Intermediate Macroeconomics
Exam Review
Course Introduction
Intermediate Macroeconomics builds on introductory economic concepts to analyze the behavior and interactions of aggregate economic variables such as output, inflation, unemployment, and interest rates. The course explores models of economic growth, business cycles, and fiscal and monetary policy, providing students with the analytical tools to understand real-world economic fluctuations. Emphasis is placed on classical and Keynesian frameworks, the role of expectations in the macroeconomy, and policy debates relating to stabilization and long-term economic welfare. Through theoretical models and empirical case studies, students gain a deeper understanding of how macroeconomic principles guide policymakers and affect society at large.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Chapter 1: A Tour of the World
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Q1) At what point could the Euro be used as currency?
A)January 1, 1998
B)January 1, 1999
C)January 1, 2000
D)January 1, 2002
Answer: D
Q2) Briefly explain why the decline in housing prices led to a major financial crisis. Answer: Many of the mortgage loans that had been given out during earlier expansion were of poor quality.Many of the borrowers had taken too large a loan and were increasingly unable to make mortgage payments.mortgage backed securities were so complex that their value was nearly impossible to assess.Not knowing the quality of the assets that other banks had on their balance sheet,banks became very reluctant to lend to each other for fear that the bank to which they lent might not be able to repay.The credit market froze up.Unable to borrow,and with assets if uncertain value,many banks found them in trouble.The bankruptcy of Lehman Brothers put other banks at risk of going bankrupt as well.The whole financial system was in trouble.
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Chapter 2: A Tour of the Book
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Q1) In the United States,someone is classified as unemployed if he or she
A)does not have a job.
B)does not have a job, or else has a job but is looking for a different one while continuing to work.
C)does not have a job, has recently looked for work, and is collecting unemployment insurance.
D)does not have a job, and is collecting unemployment insurance.
E) none of the above
Answer: E
Q2) Macroeconomists are concerned about changes in the unemployment rate because changes in the unemployment rate provide information about A)the state of the economy.
B)the welfare of those who are unemployed.
C)none of the above
D)both A and B
Answer: D
Q3) Explain why the Phillips curve on average is downward sloping.
Answer: When unemployment becomes very low,the economy is likely to overheat and this will lead to upward pressure on inflation.
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Chapter 3: The Goods Market
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Q1) Explain what the multiplier represents.
Answer: The multiplier illustrates the extent to which equilibrium output will change as a result of a given change in autonomous demand.
Q2) In the model discussed in Chapter 3,why do we assume G and T are exogenous?
Answer: It is based on two arguments: First,government do not behave with the same regularity as consumers or firms,so there is no reliable rule we could write for G or T.Second,treating G and T as exogenous help explore the implications of alternative spending and tax decisions.
Q3) Which of the following equals demand in an open economy?
A)C + I + G + X
B)C + I + G + X - IM
C)C + I + G + IM - X
D)C + I + G
Answer: B
Q4) Explain the difference between endogenous and exogenous variables.
Answer: Endogenous variables are determined by the model.Exogenous variables are taken as given and,for example in this model,do not change as income changes.
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Chapter 4: Financial Markets
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Q1) Which of the following affects demand for money?
A)prices
B)nominal income
C)interest rate
D)all of the above
E) none of the above
Q2) We would expect which of the following to occur when the central bank pursues expansionary monetary policy?
A)an increase in bond prices and an increase in the interest rate (i)
B)a reduction in bond prices and an increase in i
C)an increase in bond prices and a reduction in i
D)a reduction in bond prices and a reduction in i
E) none of the above
Q3) In 2006,the average U.S.household held approximately how much currency (dollar bills and coins)?
A)$50
B)$100
C)$600
D)$1600
E) none of the above
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) In late 2007 and early 2008,the U.S.Federal Reserve pursued expansionary monetary policy.Which of the following will occur as a result of this monetary policy action?
A)The LM curve shifts down.
B)The LM curve shifts up.
C)The IS curve shifts rightward as the interest rate falls.
