Applied Macroeconomics
Test Bank
Course Introduction
Applied Macroeconomics focuses on the practical application of macroeconomic theories and models to real-world economic issues and policy debates. The course explores topics such as economic growth, business cycles, inflation, unemployment, fiscal and monetary policy, international trade, and exchange rates. By analyzing current macroeconomic data and case studies, students develop the skills to interpret economic indicators, assess policy impacts, and understand the broader economic environment influencing business and government decisions. The course equips students with analytical tools to evaluate the effectiveness of macroeconomic strategies used to address contemporary challenges at national and global levels.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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Chapter 1: Introduction
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Sample Questions
Q1) The quantity of money in circulation in the United States is managed by A) The Securities Exchange Commission.
B) The United States Treasury.
C) The Federal Reserve System.
D) Wall Street.
Answer: C
Q2) International trade between two countries
A) benefits only the receiving country.
B) benefits only the sending country.
C) benefits both countries.
D) benefits neither country.
Answer: C
Q3) Current macroeconomic models use microeconomic principles because A) they use the same language for all economists.
B) they highlight the sociological aspects of production.
C) the behavior of economic agents changes with policy.
D) we live in a democratic society and everybody has a say.
Answer: C
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Chapter 2: Measurement
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Sample Questions
Q1) 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
Q2) What issue is there regarding housing and the measurement of GDP?
A) residential investment is measured using current house prices, not construction prices.
B) houses are a capital and a consumption good.
C) one does not know whether a house will be owned or rented when it is built.
D) mobile homes are not counted.
Answer: A
Q3) Value added is equal to the value of a firm's production minus A) all of its costs of production.
B) labor costs.
C) investment expenditures.
D) intermediate goods used in production.
Answer: D
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Page 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) Investment fluctuates less than GDP.
B) Consumption fluctuates less than GDP.
C) Employment fluctuates less than GDP.
D) Average labor productivity fluctuates less than GDP.
Answer: A
Q2) Macroeconomic forecasting is made easier due to the fact that
A) real GDP is variable about trend.
B) the business cycle has a regular frequency.
C) deviations from trend in real GDP are persistent.
D) turning points are easy to predict.
Answer: C
Q3) If deviations from trend in a macroeconomic variable are positively correlated with deviations from trend in real GDP,that variable is said to be
A) useful in predicting future movements in real GDP.
B) procyclical.
C) countercyclical.
D) acyclical.
Answer: B
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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) As the quantity of labor increases,the marginal product of labor
A) is constant.
B) increases.
C) decreases.
D) may either increase or decrease.
Q2) The indifference map
A) shows that the consumer is indifferent among all consumption bundles.
B) is an individual indifference curve.
C) captures the same information as the utility function.
D) is impossible to derive from the utility function.
Q3) A defense for the assumption that consumers maximize is that
A) consumers never make mistakes.
B) consumers do not consistently make the same mistakes.
C) it allows for many possible outcomes.
D) mistaken consumers may receive counseling from the government.
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) The variable G considered in the model encompasses
A) government expenses on goods.
B) government expenses on goods and services.
C) government expenses on goods and services as well as transfers.
D) government expenses on goods and services as well as transfers and public debt service.
Q2) In a general equilibrium model
A) all markets but one clear.
B) there are no fluctuations.
C) all prices are exogenous.
D) all prices are endogenous.
Q3) Supply-side economists argue that
A) one should get rid of all taxes.
B) tax rates should not be progressive.
C) increasing tax rates always hurts tax revenue.
D) one can increase tax revenue by decreasing the tax rate.
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Chapter 6: Search and Unemployment
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Sample Questions
Q1) If N is the working-age population,Q is the labor force,and U is the number of unemployed,then the employment/population ratio is measured as
A) N/Q
B) U/Q
C) (Q-U)/N
D) Q/N
Q2) In the DMP model,an increase in productivity does not
A) reduce the unemployment rate.
B) increase the vacancy rate.
C) increase labor market tightness.
D) increase the size of the labor force.
