Suppose individuals decide to reduce their holdings of money market funds. Further
assume that these decisions put funds into checkable deposits. Given this information,
we know that
A) the demand for M1 would increase and the demand for M2 would decrease.
B) the demand for M1 would decrease and the demand for M2 would decrease.
C) the demand for M1 would increase and the demand for M2 would increase.
D) the demand for M1 would decrease and the demand for M2 would increase.
E) none of the above
Which of the following, all else fixed, will cause the real exchange rate to increase?
A) a nominal depreciation
B) a reduction in the foreign price level
C) a reduction in the domestic price level
D) all of the above
E) none of the above
Based on our understanding of the labor market model presented in Chapter 6, we know
that an increase in the minimum wage will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) a reduction in the natural rate of unemployment.
D) both B and C
Which of the following expressions represents the dollar price of foreign currency?
A) EP*/P
B) EP/P*
C) 1/E
D) E
E) none of the above
Which of the following represents the change in the capital stock?
A) consumption minus depreciation
B) output minus depreciation
C) investment minus saving
D) investment minus depreciation
Which of the following countries has adopted the U.S. dollar as its own currency?
A) Ecuador
B) Mexico
C) Canada
D) France
E) Australia
M2 is also referred to as which of the following?
A) currency
B) narrow money
C) near money
D) high powered money
E) none of the above
Based on our understanding of the wage setting equation, which of the following will
not cause a reduction in the nominal wage?
A) an increase in unemployment
B) a reduction in the expected price level
C) a reduction in expected productivity
D) all of the above
E) none of the above
Suppose an individual experiences a $20,000 increase in real income and the individual
believes this increase in income is permanent. Economic theory suggests that this
individual’s current consumption will
A) remain unchanged.
B) increase by more than $20,000.
C) increase by at most $20,000.
D) decrease or remain unchanged, depending on the value of the real interest rate.
E) decrease, remain unchanged, or increase, depending on the value of the real interest
rate.
An economist conducts a “natural experiment” by
A) choosing two groups of people — a control group and a test group — and providing
special treatment for the test group.
B) using animal behavior to make inferences about human behavior.
C) using his or her own intuition to surmise what people will do in a given situation.
D) polling other economists to see if they believe a theory.
E) taking real-world data as it is given, and using it to test a theory.
For this question, assume that the Fed is expected to respond to any event by keeping
output constant (i.e., equal to its initial level). An unexpected increase in taxes will
cause
A) stock prices to fall.
B) stock prices to rise.
C) no change in stock prices.
D) an ambiguous effect on stock prices.
If endogenous growth models are correct, a lower rate of growth in the long run could
occur as a result of which of the following?
A) a lower rate of saving
B) a lower rate of depreciation
C) a redefinition of depreciation
D) a redefinition of the steady state
E) none of the above
Suppose policy makers decide to reduce taxes. This fiscal policy action will cause
which of the following to occur?
A) The LM curve shifts and the economy moves along the IS curve.
B) The IS curve shifts and the economy moves along the LM curve.
C) Both the IS and LM curves shift.
D) Neither the IS nor the LM curve shifts.
E) Output will change causing a change in money demand and a shift of the LM curve.
Which of the following is part of M1 and part of M2?
A) currency
B) travelers checks
C) checkable deposits
D) all of the above
E) none of the above
Which of the following will cause an increase in output per effective worker?
A) an increase in population growth
B) an increase in the rate of depreciation
C) a reduction in the saving rate
D) an increase in the rate of technological progress
E) an increase in the saving rate
When the unemployment rate is on the horizontal axis and the real wage is on the
vertical axis, an increase in productivity will cause which of the following to occur?
A) The wage-setting and price-setting curves will both shift downward.
B) The wage-setting and price-setting curves will both shift upward.
C) The price-setting curve to shift downward, and no shift in the wage-setting curve.
D) The wage-setting curve to shift upward, and the price-setting curve to shift
downward.
E) The wage-setting curve to shift downward, and the price-setting curve to shift
upward.
An expected reduction in the money supply will tend to cause
A) an increase in stock prices.
B) a reduction in stock prices.
C) no change in stock prices.
D) an ambiguous effect on stock prices.
Assume that the nominal exchange rate increases by 2%. If prices (both domestic and
foreign do not change), we know that
A) domestic goods are now relatively cheaper.
B) domestic goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both B and C
Fine tuning represents which of the following?
A) policy makers’ attempts to minimize the deviations of actual output from the natural
level of output
B) policy makers’ attempts to achieve zero inflation
C) policy makers’ attempts to minimize fluctuations in interest rates
D) policy makers’ attempts to maintain a given rate of growth in the nominal money
supply
E) policy makers’ attempts to minimize variations in the real exchange rate
Suppose there is an increase in expected future output. This will cause which of the
following to occur?
A) the IS curve to shift left in the current period
B) the IS curve to shift right in the current period
C) the LM curve to shift up in the current period
D) the LM curve to shift down in the current period
Suppose the following situation exists for an economy: Kt+1/N < Kt/N. Given this
information, we know that
A) saving per worker equals depreciation per worker in period t.
