Applied Macroeconomics
Midterm Exam
Course Introduction
Applied Macroeconomics explores the practical application of macroeconomic theories and models to real-world issues such as economic growth, inflation, unemployment, monetary and fiscal policy, international trade, and financial markets. The course emphasizes empirical analysis and the interpretation of economic data, equipping students with tools to analyze current economic events and policy debates. Through case studies and data-driven projects, students learn to evaluate the impact of macroeconomic policies on business cycles and long-term economic performance, preparing them to assess and address economic challenges in both public and private sector contexts.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Page 2
Chapter 1: A Tour of the World
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Q1) Explain why the U.S.crisis became a world crisis.
Answer: Other countries were affected through two channels.The first channel was trade.As U.S.consumers and firms cut spending,part of the decrease fell on imports of foreign goods.The second channel was financial.U.S.banks,badly needing funds in the United States,repatriated from other countries,creating problems for banks in those countries.The result was not just a U.S.,but a world recession.
Q2) Which of the following countries had the lowest level of output per capita in 2014?
A)Spain
B)France
C)Italy
D)German
Answer: A
Q3) In 2015,the unemployment in the U.S.was
A)5%.
B)11%.
C)5.4%.
D)4.6%.
Answer: C
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3
Chapter 2: A Tour of the Book
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Q1) Explain how the existence of discouraged workers alters the extent to which the official unemployment provides an accurate measure of the use of labor resources.
Answer: Discouraged workers are those individuals who have decided to stop searching for employment because they have become "discouraged" about employment opportunities.At some point,these individuals will no longer be considered as part of the labor force.The existence of discouraged workers will cause the official unemployment rate to provide an under-estimate of the underutilization of labor.
Q2) For this question,assume that 1980 is the base year.Given macroeconomic conditions in the United States over the past three decades,we know that
A)nominal GDP is always smaller than real GDP since 1980.
B)real GDP and nominal GDP would be equal for the entire period.
C)real GDP is larger than nominal GDP from 2002 to 2008.
D)real GDP and nominal GDP were equal in 1980.
E) none of the above
Answer: D
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Chapter 3: The Goods Market
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Q1) Based on our understanding of the model presented in Chapter 3,we know with certainty that an equal and simultaneous increase in G and T will cause
A)an increase in output.
B)no change in output.
C)a reduction in output.
D)an increase in investment.
Answer: A
Q2) Suppose the consumption equation is represented by the following: C = 250 + .75YD.Now assumm government spending increases by 100 for the above economy.Given the above information,we know that equilibrium output will increase by A)200.
B)400.
C)800.
D)1000.
E) none of the above
Answer: B
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Page 5
Chapter 4: Financial Markets
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Q1) For this question,assume that individuals do not hold currency (i.e.,c = 0).If the ratio of reserves to deposits is .10,the money multiplier is
A) .1.
B) 0.9.
C) 4.
D) 5.
E) 10.
Q2) Which of the following generally occurs when a central bank pursues contractionary monetary policy?
A)the central bank purchases bonds and the interest rate increases.
B)the central bank purchases bonds and the interest rate decreases.
C)the central bank sells bonds and the interest rate increases.
D)the central bank sells bonds and the interest rate decreases.
Q3) The federal funds rate is determined in which of the following markets?
A)the market for U.S. treasury securities
B)the money market
C)the bond market
D)the market for central bank money
E) none of the above
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) Use the IS-LM model to answer this question.Suppose there is a simultaneous increase in government spending and increase in the money supply.Explain what effect this particular policy mix will have on output and the interest rate.Based on your analysis,do we know with certainty what effect this policy mix will have on investment? Explain.
Q2) Based on our understanding of the IS-LM model that takes into account dynamics,we know that a reduction in government spending will cause
A)an immediate drop in Y and immediate increase in i.
B)an immediate reduction in i and no initial change in Y.
C)a gradual reduction in i and gradual reduction in Y.
