Applied Macroeconomics Practice Exam
Course Introduction
Applied Macroeconomics explores the practical aspects of macroeconomic theory by analyzing real-world economic issues such as inflation, unemployment, economic growth, and monetary and fiscal policies. The course emphasizes the application of macroeconomic models and tools to interpret economic data, evaluate policy options, and understand the effects of international trade and globalization. Through case studies, empirical analysis, and policy discussions, students gain hands-on experience in using macroeconomic concepts to assess current economic conditions and propose solutions to contemporary economic challenges.
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Macroeconomics 12th Edition by Rudiger Dornbusch Dr
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Page 2
Chapter 1: Introduction
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Q1) Labor is fully employed when
A)everyone is working eight hours per day five days per week each year
B)everyone who wants to work can find a job within a reasonable amount of time
C)the unemployment rate is zero
D)the unemployment rate is below 3 percent
E)none of the above
Answer: B
Q2) Assume an economy that is currently at the full-employment level of output.If aggregate demand decreases, what should we expect in the median run?
A)a decrease in potential GDP and the price level
B)an increase in unemployment and the price level
C)a decrease in unemployment and the price level
D)an increase in unemployment and a decrease in the price level
E)a decrease in potential GDP and an increase in unemployment
Answer: D
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3
Chapter 2: National income accounting
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Q1) As defined in our text, private domestic investment (I) does NOT include
A)new residential construction except on farms
B)movable machinery such as trucks or tractors
C)inventory accumulation, unless it was planned or intended
D)investment in labor productivity through education and training
E)new additions to existing factories
Answer: D
Q2) 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
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4
Chapter 3: Growth and accumulation
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Q1) For a neoclassical growth model, which of the following statements is FALSE?
A)an increase in the savings rate will increase the steady-state growth rate of aggregate output
B)an increase in population growth will increase the steady-state growth rate of aggregate output
C)an increase in population growth will reduce the steady-state level of income per capita
D) if poor countries save at the same rate as rich countries and have access to the same technology, they will eventually catch up
E)long-run growth results from improvements in technology
Answer: A
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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Page 5
Chapter 4: Growth and policy
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Q1) A production function that assumes a diminishing marginal product of capital A)generates a straight savings line B)ensures that the savings line is always above the investment requirement line C)ensures that the savings line and the investment requirement line cross D)is essential to the endogenous growth model E)violates important microeconomic principles
Q2) Assume an endogenous growth model with labor augmenting technology.The production function is Y = F(K,AN), with A = 2(K/N) such that y = 2k.If the savings rate is s = 0.08, the rate of population growth is n = 0.03, and the rate of depreciation is d = 0.04, what is the growth rate of output per capita?
A)1%
B)3%
C)4%
D)7%
E)9%
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Chapter 5: Aggregate supply and demand
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Q1) If output is at its full-employment level, then
A)the actual unemployment rate is zero
B)the natural rate of unemployment is zero
C)there are no frictions in the labor market since wages have reached their market-clearing level
D)there is still some positive level of unemployment due to frictions in the labor market
E)nobody who is currently employed is looking for a new job
Q2) A shift of the AD-curve to the right could be caused by
A)a decrease in taxes
B)a decrease in government transfer payments
C)an increase in money demand
D)a decrease in defense spending
E)both A and C
Q3) Which of the following was NOT true during the Great Depression?
A)investment as a share of GDP was below 3 percent
B) unemployment averaged about 18.8 percent
C) prices dropped by one-fourth
D)output fell by nearly 30 percent
E)both B and C
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Page 7
Chapter 6: Aggregate supply and the phillips curve
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Q1) For many government decision makers, the original Phillips curve implied
A)a trade-off between lowering unemployment at the cost of higher inflation or lowering inflation at the cost of higher unemployment
B)that active stabilization policy will always work if applied correctly
C)that severe recessions were a thing of the past, as unemployment could easily adjust to its natural rate
D)that the natural rate of unemployment can be lowered by expansionary monetary policy
E)all of the above
Q2) The insider-outsider model refers to
A)policy making in White House
B)the fact that the unemployed do not take part in collective bargaining
C)the fact that wages do not respond significantly to changes in the unemployment rate
D)slow price adjustments in an imperfectly competitive business environment
E)both B and C
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8
Chapter 7: Unemployment
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Q1) Which of the following does NOT affect the duration of unemployment?
