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Economic Theory
Exam Solutions
Course Introduction
Economic Theory explores the fundamental principles and models that form the basis of economic analysis. This course examines how individuals, firms, and governments make choices under conditions of scarcity and how these choices interact in various market and non-market settings. Students will study both microeconomic and macroeconomic theories, including consumer and producer behavior, market structures, game theory, and general equilibrium, as well as macroeconomic topics such as economic growth, inflation, and unemployment. Emphasis is placed on the formalization of economic reasoning, critical evaluation of economic outcomes, and application of theory to contemporary economic issues.
Recommended Textbook
Macroeconomics 9th Edition by Andrew B. Abel
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15 Chapters
1566 Verified Questions
1566 Flashcards
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Page 2
Chapter 1: Introduction to Macroeconomics
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73 Verified Questions
73 Flashcards
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Sample Questions
Q1) Classical economists argue that
A)the government should have an active role in the economy.
B)government policies will be ineffective and counterproductive.
C)the government should actively intervene in the economy to eliminate business cycles.
D)wages and prices don't adjust quickly, so the economy is slow to return to equilibrium.
Answer: B
Q2) In analyzing macroeconomic data during the past year,you have discovered that average labor productivity fell,but total output increased.What was most likely to have caused this?
A)There is nothing unusual in this outcome because this is what normally occurs.
B)The capital-output ratio probably rose.
C)There was an increase in labor input.
D)Unemployment probably increased.
Answer: C
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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3
Chapter 2: The Measurement and Structure of the National Economy
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) The Boskin Commission concluded that the CPI overstates increases in the cost of living by ________ percentage point(s)per year.
A)Less than 1
B)1 to 2
C)About 3
D)Over 4
Answer: B
Q2) Monica grows coconuts and catches fish.Last year she harvested 1500 coconuts and 600 fish.She values one fish as having a worth of three coconuts.She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and catch fish,all of which were consumed by Rachel.In terms of fish,Monica's income would equal
A)700 fish.
B)900 fish.
C)1100 fish.
D)2700 fish.
Answer: B
Q3) How are net exports,net factor payments from abroad,and the current account balance related?
Answer: NX + NFP = CA.
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Chapter 3: Productivity, output, and Employment
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111 Flashcards
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Sample Questions
Q1) The marginal product of labor (measured in units of output)for Expando Corp.is given by MPN = A(400 - N)
Where A measures productivity and N is the number of labor hours used in production.Suppose the price of output is $3 per unit and A = 2.0.What will be the demand for labor if the nominal wage is $18?
A)57
B)107
C)197
D)397
Answer: D
Q2) An adverse oil-price shock reduces labor demand.What happens to current employment and the real wage rate?
A)Both employment and the real wage rate would increase.
B)Both employment and the real wage rate would decrease.
C)Employment would increase and the real wage would decrease.
D)Employment would decrease and the real wage would increase.
Answer: B
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Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) If an investor has a tax rate on interest income of 30% and the inflation rate is 4%,which bond has the highest expected real after-tax interest rate?
A)A Treasury bond paying 8%
B)A corporate bond paying 7%
C)A Treasury bond paying 7%
D)A municipal bond paying 6%
Q2) If the government reduces the effective tax rate on capital (in a closed economy),then the real interest rate ________ and saving ________. A)falls; declines B)falls; increases C)rises; increases D)rises; declines
Q3) Calculate the tax-adjusted user cost of capital of a machine that costs $10,000 and depreciates at a rate of 10%,when the real interest rate is 3% and the tax rate on revenue is 5%.
A)$1238
B)$1300
C)$1368
D)$1800
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) For each of the following transactions,explain what happens to the merchandise trade balance,current account balance,and financial account balance in both the United States and Mexico.The exchange rate is 2 Mexican pesos per U.S.dollar.
(a)A Mexican firm spends 4 million pesos to buy radiology equipment from a U.S.firm.
(b)A U.S.firm buys 20,000 sombreros at 20 pesos each.
(c)Mexican computer firms send 200 programmers to universities in the United States,paying tuition and expenses of $3000 each.
(d)A Mexican entrepreneur gives 50,000 pesos to the United Way of San Antonio,Texas.
