Finall

Question 1

In the classical model, an increase in the government deficit that is bond financed (i.e.
borrowed in the loanable funds market) results in:
A) a decrease in the interest rate B) an increase in the quantity of saving
C) an increase in consumption D) all of the above

Answer 1

an increase in the quantity of saving

Question 2

Figure 2-7 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two
goods, cotton and cashews.
2) Refer to Figure 2-7. Assume that in autarky Pakistan consumes 50 cotton and 70
cashews while Indonesia consumes 30 cotton and 80 cashews. What are the potential
gains from trade if each nation specializes in the production of the good in which it has
a comparative advantage?
A) No gains are possible since both countries are producing effieciently.
B) 100 pounds Cashews.
C) 240 Cotton bolts.
D) Both B and C

Answer 2

240 Cotton bolts.

Question 3

) Refer to Figure 2-7. What is the opportunity cost of producing 1 pound of cashews in
Indonesia?
A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton
C) 2 2/3 bolts of cotton D) 120 bolts of cotton

Answer 3

2 2/3 bolts of cotton

Question 4

Refer to Figure 2-7. Which country has a comparative advantage in the production of
cashews?
A) They have equal productive abilities.
B) Indonesia
C) Pakistan
D) neither country

Answer 4

Pakistan

Question 5

Which of the following changes shifts the Classical aggregate supply curve to the right?
A) A decrease in the demand for labor
B) An increase in consumer confidence
C) A demographic change that reduces the labor supply
D) A decrease in taxes

Answer 5

A decrease in taxes

Question 6

In the classical model, an increase in saving is assumed to increase
A) neither the demand for money nor bonds, leaving interest rates unchanged
B) the supply of loanable funds, which decreases interest rates
C) the demand for loanable funds, which decreases interest rates
D) both the demand for money and loanable funds, which reduces interest rates

Answer 6

the supply of loanable funds, which decreases interest rates

Question 7

Economic decline (negative growth) is represented on a production possibilities frontier
model by the production possibility frontier
A) shifting inward. B) becoming steeper.
C) becoming flatter. D) shifting outward.

Answer 7

shifting inward.

Question 8

If there is an increase in government spending that is financed by issuing bonds, then
A) interest rates should rise which decreases private investment
B) interest rates should rise which increases private investment
C) interest rates should fall which increases private investment
D) interest rates will remain the same unless taxes are reduced as well

Answer 8

interest rates should rise which decreases private investment

Question 9

) What is the relationship between real and nominal GDP?
A) real GDP = nominal GDP - Price level
B) nominal GDP = Real GDP/Price level
C) real GDP = nominal GDP * Price level
D) real GDP = nominal GDP/Price level

Answer 9

real GDP = nominal GDP/Price level

Question 10

According to the classical model, changes in aggregate demand are driven by
A) changes in fiscal policy B) changes in taxes
C) changes in the money supply D) changes in borrowing and lending

Answer 10

changes in the money supply

Question 11

Assume that the classical labor market can be represented by the following equations:
Aggregate Production Function: Y = 200 + 5N
Labor Demand: Nd = 50 - 4(W/P)
Labor Supply: Ns = 40 + (W/P)
What is equilibrium W/P, N, and Y
A) W/P = 50, N = 300, and Y = 3500
B) W/P = 2, N = 42, and Y = 410
C) W/P = 2, N = 10, and Y = 250
D) Cannot be determined from information given

Answer 11

W/P = 2, N = 42, and Y = 410

Question 12

According to the Price-Specie-Flow mechanism, if half the gold in England
disappeared over night the effect would be to
A) double the price level.
B) reduce the price level by 50%.
C) make English goods more expensive to French residents.
D) None of the above.

Answer 12

reduce the price level by 50%.

Question 13

According to the classical model shown in the figure, an exogenous decline in
investment shifts the investment schedule to the left, from i0 to i1, causing the
equilibrium interest rate to decline. Distance B in the figure describes an interest rate
induced
A) decline in saving, which is an equal increase in consumption
B) decrease in investment
C) increase in the quantity of investment
D) decline in saving, which exceeds the increase in consumption

Answer 13

increase in the quantity of investment

Question 14

What two factors should you equate in deciding how many workers to employ?
A) The marginal product of labor and the marginal product of capital
B) The marginal product of capital and the real wage rate
C) The marginal product of labor and the real wage rate
D) The marginal product of labor and the real interest rate

Answer 14

The marginal product of labor and the real wage rate

Question 15

The production possibilities frontier shows the ________ combinations of two products
that may be produced in a particular time period with available resources.
A) minimum attainable B) only
C) maximum attainable D) equitable

Answer 15

maximum attainable

Question 16

Under the assumption of perfect competition, all resources are paid their marginal
oppotunity cost such that firms will earn zero economic profit. Under such conditions
any cost increases faced by firms will result in
A) a decline in the nominal wage.
B) a decline in firms economic profit.
C) a proportional increase in output price.
D) None of the above.

Answer 16

a proportional increase in output price.

Question 17

Classical economists
A) believed that prices would increase more than proportionate to an increase in the
money supply
B) argued that the money supply determined aggregate demand
C) believed that the quantity of money influences interest rates and real wages
D) regarded monetary policy as unimportant since the quantity of money does not
determine the price level

Answer 17

argued that the money supply determined aggregate demand

Question 18

An invention that speeds up the Internet is an example of
A) an income effect. B) an increase in labor.
C) a substitution effect. D) a supply shock.

Answer 18

a supply shock.

Question 19

Fiscal policy encompasses all of the following except
A) taxation by the government.
B) expenditures by the government.
C) monetary injection by the government.
D) borrowing by the government.

Answer 19

monetary injection by the government.

Question 20

The natural resources used in production are made available in the
A) goods and services market. B) government market.
C) factor markets. D) product market.

Answer 20

factor markets.

