Advanced Macroeconomics
Exam Solutions
Course Introduction
Advanced Macroeconomics offers an in-depth exploration of core macroeconomic theories, focusing on dynamic models that explain economic growth, business cycles, fiscal and monetary policy, and unemployment. The course examines modern approaches such as overlapping generations, endogenous growth theory, and new Keynesian frameworks, equipping students with analytical tools to evaluate complex economic phenomena. Emphasis is placed on the development and application of mathematical models, empirical research, and the implications of macroeconomic policies in both closed and open economies, preparing students for research or advanced professional work in economics.
Recommended Textbook
Macroeconomics 2nd Edition by Charles I. Jones
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20 Chapters
1883 Verified Questions
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) Macroeconomic is to microeconomic what __________ is to __________.
A)cosmology;particle physics
B)particle physics;cosmology
C)physics;biology
D)chemistry;organic chemistry
E)biology;zoology
Answer: A
Q2) The short run is concerned with __________ while the long run is concerned with
A)inflation;unemployment
B)causes of economic fluctuations;inflation
C)causes of economic fluctuations;determinants of economic growth
D)determinants of economic growth;causes of economic fluctuations
E)causes of economic fluctuations;the money supply
Answer: C
Q3) An economic model is an exact replica of the macroeconomy.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Measuring the Macroeconomy
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Sample Questions
Q1) According to the expenditure approach,if Y is GDP,C is consumption,I is investment,G is government purchases,and NX is net exports,the national income identity can be written as:
A)Y + C - G = I + NX.
B)Y - C = I + G - NX.
C)Y - C - G - I = NX.
D)Y = (C + I + G)/NX.
E)Y = C + I + G.
Answer: C
Q2) Which of the following are not included in the expenditure approach to National Income Accounting?
A)software
B)taxes
C)defense expenditures
D)a and b
E)none of the above
Answer: B
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Chapter 3: An Overview of Long- Run Economic Growth
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Sample Questions
Q1) One of the nice properties of the rule of 70 is that it simply approximates how long it will take for a variable to double,but it is dependent on the level of the variable.
A)True
B)False
Answer: False
Q2) In the late nineteenth century,__________ was the richest country in the world,but it now lags behind the United States because of __________.
A)China;a lower rate of inflation
B)the United Kingdom;a lower economic growth rate
C)Germany;a higher economic growth rate
D)Japan;consistently being at war
E)China;a higher economic growth rate
Answer: B
Q3) If x grows at 3 percent and y grows at -2 percent and w = x/y,then w grows at 5 percent.
A)True
B)False
Answer: True
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Chapter 4: A Model of Production
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Sample Questions
Q1) Institutions are one example of factors that influence total factor productivity.
A)True
B)False
Q2) Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*L*)/Y* = 1/3,respectively.One implication of this result is that __________ and profits are
A)w*L* + r*K* = Y*;positive
B)w*L* + r*K* = Y*;equal to zero
C)w*L* + r*K* = Y*;negative
D)(w*L* - r*K*)= Y*;equal to zero
E)(w*L*/Y*)(r*K*/Y*)= 0;negative
Q3) Exogenous variables are predetermined by the model builder.
A)True
B)False
Q4) The two main inputs we consider in our production function model are labor and land.
A)True
B)False
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Page 6
Chapter 5: The Solow Growth Model
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Sample Questions
Q1) A decline in the investment rate will cause the steadystate level of output and capital to rise.
A)True
B)False
Q2) In the Solow model,the saving rate is an endogenous variable.
A)True
B)False
Q3) In Figure 5.1,if the economy begins with the initial capital stock at K1,the capital stock will __________ and the economy will __________.
A)decrease,grow
B)increase,grow
C)stay constant,shrink
D)decrease,shrink
E)stay constant,grow
Q4) In the Solow model,if capital is in the steady state,then output:
A)will continue to grow.
B)is also in the steady state.
C)will continue to grow but its rate of growth will slow down.
D)will decline but its rate of growth will be positive.
E)will begin to contract.
Page 7
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Chapter 6: Growth and Ideas
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Sample Questions
Q1) If there are large fixed or research and development costs,such as in the pharmaceutical industry,production can characterized by:
A)negative costs.
B)constant returns to scale.
C)decreasing returns to scale.
D)large variable costs.
E)increasing returns to scale.
Q2) In Romer's influential paper he divided the economic world into:
A)resources and ideas.
B)objects and resources.
C)objects and ideas.
D)utilities and objects.
E)none of the above
Q3) In the Romer model,the Mexican economy:
A)never generates new ideas.
B)does not need to generate ideas,as it can use those devised in the United States.
C)cannot use ideas devised in the United States.
D)eventually will reach a steady state.
E)does not have an ideas sector.
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Page 8
Chapter 7: The Labor Market,wages,and Unemployment
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Sample Questions
Q1) Leading up to the 2010 mid-term elections,there was lively debate on whether or not the Bush tax cuts,enacted in 2003,should be allowed to expire for families with annual incomes over $250 thousand.What would be the impact of allowing income taxes on these families to rise on their income and the number of labor participants?
