Advanced Macroeconomics Study Guide Questions
Course Introduction
Advanced Macroeconomics delves into the complex theories and models that explain aggregate economic behavior at a national and global level. The course explores key topics such as economic growth, business cycles, unemployment, inflation, monetary and fiscal policy, and international macroeconomic interactions. Students engage with modern analytic frameworks, including advanced versions of the IS-LM, AD-AS, and Solow growth models, as well as dynamic stochastic general equilibrium (DSGE) approaches. Emphasis is placed on policy analysis, the evaluation of macroeconomic stability, and critical examination of contemporary research and data. Through rigorous mathematical modeling and empirical applications, students develop a deeper understanding of the forces shaping macroeconomic outcomes and challenges faced by policymakers.
Recommended Textbook
Macroeconomics 9th Edition by Andrew
B. Abel
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15 Chapters
1566 Verified Questions
1566 Flashcards
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) From 1800 to 1940,the price level in the United States
A)trended neither upward nor downward.
B)fluctuated wildly.
C)declined slowly.
D)increased slowly.
Answer: A
Q2) Adam Smith's idea of the "invisible hand" says that given a country's resources and its initial distribution of wealth,the use of markets will
A)insulate a nation from the effects of political instability.
B)eliminate problems of hunger and dissatisfaction.
C)eliminate inequalities between the rich and the poor.
D)make people as economically well off as possible.
Answer: D
Q3) What are the major factors affecting the long-term growth of the economy's output?
Answer: The major factors are population growth and average labor productivity.
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3
Chapter 2: The Measurement and Structure of the National Economy
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Sample Questions
Q1) Private disposable income equals
A)GNP - taxes + transfers + interest.
B)NNP - taxes + transfers + interest.
C)national income - taxes + transfers + interest.
D)national income - taxes - transfers + interest.
Answer: A
Q2) The income-expenditure identity says that
A)Y = C + S + T.
B)Y = C + I + G.
C)Y = C + I + G + NX.
D)Y = C + I + G + NX + CA.
Answer: C
Q3) Suppose that national saving is $1456 billion,investment is $1945 billion,and private saving is $1590 billion.How much is the current account balance?
A)$489 billion
B)$221 billion
C)-$221 billion
D)-$489 billion
Answer: D
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Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) In April 2000,the United States had a labor force of 141,230,000,employment of 135,706,000,and there were 67,986,000 people not in the labor force (all numbers rounded to the nearest 1000).
(a)Calculate the unemployment rate.
(b)Calculate the participation rate.
(c)Calculate the employment ratio.
Answer: (a)Unemployment = labor force - employment = 141,230,000 - 135,706,000 = 5,524,000,so the unemployment rate is 5,524,000/141,230,000 = 3.9%.
(b)The participation rate is the fraction of the adult population in the labor force.The adult population is the labor force + the number not in the labor force = 141,230,000 + 67,986,000 = 209,216,000.The participation rate is then 141,230,000/209,216,000 = 67.5%.
(c)The employment ratio is the employed fraction of the adult population,which is 135,706,000/209,216,000 = 64.9%.
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5
Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) A technological improvement will
A)increase the desired capital stock.
B)decrease the desired capital stock.
C)have no effect on the desired capital stock.
D)have the same effect on the desired capital stock as an increase in corporate taxes.
Q2) What are the economic consequences of reductions in defense spending by the government? What happens to national saving,the interest rate,and investment?
Q3) When a person gets an increase in current income,what is likely to happen to consumption and saving?
A)Consumption increases and saving increases.
B)Consumption increases and saving decreases.
C)Consumption decreases and saving increases.
D)Consumption decreases and saving decreases.
Q4) What is the difference between gross investment and net investment?
A)Net investment = gross investment minus taxes
B)Net investment = gross investment minus net factor payments
C)Net investment = gross investment minus inventory accumulation
D)Net investment = gross investment minus depreciation
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) Assuming no change in the effective tax rate on capital,a decrease in the government budget deficit will reduce the current account deficit if and only if the decrease in the budget deficit
A)reduces desired national saving.
B)increases desired national saving.
C)reduces desired national investment.
D)increases desired national investment.
Q2) Which of the following would be part of the nation's current account?