Question 21

Real output is determined by \_\_\_\_\_\_\_\_\_ and the price level by \_\_\_\_\_\_\_\_\_ in the
Classical model
A) aggregate supply; aggregate demand
B) aggregate demand; aggregate demand
C) aggregate supply; aggregate supply
D) none of the above.

Answer 21

aggregate supply; aggregate demand

Question 22

A production possibilities frontier with a bowed outward shape indicates
A) increasing opportunity costs as more and more of one good is produced.
B) the possibility of inefficient production.
C) constant opportunity costs as more and more of one good is produced.
D) decreasing opportunity costs as more and more of one good is produced.

Answer 22

increasing opportunity costs as more and more of one good is produced.

Question 23

The principle of opportunity cost is that
A) taking advantage of investment opportunities involves costs.
B) in a market economy, taking advantage of profitable opportunities involves some
money cost.
C) the economic cost of using a factor of production is the alternative use of that
factor that is given up.
D) the cost of production varies depending on the opportunity for technological
application.

Answer 23

the economic cost of using a factor of production is the alternative use of that
factor that is given up.

Question 24

Suppose the marginal product of labor is
MPN = 200 - 0.5N
where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w
where w is the real wage. What is the equilibrium quantity of employment?
A) 760 B) 380 C) 12 D) 190

Answer 24

380

Question 25

In the Classical model, an increase in tax on firms that hired labor would (i.e. a tax the
firm pays for each worker hired)
A) decrease labor supply, increase the real wage, and decrease output
B) decrease labor demand and the real wage and increase output
C) decrease labor demand, decrease the real wage, and decrease output
D) reduce real wages and increase output

Answer 25

decrease labor demand, decrease the real wage, and decrease output

Question 26

A vertical aggregate supply schedule implies that
A) real wages cannot impact output
B) the price level does not impact output
C) aggregate demand is horizontal
D) unemployment cannot impact output

Answer 26

the price level does not impact output

Question 27

The ________ demonstrates the roles played by households and firms in the market
system.
A) business cycle B) theory of comparative advantage
C) production possibilities frontier D) circular flow model

Answer 27

circular flow model

Question 28

Which of the following statements most accurately describes the Classical view?
A) Fiscal policy is effective at changing nominal aggregate demand but not real
aggregate demand.
B) Changes in the money supply are important determinants of changes in real
output.
C) The economy is a complex dynamic system that is naturally self-correcting and
requires no intervention by fiscal or monetary authorities.
D) All of the above.

Answer 28

The economy is a complex dynamic system that is naturally self-correcting and
requires no intervention by fiscal or monetary authorities.

Question 29

Adam Smith’s invisible hand refers to
A) the government’s unobtrusive role in ensuring that the economy functions
efficiently.
B) property ownership laws and the rule of the court system.
C) the process by which individuals acting in their own self-interest bring about a
market outcome that benefits society as a whole.
D) the laws of nature that influence economics decisions.

Answer 29

the process by which individuals acting in their own self-interest bring about a
market outcome that benefits society as a whole.

Question 30

The marginal product of capital is the increase in
A) output from a one-unit increase in capital.
B) labor needed to accompany a one-unit increase in capital.
C) output from a one-dollar increase in capital.
D) capital needed to produce one more unit of output.

Answer 30

output from a one-unit increase in capital.

Question 31

Assuming that money is neutral, an increase in the nominal money supply would cause
A) a rise in nominal wages.
B) an excess supply for goods.
C) an increase in the real money supply.
D) a fall in the price level.

Answer 31

a rise in nominal wages.

Question 32

A winter ice storm has paralyzed the entire east coast, reducing productivity sharply.
This supply shock shifts the marginal product of labor curve
A) down and to the left, reducing the quantity of labor demanded at any given real
wage.
B) up and to the right, raising the quantity of labor demanded at any given real wage.
C) down and to the left, raising the quantity of labor demanded at any given real
wage.
D) up and to the right, reducing the quantity of labor demanded at any given real
wage.

Answer 32

down and to the left, reducing the quantity of labor demanded at any given real
wage.

Question 33

In the classical model, if money growth and velocity are constant, then
A) the price level will be constant
B) the price level will rise at the rate of output growth
C) the price level will fall at the rate of output growth
D) none of the above

Answer 33

the price level will fall at the rate of output growth

Question 34

Which of the following is not a characteristic of the classical system?
A) real values, not nominal values, matter
B) Money wage flexibility
C) Price flexibility
D) temporary excess demand and supply in labor markets

Answer 34

temporary excess demand and supply in labor markets

Question 35

The marginal product of labor
A) is smaller when the labor supply is relatively smaller.
B) is larger when the labor supply is relatively larger.
C) is measured by the slope of the production function relating capital to
employment.
D) decreases as the number of workers already employed increases.

Answer 35

decreases as the number of workers already employed increases.

Question 36

According to the quantity theory of money, the quantity of money determines the
A) level of real output B) level of employment
C) price level D) interest rate

Answer 36

price level

Question 37

If the demand for labor is plotted against the money wage, with the money wage on the
vertical axis, then
A) an increase in the money wage will cause the labor demand schedule to shift to
the right
B) the labor demand schedule will be upward sloping
C) an increase in the money wage will cause the labor demand schedule to shift to
the left
D) an increase in the price level will cause the labor demand schedule to shift to the
right

Answer 37

an increase in the price level will cause the labor demand schedule to shift to the
right

Question 38

Suppose that there is an increase in technology. The classical model predicts that
A) both output and the price level rises
B) output rises and the price level falls
C) output rises and the price level remains the same
D) none of the above

Answer 38

output rises and the price level falls

Question 39

) According to the classical model, a 10-percent increase in the money supply, holding
everything else constant, will lead to
A) a 10% increase in prices and no change in the money wage or interest rates
B) a 10% increase in prices, a 10% increase in the money wage, and no change in
nominal interest rates
C) a 10% increase in prices, a 10% increase in the money wage, and a 10% increase
in nominal interest rates
D) a 10% increase in prices, a 10% increase in the real wage, and a 10% increase in
real interest rates

Answer 39

a 10% increase in prices, a 10% increase in the money wage, and a 10% increase
in nominal interest rates

Question 40

The CPI overestimates inflation because
A) it often ignores the invention of new or higher quality goods
B) it always includes discount stores
C) it allows substitution from more expensive goods to cheaper goods
D) all of the above

Answer 40

it often ignores the invention of new or higher quality goods

Question 41

Refer to Figure 2-1. Point A is
A) unattainable with current resources.
B) the equilibrium output combination.
C) technically efficient.
D) inefficient in that not all resources are being used.

