Applied Macroeconomics
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Course Introduction
Applied Macroeconomics explores the practical implementation of macroeconomic theories and models to address real-world economic issues. The course covers topics such as national income determination, unemployment, inflation, fiscal and monetary policy, economic growth, and international trade. Emphasis is placed on analyzing current economic events, interpreting macroeconomic data, and evaluating policy responses to macroeconomic challenges. By engaging with empirical research and contemporary case studies, students learn how macroeconomic principles are used in government decision-making, business strategy, and global economic analysis.
Recommended Textbook
Macroeconomics 7th Edition by Andrew Abel
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) From 1800 to 1940,the price level in the United States
A)trended neither upward nor downward.
B)fluctuated wildly.
C)declined slowly.
D)increased slowly.
Answer: A
Q2) A central bank is an institution that
A)pays for government expenditures.
B)controls a nation's monetary policy.
C)runs a country's stock market.
D)determines a nation's fiscal policy.
Answer: B
Q3) A country is said to be experiencing inflation when
A)prices of most goods and services are rising over time.
B)prices of most goods and services are falling over time.
C)total output is rising over time.
D)total output is falling over time.
Answer: A
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3
Chapter 2: The Measurement and Structure of the National Economy
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Sample Questions
Q1) Two years ago,the GDP deflator for Old York was 300,and today it is 330.75.Based on this information the annual average inflation rate for the two years was A)5%.
B)5.125%.
C)10%.
D)10.25%.
Answer: A
Q2) In the mid-to-late 1980s,the United States had "twin deficits" because both ________ and ________ were negative.
A)government saving; private saving
B)saving; investment
C)the current account; investment
D)government saving; the current account
Answer: D
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) Which of the following events would lead to an increase in the marginal product of labor for every quantity of labor?
A)An increase in the real wage
B)A decrease in the real wage
C)A favorable supply shock such as a fall in the price of oil
D)An adverse supply shock,such as a reduced supply of raw materials
Answer: C
Q2) Suppose oil prices fall temporarily,as oil becomes more plentiful.What impact is this likely to have on the production function,the marginal products of labor and capital,labor demand,employment,and the real wage?
Answer: More output can now be produced by the same amounts of capital and labor,since oil is more abundant and cheaper.The production function shifts upward,with the marginal products of labor and capital rising.Since the marginal product of labor is higher,so is labor demand.As a result of the shift to the right in the labor demand curve,employment rises,as does the real wage.
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) A firm's output (Y)depends on how much capital (K)it has,according to the equation: Y = 20K - K<sup>2</sup>.The real interest rate is 6% per year,the depreciation rate of capital is 14% per year and the price of a unit of capital is $80,and each unit of output sells for $1.
(a)For capital levels of 0 to 6,how much is output?
(b)For capital levels from 1 to 6,calculate the marginal product of capital.
(c)How many units of capital does the firm desire?
(d)If the real interest rate was 1% per year,how many units of capital would the firm desire?
Q2) The substitution effect of a decrease in real interest rates is to cause a consumer to
A)increase future consumption and decrease current consumption.
B)decrease future consumption and increase current consumption.
C)increase current consumption and increase saving.
D)decrease current consumption and increase saving.
Q3) For a borrower,an increase in the real interest rate will lead to
A)higher current consumption and less borrowing.
B)higher current consumption and less saving.
C)lower current consumption and less borrowing.
D)lower current consumption and less saving.
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) If there's an increase in the future marginal product of capital in a large open economy,it causes the current account to ________ and saving to ________.
A)fall; rise
B)rise; remain unchanged
C)fall; remain unchanged
D)rise; rise
Q2) In a large open economy like the United States,an increased government budget deficit which reduces national saving
A)reduces investment and improves the current account balance.
B)reduces investment and reduces the current account balance.
C)has no effect on investment,but reduces the current account balance.
D)has no effect on either investment or the current account balance.
Q3) A small open economy has a current account balance of zero.A rise in the world real interest rate causes
A)a current account surplus.
B)a capital and financial account surplus.
