Global Economics
Question Bank
Course Introduction
Global Economics explores the interconnected nature of national economies in the context of an increasingly integrated world. This course examines international trade, capital flows, exchange rates, and the effects of globalization on economic growth, poverty, and inequality. Students will analyze the roles of key international institutions, such as the International Monetary Fund and the World Trade Organization, as well as the impact of economic policies and agreements on different countries. Through case studies and real-world data, learners will develop an understanding of how global economic forces shape national economic policies and affect everyday life across the globe.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Page 2
Chapter 1: A Tour of the World
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Sample Questions
Q1) Explain how the financial crisis turned into a major economic crisis.
Answer: Hit by the decrease in housing prices and the collapse in stock prices,and worried that this might be the beginning of another Great Depression,people sharply cut back consumption.Worried about sales and uncertain about the future,firms sharply cut back investment..Decreases in consumption and investment led to decrease in demand,which in turn,led to decrease in output.
Q2) The most recent financial crisis started in A)stock market.
B)bond market.
C)foreign exchange market.
D)housing market.
Answer: D
Q3) Discuss what is meant by labor market rigidities and explain how they might cause the relatively high unemployment in Europe.
Answer: Examples of labor market rigidities are: relatively high minimum wage,relatively high unemployment benefits,and relatively high level of worker protection.All three of these are hypothesized to cause a reduction in employment and,therefore,an increase in the unemployment rate.
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Chapter 2: A Tour of the Book
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Sample Questions
Q1) Explain how inflation can lead to distortions.
Answer: First,not all prices and wages adjust automatically when inflation occurs.Second,variations in relative prices (which occur when there is not pure inflation)can lead to uncertainty.Inflation can also lead to distortions if the tax system is not adjusted when inflation occurs (e.g.nominal income tax brackets).
Q2) Based on the notation presented in Chapter 2,which of the following expressions represents real GDP?
A)Yt
B)PtYt
C)Yt / Pt
D)$Yt / Pt
Answer: A
Q3) The GDP deflator provides a measure of which of the following?
A)the ratio of GDP to the size of the population
B)the ratio of GDP to the number of workers employed
C)the ratio of nominal GDP to real GDP
D)the price of a typical consumer's basket of goods
E) real GDP divided by the aggregate price level
Answer: C
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Page 4
Chapter 3: The Goods Market
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Sample Questions
Q1) The marginal propensity to consume represents
A)the level of consumption that occurs if disposable income is zero.
B)the ratio of total consumption to disposable income.
C)total income minus total taxes.
D)the change in output caused by a one-unit change in autonomous demand.
E) the change in consumption caused by a one-unit change in disposable income.
Answer: E
Q2) Autonomous spending in a closed economy equals which of the following?
A)c + I + G - c T
B)C + I + G
C)Z
D)c + I + G + c T
Answer: A
Q3) For a closed economy,which of the following conditions must be satisfied for equilibrium to be maintained?
A)G = T
B)X = IM = 0
C)C = S
D)none of the above
Answer: D
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Chapter 4: Financial Markets
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Q1) Which of the following is a component of money?
A)bonds
B)saving
C)income
D)stocks
E) none of the above
Q2) Which of the following will cause the money multiplier to become smaller?
A)an increase in high powered money
B)a decrease in the ratio of reserves to checkable deposits
C)an increase in the public's preference for checking deposits as opposed to holding currency
D)a reduction in high powered money
E) none of the above
Q3) Which of the following is not included as a component of the M1 definition of money?
A)bonds
B)checkable deposits
C)coins and bills held by the nonbank public
D)all of the above
E) none of the above
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Page 6
Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) Suppose the economy is currently operating on both the LM curve and the IS curve.Which of the following is true for this economy?
A)Production equals demand.
B)The quantity supplied of bonds equals the quantity demanded of bonds.
C)The money supply equals money demand.
D)Financial markets are in equilibrium.
E) all of the above
Q2) Suppose there is a simultaneous fiscal expansion and monetary contraction.We know with certainty that
A)output will increase.
