Introduction to Macroeconomics
Final Test Solutions
Course Introduction
Introduction to Macroeconomics explores the broad principles and foundational concepts that govern the economy as a whole. The course investigates topics such as gross domestic product (GDP), inflation, unemployment, economic growth, fiscal and monetary policy, and international trade. By analyzing how governments, consumers, and producers interact within an economy, students gain a comprehensive understanding of economic cycles, market dynamics, and the impact of policy decisions on aggregate economic performance. This course provides essential tools for interpreting economic trends, understanding current events, and making informed decisions in a globalized world.
Recommended Textbook
Macroeconomics 12th Edition by Robert J Gordon
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Page 2
Chapter 1: What Is Macroeconomics
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Sample Questions
Q1) Hyperinflation can be defined as an inflation rate of
A)50% or more per month.
B)50% or more per year.
C)50% or more decade.
D)All of the above are appropriately defined as hyperinflation.
Answer: A
Q2) Generally,the higher the level of output in an economy is the ________ will be.
A)lower the unemployment rate and inflation rate
B)higher the unemployment rate and inflation rate
C)higher the unemployment rate and the lower inflation rate
D)lower the unemployment rate and the higher inflation rate
Answer: D
Q3) To avoid the conflicts and suffering of a "zero-sum society," an economy must maintain a
A)positive rate of productivity growth.
B)positive rate of inflation.
C)foreign trade surplus
D)government budget deficit.
Answer: A
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Page 3
Chapter 2: The Measurement of Income,prices,and Unemployment
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Sample Questions
Q1) With positive net exports,a nation is a net ________,and thus has a ________ "net foreign investment."
A)seller of assets to foreigners,positive
B)seller of assets to foreigners,negative
C)buyer of foreign assets,positive
D)buyer of foreign assets,negative
Answer: C
Q2) Refer to above Table 2-1.What is the level of Disposable Personal Income?
A)2520
B)1900
C)2200
D)2120
Answer: D
Q3) Changes in business inventories
A)are included in gross but not in net investment.
B)can either be positive or negative.
C)are not included in GDP because they are not sold to anyone.
D)are only partly included in GDP because part of these are holdings of intermediate goods.
Answer: B
Page 4
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Chapter 3: Income and Interest Rates: the Keynesian Cross
Model and the Is Curve
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Q1) Stability of the U.S.economy between 1985 and 2007 referred to as
A)Great Moderation.
B)the Great Depression.
C)Automatic Stabilizer.
D)Fiscal Discretion.
Answer: A
Q2) The multiplier measures the
A)number of steps it takes to move from one equilibrium to another.
B)rise in saving resulting from a rise in income.
C)marginal propensity to invest.
D)rise in equilibrium GDP resulting from a one dollar rise in planned autonomous expenditures.
Answer: D
Q3) Which of these variables remains exogenous throughout Chapter 3?
A)the interest rate
B)investment
C)price level
D)all of the above
Answer: D
Page 5
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Chapter 4: Strong and Weak Policy Effects in the Is-Lm
Model
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Sample Questions
Q1) A steep LM curve implies that
A)an increase in government spending will change output by a relatively small amount.
B)a decrease in taxes will change output by a relatively small amount.
C)changes in government spending and taxes will have a large multiple effect on output.
D)A and B.
Q2) Crowding-out is eliminated when the LM curve is ________,so that expansionary fiscal policy ________ the interest rate.
A)vertical,does not affect
B)vertical,raises
C)horizontal,does not affect
D)horizontal,raises
Q3) A change in the public's desire to hold money will
A)shift the IS curve.
B)change the slope of the IS curve.
C)shift the LM curve.
D)change the slope and position of the LM curve.
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Page 6
Chapter 5: Financial Markets, financial Regulation, and Economic Instability
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Sample Questions
Q1) The output gap of zero indicates that
A)nominal GDP is equal to Real GDP.
B)GDP is equal to GNP.