D)The IS curve shifts leftward as the interest rate increases.
E) none of the above
Q2) Based on our understanding of the IS-LM model that takes into account dynamics,we know that a reduction in the money supply will cause
A)an immediate drop in Y and immediate increase in i.
B)an immediate increase in i and no initial change in Y.
C)a gradual increase in i and gradual reduction in Y.
D)none of the above
Q3) Explain the determinants of investment.Include in your answer an explanation of how a change in each determinant affects investment.
Q4) Graphically derive the IS curve from the goods market equilibrium.
Q5) First,define the LM curve.Second,explain why it has its particular shape.
Q6) What is the IS relation? Explain why IS curve is downward sloping.
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) Which of the following are reported as liabilities on a bank's balance sheet?
A)reserves
B)checkable deposits
C)consumer loans
D)deposits with other banks
Q2) Depositors lack of information about the quality of bank assets can lead to
A)bank panics.
B)bank booms.
C)sequencing.
D)asset transformation.
Q3) The spread between the interest rates on bonds with default risk and default-free bonds is called the
A)risk premium.
B)junk margin.
C)bond margin.
D)default premium.
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Chapter 7: The Labor Market
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Q1) The participation rate in the U.S.has increased steadily over time.First,explain what the participation rate represents.Second,explain why the participation rate has increased.
Q2) The natural rate of unemployment is the rate of unemployment
A)that occurs when the money market is in equilibrium.
B)that occurs when the markup of prices over costs is zero.
C)where the markup of prices over costs is equal to its historical value.
D)that occurs when both the goods and financial markets are in equilibrium.
E) none of the above
Q3) Based on the information above,the labor force participation rate is
A)36%.
B)40%.
C)44%.
D)90.1%.
E) 66%.
Q4) Explain what effect an increase in the unemployment rate will have on the real wage based on: (1)the WS relation; and (2)the PS relation.
Q5) First,explain what the WS relation represents.Second,explain why it has its particular shape.
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) When a worker's nominal wage is indexed,the nominal wage is usually automatically adjusted based on movements in which of the following variables?
A)productivity
B)the price of the firm's product
C)the average wage in the country
D)the average wage in the industry
E) none of the above
Q2) Use the following Phillips curve equation to answer this question: t - t = (m + z)ut.Which of the following will cause an increase in the natural rate of unemployment?
A)a reduction in m
B)an increase in z
C)an increase in
D)a reduction in expected inflation
E) none of the above
Q3) During which decade did the original Phillips curve break down? Also,briefly explain why the original Phillips curve broke during this period.
Q4) What is the difference between deflation and disinflation?
Q5) Explain what is meant by the "wage-price" spiral.
Page 10
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Model
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Q1) What is the major reason for oil price to go up in the 1970s?
A)formation of the OPEC
B)fast of growth of emerging economies
C)new energy
D)higher demand from the US
Q2) When a government reduces its deficits by increasing taxes,in the medium run,
A)output returns to potential.
B)output increases.
C)interest rate is higher.
D)IS curve shifts inward to the left.
Q3) Disposable income equals
A)income minus saving.
B)income minus both saving and taxes.
C)consumption minus taxes.
D)the sum of consumption and saving.
E) none of the above
Q4) 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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Chapter 10: The Facts of Growth
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Q1) For this question,assume that there are decreasing returns to capital,decreasing returns to labor,and constant returns to scale.Now suppose that both capital and labor decrease by 5%.Given this information,we know that output (Y)will
A)not change.
B)decrease by less than 5%.
C)decrease by 5%.
D)decrease by more than 5% but less than 10%.
E) none of the above
Q2) Over the past fifty years,convergence has generally occurred for all of the following groups of countries with the exception of
A)the five richest countries.
B)European countries.
C)the 'four tigers' in Asia.
D)OECD countries.
E) none of the above
Q3) Explain why economists do not use exchange rates to compare standards of living across countries.Also,discuss what economists do to avoid these problems.