A)the availability of unemployment benefits
B)the rate at which new workers enter the work force
C)the demographic make-up of the labor force
D)the organization of the labor market
E)none of the above
Q2) Concerns about high unemployment
A)are not justified since most people find new employment in less than 3 months
B)are irrational since the government routinely provides unemployment benefits for more than one year
C)arise from its high costs in terms of lost output
D)stem from the fact that the costs of unemployment tend to be unevenly distributed
E)both C and D
Q3) An employed person is defined as a person who during a reference week
A)had a job but was not working due to family or personal reasons
B)had a job but was not working due to maternity or paternity leave
C)did at least one hour of work as a paid employee
D)all of the above
E)none of the above
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Page 9
Chapter 8: Inflation
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Q1) The concern over inflation
A)is not justified since gains and losses from real wealth transfers cancel out over time for the economy as a whole
B)is irrational since high inflation generally means high growth
C)is attributable primarily to increased transfers arising from cost-of-living adjustments
D)stems from the fact that inflation is rarely predictable and those households who hold fixed dollar assets will experience a loss in wealth
E)none of the above
Q2) If you had owned a ten-year Treasury bond from 2000 to 2009, what would have been your real rate of return?
A)0)1%
B)0)9%
C)1)9%
D)2)6%
E)6)2%
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10
Chapter 9: Policy preview
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Q1) Which of the following is NOT a way in which a central bank can conduct its monetary policy?
A)by establishing target interest rates and then undertaking open market operations to maintain them
B)by buying and selling government bonds
C)by making small policy changes and readjusting policies as needed
D)by changing the rate of capital accumulation to influence aggregate supply
E)by changing interest rates to influence spending on durable goods and investment
Q2) In the Taylor rule, if the output coefficient ? is set to zero, then the central bank
A)is mostly concerned with maintaining full employment
B)always sets interest rates 2% above its inflation target
C)will aggressively lower interest rates as soon as output declines
D)engages in strict inflation targeting
E)none of the above
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11
Chapter 10: Income and spending
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Q1) Assume a model of the expenditure sector with no government or foreign sector.If the savings function is defined as S = - 300 + (0.1)Y and autonomous investment increases by 200, by how much will consumption increase?
A)180
B)200
C)1,800
D)2,000
E)2,100
Q2) A consumption function of the form C = Co + cYD has a positive vertical intercept Co, which indicates that
A)some consumption is unaffected by changes in disposable income
B)the mpc will increase as disposable income increases
C)the apc will always increase as disposable income increases
D)the apc will always be less than the mpc
E)all of the above
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Chapter 11: Money, interest, and income
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Q1) If the central bank increases money supply, then real money balances will rise and A)so will the interest rate
B)the interest rate will fall
C)the LM-curve will shift to the left
D)the IS-curve will shift to the right
E)asset prices will fall
Q2) If investment becomes more sensitive to changes in the interest rate, then
A)the size of the fiscal policy multiplier will decrease
B)the size of the fiscal policy multiplier will increase
C)the size of the monetary policy multiplier will decrease
D)the size of the monetary policy multiplier will increase
E)both A and D
Q3) The slope of the AD-curve will become flatter if
A)money demand becomes more income inelastic
B)money demand becomes more interest elastic
C)investment becomes more interest elastic
D)the marginal propensity to save increases
E)both A and C
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Chapter 12: Monetary and fiscal policy
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Q1) In an IS-LM framework, fiscal expansion generally leads to income expansion
A)only if it is combined with monetary expansion
B)except if we are in the liquidity trap
C)but interest rates will increase, leading to a lower level of saving
D)but the composition of output will change
E)but most consumption spending will be crowded out
Q2) If we have a normal IS-curve but a horizontal LM-curve,
A)fiscal policy is the most effective way to reduce unemployment
B)fiscal policy is at its weakest in reducing unemployment
C)monetary policy can aid fiscal policy in reducing unemployment
D)monetary policy is the most effective way to reduce unemployment
E)neither fiscal nor monetary policy is effective in reducing unemployment
Q3) One side effect of expansionary fiscal policy is that
A)higher interest rates cause a change in the composition of GDP
B)higher interest rates significantly increase private saving
C)consumption spending is crowded out
D)the Fed has to reinforce the policy through open market sales
E)all of the above
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Chapter 13: International linkages
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Q1) As of 2013, which of the following countries had not yet adopted the euro as their currency?
