Advanced Macroeconomics Exam Review
Course Introduction
Advanced Macroeconomics delves into the theoretical and empirical analysis of aggregate economic activity, focusing on the determinants of growth, fluctuations, and policy effectiveness. The course examines foundational models such as the Solow growth model, overlapping generations model, and dynamic stochastic general equilibrium (DSGE) frameworks while exploring topics like government debt, fiscal and monetary policy, business cycles, and the role of expectations in macroeconomic outcomes. Emphasis is placed on formal mathematical modeling, recent research developments, and the application of macroeconomic theory to current global economic challenges.
Recommended Textbook
Macroeconomics 2nd Edition by Charles I. Jones
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20 Chapters
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) In the short run,we are concerned with the causes of economic fluctuations and how to fix them.
A)True
B)False
Answer: True
Q2) In the long run,we are concerned about the causes of economic growth.
A)True
B)False
Answer: True
Q3) Which of the following questions should a successful model predict?
i.Why,in general,do Americans have higher incomes than Africans?
ii.How much less unemployment is there during an economic expansion?
iii.Why does the United States have a lower unemployment rate than Europe?
A)i and ii
B)ii only
C)iii only
D)i,ii,and iii
E)i and iii
Answer: D
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Chapter 2: Measuring the Macroeconomy
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Sample Questions
Q1) By how much does the current GDP rise in the following scenario? A real estate agent sells a house for $250,000 that the previous owners had purchased 10 years earlier for $90,000.The real estate agent earns a commission of $10,000.
A)$160,000
B)$250,000
C)$10,000
D)$90,000
E)$260,000
Answer: C
Q2) In 2005,government expenditures accounted for about __________ of total GDP.
A)11 percent
B)40 percent
C)16 percent
D)70 percent
E)19 percent
Answer: E
Q3) The largest GDP expenditure share historically has been government expenditure. A)True
B)False
Answer: False
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Chapter 3: An Overview of Long- Run Economic Growth
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Sample Questions
Q1) Assuming the current rate of economic growth continues,the average parent of a college student will have a lifetime income __________ that of his or her son or daughter.
A)ten times
B)half
C)about the same as D)five times
E)about twice
Answer: B
Q2) Name three of the fastest growing countries from 1960 to 2000.Name three of the slowest over the same period.Are there any similarities?
Answer: Fast-South Korea,Hong Kong,Thailand,China,Japan,and Ireland;slow-Niger,Nicaragua,Mozambique,Madagascar,and Venezuela.At this point,we can only mention generalities about geographical regions: the fastest tend to be Southeast Asia while the slowest are in Africa and Latin America.More specific reasons won't be given until Chapters 4-6.
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5
Chapter 4: A Model of Production
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Sample Questions
Q1) In the United States,each year of education increases a worker's wage by about __________ per year.
A)7 percent
B)1 percent
C)4 percent
D)10 percent
E)none of the above
Q2) Which of the following explain differences in total factor productivity?
A)institutions
B)human capital
C)infrastructure
D)legal structure.
E)all of the above
Q3) The marginal product of labor is measured in: A)dollars.
B)units of output.
C)units of output per dollar.
D)units of capital per dollar.
E)units of labor per dollar.
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Page 6
Chapter 5: The Solow Growth Model
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Sample Questions
Q1) In the Solow model,with population growth,
A)there is no steady state in output per person.
B)the economy never settles down to a steady state with no growth in output per person.
C)the economy eventually settles down to a steady state with no growth in output per person.
D)the economy eventually settles down to a steady state with no growth in aggregate output.
E)None of the above is correct.
Q2) The productivity parameter,A±,plays a larger role in the Solow model than it does in the production model.
A)True
B)False
Q3) In the corn farm example,corn can be used as:
A)only investment.
B)either saving or depreciation.
C)only consumption.
D)either consumption or investment.
E)tax revenue.
Q4) What are the key assumptions of the Solow growth model?
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Chapter 6: Growth and Ideas
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Sample Questions
Q1) If there are large fixed costs,due to research and development,perfect competition does not generate new ideas,because:
A)firms need to recoup these costs through higher profits.
