Economic Theory
Exam Solutions
Course Introduction
Economic Theory is a foundational course that explores the core principles and models underlying microeconomics and macroeconomics. Through analysis of concepts such as supply and demand, market equilibrium, consumer behavior, production, and the role of government, students learn how individuals and organizations make rational economic choices. The course also examines broader economic phenomena, including inflation, unemployment, economic growth, and the impact of policy decisions. Emphasis is placed on critical thinking, analytical tools, and the application of theoretical constructs to real-world situations, preparing students for advanced study or professional work in economics and related disciplines.
Recommended Textbook
Macroeconomics 8th Edition by Andrew Abel
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15 Chapters
1417 Verified Questions
1417 Flashcards
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Page 2
Chapter 1: Introduction to Macroeconomics
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67 Verified Questions
67 Flashcards
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Sample Questions
Q1) The highest and most prolonged period of unemployment in the United States over the last 125 years occurred during
A)World War II.
B)the 1890s Depression.
C)the 1990-1991 recession.
D)the Great Depression of the 1930s.
Answer: D
Q2) During the Great Depression,the unemployment rate for the United States peaked at approximately A)10%.
B)70%.
C)45%.
D)25%.
Answer: D
Q3) What are the major factors affecting the long-term growth of the economy's output?
Answer: The major factors are population growth and average labor productivity.
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Chapter 2: The Measurement and Structure of the National Economy
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) If the expected inflation rate was 2.5%,the expected real interest rate was 4.0%,and the actual inflation rate turned out to be 3.2%,then the real interest rate equals
A)1)7%
B)3)2%
C)3)3%.
D)4)7%
Answer: C
Q2) The equation total production = total income = total expenditure is called
A)the goods-market equilibrium condition.
B)the total identity.
C)the fundamental identity of national income accounting.
D)Say's Law.
Answer: C
Q3) Business fixed investment includes purchases of A)capital equipment and structures.
B)land and energy.
C)long-term bonds.
D)inventories.
Answer: A
Page 4
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Chapter 3: Productivity, Output, and Employment
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99 Flashcards
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Sample Questions
Q1) The ________ is the number of unemployed divided by the labor force and the ________ is the labor force divided by the adult population.
A)unemployment rate; employment rate
B)unemployment rate; employment ratio
C)unemployment ratio; participation rate
D)discouraged worker ratio; employment rate
Answer: C
Q2) As a result of the superb economics essay that you wrote during this quarter,you won the Adam Smith prize of $100.The receipt of these funds would be an example of
A)the substitution effect being stronger than the income effect.
B)the income effect being stronger than the substitution effect.
C)a pure income effect.
D)a pure substitution effect.
Answer: C
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) Suppose you divide your life into two periods-working age and retirement age.When you work,you earn labor income Y; when retired,you earn no labor income,but must live off your savings and the interest it earns.You have no initial assets.You save the amount S while working,earning interest at rate r,so you have (1 + r)S to live on when retired.Because you don't need to consume as much when retired,you want to set consumption when working twice as high as consumption when retired.
(a)Suppose you earn $1 million over your working life,and the real interest rate for retirement saving is 50%.How much will you save,and how much will you consume in each part of your life?
(b)Suppose your current income went up to $2 million when working.Now what will you save and how much will you consume each period?
(c)Suppose a social security system will pay you 25% of your working income when you are retired.Now (with Y = $1 million as in part (a)how much will you save and how much will you consume each period?
(d)Suppose the interest rate rises.Will you save more or less?
Q2) What are the economic consequences of reductions in defense spending by the government? What happens to national saving,the interest rate,and investment?
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Chapter 5: Saving and Investment in the Open Economy
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107 Flashcards
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Sample Questions
Q1) If a French company sells 1000 gallons of Perrier to a U.S.company at 5 euros per gallon,and uses the money to buy stock in a Spanish cork company,how does this affect the French balance of payments accounts?