A)Belgium
B)Denmark
C)Greece
D)Luxembourg
E)Spain
Q2) If exchange rates are determined in the foreign exchange market, they are never
A)fixed
B)flexible
C)managed
D)floating
E)influenced by actions of the central bank
Q3) When financial investors use the forward exchange rate to eliminate the risk of exchange rate fluctuations, it leads to a condition that is called
A)covered interest rate parity
B)uncovered interest rate parity
C) purchasing power parity
D)managed floating
E)external balance
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Chapter 14: Consumption and saving
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Q1) According to the permanent-income theory of consumption
A)permanent income is always lower than transitory income
B)the mpc out permanent income is close to zero
C)the mpc out of transitory income is close to 1
D)all of the above
E)none of the above
Q2) When the aggregate consumption function is defined as C = C? + cYD, then
A)the mpc increases with higher levels of disposable income
B)the mpc is constant at all levels of disposable income
C)the apc is constant at all levels of disposable income
D)the apc increases with higher levels of disposable income
E)the expenditure multiplier is less than one
Q3) 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
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Chapter 15: Investment spending
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Q1) Leaving taxes aside, a firm will calculate its rental cost of capital as
A)the nominal interest rate
B)the real interest rate
C)the real interest rate plus the rate of depreciation
D)the real interest rate minus the rate of depreciation
E)the nominal interest rate minus the rate of depreciation
Q2) According to the neoclassical theory of business fixed investment, which of the following is true?
A)investment spending is governed by the discrepancy between desired and actual interest rates
B)the desired capital stock decreases with a decrease in the rental cost of capital
C)monetary and fiscal policy changes affect investment spending but often with long lags
D)the desired capital stock decreases with an increase in the expected level of output
E)none of the above
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Chapter 16: The demand for money
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Q1) Assume we know that the income velocity of M2 has remained constant, while M2 has increased by 6% and prices have increased by 4%.We can conclude that
A)real GDP has grown by 2%
B)nominal GDP has grown by 10%
C)real GDP has grown by 1.5%
D)real GDP has decreased by 1.5%
E)nominal GDP has decreased by 2%
Q2) 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
Q3) The introduction of NOW-accounts (interest-earning checking accounts) in 1980 led to
A)transfers from passbook saving deposits into NOW-accounts
B)an increase in M1, while leaving M2 unchanged
C)a decrease in the income velocity of M1
D)all of the above
E)none of the above
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Chapter 17: The fed, money, and credit
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Q1) An increase in the market interest rate will increase the size of the money multiplier since
A)the reserve-deposit ratio will decrease
B)the currency-deposit ratio will increase
C)the demand for money will decrease
D)banks will earn more interest on their existing assets
E)banks will get more interest on the deposits they hold at the Fed
Q2) The stock of high-powered money is reduced when
A)the Fed buys foreign currency in the foreign exchange market
B)the Fed lends to member banks
C)the Treasury deposits funds in its account at the Fed
D)the Fed buys government securities from the public
E)all of the above
Q3) Between 1990 and 1992, the Fed conducted monetary policy almost entirely with reference to interest rates since
A)banks rationed credit
B) the economy grew at a very fast pace
C)the growth rates of different monetary aggregates diverged widely
D)the objective was to increase the profitability of banks
E)the objective was to keep money supply stable
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Chapter 18: Policy
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Q1) Imposing policy rules
A)reduces the risk that policy makers will react to disturbances in unpredictable ways
B)appeals to economists who assume the economy is very unstable
C)always implies that the growth rate of money supply has to be kept constant
D)only works if there is a large tradeoff between unemployment and inflation
E)all of the above
Q2) Formulating an appropriate policy response to an economic disturbance is difficult since policy makers are often unsure about
A)the timing and magnitude of the effects of a proposed policy measure
B)whether a disturbance is temporary or permanent
C)how the economy really works
D)how a proposed policy measure affects people's expectations
E)all of the above
Q3) A central bank that is independent of the administration is desirable since
A)independence decreases the likelihood of political cycles
B)countries with independent central banks tend to have lower inflation rates
C)independence mitigates the problem of dynamic inconsistency
D)independence lends more credibility to monetary policy
E)all of the above
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Page 20
Chapter 19: Financial markets and asset prices
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Q1) The relationship between the yields of government securities with different terms to maturity is called
A)yield to maturity
B)interest rate risk
C)term structure of interest rates
D)interest rate differential
E)uncovered interest parity
Q2) Assume you put $8,000 in a savings account and leave it there for four years.If you get a compounded yearly interest rate of 5% the first two years but only 4% the last two years, how much will be in the account after the four years?