C)the balance between unemployment and inflation has been reached.
D)actual real GDP is equal to natural real GDP.
Q2) Leverage refers to
A)the ratio of total assets of a financial institution to total liabilities.
B)the ratio of the liabilities of a financial institution to equity capital..
C)the ratio of equity capital of a financial institution to the liabilities.
D)the ratio of the debt of a financial institution to liabilities.
Q3) In the IS-LM Model,assuming downward sloping IS curve and upward sloping LM curve;increase in consumers' wealth is going to
A)cause a movement along the IS curve.
B)cause a rightward shift of the IS curve.
C)cause a leftward shift of the LM curve.
D)cause a rightward shift of the LM curve.
Q4) In the recent Global Economic Crisis,the negative wealth effect caused A)LM curve to shift to the right.
B)LM curve to shift to the left.
C)IS curve to shift to the left.
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Limitations of Fiscal Policy
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Q1) In a small open economy,when exports exceed imports,all of the following are true EXCEPT
A)net capital outflows are positive.
B)net exports are positive.
C)domestic investment exceeds domestic saving.
D)domestic output exceeds spending.
Q2) In the wake of the Reagan "supply-side" tax cuts of the early 1980s,growth in the labor-force participation rate ________ and the personal saving rate ________.
A)increased,rose
B)increased,fell
C)decreased,rose
D)decreased,fell
Q3) Over a decade or longer,a government budget deficit
A)reduces national saving and stimulates economic growth.
B)reduces national saving and economic growth.
C)increases national saving and economic growth.
D)increases national saving and decreases economic growth.
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Page 8
Chapter 7: International Trade, exchange Rates, and Macroeconomic Policy
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Sample Questions
Q1) In the past decade,the United States has been running extraordinary large foreign trade deficits.This is possible by the
A)desire of China,Japan and other countries to keep their currencies from strengthening against the dollar.
B)desire of China,Japan,and other countries to keep their currencies from weakening against the dollar.
C)desire of the U.S.population to save large amounts of their income.
D)desire of the U.S.government to maintain budget surplus.
Q2) Which of the following is likely to upset the prediction of the purchasing power parity theorem?
A)differing rates of technical change in the two nations
B)discovery of new natural resources in one of the nations
C)differing government policies in the two nations
D)All of these.
Q3) When a fiscal policy stimulus raises both real income and the interest,
A)the dollar appreciates.
B)the dollar depreciates.
C)imports decrease and exports increase.
D)both A and C.
Page 9
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Chapter 8: Aggregate Demand, aggregate Supply, and the Great Depression
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Sample Questions
Q1) The Pigou effect might be ineffective in correcting a recession if A)prices are falling.
B)people expect the implied deflation to continue.
C)there is a liquidity trap.
D)the government does not expand the money supply.
Q2) Keynes argued that monetary policy would be impotent during the Great Depression because
A)the LM curve was horizontal and the IS curve was vertical.
B)the LM curve was continuously shifting and the IS curve was vertical.
C)the LM curve was vertical and the IS curve was nearly flat.
D)both the LM curve and the IS curve were shifting rightward at the same time.
Q3) Which of the following factors will NOT cause the AD curve to shift?
A)tax rates
B)autonomous exports
C)changes in the marginal product of labor
D)consumer confidence
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10
Chapter 9: Inflation: Its Causes and Cures
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Sample Questions
Q1) In constructing the short-run Phillips Curve,SP, A)real wages are fixed.
B)nominal wages are renegotiated.
C)nominal wages are fixed.
D)raw materials prices are fixed.
Q2) "Overshooting" refers to a temporary period in the adjustment loop during which A)the percentage deviation of real GDP from natural real GDP exceeds the growth rate of nominal GDP.
B)inflation exceeds the growth rate of nominal GDP.
C)nominal GDP growth exceeds its permanent value.
D)we move from one long-run equilibrium to another.