C)net borrowing from abroad.
D)absorption to exceed income.
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) All of the following are explanations of the post-1973 productivity slowdown EXCEPT
A)problems in measuring productivity.
B)changes in the legal and human environment.
C)higher oil prices.
D)greater competition from foreign imports.
Q2) If the capital-labor ratio is above the Golden Rule capital-labor ratio,then in the steady state,
A)capital per worker is above its maximum.
B)output per worker is less than it would be at the Golden Rule capital-labor ratio.
C)investment per worker exceeds output per worker.
D)consumption per worker is not at its maximum.
Q3) The elasticity of output with respect to capital
A)is the increase in output resulting from an increase in the capital stock.
B)is the percentage increase in output resulting from a 1% increase in the capital stock.
C)is always greater than one.
D)is the inverse of the elasticity of output with respect to labor.
Q4) What types of government policies can increase long-run living standards?
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Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) People's best guesses about returns on assets are called
A)expected returns.
B)liquidity.
C)risk.
D)the term structure of returns.
Q2) If the income elasticity of money demand is 3/4 and income increases 8%,by about how much does the price level change?
A)Falls by 6%.
B)Unchanged.
C)Rises by 6%.
D)Rises by 8%.
Q3) Suppose velocity is 3,real output is 9000,and the price level is 1.5.What is the level of real money demand in this economy?
A)2000
B)3000
C)6000
D)30,000
Q4) Give five examples of factors that could reduce the demand for money.
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Chapter 8: Business Cycles
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Sample Questions
Q1) One of the first organizations to investigate the business cycle was
A)the Federal Reserve System.
B)the National Bureau of Economic Research.
C)the Council of Economic Advisors.
D)the Brookings Institution.
Q2) According to research by Stock and Watson,the recent decline in volatility in many macroeconomic variables was a
A)sudden drop that occurred around 1984.
B)gradual decline throughout the 1980s.
C)sudden drop that occurred around 1990.
D)gradual decline throughout the 1990s.
Q3) The three main components of the aggregate demand-aggregate supply model include
A)AD,SRAS,LM
B)SRAS,LRAS,IS
C)AD,IS,LM
D)AD,SRAS,LRAS
Q4) Describe the major features of the business cycle.Be sure to discuss what variables are affected by the cycle,a description of the key features that are apparent in the data,how variables are related to one another,how regular the cycle is,and how predictable the cycle is.
Page 10
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Chapter 9: The Is-Lmad-As Model
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Sample Questions
Q1) A temporary supply shock,such as an increase in oil prices,would
A)shift the IS curve down and to the left and leave the FE line unchanged.
B)shift the IS curve down and to the left and shift the FE line to the left.
C)shift the IS curve up and to the right,but leave the FE line unchanged.
D)have no effect on the IS curve.
Q2) A temporary adverse supply shock directly causes
A)a shift down and to the left of the IS curve.
B)a shift to the left of the FE line.
C)a shift down and to the right of the LM curve.
D)a shift up and to the right of the IS curve.
Q3) An increase in wealth that doesn't affect labor supply would cause the IS curve to ________ and the FE line to ________.
A)shift down and to the left; be unchanged
B)shift down and to the left; shift left
C)shift up and to the right; be unchanged
D)shift up and to the right; shift left
Q4) Describe the effects,in both the short run and the long run,of an increase in the money supply.Explain what happens to real output and the price level.
Q5) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) If the money supply grows 7% during the year,and people expected the money supply to grow by 5%,what happens to the short-run aggregate supply curve,according to the misperceptions theory?
A)It shifts down.
B)It shifts up.
C)It doesn't shift.
D)It shifts down unless Ricardian equivalence holds,in which case it doesn't shift.
Q2) The term household production refers to A)output produced by forcing children to work.
B)output produced by workers who are telecommuting.
C)services provided directly to households,such as lawn mowing by landscape companies.
D)output produced at home.
Q3) Describe,in general terms,how an economist calibrates a macroeconomic model.What statistics can be usefully examined to see how well the model corresponds to the data?