B)with monopolistic competition,prices are equal to the marginal cost plus a markup.
C)with monopolistic competition,prices are equal to the marginal cost minus a markup.
D)perfectly competitive firms always set prices lower than the marginal cost.
E)Both a and b are correct.
Q2) According to the combined Solow-Romer model,all countries grow at the same rate in the medium and long runs.
A)True
B)False
Q3) In the Romer model,if an economy allocates all of its labor to production,
A)it will reduce output.
B)it will reduce the number of ideas it generates.
C)it will increase the number of ideas it generates.
D)it will not generate any ideas.
E)None of the above is correct.
Q4) How does the Romer model of economic growth exploit the concept of nonrivalry?
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Page 8
Chapter 7: The Labor Market,wages,and Unemployment
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Sample Questions
Q1) Because of the dynamics of the workforce,for example,whether or not workers become discouraged when there are changes in the economy,
A)the unemployment rate is not necessarily an accurate gauge of the labor market.
B)the unemployment rate is a precise gauge of the labor market.
C)it might be best to consider the employment population ratio rather than the unemployment rate.
D)Both a and c are correct
E)None of the above is correct.
Q2) You are a senior graduating soon.In 2010 the average annual wage was about $62,000.Suppose you graduate when you are 22 and will retire when you are 67 (normal in the United States,about 45 years of work).Assuming your wages don't grow over time,ignoring inflation,and assuming we discount the future at 4.5 percent,what would be present value of your human capital? If we discount the future at 3 percent what would be your present value lifetime income? Intuitively explain the difference.
Q3) Wage rigidity decreases labor market volatility.
A)True
B)False
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Page 9
Chapter 8: Inflation
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Sample Questions
Q1) Money neutrality is the proposition that changes in money have no real effect on the economy.
A)True
B)False
Q2) __________ are(is)the most liquid asset.
A)Gold
B)Small savings accounts
C)Short-term treasury bills
D)Currency
E)Copper
Q3) The quantity theory states that the nominal GDP is equal to:
A)the real GDP.
B)the number of dollars in circulation.
C)the velocity of money.
D)the effective amount of money used in purchases.
E)velocity times real GDP.
Q4) Explain how increases in government expenditures can lead to inflation.
Q5) In times of high inflation,shoe-leather costs rise.
A)True
B)False
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Chapter 9: An Introduction to the Short Run
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Sample Questions
Q1) New technology,oil price changes,pork-barrel spending,interest rate changes,changes in planned investment,and disasters are examples of __________.
A)long-term economic shocks
B)short-term economic shocks
C)political unrest
D)monetary policy
E)fiscal policy
Q2) The table below displays the United States' potential and actual output for six select months between 1960 and 2009.In which month does the economy have the largest expansionary gap? Largest recessionary gap?
Table 9.1: Actual and Potential Output,in billions $s
Q3) Consider Figure 9.4,which shows the annual inflation rate month to month.According to the Phillips curve,the period from about 1998.04 to 2000.02 is a period of
A)stagnation
B)recession
C)expansion
D)none of the above
E)Not enough information is given.
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Page 11
Chapter 10: The Great Recession: a First Look
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Sample Questions
Q1) The sharp swing in core inflation in 2008-09 was due to:
A)movements in energy prices.
B)the sharp decline in housing prices.
C)There was no sharp swing in core inflation.
D)rapid increases in wages.
E)rapidly rising unemployment.
Q2) In 1933 the __________ was set up to __________.
A)Troubled Asset Relief Fund;shore up insolvent commercial banks
B)Federal Reserve System;centralize monetary policy
C)Federal Deposit Insurance Corporation;help prevent bank runs
D)Depository Institutions Deregulation and Monetary Control Act;repeal the Glass-Steagall Act
E)U.S.Department of Treasury;monitor investment bank activity
Q3) Explain the relationships between the global savings glut,sub-prime loans,interest rates,and the burst housing bubble.
Q4) Briefly discuss the macroeconomic outcomes of the financial crisis.
