Course Introduction
Applied Macroeconomics
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Applied Macroeconomics explores the practical use of macroeconomic theories and models to analyze real-world economic issues and policy questions. The course covers topics such as aggregate output, unemployment, inflation, fiscal and monetary policy, and international trade and finance. Students will learn how to interpret economic indicators, evaluate the impact of government interventions, and understand the dynamics of economic cycles. Hands-on case studies and empirical analysis are emphasized to connect theory with current macroeconomic challenges faced by economies globally.
Recommended Textbook
Macroeconomics 12th Edition by Rudiger Dornbusch Dr
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Page 2
Chapter 1: Introduction
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Q1) In the very short run, the level of
A)output is determined by both aggregate demand and aggregate supply
B)output is determined by aggregate demand alone
C)prices will change if aggregate demand shifts
D)prices is determined by aggregate demand alone
E)both A and C
Answer: B
Q2) In the very long-run AD-AS model, if the AD-curve shifts to the left, then
A)prices and output will both decrease
B)prices and output will both increase
C)prices will decrease but output will remain the same
D)output will decrease but prices will remain the same
E)output will increase but prices will decrease
Answer: C
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3
Chapter 2: National income accounting
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Q1) If the U.S.unemployment rate has increased, which of the following must have occurred?
A)more workers have become discouraged and stopped looking for jobs
B)more people have been forced to work in part-time rather than full-time jobs
C)there has been an decrease in the work force as fewer job openings were listed
D)more people have become only "marginally attached" to the work force
E)none of the above
Answer: E
Q2) If national income is 5,200, disposable income is 4,400, consumption is 4,100, the trade deficit is 110, and the budget deficit is 150, what is the level of private domestic investment?
A)1,060
B)540
C)300
D)260
E)40
Answer: D
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Page 4
Chapter 3: Growth and accumulation
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Q1) Growth accounting explains
A)how economic decisions control the accumulation of capital
B)how the current savings rate affects the stock of capital in the future
C)what part of growth in total output is due to growth in different factors of production
D)all of the above
E)only A and B
Answer: C
Q2) The Cobb-Douglas aggregate production function provides a fairly good approximation of the U.S.economy if we assume that
A)the shares of capital and labor are equal
B)the share of capital is 0.65 and the share of labor is 0.35
C)the share of capital is 0.45 and the share of labor is 0.55
D)the share of capital is 0.25 and the share of labor is 0.75
E)the share of capital is 0.15 and the share of labor is 0.85
Answer: D
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Chapter 4: Growth and policy
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Q1) Which of the following was NOT a common element contributing to the growth of the four "Asian Tigers" between 1966 and 1990?
A)an increase in the labor force participation rate
B)high educational achievement
C)a high savings rate
D)emphasis on laissez-faire economics
E)an increase in total factor productivity achieved by higher levels of inputs
Q2) The neoclassical growth model predicts conditional convergence for countries with the same population growth, level of technology, and
A)a higher savings rate
B)a lower savings rate
C)the same savings rate
D)all of the above
E)none of the above
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Chapter 5: Aggregate supply and demand
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Q1) The natural rate of unemployment is A)always zero
B)the unemployment rate that exists when inflation is zero
C)the unemployment rate that exists when output is assumed to be at its full-employment level
D)the unemployment rate that exists above frictional unemployment
E)none of the above
Q2) Assume you mistakenly buried a $100 bill in a time capsule in 1970 and dug it up again in 2012.What would be its real purchasing power ?
A)$122
B)$100
C)$88
D)$42
E)$17
Q3) An increase in aggregate demand can be caused by
A)an increase in government expenditures
B)an increase in nominal money supply
C)a decrease in taxes
D)an increase in business and consumer confidence
E)all of the above
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Chapter 6: Aggregate supply and the phillips curve
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Q1) The sacrifice ratio is defined as
A)the percentage of output lost for every 1 percent increase in the unemployment rate
B)the percentage increase in the unemployment rate for every 1 percent reduction in GDP
C)the percentage of output lost for each 1 percent reduction in the rate of inflation
D)the inflation rate plus the unemployment rate
E)the inflation rate divided by the unemployment rate
Q2) Which of the following is the most likely medium-run outcome of an adverse supply shock?
A)an increase in consumer prices and a higher level of real GDP
B)a decrease in real GDP
C)an increase in real wage rates
D)an increase in frictional unemployment
E)an increase in nominal GDP with real GDP remaining the same
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Chapter 7: Unemployment
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Q1) Which of the following statements is FALSE?