Answer 41

inefficient in that not all resources are being used.

Question 42

Which of the following is not a factor of production?
A) a drill press in a machine shop B) the manager of the local tire shop
C) $1,000 in cash D) an acre of farmland

Answer 42

$1,000 in cash

Question 43

Year 2 nominal GDP is

A) $310. B) $390. C) $200. D) $270.

Answer 43

$390.

Question 44

Suppose that Year 1 is the base year. Year 2 real GDP is

A) $310. B) $270. C) $390. D) $200.

Answer 44

$310

Question 45

The slope of the aggregate production function with capital stock held fixed measures
A) the marginal propensity to produce B) the marginal product of labor
C) the marginal utility of output D) none of the above.

Answer 45

the marginal product of labor

Question 46

In the classical model, the only government policy that can affect real output in the
economy is:
A) spending policy B) tax policy
C) monetary policy D) none of the above.

Answer 46

tax policy

Question 47

In the classical system, the quantity of money
A) determines the price level and, for a given real income, the level of nominal
income
B) does not affect the equilibrium values of output, employment, and the interest rate
C) affects the equilibrium values of output, employment, and the interest rate
D) Both a and b
E) Both a and c

Answer 47

determines the price level and, for a given real income, the level of nominal
income

Question 48

In the classical model, when AD increases due to an increase in money supply, the
effect on the equilibrium real wage is:
A) The real wage is not affected
B) The same as the effect on real output
C) The same as the effect on total employment
D) All of the above

Answer 48

All of the above

Question 49

When you purchase a new pair of jeans you do so in the
A) product market. B) resource market.
C) factor market. D) input market.

Answer 49

product market.

Question 50

If government spending and tax collections both increase by the same amount, then
according to the classical loanable funds market
A) the demand for loanable funds will fall and the interest rate will rise
B) the demand for loanable funds will increase and the interest rate will rise
C) savings will rise and interest rates will fall
D) nothing will shift and the interest rate will remain constant

Answer 50

nothing will shift and the interest rate will remain constant

Question 51

The “crowding out effect” can be characterized as,
A) increases in spending, usually G, lead to higher interest rates and thus reduced
investment spending.
B) G↑→Y↑→Md↑→r↑→I↓
C) the difference between the simple expenditure multiplier and the equilibrium
expenditure multiplier.
D) All of the above.

Answer 51

All of the above.

Question 52

On the graph above, a possible cause of the rightward shift of the IS curve is an
increase in \_\_\_\_\_\_\_\_.
A) taxes
B) interest rates
C) money supply
D) the exchange rate
E) none of the abov

Answer 52

none of the abov

Question 53

The marginal propensity to consume represents
A) the level of consumption that occurs if disposable income is zero.
B) the ratio of total consumption to disposable income.
C) the change in consumption caused by a one-unit change in disposable income.
D) total income minus total taxes.
E) the change in output caused by a one-unit change in autonomous demand.

Answer 53

the change in consumption caused by a one-unit change in disposable income.

Question 54

In the Keynesian framework, as long as output is ________ the equilibrium level,
unplanned inventory investment will remain ________, firms will continue to lower
production, and output will continue to fall.
A) below; negative B) below; positive
C) above; positive D) above; negative

Answer 54

above; positive

Question 55

According to liquidity preference theory, as real income increases, so does \_\_\_\_\_\_\_\_.
A) the demand for real money balances
B) the real interest rate
C) the supply of real money balances
D) all of the above
E) none of the above

Answer 55

the demand for real money balances

Question 56

If the economy is on the IS curve, but is to the right of the LM curve, aggregate output
will ________ and the interest rate will ________.
A) rise; rise B) fall; rise C) fall; fall D) rise; fall

Answer 56

fall; rise

Question 57

If the consumption function is C = 20 + 0.5YD, then an increase in disposable income
by $100 will result in an increase in consumer expenditure by
A) $25. B) $70. C) $50. D) $100

Answer 57

$50

Question 58

The interest rate will increase as a result of which of the following events?
A) an increase in income
B) an open market purchase of bonds by the central bank
C) a reduction in income
D) all of the above
E) none of the above

Answer 58

an increase in income

Question 59

The IS curve shows the combinations of output and the real interest rate for which
A) the labor market is in equilibrium.
B) the financial asset market is in equilibrium.
C) the goods market is in equilibrium.
D) an increase in output will cause the market-clearing interest rate to be bid up.

Answer 59

the goods market is in equilibrium.

Question 60

Keynesians believe that the crowding out effect of government spending is
___________ while the classicals believed it to be ___________.
A) small; large B) small; small
C) None of the above. D) large; large

Answer 60

small; large

Question 61

Suppose there is a simultaneous fiscal expansion and monetary expansion. We know
with certainty that
A) both output and the interest rate will increase.
B) output will increase.
C) output will decrease.
D) the interest rate will increase.
E) the interest rate will decrease.

Answer 61

output will increase.

Question 62

Suppose a one-year discount bond offers to pay $1000 in one year and currently has a
15% interest rate.
 Given this information, we know that the bond's price must be
A) $869.56.
B) $1150.
C) $850.
D) $950.
E) none of the above

Answer 62

$869.56.