B)output will decrease.
C)the interest rate will increase.
D)the interest rate will decrease.
E) both output and the interest rate will increase.
Q3) A fiscal expansion (e.g.a tax cut)will result in an increase in income,an increase in money demand,and an increase in the equilibrium interest rate in financial markets.Explain what happens to the position of the LM curve as policy makers pursue expansionary fiscal policy.
Q4) Graphically derive the IS curve from the goods market equilibrium.
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) The Case-Shiller index reached its peak in
A)2006.
B)2007.
C)2005.
D)2008.
Q2) Which of the following statements are true?
A)A bank's assets are its sources of funds.
B)A bank's liabilities are its uses of funds.
C)A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
D)A bank's balance sheet indicates whether or not the bank is profitable.
Q3) Which of the following bonds are considered to be default-risk free?
A)municipal bonds
B)investment-grade bonds
C)U)S. Treasury bonds
D)junk bonds
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Chapter 7: The Labor Market
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Q1) The natural level of output is the level of output that occurs when
A)the goods market and financial markets are in equilibrium.
B)the economy is operating at the unemployment rate consistent with both the wage-setting and price-setting equations.
C)the markup (m)is zero.
D)the unemployment rate is zero.
E) there are no discouraged workers in the economy.
Q2) Which of the following statements about wage setting is true?
A)most workers in the U.S. have their wages set by formal contracts.
B)formal contracts play a more important role in Japan and Western Europe than in the United States.
C)the minimum wage in the U.S. is about 75% of the average wage.
D)all of the above
Q3) For this question,assume that Y = N.Based on our understanding of the labor market model presented in Chapter 6,we know that an increase in the minimum wage will cause A)an increase in the natural level of output.
B)a reduction in the natural level of output.
C)no change in the natural level of output.
D)an increase in the natural level of employment.
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Page 9
Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) In the Phillips curve equation,which of the following will cause a reduction in the current inflation rate?
A)a reduction in the expected inflation rate
B)an increase in the unemployment rate
C)a reduction in the markup, m
D)all of the above
E) none of the above
Q2) Assume that expected inflation is based on the following: t = t .An increase in will cause
A)an increase in the natural rate of unemployment.
B)a reduction in the natural rate of unemployment.
C)no change in the natural rate of unemployment.
D)inflation in period t to be more responsive to changes in unemployment in period t.
Q3) As of 2009,what was the last year that U.S.experienced deflation?
A)1933
B)1955
C)1973
D)1991
E) 2001
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Chapter
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Q1) An increase in the price of oil will cause which of the following in the medium run?
A)no change in the level of output
B)no change in the price level
C)an increase in the unemployment rate
D)a reduction in the interest rate
E) none of the above
Q2) For this question,assume that the economy is initially operating at the natural level of output.An increase in the price of oil will cause which of the following in the medium run?
A)a reduction in the interest rate
B)a reduction in output and an increase in the aggregate price level
C)a reduction in output and a reduction in the interest rate
D)a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate price level
E) a reduction in the aggregate price level and no change in output
Q3) Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes both in the short run and in the medium run.
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Page 11
Chapter 10: The Facts of Growth
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Sample Questions
Q1) Explain why economists do not use exchange rates to compare standards of living across countries.Also,discuss what economists do to avoid these problems.
Q2) Consider the production function
Y = \( \sqrt{\mathrm{K}} \) \( \sqrt{N} \)
a.Compute output when K = 81 and N = 100.
b.Is this production function characterized by constant returns to scale? Explain.
Q3) Over the last hundred years,
A)movements in output due to recessions and recoveries dominate the movement caused by long-run growth.
B)output has decreased in as many years as it has increased.
C)U.S. output has approximately doubled.
D)all of the above
E) none of the above
Q4) Which of the following will cause a reduction in output per worker (Y / N)?
A)a reduction in the capital stock (K)
B)a reduction in the saving rate
C)a reduction in K / N
D)all of the above
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Page 12
Chapter 11: Saving, capital Accumulation, and Output
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Q1) Suppose there is an increase in the saving rate.Explain what effect this will have on output,output per worker,the rate of growth of output,and the rate of growth of output per worker.