Q4) Briefly explain what effect a reduction in the saving rate will have on growth.
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) At the current steady state capital-labor ratio,assume that the steady state level of per capita consumption,(C / N)*,is less than the golden rule level of steady state per capita consumption.Given this information,we can be certain that
A)an increase in the saving rate will cause an increase in the steady state level of per capita consumption ((C / N)*).
B)a reduction in the capital-labor ratio will cause a reduction in (C / N)*.
C)the capital labor ratio will tend to increase over time.
D)the capital labor ratio will tend to decrease over time.
E) a reduction in the saving rate will have an ambiguous effect on (C / N)*.
Q2) Suppose policy makers wish to increase steady state consumption per worker.Explain what must happen to the saving rate to achieve this objective.
Q3) Which of the following is not a flow variable?
A)investment
B)saving
C)the money supply
D)output
E) all of the above
Q4) Explain the relationship among output,saving,and investment.
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Chapter 12: Technological Progress and Growth
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Q1) Suppose there is an increase in the saving rate.Explain what effect this increase in the saving rate will have on the rate of growth of output per worker.
Q2) To what extent can changes in the rate of technological progress cause permanent changes in the rate of growth of output per worker? Explain.
Q3) Which of the following best describes a situation where research is considered appropriable?
A)research that is well suited to its commercial purpose
B)research that is easily copied by another firm
C)research that translates into many new products
D)all of the above
E) none of the above
Q4) Let represent labor's share of total output.The Solow residual is,therefore,represented by A) g .
B) gA.
C) gK.
D) gN.
E) 1 / .
Q5) Explain the different dimensions of technological progress.
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) Which of the following represents the wage setting relation when changes in labor productivity are allowed to occur?
A)W = P F(u,z)
B)W = P(1 + m)
C)W = P F(u,z)/ A
D)W = AP / (1 + m)
E) none of the above
Q2) In recent years,the increasing relative wage of skilled labor has been mostly due to A)a decrease in the supply of skilled labor that exceeds the decrease in demand.
B)an increase in the demand for skilled labor that exceeds the increase in supply.
C)a decrease in the supply of, and increase in the demand for, skilled labor.
D)government laws promoting the hiring of skilled labor.
E) government subsidies provided to college students.
Q3) Explain some of the causes of increased wage inequality.
Q4) Suppose an economy experiences a reduction in productivity.Explain both the short-run and medium-run effects of this reduction in productivity on output,employment,and the unemployment rate.
Q5) Explain how technological change can cause changes in wage inequality.
Page 15
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Chapter 14: Financial Markets and Expectations
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Q1) A bond has a face value of $10,000,a price of $12,000,and coupon payments of $2000 for two years.The coupon rate of this bond is
A)10%.
B)16.7%.
C)20%.
D)30%.
E) none of the above
Q2) Which of the following does not represent a form of debt finance?
A)bonds
B)loans
C)stock
D)all of the above
Q3) A "junk bond" is a bond with a A)low yield to maturity.
B)value of zero.
C)low face value, but high coupon rate.
D)high default risk.
E) very low maturity.
Q4) Suppose the yield curve is upward sloping.How should one interpret this particular yield curve?
Page 16
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Chapter 15: Expectations, consumption, and Investment
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Q1) Suppose there is a tax cut.This tax cut would have a direct effect on which of the following?
A)financial wealth
B)housing wealth
C)human wealth
D)none of the above
Q2) An increase in which of the following variables should cause an increase in profit per unit of capital?
A)total wages and salaries
B)total sales
C)the capital stock
D)the ratio of total sales to the capital stock
E) the ratio of total sales to total wages and salaries
Q3) Suppose firms expect future output to be higher and future interest rates to be higher.Given this information,how will firms alter investment in the current period? Explain.
Q4) Explain why current consumption is likely to respond less than one for one to changes in current income.
Q5) What is Tobin's q? How tight is the relation between Tobin's q and investment?
Page 17
Q6) Explain how a change in expected future output could affect current output.