Question 63

If the consumption function is given by C = 100 + .6(Y-T) and planned investment is
150, government spending is 50, and T is 100, then equilibrium income is
A) 300 B) 600 C) 420 D) 750

Answer 63

600

Question 64

The IS curve shifts to the left when \_\_\_\_\_\_\_\_.
A) autonomous consumption increases
B) autonomous investment increases
C) taxes increase
D) all of the above
E) none of the above

Answer 64

taxes increase

Question 65

As the nominal interest rate increases ________.
A) the opportunity cost of holding money rises
B) the quantity of money demanded falls
C) it becomes more costly to hold money instead of bonds
D) all of the above
E) none of the above

Answer 65

all of the above

Question 66

A rise in the price of a bond causes the yield of the bond to
A) fall.
B) rise.
C) rise if it’s a short-term bond, fall if it’s a long-term bond.
D) remain unchanged.

Answer 66

fall.

Question 67

The money demand curve shifts to the right when
A) there is a decrease in the interest rate
B) income decreases
C) income increases
D) there is an increase in the riskiness of interest-bearing assets

Answer 67

income increases

Question 68

An increase in spending that results from expansionary ________ policy causes the
interest rate to ________, everything else held constant.
A) incomes; fall B) fiscal; fall C) incomes; rise D) fiscal; rise

Answer 68

fiscal; rise

Question 69

In the Keynesian cross diagram, a decline in autonomous consumer expenditure causes
the aggregate demand function to shift ________, the equilibrium level of aggregate
output to fall, and the IS curve to shift to the ________, everything else held constant.
A) up; left B) down; right C) down; left D) up; right

Answer 69

down; left

Question 70

If aggregate output is above its equilibrium level ________.
A) actual output is below planned expenditure
B) there is an excess supply of goods
C) firms will tend to replenish their low inventories driving output up toward
equilibrium
D) all of the above
E) none of the above

Answer 70

there is an excess supply of goods

Question 71

Assume that autonomous consumption equals $200 and disposable income equals
$1000. If total consumption equal $800, then the mpc equals
A) 0.2. B) 0.6. C) 0.8. D) 1.0.

Answer 71

0.6.

Question 72

Suppose the economy is currently operating on both the LM curve and the IS curve.
Which of the following is true for this economy?
A) Financial markets are in equilibrium.
B) The quantity supplied of bonds equals the quantity demanded of bonds.
C) Production equals demand.
D) The money supply equals money demand.
E) all of the above

Answer 72

all of the above

Question 73

The ________ traces out the points for which total quantity of goods produced equals
total quantity of goods demanded.
A) investment schedule B) consumption function
C) iS curve D) LM curve

Answer 73

iS curve

Question 74

In the ISLM framework, an expansionary fiscal policy causes aggregate output to
________ and the interest rate to ________, everything else held constant.
A) increase; increase B) increase; decrease
C) decrease; decrease D) decrease; increase

Answer 74

increase; increase

Question 75

“Real money balances” refers to ________.
A) money that is actually available to be spent
B) the quantity of goods and services that money can buy
C) gold and silver
D) all of the above
E) none of the above

Answer 75

the quantity of goods and services that money can buy

Question 76

If Md = 3,000 — 400r and Ms = 2,000, the MPC = .85, G=100, and T = 120, then the
equilibrium interest rate is
A) 10 B) 5.0 C) 2.5 D) 20

Answer 76

2.5

Question 77

Which of the following best describes the Keynesian liquidity trap?
A) A situation in which income is so high that households willingly hold any new
money balances supplied by the central bank such that increases in the supply of
money do not reduce equilibrium interest rates.
B) A situation in which households prefer to hold bonds rather than money such that
increases in the supply of money do not reduce equilibrium interest rates.
C) A situation in which interest rates are so low that households willingly hold any
new money balances supplied by the central bank such that increases in the supply
of money do not reduce equilibrium interest rates.
D) A situation in which interest rates are so high that households are unwilling to
hold any new money balances supplied by the central bank such that increases in
the supply of money do not reduce equilibrium interest rates.

Answer 77

A situation in which interest rates are so low that households willingly hold any
new money balances supplied by the central bank such that increases in the supply
of money do not reduce equilibrium interest rates.

Question 78

By referring to Figure above, an increase in the money stock
A) leaves the LM curve unchanged at LM0
B) shifts the LM schedule to the right from LM0 to LM1
C) shifts the LM schedule to the left from LM0 to LM2
D) shifts neither the IS nor the LM schedule

Answer 78

shifts the LM schedule to the right from LM0 to LM1

Question 79

Assume that autonomous consumption equals $200 and disposable income equals
$1000. If total consumption equal $800, then the mpc equals
A) 0.2. B) 0.6. C) 0.8. D) 1.0.

Answer 79

0.6.

Question 80

Economists define investment as the purchase of
A) any physical asset used by business to increase production and the repurchase of
common stock.
B) any physical asset, whether new or not, used by business to increase production.
C) business spending on capital and household spending on durable goods.
D) a new physical asset such as a new machine or a new house.

Answer 80

a new physical asset such as a new machine or a new house.

Question 81

Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with
certainty that this combination of policies must cause
A) a reduction in i. B) a reduction in Y.
C) an increase in output (Y). D) an increase in the interest rate (i).

Answer 81

an increase in output (Y).

Question 82

An increase in the money supply would cause the IS curve to
A) shift down and to the left.
B) shift up and to the right.
C) shift up and to the right only if people face borrowing constraints.
D) remain unchanged.

Answer 82

remain unchanged.

