Intermediate Macroeconomics
Final Test Solutions
Course Introduction
Intermediate Macroeconomics builds upon foundational economic principles to deepen students understanding of national income determination, economic growth, business cycles, unemployment, inflation, and the roles of fiscal and monetary policy. Emphasizing both theoretical models and real-world applications, the course explores the dynamics of aggregate demand and supply, the IS-LM framework, and open economy macroeconomics. Students will critically analyze how government policies and external shocks influence economic performance, and gain analytical skills necessary for interpreting economic data and policy debates.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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18 Chapters
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) Thinking in economic terms, when Mary Sweet-Tooth is deciding whether to eat another brownie, she:
A)considers only the price of the brownie.
B)considers only how much additional exercise she will need to do to work off the calories associated with eating another brownie.
C)compares all of the benefits and costs of eating another brownie.
D)considers whether she can do so without anyone else noticing.
Answer: C
Q2) If equilibrium exists:
A)all individuals must have an equal amount of income.
B)the price in that market will not fluctuate by more than 5%.
C)there will be no remaining opportunities for individuals to make themselves better off.
D)the number of buyers will equal the number of sellers.
Answer: C
Q3) Equity is the same as efficiency.
A)True
B)False
Answer: False
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3
Chapter 2: Economic Models
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Sample Questions
Q1) (Table: Coffee and Salmon Production Possibilities II) Look at the table Coffee and Salmon Production Possibilities II. This table shows the maximum amounts of coffee and salmon, both measured in pounds, that Brazil and Alaska can produce if they just produce one good. Brazil has an absolute advantage in producing:
A)coffee only.
B)salmon only.
C)both coffee and salmon.
D)neither coffee nor salmon.
Answer: A
Q2) Assume that Colombia gives up three motorcycles for each ton of coffee it produces, while Bolivia gives up seven motorcycles for each ton of coffee it produces. Colombia has a comparative advantage in _____ production and should specialize in _____.
A)motorcycle; coffee
B)coffee; motorcycles
C)coffee; coffee
D)motorcycle; motorcycles
Answer: C
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) Which of the following will raise the price of milk?
A)a shift to the right of the supply curve for milk
B)a shift to the right of the demand curve for milk
C)an increase in the number of milk suppliers
D)a decrease in the number of milk buyers
Answer: B
Q2) (Figure: Shifts in Demand and Supply III) Look at the figure Shifts in Demand and Supply III. The figure shows how supply and demand might shift in response to specific events. Suppose a spring frost destroys one-third of the nation's artichoke crop. Which panel BEST describes how this will affect the market for mayonnaise, which is a complement to artichokes?
A)panel A
B)panel B
C)panel C
D)panel D
Answer: D
Q3) An increase in demand for good X can be caused by a decrease in the price of X.
A)True
B)False
Answer: False
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Chapter 5: International Trade 5
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Sample Questions
Q1) (Table: Production Possibilities for Machinery and Petroleum) Look at the table Production Possibilities for Machinery and Petroleum. The opportunity cost of _____ is _____ in the United States as (than) in Mexico.
A)machinery; more B)machinery; the same C)machinery; less D)petroleum; less
Q2) Taken collectively, people in nations that engage in international trade are not likely to:
A)consume more than they were able to consume in the absence of trade.
B)raise their standards of living.
C)gain from lower opportunity costs of production.
D)be made worse off.
Q3) Canada, Mexico, and the United States have:
A)joined together and are operating in what is called a closed-trade area with respect to the European Union.
B)developed a currency similar to the euro.
C)eliminated many trade barriers among themselves.
D)reduced trade among themselves to protect jobs at home.
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Page 6
Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) One type of macroeconomic policy is antitrust enforcement.
A)True
B)False
Q2) Macroeconomics focuses on:
A)the economy as a whole.
B)individual decisions.
C)wages.
D)the allocation of scarce resources.
Q3) An economic expansion in the United States is typically associated with a(n):
A)falling inflation rate.
B)increase in the poverty rate.
C)falling unemployment rate.
D)decrease in corporate profits.
Q4) If all of the households and businesses start saving more during economic hard times, then aggregate income will fall, hurting everyone in the economy. This is known as:
A)the quantity theory.
B)the crowding-out theory.
C)the paradox of thrift.
D)the permanent income hypothesis.
Page 7
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) (Table: Real and Nominal Output) Look at the table Real and Nominal Output. Nominal GDP in year 2 is equal to:
A)$40.
B)$60.
C)$100.
D)$280.
Q2) (Table: Per Capita GDP) Look at the table Per Capita GDP. The growth rate of nominal GDP from 2011 to 2014 was:
A)37.5%.
B)60%.