D)a gradual reduction in i and an immediate reduction in Y.
Q3) First,briefly explain what is meant by the policy mix.Second,explain what effect different policy mixes might have on the level of output,investment,and the interest rate.
Q4) If government spending and taxes increase by the same amount,
A)the IS curve does not shift
B)the IS curve shift leftward
C)the IS curve shifts rightward
D)the LM curve shifts downward
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) With a nominal interest rate of 10%,the present discounted value of $200 to be received in one year is
A)$90.91.
B)$165.29.
C)$181.82.
D)$190.00.
E) $220.00.
Q2) Securitization is a process of asset transformation that involves a number of different financial institutions working together.These financial institutions are known collectively as the A)transformers.
B)amalgamation.
C)movers and shakers.
D)shadow banking system.
Q3) Which of the following statements are true?
A)A bank's assets are its sources of funds.
B)A bank's liabilities are its uses of funds.
C)A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
D)A bank's balance sheet indicates whether or not the bank is profitable.
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Chapter 7: The Labor Market
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Q1) Based on price setting behavior,we know that an increase in the unemployment rate will cause
A)no change in the real wage.
B)a reduction in the real wage.
C)an increase in the real wage.
D)an upward shift of the PS curve.
Q2) Graphically illustrate (using the WS and PS relations)and explain the effects of a reduction in the markup on the equilibrium real wage,the natural rate of unemployment,the natural level of employment,and the natural level of output.
Q3) Explain why nominal wages are a function of the expected price level.
Q4) Explain several implications and characteristics of efficiency wage theories.
Q5) The reservation wage is
A)the wage that an employer must pay workers to reduce turnover to a reasonable level.
B)the wage that ensures a laid-off individual will wait for re-hire, rather than find another job.
C)the lowest wage firms are allowed by law to pay workers.
D)the wage offer that will end a labor-strike.
E) none of the above
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) Suppose the Phillips curve is represented by the following equation: t - t = 202ut.Given this information,which of the following is most likely to occur if the actual unemployment in any period is equal to 6%?
A)the rate of inflation will tend to increase
B)the rate of inflation will be constant
C)the rate of inflation will tend to decrease
D)none of the above
Q2) As of 2009,what was the last year that U.S.experienced deflation?
A)1933
B)1955
C)1973
D)1991
E) 2001
Q3) Why has the U.S.natural rate of unemployment fallen since the early 1990s?
Q4) Based on your understanding of the Phillips curve,is it possible for the unemployment rate to increase while inflation increases? Explain.
Q5) Explain how the unexpectedly high rate of productivity growth at the end of the 1990s affected inflation and unemployment during this period.
Page 10
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Q1) When the policy rate decreases,
A)IS curve does not change.
B)IS curve shifts to the right.
C)IS curve shifts to the left.
D)LM curve shifts upward.
E) LM curve shifts downward.
Q2) In the IS-LM-PC model,investment does not depend on
A)T.
B)Y.
C)r.
D)x.
Q3) Okun's law shows that when the unemployment rate is above the natural rate,
A)inflation is higher than expected.
B)inflation is lower than expected.
C)output is below potential.
D)output is above potential.
Q4) Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes both in the short run and in the medium run.
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Chapter 10: The Facts of Growth
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Q1) Discuss and explain what is meant by the "state of technology."
Q2) Assume that constant returns to scale exists and that N and K both increase by 2%.Given this information,we know that
A)output (Y)will increase by 4%.
B)Y will increase by 2%.
C)Y will increase by less than 2%.
D)Y will increase by less than 4% and more than 2%.
Q3) Given the narrow interpretation of technology,technology will include which of the following?
A)how well firms are run
B)the organization and sophistication of markets
C)the political environment
D)none of the above
Q4) Briefly explain the relationship between output per capita and happiness.Specifically,to what extent are these two variables related?
Q5) Explain each of the following: (1)constant returns to scale; (2)decreasing returns to capital; and (3)decreasing returns to labor.