Question 83

Macroeconomic equilibrium requires ________.
A) equilibrium in neither the goods nor the money market
B) equilibrium in the goods market
C) equilibrium in the money market
D) equilibrium in both the goods and money markets

Answer 83

equilibrium in both the goods and money markets

Question 84

The money demand curve will shift to the right when which of the following occurs?
A) an increase in income
B) an increase in the money supply
C) a reduction in the interest rate
D) all of the above
E) none of the above

Answer 84

an increase in income

Question 85

In the Keynesian money market, velocity is
A) negatively related to the interest rate
B) independent of the interest rate
C) positively related to the interest rate
D) None of the above.

Answer 85

positively related to the interest rate

Question 86

When people are holding money in excess of their demand for real money balances
________.
A) the central bank buys bonds to correct the imbalance
B) the nominal interest rate will fall
C) they increase their purchases of goods and services
D) all of the above
E) none of the above

Answer 86

the nominal interest rate will fall

Question 87

If the marginal propensity to save is equal to 0.5 in the simple Keynesian model, then a
10-unit increase in government spending will cause output to rise by
A) 20 B) 10 C) 40 D) 5

Answer 87

20

Question 88

Which of the following statements concerning Keynesian ISLM analysis is true?
A) Changes in net exports arising from a change in interest rates causes a shift in the
IS curve.
B) Expansionary fiscal policy will cause the interest rate to fall.
C) A fall in the money supply shifts the LM curve to the right.
D) For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.

Answer 88

For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.

Question 89

If the nominal interest rate is above the equilibrium level ________.
A) the opportunity cost of holding money is low, and is rising
B) purchases of bonds and other assets will cause the interest rate to fall
C) issuance of bonds and other assets will cause the supply of real money balances to
increase
D) all of the above
E) none of the above

Answer 89

purchases of bonds and other assets will cause the interest rate to fall

Question 90

You have just read that the Federal Reserve has increased the money supply to avoid a
recession. For a given price level, you would expect the LM curve to
A) shift up and to the left as the real money supply rises.
B) shift down and to the right as the real money supply rises.
C) shift up and to the left as the real money supply falls.
D) shift down and to the right as the real money supply falls.

Answer 90

shift down and to the right as the real money supply rises.

Question 91

If aggregate demand falls short of current output, business firms will ________
production to ________ inventories.
A) expand; build up B) cut; build up
C) expand; keep from accumulating D) cut; keep from accumulating

Answer 91

cut; keep from accumulating

Question 92

Suppose the demand for money is NOT very sensitive to the interest rate. Given this
information, we know that
A) the LM curve should be relatively steep.
B) the IS curve should be relatively flat.
C) the IS curve should be relatively steep.
D) the LM curve should be relatively flat.
E) neither the IS nor the LM curve will be affected.

Answer 92

the LM curve should be relatively steep.

Question 93

In Figure 24-1, the economy moves from point 1 to point 2 whenever
A) government spending increases.
B) investment expenditures unrelated to the interest rate increase.
C) the money supply increases.
D) either A or B occurs

Answer 93

either A or B occurs

Question 94

A decline in the money stock will
A) shift the IS schedule downward and to the right
B) not have any effect on the LM schedule
C) shift the LM schedule to the left
D) shift the LM schedule to the right

Answer 94

shift the LM schedule to the left

Question 95

Everything else held constant, if aggregate output is to the left of the IS curve, then
there is an excess ________ of goods which will cause aggregate output to ________.
A) supply; fall B) demand; rise C) supply; rise D) demand; fall

Answer 95

demand; rise

Question 96

A tax cut ________ disposable income, ________ consumption expenditure, and shifts
the IS curve to the ________, everything else held constant.
A) decreases; increases; left B) increases; decreases; right
C) decreases; decreases; left D) increases; increases; right

Answer 96

increases; increases; right

Question 97

Let C = 200 + .8(Y-T), planned investment equals 150, and T equals 200. If the
equilibrium level of income is 2,000, then the level of government spending needed to
make this true is
A) 210 B) 200 C) 250 D) 100

Answer 97

210

Question 98

Keynes believed that the U.S. economy was mired in a liquidity trap in the 1930-36
period which meant that
A) households were unwilling to hold new money balances.
B) monetary policy was ineffective.
C) fiscal policy was ineffective.
D) all of the above.

Answer 98

monetary policy was ineffective.

Question 99

Using the information in situation 20-2, if government increases their spending by $50
and increases taxes by 50, then equilibrium aggregate output will change by
A) $50. B) -$50. C) -$100. D) $100.

Answer 99

$50.

Question 100

If the government reduces spending ________.
A) output will increase if interest rates remain fixed
B) the IS curve will shift to the right
C) consumption will increase
D) all of the above
E) none of the above

Answer 100

none of the above

Question 101

According to real business cycle theory
A) Federal Reserve actions need to be watched closely.
B) monetary policy is driving business cycles.
C) technology shocks have a major role in business cycles.
D) cash-in-advance is necessarily to explain business cycles

Answer 101

technology shocks have a major role in business cycles.

Question 102

When an economy is operating at the steady state, we know that
A) steady state saving/investment is equal to depreciation per worker.
B) steady state saving/investment exceeds depreciation each year by a constant amount.
C) steady state saving/investment is less than total consumption.
D) steady state saving/investment equals consumption.
E) none of the above

Answer 102

steady state saving/investment is equal to depreciation per worker.

Question 103

Active stabilization policy by the central bank can be rationalized in the New Keynesian model
because
A) it allows a faster return to economic efficiency.
B) the government knows best.
C) it makes it possible to obtain zero inflation.
D) it counteracts the influence of unions.

Answer 103

it allows a faster return to economic efficiency.

Question 104

TheʺGolden Ruleʺsteady state is characterized by
A) minimum depreciation of the capital stock.
B) minimum output lost to saving.
C) maximum output per person.
D) maximum consumption per person.

Answer 104

maximum consumption per person.

Question 105

) In the RBC model, actual real GDP is
A) always equal to the natural (potential) real GDP.
B) equal to the natural (potential) real GDP when P = Pe.
C) equal to the natural (potential) real GDP when P is equal to or greater than Pe.
D) never equal to the natural (potential) real GDP.