B) saving per worker is less than depreciation per worker in period t.
C) saving per worker is greater than depreciation per worker in period t.
D) the saving rate fell in period t.
E) none of the above
The maximum number of individuals a U.S. president can appoint to the Board of
governors is
A) 15.
B) 12.
C) 7.
D) 4 .
E) none of the above
Assume that an economy experiences both positive population growth and
technological progress. Once the economy has achieved balanced growth, we know that
the output per effective worker ratio (Y/NA) is
A) growing at a rate of 0.
B) growing at a rate of gA + gN.
C) growing at a rate of gN.
D) growing at a rate of gA.
E) none of the above
Suppose there is an increase in expected future taxes. This will cause which of the
following to occur?
A) the IS curve to shift left in the current period
B) the IS curve to shift right in the current period
C) the LM curve to shift up in the current period
D) the LM curve to shift down in the current period
For this question, assume that expected inflation is zero. In this situation, we know that
A) the nominal and real interest rates are equal.
B) the nominal interest rate will exceed the real interest rate.
C) the real interest rate will exceed the nominal interest rate.
D) the real interest will be zero.
E) the real interest rate is negative.
For this question, assume that a country experiences a permanent reduction in its saving
rate. Which of the following will occur as a result of this reduction in the saving rate?
A) a permanently slower growth rate of output
B) no permanent effect on the level of output per capita
C) a permanently lower level of output per worker
D) both A and B
E) both B and C
When policy makers decide to devalue the currency, such an action generally represents
A) a decision to let the currency float.
B) an increase in the pegged value of the domestic currency.
C) a reduction in the foreign price level.
D) a reduction in the domestic price level.
E) none of the above
Suppose financial market participants expect short-term rates in the future to be less
than current short-term interest rates. Given this information, we would expect
A) an upward sloping yield curve.
B) a downward sloping yield curve.
C) an upward shifting yield curve.
D) a downward shifting yield curve.
E) a horizontal yield curve.
Which of the following will cause a reduction in current consumption?
A) a reduction in current disposable income
B) a reduction in financial wealth
C) a reduction in human wealth
D) all of the above
E) both B and C
Based on the notation presented in Chapter 2, which of the following expressions
represents nominal GDP?
A) Yt
B) PtYt
C) Yt/Pt
D) $Yt/Pt
Suppose that over the past decade, U.S. inflation is greater than that in Mexico. Further
assume that during this same period, the dollar appreciates relative to the Mexican peso.
Given this information,
A) the real exchange rate remains unchanged.
B) the real exchange rate must decrease.
C) the real exchange rate must increase.
D) the real exchange rate can increase or remain the same, but not decrease.
E) the real exchange rate can decrease or remain the same, but not increase.
Expansionary monetary policy in a flexible exchange rate regime will cause
A) a shift of the IP curve.
B) an appreciation of the domestic currency.
C) a reduction in E.
D) no change in E.
Assume that an economy experiences both positive population growth and
technological progress. In this economy, which of the following is constant when
balanced growth is achieved?
A) I
B) S
C) Y/N
D) all of the above
E) none of the above
For this question, assume that individuals hold both currency and checkable deposits.
The money multiplier is equal to
A) 1/c.
If the nominal interest rate is 20% per year, how much money can an individual borrow
today if she wants to repay $100 in one year?
A) $80.00
B) $83.33
C) $120.00
D) $78.00
E) $121.00
Suppose firms expect future output to be lower and future interest rates to be lower.
Given this information, how will firms alter investment in the current period? Explain.
Suppose a cut in government spending occurs that is at least partially unexpected.
Explain what effect this will have on stock prices.
What is uncovered interest parity? Explain.
Explain what factors determine the expected return on a foreign bond.
What problems remain in advanced countries after the crisis?
Discuss the major intellectual failure on macroeconomics from the crisis.
In the 1960s, there was significant debate between Keynesians and monetarists. Explain
several aspects of this debate.
Based on the ‘early incarnation’ of the Phillips curve, explain what effect an increase in
the unemployment rate will have on the inflation rate.
Discuss the time inconsistency problem and explain how it relates to monetary policy.
Suppose the central bank implements a monetary contraction in the current period and
is expected to continue this monetary contraction in the future. Use the IS-LM model to
illustrate graphically and explain the effects of this policy on current output and the
current interest rate.
Explain the macroeconomic effects of a tax cut according to the Ricardian Equivalence
proposition. Include in your answer the IS-LM graph that shows the effects of this tax
cut.
Discuss several of the hypotheses concerning the reduction in productivity growth in
the mid-1970s.
Suppose there is a reduction in the saving rate. Explain what effect this will have on
output, output per worker, the rate of growth of output, and the rate of growth of output
per worker.
First, define nominal GDP and real GDP. Second, is it possible for nominal GDP in a
year to be less than real GDP in the same year? Explain.
Explain the difference between “profitability” and “cash flow.”
In the model where it is assumed that the state of technology does not change, what
parameters and/or variables cause changes in steady state output per worker.
Suppose the yield curve is downward sloping. How should one interpret this particular
yield curve?