Applied Macroeconomics
Exam Materials
Course Introduction
Applied Macroeconomics explores the use of macroeconomic theories, models, and quantitative tools to analyze real-world economic issues and policy decisions. The course covers topics such as national income determination, inflation, unemployment, monetary and fiscal policy, economic growth, and open economy macroeconomics. Students learn how to interpret macroeconomic data, evaluate policy impacts, and apply empirical techniques to assess economic scenarios. Through case studies and practical applications, the course prepares students to address contemporary economic problems and contribute to informed decision-making in public and private sectors.
Recommended Textbook
Macroeconomics 5th Edition by R.
Glenn Hubbard
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19 Chapters
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Zane's Vanes is a service that restores old weather vanes.Zane has just spent $125 purchasing a 1920s era weather vane which he expects to restore and sell for $500 once the work is completed.After having spent $125,Zane realizes that he will need to spend an additional $200 on materials to complete the restoration.Alternatively,he can sell the weather vane without restoring it for $200.What is his marginal benefit if he sells the weather vane without restoring it?
A)$75
B)$125
C)$200
D)$300
Answer: C
Q2) Economists assume that rational people
A)never use all available information as they act to achieve their goals.
B)undertake activities that benefit others and hurt themselves.
C)only weigh the benefits and costs of the most desirable alternative actions.
D)respond to economic incentives.
Answer: D
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3
Chapter 2: Trade-Offs,comparative Advantage,and the Market System
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Sample Questions
Q1) If Abigail can make more candles in one day than Pierre,then Abigail has an absolute advantage in making candles.
A)True
B)False
Answer: True
Q2) In the circular flow model,households
A)sell goods and services in the input market.
B)and firms spend earnings from resource sales on goods and services in the factor market.
C)hire resources sold by firms in the factor market.
D)spend earnings from resource sales on goods and services in the product market. Answer: D
Q3) Should countries specialize in producing goods and services based on having a comparative advantage or an absolute advantage? Why?
Answer: Countries should specialize in producing products based on comparative advantage because this allows countries to produce those products and services at a lower opportunity cost than competitors.
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Page 4
Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Suppose that when the price of pickles decreases,Teddy increases his purchase of ketchup.To Teddy,
A)pickles and ketchup are complements.
B)pickles and ketchup and substitutes.
C)pickles and ketchup are normal goods.
D)pickles are a normal good and ketchup is an inferior good.
Answer: A
Q2) The market for smartphones has become very competitive.The increase in competition in this market is an example of how the market responds to A)decreases in the price of desktop computers (a substitute for the product).
B)increases in income.
C)changes in population.
D)changes in consumer tastes.
Answer: D
Q3) What is the difference between a demand schedule and a demand curve?
Answer: A demand schedule is a table that shows the relationship between the price of a product and the quantity of the product demanded.A demand curve is a curve that shows the relationship between the price of a product and the quantity of the product demanded.
Page 5
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Table 4-2.The table above lists the highest prices five consumers are willing to pay for a concert ticket.If the price of one ticket falls from $50 to $20
A)only three tickets will be sold.
B)consumer surplus decreases from $48 to $24.
C)consumer surplus increases from $0 to $62.
D)everyone will buy a ticket.
Q2) The following equations represent the demand and supply for kumquats.
Q<sub>D</sub> = 60 - 3P
Q<sub>S</sub> = -20 + 5P
What is the equilibrium price (P)and quantity (Q - in thousands)of kumquats?
A)P = $5; Q = 20 thousand
B)P = $30; Q = 5 thousand
C)P = $20; Q = 10 thousand
D)P = $10; Q = 30 thousand
Q3) When ________ in a market,the total net benefit to society is maximized.
A)deadweight loss is maximized
B)a competitive equilibrium is achieved
C)consumer surplus is minimized
D)producer surplus is minimized
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) ________ occurs when actions taken by one party to a transaction are different from what the other party expected at the time of the transaction.
A)Adverse selection
B)Risk aversion
C)Fraud
D)Moral hazard
Q2) In 1960,out-of-pocket spending on health care in the United States was
A)2.2 percent.