Answer 105

always equal to the natural (potential) real GDP.

Question 106

) Suppose the economy is producing at the natural rate of output.An open market sale of
bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in
the short run, everything else held constant.
A) no change; an increase B) no change; a decrease
C) a decrease; a decrease D) an increase; an increase

Answer 106

a decrease; a decrease

Question 107

Assume that constant returns to scale describes the production technology and that N and K
both increase by 2%. Given this information, we know that
A) Y will increase by 2%.
B) Y will increase by less than 4% and more than 2%.
C) Y will increase by less than 2%.
D) output (Y) will increase by 4%.

Answer 107

Y will increase by 2%.

Question 108

An increase in real interest rate will________ current consumption and _________ future
consumption.
A) increase; decrease B) decrease; increase
C) have an unclear effect on; decrease D) decrease; have an unclear effect on

Answer 108

decrease; increase

Question 109

Temporary productivity shocks lead to an intertemporal ___________ effect in which real
________ rates change as households smooth their consumption.
A) income; exchange B) income; wage
C) substitution;interest D) substitution;wage

Answer 109

substitution;interest

Question 110

Next periodʹs capital is equal to current-period investment
A) plus the amount of current period depreciation.
B) minus the amount of current period depreciation.
C) plus the amount of current capital left over after depreciation.
D) minus the amount of current capital left over after depreciation.

Answer 110

plus the amount of current capital left over after depreciation.

Question 111

The rate of output at which the price level has no tendency to rise or fall is called the
A) bliss point. B) potential level of income.
C) efficient level of output. D) natural rate of output.

Answer 111

natural rate of output.

Question 112

An increase in lifetime wealth is likely to
A) decrease current labor supply and decrease current consumption demand.
B) increase current labor supply and increase current consumption demand.
C) decrease current labor supply and increase current consumption demand.
D) increase current labor supply and decrease current consumption demand.

Answer 112

decrease current labor supply and increase current consumption demand.

Question 113

When considering the cost of taking leisure in the current period which factors are relevant?
A) the degree to which any productivty change is permanent or temporary.
B) the current real wage versus the future real wage.
C) the current marginal product of labor versus the future marginal product of labor.
D) All of the above.
E) None of the above.

Answer 113

All of the above.

Question 114

An important critique of real business cycle theory is the belief that cyclical movements in total
factor productivity, i.e. the Solow residual
A) may, in part, be an artifact of measurement error.
B) lead to imperceptible changes in labor demand.
C) are too small to account for the size of fluctuations in real GDP.
D) rarely occur.

Answer 114

may, in part, be an artifact of measurement error.

Question 115

In response to a permanent increase in government spending, the permanent income
hypothesis would suggest that, to a first approximation, consumption demand should
A) fall by less than the increase in government spending.
B) fall by more than the increase in government spending.
C) fall exactly as much as the increase in government spending.
D) be unaffected.

Answer 115

fall exactly as much as the increase in government spending.

Question 116

When the aggregate demand curve shifts rightward, the price level \_\_\_\_\_\_\_\_ and the
unemployment rate \_\_\_\_\_\_\_\_.
A) does not change; does not change
B) decreases; increases
C) increases; increases
D) decreases; decreases
E) increases; decrease

Answer 116

increases; decrease

Question 117

Menu costs are
A) the relative cost of raw materials compared to finished goods.
B) the cost of differentiating prices for different goods.
C) very small costs.
D) the cost of changing prices.

Answer 117

the cost of changing prices.

Question 118

The rational expectations hypothesis implies that when macroeconomic policy changes,
A) people will be slow to catch on to the change.
B) the economy will become highly unstable.
C) the way expectations are formed will change.
D) people will make systematic mistakes.

Answer 118

the way expectations are formed will change.

Question 119

) The output gap is
A) the difference between forecasted output and past output.
B) the difference between target output and realized output.
C) the difference between the potential output and actual output.
D) the difference between initial output and final output.

Answer 119

the difference between the potential output and actual output.

Question 120

Moving along the short-run Phillips curve, a ________ unemployment rate can only be
achieved by paying the cost of ________.
A) lower; a lower price level
B) lower; a lower inflation rate
C) higher; a higher inflation rate
D) lower; a higher expected inflation rate
E) lower; a higher inflation rate

Answer 120

lower; a higher inflation rate

Question 121

Smoothing your consumption over time is best represented by ______________.
A) U(Ct) = U(Ct+1) B) MU(ℓt) = βMU(ℓt+1)
C) MU(Ct) =βMU(Ct+1) D) Ct = βCt+1

Answer 121

MU(Ct) =βMU(Ct+1)

Question 122

Assume that the central bank uses a New Keynesian model to guide itspolicy decisions. The
current policy objective is to reduce inflation and inflation expectations in the economy with as
little output loss as possible. Which of the following policy choices does their preferred model
tell them has the best chance of meeting the policy objectives?
A) Raise the target rate of interest and announce that the tight monetray policy will last for a
long time.
B) Raise the target rate of interest without any forewarning to have the biggest impact.
C) Reduce the target rate of interest and announce that the loose monetray policy will last
for a long time.
D) None of the above.

Answer 122

Raise the target rate of interest and announce that the tight monetray policy will last for a
long time.

Question 123

The intertemporal budget constraint tells us that
A) the present value of lifetime consumption equals the present value of lifetime income.
B) the income earned in a lifetime will be evenly divided between consumption and saving.
C) consumption smoothing only occurs in years when income is greater than consumption.
D) household consumption is based on permanent income and not transitory income

Answer 123

the present value of lifetime consumption equals the present value of lifetime income.