Q2) Which of the following are reasons to suspect spending on education might overestimate human capital investment?
A)Education spending leaves out foregone wages.
B)Part of total spending on education is really consumption.
C)Much human capital investment comes from on-the-job training.
D)all of the above
E) none of the above
Q3) Graphically illustrate and explain the effects of an increase in the rate of depreciation ( )on the Solow growth model.In your graph,clearly label all curves and equilibria.
Q4) Explain what human capital is and discuss how changes in human capital can affect output per worker.
Q5) Explain the two relations that determine the evolution of output in the long run.
Q6) Explain the difference between fully funded social security system and pay-as-you-go social security system.
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Chapter 12: Technological Progress and Growth
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Q1) Which of the following will cause an increase in the steady-state growth rate of capital?
A)an increase in the saving rate
B)an increase in the population growth rate
C)a temporary increase in technological progress
D)all of the above
E) none of the above
Q2) Graphically illustrate and explain the effects of a reduction in the saving rate on the Solow growth model.In your answer,you must clearly label all curves and the initial and final equilibria.In your answer,explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this decrease in the saving rate.
Q3) In the following production function,Y = f(K,NA),suppose A increases by 20%.This 20% increase in A implies that
A)the same output can be produced with 20% less labor.
B)the effective quantity of labor has increased by 20%.
C)output will increase by less than 20%.
D)all of the above
E) both A and C.
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Page 14
Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) Assume an economy experiences an increase in productivity that occurs as a result of the more efficient use of existing technologies.Given this information,we would expect which of the following to occur?
A)aggregate demand would not change
B)aggregate demand would shift to the right
C)aggregate demand would shift to the left
D)both the aggregate demand and aggregate supply curves would shift to the left
Q2) Explain some of the causes of increased wage inequality.
Q3) Which of the following statements about the United States during the twentieth century is correct?
A)Output growth has been approximately equal to employment growth.
B)Output growth has been slower than employment growth.
C)Output growth has been faster than employment growth.
D)Output has increased largely due to monetary and fiscal policy.
E) Output has decreased largely due to monetary and fiscal policy.
Q4) Because of labor hoarding,a reduction in output may signal
A)an increase in employment.
B)a reduction in employment.
C)no change in employment.
D)a reduction in productivity.
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Chapter 14: Financial Markets and Expectations
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Sample Questions
Q1) An expected reduction in the money supply will tend to cause
A)an increase in stock prices.
B)a reduction in stock prices.
C)no change in stock prices.
D)an ambiguous effect on stock prices.
Q2) The fundamental value of a share of stock is equal to which of the following?
A)the sum of expected dividends
B)the present value of expected dividends
C)the sum of coupon payments
D)the present value of coupon payments
E) the present value of the expected yield
Q3) Suppose households unexpectedly increase consumption.Which of the following will occur as a result of this unexpected increase in consumption?
A)an increase in stock prices
B)a reduction in stock prices
C)no change in stock prices
D)an ambiguous effect on stock prices
Q4) Suppose the yield curve is downward sloping.How should one interpret this particular yield curve?
Q5) Explain what is meant by the fundamental value of a share of stock.
Page 16
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Chapter 15: Expectations, consumption, and Investment
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Q1) Explain how a change in expected future output could affect current output.
Q2) Figures on "mean wealth" of the elderly (ages 65-69)show that most wealth consists of
A)home equity.
B)personal savings.
C)stocks and bonds.
D)social security benefits.
E) collectibles, like stamps, coins and art.
Q3) Which of the following will cause the rental cost / user cost of capital to decrease?
A)The rate of depreciation decreases.
B)The real interest rate increases.
C)The expected profit from the machine decreases.
D)all of the above
E) none of the above
Q4) Investment accounts for ________ of US GDP.
A)15%
B)20%
C)50%
D)70%
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Chapter 16: Expectations, output, and Policy
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Q1) Explain what effect a reduction in future expected output will have on the IS curve and LM curve in the current period.
