Applied Macroeconomics Exam Review
Course Introduction
Applied Macroeconomics focuses on the practical application of macroeconomic theories and models to real-world economic issues and policy challenges. The course covers topics such as national income determination, fiscal and monetary policy, inflation, unemployment, economic growth, and international trade, emphasizing how these elements interact in both developed and developing economies. Students will learn to analyze and interpret macroeconomic data, evaluate government policies, and use quantitative tools to assess current economic conditions. Through case studies and empirical exercises, the course aims to equip students with the analytical skills necessary to understand and address contemporary macroeconomic problems.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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18 Chapters
966 Verified Questions
966 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) The development most responsible for the wide-spread introduction of macroeconomic models built upon solid microeconomic foundations was the
A) work of John Maynard Keynes.
B) rational expectations revolution.
C) popularization of supply-side economics.
D) development of the Keynesian coordination failure model.
Answer: B
Q2) A likely explanation for the 2008-2009 recession is
A) an increase in energy prices.
B) financial market problems.
C) a drastic reduction in government expenses.
D) an increase in taxes.
Answer: B
Q3) The most likely explanation of the recession of 1981-1982 was A) an increase in energy prices.
B) a collapse in investment spending.
C) that it was an unfortunate byproduct of a decrease in inflation.
D) a dramatic decrease in stock prices.
Answer: C
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Page 3
Chapter 2: Measurement
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Sample Questions
Q1) When there is positive inflation,
A) growth in nominal GDP exceeds growth in real GDP.
B) growth in real GDP exceeds growth in nominal GDP.
C) growth in real GDP and nominal GDP are roughly equal.
D) there can never be any growth in nominal GDP.
Answer: A
Q2) Recently,consumption has comprised approximately
A) one-half of GDP.
B) two-thirds of GDP.
C) three-fourths of GDP.
D) four-fifths of GDP.
Answer: B
Q3) The base year matters for the computation of real GDP because
A) otherwise we cannot compute growth rates.
B) relative prices can change over time.
C) it allows an international comparison of GDP.
D) it establishes a target for macroeconomic policy.
Answer: B
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4
Chapter 3: Business Cycle Measurement
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Sample Questions
Q1) Which of the following is not a correct characterization of the U.S. business cycle?
A) Employment is procyclical.
B) Consumption is procyclical.
C) Real wages are procyclical.
D) Prices are procyclical.
Answer: D
Q2) If real GDP helps to predict the path of a particular macroeconomic variable,it is said to be a
A) conventional variable.
B) coincident variable.
C) leading variable.
D) lagging variable.
Answer: D
Q3) Average labor productivity is computed as the
A) ratio of industrial production to the employment rate.
B) ratio of real output in manufacturing to the level of real GDP.
C) ratio of real GDP to the unemployment rate.
D) ratio of real GDP to the level of employment.
Answer: D
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Page 5
Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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Sample Questions
Q1) A Cobb-Douglas production function is
A) a production function for the textile industry.
B) a particular production function that fits the data well.
C) a production function applicable in the service industry.
D) the production function that Henry Ford applied in his firm.
Q2) Labor supply
A) must necessarily increase when the real wage increases.
B) increases if the substitution effect exceeds the income effect.
C) is increasing and then decreasing in the real wage.
D) increases when taxes increase.
Q3) The consumer wants to work because he/she
A) is told to work.
B) likes to work.
C) likes leisure.
D) wants the income.
Q4) Labor demand is decreasing in the wage because
A) the substitution effect is larger than the income effect.
B) the income effect is larger than the substitution effect.
C) the production function is concave.
D) the marginal product of labor is increasing in labor.
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Chapter 5: A Closed-Economy One-Period Macroeconomic Model
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Sample Questions
Q1) 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.
Q2) The tax base is
A) the average tax rate.
B) the tax rate for the base year.
C) the object being taxed.
D) the lowest tax rate.
Q3) Making use of an economic model is a process of
A) solving hundreds of simultaneous equations.
B) running experiments to determine how changes in the endogenous variables will change the exogenous variables.
C) running experiments to determine how changes in the exogenous variables will change the endogenous variables.
D) resolving inconsistencies in the actions of economic agents.
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Page 7
Chapter 6: Search and Unemployment
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Sample Questions
Q1) In the 1948-2012 data,the unemployment rate was highest in A) 2009
B) 1991
C) 1975
D) 1982
Q2) In the DMP model,a decrease in the unemployment insurance benefit
A) increases the unemployment rate.
B) reduces labor market tightness.
C) reduces the unemployment rate.