Q6) Briefly explain what effect an increase in the saving rate will have on growth.
Q7) Convergence refers to what phenomenon regarding growth theory?
Page 12
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) In the absence of technological progress,we know with certainty that an decrease in the saving rate will cause which of the following?
A)decrease steady state consumption
B)increase steady state consumption
C)have no effect on steady state consumption
D)decrease steady state consumption only if the decrease in saving exceeds the increase in depreciation
E) decrease steady state consumption only if the decrease in saving is less than the decrease in depreciation
Q2) If endogenous growth models are correct,a lower rate of growth in the long run could occur as a result of which of the following?
A)a lower rate of saving
B)a lower rate of depreciation
C)a redefinition of depreciation
D)a redefinition of the steady state
E) none of the above
Q3) Suppose policy makers wish to increase steady state consumption per worker.Explain what must happen to the saving rate to achieve this objective.
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Chapter 12: Technological Progress and Growth
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Q1) Suppose there is a decrease in the saving rate.Explain what effect this decrease in the saving rate will have on the rate of growth of output per worker.
Q2) Assume that an economy experiences both positive population growth and technological progress.A reduction in the saving rate will cause
A)no change in K / NA.
B)a permanent reduction in the rate of growth of output per worker.
C)a permanent reduction in the rate of growth of output.
D)no change in Y / NA.
E) none of the above
Q3) Research suggests that the relatively higher rate of growth of output per capita between in China between 1996 and 2011 was the result of which of the following?
A)an increase in the rate of technological progress
B)an increase in K / NA
C)an increase in the rate of growth of N
D)an increase in the saving rate
E) both A and D
Q4) What factors determine technological progress?
Q5) Explain what factors determine the slope of the required investment line.
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) Which of the following is not true about technological progress?
A)allow for the production of a larger quantity of goods using the same number of workers
B)lead to the production of new goods
C)lead to the disappearance of old goods
D)cause a reduction in employment in the short run
E) none of the above
Q2) For this question,assume that firms' of productivity are accurate while workers' expectations of productivity adjust slowly over time.In this case,an increase in productivity will cause which of the following?
A)an increase in both the real wage and the natural rate of unemployment
B)a decrease in both the real wage and the natural rate of unemployment
C)an increase in the real wage and a reduction in the natural rate of unemployment
D)a decrease in the real wage and an increase in the natural rate of unemployment
E) none of the above
Q3) There are some concerns that technological progress can lead to an increase in unemployment.Explain the two related but separate dimensions of technological progress.
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Chapter 14: Financial Markets and Expectations
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Q1) Suppose households unexpectedly decrease consumption.Which of the following will occur as a result of this unexpected reduction in consumption?
A)an increase in stock prices
B)a reduction in stock prices
C)no change in stock prices
D)an ambiguous effect on stock prices
Q2) Which of the following represents a stock's fundamental value?
A)the price the stock would sell at in the midst of a rational bubble
B)the price the stock would sell at if the interest rate were zero
C)the present value of its expected future dividend payments
D)the simple sum of its future dividend payments
E) none of the above
Q3) Explain what the term structure of interest rates represents.
Q4) An expected reduction in the money supply will tend to cause
A)an increase in stock prices.
B)a reduction in stock prices.
C)no change in stock prices.
D)an ambiguous effect on stock prices.
Q5) Explain what is meant by the fundamental value of a share of stock.
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Chapter 15: Expectations, consumption, and Investment
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Q1) Human wealth is a function (i.e.,affected by changes in)of which of the following variables?
A)future expected income
B)future expected taxes
C)current interest rates
D)all of the above
E) none of the above
Q2) Which of the following would cause a reduction in human wealth?
A)a permanent reduction in salary
B)a reduction in the value of one's house
C)a reduction in the value of one's stock portfolio
D)all of the above
E) none of the above
Q3) Which of the following will cause the rental cost / user cost of capital to decrease?