Q3) In the 1948-2012 data,the unemployment rate was highest in A) 2009
B) 1991
C) 1975
D) 1982
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Chapter 7: Economic Growth: Malthus and Solow
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Sample Questions
Q1) Which of the following,if implemented in the Solow growth model,would not lead to a steady state?
A) A higher savings rate.
B) A higher depreciation rate.
C) A savings rate that increases as income increases.
D) A population growth rate that increases as income increases.
Q2) The biggest contribution to real U.S. GDP growth in the 1970s was due to growth in A) total factor productivity.
B) the capital stock.
C) the labor force.
D) both the capital stock and the labor force.
Q3) The per-worker production function relates output per worker
A) to capital per worker.
B) to the participation rate.
C) to production per worker.
D) in different countries.
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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,workers divide their time between market work and A) accumulating physical capital.
B) accumulating human capital.
C) trying to invent new production processes.
D) work at home.
Q2) In the endogenous growth model presented in the text,suppose that u represents the fraction of time spent working (as opposed to accumulating human capital),b represents the efficiency of human capital accumulation,H represents the amount of human capital,and z represents the marginal product of efficiency units of labor. Consumption equals
A) buH.
B) zuH.
C) buz.
D) buzH.
Q3) What immediate consequence does an increase in education time have in the endogenous growth model with human capital?
A) lower output
B) lower output in the future
C) lower wages
D) lower human capital
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) Macroeconomists are interested in how consumers respond to changes in the market real interest rate because
A) interest rates are an important channel for the effects of monetary and fiscal policies.
B) substitution effects and income effects net out in the aggregate.
C) of the permanent income hypothesis.
D) future income affects current consumption.
Q2) An important reason why Ricardian equivalence may fail is if
A) borrowing and lending are done through intermediaries.
B) government debt incurred today may not be paid off until after some current consumers are deceased.
C) state and local governments also engage in debt finance.
D) some consumers are borrowers, while other consumers are lenders.
Q3) A permanent increase in income leads to
A) a small increase in current consumption.
B) a large increase in current consumption.
C) a small decrease in future consumption.
D) a large decrease in future consumption.
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Page 11
Chapter 10: Credit Market Imperfections: Credit Frictions,
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Sample Questions
Q1) Asymmetric information means
A) some market participants have more information than others.
B) some news are more important than others.
C) some market participants interpret news differently.
D) the impact of news on economic outcomes depends on the context.
Q2) When there are credit-market imperfections,an increase in government debt may be advantageous because it
A) discourages credit-constrained consumers from borrowing too much.
B) allows credit-constrained consumers to consume more.
C) eliminates the problems that cause credit-market imperfections.
D) encourages more private saving.
Q3) In the two-period model with asymmetric information,a one-unit increase in the real rate of interest on bank deposits
A) causes the real loan interest rate to increase by more than one unit.
B) causes the real loan interest rate to increase by less than one unit.
C) cause the real loan interest rate to decrease by less than one unit.
D) causes the real loan interest rate to decrease by more than one unit.
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Page 12
Chapter 11: A Real Intertemporal Model with Investment
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Sample Questions
Q1) If the interest rate goes up,what happens to the investment demand curve?
A) It shifts to the right.
B) It shift to the left.
C) It stays put.
D) We cannot tell.
Q2) When drawn against the real interest rate,output demand increases if
A) current government expenses increase.
B) future government expenses increase.
C) current taxes increase.
D) future taxes increase.
Q3) A temporary increase in government spending that leads to only a small decline in lifetime wealth likely shifts the output demand curve to the
A) right by more than the rightward shift in output supply.
B) right by less than the rightward shift in output supply.
C) left by more than the leftward shift in output supply.
D) left by less than the leftward shift in output supply.
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Chapter 12: Money, Banking, Prices, and Monetary Policy
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Sample Questions
Q1) The opportunity cost of holding money is A) zero.
B) the inflation rate.
C) the real interest rate.
D) the nominal interest rate.
Q2) Central banks sometimes attempt quantitative easing when A) money growth is too high.
B) inflation is too high.
C) there is a liquidity trap.
D) inflation is too low.
Q3) The equilibrium price of credit card services is A) the real quantity of money.
B) determined only by the demand for credit card services.