A)$9,640
B)$9,540
C)$9.340
D)$9,240
E)$9,040
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21
Chapter 20: The national debt
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Q1) Which of the following countries had the LOWEST debt-to-GDP ratio in 2010?
A)Greece
B)Ireland
C)Italy
D)Portugal
E)Spain
Q2) From 1960 to 2010, the share of total government spending in GDP
A)remained fairly stable
B)increased from about 15 percent to about 25 percent
C)increased from about 23 percent to about 35 percent
D)18.8 percent of GDP
E)20.4 percent of GDP
Q3) The debt-to-GDP ratio will always decrease if
A)the economy enters a boom
B)the government implements sharp spending cuts
C)government tax revenues as a share of GDP do not decrease
D)the primary deficit grows at the same rate as GDP
E)none of the above
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Chapter 21: Recession and depression
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Q1) Inflation-adjusted home prices in the U.S.
A)experienced a huge increase from the late 1990s through 2006
B)were higher in 1982 than in 2002
C)decreased throughout the 1990s but then rose sharply after 2002
D)increased sharply in the mid-1980s and then again in the early 1990s
E)steadily declined in the 1980s and 1990s
Q2) Which of the following is FALSE about the mortgage-backed securities?
A)many of them were purchased by financial investors who had no idea how risky they were
B)they were marketed as virtually risk-free even though they were actually very risky
C)in principle they spread risk more widely and allow banks to make more loans
D)all of the above
E)none of the above
Q3) According to John Maynard Keynes, the major cause of the Great Depression was
A)the collapse of the stock market
B)the inability of the Fed to conduct open market sales
C)the high interest rates that existed at the time
D)the huge increase in the federal budget deficit
E)none of the above
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Page 23
Chapter 22: Inflation and hyperinflation
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Q1) Which measure was successful in 2009 in putting an end to Zimbabwean hyperinflation
A)the Zimbabwean dollar was devalued by more than half
B)the old Zimbabwean dollar was replaced by the new Zimbabwean dollar, which had fewer zeros printed on it
C)the U.S. dollar and the South African rand were substituted for the Zimbabwean dollar as a medium of exchange
D)money was eliminated in favor of a barter economy
E)none of the above
Q2) Between 1960 and 1990, the rate of inflation and the growth of M2 in the U.S.moved roughly together
A)and an equally close relation existed between the inflation rate and the growth of M1
B)despite the fact that the velocity of M2 varied greatly during this period
C)and it is therefore safe to assume that the income velocity of money will always be constant in the long run
D)and a similar relationship can be observed in most other countries as well
E)but in the late 1990s, the link between inflation and M2 started to break down
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Chapter 23: International adjustment and interdependence
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Q1) The short-run effects of lower U.S.income taxes may include
A)an appreciation of the Japanese yen versus the U.S. dollar
B)a decrease in the trade imbalance with Japan
C)a decrease of imports into the U.S.
D)a decrease in U.S. net exports
E)all of the above
Q2) Under a system of flexible exchange rates and perfect capital mobility, restrictive monetary policy will in the long run
A)lower inflation and the nominal exchange rate, while leaving real output, relative prices, and the real exchange rate the same
B)increase the real interest rate
C)lower inflation, the exchange rate, and the real interest rate
D)leave output the same, while lowering the real interest rate and the real exchange rate
E)reduce real money balances, domestic prices, and the real exchange rate
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Chapter 24: Advanced topics
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Q1) Assume that people have rational expectations and wages are fixed by long-term contracts.If prices of goods can change fairly quickly, we should still expect that
A)random shocks will not significantly affect the level of output
B) labor markets will be in equilibrium longer than goods markets
C)firms will not supply more output after a price increase
D)unanticipated monetary policy changes will affect the level of real output in the short run
E)none of the above
Q2) The rational expectations approach assumes that
A)people never make any mistakes in forming inflationary expectations
B)people do make mistakes in their forecasts from time to time, but they do not make any systematic mistakes
C)people change their inflationary expectations only long after it has become clear that they were wrong
D)unannounced policy changes have little effect on output since people change their inflationary expectations only very slowly
E)none of the above
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