A)The rate of depreciation decreases.
B)The real interest rate increases.
C)The expected profit from the machine decreases.
D)all of the above
E) none of the above
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Chapter 16: Expectations, output, and Policy
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Q1) Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future taxes to decrease.Given this information,individuals will expect
A)an increase in the expected future interest rate and no change in expected future output.
B)an increase in the expected future interest rate and an increase in expected future output.
C)an increase in the expected future interest rate and a reduction in expected future output.
D)an increase in the expected future interest rate and an ambiguous effect on expected future output.
Q2) Explain what effect an increase in future expected output will have on the IS curve and LM curve in the current period.
Q3) Explain the three channels economists have identified through which quantitative or credit easing may affect the economy.
Q4) Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations.
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18
Chapter 17: Openness in Goods and Financial Markets
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Q1) The difference between net capital flows and the current account deficit is called the
A)capital account surplus.
B)capital account deficit.
C)international error.
D)missing number.
E) statistical discrepancy.
Q2) Another name for "current account transactions" is
A)"capital account transactions."
B)"investment income."
C)"net transfers received."
D)"checking account transactions."
E) "transactions above the line."
Q3) When E increases by 5%,we know that
A)a real appreciation will occur if P decreases by 5%.
B)a real depreciation will occur if P also increases by 5%.
C)a nominal appreciation will occur.
D)a nominal depreciation will occur.
Q4) Explain the difference between gross domestic product and gross national product.
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Chapter 18: The Goods Market in an Open Economy
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Q1) Which of the following represents the domestic demand for goods?
A)C + I + G
B)C + I + G + X
C)C + I + G - IM /
D)C + I + G + X - M /
E) C + I + G + X + IM
Q2) A reduction in the marginal propensity to import will cause
A)the multiplier to increase and a given change in government spending (G)to have a larger effect on domestic output.
B)the multiplier to increase and a given change in government spending (G)to have a smaller effect on domestic output.
C)the multiplier to decrease and a given change in government spending (G)to have a larger effect on domestic output.
D)the multiplier to decrease and a given change in government spending (G)to have a smaller effect on domestic output.
Q3) Explain why the demand for domestic goods curve (ZZ)has a different shape than the domestic demand curve (DD).
Q4) Explain why in practice policy coordination is hard to achieve.
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Page 20
Chapter
19: Output, the Interest Rate, and the Exchange Rate
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Q1) Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect monetary expansion will have on the domestic economy.In your graphs,clearly label all curves and equilibria.
Q2) Expansionary monetary policy in a flexible exchange rate regime will cause
A)a shift of the IP curve.
B)an appreciation of the domestic currency.
C)a reduction in E.
D)no change in E.
Q3) An increase in the real exchange rate will cause
A)an increase in net exports.
B)an increase in the quantity of imports.
C)an increase in output.
D)a decrease in government spending.
E) all of the above
Q4) In the early 1990s,European unemployment rose largely because of A)reductions in stock prices.
B)undervalued currencies.
C)overvalued currencies.
D)high inflation.
E) none of the above
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Chapter 20: Exchange Rate Regimes
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Q1) Refer to the information above.The real exchange rate (from the United States' perspective)is
A)0.625.
B)0.8.
C)1.6.
D)2.0.
E) none of the above
Q2) What is an "optimal currency area"? Also,discuss the conditions that must be satisfied for an optimal currency area to exist.
Q3) Which of the following is an argument of opponents of devaluations?
A)Devaluations cause relatively slow adjustments.
B)Participants in foreign exchange markets have a short memory: if the expected devaluation doesn't occur within a short time-period, they will stop expecting it.
C)A devaluation causes a nation with fixed exchange rates to lose credibility in the medium run, driving its interest rate higher.
D)all of the above
E) none of the above
Q4) Does Europe constitute an optimal common currency area? Why?