Q2) A drawback of unemployment benefits is:
A)it gives workers a disincentive to find work.
B)it costs taxpayers over 50 percent of their income.
C)the payments are too large.
D)it lengthens the time spent unemployed.
E)Both a and d are correct.
Q3) Wage rigidity:
A)helps the labor market achieve equilibrium.
B)prevents the capital market from realizing equilibrium.
C)prevents the labor market from realizing equilibrium.
D)prevents unemployment.
E)does none of the above.
Q4) What has been happening to cause returns to a college education over the past 50 years or so,compared to only receiving a high school education? What explains this difference?
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Chapter 8: Inflation
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Sample Questions
Q1) According to the government's budget constraint,if the government spends more than it generates in taxes,it can raise revenues by:
A)printing money.
B)increasing its debt.
C)lowering interest rates.
D)privatization.
E)a and b
Q2) Fiat money has value because:
A)people believe it has value.
B)of social convention.
C)it is backed by gold.
D)it has intrinsic value.
E)a and b are correct.
Q3) The data presented in Figure 8.1 confirm that the relationship between inflation and money growth is:
A)positive,as suggested by the Fisher equation.
B)positive,as suggested by money neutrality.
C)positive,as suggested by the quantity theory of money.
D)negative,as suggested by the quantity theory of money.
E)none of the above
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Chapter 9: An Introduction to the Short Run
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Sample Questions
Q1) Current output is defined as __________.
A)the amount of output when inflation is about 2 percent
B)what an economy produces when it is at capacity
C)the amount of total output at the current level of input utilization
D)the amount of total output if all inputs were utilized at their long-run sustainable levels
E)the amount of output where unemployment is zero
Q2) In 1980,the inflation rate reached about 14 percent.The Federal Reserve __________ interest rates,sending the economy into a(n)__________.When doing so,the Federal Reserve knew this would be the case because of the __________.
A)raised;expansion;Phillips curve
B)raised;recession;Phillips curve
C)raised;recession;Okun relationship
D)decreased;recession;Phillips curve
E)decreased;expansion;Phillips curve
Q3) Figure 9.6 below shows the output gap for the years 1990-2010.Using the Phillips curve and Okun's law,discuss the impacts on inflation and unemployment for the years 1997-2000 and 2008-2010.From this analysis,what is the relationship between unemployment and inflation?
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11
Chapter 10: The Great Recession: a First Look
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Sample Questions
Q1) According to the data in Table 10.1,when was the recession deepest?
A)2001
B)2003
C)2009
D)2008
E)not enough information
Q2) Which of the following financial institutions converted to bank holding companies in the financial collapse?
A)Wells Fargo
B)Goldman Sachs
C)Morgan Stanley
D)Citicorp
E)b and c
Q3) According to The Economist,in 2006 approximately one-half of all home loans were subprime.
A)True
B)False
Q4) The federal funds rate is the rate the Fed charges to member banks.
A)True
B)False
Page 12
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Chapter 11: The Is Curve
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Sample Questions
Q1) If the real interest rate is less than the marginal product of capital,firms are better off:
A)producing at a loss.
B)saving their earnings in an economywide financial market.
C)accumulating more inventory.
D)borrowing in financial markets and buying more capital.
E)none of the above
Q2) The I in the IS curve stands for __________ and S denotes __________.
A)investment;sales
B)interest rate;savings
C)investment;savings
D)inventory;sales
E)interest rate;sales
Q3) The basic IS model embodies the Life Cycle and Permanent Income hypotheses by:
A)setting consumption proportional to potential output.
B)keeping consumption growth constant.
C)setting consumption proportional to the real interest rate.
D)setting consumption equal to past income.
E)a and b are correct.
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) Which of the following statements is not true?
A)Small menu prices lead to price stickiness.
B)In the classical dichotomy,some prices are sticky.
C)In the classical dichotomy,an increase in money supply growth leads to a corresponding increase in inflation.
D)Short-run contracts lead to price persistence.
E)Imperfect information may lead to price inflexibility.
Q2) When a central bank targets interest rates,it adopts a policy to adjust __________ to accommodate __________.
A)money supply;money demand shocks
B)money supply;tax changes
C)money demand;government debt
D)interest rates;money supply
E)money demand;money supply shocks
Q3) When the Fed targets the interest rate,it adjusts the money supply to maintain that interest-rate target.
A)True
B)False
Q4) Discuss the differences between the ex ante and ex post real interest rate.
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Chapter 13: Stabilization Policy and the Asad Framework
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Sample Questions
Q1) The equation used to predict the federal funds rate is called the:
A)Phillips curve.
B)monetary policy rule.
C)Taylor rule.
D)marginal product of capital.
E)Slutsky equation.
Q2) When we raise the federal funds rate by 2 percent for every 1 percent increase in the inflation rate,this is an example of:
A)a fiscal policy rule.
B)a monetary policy rule.
C)discretionary monetary policy.
D)discretionary fiscal policy.
E)none of the above
Q3) The Lucas critique states that it is better for economists to use adaptive rather than rational expectations in their macroeconomic models.