D) reduces the vacancy rate.
Q3) In the DMP model,
A) There are N firms, Q is the labor force, and N-Q is the vacancy rate.
B) There are N consumers, Q is the labor force, and N+Q is the number of consumers choosing home production.
C) There are Q consumers, N is the labor force, and N-Q is the number of consumers choosing home production.
D) There are N consumers, Q is the labor force, and N-Q is the number of consumers choosing home production.
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8
Chapter 7: Economic Growth: Malthus and Solow
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Sample Questions
Q1) In the Malthusian model,population growth is endogenous because
A) the birth rate is endogenous.
B) the death rate is endogenous.
C) the birth and death rates are endogenous.
D) neither is endogenous.
Q2) In the steady state of Solow's exogenous growth model,an increase in the savings rate
A) increases output per worker and increases capital per worker.
B) increases output per worker and decreases capital per worker.
C) decreases output per worker and increases capital per worker.
D) decreases output per worker and decreases capital per worker.
Q3) In a Malthusian world,what event would improve temporarily the standard of living,as measured by output per capita?
A) a peace keeping mission
B) an increase in violent crime
C) a new mutation of germs
D) a new sewer system
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Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Sample Questions
Q1) In the endogenous growth model,human capital accumulation is best described as a form of
A) consumption.
B) investment.
C) government spending.
D) none of the above
Q2) In the endogenous growth model,an increase in a worker's level of human capital
A) increases the amount of additional human capital she can produce, but does not increase the amount of output she can produce.
B) increases the amount of additional output she can produce, but does not increase the amount of human capital she can produce.
C) increases both the amount of additional human capital she can produce and the amount of output she can produce.
D) increases neither the amount of additional human capital she can produce nor the amount of output she can produce.
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) The two primary explanations for the excess volatility of consumption are
A) consumers' limited life spans and credit market imperfections.
B) credit market imperfections and changes in market prices.
C) changes in market prices and distorting taxes.
D) distorting taxes and consumers' limited life spans.
Q2) If government spending does not change,an increase in the government deficit leads to
A) an increase in current consumption.
B) a decrease in current consumption.
C) no change in current consumption.
D) it depends on the marginal propensity to consume.
Q3) The desire to smooth consumption is reflected in A) the consumer's budget constraint.
B) the curvature in a consumer's indifference curves.
C) choice between present and future.
D) the production possibilities frontier.
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11
Chapter
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Sample Questions
Q1) An interest rate spread is
A) the difference between long-term and short-term interest rates.
B) the difference between nominal and real interest rates.
C) the difference between lending and borrowing interest rates.
D) the difference between public and commercial interest rates.
Q2) Why do consumers benefit from pay-as-you-go social security?
A) It keeps inflation in check as money is redistributed.
B) It is a better way than taxes to finance the government.
C) It forces people to save more than they would otherwise.
D) With sufficiently high population growth, many young contribute to the benefits of the old.
Q3) Pay-as-you-go social security
A) can never improve economic welfare for everyone.
B) can improve welfare for everyone if the population growth rate is large enough.
C) is always inefficient.
D) is not used by any countries in the world.
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Page 12
Chapter 11: A Real Intertemporal Model with Investment
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Sample Questions
Q1) When drawn against the real interest rate,the output supply curve is upward sloping because labor supply is
A) increasing in the real interest rate and labor demand is independent of the real interest rate.
B) decreasing in the real interest rate and labor demand is independent of the real interest rate.
C) independent of the real interest rate and labor demand is increasing in the real interest rate.
D) independent of the real interest rate and labor demand is decreasing in the real interest rate.
Q2) An increase in lifetime wealth
A) increase current labor supply and increase current consumption demand.
B) increase current labor supply and decrease current consumption demand.
C) decrease current labor supply and increase current consumption demand.
D) decrease current labor supply and decrease current consumption demand.
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Chapter 12: Money, Banking, Prices, and Monetary Policy
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Sample Questions
Q1) We want money mostly because A) it makes us happy.
B) we can buy goods with it.
C) we lengthen the life of our mattress.
D) we trust it.
Q2) As means of payment currency,credit cards,and debit cards differ according to A) whether they pay interest.
B) whose liability they represent.
C) transactions costs.
D) all of the above.
Q3) The current demand for money increases when A) current real income increases.
B) future real income decreases.
C) the nominal rate of interest increases.
D) none of the above.
Q4) Money is neutral in the model economy we discussed because A) the money supply is exogenous.
B) the money supply is intertemporal.
C) prices are fully flexible.
