Introduction to Macroeconomics Practice Questions
Course Introduction
Introduction to Macroeconomics offers a foundational exploration of the large-scale economic factors that influence national and global economies. This course covers key topics such as national income, gross domestic product (GDP), inflation, unemployment, fiscal and monetary policies, and international trade. Students will examine how governments use policy tools to manage economic growth and stability, and analyze real-world economic trends and issues. Through lectures, discussions, and case studies, the course equips students with the analytical skills necessary to understand how economies operate and the challenges they face in a changing world.
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Macroeconomics 4th Edition by Paul Krugman
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Page 2
Chapter 1: First Principles
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Sample Questions
Q1) When individuals act in their own self-interest:
A)efficiency is always achieved.
B)equity is always achieved.
C)society may be worse off in some cases.
D)all opportunities have been taken to make some people better off without making other people worse off.
Answer: C
Q2) Increases in total output realized when individuals specialize in particular tasks and trade are known as:
A)the gains from trade.
B)the profits obtained from sales of a good or service.
C)marginal analysis.
D)a trade-off.
Answer: A
Q3) Market failure occurs when:
A)prices of essential goods such as gas become very high.
B)individual actions have side effects that are not properly taken into account.
C)mutually beneficial trades take place.
D)a business declares bankruptcy.
Answer: B
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Chapter 2: Economic Models
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Sample Questions
Q1) Which of the following offices of the U.S. government is a major employer of economists?
A)International Monetary Fund
B)United Nations
C)World Bank
D)Bureau of Labor Statistics
Answer: D
Q2) When a nation's economy grows:
A)its production possibility frontier shifts outward.
B)its production possibility frontier shifts inward.
C)it has been able to reach full employment.
D)it has moved to a more consumer-oriented position on its production possibility frontier.
Answer: A
Q3) "Many economists agree that income taxes should be increased for rich people" is a positive statement.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Supply and Demand
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Sample Questions
Q1) You notice that the price of Blu-ray players falls and the quantity of Blu-ray players sold increases. You suspect that _____ Blu-ray players shifts to the _____.
A)demand for; right.
B)demand for; left.
C)supply of; right.
D)supply of; left.
Answer: C
Q2) (Figure: The Demand and Supply of Wheat) Look at the figure The Demand and Supply of Wheat. If there is an increase in demand of 2,000 bushels at each price, the equilibrium price and quantity will be _____ and _____ bushels, respectively.
A)$5; 5,000
B)$6; 7,000
C)$7; 7,000
D)$8; 8,000
Answer: C
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Chapter 5: International Trade 5
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Sample Questions
Q1) Import protections are often imposed because:
A)import protections increase total surplus, even though some groups are harmed.
B)groups representing import-competing industries are more cohesive than consumers.
C)benefits to producers outweigh the costs to the consumer.
D)the loss in consumer surplus is usually quite small.
Q2) (Figure: Domestic Market for Digital Cameras) Look at the figure The Domestic Market for Digital Cameras. Assume that P<sub>A</sub> is the autarky price and P<sub>W</sub> is the world price. Total surplus before international trade is equal to the area:
A)A + B + C.
B)A + B.
C)A + B - D - E.
D)A.
Q3) A direct restriction on the quantity of an import is called a(n): A)import quota.
B)tariff.
C)import subsidy.
D)import restriction.
Q4) Explain the difference between comparative advantage and absolute advantage.
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Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) An increase in the nation's _____ is generally accepted as a long-run indicator of a rising standard of living.
A)output per person
B)unemployment rate
C)inflation rate
D)trade deficit
Q2) A trade surplus occurs:
A)during economic contractions only.
B)when the value of imports exceeds the value of exports.
C)when the value of imports is less than the value exports.
D)when unemployment is rising.
Q3) You read a newspaper article that says the unemployment rate rose this month. Are we in a recession? Explain.
Q4) The topics studied in macroeconomics include:
A)inflation.
B)monopolies.
C)spillovers, such as pollution.
D)mergers.
Q5) What are Keynesian policies?
Q6) Explain what is meant by the paradox of thrift.
Page 7
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) If GDP increases from $10 trillion to $12 trillion in a year, it can only mean that aggregate output grew by 20%.
A)True
B)False
Q2) Flows of money, goods and services, and factors of production through the economy are all shown in the circular-flow diagram.
A)True
B)False
Q3) Flows into financial markets are equal to the sum of:
A)all foreign lending.
B)foreign lending and purchases of stock plus private saving.
C)borrowing and stock issues plus foreign borrowing and sales of stock.
D)private saving.