Q5) According to The Economist,in 2006 approximately one-half of all home loans were subprime.
A)True
B)False
Page 12
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Chapter 11: The Is Curve
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Sample Questions
Q1) In the short run,because financial markets respond immediately to interest rate changes,
A)prices are very volatile.
B)the marginal product of capital always is greater than the real interest rate.
C)the marginal product of capital never deviates to the real interest rate.
D)the marginal product of capital deviates to the real interest rate.
E)investment is less volatile than output.
Q2) The IS curve describes the __________ relationship between __________ and __________.
A)negative;tax rate;investment
B)positive;interest rate;output
C)positive;tax rate;government expenditure
D)negative;interest rate;output
E)negative;interest rate;money supply
Q3) The fundamental lesson of the Life Cycle and Permanent Income hypotheses is that individuals smooth their consumption patterns over their lifetime.
A)True
B)False
Q4) Derive Hicks' IS relationship beginning with the national income identity.
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Chapter 12: Monetary Policy and the Phillips Curve
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Sample Questions
Q1) Expected inflation is:
A)equal to zero.
B)equal to the real interest rate.
C)equal to future periods' inflation rate.
D)the rate of inflation that firms believe will prevail in macroeconomy.
E)about 2 percent.
Q2) When economists say "sticky inflation," they mean that inflation does not react directly with the monetary policy.
A)True
B)False
Q3) According to the Fisher equation,the nominal interest rate is equal to:
A)the rate of inflation.
B)the real interest rate minus the rate of inflation.
C)the real interest rate plus the rate of inflation.
D)the rate of unemployment.
E)the real interest rate plus short-run economic fluctuations.
Q4) In the classical dichotomy,some prices are sticky.
A)True
B)False
Q5) What are the mechanics of lowering interest rates?
Page 14
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Chapter 13: Stabilization Policy and the Asad Framework
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Sample Questions
Q1) Which of the following shifts the aggregate supply curve?
A)a change in u¯
B)an increase in the price of oil
C)the current inflation rate
D)all of the above
E)raising the federal funds rate
Q2) If the United Auto Workers successfully negotiate higher wages,this would cause the AD curve to shift to the left.
A)True
B)False
Q3) The reputations of __________,__________,and __________ have convinced observers that the Fed is committed to low and stable inflation.
A)John Taylor,Milton Friedman,Karl Marx
B)George H.W.Bush,Bill Clinton,George W.Bush
C)Ronald Reagan,Alan Greenspan,Ben Bernanke
D)Paul Volcker,Alan Greenspan,Ben Bernanke
E)David Ricardo,John Stuart Mill,Alfred Marshall
Q4) How does the simple monetary rule dictate interest responses to a decrease in the rate of inflation?
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Chapter 14: The Great Recession and the Short-Run Model
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Sample Questions
Q1) By linking bank executive compensation to long-term performance,__________ hopes to __________ in financial markets.
A)Long Term Capital Management;increase the use of complicated financial algorithms
B)the Squam Lake Group;reduce systematic risktaking
C)American Insurance Group;increase the use of collateralized insurance obligations
D)the Fed;increase risk-sharing through the use of collateralized debt obligations
E)Fannnie Mae;reduce subprime loans
Q2) The price-to-earnings ratio is useful in identifying asset bubbles.
A)True
B)False
Q3) The effect of the subprime loan crisis pushed the risk premium up.This pushes the MP curve up and the AD down.
A)True
B)False
Q4) The risk premium raises the borrowing rate above the nominal federal funds rate. A)True
B)False
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16
Chapter 15: Consumption
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Sample Questions
Q1) The intertemporal budget constraint basically states that:
A)the present value of consumption must equal lifetime income only.
B)total consumption equals total income.
C)the present value of consumption must equal lifetime wealth.
D)there is no future consumption because there is no future income.
E)the present value of consumption is paid for by today's income only.
Q2) In 1992,the first Bush administration was worried about a lingering recession.The administration announced that households would receive a reduction in their taxes for the year 1992.However,this was not accompanied by a reduction in tax rates,and the taxes would have to be repaid when households filed their taxes in April 1993.Explain what the impact of such a policy would be.
