Applied Macroeconomic Theory
Test Preparation
Course Introduction
Applied Macroeconomic Theory explores the practical application of key macroeconomic models and concepts to real-world economic issues. The course examines the determination of output, employment, inflation, and interest rates, integrating theories of economic growth, business cycles, and fiscal and monetary policy. Students will analyze macroeconomic data, interpret trends, and assess policy impacts using contemporary case studies. Emphasis is placed on understanding the role of government intervention, central banks, and global macroeconomic linkages. The course equips students with the analytical tools required to evaluate economic indicators and formulate informed policy recommendations for addressing prevailing macroeconomic challenges.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) What do we assume about households and firms?
A) They act irrationally.
B) They do what the government tells them to do.
C) They look after each other.
D) They optimize.
Answer: D
Q2) Limit commitment occurs when
A) collateral is required to get a loan.
B) one cannot borrow as much as necessary to conduct business.
C) one cannot be forced to repay a loan.
D) the bank can sell your loan to another bank.
Answer: C
Q3) Two plausible hypotheses to explain the productivity slowdown are
A) measurement problems and adjustments to new technologies.
B) large government budget deficits and large balance of trade deficits.
C) globalization of capital markets and reductions in tariffs.
D) adjustments to new technologies and failures in the educational system.
Answer: A
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3
Chapter 2: Measurement
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Sample Questions
Q1) Suppose that Year 2 is the base year. Year 1 real GDP is
A) $200.
B) $270.
C) $310.
D) $390.
Answer: B
Q2) An example of a stock would be
A) real GDP.
B) savings.
C) investment.
D) the amount of money in circulation.
Answer: D
Q3) What is the real GDP in year 2 using base year 2?
A) $418.
B) $300.
C) $360.
D) $338.
Answer: A
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Chapter 3: Business Cycle Measurement
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Q1) Macroeconomic forecasting is made easier due to the fact that
A) real GDP is variable about trend.
B) the business cycle has a regular frequency.
C) deviations from trend in real GDP are persistent.
D) turning points are easy to predict.
Answer: C
Q2) A business cycle trough is a
A) small positive deviation from trend in real GDP.
B) relatively large positive deviation from trend in real GDP.
C) small negative deviation from trend in real GDP.
D) relatively large negative deviation from trend in real GDP.
Answer: D
Q3) A turning point is
A) a change in policy.
B) a peak or a trough.
C) a boom or a recession.
D) a zero deviation from trend.
Answer: B
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5
Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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Sample Questions
Q1) At the optimal consumption bundle,the marginal rate of substitution of leisure for consumption is equal to
A) the real wage and the budget line is tangent to an indifference curve.
B) minus the real wage and the budget line is tangent to the indifference curve.
C) the real wage and the budget line intersects the indifference curve.
D) minus the real wage and the budget line intersects the indifference curve.
Q2) The marginal rate of substitution measures
A) the willingness of a consumer to exchange a good with another consumer.
B) the willingness of a consumer to pay the form for a good.
C) the value in dollars of the last unit of good obtained by the consumer.
D) the rate at which a consumer is willing to exchange one good for another.
Q3) A production function describes the
A) technological possibilities for converting factor inputs into outputs.
B) intellectual possibilities for converting factor inputs into outputs.
C) amount of resources available to the representative firm.
D) actual process of converting factor inputs into outputs.
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Chapter 5: A Closed-Economy One-Period Macroeconomic
Model
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Q1) The PPF determines
A) all possible outcomes for a given wage.
B) the set of feasible outcomes.
C) given leisure, how much consumption a household wants.
D) the share of consumption in output.
Q2) A competitive equilibrium fails to be a Pareto Optimum with a distorting tax because
A) the consumer's budget constraint has an additional kink.
B) the firm is no longer maximizing profits.
C) the government wastes its revenue.
D) the consumer faces a different effective wage than the firm.
Q3) At the competitive equilibrium with a positive proportional labor income tax
A) the real wage after tax exceeds the marginal product of labor.
B) the real wage after tax equals the marginal product of labor.
C) the real wage after tax is lower than the marginal product of labor.
D) We cannot say.
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Chapter 6: Search and Unemployment
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Q1) The unemployment rate is
A) countercyclical
B) procyclical
C) a leading variable
D) smooth
Q2) The participation rate is
A) countercyclical
B) more variable than GDP
C) procyclical
D) a leading variable
Q3) The average unemployment rate was lowest during what period?