B)6 percent.
C)48 percent.
D)64 percent.
Q3) In ________,health care spending per person based on income per person is significantly higher than the average for most other countries.
A)Austria
B)Canada
C)Norway
D)the United States
Q4) Briefly describe the types of health care systems in Canada,Japan,and the United Kingdom.
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Chapter 6: Firms,the Stock Market,and Corporate Governance
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Sample Questions
Q1) What is a secondary market?
A)a market where factory seconds and damaged merchandise are sold
B)a market where newly issued bonds are sold to initial buyers by the borrowing firm
C)a market where a newly issued stocks are sold to initial buyers by the borrowing firm
D)a market where you can sell any stocks you own as a private investor
Q2) How are corporate profits taxed in the United States?
A)Earnings are taxed first by state sales taxes and then as corporate profits at the Federal level.
B)Earnings are taxed first as personal income then as corporate profits at the Federal level.
C)Earnings are taxed first as corporate profits then as personal income after dividends are paid.
D)Corporate profits are not taxed at all.
Q3) Net worth and stockholders' equity are both equal to the difference between assets and liabilities.
A)True
B)False
Q4) How does a firm raise external funds through direct finance?
Page 8
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Chapter 7: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Refer to Table 7-6.With trade,what is the total gain in belt production?
A)30
B)80
C)120
D)210
Q2) In the 1980s,Japan agreed to limit the quantity of automobiles it would export to the United States.Why did the Japanese government agree to this trade restriction?
A)Japanese automobile producers lobbied for the restrictions in order to increase the price of their exports to the United States.
B)The Japanese government wanted to limit sales to the United States in order to make more automobiles available for Japanese consumers.
C)The Japanese government feared that the alternative would be a tariff or quota on imports of Japanese automobiles imposed by the U.S.government.
D)The Japanese government wanted more automobiles to be available for export to countries other than the United States.
Q3) What are terms of trade?
Q4) What was the GATT,why was it established,and why and with what was it replaced?
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Chapter 8: GDP: Measuring Total Production and Income
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Sample Questions
Q1) Give two reasons why GDP does not reflect total production in an economy.
Q2) Macroeconomics,as opposed to microeconomics,includes the study of what determines the
A)average price levels of goods and services in the economy.
B)price charged for laptop computers by Dell.
C)wages paid to employees by Dell.
D)quantity of Dell employees.
Q3) Residential investment includes spending by firms on office buildings.
A)True
B)False
Q4) In the circular flow model,the value of total production for an economy ________ the value of total expenditures on final goods and services. A)equals
B)is greater than
C)is less than
D)may be greater than or less than
Q5) Why do we not count the value of intermediate goods and services in gross domestic product? Does the value of intermediate goods and services show up in gross domestic product? If so,how?
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Chapter 9: Unemployment and Inflation
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Sample Questions
Q1) Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called
A)frictional unemployment.
B)structural unemployment.
C)cyclical unemployment.
D)seasonal unemployment.
E)unnatural unemployment.
Q2) If the CPI rises from 206.7 to 212.7 between two consecutive years,by how much has the cost of living changed between these two years?
A)The cost of living has increased by 6%.
B)The cost of living has increased by 2.9%.
C)The cost of living has increased by 12.7%.
D)The cost of living has decreased by 6%.
Q3) In 2013,Caterpillar laid off employees.The employees who were laid off due to the business cycle would be considered
A)structurally unemployed.
B)frictionally unemployed.
C)seasonally unemployed.
D)cyclically unemployed.
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Chapter 10: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) If net taxes fall by $80 billion,we would expect
A)the government deficit to fall by $80 billion.
B)household saving to rise by $80 billion.
C)household saving to rise by less than $80 billion.
D)household saving to fall by more than $80 billion.
Q2) Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures,and ________ long-run economic growth in the economy.
A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases
Q3) Using equations for public and private saving,show that saving must equal investment in a closed economy.Begin with the expression for total saving in the economy.
Q4) Which of the following is a correct statement?
A)Inflation is measured as the percent change in the CPI.
B)The CPI is a widely used measure of the inflation rate.
