Contemporary Macroeconomic Theory
Exam Answer Key
Course Introduction
Contemporary Macroeconomic Theory explores advanced topics and recent developments in macroeconomics, focusing on how modern economies function and respond to policy interventions. This course delves into theoretical frameworks such as New Keynesian and Real Business Cycle models, analyses of economic growth, consumption, investment, unemployment, inflation, and the impacts of monetary and fiscal policy. Students will engage with empirical evidence and learn to apply quantitative tools to evaluate current macroeconomic issues and debates, preparing them to understand and assess the global and domestic economic environment.
Recommended Textbook
CoreMacroeconomics 3rd Edition by Eric Chiang
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16 Chapters
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Page 2
Chapter 1: Exploring Economics
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Sample Questions
Q1) "Thinking at the margin" involves:
A) influencing how individuals make decisions.
B) making wiser decisions given limited information.
C) maximizing an firm's or individual's well-being.
D) weighing the impact of one additional activity.
Answer: D
Q2) Economics is about allocating limited resources to maximize an individual or society's well-being or satisfaction.
A)True
B)False
Answer: True
Q3) (Figure: Sales and Advertising)The graph shows the advertising expenditures and the resulting sales (in bottles)of a new caffeinated beverage called Jump.The vertical intercept for the equation graphed is 3,000 bottles.
A)True
B)False
Answer: True
Q4) Is understanding recessions a microeconomic or a macroeconomic issue? Explain. Answer: Macroeconomic;it is a national issue.
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Chapter 2: Production, Economic Growth, and Trade
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Sample Questions
Q1) Who developed the theory of comparative advantage?
A) John Stuart Mill
B) Adam Smith
C) David Ricardo
D) Karl Marx
Answer: C
Q2) (Figure: Bread and Honey)In the graph,a move from point a to point b costs:
A) 70 jars of honey.
B) 75 loaves of bread.
C) 90 loaves of bread.
D) 15 loaves of bread.
Answer: D
Q3) A change from an inefficient mix to an efficient mix of output would BEST be represented with a production possibilities frontier (PPF)as a:
A) shift outward of the PPF.
B) shift inward of the PPF.
C) movement from inside the PPF onto the PPF.
D) movement from a point on the PPF to a point inside the PPF.
Answer: C
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) When a consumer's income level is low,it is MORE likely the consumer will purchase ______ goods.
A) complementary
B) substitute
C) normal
D) inferior
Answer: D
Q2) Which of the following will cause a decrease in demand?
A) an increase in the price of the product
B) an increase in the price of a complementary good
C) an increase in the price of a substitute good
D) a decrease in income for an inferior good
Answer: B
Q3) Suppose that quantity supplied of a product equals 5 and quantity demanded equals 8.In this market,there is a:
A) shortage of this product and the price should fall.
B) shortage of this product and the price should rise.
C) surplus of this product and the price should fall.
D) surplus of this product and the price should rise.
Answer: B
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Chapter 4: Markets and Government
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Sample Questions
Q1) (Figure: Determining Surplus and Loss)Consider the graph.If the price is raised from $8 to $12:
A) $80 is transferred from producers to consumers.
B) $80 is transferred from consumers to producers.
C) $140 is transferred from producers to consumers.
D) $140 is transferred from consumers to producers.
Q2) Producer surplus is shown graphically as the area:
A) under the demand curve and above the market price.
B) under the demand curve and below the market price.
C) above the supply curve and above the market price.
D) above the supply curve and below the market price.
Q3) When prices fall below equilibrium:
A) producer surplus falls and consumer surplus falls.
B) producer surplus falls and consumer surplus rises.
C) producer surplus falls and it is uncertain what happens to consumer surplus.
D) consumer surplus falls and it is uncertain what happens to producer surplus.
Q4) The lack of easy entry into a market tends to depress prices.
A)True
B)False
Q5) Will producer surplus rise or shrink when prices rise above equilibrium?
Page 6
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Chapter 5: Introduction to Macroeconomics
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Sample Questions
Q1) The major item that must be added to national income to obtain GDP is:
A) individual income taxes.
B) property taxes.
C) capital consumption allowance.
D) Social Security payments.
Q2) Within the circular flow diagram,the arrows pointing counterclockwise represent flows of real items.
A)True
B)False
Q3) The circular flow diagram shows that the sum of the resource market and the product market must equal the total payments going to the business market.
A)True
B)False
Q4) A drawback to producing a set of national income and product accounts statistics that take into account factors such as environmental changes and nonmarket transactions is greater cost in their preparation.
