Finall Flashcards
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
an increase in the quantity of saving
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
240 Cotton bolts.
) 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
2 2/3 bolts of cotton
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
Pakistan
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
A decrease in taxes
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
the supply of loanable funds, which decreases interest rates
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.
shifting inward.
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
interest rates should rise which decreases private investment
) 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
real GDP = nominal GDP/Price level
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
changes in the money supply
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
W/P = 2, N = 42, and Y = 410
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.
reduce the price level by 50%.
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
increase in the quantity of investment
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
The marginal product of labor and the real wage rate
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
maximum attainable
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.
a proportional increase in output price.
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
argued that the money supply determined aggregate demand
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.
a supply shock.
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.
monetary injection by the government.
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.
factor markets.
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.
aggregate supply; aggregate demand
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.
increasing opportunity costs as more and more of one good is produced.
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.
the economic cost of using a factor of production is the alternative use of that
factor that is given up.
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
380
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
decrease labor demand, decrease the real wage, and decrease output
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
the price level does not impact output
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
circular flow model
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.
The economy is a complex dynamic system that is naturally self-correcting and
requires no intervention by fiscal or monetary authorities.
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.
the process by which individuals acting in their own self-interest bring about a
market outcome that benefits society as a whole.
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.
output from a one-unit increase in capital.
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.
a rise in nominal wages.
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.
down and to the left, reducing the quantity of labor demanded at any given real
wage.
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
the price level will fall at the rate of output growth
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
temporary excess demand and supply in labor markets
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.
decreases as the number of workers already employed increases.
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
price level
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
an increase in the price level will cause the labor demand schedule to shift to the
right
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
output rises and the price level falls
) 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
a 10% increase in prices, a 10% increase in the money wage, and a 10% increase
in nominal interest rates
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
it often ignores the invention of new or higher quality goods
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.
inefficient in that not all resources are being used.
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
$1,000 in cash
Year 2 nominal GDP is
A) $310. B) $390. C) $200. D) $270.
$390.
Suppose that Year 1 is the base year. Year 2 real GDP is
A) $310. B) $270. C) $390. D) $200.
$310
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.
the marginal product of labor
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.
tax policy
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
determines the price level and, for a given real income, the level of nominal
income
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
All of the above
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.
product market.
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
nothing will shift and the interest rate will remain constant
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.
All of the above.
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
none of the abov
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.
the change in consumption caused by a one-unit change in disposable income.
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
above; positive
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
the demand for real money balances
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
fall; rise
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
$50
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
an increase in income
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.
the goods market is in equilibrium.
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
small; large
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.
output will increase.
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
$869.56.
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
600
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
taxes increase
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
all of the above
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.
fall.
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
income increases
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
fiscal; rise
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
down; left
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
there is an excess supply of goods
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.
0.6.
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
all of the above
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
iS curve
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
increase; increase
“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
the quantity of goods and services that money can buy
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
2.5
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.
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.
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
shifts the LM schedule to the right from LM0 to LM1
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.
0.6.
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.
a new physical asset such as a new machine or a new house.
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).
an increase in output (Y).
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.
remain unchanged.
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
equilibrium in both the goods and money markets
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
an increase in income
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.
positively related to the interest rate
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
the nominal interest rate will fall
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
20
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.
For a given change in taxes, the IS curve will shift less than for an equal change in
government spending.
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
purchases of bonds and other assets will cause the interest rate to fall
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.
shift down and to the right as the real money supply rises.
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
cut; keep from accumulating
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.
the LM curve should be relatively steep.
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
either A or B occurs
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
shift the LM schedule to the left
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
demand; rise
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
increases; increases; right
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
210
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.
monetary policy was ineffective.
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.
$50.
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
none of the above
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
technology shocks have a major role in business cycles.
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
steady state saving/investment is equal to depreciation per worker.
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.
it allows a faster return to economic efficiency.
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.
maximum consumption per person.
) 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.
always equal to the natural (potential) real GDP.
) 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
a decrease; a decrease
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%.
Y will increase by 2%.
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
decrease; increase
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
substitution;interest
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.
plus the amount of current capital left over after depreciation.
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.
natural rate of output.
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.
decrease current labor supply and increase current consumption demand.
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.
All of the above.
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.
may, in part, be an artifact of measurement error.
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.
fall exactly as much as the increase in government spending.
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
increases; decrease
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.
the cost of changing prices.
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.
the way expectations are formed will change.
) 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.
the difference between the potential output and actual output.
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
lower; a higher inflation rate
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
MU(Ct) =βMU(Ct+1)
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.
Raise the target rate of interest and announce that the tight monetray policy will last for a
long time.
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
the present value of lifetime consumption equals the present value of lifetime income.
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.
rate of inflation will be higher than it would be with commitment.
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.
money having an impact on the real interest rate.
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.
substitution effect dominates the income effect in the short run.
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
all of the above
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
fall; rise
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
labor hoarding.
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
an increase; demand
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
shifts; does not shift
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
short-run aggregate supply
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.
the present discounted value of expected future after-tax labor income.
) 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
use all available information up to MCinfo = MBinfo.
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.
downward sloping because the marginal product of labor declines with the quantity of
labor employed.
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
substitution effect on labor
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.
an increase in future income and wealth.
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.
working more hours and consuming fewer goods in the present period.
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.
E) both B and C.
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
investment minus depreciation
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.
it is easier for firms to change prices rather than change output.
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
investment; intertemporal substitution
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.
the short-run aggregate supply.
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.
A, B, and C.
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.
it does not change fast enough to restore full market equilibrium.
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.
moving upward along the short-run Phillips curve.
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
all of the above
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
decrease consumption in both the short run and the long run.
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
a rejection of, continuous market-clearing
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
ALLLLLLL Dumbasssss
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
the IS curve to shift left in the current period
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
much longer
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
hort-run aggregate ssupply
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
a higher inflation rate than necessary.
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
all of the above
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
increases; durable goods
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
All of the above
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
right; right; increased; decreased
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
base predictions on past observations of the variable being forecast.
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.
equal to potential GDP.