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Chapter 16: Expectations, output, and Policy
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Q1) Adaptive expectations assumes that individuals
A)can accurately predict the future.
B)base predictions on random events (i.e., animal spirits).
C)form their predictions of macroeconomic variables randomly.
D)use all available information in predicting the future.
E) none of the above
Q2) Suppose there is a fiscal expansion in the current period.This fiscal expansion will tend to cause a smaller increase in current output when
A)an increase in current output causes an increase in expected future output.
B)an increase in the current interest rate causes expectations of expansionary monetary policy in the future.
C)an increase in the current interest rate causes an increase in expected future interest rates.
D)both A and B
E) all of the above
Q3) Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output.
Q4) Explain the determinants of aggregate private spending.
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Chapter 17: Openness in Goods and Financial Markets
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Q1) Suppose the U.S.one-year interest rate is 3% per year,while a foreign country has a one-year interest rate of 5% per year.Ignoring risk and transaction costs,a U.S.investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is
A)less than 5%.
B)greater than 5%.
C)greater than 2%.
D)less than 2%.
E) less than 1%.
Q2) In 2014,which of the following countries had the highest ratio of exports to GDP?
A)Germany
B)Netherlands
C)Japan
D)United States
E) Austria
Q3) Suppose you are considering the purchase of a bond issued in another country.What calculations must you do to calculate the expected return on a foreign bond? Explain.
Q4) Explain what factors determine the expected return on a foreign bond.
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Chapter 18: The Goods Market in an Open Economy
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Q1) Which of the following is true when a county is experiencing a trade deficit (NX < 0)?
A)Demand for domestic goods is equal to the domestic demand for goods.
B)Demand for domestic goods is greater than the domestic demand for goods.
C)Demand for domestic goods is less than the domestic demand for goods.
D)A budget deficit exists.
Q2) Suppose the rest of the world experiences a recession that causes a reduction in foreign income (Y*).From the domestic economy's perspective,this reduction in foreign income will cause which of the following as the domestic economy adjusts to the drop in Y*?
A)a reduction in income and a reduction in imports
B)a reduction in imports and an increase in net exports
C)the NX line to shift up
D)an ambiguous effect on net exports
Q3) An increase in the budget deficit can be reflected in
A)an increase in private saving.
B)a reduction in investment.
C)a reduction in net exports.
D)all of the above
E) none of the above
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Chapter 19: Output, the Interest Rate, and the Exchange
Rate
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Q1) Assume the exchange rate is allowed to fluctuate freely.Using the IS-LM-IP model,graphically illustrate and explain what effect monetary contraction will have on the domestic economy.In your graphs,clearly label all curves and equilibria.
Q2) Explain what effect each of the following events will have on the IS curve in a flexible exchange rate regime: (1)an increase in foreign output; (2)a reduction in the foreign interest rate; and (3)an increase in the domestic interest rate.
Q3) The exchange rate policy of the United States is
A)the EMS.
B)a crawling peg.
C)a float.
D)a fixed rate within a band.
E) none of the above
Q4) Assume the exchange rate is fixed.Using the IS-LM model,graphically illustrate and explain what effect a reduction in consumer confidence will have on the domestic economy.In your graphs,clearly label all curves and equilibria.
Q5) In an economy operating under flexible exchange rates,explain why the IS curve is downward sloping.
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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 continuing crises in 1993,the EMS countries
A)agreed to entirely abandon the system.
B)stood firm, refusing to adjust central parities.
C)narrowed the band of allowable fluctuations around central parities.
D)removed France from its leading role in the system.
E) widened the band of allowable fluctuations around central parities.
Q3) Assume a country is in a fixed exchange rate regime.Now suppose that individuals expect that policy makers will revalue its currency.Explain the various actions that policy makers can choose in response to this expected revaluation.
Q4) Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will revalue its currency.
Q5) Explain exchange rate crisis.
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Chapter 21: Should Policy Makers Be Restrained
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Q1) Those who are concerned about balanced budget amendments typically argue that balanced budget amendments
A)cause interest rates to be higher than they otherwise would be.