A)True
B)False
Q5) Describe the shortcomings of GDP as a measure of our standard of living.
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Chapter 6: Measuring Inflation and Unemployment
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Sample Questions
Q1) Jasmine works in her family's boutique 16 hours a week and is considered an unpaid family member.Since she is not paid for her services,she is not in the labor force.
A)True
B)False
Q2) Which of the following statements describes a difference between the consumer price index (CPI)and the producer price index (PPI)?
A) Only the CPI is associated with the problem of quality changes.
B) Only the PPI is associated with the problem of deleted products.
C) Only the PPI measures net revenues received by firms.
D) Only the PPI has a fixed market basket.
Q3) Which of the following persons is considered to be unemployed?
A) Ahmed,who is on vacation
B) Sarah,who is on strike duty
C) Tiffany,who is going on interviews,hoping to get her first job
D) Carmen,who works three days a week at her father's business but is not paid
Q4) The unemployment rate does not explicitly include underemployed and discouraged workers.
A)True
B)False
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Chapter 7: Economic Growth
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Sample Questions
Q1) The legal enforcement of contract rights is an important component of intangible infrastructure that promotes economic growth.
A)True
B)False
Q2) For which growth rate would the Rule of 70 be most accurate?
A) 1%
B) 15%
C) 20%
D) 30%
Q3) Land and natural resources include:
A) the mental and physical talents of people.
B) human capital.
C) manufactured products that are used to produce other goods and services.
D) water and minerals that come from the earth.
Q4) The more a country produces and the higher the value of its goods and services,the lower its standard of living will be.
A)True
B)False
Q5) How can an effective legal system facilitate economic growth?
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Chapter 8: Aggregate Expenditures
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Sample Questions
Q1) The balanced budget multiplier does not depend on the marginal propensity to consume.
A)True
B)False
Q2) At equilibrium,when a tax is put in place,income falls more than the tax multiplied by the multiplier,since consumers pay for the tax in part by reducing their savings.
A)True
B)False
Q3) Changes in government spending and changes in net exports have __________ multiplier effects than changes in investment spending.
A) smaller
B) larger
C) the same
D) at first,smaller,but later,larger
Q4) In the Keynesian aggregate expenditure model,prices are assumed to be fixed because resources are idle (underutilized).
A)True
B)False
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Page 10
Chapter 9: Aggregate Demand and Supply
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Sample Questions
Q1) (Figure: Determining SRAS Shifts)Which statement is NOT correct?
A) Equilibrium output is $3,000 worth of goods and services.
B) An increase in aggregate demand would lead to deflation.
C) Full employment occurs when the economy produces $3,000 worth of goods and services.
D) In the short-run equilibrium,output can be greater than or less than $3,000.
Q2) Which is a determinant of aggregate supply?
A) interest rates
B) productivity
C) prices of substitutes
D) household expectations
Q3) As the aggregate price level declines:
A) there is a movement down along the aggregate demand curve.
B) the aggregate demand curve shifts to the left.
C) there is a movement up along the aggregate demand curve.
D) the aggregate demand curve shifts to the right.
Q4) The aggregate supply curve in the long run is vertical because wages and other input prices respond completely to a change in price level.
A)True
B)False
Page 11
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Chapter 10: Fiscal Policy and Debt
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Sample Questions
Q1) If an expansionary policy pushes output beyond the full employment level of GDP:
A) the economy will undergo deflation.
B) the natural rate of unemployment will fall.
C) costs of production will drop.
D) the short-run aggregate supply will eventually shift to the left.
Q2) Examples of discretionary government spending include national defense,transportation,and education.
A)True
B)False
Q3) Functional finance emphasizes economic growth and price level stability.
A)True
B)False
Q4) Automatic stabilizers include all of the following EXCEPT:
A) unemployment compensation benefits.
B) welfare payments.
C) national defense spending.
D) tax revenues.
Q5) The sale of Treasury bills by the Federal Reserve monetizes the federal debt. A)True
B)False
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Chapter 11: Saving, Investment, and the Financial System
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Sample Questions
Q1) Suppose a one-year bond with a face value of $200 is sold for $188.What is the bond's yield?
A) 5.3%
B) 6.0%
C) 6.4%
D) 12.0%
Q2) Which is NOT a necessary characteristic for something to be accepted and used as money?
A) It is easily standardized.
B) It must have the words legal tender on it.
C) It is divisible.