(e)Mexican investors buy $10 million worth of 30-year U.S.Treasury bonds.
Q2) Due to a change in the regulatory structure of a small open economy,the desired capital stock becomes higher for both private investment and government investment.Increased government investment spending is financed by borrowing,not by higher taxes.If both desired investment and government spending rise at the same time,will there be "twin deficits"?
Q3) What determines the interest rate in a small open economy?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) An increase in the saving rate in a steady-state economy would cause
A)a rightward movement along the saving-per-worker curve and an increase in the capital-labor ratio.
B)an upward shift in the saving-per-worker curve and an increase in the capital-labor ratio.
C)a downward shift in the saving-per-worker curve and a decrease in the capital-labor ratio.
D)a leftward movement along the saving-per-worker curve and a decrease in the capital-labor ratio.
Q2) Which of the following changes would lead,according to the Solow model,to a higher level of long-run output per worker?
A)A lower level of capital per worker
B)An increase in the saving rate
C)A rise in the rate of population growth
D)A decrease in productivity
Q3) Briefly explain the shape of the per-worker production curve in the Solow model.If investment per worker initially exceeds saving per worker,how is the steady-state capital-labor ratio achieved?
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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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) If the income elasticity of money demand is 3/4 and the interest elasticity of money demand is -1/4,by what percent does money demand rise if income rises 10% and the nominal interest rate rises from 4% to 5%?
A)7)50%
B)6)25%
C)5)00%
D)1)25%
Q2) Mr.Pierpont has wealth of $200,000.He wants to keep at least $80,000 in bonds at all times,and will shift $10,000 into bonds from his checking account for each percentage point that the interest rate on bonds exceeds the interest rate on his checking account.If the interest rate on checking accounts is 4% and the interest rate on bonds is 9%,how much does Mr.Pierpont keep in his checking account?
A)$50,000
B)$70,000
C)$130,000
D)$150,000
Q3) Define asset market equilibrium and state the asset market equilibrium condition.
Q4) Give five examples of factors that could reduce the demand for money.
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Page 9
Chapter 8: Business Cycles
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107 Flashcards
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Sample Questions
Q1) Which group within the National Bureau of Economic Research officially determines whether the economy is in a recession or expansion?
A)The G-4
B)The Business Cycle Dating Committee
C)The Business Cycle Governors
D)The Turning Point Group
Q2) The NBER's Business Cycle Dating Committee picks recession dates by looking at many variables,the four most important of which are industrial production,manufacturing and trade sales,nonfarm employment,and real personal income.These variables are known as
A)leading indicators.
B)coincident indicators.
C)lagging indicators.
D)recession indicators.
Q3) Which of the following macroeconomic variables is the most seasonally procyclical?
A)Expenditure on services
B)The unemployment rate
C)Expenditure on durable goods
D)The real wage
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Page 10
Chapter 9: The Is-Lmad-As Model
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109 Flashcards
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Sample Questions
Q1) Which of the following would shift the FE line to the right?
A)An adverse supply shock
B)An increase in labor supply
C)A decrease in the capital stock
D)An increase in the future marginal productivity of capital
Q2) An increase in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.
A)rise; rise
B)remain unchanged; fall
C)remain unchanged; rise
D)fall; fall
Q3) The aggregate demand curve
A)is vertical.
B)slopes upward.
C)is horizontal.
D)slopes downward.
Q4) 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%.
Q5) Describe what happens to the FE line if government purchases increase.
Page 11
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Chapter 10: Classical Business Cycle Analysis
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106 Verified Questions
106 Flashcards
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Sample Questions
Q1) Which of the following statements is true about the misperceptions theory?
A)Both anticipated and unanticipated changes in the nominal money supply have real effects on the economy.
B)Neither anticipated nor unanticipated changes in the nominal money supply has real effects on the economy.
C)Unanticipated changes in the nominal money supply have real effects, but anticipated changes are neutral.
D)Anticipated changes in the nominal money supply have real effects, but unanticipated changes are neutral.
Q2) The most common measure of productivity shocks is known as
A)the Solow residual.
B)the Lucas supply curve.
C)the Prescott productivity parameter.