Q3) "pe = p - 1" is an expression of
A)the forward-looking expectations assumption.
B)the adaptive expectations assumption.
C)one of the conditions for short-run equilibrium.
D)one of the conditions for long-run equilibrium.
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11
Chapter 10: The Goals of Stabilization Policy: Low Inflation and
Low Unemployment
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Sample Questions
Q1) The U.S.macroeconomic experience of the early to mid-1980s is an example of how
A)reducing inflation comes at the cost of a permanent reduction in real GDP.
B)reducing inflation comes at the cost of a temporary reduction in real GDP.
C)reducing inflation can be done costless by simply increasing the money growth rate.
D)increasing the money growth rate affects inflation alone,and not real GDP.
Q2) The classic loser from an unanticipated inflation is
A)the borrower who pays less nominal interest than expected.
B)the borrower who pays more nominal interest than expected.
C)the saver who earns less real interest than expected.
D)the saver who earns more real interest than expected,and so should have saved more.
Q3) Suppose there is a shortage of computer programmers,but firms refuse to hire unemployed typists and train them.This is one reason for ________ unemployment.
A)turnover
B)seasonal
C)mismatch
D)cyclical
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Chapter 11: The Theory of Economic Growth
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Sample Questions
Q1) Refer to the information above.If an economy has a real GDP doubling-time of 48 years,this can be reduced to 30 years if annual GDP growth is raised by ________ percentage points.
A)4
B)2.4
C)1.6
D)0.9
Q2) Which of the following is NOT a real world factual conflict with the neoclassical growth model?
A)Income per capita varies greatly across countries.
B)Poor countries do not have a higher rate of return on capital.
C)Immigrant labor from poor countries experiences very small increases in income when it moves to rich countries.
D)Poor countries' income levels have not converged to the income levels of rich countries.
Q3) If technological change is "labor augmenting," then
A)output per worker declines,output per unit of capital increases.
B)"effective labor input" increases,output per unit of capital declines.
C)output per worker increases,output per unit of capital is constant.
D)Both output per worker and output per unit of capital change.
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Chapter 12: The Big Questions of Economic Growth
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Sample Questions
Q1) MFP growth represented by a will be lower than the growth of labor productivity if A)k > n.
B)k < n.
C)k = n.
D)None of the above.The relative size of k and n do not affect MFP growth.
Q2) If the growth rate of multifactor productivity is 1.775,b = 0.15,n = 1,and y = 3,then the growth rate of capital is A)1.225.
B)1.45.
C)4.0.
D)2.5.
Q3) If the supply of labor increases while demand for labor is unchanged, A)the real wage and labor productivity will increase.
B)the real wage will decrease and labor productivity will increase.
C)the real wage will increase and labor productivity will decrease.
D)the real wage and labor productivity will decrease.
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Chapter 13: Money,banks,and the Federal Reserve
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Sample Questions
Q1) With faster inflation,money in the form of ________ becomes more desirable.
A)currency
B)non-interest-bearing checkable deposits
C)interest-bearing checkable deposits
D)All of these forms are equally desirable when inflation increases.
Q2) Suppose that the interest rate is so low that banks currently refuse to make loans.An increase in the supply of high-powered money will
A)have no effect on the money supply if all the new high-powered money ends up as bank reserves.
B)have no effect on the money supply if all the new high-powered money ends up as cash in the hands of the nonbank public.
C)raise the money supply depending on banks reserve-holding ratio.
D)All of the above are correct.
Q3) The Fed's decision to concentrate more on interest rates in conducting near-term monetary policy
A)was the result of deregulation and innovation in financial markets.
B)was necessitated by the inability to identify a stable demand for money.
C)is sometimes misrepresented by the media as the Fed "setting" interest rates.
D)all of the above.
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Page 15
Chapter 14: The Goals, tools, and Rules of Monetary Policy
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Sample Questions
Q1) In Taylor Rule equation,high value of parameter a indicates that
A)Fed cares more about avoiding recessions and high unemployment than about avoiding inflation.