Q4) Explain why each of the following transactions would or would not be counted in the GDP of the United States.
a. American auto producer Ford builds a factory in Canada.
b. You buy a blueberry muffin at your coffee shop.
c. A Ford dealership in Ohio has 15 unsold new cars at the end of 2011.
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Page 8
Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) If the government increases the length and amount of unemployment benefits, the unemployment rate will fall.
A)True
B)False
Q2) The labor force is considered to be:
A)everyone who is employed.
B)everyone who is employed plus everyone who is unemployed.
C)the population of the nation.
D)those not frictionally unemployed plus all others employed.
Q3) When the actual rate of unemployment is equal to the natural rate of unemployment, we conclude that there is no cyclical unemployment.
A)True
B)False
Q4) (Table: The Consumer Price Index (CPI)) Look at the table The Consumer Price Index (CPI). The inflation rate between 2011 and 2012 was:
A)10%.
B)3%.
C)1.4%.
D)24.6%.
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) Which sector is responsible for most of the growth in the United States during the 1990s?
A)service
B)manufacturing
C)mining
D)retail
Q2) Natural resources are:
A)more important determinants of productivity today than ever before.
B)the reason behind the fast development of countries like Japan.
C)the reason behind the slow development of countries like Nigeria.
D)less reliable indicators of productivity today than they were a century ago.
Q3) (Scenario: Growth Rates in Two Countries) Look at the scenario Growth Rates in Two Countries. How long will it take India to double its real GDP per capita?
A)7.8 years
B)10.2 years
C)14.6 years
D)90 years
Q4) Many impoverished nations struggle with diseases like malaria. How would reduction or elimination of malaria contribute to long-run economic growth?
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) (Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is investment spending?
A)$2 trillion
B)$3 trillion
C)$3.5 trillion
D)$4 trillion
Q2) Which of the following is (are) source(s) of funds for Facebook's investment spending?
I. investors who purchase shares of stock in the company
II. borrowing from savers
A)I only
B)II only
C)both I and II
D)neither I nor II
Q3) If you are paid $10,500 in one year on a $10,000 loan made today, then your annual interest rate is:
A)0.5%.
B)5%.
C)10%.
D)10.5%.
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Sample Questions
Q1) If there is an inflationary gap in the economy, discretionary fiscal policy will likely include action to:
A)shift aggregate demand to the right.
B)prevent the aggregate demand curve from shifting.
C)shift aggregate demand to the left.
D)shift both aggregate demand and short-run aggregate supply to the left.
Q2) Automatic stabilizers act like:
A)automatic expansionary fiscal policy when the economy is in inflation.
B)automatic expansionary fiscal policy when the economy is in a recession.
C)an additional multiplier effect.
D)automatic contractionary policy when the economy is in a recession.
Q3) If a government has large consecutive budget deficit but its GDP is growing faster than its debt, the ratio of debt to GDP will increase.
A)True
B)False
Q4) The economy is in a recessionary gap. What are the fiscal policy options available to the government?
Q5) What is meant by the term social insurance? Give an example of a social insurance program.
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Chapter 14: Money, Banking, and the Federal Reserve System
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Sample Questions
Q1) If a bank has deposits of $10,000 and reserves of $5,000 and if the reserve requirement is 20%, it can make loans of $5,000.
A)True
B)False
Q2) A gift certificate that can be used to buy goods at Walmart is money.
A)True
B)False
Q3) Which of the following is part of M1?
A)short-term certificates of deposit
B)shares of corporate stock
C)currency in a bank's vault
D)checkable bank deposits
Q4) Which of the following is near-money?
A)a traveler's check
B)a credit card
C)a debit card
D)a savings account
Q5) Money is the most liquid asset in the economy.
A)True
B)False
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Chapter 15: Monetary Policy
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Sample Questions
Q1) If long-term interest rates are 8% and short-term rates are 3%, the market expects:
A)short-term rates to fall.
B)short-term rates to rise.
C)short-term rates to remain the same.
D)there is no relationship between long-term and short-term rates.
Q2) If the economy is at potential output and the Fed increases the money supply, in the SHORT run the price level will likely:
A)fluctuate randomly.
B)remain the same.
C)decrease.
D)increase.
Q3) The liquidity preference model uses the demand for and supply of money to determine:
A)GDP.
B)the price level.
C)the interest rate.
D)nominal output.
Q4) Why does a recession, all else equal, decrease the demand for money?
Q5) What is the opportunity cost of holding money?
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Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) Which of the following could lead to moderate inflation?
A)a negative supply shock
B)a drop in consumer confidence
C)a contractionary fiscal policy
D)the pursuit of a balanced budget during an expansion
Q2) Deflation:
A)can cause increases in output.