A)Debit: capital and financial account; credit: merchandise trade
B)Debit: merchandise trade; credit: capital and financial account
C)Debit: net investment income from abroad; credit: capital and financial account
D)Debit: merchandise trade; credit: net investment income from abroad
Q2) Consider a small open economy with desired national saving of Sd = 200 + 10,000rw and desired investment of Id = 1,000 - 5,000rw.If rw = 0.05,then a rise in government spending of 50 with no change in private saving causes net exports to become A)100.
B)50.
C)-50. D)-100.
Q3) In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.
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Page 7
Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) An increase in pollution has caused a permanent increase in the rate of capital depreciation.This would cause
A)an increase in the capital-labor ratio.
B)output per worker to fall.
C)a decline in consumption per worker.
D)the capital-labor ratio to be unaffected.
Q2) In the textbook model of endogenous growth,long-run output growth would increase if there were either a ________ in the saving rate or a ________ in the depreciation rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) In the Solow model,if f(k)= 8k0.5,s = 0.2,n = 0.3,and d = 0.1,what is the value of k at equilibrium? A)1
Q4) What types of government policies can increase long-run living standards?
Page 8
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Chapter 7: The Asset Market, Money, and Prices
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100 Flashcards
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Sample Questions
Q1) If the nominal money supply grows 5%,real income falls 2%,and the income elasticity of money demand is 0.8,then the inflation rate is A)3)0%.
B)3)4%.
C)6)6%.
D)7)0%.
Q2) If the nominal money supply doubles while real money demand is unchanged,what happens to the price level?
A)The price level increases by a factor of four.
B)The price level doubles.
C)The price level is unchanged.
D)The price level falls by one-half.
Q3) Money demand is given by Md/P = 1000 + .2Y - 1000i.
Given that P = 200,Y = 2000,and i = .10,real money demand is equal to A)1,300.
B)1,500.
C)260,000.
D)300,000.
Q4) Give five examples of factors that could reduce the demand for money.
Page 9
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Chapter 8: Business Cycles
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Sample Questions
Q1) When a recession occurs,do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?
Q2) 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.
Q3) Using the seasonal business cycle as your guide,during which quarter would you be most likely to expect an increase in your corporation's sales?
A)The first quarter of the year (January-March)
B)The second quarter of the year (April-June)
C)The third quarter of the year (July-September)
D)The fourth quarter of the year (October-December)
Q4) Real interest rates are
A)procyclical,just like nominal interest rates.
B)acyclical,while nominal interest rates are procyclical.
C)acyclical,just like nominal interest rates.
D)countercyclical,while nominal interest rates are procyclical.
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Chapter 9: The IS-LM/AD-AS Model
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Sample Questions
Q1) The Fed has announced that it plans to lower the rate of monetary growth from 10% per year to 2% per year.You would expect this announcement to directly
A)increase money demand,shifting the LM curve up and to the left.
B)increase money demand,shifting the LM curve down and to the right.
C)decrease money demand,shifting the LM curve up and to the left.
D)decrease money demand,shifting the LM curve down and to the right.
Q2) For each of the following changes,which equilibrium curve (IS,LM,or FE)is shifted? Draw the change in the underlying demand or supply curves (for example,money demand and supply for the LM curve)and show how the equilibrium curve changes.
(a)Expected inflation increases.
(b)The future marginal productivity of capital increases.
(c)Labor supply decreases.
(d)Future income declines.
(e)There's a temporary beneficial supply shock.
(f)The nominal interest rate on money rises.
Q3) Calculate the real money supply growth rate when the nominal money supply increases by 10% and the price level increases by each of the following percentages: a)2%; b)8%; c)10%; d)15%.
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11
Chapter 10: Classical Business Cycle Analysis
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96 Flashcards
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Sample Questions
Q1) In recession years,________ jobs are lost than created,and vacacies and job openings ________.
A)more; increase
B)more; decline
C)fewer; decline
D)fewer; increase
Q2) The primary reason that short-lived shocks can have long-run effects is
A)the nonneutrality of money.
B)misperceptions by the public over the actual price level and the expected price level.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms.