B)Fed cares more about avoiding inflation than about avoiding recessions and high unemployment.
C)Fed cares more about avoiding recessions than about avoiding high unemployment.
D)Fed cares more about avoiding high unemployment than about avoiding recessions.
Q2) Economists who support a monetary rule as opposed to an activist monetary policy believe that the effectiveness lag in monetary policy is
A)short and variable,policy changes affect AD quickly and are predictable.
B)zero,policy changes have an immediate effect on expenditures.
C)long and variable,policy changes affect AD slowly over time and are unpredictable.
D)long,but predictable.
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16
Chapter 15: The Economics of Consumption Behavior
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Sample Questions
Q1) The fact that 80% of the assets accumulated during a lifetime are bequeathed to heirs in the United States suggests that
A)the appropriate time horizon for consumption theory is the lifetime of the earner.
B)the appropriate time horizon for consumption theory is intergenerational.
C)the Barro-Ricardo equivalence theorem is correct.
D)it is true that higher taxes increase savings.
Q2) Modigliani's consumption function differs from both Friedman's and Keynes' function in which of the following?
A)It is based on forward looking expectations.
B)It is based on disposable income received over time.
C)It is based on the value of assets accumulated over time.
D)It is based on disposable income or permanent income.
Q3) The MPC on ________ income is less than the MPC on ________ income according to ________ theory.
A)transitory;permanent;Friedman's B)transitory;permanent;Modigliani's C)permanent;transitory;Modigliani's D)permanent;transitory;Friedman's
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Chapter 16: The Economics of Investment Behavior
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Sample Questions
Q1) If the government allows business firms an investment credit to lower taxes,then
A)the user cost of capital declines and V* increases.
B)the user cost of capital declines and V* decreases.
C)the user cost of capital increases and V* decreases.
D)the user cost of capital increases and V* increases.
Q2) Rising government expenditure,through its effect on the real interest rate,________ v* and thus ________ net investment. A)raises,stimulates B)raises,depresses C)lowers,stimulates D)lowers,depresses
Q3) Refer to the information above.What is the value of net investment in period 5?
A)17.5
B)89.25
C)106.75
D)612.5
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18
Chapter 17: New Classical Macro and New Keynesian Macro
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Sample Questions
Q1) Were the government to decree that henceforth all wages and other input prices are to be indexed to nominal aggregate demand,this ________ "coordination failure" of the macroeconomy and ________ business cycles.
A)solves the,amplifies
B)solves the,dampens
C)creates a,amplifies
D)creates a,dampens
Q2) According to the original Keynesian model,there would be counter-cyclical movements of the real wage rate in response to changes in aggregate demand because
A)firms react to nominal wages and workers respond to real wages.
B)firms react to real wages and workers respond to the expected real wage.
C)firms are on their labor demand curve and workers are off their labor supply curve.
D)firms are off their labor demand curve and workers are on their labor supply curve.
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Chapter 18: Conclusion: Where We Stand
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Q1) In the late 1960s,the Friedman-Phelps "natural rate hypothesis" predicted from the microeconomic structure of the labor market that the long-run Phillips Curve is ________,while macroeconomic events caused a very ________ acceptance of this change in aggregate supply theory.
A)horizontal,rapid
B)horizontal,gradual
C)vertical,rapid
D)vertical,gradual
Q2) The quantity theory of money idea that velocity is ________ link between money growth and nominal GDP growth was ________ in the 1930s.
A)a stable,confirmed
B)a stable,disproved
C)an unstable,confirmed
D)an unstable,disproved
Q3) The evolution of macroeconomic theory
A)usually precedes and causes major macroeconomic events.
B)usually is in reaction to major macroeconomic events.
C)is evenly divided between causing and reacting to major macroeconomic events.
D)proceeds rather independently of major macroeconomic events.
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Page 20