Q2) Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations.
Q3) Which of the following will cause the LM curve to shift down?
A)a reduction in the expected future interest rate
B)a reduction in current income
C)a reduction in expected future taxes
D)all of the above
E) none of the above
Q4) "Animal spirits" refers to
A)the stubborn refusal of many economic decision-makers to use rational expectations. B)movements in investment that cannot be explained by changes in current variables.
C)the often-observed Fed refusal to cooperate with the government in setting its monetary policy.
D)the impact of tax-evasion on the budget deficit.
E) an exotic alcoholic drink favored by Wall Street traders.
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18
Chapter 17: Openness in Goods and Financial Markets
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Q1) Which of the following conditions will occur when two countries are engaged in a credible,fixed exchange rate regime?
A)E = 1
B)E > 1
C)i = i*
D)E < 1
Q2) Which of the following events will cause the smallest change in the real exchange rate ( )?
A)a 6% drop in E and a 6% increase in the foreign price level (P*)
B)a 6% increase in the domestic price level (P)and a 6% reduction in P*
C)a 6% drop in E and a 6% reduction in P*
D)a 3% increase in E
E) a 2% increase in E and a 2% increase in P
Q3) Which of the following,all else fixed,will cause the real exchange rate to increase?
A)a nominal depreciation
B)a reduction in the foreign price level
C)a reduction in the domestic price level
D)all of the above
E) none of the above
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Page 19
Chapter 18: The Goods Market in an Open Economy
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Q1) Which of the following will always cause an increase in net exports?
A)a reduction in domestic output
B)an increase in the real exchange rate
C)an increase in government spending
D)an increase in investment
E) all of the above
Q2) Using the ZZ / Y and NX graphs,illustrate graphically and explain what effect a reduction in taxes will have on output,exports,imports,and net exports.Clearly label all curves and clearly label the initial and final equilibria.
Q3) Assume a country is closed.Given this information,which of the following must occur?
A)demand for domestic goods will be less than the domestic demand for goods
B)demand for domestic goods will be greater than the domestic demand for goods
C)S + T = I + G
D)a budget surplus exists
E) S = I
Q4) Explain what the J-curve is and why it occurs.
Q5) Explain why in practice policy coordination is hard to achieve.
Q6) Explain what the Marshall-Lerner condition represents.
Q7) Explain the determinants of exports and imports.
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Chapter 19: Output, the Interest Rate, and the Exchange Rate
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Q1) Assume the interest parity condition holds and that initially i = i*.A reduction in the foreign interest rate (i*)will cause
A)an increase in the demand for the domestic currency.
B)an increase in E.
C)an expected depreciation of the domestic currency.
D)all of the above
Q2) For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that households decide to decrease consumption because of,for example,a reduction in consumer confidence.Given this information,we would expect which of the following to occur?
A)a reduction in the domestic interest rate
B)an increase in E
C)a reduction in E
D)a reduction in investment
E) none of the above
Q3) Assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that the foreign interest rate increases.Discuss what policy makers must do to maintain the pegged exchange rate.Also discuss what effect this will have on domestic output and net exports.
Page 21
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Chapter 20: Exchange Rate Regimes
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Q1) A country which does not revalue when financial markets expect it to will probably suffer
A)a real depreciation of its currency.
B)lower interest rates.
C)a default on its national debt.
D)all of the above
E) none of the above
Q2) After Britain returned to the Gold Standard in the 1920s,the British pound was
A)undervalued, contributing to a long period of inflation.
B)undervalued, contributing to a long period of recession.
C)overvalued, contributing to a long period of inflation.
D)overvalued, contributing to a long period of recession.
E) value about right, leading to a long period healthy growth with almost no inflation.
Q3) Explain exchange rate crisis.
Q4) First,briefly explain why the AD curve is downward sloping in a closed economy.Second,briefly explain why the AD curve is downward sloping in an open economy under fixed exchange rates.And finally,briefly compare the size of the slopes of the two AD curves.