D) It is generally accepted by society.
Q3) Money used to purchase goods or services is functioning as a:
A) unit of account.
B) store of value.
C) standard value.
D) medium of exchange.
Q4) What are the conditions for a commodity to serve as money in a modern economy?
Q5) List the factors that shift the supply curve of loanable funds.
Q6) Explain why households supply loanable funds to the market.
Page 13
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Chapter 12: Money Creation and the Federal Reserve
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Sample Questions
Q1) The Federal Reserve System resulted from a compromise between those who wanted a massive central bank and those who wanted no central bank.
A)True B)False
Q2) If there is a general rise in fear of the financial system,then the POTENTIAL money multiplier will fall.
A)True B)False
Q3) The growth of businesses such as Coinstar that convert coins into bank notes or gift cards caused money to ____ and the actual money multiplier to ____,ceteris paribus.
A) reenter the banking system;rise
B) reenter the banking system;fall
C) leave the banking system;rise
D) leave the banking system;fall
Q4) The money multiplier is equal to one divided by checkable deposits. A)True B)False
Q5) How did the Federal Reserve System evolve in the United States?
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Chapter 13: Monetary Policy
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Sample Questions
Q1) Keynes defined the liquidity trap as a situation in which,once interest rates sink low,individuals spend their money rather than holding onto it.
A)True
B)False
Q2) _____ on credit by households and _____ interest rates set in motion the events that lead to the 2007-2009 recession.
A) Overspending;high
B) Underspending;high
C) Underspending;low
D) Overspending;low
Q3) If the Federal Reserve tries to target inflation near 2%,the inflation rate is 1.5%,and output is 2.3% below potential GDP,the target federal funds rate according to the Taylor rule is 4.4%.
A)True
B)False
Q4) What are the assumptions of the classical quantity theory of money? How do these assumptions affect its conclusions?
Q5) Compare and contrast the three models of monetary theory.
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Chapter 14: Macroeconomic Policy: Challenges in a Global Economy
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Sample Questions
Q1) Which of the following does NOT describe the natural rate of unemployment?
A) the point where the rates of change in productivity and wages are equal
B) the unemployment rate that exerts inflationary pressures
C) the unemployment rate at which inflation equals expected inflation,resulting in zero price pressures on the economy
D) the point where the rates of change in productivity and wages are equal and the unemployment rate exerts no inflationary pressures
Q2) If policymakers were using the Phillips curve and they wished to decrease inflation to near zero,they would:
A) accept decreasing unemployment.
B) accept increasing unemployment.
C) promote policies to increase productivity to offset wage increases.
D) accept increasing unemployment and promote policies to increase productivity to offset wage increases.
Q3) Adaptive expectations are driven by emotions.
A)True
B)False
Q4) What happens when the actual inflation rate is more than the expected rate?
Q5) Explain how changing employment practices drive jobless recoveries.
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Chapter 15: International Trade
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Sample Questions
Q1) Over the long run,the liberalization of trade has caused incomes to _______,leading to ________ environmental damage.
A) rise;less
B) rise;more
C) fall;more
D) fall;less
Q2) One rationale used for tariff protection involves when:
A) the importing country finds the cost of producing its products to be higher than in other countries.
B) imports are produced by foreign firms,which are more efficient than domestic producers.
C) the importing country wants to practice international price discrimination.
D) imports are produced by foreign firms that receive subsidies from their governments.
Q3) "With international trade,there are both gainers and losers." Explain.
Q4) The national defense argument for imposing trade restraints is unjustified during times of peace.
A)True
B)False
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Page 17
Chapter 16: Open Economy Macroeconomic
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Sample
Questions
Q1) Explain why interest rate differentials sometimes persist between two countries.
Q2) Which of the following occurrences will lead to increased imports and decreased exports,ultimately resulting in currency depreciation for the U.S.dollar?
A) rising interest rates in the United States
B) increased preferences for U.S.products in the United States
C) U.S.income growth less than that of other countries
D) decreasing prices in the United States
Q3) A gold standard is effectively:
A) a fixed exchange rate.
B) a flexible exchange rate.
C) a managed exchange rate.
D) the only method to cure depressions.
Q4) Suppose the current exchange rates between the dollar and the British pound and the dollar and the yen are $2 = 1 and $0.01 = 1 yen.The exchange rate between the pound and the yen is:
A) 200 = 1 yen.
B) 1 = 1 yen.
C) 2 = 1 yen.
D) 1 = 200 yen.
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