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Chapter 21: Should Policy Makers Be Restrained
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Q1) The Masstricht treaty set the budget ratio to GDP to be ________ in order for countries to qualify to join the Euro area.
A)below 60%
B)below 70%
C)below 80%
D)below 90%
Q2) Which of the following statements is true about the United States over the past fifty years?
A)There is no evidence of political business cycles in the United States.
B)The debt-to-GDP ratio has been roughly constant.
C)Under either party, output growth has been generally higher in the year preceding an election than in other years.
D)none of the above
Q3) Explain spending caps set by the Budget Enforcement Act.
Q4) Explain what a PAYGO rule is.
Q5) Explain whether uncertainty should cause policy makers to do more or do less to stabilize the economy.
Q6) Use "wars of attrition" to explain the debate about deficit reduction.
Q7) What are the new rules of the Euro Plus Pact adopted in 2011?
Page 23
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Chapter 22: Fiscal Policy: a Summing up
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Q1) Explain the economic costs of hyperinflation.
Q2) Hyperinflation typically leads to
A)a reduction in barter.
B)a reduction in real money balances.
C)a preference for domestic over foreign currency.
D)an increase in real tax revenues collected by the government.
E) all of the above
Q3) The debt-to-GDP ratio will tend to decline over time when
A)r > g.
B)r < g.
C)the primary deficit increases.
D)the initial level of debt increases.
Q4) Explain fiscal dominance.
Q5) The Ricardian Equivalence proposition suggests that a tax increase that causes a budget surplus will
A)cause an increase in output.
B)cause no change in output.
C)cause a reduction in output.
D)a reduction in consumption.
Q6) Explain what can occur to cause an increase in the debt ratio.
Page 24
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Chapter 23: Monetary Policy: a Summing up
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Q1) Briefly discuss the organization of the Federal Reserve.Include in your answer a discussion of the individuals / groups who make decisions about monetary policy.
Q2) Discuss the relationships among the various monetary aggregates.
Q3) Reducing the maximum LTV is likely to ________ demand and thus ________ the housing price increase.
A)decrease; slow down
B)increase; slow down
C)decrease; speed up
D)increase; speed up
Q4) An asset is considered liquid if it
A)can be used as a store of value.
B)has a guaranteed rate of return.
C)is indexed to the rate of inflation.
D)acts as a medium of exchange.
E) none of the above
Q5) What are the lessons from the crisis for monetary policy?
Q6) Discuss the current debate on the optimal inflation target.
Q7) Suppose an economy experiences an increase in inflation.Explain the possible macroeconomic benefits of this increase in inflation.
Page 25
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) According to rational expectations theory,monetary policy will affect output only if it is
A)anticipated.
B)unanticipated.
C)a very large change.
D)a very small change.
E) a policy that has been tried in the past.
Q2) The new classical interpretation of the economy suggests that
A)output is always above the natural level.
B)output is always below the natural level.
C)output is always equal to the natural level.
D)recessions will not occur.
Q3) Economist ________ shows the "limits of arbitrage."
A)Doug Diamond
B)Andrei Shleifer
C)Philip Dybvig
D)Richard Thaler
Q4) Explain several of the key contributions of Keynes.
Q5) Discuss new classical economics and real business cycle theory.
Q6) Explain the menu cost explanation of output fluctuations.
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Chapter 25: Appendix
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Q1) When we estimate a regression to determine the relationship between changes in consumption and changes in current income,we find that
A)there are no residuals.
B)the R² is zero.
C)the MPC is larger than one.
D)all of the above
E) none of the above
Q2) When estimating a regression line,a high R² tells us we have A)a good fit.
B)large residuals.
C)correctly determined the direction of causation.
D)all of the above
E) none of the above
Q3) Net national product (NNP)is equal to A)personal income minus taxes.
B)GNP minus consumption of fixed capital.
C)GDP plus consumption of fixed capital.
D)national income plus consumption of fixed capital.
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