A)there is a high turnover rate in the labor market
B)a significant amount of the turnover rate in the labor market is cyclical
C)there are large variations in unemployment rates across groups defined by age, race, and sex
D)over 50 percent of the workers who became unemployed in 2009 remained unemployed for more than half a year
E)many workers who are counted as unemployed will be (or have been)unemployed for several weeks
Q2) Which of the following statements is FALSE for the United States?
A)most of the unemployed remain unemployed for more than half a year
B)a significant amount of the turnover rate in the labor market is cyclical
C)variations in unemployment rates across groups defined by age, race, and gender tend to be large
D)almost 50 percent of the unemployed find a job in less than 14 weeks
E)many jobs were permanently eliminated in the 1990s, so the search for new employment took longer than it had in the past
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Page 9
Chapter 8: Inflation
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Q1) If you had $2,000 in a savings account that paid 4% interest compounded annually, what would be the real value of your savings after two years if the annual inflation rate were 2%?
A)$2,040
B)$2,081
C)$2,160
D)$1,163
E)$2,247
Q2) If inflation were always completely unanticipated, then
A)the real rate of return on interest-bearing assets could not be easily predicted
B)real interest rates would always be negative
C)menu costs would not occur
D)there would not be a need for wage indexation
E)all of the above
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Chapter 9: Policy preview
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Q1) The Taylor rule
A)allows for strict inflation targeting as long as the output coefficient is zero
B)should only be followed if the economy is growing strongly
C)suggests changes in money growth in response to changes in the inflation rate
D)does not allow for strict inflation targeting
E)implies a strict monetary growth rule
Q2) The U.S.Fed "sets" interest rates by
A)announcing a desired discount rate and then attempting to keep the federal funds rate two percentage points above it
B)announcing a desired monetary growth rate designed to keep inflation stable
C)buying or selling Treasury bills
D)announcing its intentions far in advance since transparency allows financial markets to adjust before any action is taken
E)trying to keep bank reserves stable
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11
Chapter 10: Income and spending
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Q1) If the savings function is of the form S = - 200 + (0.1)YD and the marginal income tax rate is t = 0.2, an increase in income of 200 will increase consumption by
A)180
B)144
C)80
D)72
E)20
Q2) Assume an economy with no foreign sector, a marginal propensity to save of mps = 0.1, and a marginal income tax rate of t = 1/3.What change in government purchases would lead to an increase in national income of 500?
A)50
B)100
C)200
D)300
E)500
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Chapter 11: Money, interest, and income
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Q1) If we change the assumption that money supply is fixed but instead assume that the amount of money supplied increases as the interest rate increases, then
A)the LM-curve will become flatter
B)the LM-curve will become steeper
C)the LM-curve will shift to the left
D)monetary policy will be more effective
E)both A and D
Q2) If money demand becomes more income elastic, then the LM-curve will
A)shift parallel to the right
B)shift parallel to the left
C)become steeper
D)become flatter
E)become flatter and shift to the right
Q3) In an IS-LM model, if the government decides to cut welfare spending,
A)the interest rate will decrease while personal saving will increase
B)the interest rate and the level of consumption will both decrease
C)the interest rate will decrease while income tax revenue will increase
D)the federal budget deficit will decrease and the level of output will increase
E)none of the above
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Page 13
Chapter 12: Monetary and fiscal policy
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Q1) In an IS-LM model, if net exports is no longer assumed to be exogenous (that is, NX = NX?), but instead is assumed to decrease as the level of income increases (that is, NX = NX? - mY, with m > 0), then
A)the IS-curve will become steeper and shift to the left
B)the IS-curve will become flatter and shift to the right
C)the LM-curve will become steeper and shift to the left
D)the LM-curve will become flatter and shift to the right
E)the fiscal policy multiplier will become larger
Q2) Fiscal policy is weakest and monetary policy is strongest when
A)we are in the liquidity trap
B)money demand is very interest elastic
C)investment is very interest inelastic
D)we are in the classical case
E)the IS-curve is very steep and the LM-curve is very flat
Q3) The LM-curve is vertical when
A)the interest elasticity of investment is zero
B)the central bank keeps nominal money supply constant
C)we are in the classical case
D)we are in the liquidity trap
E)none of the above
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Chapter 13: International linkages
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Q1) A country following a beggar-thy-neighbor policy is
A)inducing an exchange rate depreciation to increase domestic output
B)inducing an exchange rate appreciation to create unemployment in other countries
C)imposing a tax on goods that are exported
D)imposing tariffs on imports
E)asking other nations for foreign aid
Q2) The ease with which international investors can shift their assets around the world affects