A)An old house purchased by an American in Italy
B)The purchase of a U.S. Treasury bond by a foreigner
C)The interest an American earns on a British bond
D)A factory built by the Japanese in the United States
Q3) When there are two large open economies,if desired international borrowing by the domestic country exceeds desired international lending by the foreign country,then
A)domestic investment must fall.
B)domestic investment must rise.
C)the world real interest rate must fall.
D)the world real interest rate must rise.
Q4) What determines the interest rate in a small open economy?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Edward Denison's analysis of the American economy found that
A)total factor productivity was the largest source of economic growth since 1948.
B)the contribution of labor growth has been more variable than the contribution of capital growth.
C)productivity growth has been positive over every period of more than five years since WorldWar II.
D)the contribution of labor growth has been greater than the contribution of capital growth.
Q2) Steady-state investment per worker is positively related to the capital-labor ratio because the higher the capital-labor ratio
A)the lower the capital depreciation rate.
B)the greater the amount of resources available for capital investment.
C)the more investment per worker is required to replace depreciating capital.
D)the less the economy needs to equip new workers with the same high level of capital.
Q3) Briefly explain the shape of the per-worker production curve in the Solow model.If investment per worker initially exceeds saving per worker,how is the steady-state capital-labor ratio achieved?
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Page 8
Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) The idea that investors today compare the returns on bonds with differing times to maturity to see which is expected to give them the highest return is the underlying principle behind the ________ of the term structure of interest rates.
A)expectations theory
B)investors' viewpoint analysis
C)segmented-markets theory
D)yield comparison theory
Q2) What's the most common way for a central bank to reduce the money supply?
A)Collect higher taxes
B)Sell bonds to the public
C)Buy bonds from the government
D)Buy bonds from the public
Q3) Over half of U.S.currency is
A)held abroad.
B)used in the underground economy.
C)held by banks as reserves.
D)held by businesses, especially retailers, for making transactions.
Q4) What are the major components of M1? What are the major components of M2? Describe each component.
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Chapter 8: Business Cycles
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Sample Questions
Q1) In the Great Depression,the financial sector collapsed,as
A)banks engaged in ruinous competition.
B)the stock market boomed, so people withdrew most of their funds from banks and invested heavily in stocks.
C)the bond market boomed, so people withdrew most of their funds from banks and invested heavily in bonds.
D)many banks closed.
Q2) Christina Romer's estimates of the business cycles prior to World War II showed that the business cycle
A)had greater fluctuations before World War II than previous estimates had shown.
B)had smaller fluctuations before World War II than previously estimated.
C)had smaller fluctuations before World War II than after World War II.
D)had larger fluctuations after World War II than had been previously measured.
Q3) Economists use the term shocks to mean
A)unexpected government actions that affect the economy.
B)typically unpredictable forces that have major impacts on the economy.
C)sudden rises in oil prices.
D)the business cycle.
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Chapter 9: The Is-Lmad-As Model
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Sample Questions
Q1) The aggregate demand curve
A)is vertical.
B)slopes upward.
C)is horizontal.
D)slopes downward.
Q2) When the money supply rises by 10%,in the short run,output ________ and the price level ________.
A)rises; is unchanged
B)declines; falls
C)is unchanged; falls
D)declines; is unchanged
Q3) An increase in investment spending would cause the FE line to A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if Ricardian equivalence holds; otherwise, shift to the right.
Q4) Identify changes in three variables that would cause the FE line to shift to the right.
Q5) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) Why doesn't stabilization policy work,according to economists using the misperceptions theory?
Q2) According to classical economists,the increase in unemployment in recessions is caused by
A)slack aggregate demand.
B)the failure of wages to adjust to restore equilibrium in the labor market.
C)the power of labor unions, which prevent firms from cutting wages.
D)a mismatch of workers and jobs.
Q3) According to classical economists,the government should increase government purchases when
A)the benefits of the spending exceed the costs.
B)the economy is in a recession.
C)the economy is likely to go into a recession in the next six months to a year.
D)inflation is lower than its targeted level.
Q4) The most common measure of productivity shocks is known as A)the Solow residual.
B)the Lucas supply curve.
C)the Prescott productivity parameter.
D)the Kydland factor.
Q5) Define real shocks,define nominal shocks,and give an example of each.
Page 12
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Chapter 11: Keynesianism: the Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) In the Keynesian model,a firm's high menu costs cause
A)real-wage rigidity.