Question 124

Application of the time inconsistency problem to monetary policy suggests that, without some
mechanism to ensure central bank commitment, the
A) rate of inflation will be higher and the level of real output will be lower than they would
be with commitment.
B) rate of inflation and the level of real output will be higher than they would be with
commitment.
C) level of real output will be lower than it would be with commitment.
D) rate of inflation will be higher than it would be with commitment.

Answer 124

rate of inflation will be higher than it would be with commitment.

Question 125

The New Keynesian transmission mechanism for monetary policy is characterized by
A) helicopter drops of money.
B) money having an impact on the real interest rate.
C) the government buying goods with fresh money.
D) banks using money injections for business loans.

Answer 125

money having an impact on the real interest rate.

Question 126

The assumption that current-period labor supply is positively related to the current-period
real wage (i.e. the NS curve is upward sloping) is justified as long as the
A) substitution effect dominates the income effect in the short run.
B) income effect dominates the substitution effect in the long run.
C) substitution effect dominates the income effect in the long run.
D) income effect dominates the substitution effect in the short run.

Answer 126

substitution effect dominates the income effect in the short run.

Question 127

Assume the economy is initially operating at the natural level of output. Now suppose a
budget is passed that calls for an increase in government spending. This increase in
government spending will, in the short run, cause an increase in
A) the nominal wage.
B) the interest rate.
C) the price level.
D) all of the above
E) none of the above

Answer 127

all of the above

Question 128

When the economy is hit by a temporary positive productivity shock, intertemporal decision
theorypredicts that the real interest rate will _________ and current consumption for the
representative agent will ____________.
A) not change; rise B) fall; fall
C) fall; rise D) rise; rise

Answer 128

fall; rise

Question 129

The phenomenon of underutilization of labor during a recession is called
A) investing in human capital. B) labor hoarding.
C) labor force stabilization. D) labor stockpiling

Answer 129

labor hoarding.

Question 130

Assuming the economy is starting at the natural rate of output and everything else held
constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in
the short-run, but in the long-run the only effect is a rise in inflation.
A) a decrease; demand B) an increase; supply
C) a decrease; supply D) an increase; demand

Answer 130

an increase; demand

Question 131

If the expected inflation rate rises, then the short-run Phillips curve ________ and the long-run
Phillips curve ________.
A) shifts; does not shift
B) does not shift; shifts
C) does not shift; does not shift
D) might shift; shifts only if the short-run Phillips curve shifts
E) shifts; shifts

Answer 131

shifts; does not shift

Question 132

In the AD-AS model a change in workersʹexpectations about inflation will cause ________ to
change.
A) the production function B) long-run aggregate supply
C) aggregate demand D) short-run aggregate supply

Answer 132

short-run aggregate supply

Question 133

Human wealth is
A) the sum of financial and housing wealth.
B) financial wealth minus housing wealth.
C) total wealth minus housing wealth.
D) the discounted present value of all financial assets.
E) the present discounted value of expected future after-tax labor income.

Answer 133

the present discounted value of expected future after-tax labor income.

Question 134

) Rational expectations assumes that individuals
A) have perfect foresight.
B) use all available information up to MCinfo = MBinfo.
C) can accurately predict the future.
D) form their predictions of macroeconomic variables randomly.
E) none of the above

Answer 134

use all available information up to MCinfo = MBinfo.

Question 135

When drawn against the current real wage, the labor demand curve is
A) upward sloping because the marginal product of labor rises with the quantity of labor
employed.
B) upward sloping because the marginal product of labor declines with the quantity of labor
employed.
C) downward sloping because the marginal product of labor declines with the quantity of
labor employed.
D) downward sloping because the marginal product of labor rises with the quantity of labor
employed.

Answer 135

downward sloping because the marginal product of labor declines with the quantity of
labor employed.

Question 136

Robbie Cruz has a special offer from her boss, all widgets sold this week will result in double
the normal commission per unit. What feature of intertemporal choice theory is the boss trying
to exploit?
A) substitution effect on consumption B) income effect on consumption
C) substitution effect on labor D) income effect on labor

Answer 136

substitution effect on labor

Question 137

rightward shift in the intertemporal budget line would be caused by ________.
A) an increase in future income and wealth.
B) a decrease in future income and wealth.
C) an increase in future income and a decrease in wealth.
D) a decrease in future income and an increase in wealth.

Answer 137

an increase in future income and wealth.

Question 138

A consumer may increase her saving by
A) working fewer hours and consuming more goods in the present period.
B) working more hours and consuming more goods in the present period.
C) working fewer hours and consuming fewer goods in the present period.
D) working more hours and consuming fewer goods in the present period.

Answer 138

working more hours and consuming fewer goods in the present period.

Question 139

For this question, assume that a country experiences a permanent increase in its saving rate.
Which of the following will occur as a result of this increase in the saving rate?
A) a permanently faster growth rate of output
B) a permanently higher level of output per capita
C) a permanently higher level of capital per worker
D) all of the above
E) both B and C.

Answer 139

E) both B and C.

Question 140

Which of the following represents the change in the capital stock (△κ)? (Assume allin per
capita)
A) investment minus saving B) output minus depreciation
C) investment minus depreciation D) consumption minus depreciation

Answer 140

investment minus depreciation

Question 141

A classical objection to Keynesian sticky price models is that
A) sticky price models are internally inconsistent.
B) it is easier for firms to change prices rather than change output.
C) real shocks are more important than nominal shocks.
D) it is cheaper for firms to change output rather than change prices.

Answer 141

it is easier for firms to change prices rather than change output.

Question 142

According to the traditional interest-rate channel, expansionary monetary policy lowers the
real interest rate, thereby raising expenditure on ___________, but the New Keynesian model
relies on the ________________effect on consumption spending.
A) investment; intertemporal substitution
B) saving; intertemporal wealth
C) investment; intratemporal substitution
D) consumption; intratemporal substitution

Answer 142

investment; intertemporal substitution

Question 143

The short-run Phillips curve is another way of looking at
A) the natural rate of unemployment.
B) aggregate demand.
C) the short-run aggregate supply.
D) potential GDP.
E) Okunʹs law as applied to aggregate demand.