C)62.5%.
D)166.7%.
Q3) The aggregate price level is the average of stock prices on the New York Stock Exchange.
A)True
B)False
Q4) Real GDP will increase if aggregate output increases.
A)True
B)False
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) The natural rate of unemployment is:
A)the rate during recessions.
B)equal to the sum of frictional and cyclical unemployment.
C)equal to the sum of frictional and structural unemployment.
D)cyclical unemployment less frictional unemployment.
Q2) When labor unions successfully bargain for wage rates that are _____ than the equilibrium wage rate, they may cause _____.
A)lower; frictional unemployment.
B)equal to; shortages in that labor market.
C)higher than; an increase in structural unemployment.
D)higher than; shortages in that labor market.
Q3) The labor force is the total:
A)number of people employed.
B)population.
C)number of people in the population of working age.
D)number of people who are employed or unemployed.
Q4) The minimum wage is higher in the United States than in most Western European countries.
A)True
B)False
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) High rates of savings and investment and a lack of consumption spending have contributed to the recent stagnant economic growth in Latin America.
A)True
B)False
Q2) (Scenario: Productivity) Look at the scenario Productivity. How much has growing physical capital per worker contributed as a percentage of total productivity growth?
A)80%
B)53%
C)30%
D)9%
Q3) Economists are optimistic that growth can continue in the face of resource scarcity because:
A)the oil industry vastly understates the level of oil reserves.
B)prices of scarce resources fall and provide incentives to use more of those resources. C)prices of scarce resources rise and provide incentives to find alternative energy sources.
D)resource scarcity no longer limits economic growth.
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) Which of the following qualifies as an asset from the viewpoint of a household?
A)a house
B)mortgage
C)credit card debt
D)car loan
Q2) An individual can reduce financial risk by diversifying investments, that is, by investing in several assets whose possible losses are independent events.
A)True
B)False
Q3) (Table: Investment Projects) Look at the table Investment Projects. If the market interest rate is 11%, the amount of investment demanded is:
A)$800.
B)$1,000.
C)$2,000.
D)$4,000.
Q4) When households invest their wealth in financial markets, they purchase financial assets.
A)True
B)False
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Sample Questions
Q1) (Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. In panel (a), the economy is initially at output level Y<sub>1</sub> and there is:
A)an inflationary gap.
B)a recessionary gap.
C)equilibrium at full employment.
D)no gap.
Q2) Suppose that real GDP is $500, potential GDP is $1,000, and the marginal propensity to consume is 0.9. If the government is going to spend and does not impose taxes, what specific fiscal policy action should policy makers take?
Q3) The business cycle and the budget balance are unrelated.
A)True
B)False
Q4) If debt increases faster than GDP, the ratio of debt to GDP will fall.
A)True
B)False
Q5) The cyclically balanced budget deficit doesn't fluctuate as much as the actual budget deficit.
A)True
B)False
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Chapter 14: Money, Banking, and the Federal Reserve System
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Sample Questions
Q1) If professional basketball superstar LeBron James signed his jersey and gave it to you, it would certainly be a valuable asset. Why would this valuable asset not serve as a very good form of money if you took it to a shopping mall, looking to purchase a pair of shoes? Use the three roles of money in your explanation.
Q2) Long-Term Capital Management was a(n):
A)investment bank.
B)hedge fund.
C)government agency that the Federal Reserve used to hold deposits of its member banks.
D)mortgage company.
Q3) The TED spread is the interest rate that banks pay when they borrow reserves from the Fed or another bank.
A)True B)False
Q4) Explain the role of the housing market in the 2008 financial crisis.
Q5) Fannie Mae and Freddie Mac are the government agencies that insure deposits at financial institutions.
A)True B)False
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Chapter 15: Monetary Policy
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Sample Questions
Q1) The Fed prints money only when it is conducting monetary policy.
A)True
B)False
Q2) The introduction of ATMs:
A)increased the demand for cash because it made cash easier to get.
B)decreased the demand for cash because it reduced the cost of moving from other assets into cash.
C)did not change the demand for cash because it is proportional to the price level.
D)did not change the demand for cash, as ATMs do not affect public spending habits.
Q3) According to the Taylor rule, the target federal funds rate should be positively related to the inflation rate and inversely related to the unemployment rate.
A)True
B)False
Q4) Expansionary monetary policy works by decreasing consumption, allowing other sectors of the economy to spend more.
A)True
B)False
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Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) A long-run Phillips curve has a(n) _____ slope because _____.
