Economic Theory
Final Test Solutions
Course Introduction
Economic Theory explores the foundational principles and models that underpin the functioning of economies at both micro and macro levels. The course examines concepts such as supply and demand, market structures, consumer and producer behavior, and general equilibrium. It also delves into welfare economics, market failures, and the impact of government intervention. Through analytical techniques and real-world applications, students develop a deep understanding of how economic agents make decisions, how markets allocate resources, and how various factors influence economic outcomes. The course provides a rigorous theoretical framework essential for advanced study and policy analysis in economics.
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) The peak in U.S.government spending as a percent of GDP occurred during A)World War II.
B)the 1960s war on poverty.
C)the Great Depression.
D)the war against Iraq in the 2000s.
Answer: A
Q2) Which of the following factors are most important for determining the economic growth of a country?
A)The country's level of resources
B)The independence of the country's central bank
C)The country's rates of saving and investment
D)The level of sophistication of a country's financial markets
Answer: C
Q3) The inflation rate is the
A)percent increase in the average level of prices over a year.
B)percent increase in output over a year.
C)percent increase in the unemployment rate over a year.
D)price level divided by the level of output.
Answer: A
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Page 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) GDP differs from GNP because
A)GDP = GNP - net factor payments from abroad.
B)GNP = GDP - net factor payments from abroad.
C)GDP = GNP - capital consumption allowances.
D)GNP = GDP - capital consumption allowances.
Answer: A
Q2) If C = $500,I = $150,G = $100,NX = $40,and GNP = $800,how much is NFP?
A)-$10
B)-$5
C)$5
D)$10
Answer: D
Q3) To ensure that the fundamental identity of national income accounting holds,changes in inventories are
A)treated as part of expenditure.
B)treated as part of saving.
C)ignored.
D)counted as consumption.
Answer: A
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Chapter 3: Productivity, output, and Employment
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111 Verified Questions
111 Flashcards
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Sample Questions
Q1) What is the unemployment rate if there are 170 million people employed,25 million people unemployed,and 35 million not in the labor force?
A)14.7%
B)13.7%
C)12.8%
D)10.9%
Answer: C
Q2) If Y = A × N × (75 + K/N),where K = 1000,N = 20,and A = 10,what happens if K doubles and N doubles?
A)Y is unchanged.
B)Y increases by 50%.
C)Y doubles.
D)Y quadruples.
Answer: C
Q3) The marginal product of capital is the increase in
A)capital needed to produce one more unit of output.
B)output from a one-unit increase in capital.
C)labor needed to accompany a one-unit increase in capital.
D)output from a one-dollar increase in capital.
Answer: B
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Chapter 4: Consumption, saving, and Investment
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109 Flashcards
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Sample Questions
Q1) If the rate of depreciation increases,then user cost ________ and the desired capital stock ________.
A)falls; falls
B)falls; rises
C)rises; rises
D)rises; falls
Q2) 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?
Q3) What is the difference between gross investment and net investment?
A)Net investment = gross investment minus taxes
B)Net investment = gross investment minus net factor payments
C)Net investment = gross investment minus inventory accumulation
D)Net investment = gross investment minus depreciation
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Chapter 5: Saving and Investment in the Open Economy
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118 Flashcards
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Sample Questions
Q1) Consider a small open economy with desired national saving of S<sup>d</sup> = 1000 + 1000r<sup>w</sup> and desired investment of I<sup>d</sup> = 1000500r<sup>w</sup>.
Calculate national saving,investment,and the current account balance in equilibrium when the real world interest rate is (a)r<sup>w</sup> = 0.025.
(b)r<sup>w</sup> = 0.05.
(c)r<sup>w</sup> = 0.0.
Q2) A large country imposes capital controls that prohibit foreign borrowing and lending by domestic residents.The country is currently running a financial account surplus.The imposition of the capital controls will cause A)net exports to decrease.
B)real domestic interest rates to rise.
C)real world interest rates to rise.
D)desired national saving to fall.
Q3) What were the principal causes of the U.S.government budget deficits of the 1980s? How did these budget deficits lead to the twin deficits? According to the Ricardian equivalence proposition,should twin deficits arise as a result of tax cuts?
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Chapter 6: Long-Run Economic Growth
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91 Flashcards
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Sample Questions
Q1) In the long run,a reduction in productivity will cause
A)an increase in the capital-labor ratio and an increase in consumption per worker.
B)an increase in the capital-labor ratio and a decrease in consumption per worker.
C)a decrease in the capital-labor ratio and a decrease in consumption per worker.
D)a decrease in the capital-labor ratio and an increase in consumption per worker.
Q2) In a steady state
A)both consumption per worker and the capital-labor ratio are constant.
B)consumption per worker is constant, but the capital-labor ratio can change.
C)capital and labor, by definition, are inversely related to one another.
D)consumption per worker can change, but the capital-labor ratio is constant.
Q3) In the Solow model,the steady-state capital-labor ratio will decline if
A)the saving rate per worker increases.
B)the consumption rate per worker declines.
C)population growth increases.
D)productivity increases.
Q4) What types of government policies can increase long-run living standards?
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Page 8
Chapter 7: The Asset Market, money, and Prices
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) Which of the following measures is the best measure of money as a medium of exchange?
A)M1
B)M2
C)M3
D)None of the above
Q2) Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?
Q3) How does the break-even inflation rate differ from the expected inflation rate as measured in surveys?
A)They are very close to each other.
B)The break-even inflation rate varies less than the expected inflation rate from surveys.