A) 1980-1990
B) 1950-1970
C) 2000-2010
D) 1980-2000
Q4) In the 1948-2012 data,the unemployment rate was highest in
A) 2009
B) 1991
C) 1975
D) 1982
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Chapter 7: Economic Growth: Malthus and Solow
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Q1) In a Malthusian world,why is misery recurrent?
A) The marginal returns of capital are decreasing.
B) Fertility is endogenous.
C) Output is increasing in labor.
D) Mortality depends on the standard of living.
Q2) In the Solow growth model,an increase in the savings rate
A) raises steady state per capita output.
B) raises the growth rate in aggregate output.
C) must reduce per capita consumption.
D) must reduce the standard of living.
Q3) With an increase in total factor productivity in the Solow growth model,
A) output decreases temporarily and returns to the previous steady state.
B) output increases temporarily and returns to the previous steady state.
C) the economy reaches a steady state with higher output.
D) the economy reaches a steady state with lower output.
Q4) In the Golden Rule steady state,the marginal product of capital is equal to the A) savings rate plus the population growth rate.
B) population growth rate plus the depreciation rate.
C) depreciation rate plus the savings rate.
D) savings rate divided by the marginal product of labor.
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Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Sample Questions
Q1) What characteristic do human and physical capital share?
A) Both are controlled by the government.
B) Current costs are incurred for future benefits.
C) Their growth depends crucially on the growth of total factor productivity.
D) The use of both exhibits rivalry.
Q2) In the Solow growth model,countries with identical total factor productivities,identical labor force growth rates,and identical savings rates
A) always have identical levels of capital per worker and output per worker.
B) in equilibrium, have identical levels of capital per worker and output per worker.
C) in equilibrium, have identical levels of capital per worker but not necessarily identical levels of output per worker.
D) in equilibrium, have identical levels of output per worker but not necessarily identical levels of capital per worker.
Q3) Endogenous growth theory is about
A) welfare of indigenous people.
B) explaining growth.
C) studying education.
D) studying fertility choices.
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) Macroeconomists are interested in how consumers respond to changes in the market real interest rate because
A) interest rates are an important channel for the effects of monetary and fiscal policies.
B) substitution effects and income effects net out in the aggregate.
C) of the permanent income hypothesis.
D) future income affects current consumption.
Q2) The idea that a permanent increase in income causes a larger increase in consumption than a temporary change in income is called the
A) Friedman-Lucas theory.
B) permanent income hypothesis.
C) Ricardian equivalence theorem.
D) intertemporal substitution effect.
Q3) An important reason why Ricardian equivalence may fail is if
A) borrowing and lending are done through intermediaries.
B) government debt incurred today may not be paid off until after some current consumers are deceased.
C) state and local governments also engage in debt finance.
D) some consumers are borrowers, while other consumers are lenders.
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Chapter 10: Credit Market Imperfections: Credit Frictions, Financial Crises,
and Social Security
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Q1) When there are credit market frictions,Ricardian equivalence may not hold because
A) consumers cannot understand the implications of the government budget constraint.
B) a tax cut in the present with a future increase in taxes works effectively like a loan.
C) an increase in government saving is matched one-for-one by a decrease in private saving.
D) social security is fully-funded.
Q2) If there is limited commitment and the government is no better at collecting on its debts than is the private sector,then
A) Ricardian equivalence holds.
B) the private sector can benefit from a government loan program.
C) Ricardian equivalence does not hold.
D) the Fisher relation does not hold.
Q3) A default premium is the interest rate premium
A) under normal market circumstances.
B) when there are no market fluctuations.
C) covering the default risk.
D) for government debt.
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Page 12
Chapter 11: A Real Intertemporal Model with Investment
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Q1) A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the
A) right by more than the rightward shift in output supply.
B) right by less than the rightward shift in output supply.
C) left by more than the leftward shift in output supply.
D) left by less than the leftward shift in output supply.
Q2) Next period's capital is equal to current-period investment
A) plus the amount of current capital left over after depreciation.
B) minus the amount of current capital left over after depreciation.
C) plus the amount of current period depreciation.
D) minus the amount of current period depreciation.
Q3) If firm-level asymmetric information becomes more severe,then
A) investment demand increases.
B) investment demand decreases.
C) investment demand does not change.
D) it is impossible to tell.
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13
Chapter 12: Money, Banking, Prices, and Monetary Policy
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Q1) Seigniorage is government revenue raised by A) a tax on transactions.
B) issuance of treasury bonds.
C) issuance of money.
D) lump-sum taxation.