B)can cause budget surpluses.
C)can cause decreases in output.
D)will not affect output.
Q3) A liquidity trap results from:
A)the inflation tax.
B)expansionary fiscal policy.
C)the Fisher effect.
D)the zero bound of the nominal interest rate.
Q4) The debt is monetized when:
A)the budget is approved by Congress.
B)the Fed buys back debt via open-market purchases.
C)the government raises taxes.
D)transfer payments are decreased.
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Chapter 17: Crises and Consequences
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Sample Questions
Q1) Lehman Brothers was forced to declare bankruptcy in September 2008, when:
A)Barack Obama was elected president.
B)it purchased Bear Stearns, another investment bank.
C)one of its short-term lenders, JPMorgan Chase, demanded $5 billion in cash as collateral for loans it had made to Lehman.
D)the European Union abandoned the euro.
Q2) 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.
Q3) Why are banking-crisis recessions so bad?
Q4) What is maturity transformation? Explain the difference between maturity transformation by depository banks and by shadow banks.
Q5) What caused the banking crises in the 1990s in Finland, Sweden, and Japan?
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Chapter 18: Events and Ideas
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Sample Questions
Q1) The experience of the Great Depression led to the widespread acceptance of classical economics.
A)True
B)False
Q2) Reduction of interest rates was ineffective in fighting the Great Recession because:
A)Congress decreased government spending to balance the budget.
B)crowding-out occurred.
C)the economy was dangerously close to a liquidity trap.
D)businesses and consumers borrowed and spent so much that it caused an inflationary gap.
Q3) There may NOT have been business cycles in the United States before 1854 because:
A)the country was growing too rapidly to have a recession.
B)the banking system established by Alexander Hamilton prevented business cycles.
C)monetary policy conducted by the Fed was very successful.
D)the economy was agricultural.
Q4) Explain the rational expectations theory and how it predicts the usefulness of fiscal and monetary policy.
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17
Chapter 19: Open-Economy Macroeconomics
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Sample Questions
Q1) If the country's balance of payments on the current account is positive:
A)the balance of payments on the financial account is also positive.
B)the balance of payments on the financial account is negative, so that the sum of the accounts equals zero.
C)a country's flow of funds into the country is greater than the flow of funds out of the country.
D)the country's imports are greater than its exports.
Q2) Capital tends to move from:
A)less developed to more developed countries.
B)poorer countries to wealthier countries.
C)slow-growing countries to fast-growing countries.
D)fast-growing countries to slow-growing countries.
Q3) Floating exchange rates lead to more stable conditions for international trade.
A)True
B)False
Q4) If a country's currency appreciates, all other things equal, its exports and imports will increase.
A)True
B)False
Q5) What are the advantages and disadvantages of fixed and floating exchange rates?
Page 18
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Chapter 20: Graphs in Economics
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Sample Questions
Q1) (Figure: Seasonally Adjusted Unemployment Rate) Look at the figure Seasonally Adjusted Unemployment Rate. The distance between each labeled point on the horizontal axis is one year. Unemployment was ______ between 1/2001 and 1/2003 and ______ between 1/2007 and 1/2008.
A)increasing; decreasing B)increasing; increasing C)decreasing; increasing D)decreasing; decreasing
Q2) (Figure: Illustrating Slope) Look at the figure Illustrating Slope. In the graph, line 1 depicts X and Y to be:
A)positively related.
B)nonlinearly related.
C)unrelated.
D)negatively related.
Q3) If two variables are positively related, on a graph they will always be represented by:
A)a line or curve that slopes downward.
B)a straight line.
C)a horizontal line.
D)a line or curve that slopes upward.
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Page 19
Chapter 21: toward a Fuller Understanding of Present Value
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Sample Questions
Q1) To finance your education, you borrow $10,000 from a relative at an annual interest rate of 5%. You promise to pay her back in eight years. Which formula will provide the correct formula for calculating the value of your payment in eight years?
A)$10,000(1 + 0.05)
B)$10,000(1 + 5)
C)$10,000(1 + 0.05)<sup>8</sup>
D)$10,000(1 + 0.5)<sup>8</sup>
Q2) If a friend offers to pay you $1 five years from now, when the prevailing annual interest rate is 5%, what is the net present value of that $1 today?
A)$0.95
B)$1.05
C)$0.78
D)$1.50
Q3) The present value of a future payment:
A)decreases when the interest rate rises.
B)decreases when the interest rate falls.
C)decreases when the interest rate stays the same.
D)never changes regardless of the interest rate.
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Page 20