A)True
B)False
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) The Taylor rule expresses the federal funds rate as the weighted average of:
A)the unemployment rate and inflation.
B)inflation and short-run output.
C)the misery index,money growth rate,and the mortgage rate.
D)the CPI and real GDP.
E)long-run output and the natural rate of unemployment.
Q2) 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
Q3) Between approximately 2001 and 2006,the Taylor rule predicted federal funds rate:
A)was greater than the actual federal funds rate.
B)was less than the actual federal funds rate.
C)was statistically equal to the actual federal funds rate.
D)The Taylor rule is used to predict the natural rate of unemployment.
E)was negatively correlated with the federal funds rate.
Q4) The risk premium raises the borrowing rate above the nominal federal funds rate.
A)True
B)False
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Chapter 15: Consumption
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Sample Questions
Q1) To analyze Ricardian equivalence using the neoclassical consumption model,we must:
A)remove taxes from the present value of wealth.
B)include inflation in the intertemporal budget constraint.
C)treat the discount factor as greater than one.
D)use nominal,rather than real,interest rates.
E)assume marginal utility is constant.
Q2) When applied to the first President Bush's temporary tax cuts,which were repealed six months after they were implemented,Ricardian equivalence predicts that households did not boost their spending.
A)True
B)False
Q3) Your high school economics teacher recently saw the graph of personal savings rate below.She knows you are taking economics in college and is curious to hear your opinion about what is causing the general trends in saving rates from 1980 to today.What do you tell her?
Q4) If the Euler equation did not hold,then the real interest rate would be zero.
A)True
B)False
Q5) Are all households homogeneous and rational,at least as defined by economists?
Page 17
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Chapter 16: Investment
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Sample Questions
Q1) When discussing arbitrage in the stock market,a financial investor can choose between putting money into a savings account or buying a stock.
A)True
B)False
Q2) The arbitrage condition for capital demonstrates that:
A)returns to a bank account are equal to the return to capital.
B)returns to a bank account are equal to the user cost of capital.
C)if taxes are zero,profits are maximized.
D)profit maximizing will yield the optimal amount of capital a firm should buy.
E)the user cost is less than the marginal product of capital.
Q3) In 2006,investment __________ from about __________ of GDP to about __________ by mid-2009.
A)fell;17.5 percent;11 percent
B)rose;12 percent;15 percent
C)rose;70 percent;71 percent
D)fell;-2.5 percent;-5 percent
E)rose;20 percent;21 percent
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18
Chapter 17: The Government and the Macroeconomy
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Sample Questions
Q1) An explanation of why governments are willing to burden future generations with debt to finance a war today is that future generations will enjoy peace and must pay something.
A)True
B)False
Q2) The debt-to-GDP ratio in the United States was over 100 percent during World War II.
A)True
B)False
Q3) The government's intertemporal budget constraint assumes the budget is always balanced.
A)True
B)False
Q4) If the federal government has a budget shortfall,it generally sells some of its real asset holdings to cover the excess outlays.
A)True
B)False
Q5) During which period did the United States have the largest debt-to-GDP ratio? Why?
Q6) Explain how budget deficits lead to crowding out.Is there evidence of this?
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Chapter 18: International Trade
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Sample
Questions
Q1) The example demonstrating how corn can be "turned into" cars illustrates how trade can be viewed as:
A)bad for farmers.
B)good for certain industries.
C)an alternative technology for producing goods.
D)undermining America's ability to produce both corn and cars.
E)turning the United States into a low value-added economy.
Q2) If the United States is running a trade deficit this year,it also must __________ now,and in the long run,__________.
A)lend to China;run balanced trade with China
B)borrow from China;run a trade deficit
C)lend to China;run balanced trade with China.
D)lend to China;run a trade deficit
E)Not enough information is given.
Q3) As with new technology,trade can be viewed as a way for:
A)an economy to increase its production possibilities and welfare.
B)an economy to specialize to the detriment of everyone.
C)exporters to benefit at the expense of everyone else.
D)an economy to reduce its aggregate production.
E)none of the above
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Chapter 19: Exchange Rates and International Finance
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Sample Questions
Q1) With the foreign interest rate in the IS model,an increase in the foreign interest rate causes __________ because __________.
A)the IS curve to shift right;it leads to a depreciation of the domestic real exchange rate
B)rightward movement along the IS curve;it leads to a depreciation of the domestic real exchange rate
C)the IS curve to shift left;it leads to a depreciation of the domestic real exchange rate
D)the IS curve to shift right;it leads to an appreciation of the domestic real exchange rate
E)the IS curve to stay put;the change in investment and net exports offset each other
Q2) In 2004,the average amount of foreign exchange trades each day was about:
A)$2 billion per day.
B)$2 trillion per year.
C)$2 trillion per day.
D)$2 trillion per month.
E)$1 trillion per day.
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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) 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
Q3) The policies used by a successful economy can be adopted by aspiring economies.
A)True
B)False
Q4) If we cannot accurately measure potential GDP,we might overestimate the severity of a recession.
A)True
B)False
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