D)the Kydland factor.
Q3) Use the classical (RBC)IS-LM-FE model to show the effects on the economy of a temporary adverse supply shock; for example,an increase in the price of oil.You should show the impact on the real wage,employment,output,the real interest rate,consumption,investment,and the price level.
Q4) Define real shocks,define nominal shocks,and give an example of each.
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Chapter 11: Keynesianism: the Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) In the efficiency wage model,an increase in productivity would
A)increase output but decrease the real wage.
B)decrease the real wage but have no effect on output.
C)increase output but have no effect on the real wage.
D)have no effect on either output or the real wage.
Q2) According to the Keynesian IS-LM model,what is the effect of each of the following on output,the real interest rate,employment,and the price level? Distinguish between the short run and the long run.
(a)Expected inflation rises.
(b)Wealth increases.
(c)Labor supply decreases due to a change in demographics.
(d)The future marginal product of capital decreases.
Q3) Why might firms pay an efficiency wage rather than a market-clearing wage?
Q4) In practice,one of the principal problems with aggregate demand management is that
A)changes in aggregate demand do not affect output.
B)changes in aggregate demand cannot reduce unemployment.
C)changes in aggregate demand are highly inflationary.
D)stabilization policies could increase aggregate demand too much and at the wrong times.
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Chapter 12: Unemployment and Inflation
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101 Flashcards
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Sample Questions
Q1) One reason for the rise in the natural rate of unemployment from 1960 to 1980 is A)changes in the demographic composition of the work force.
B)the decline in inflation.
C)increased competition from foreign workers.
D)the depreciation of the dollar relative to foreign currencies.
Q2) A COLA is
A)a center of labor activity.
B)a cost of living adjustment.
C)a contract on long-term assets.
D)a crisis of labor analysis.
Q3) Which of the following disinflationary monetary policies would classical economists prefer?
A)A cold turkey approach that is announced and credible.
B)A cold turkey approach that is announced, but not credible.
C)A gradual approach that is announced and credible.
D)A gradual approach that is unannounced.
Q4) Describe the principal costs of unemployment.Are there any benefits to unemployment?
Q5) What is the Lucas critique,and why was it so important to macroeconomists in the 1970s?
Page 14
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Chapter 13: Exchange Rates, business Cycles, and
Macroeconomic Policy in the Open Economy
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106 Flashcards
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Sample Questions
Q1) A decline in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q2) An optimum currency area is a geographic region
A)with inflation near zero.
B)that allows exchange rates to float.
C)that has fixed exchange rates.
D)for which the benefits of having a common currency exceed the costs.
Q3) A rise in the real exchange rate is called
A)a real depreciation.
B)a real appreciation.
C)a real bargain.
D)a real devaluation.
Q4) 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?
Q5) 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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121 Flashcards
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Sample Questions
Q1) Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $40 million,and bank deposits are $90 million.The money multiplier is equal to
A)2)5.
B)3)0.
C)4)0.
D)5)0.
Q2) Fractional reserve banking is the system that
A)allows banks not to insure their deposits.
B)allows banks not to join the Federal Reserve System.
C)limits banks' activities from crossing state lines.
D)allows banks to keep smaller reserves than their deposits.
Q3) 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.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The amount the government budget deficit would be if the economy were at full employment is known as the
A)primary deficit.
B)full-employment deficit.
C)natural deficit.
D)current deficit.
Q2) Find the largest nominal deficit that the government can run without raising the debt-GDP ratio,under each of the following sets of assumptions:
(a)Suppose that real GDP is 20,000 and remains constant,nominal GDP is initially 30,000,inflation is 4%,and the debt-GDP ratio is 1.2.
(b)Suppose that nominal GDP growth is 5% and outstanding nominal debt is 1500.
Q3) A decrease in the average tax rate,with the marginal tax rate held constant,will
A)increase the amount of labor supplied at any real wage.
B)not affect the amount of labor supplied at any real wage.
C)decrease the amount of labor supplied at any real wage.
D)increase the amount of labor supplied at any real wage if the average tax rate is above the marginal tax rate, but decrease the amount of labor supplied at any real wage if the average tax rate is below the marginal tax rate.
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