C)The break-even inflation rate varies more than the expected inflation rate from surveys.
D)The break-even inflation rate is always several percentage points higher than the expected inflation rate from surveys.
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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107 Verified Questions
107 Flashcards
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Sample Questions
Q1) The trough of a business cycle occurs when ________ hits its lowest point.
A)inflation
B)the money supply
C)aggregate economic activity
D)the unemployment rate
Q2) A detailed history of business cycles is known as a A)historical decomposition.
B)trend analysis.
C)Hodrick-Prescott filter.
D)business cycle chronology.
Q3) When aggregate economic activity is increasing,the economy is said to be in A)an expansion.
B)a contraction.
C)a peak.
D)a turning point.
Q4) The long boom occurred in the A)1920s and 1930s.
B)1940s and 1950s.
C)1960s and 1970s.
D)1980s and 1990s.
Page 10
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Chapter 9: The Is-Lmad-As Model
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109 Flashcards
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Sample Questions
Q1) An adverse supply shock would cause the FE line to A)shift to the right.
B)shift to the left.
C)remain unchanged.
D)remain unchanged if the shock is temporary; shift to the right if the shock is permanent.
Q2) A rise in the price of a bond causes the yield of the bond to A)rise.
B)fall.
C)remain unchanged.
D)rise if it's a short-term bond, fall if it's a long-term bond.
Q3) Which of the following changes shifts the AD curve up and to the right?
A)A temporary decrease in government purchases
B)A decline in the nominal money supply
C)An increase in corporate taxes
D)An increase in consumer confidence
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) The main avenue by which a temporary change in government purchases in the classical model affects the labor supply is by
A)changing the population.
B)affecting the value of the stock market.
C)increasing business confidence.
D)affecting workers' wealth.
Q2) You are likely to think that the relative price of your good has risen and you should increase your output if you expected
A)the inflation rate to be 10% and the price of your good rose 7%.
B)the inflation rate to be 10% and the price of your good rose 10%.
C)the inflation rate to be 10% and the price of your good rose 13%.
D)the inflation rate to be 0% and the price of your good fell 10%.
Q3) According to classical economists,in recessions,the government should
A)stimulate the economy to increase demand.
B)actively use fiscal policy to combat the recession.
C)increase the minimum wage so that poor people will be able to afford necessities.
D)eliminate barriers to labor market adjustment, such as burdensome regulations on businesses.
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Page 12
Chapter 11: Keynesianism: the Macroeconomics of Wage and Price Rigidity
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98 Flashcards
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Sample Questions
Q1) 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.
Q2) In the Keynesian model in the short run,what is likely to happen to employment after each of the following shocks?
(a)An increase in taxes
(b)An increase in consumer spending generated by a reduced desire for saving
(c)An increase in the money supply
Q3) 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.
Q4) 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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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) The Friedman-Phelps analysis shows that a negative relationship between inflation and unemployment holds
A)even when expected inflation changes.
B)even when the natural rate of unemployment changes.
C)even if both the expected inflation rate and the natural rate of unemployment change.
D)as long as the expected inflation rate and the natural rate of unemployment are approximately constant.
Q2) If a rapid disinflation has a lower sacrifice ratio than a slow disinflation,then reducing inflation is best accomplished by
A)gradualism.
B)increasing money growth.
C)reducing interest rates.
D)a cold-turkey approach.
Q3) When the economy goes into a recession,there's an increase in A)frictional unemployment.
B)structural unemployment.
C)cyclical unemployment.
D)voluntary unemployment.
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14
Chapter 13: Exchange Rates, business Cycles, and
Macroeconomic Policy in the Open Economy
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106 Verified Questions
106 Flashcards
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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) An increase in domestic output would cause a ________ in net exports and a ________ in the exchange rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) A geographic region in which the benefits of having a common currency exceed the costs is
A) an optimum currency area.
B)an exchange-rate mechanism.
C)a currency board area.
D)a common currency area.
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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121 Verified Questions
121 Flashcards
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Sample Questions
Q1) From 2007 to 2012,the amount of assets owned by the Fed approximately A)doubled.
B)tripled.
C)quadrupled.
D)quintupled.
Q2) The largest liability of the Fed from those on this list is
A)U)S. Treasury securities.
B)mortgage-backed securities.
C)loans to depository institutions.
D)currency outstanding.
Q3) 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.
Q4) A bank run is
A)a large-scale, panicky withdrawal of deposits from a bank.
B)the transfer of funds from one bank to another.
C)a situation when a bank borrows from the Fed's discount window.
D)a situation in which a bank borrows at the Federal funds rate.
Page 16
Q5) Was the money multiplier stable during the Great Recession? Why would an unstable money multiplier pose a problem for monetary policy?
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The current deficit minus net interest is called the
A)primary deficit.
B)net current deficit.
C)current surplus.
D)primary current deficit.
Q2) From 2001 to 2015,the debt-GDP ratio in the United States
A)steadily fell.
B)steadily increased.
C)was about constant.
D)fell from 1995 to 1998, then rose sharply.
Q3) When the economy strengthens,following the period of quantitative easing,the Federal Reserve plans to keep a lid on money growth by
A)increasing reserve requirements.
B)selling dollars in foreign-exchange markets.
C)increasing the interest rate paid on reserves.
D)buying dollars in foreign-exchange markets.
Q4) How is real seignorage revenue related to inflation? How does the quantity of real seignorage revenue change as inflation rises from zero to a positive level,to still higher levels?
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