Q3) Define real shocks,define nominal shocks,and give an example of each.
Q4) Prescott's calibrated RBC model was able to match the data in terms of the ________ between many key macroeconomic variables and GNP; that is,in terms of how closely they moved with GNP over the business cycle.
A)correlation
B)interdependence
C)gamma coefficient
D)sigma ratio
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Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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90 Verified Questions
90 Flashcards
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Sample Questions
Q1) Describe the effects of an oil price shock in a Keynesian model; why are such supply shocks difficult to handle using macroeconomic stabilization policies?
Q2) If the menu cost theory is true,then firms that change prices less frequently than other firms are likely to be in
A)more competitive industries.
B)service,rather than manufacturing,industries.
C)growing,rather than declining,industries.
D)less competitive industries.
Q3) Describe the empirical research on the stickiness of prices.Given some doubt on how sticky prices are,why is it nevertheless useful for the Keynesian model to assume that prices are sticky,especially when analyzing monetary policy?
Q4) The distinguishing feature that determines whether an analysis is classical or Keynesian is
A)the speed of price adjustment.
B)the slope of the aggregate demand curve.
C)the degree of monopoly power in the economy.
D)the assumption about the transmission mechanism of monetary policy.
Q5) Why might firms pay an efficiency wage rather than a market-clearing wage?
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Chapter 12: Unemployment and Inflation
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91 Flashcards
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Sample Questions
Q1) If the expected inflation rate is unchanged,a fall in the natural rate of unemployment would
A)shift the Phillips curve to the right.
B)not shift the Phillips curve.
C)shift the Phillips curve to the left.
D)shift the Phillips curve to the left and shift the long-run Phillips curve to the right.
Q2) Countries in which wages adjust slowly to changes in the supply of and demand for labor are likely to have ________ sacrifice ratio.
A)an infinite
B)a high
C)a low
D)a zero
Q3) What is the Lucas critique,and why was it so important to macroeconomists in the 1970s?
Q4) Describe the principal costs of unemployment.Are there any benefits to unemployment?
Q5) Why did the government use expansionary monetary policies in the late 1970s,and what was the principal negative macroeconomic effect of these policies?
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Chapter 13: Exchange Rates,Business Cycles,and
Macroeconomic Policy in the Open Economy
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96 Verified Questions
96 Flashcards
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Sample Questions
Q1) An increase in the U.S.money supply would cause the value of the dollar to ________ and U.S.net exports to ________ in the short run using a Keynesian model.
A)fall; fall
B)fall; rise
C)rise; rise
D)rise; fall
Q2) In a Keynesian model,what are the short-run effects on output,the real interest rate,and the real exchange rate,for both the domestic economy and a foreign economy,of a decline in investment?
Q3) 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.
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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111 Flashcards
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Sample Questions
Q1) Monetarists suggest doing which of the following?
A)Maintain a steady growth rate of the money supply.
B)Use fiscal policy to combat unemployment in the short run.
C)Use monetary policy to combat unemployment in the long run.
D)Use fiscal policy to combat inflation in the long run.
Q2) Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged.
Q3) When the Fed increases the quantity of assets it owns,it is said to be engaging in
A)credit easing.
B)forward guidance.
C)quantitative easing.
D)a maturity extension program.
Q4) Which of the following variables is likely to serve as an intermediate target for monetary policy?
A)Money supply
B)Inflation rate
C)Open-market operations
D)Unemployment rate
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) A Social Security system in which payroll taxes that workers and their employers pay in go directly to retirees and other beneficiaries is known as
A)a pay-as-you-go system.
B)an individual-account system.
C)a primary-deficit system.
D)a social-lockbox system.
Q2) The deficit is
A)the amount by which government purchases,transfers,and net interest exceed tax revenues.
B)the amount by which government purchases and transfers exceed tax revenues.
C)the primary deficit minus net interest payments.
D)total tax revenues minus net interest minus government expenditures.
Q3) 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.
Q4) Who bears the burden of the government debt? Explain why.Under what circumstances is there no burden to be borne?
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