C) the nominal interest rate.
D) equal to the average cost of credit card services.
Q4) The most narrowly defined monetary aggregate is A) M0.
B) M1.
C) M2.
D) L.
Page 14
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Sample Questions
Q1) A model with coordination failures has
A) agents that do not act rationally.
B) multiple equilibria.
C) a government that is too large.
D) a tax rate that is too high.
Q2) The phenomenon of underutilization of labor during a recession is called
A) labor stockpiling.
B) investing in human capital.
C) labor force stabilization.
D) labor hoarding.
Q3) In the real business cycle model,a persistent increase in total factor productivity
A) has no effect on the real interest rate.
B) unambiguously increases the real interest rate.
C) unambiguously decreases the real interest rate.
D) has a theoretically ambiguous effect on the real interest rate.
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Chapter 14: New Keynesian Economics: Sticky Prices
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Sample Questions
Q1) In the New Keynesian model,
A) money is neutral.
B) money is fixed.
C) monetary policy has a real impact.
D) prices are countercyclical.
Q2) Menu costs are
A) very small costs.
B) the cost of differentiating prices for different goods.
C) the relative cost of raw materials compared to finished goods.
D) the cost of changing prices.
Q3) Stabilization policy is policy that seeks to A) get zero inflation.
B) eliminate fluctuations.
C) eradicate unemployment.
D) maximize output.
Q4) The output gap is
A) the difference between target output and realized output.
B) the difference between initial output and final output.
C) the difference between market-clearing output and actual output.
D) the difference between forecasted output and past output.
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Chapter 15: International Trade in Goods and Assets
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Sample Questions
Q1) In a two-period model,holding everything else constant,an increase in government spending
A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus.
Q2) A current account deficit is
A) good because a country wants to own the others.
B) bad because every country should have a surplus.
C) good because it allows to smooth consumption.
D) it does not matter.
Q3) In a two-period model with production,an increase in current domestic total factor productivity
A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.
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Chapter 16: Money in the Open Economy
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Sample Questions
Q1) In the monetary small open-economy model with a flexible exchange rate,an increase in the domestic price level has which impact on domestic money demand?
A) It increases it.
B) It decreases it.
C) It has no impact.
D) It depends.
Q2) In the monetary small open-economy model with a fixed exchange rate,the domestic
A) government loses control over the level of domestic government spending.
B) government loses control over the level of domestic taxes.
C) government loses control over the level of domestic government spending and domestic taxes.
D) central bank loses control over the domestic stock of money.
Q3) To maintain a fixed exchange rate,authorities
A) make laws stipulating the exchange rate.
B) modify money supply.
C) modify government expenses.
D) modify taxes.
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18
Chapter 17: Money, Inflation, and Banking
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Sample Questions
Q1) Moral hazard is a problem in providing deposit insurance because insured banks are A) more likely to make bookkeeping errors.
B) overly cautious due to extra regulations adopted by the FDIC.
C) more likely to provide bank managers with lavish perquisites.
D) encouraged to take on more risk.
Q2) The phenomenon in which an insured individual takes less care in preventing the event against which she is insured is an example of A) foolish behavior.
B) adverse selection.
C) moral hazard.
D) double coincidence of wants.
Q3) In the contemporary U.S. economy,the best example of fiat money would be A) coins issued by the U.S. Treasury.
B) deposits at all depository institutions.
C) deposits at commercial banks, but not deposits at other depository institutions.
D) Federal Reserve Notes.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Sample Questions
Q1) The fact that private sector economic agents cannot be systematically fooled by economic policymakers is implied by
A) the Phillips curve.
B) time inconsistency.
C) commitment.
D) the rational expectations hypothesis.
Q2) The slope of the Phillips curve in the United States was smallest during which period?
A) 1985-2012
B) 1970-1984
C) 1947-1969
D) 1776-1800
Q3) The original work on the application of the time inconsistency problem in macroeconomics is due to
A) Milton Friedman and Robert Lucas.
B) Michael Hutchinson and Carl Walsh.
C) Finn Kydland and Edward Prescott.
D) Robert Barro and Donald Gordon.
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