B)would make fluctuations in output around the natural level of output greater.
C)would increase spending in a recession.
D)would reduce national saving.
Q2) Which of the following was one of the main rules in the 1990 "Budget Enforcement Act"?
A)flat tax rate
B)PAYGO rule
C)indexation of income tax brackets
D)consumption tax
E) none of the above
Q3) In 1994,Republicans introduced their "Contract with America." This plan
A)included a PAYGO rule.
B)would restrict the ability of monetary policy to affect the economy in the short run.
C)included a line item veto.
D)would make the Federal Reserve even more independent than it already is.
E) all of the above
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Chapter 22: Fiscal Policy: a Summing up
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Q1) When the economy is in a liquidity trap,which of the following is not correct?
A)A reduction in the interest rate can be used to increase output.
B)Fiscal policy is more important.
C)Interest rate is zero.
D)Large increases in spending and cuts in taxes were not enough to avoid the recession.
Q2) What are the primary causes of hyperinflations? Explain.
Q3) A major reason to be concerned about any U.S.budget deficit is that
A)if it were maintained, it would lead to an ever-increasing debt-to-GDP ratio.
B)it would exacerbate the problem of the low U.S. saving rate.
C)under current legislation, it would lead to budget surpluses in the future.
D)if it were to increase, Ricardian equivalence will no longer hold.
E) since large deficits are associated with wars, the deficit might encourage the U.S. to become more adventuristic in its foreign policy.
Q4) Given nominal money growth,the amount of seignorage will be greater when
A)tax revenues are higher.
B)real money balances are larger.
C)the inflation rate is higher.
D)foreign lending is higher.
E) none of the above
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Chapter 23: Monetary Policy: a Summing up
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Q1) M1 consists of
A)currency only.
B)currency plus travelers checks only.
C)currency plus checkable deposits only.
D)checkable deposits only.
E) none of the above
Q2) Which of the following is a function of money?
A)medium of exchange
B)provides protection from inflation
C)it is a flow variable
D)all of the above
E) none of the above
Q3) For this question,assume that the Fed sets monetary policy according to the Taylor rule.Suppose current U.S.macroeconomic conditions are represented by the following: = ?* and u < un.Given this information,we would expect that the Fed will
A)implement a monetary contraction.
B)implement a monetary expansion.
C)maintain its current stance of monetary policy.
D)more information is need to answer this question.
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) The flatter is the IS curve,
A)the more effective is monetary policy.
B)the less effective is monetary policy.
C)the effectiveness of monetary policy does not change.
D)a given change in the money supply will have a smaller effect on output.
Q2) Discuss the major intellectual failure on macroeconomics from the crisis.
Q3) Discuss the consensus on the adjustment process after the crisis.
Q4) According to Keynes,
A)the Great Depression was caused by ill-considered expansionary fiscal policy.
B)balancing the budget in the midst of a depression would be a serious mistake.
C)inflation is always and everywhere a monetary phenomenon.
D)the Phillips curve is stable.
E) none of the above
Q5) Discuss what is meant by the neoclassical synthesis and explain how it emerged.
Q6) Briefly discuss new growth theory.
Q7) The intellectual leader of new classicals is
A)Edward Prescott.
B)John Taylor.
C)Stanley Fischer.
D)Ben Bernanke.
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Chapter 25: Appendix
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Q1) When we use ordinary least squares to determine the relationship between changes in consumption and changes in both current and lagged income,we find that
A)only current income influences current consumption.
B)current income has no impact on current consumption.
C)consumption is not affected by income in any quarter.
D)current income, last quarter's income, and income two quarter's ago all have the same impact on current consumption.
E) current income has a greater impact on consumption than income lagged one quarter.
Q2) Which of the following problems would lead an economist to use instrument variable methods?
A)The dependent variable has an impact on the independent variable.
B)There are too few quarters of data.
C)There are too many independent variables.
D)The R² is too high.
E) The residuals are too small.
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