A)real exchange rates
B)the ability of central banks to control interest rates
C)national incomes
D)the ability of central banks to conduct monetary policy
E)all of the above
Q3) Expansionary monetary policy by the U.S.Fed most likely will
A)raise U.S. GDP
B)lower the value of the U.S. dollar
C)increases the U.S. trade balance
D)lower U.S. interest rates
E)all of the above
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Page 15
Chapter 14: Consumption and saving
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Q1) Robert E.Hall's theory of consumption behavior is called
A)the absolute-income hypothesis
B)the permanent-income theory
C)the random-walk theory
D)the buffer-stock theory
E)the life-cycle theory
Q2) The sensitivity of current consumption to changes in current income can be explained by
A)myopia
B)the absence of liquidity constraints
C)the fact that consumers have the opportunity to borrow
D)the fact that consumers always realize when a permanent change in income has occurred
E)none of the above
Q3) The fact that consumption exhibits "excess sensitivity" implies that consumption
A)responds too strongly to predictable changes in income
B)responds too little to predictable changes in income
C)responds too little to surprise changes in income
D)is never affected by liquidity constraints
E)never behaves as Keynes predicted
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Chapter 15: Investment spending
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Q1) At which times is credit rationing by banks likely to intensify?
A)in periods of rapidly falling interest rates
B)when the economy starts to enter a recession
C)when stock market values are rapidly increasing
D)when the central bank announces a change in monetary policy
E)none of the above
Q2) The q-theory of investment states that firms should add physical capital whenever
A)the value of q is greater than 1
B)the value of q is less than 1
C)the value of q is lower than the market interest rate
D)the replacement cost of capital is equal to the rental cost of capital
E)the market value of the firm divided by the replacement cost of capital is less than 1
Q3) In 2011, the ratio of gross investment to GDP in the U.S.was
A)higher than that of China
B)roughly the same as that of China
C)roughly the same as that of Canada
D)higher than that of Canada
E)lower than that of Canada
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17
Chapter 16: The demand for money
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Q1) Which of the following functions does money NOT serve very well?
A)as a unit of account
B)as a standard of deferred payment
C)as a protection against high inflation
D)as a store of value
E)as a medium of exchange
Q2) If the income elasticity of money demand is less than 1, then
A)the income velocity of money will increase as the level of income increases
B)the income velocity of money will decrease as the level of income increases
C) the income velocity of money will remain constant over time
D) the income velocity of money will increase with an increase in money demand
E)an increase in income is always less than the resulting increase in money demand
Q3) An asset (other than money) is considered to be more liquid if
A)it has a longer maturity
B)it is issued by a major company rather than the government
C)it earns a high rate of interest or dividend
D)it has more than one use
E)it can be quickly and cheaply transferred into money
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18
Chapter 17: The fed, money, and credit
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Q1) The federal funds rate
A)is not affected by open market operations
B)is also known as the primary credit rate
C)is the rate that banks have to pay if they borrow from the Fed
D)is the rate a bank has to pay if it borrows funds temporarily from another bank
E)none of the above
Q2) If the Fed imposed a 100% reserve requirement, it would imply that
A)the Fed had no control over money supply
B) the Fed would no longer be able to conduct any open market operations
C) the money multiplier would be equal to one
D)the money multiplier would be equal to zero
E)banks would become completely obsolete
Q3) The federal funds rate is the rate that
A)banks are charged if they borrow funds from the Fed
B)the Fed pays on reserves held as deposits in its account
C)banks charge each other, usually for large overnight loans
D)banks charge their best customers
E)the FDIC charges to insure deposits
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Chapter 18: Policy
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Q1) Imposing an active monetary growth rule that links monetary growth to the unemployment rate implies that
A)the economy can be fine tuned
B) flexibility in responding to economic disturbances is totally lost
C) political cycles can more easily occur
D)the administration can more easily influence decisions made by the FOMC
E)none of the above
Q2) Designing successful economic stabilization policy is difficult since policy makers
A) never assume that an economic disturbance is temporary
B) do not have enough policy tools to deal with economic disturbances
C) do not know the expectations of consumers and firms or how they may react
D) cannot adjust the automatic stabilizers
E) all of above
Q3) The best policy response to a disturbance may be to do nothing if,
A)there are long and variable outside lags
B)a disturbance is short-lived
C)the inside and outside lags are both short
D)the recognition lag is negative
E)both A)and B
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Page 20
Chapter 19: Financial markets and asset prices
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Q1) Which of the following statements is NOT accurate?