A)negative; there is a positive relationship between the output gap and the nonaccelerating inflation rate of unemployment (NAIRU)
B)infinite; any unemployment rate below the NAIRU leads to ever-accelerating inflation
C)zero; there is a positive relationship between expected inflation and unemployment
D)positive; any unemployment rate above the NAIRU leads to ever-accelerating inflation
Q2) When the output gap is negative, the actual unemployment rate is:
A)above the natural rate.
B)below the natural rate.
C)equal to the natural rate.
D)The actual and natural unemployment rates are not related to the output gap.
Q3) A negative output gap is associated with a(n) _____ unemployment rate.
A)unusually low
B)natural
C)unusually high
D)unchanged
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15
Chapter 17: Crises and Consequences
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Sample Questions
Q1) Long recessions often follow banking crises because:
A)banking crises may cause a surplus of credit, so that interest rates fall to levels so low that investors earn very little in interest income.
B)the vicious cycle of deleveraging that follows leads to overpriced assets.
C)consumer and investment spending increase too rapidly, causing high rates of inflation.
D)monetary policy is not very effective because banks hold on to excess reserves and are unwilling to lend them out.
Q2) During the 2008 and 2011 financial crises in Spain and Italy, the spread between the interest rates on 10-year bonds issued by the governments of Italy and Spain and the interest rates on 10-year bonds issued by _____ was a measure of risk.
A)Great Britain
B)Germany
C)Ireland
D)France
Q3) In a banking crisis, banks are likely to hold more excess reserves than usual.
A)True
B)False
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Chapter 18: Events and Ideas
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Sample Questions
Q1) Monetarists believe that:
A)short-run problems are not likely.
B)GDP fluctuations will be less pronounced if the Federal Reserve uses discretionary monetary policy.
C)price fluctuations are likely in the short or long run.
D)GDP will grow steadily if the money supply grows steadily.
Q2) Which of the following is the consensus among most economists today with respect to the management of unemployment?
A)Government can't do anything about it.
B)Expansionary policy can be used to achieve permanently low unemployment.
C)Unemployment cannot be kept below the natural rate.
D)Unemployment cannot be kept anywhere near the natural rate.
Q3) According to the Great Moderation consensus:
I. monetary policy should be the main stabilization tool.
II. the natural rate of unemployment doesn't actually exist.
A)I only
B)II only
C)I and II
D)neither I nor II
Q4) Why did the adoption of Keynesian economics come out of the Great Depression?
Page 17
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Chapter 19: Open-Economy Macroeconomics
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Sample Questions
Q1) Which of the following was an argument AGAINST Britain's adopting the euro?
I. Using the same currency as many other European countries would discourage trade and decrease productivity.
II. Using the euro would decrease the effectiveness of monetary policy.
A)I only
B)II only
C)I and II
D)neither I nor II
Q2) A current account surplus occurs when:
A)the balance on the current account is positive.
B)net exports are negative.
C)spending flowing out of the country exceeds spending flowing into the country.
D)imports exceed exports.
Q3) A revaluation can help reduce a(n):
I. inflationary gap
II. deflationary gap
A)I only
B)II only
C)I and II
D)neither I nor II
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Chapter 20: Graphs in Economics
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Sample Questions
Q1) (Figure: Good X and Good Y) Look at the figure Good X and Good Y. If we move from point B to point C in the figure, the x-variable has ______ units and the y-variable has ______ units.
A)decreased by 2; increased by 15
B)increased by 2; decreased by 15
C)decreased by 15; increased by 2
D)increased by 15; decreased by 2
Q2) The owner of the Dismal Philosopher, one of five bookstores on College Road, asks you to make a graph showing each College Road bookstore's share of all five stores' book purchases. The best way to show this information is with:
A)a scatter diagram.
B)a pie chart.
C)a time-series graph.
D)an independent graph.
Q3) The fact that two variables always move together over time:
A)does not prove that one of the variables is dependent on the other.
B)proves that one of the variables is dependent on the other.
C)proves that changes in one variable cause changes in the other.
D)is often illustrated or depicted using either a pie chart or a bar chart.
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Page 19
Chapter 21: toward a Fuller Understanding of Present Value
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Sample Questions
Q1) You have heard about a new light bulb that is costly to purchase but uses little electricity and thus allows you to save money on your utility bill. Suppose the new light bulb costs $10 today but next year your electricity bill will be $50 lower. If the interest rate is 10%, what is the net present value of buying this new light bulb and using it for one year?
A)$40
B)-$45.45
C)$55
D)$35.45
Q2) A semiconductor firm is considering opening a new plant. The plant will generate profits of $100 million at the end of each of three years after the first year of production and then no profits after that. If the interest rate is 10%, what is the maximum cost (to the nearest million) the firm is willing to pay now for the plant?
A)$300 million
B)$249 million
C)$273 million
D)$100 million
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