Q4) Why doesn't stabilization policy work,according to economists using the misperceptions theory?
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Page 12
Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) According to the efficiency wage model,during a recession,firms will not reduce real wages because
A)unions would go on strike,reducing profitability.
B)this would reduce worker effort and productivity.
C)the equilibrium real wage has increased.
D)legally,they can't.
Q2) (a)Draw a figure,using the Keynesian IS-LM framework,of an economy in recession.
(b)If the Fed's goal is to move output to its full-employment level,what should it do with monetary policy? What will happen to the real interest rate? What is the effect on the price level? Show the result in your diagram.
(c)Suppose the Fed decides to keep the money supply unchanged.How could the government use fiscal policy to move the economy to full employment? Show the result in your diagram.
(d)How does the real interest rate differ between parts (b)and (c)?
Q3) In the Keynesian model,which curve is vertical?
A)LRAS
B)SRAS
C)AD
D)NS
Page 13
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) In the expectations-augmented Phillips curve, = <sup>e</sup> - 3(u - 0.05).When = 0.03 and <sup>e</sup> = 0.06,the unemployment rate is
A)0.04.
B)0.05.
C)0.06.
D)0.07.
Q2) Friedman and Phelps suggested that there should not be a stable relationship between inflation and unemployment,but there should be a stable relationship between
A)anticipated inflation and frictional unemployment.
B)anticipated inflation and cyclical unemployment.
C)unanticipated inflation and frictional unemployment.
D)unanticipated inflation and cyclical unemployment.
Q3) One cost of an unanticipated inflation is that it
A)transfers wealth from lenders to borrowers.
B)transfers wealth from borrowers to lenders.
C)decreases menu costs.
D)increases the purchasing power of money.
Q4) What is the Lucas critique,and why was it so important to macroeconomists in the 1970s?
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Chapter 13: Exchange Rates,business Cycles,and
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) A temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.
A)lower; increase
B)lower; decrease
C)raise; increase
D)raise; decrease
Q2) From 1980 to 2000,the yen/dollar exchange rate fell from 240 yen/dollar to 102 yen/dollar,while the dollar/pound exchange rate fell from 2.22 dollars/pound to 1.62 dollars/pound.As a result,
A)the dollar appreciated relative to the yen,but depreciated relative to the pound.
B)the dollar depreciated relative to the yen,but appreciated relative to the pound.
C)the dollar appreciated relative to both the yen and the pound.
D)the dollar depreciated relative to both the yen and the pound.
Q3) Describe how the euro was created.What are the benefits of the monetary union? What are the costs?
Q4) What is purchasing power parity? Why might it not hold?
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) Evidence on the existence of a credit channel for monetary policy transmission shows that on the supply side of the credit market,the credit channel was ________ in the 1960s and 1970s,and has ________ more recently.
A)powerful; weakened
B)powerful; become stronger
C)weak; become stronger
D)weak; disappeared completely
Q2) In the Keynesian model,suppose the Fed sets a target for the real interest rate.If the IS curve shifts to the left,and the Fed wants to keep output unchanged, A)taxes will increase.
B)the money supply will decline.
C)the real interest rate will decrease.
D)taxes will decrease.
Q3) What types of rules for monetary policy may be sensible for policymakers to consider? What is the advantage of using rules over discretion? What problems might there be with rules?
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16
Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The total amount of taxes paid divided by before-tax income is the A)median taxpayer rate.
B)rate of hysteresis.
C)average tax rate.
D)marginal tax rate.
Q2) Suppose that real GDP is 10,000 and remains constant,nominal GDP is initially 30,000,inflation is 3%,and the debt-GDP ratio is 0.7.Find the largest nominal deficit that the government can run without raising the debt-GDP ratio.
Q3) Seignorage is the revenue a government raises by A)taxation.
B)printing money.
C)borrowing money.
D)charging fees for services.
Q4) The total value of government bonds outstanding at any particular time is called the A)government debt.
B)government deficit.
C)seignorage revenue.
D)yield curve.
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