C)Real GDP is our best measure of economic growth.
D)The PPI measures inflation as experienced by producers.
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Chapter 11: Long-Run Economic Growth: Sources and Policies
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Sample Questions
Q1) According to the text,there are three ways the government can help increase the accumulation of knowledge capital.What are they?
A)protecting intellectual property rights,subsidizing research and development,and subsidizing education
B)increasing taxes on firms,eliminating patents,and increasing the minimum wage
C)encouraging the use of trade secrets,expanding student loan programs,and increasing the minimum wage
D)reducing taxes on capital,increasing Social Security payments,and lowering the exchange rate
Q2) When firms benefit from the results of research and development they didn't pay for,we say firms
A)are litigious.
B)free ride.
C)invest in knowledge capital.
D)maintain a level playing field.
Q3) Use production functions from the economic growth model to explain why the United States grew at a much faster rate than the Soviet Union in the latter half of the 20th century.
Q4) Explain three reasons why the productivity slowdown of 1974-1995 occurred.
Page 13
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Chapter 12: Aggregate Expenditure and Output in the Short Run
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Sample Questions
Q1) An increase in taxes will ________ consumption spending,and a decrease in transfer payments will ________ consumption spending.
A)increase; increase
B)decrease; increase
C)increase; decrease
D)decrease; decrease
Q2) From 1983-2013,________ for the United States were negative.
A)planned inventories
B)net exports
C)unplanned inventories
D)transfer payments
Q3) National income =
A)Consumption + Saving - Taxes
B)Consumption - Saving - Taxes
C)Consumption - Saving +Taxes
D)Consumption + Saving + Taxes
Q4) Ceteris paribus,how does a recession in the United States affect U.S.net exports?
Q5) Why is the aggregate demand curve downward sloping while the aggregate expenditure line is upward sloping?
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Chapter 13: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) Refer to Figure 13-2.Ceteris paribus,a decrease in the labor force would be represented by a movement from
A)SRAS<sub>1</sub> to SRAS<sub>2</sub>.
B)SRAS<sub>2</sub> to SRAS<sub>1</sub>.
C)point A to point B.
D)point B to point A.
Q2) Suppose the U.S.GDP growth rate is slower relative to other countries' GDP growth rates.This will
A)move the economy up along a stationary aggregate demand curve.
B)move the economy down along a stationary aggregate demand curve.
C)shift the aggregate demand curve to the left.
D)shift the aggregate demand curve to the right.
Q3) Last week,13 Mexican pesos could purchase one U.S.dollar.This week,it takes 11 Mexican pesos to purchase one U.S.dollar.This change in the value of the dollar will ________ exports from the United States to Mexico and ________ U.S.aggregate demand.
A)increase; increase B)decrease; decrease C)increase; decrease D)decrease; increase
Page 15
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Chapter 14: Money, banks, and the Federal Reserve System
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Sample Questions
Q1) A decrease in the reserve requirement ________ bank reserves and ________ the money supply.
A)increases; increases B)increases; decreases C)decreases; increases D)decreases; decreases
Q2) Net worth is
A)a measure of a firm's profits. B)part of stockholders' equity.
C)the difference between a firm's assets and liabilities. D)listed on the asset side of a firm's balance sheet.
Q3) If bankers become more uncertain regarding future deposits and withdrawals and choose to hold more excess reserves against deposits,the money multiplier will increase. A)True
B)False
Q4) Suppose you transfer $2,000 from your mutual fund account to your checking account.What is the immediate impact of this transfer on M1 and M2?
Q5) What is the principle monetary policy tool used by the Fed.Why?
Q6) How do open market operations work?
Page 16
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Chapter 15: Monetary Policy
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Sample Questions
Q1) In reality,the Fed is unable to use monetary policy to keep real GDP exactly at its potential level.
A)True
B)False
Q2) How do economists generally rate the Fed's performance in the 1980s,1990s,and the early 2000s? Has the public been supportive of their policies? Is there anything on the horizon for the Fed that might cause the public concern?
Q3) The money supply curve is vertical if
A)banks and the Fed jointly determine the money supply.