B)full employment.
C)price stickiness.
D)efficiency wages.
Q2) According to the menu cost theory,firms will be slow in changing their prices because
A)if prices changed frequently, individuals would reduce their demand for that good because of uncertainty.
B)frequent price changes would be a sign of monopolistic behavior.
C)the cost of changing the price might exceed the additional revenue the price change would generate.
D)demand for their product would fall because consumers would purchase goods from firms that had not raised their prices.
Q3) A firm is a price taker if it
A)always sells its output at the industry-determined price.
B)takes consumer demand into consideration in setting its price.
C)takes its production costs into consideration in setting its price.
D)uses a pricing strategy to gain market share.
Page 13
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) Can macroeconomic policy be used systematically to create unanticipated inflation?
A)No, according to Keynesian economists.
B)Yes, according to classical economists.
C)No, according to classical economists.
D)Yes, according to Keynesian economists, if Ricardian equivalence holds.
Q2) Consider the following misperceptions model of the economy.
AD: Y = 600 + 10(M/P)
SRAS: Y = \( \bar{\gamma} \) + P - P<sup>e</sup> \( \bar{\gamma} \)
Okun's Law: (Y - \( \bar{\gamma} \) )/ \( \bar{\gamma} \) = -2(u - \( \bar u \) )
Let \( \bar{\gamma} \) = 750,= 0.05,M = 600,and P<sup>e</sup> = 40.
(a)What is the price level?
(b)Suppose there is an unanticipated increase in the nominal money supply to 800.What is the short-run equilibrium level of output,the unemployment rate,and the price level?
(c)When price expectations adjust fully,what is the price level?
Q3) What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
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Page 14
Chapter 13: Exchange Rates, business Cycles, and Macroeconomic
Policy in the Open Economy
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Sample Questions
Q1) Describe how the euro was created.What are the benefits of the monetary union? What are the costs?
Q2) Purchasing power parity means that
A)e<sub>nom</sub> = P<sub>For</sub> / P.
B)P = P<sub>For</sub>.
C)P = e<sub>nom</sub> / P<sub>For</sub>. D)e<sub>nom</sub> = mc<sup>2</sup>.
Q3) Assume the United States is currently running a current account deficit.The most effective way of eliminating this current account deficit would be to temporarily ________ government purchases and ________ the domestic money supply. A)increase; increase B)increase; decrease C)decrease; increase D)decrease; decrease
Q4) In a flexible exchange-rate system,the value of a currency is determined by A)the government.
B)the intersection of the IS and LM curves.
C)the demand and supply for the currency in the foreign exchange market. D)Swiss gnomes.
Page 15
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) The Federal Reserve is
A)a Kentucky bourbon.
B)a wild game preserve.
C)an express mail service.
D)the central bank of the United States.
Q2) Zero lower bound refers to the fact that
A)the government budget deficit must be zero in the long run.
B)the lowest possible level of the current account deficit is zero in the long run.
C)the inflation rate can never decline below zero.
D)nominal interest rates cannot fall below zero.
Q3) The largest liability of the Fed from those on this list is
A)U)S. Treasury securities.
B)mortgage-backed securities.
C)loans to depository institutions.
D)currency outstanding.
Q4) Describe the Taylor rule.If the Fed were following the rule,what would the nominal Fed funds rate be if inflation over the past year were 4% and output were 1% below its full-employment level?
Page 16
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The primary deficit is equal to
A)the amount by which government purchases, transfers, and net interest exceed tax revenues.
B)the amount by which government purchases and transfers exceed tax revenues.
C)the deficit plus net interest payments.
D)total tax revenues minus net interest minus government expenditures.
Q2) The deficit is
A)the amount by which government purchases, transfers, and net interest exceed tax revenues.
B)the amount by which government purchases and transfers exceed tax revenues.
C)the primary deficit minus net interest payments.
D)total tax revenues minus net interest minus government expenditures.
Q3) An example of tax smoothing is provided by evidence of
A)temporary changes in defense expenditures by the government.
B)reductions in tax rates prior to presidential elections.
C)Keynesian tax cuts designed to help the economy recover from a recession.
D)reliance on debt financing rather than taxation during World War II.
Q4) What are the main reasons (give at least three)that Ricardian equivalence might not hold?
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