Q2) The current demand for money increases when
A) current real income decreases.
B) future real income decreases.
C) the nominal rate of interest decreases.
D) none of the above.
Q3) The nominal interest rate cannot fall below
A) the real interest rate.
B) the rate of growth in the money stock.
C) 2%.
D) zero.
Q4) Going from M0 to M1 and to M2,what is the principle?
A) from household money demand to firm money demand
B) from illiquid to liquid
C) from most usable to least usable for transaction purposes
D) from most usable to least usable as a store of value
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Sample Questions
Q1) There are several competing models of the business cycle because
A) none currently captures all facets of the business cycle.
B) they are all rooted in different philosophical traditions.
C) different shocks need different models.
D) they depend on the type of policy that is adopted.
Q2) If an economy is stuck in a "bad" equilibrium in the coordination failure model
A) the government should intervene by spending more.
B) the government should intervene by spending less.
C) the government should promote optimism.
D) there is nothing that can be done.
Q3) In the coordination failure model,how is a particular equilibrium attained?
A) The Federal Reserve picks it.
B) It depends on total factor productivity shocks.
C) It depends on money supply shocks.
D) because people expect it to be the equilibrium.
Q4) A model with coordination failures has
A) agents that do not act rationally.
B) multiple equilibria.
C) a government that is too large.
D) a tax rate that is too high.
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Chapter 14: New Keynesian Economics: Sticky Prices
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Sample Questions
Q1) Menu costs are
A) very small costs.
B) the cost of differentiating prices for different goods.
C) the relative cost of raw materials compared to finished goods.
D) the cost of changing prices.
Q2) Under fiscal stabilization policy in the New Keynesian model,after a positive shock to output,
A) the government increases expenditures and the central bank increases the money supply.
B) the government increases expenditures and the central bank decreases the money supply.
C) the government decreases expenditures and the central bank increases the money supply.
D) the government decreases expenditures and the central bank decreases the money supply.
Q3) A classical objection to Keynesian sticky price models is that
A) it is easier for firms to change prices rather than change output.
B) it is cheaper for firms to change output rather than change prices.
C) sticky price models are internally inconsistent.
D) real shocks are more important than nominal shocks.
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Chapter 15: International Trade in Goods and Assets
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Q1) In a two-period model with production,a decrease in the world real interest rate
A) increases the current account surplus and increases real output.
B) reduces the current account surplus and increases real output.
C) increases the current account surplus and reduces real output.
D) reduces the current account surplus and reduces real output.
Q2) In a two-period model,holding everything else constant,an increase in current taxes
A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.
Q3) In a two-period model with production,a temporary increase in domestic government spending
A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.
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Chapter 16: Money in the Open Economy
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Q1) The supply of euros is managed by
A) the European Monetary Union.
B) the European Monetary System.
C) the European Central Bank.
D) the European Bank for Reconstruction and Development.
Q2) In the monetary small open-economy model with a flexible exchange rate,an increase in the domestic money supply increases
A) domestic output, but has no effect on the domestic price level or the nominal exchange rate.
B) the domestic price level, but has no effect on domestic output or the nominal exchange rate.
C) the nominal exchange rate, but has no effect on domestic output or the domestic price level.
D) the domestic price level and the nominal exchange rate, but has no effect on domestic output.
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Chapter 17: Money, Inflation, and Banking
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Q1) If an increase in the growth rate of the money supply results in an equal increase in the rate of inflation with no effect on any real variables,we say that
A) the classical dichotomy fails.
B) money is neutral.
C) money is superneutral.
D) money is the most preferred store of value.
Q2) An increase in the inflation rate shifts the labor
A) supply curve to the right.
B) supply curve to the left.
C) demand curve to the right.
D) demand curve to the left.
Q3) Which of the following is not a property of assets?
A) risk
B) inflation.
C) liquidity
D) maturity
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Q1) Application of the time inconsistency problem to monetary policy suggests that,without some mechanism to ensure commitment,the
A) rate of inflation will be higher than it would be with commitment.
B) level of real output will be lower than it would be with commitment.
C) rate of inflation will be higher and the level of real output will be lower than they would be with commitment.
D) rate of inflation and the level of real output will be higher than they would be with commitment.
Q2) If the central bank cannot commit,then
A) the inflation rate is higher than with commitment, but aggregate output is the same. B) money is neutral in the short run.
C) the inflation rate is higher than with commitment, and aggregate output is lower.
D) the central bank can permanently increase the quantity of real output.
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