B)the Fed is able to completely determine the money supply.
C)banks and households determine the money supply.
D)households and the Fed jointly determine the money supply.
Q4) The interest rate that banks charge other banks for overnight loans is the A)prime rate.
B)discount rate.
C)federal funds rate.
D)Treasury bill rate.
Q5) What actions should the Fed take if it believes the economy is about to experience a high rate of inflation?
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Chapter 16: Fiscal Policy
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Sample Questions
Q1) To combat a recession with discretionary fiscal policy,Congress and the president should
A)decrease government spending to balance the budget.
B)decrease taxes to increase consumer disposable income.
C)lower interest rates and increase investment by increasing the money supply.
D)raise taxes on interest and dividends,but not on personal income.
Q2) In preparing their estimates of the stimulus package's effect on GDP,Obama administration economists estimated a government purchases multiplier of 1.57.This indicates that a ________ increase in government purchases would increase equilibrium real GDP by $157 billion
A)$1 billion.
B)$10 billion.
C)$100 billion.
D)$157 billion.
Q3) Calculate the value of the government purchases multiplier if the marginal propensity to consume equals 0.9,the tax rate equals 0.25,and the marginal propensity to import equals 0.15.
Q4) Explain why the tax multiplier is different from the government purchases multiplier,in both sign and relative magnitude.
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Chapter 17: Inflation, unemployment, and Federal Reserve Policy
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Sample Questions
Q1) What is the natural rate of unemployment?
A)the unemployment rate that exists when the economy is at potential GDP
B)the unemployment rate that exists when the economy is at a trough in a business cycle
C)an unemployment rate of 0%
D)any unemployment rate that is above the inflation rate
Q2) When individuals use ________ about an economic variable to make a decision,expectations are rational.
A)only historical information
B)only information announced by the Fed
C)all available information
D)only information garnered in the private sector
Q3) According to economists Robert Lucas and Thomas Sargent,the apparent short-run trade-off between unemployment and inflation in the 1950s and 1960s was the result of
A)unexpected changes in monetary policy.
B)expected changes in monetary policy.
C)unexpected changes in fiscal policy.
D)expected changes in fiscal policy.
Q4) Why is the credibility of the Fed's policy announcements particularly important?
Page 19
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Chapter 18: Macroeconomics in an Open Economy
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Sample Questions
Q1) Expansionary monetary policy lowers interest rates and forces a real appreciation of the dollar in international currency markets.
A)True
B)False
Q2) The impact of crowding out
A)is larger in a closed economy as compared to an open economy.
B)is larger in an open economy as compared to a closed economy.
C)is larger in an open economy as compared to a closed economy when fiscal policy is contractionary.
D)is larger in a closed economy as compared to an open economy when fiscal policy is contractionary.
Q3) The level of saving in Japan has historically been high relative to the level of domestic investment.Based on this information,we would expect that
A)Japan's net foreign investment has been relatively low.
B)Japan's net exports have been relatively high.
C)Japan's capital inflows are positive.
D)Japan's private saving is greater than its public saving.
Q4) Explain the relationship between net exports and net foreign investment.
Q5) Why is the balance of payments always zero?
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Chapter 19: The International Financial System
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Sample Questions
Q1) A persistent shortage or surplus of a currency under the Bretton Woods system was evidence of
A)failure to support the existing fixed exchange rate by central banks.
B)fundamental disequilibrium in the country's exchange rate.
C)speculation against the currency by speculators in world exchange markets.
D)all of the above
Q2) Suppose Mexico and the United States are on the gold standard.If there is a half an ounce of gold in the dollar,and one quarter an ounce of gold in the peso,then the exchange rate is
A)$1 = 2 pesos.
B)$1 = 4 pesos.
C)$1 = 1/2 peso.
D)$1 = 1/4 peso.
E)$0.50 = 1/2 peso.
Q3) The Bretton Woods system was established in 1944 and remained in place until the early 1970s.
A)True
B)False
Q4) Why might a country raise interest rates in the face of an exchange rate crisis?
Q5) What are the three main exchange rate systems,and how do they operate?
Page 21
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