D) it is a barter economy.
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Sample Questions
Q1) One potential weakness of the coordination failure model as an explanation of business cycles is that
A) evidence supporting intertemporal substitution as an important determinant of labor supply is weak.
B) evidence supporting the existence of increasing returns at the aggregate level is weak.
C) it fails to explain several of the key business cycle regularities.
D) it requires that consumers not behave in a rational manner.
Q2) A Keynesian model that is consistent with fully flexible wages and prices is based upon the notion of
A) cooperation failures.
B) coordination failures.
C) collaboration failures.
D) decreasing returns to scale.
Q3) Real business cycle theory was introduced by
A) Milton Friedman and Robert Lucas.
B) Milton Friedman and Anna Schwartz.
C) Thomas Cooley and Gary Hansen.
D) Finn Kydland and Edward Prescott.
Page 15
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Chapter 14: New Keynesian Economics: Sticky Prices
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Sample Questions
Q1) What do we need to assume about firms in the sticky price model?
A) They accommodate any demand at the given price.
B) They hire until the real wage equals the average labor productivity.
C) They maximize only current profits.
D) They adapt the price to current conditions.
Q2) Consider two alternative worlds: (i)the world works according the real business cycle model,and the central bank acts to stabilize the price level; (ii)the world works according to the New Keynesian sticky price model,and the central bank acts to make the output gap zero. Which is correct?
A) We would prefer to live in world (ii).
B) We would prefer to live in world (i).
C) The data cannot tell us whether we are living in world (i) or world (ii).
D) in either world, the central bank is irrelevant.
Q3) A price may be sticky because
A) of monetary policy.
B) of menu costs.
C) of total factor productivity shocks.
D) of the monetary illusion.
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Chapter 15: International Trade in Goods and Assets
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Sample Questions
Q1) A small open economy is an economy
A) in which both imports and exports are less than 5% of GDP.
B) whose firms and consumers are individually, but not collectively price takers.
C) whose firms and consumers are collectively, but not individually price takers.
D) whose firms and consumers are individually and collectively price takers.
Q2) In a two-period model with default,the nation defaults on its debt in the current period if
A) the market interest rate is high, the cost of defaulting is low, and national debt is high.
B) the market interest rate is low, the cost of defaulting is low, and national debt is high.
C) the market interest rate is high, the cost of defaulting is high, and national debt is low.
D) the market interest rate is low, the cost of defaulting is high, and national debt is low.
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Chapter 16: Money in the Open Economy
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Sample Questions
Q1) The adoption of capital controls makes
A) everyone in the domestic economy better off.
B) some domestic residents better off and some worse off, although on average welfare increases.
C) some domestic residents better off and some worse off, although on average welfare decreases.
D) everyone in the domestic economy worse off.
Q2) The International Monetary Fund plays the key role of
A) providing deposit insurance for banks in its member nations.
B) acting as lender of last resort for its member countries' central banks.
C) providing loans to member countries to help finance development projects.
D) enforcing international monetary agreements.
Q3) In the New Keynesian open economy model
A) the nominal exchange rate is always fixed.
B) prices are flexible.
C) net exports depends on the relative price of foreign goods to domestic goods.
D) the nominal exchange rate is always flexible.
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Chapter 17: Money, Inflation, and Banking
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Sample Questions
Q1) To implement the Friedman rule for long-term monetary policy,the monetary authority would need to set the
A) inflation rate equal to zero.
B) nominal rate of interest equal to zero.
C) real rate of interest equal to zero.
D) money growth rate equal to zero.
Q2) Which of the following properties must a good have to be used as money?
A) It should be a durable good.
B) It should be issued by a government of central bank.
C) It should have intrinsic value.
D) It should be shiny.
Q3) A key property of a Diamond-Dybvig bank is
A) it is well-diversified.
B) it lends to borrowers.
C) it provides benefits very different from the provision of insurance.
D) it trades with other banks.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Sample Questions
Q1) The idea that economic agents do not make systematic errors because they use all information efficiently is called the
A) consistency hypothesis.
B) rational expectations hypothesis.
C) information efficiency hypothesis.
D) principle of maximizing behavior.
Q2) A predominant view among Federal Reserve officials is that
A) the Phillips curve is unimportant.
B) the Phillips curve helps us forecast inflation.
C) the Phillips curve helps us forecast the nominal interest rate.
D) the Phillips curve does not exist in the data.
Q3) The Phillips curve shifts because
A) fiscal policy changes over time.
B) of total factor productivity shocks.
C) of economic development.
D) none of the above.
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