Q5) Does Europe constitute an optimal common currency area? Why?
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Chapter 21: Should Policy Makers Be Restrained
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Q1) Game theory analysis of macro policy suggests that as voters become more short-sighted
A)policy makers will be tempted to raise taxes.
B)policy makers will be forced to balance the budget.
C)policy makers will adopt policies today to achieve balanced budgets in the future.
D)all of the above
E) none of the above
Q2) As uncertainty about the effects of policy on output decreases,we would expect that A)policy makers would be more frequently implement fine tuning policies.
B)policy makers would implement more active policies.
C)policy makers would implement less active policies.
D)both A and B
E) both A and C
Q3) Use "wars of attrition" to explain the debate about deficit reduction.
Q4) First,what can be done to increase central bank credibility? Second,why is central bank credibility important?
Q5) Balanced budget amendments are believed to be destabilizing.Explain why this is so.
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Chapter 22: Fiscal Policy: a Summing up
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Q1) The official measure of the deficit becomes more inaccurate as A)the inflation rate rises.
B)the total debt falls.
C)taxes rise.
D)all of the above
E) none of the above
Q2) Which of the following represents debt monetization?
A)an increase in the budget deficit that is financed by money creation
B)an increase in the budget deficit that is financed by foreigner investors' purchases of domestic bonds
C)an increase in the budget deficit that coincides with a central bank sale of bonds
D)an open market purchase of bonds that results in inflation
E) none of the above
Q3) The official measure of the deficit is equal to
A)iB + G - T.
B)iB + T - G.
C)rB - G + T.
D)(i - )B + G - T.
E) none of the above
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Chapter 23: Monetary Policy: a Summing up
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Q1) Each governor of the Federal Reserve is
A)appointed by the President to a 4-year term.
B)appointed by the President to a 14-year term.
C)appointed by the President for life.
D)elected by the Presidents of banks and savings institutions.
Q2) Bracket creep would less likely occur in which of the following?
A)a progressive income tax system
B)a regressive income tax system
C)a flat income tax system
D)none of the above
Q3) What are some of the questions about the macro prudential tools?
Q4) The Taylor rule (where a and b are positive parameters)is represented by
A)i = i* + a( * - )- b(un - u).
B)i = i* + a( - *)+ b(u - un).
C)i = i* + a( * - )- b(u - un).
D)none of the above
Q5) Explain what is meant by shoe-leather costs.
Q6) What are the lessons from the crisis for monetary policy?
Q7) Discuss the relationships among the various monetary aggregates.
Q8) Explain the costs imposed by an increase in inflation.
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) Economist ________ shows the "limits of arbitrage."
A)Doug Diamond
B)Andrei Shleifer
C)Philip Dybvig
D)Richard Thaler
Q2) Most economists would agree that,unless it incorporates rational expectations or something like it,a model cannot account for
A)the Great Depression.
B)shifts in aggregate supply.
C)the relationship between consumption and income.
D)the stagflation of the 1970s.
E) the different initial impact of a permanent versus a temporary policy change.
Q3) Explain several of the key contributions of Keynes.
Q4) If the IS curve is relatively steep,then
A)there can be no long-run tradeoff between inflation and unemployment.
B)monetary policy cannot be very effective in changing GDP.
C)rational expectations theory is probably correct.
D)Ricardian equivalence most likely holds.
E) budget deficits will not affect future capital accumulation.
Q5) Discuss new classical economics and real business cycle theory.
Page 26
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Chapter 25: Appendix
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Q1) When we estimate a regression to determine the relationship between changes in consumption and changes in current income,we find that
A)there are no residuals.
B)the R² is zero.
C)the MPC is larger than one.
D)all of the above
E) none of the above
Q2) Changes in business inventories will be negative when
A)production exceeds sales.
B)production is less than sales.
C)a trade surplus exists.
D)a budget surplus exists.
Q3) Which of the following is included in National Income?
A)indirect taxes
B)consumption of fixed capital
C)proprietors' income
D)all of the above
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