Answer 143

the short-run aggregate supply.

Question 144

The long-run aggregate supply curve shifts to the right when there is
A) an increase in the total amount of capital in the economy.
B) an increase in the available technology.
C) a decrease in the natural rate of unemployment..
D) A and B.
E) A, B, and C.

Answer 144

A, B, and C.

Question 145

A price is sticky when
A) it changes too much and does not balance markets.
B) it does not change fast enough to restore full market equilibrium.
C) it tends to return to its steady-state level.
D) it changes in discrete steps which may not balance markets.

Answer 145

it does not change fast enough to restore full market equilibrium.

Question 146

Moving upward along the aggregate supply curve, is equivalent to
A) moving downward along the short-run Phillips curve.
B) shifting the short-run Phillips curve leftward.
C) shifting the short-run Phillips curve rightward.
D) shifting the short-run Phillips curve upward.
E) moving upward along the short-run Phillips curve.

Answer 146

moving upward along the short-run Phillips curve.

Question 147

In the New Keynesian model, as the nominal interest rate increases \_\_\_\_\_\_\_\_.
A) the cost of current consumption rises
B) the real interest rate increases
C) the cost of current leisure rises
D) all of the above
E) none of the above

Answer 147

all of the above

Question 148

When steady state capital per worker is above the golden-rule level, we know with certainty
that an increase in the saving rate will
A) increase consumption in both the short run and the long run.
B) decrease consumption in both the short run and the long run.
C) increase consumption in the short run, and decrease it in the long run.
D) decrease consumption in the short run, and increase it in the long run.
E) none of the above

Answer 148

decrease consumption in both the short run and the long run.

Question 149

RBC theory leads to ________ government macro-stabilization policy, due to the theoryʹs
assumption of ________.
A) a rejection of, slow wage and price adjustment
B) a rationale for, slow wage and price adjustment
C) a rationale for, continuous market-clearing
D) a rejection of, continuous market-clearing

Answer 149

a rejection of, continuous market-clearing

Question 150

Behavioral economics has taught us that Homo economicus, i.e. the perfectly rational
economic decision maker, does not exist in the real world. To what extent does this make the
models we have discussed this semester, that generally rely on the assumption she exists ,
unreliable?
A) The true test of a model is itʹs ability to predict and help analyze real-world events, and
the current Macro consensus does that pretty well. Stick with it until something is proven
to be better.
B) We are so far off we need a whole new Macroeconomics.
C) The current consensus model is flexible enough to incorporate new discoveries in human
behavior. It makes no sense to jettison the whole thing. Just keep making marginal
improvements over time.
D) Itʹs as serious as the Lucas critique. Garbage in, garbage out

Answer 150

ALLLLLLL Dumbasssss

Question 151

Suppose there is an increase in expected future taxes. When expectations are rational this will
cause which of the following to occur?
A) the IS curve to shift right in the current period
B) the IS curve to shift left 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

Answer 151

the IS curve to shift left in the current period

Question 152

One implication of adaptive expectations is that the lags in the economyʹs response to shocks will
be _______________ relative to the full information model.
A) much longer B) much shorter C) irrelevant D) about the same

Answer 152

much longer

Question 153

Everything else held constant, a change in workersʹexpectations about inflation will cause
________ to change.
A) long-run aggregate supply B) aggregate demand
C) the production function D)hort-run aggregate ssupply

Answer 153

hort-run aggregate ssupply

Question 154

Suppose policy makers underestimate the natural rate of unemployment, i.e. they believe the
natural rate is 4% when it is really 6%. In situations like these, policy makers will likely implement
policies that result in
A) a higher inflation rate than necessary.
B) an unemployment rate that isʺtoo high.ʺ
C) more unemployment than necessary.
D) a steadily decreasing inflation rate.
E) overly contractionary monetary and fiscal policy

Answer 154

a higher inflation rate than necessary.

Question 155

Assume the economy is initially operating at the natural level of output. Now suppose a budget is
passed that calls for an increase in government spending. This increase in government spending
will, in the short run, cause an increase in
A) the nominal wage.
B) the price level.
C) the nominal interest rate.
D) all of the above
E) none of the above

Answer 155

all of the above

Question 156

According Friedmanʹs restatement of the quantity theory of money, an increase in the money
supply ________ the demand for ________, everything else held constant.
A) increases; supply B) decreases; non-durable goods
C) increases; durable goods D) decreases; supply

Answer 156

increases; durable goods

Question 157

Assets that generate high returns when wealth is decreasing are more valuable than those that are
poitively correlated with changes in wealth because such assets can be use to _____.
A) equate marginal utilities of consumption over time
B) smooth consumption
C) hedge income risk
D) All of the above

Answer 157

All of the above

Question 158

Assume that the economy is in long-run equilibrium with output equal to potential. A
technological improvement will cause the short-run AS to shift _______ and the long-run AS to
shift _______ leading to ___________ output and ___________ inflation.
A) left; right; decreased; decreased B) leftt; left; decreased; increased
C) right; right; increased; decreased D) right; right; decreased; decreased

Answer 158

right; right; increased; decreased

Question 159

Adaptive expectations assumes that individuals
A) can accurately predict the future.
B) form their predictions of macroeconomic variables randomly.
C) base predictions on past observations of the variable being forecast.
D) use all available information in predicting the future.
E) none of the above

Answer 159

base predictions on past observations of the variable being forecast.

Question 160

If the economy is on its short-run Phillips curve at the natural unemployment rate, then in the
AS-AD model, real GDP is definitely
A) greater than potential GDP.
B) less than potential GDP.
C) decreasing.
D) increasing.
E) equal to potential GDP.

Answer 160

equal to potential GDP.