A)financial markets are forward-looking
B)new surprise information about firms changes the value of their stock
C)if stocks did well last quarter they are likely to do well this quarter
D)a random walk is a sign of market efficiency
E)interest rate differentials between two countries are reflected in exchange rate movements
Q2) Assume U.S.interest rates decrease but interest rates in other countries remain the same.Which of the following is FALSE?
A)the value of the U.S. dollar will decrease
B)the exchange rate of foreign currency to U.S. dollars will increase
C)the U.S. will experience an outflow of funds
D)U)S. stock values will increase
E)U)S. bond prices will increase
Q3) The concept of arbitrage implies that
A)stock market prices cannot be accurately predicted
B)financial markets are inefficient
C)international interest rate differentials persist over the long run
D)long-term bonds and short-term bonds have the same yield
E)none of the above
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Chapter 20: The national debt
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Q1) Why is so much of the U.S.federal debt owned by foreigners?
A)U)S. government bonds tend to pay higher yields than the securities of other governments
B)U)S. domestic savings are insufficient to support the national debt
C)it is difficult for international investors to cash in their U.S. government bonds
D)international investors believe that the U.S. dollar will never lose any of its value
E)none of the above
Q2) Even though the national debt is rising, the debt-to-GDP ratio will fall as long as A)interest payments on the national debt as a fraction of government spending remain constant
B)the real interest rate exceeds the economic growth rate and the primary budget is balanced
C)the real interest rate is lower than the economic growth rate and the primary deficit is zero
D)the debt is growing more slowly than the federal budget deficit
E)the primary budget deficit as a share of GDP is not growing
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Chapter 21: Recession and depression
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Q1) Which of the following did NOT happen in the period from 2008 to 2012?
A)Canada experienced a worse recession than the U.S.
B)Ireland and Iceland suffered greatly from the financial crisis that originated in the U.S.
C)long-term unemployment in the U.S. reached unprecedented levels
D)nearly one out of six workers in the U.S. was either unemployed or underemployed
E)the average duration of unemployment went from about 15 weeks to about 40 weeks
Q2) During the period known as "the Great Moderation," the U.S.inflation rate never exceeded
A)2)2%
B)2)5%
C)3)0%
D)3)2%
E)5)0%
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Chapter 22: Inflation and hyperinflation
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Q1) From 1983-88, which of these countries had the HIGHEST average inflation rate?
A)Argentina
B)Bolivia
C)Colombia
D)Mexico
E)Peru
Q2) What was Bolivia's average inflation rate during the period of 1983-88?
A)21%
B)35%
C)87%
D)382%
E)1,797%
Q3) Assuming a long-run relationship, if nominal money supply grows at a rate of 6.5%, real output growth is 3.2%, and the inflation rate is 2.8%, what is the percentage change in velocity?
A)6)1%
B)0)5%
C)0%
D)-0.1%
E)-0.5%
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Chapter 23: International adjustment and interdependence
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Q1) If the yield on a Japanese government security is 6%, the yield on a U.S.government security of the same maturity is 4%, and the exchange rate of the dollar to the Japanese yen is expected to depreciate by 3%, then
A)Americans are likely to buy Japanese government securities
B)Japanese people are likely to buy American government securities
C)the Fed is likely to intervene in the foreign exchange market by buying Japanese yen
D)the Japanese central bank is likely to intervene in the foreign exchange market by selling U.S. dollars
E)both C)and D)
Q2) Substantial intervention in foreign exchange markets by a central bank in an attempt to maintain an exchange rate is called
A)sterilization
B)synchronization
C)dirty floating
D)managed neutralization
E)open market operations
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Chapter 24: Advanced topics
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Q1) The random walk of GDP model assumes that
A)output follows a trend which can be explained by capital improvements
B)output generally follows a steady trend but there are always some transitory business fluctuations
C)there is no tendency for GDP to return to trend after a supply-side disturbance
D)permanent changes in output are infrequent, so changes in aggregate demand always dominate
E)all output fluctuations are transitory
Q2) The rational expectations equilibrium approach emphasizes
A)the microeconomic foundations of macroeconomics
B)the idea that after disturbances output will not return to trend
C)the idea that even small menu costs involved in making price changes cause big problems
D)that fiscal and monetary policies are always successful in changing real output
E)that even rational decisions in an imperfectly competitive world often lead to socially undesirable outcomes
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