Q3) The utility function is constructed in such a way that consumption exhibits:
A)diminishing marginal utility.
B)total satisfaction.
C)a single period level of utility.
D)total lifetime income.
E)diminishing utility.
Q4) Behaviorial economics treats all households as heterogenous.
A)True
B)False
Page 17
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Chapter 16: Investment
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Sample Questions
Q1) Consider Figure 16.1.If there is an increase in the capital,then curve __________ would shift to curve __________.If the MPK falls,curve __________ would shift to
A)d;c;a;b
B)b;a;c;d
C)c;d;b;a
D)a;b;d;c
E)not enough information
Q2) In the simple model of financial asset model arbitrage we assume that:
A)futures markets are perfectly efficient.
B)there is no uncertainty about stock prices.
C)stock prices follow a random walk.
D)the risk premium does not equal zero.
E)capital gains are zero.
Q3) During recessions __________ disproportionately to __________.
A)taxes;income
B)consumption falls;government expenditures
C)consumption rises;income
D)investment falls;consumption
E)output falls;income
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Chapter 17: The Government and the Macroeconomy
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Q1) An implication of the intertemporal budget constraint is that the government can borrow as much as it wants.
A)True
B)False
Q2) Which of the following should economic policymakers consider to be associated with large deficits and a large debt-to-GDP ratio?
A)the importance of economic growth
B)the possibility of high inflation or default
C)intergenerational equity
D)the extent to which deficits crowd out private investment
E)all of the above
Q3) The largest debt-to-GDP ratio is in the United States.
A)True
B)False
Q4) According to the law of diminishing returns,the longer we live,the more we will be willing to pay relatively more for medical care than for other goods and services.
A)True
B)False
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Chapter 18: International Trade
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Sample Questions
Q1) Running trade deficits in some periods and trade surpluses in others allows a country to:
A)run budget deficits.
B)increase consumption in every period.
C)smooth consumption.
D)increase interest rates.
E)increase the value of its currency vis-à-vis other currencies.
Q2) The national income identity can be rearranged to yield the relationship between:
A)the international flow of goods and services to the international flow of capital.
B)the national flow of goods and services to the national flow of capital.
C)the international flow of goods and services to the government's budget constraint.
D)savings to the international flow of capital.
E)the money supply to the exchange rate.
Q3) With intertemporal trade,a country running a trade deficit is in a bad position.
A)True
B)False
Q4) What has been the trend of trade in the United States since 1950? Explain.
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Page 20
Chapter 19: Exchange Rates and International Finance
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Sample Questions
Q1) The reason individuals have to trade currencies is to buy and sell foreign goods.
A)True
B)False
Q2) Consider Figure 19.1,which shows the £UK/$US,$US/ ,and £UK/ exchange rates.During the period 2001-2007,the U.S.dollar __________ relative to the euro and __________ relative to the U.K.pound.
A)appreciated;appreciated
B)depreciated;remained somewhat unchanged
C)appreciated;remained somewhat unchanged
D)depreciated;appreciated
E)Not enough information is given.
Q3) To extend the short run to include a more sophisticated version of the trade balance,we include:
A)foreign income.
B)the gap between domestic and foreign inflation rates.
C)the changes in the money supply.
D)the gap between the domestic and foreign real interest rates.
E)none of the above
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Chapter 20: Parting Thoughts
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Sample Questions
Q1) If we cannot accurately measure potential GDP,
A)we might overestimate the severity of a recession.
B)we may adopt the wrong fiscal or monetary policy.
C)we will never know the true state of the economy.
D)All of the above are correct.
E)None of the above is correct.
Q2) Name three contributing factors to standards of living in the long run.
Q3) Different rates of economic growth across countries reflect:
A)differences in savings rates.
B)differences in initial endowments.
C)the principle of transition dynamics.
D)all of the above
E)none of the above
Q4) Which of the following has not contributed to higher standards of living in the long run?
A)productivity
B)investment in human capital
C)the stock of technology
D)investment in physical capital
E)none of the above
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