Macroeconomic Policy
Exam Answer Key
Course Introduction
Macroeconomic Policy explores the tools and strategies governments and central banks use to influence the performance and stability of an economy at the national and global levels. The course examines fiscal policy government spending and taxation and monetary policy central banking actions such as setting interest rates and controlling money supply. Students will analyze the goals and trade-offs involved in managing inflation, unemployment, and economic growth, and consider the impact of policy decisions on public debt, exchange rates, and international trade. Case studies and current events are employed to illustrate the challenges and outcomes of macroeconomic policy implementation in both advanced and developing economies.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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Chapter 1: First Principles
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Sample Questions
Q1) Handicapped-designated parking spaces are an example of the market economy achieving efficiency.
A)True
B)False
Answer: False
Q2) Julie is getting ready for final exams. She has three exams during the first three days of the exam period. To prepare, she has outlined a schedule that includes reviewing for her first exam on one day, her next exam on the following day, and her third exam on the third day. On each day, she has also allocated some time when she can watch TV or basically do nothing. Which best explains why Julie provides some time for leisure?
A)Julie is not that smart and cannot study that long.
B)Julie is slacking off and will most likely fail all of her finals.
C)Julie realizes that there are benefits to leisure time that outweigh the costs of constant studying.
D)Julie does not understand the importance of studying.
Answer: C
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3
Chapter 2: Economic Models
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Sample Questions
Q1) (Figure: Production Possibility Frontier) Look at the figure Production Possibilities Frontier. This production possibility frontier is:
A)bowed out because of increasing opportunity costs.
B)bowed in because of increasing opportunity costs.
C)bowed in because of constant cost of cars and computers.
D)linear because of constant costs.
Answer: A
Q2) In the circular-flow diagram households receive money for _____ in the _____ market.
A)producing and selling goods and services; product
B)selling resources; product
C)selling resources; factor
D)selling goods and services; factor
Answer: C
Q3) Which of the following is sold in the factor market?
A)hamburgers
B)video games
C)haircuts
D)labor
Answer: D
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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. This set of observations can be the result of the _____ Blu-ray players shifting to the _____.
A)demand for; right
B)demand for; left
C)supply of; right
D)supply of; left
Answer: C
Q2) The market equilibrium is found at the:
A)price where quantity demanded exceeds quantity supplied.
B)price where quantity demanded equals quantity supplied.
C)price where quantity supplied exceeds quantity demanded.
D)highest price the market will bear.
Answer: B
Q3) An increase in the supply of a good is caused by:
A)input prices rising.
B)a fall in the price of the good.
C)an increase in the number of sellers.
D)expectations of future price increases.
Answer: C
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Chapter 5: International Trade 5
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Sample Questions
Q1) Which of the following trade patterns is best explained by increasing returns?
A)Honduras exports bananas to the United States and the United States exports airplanes to Honduras.
B)Pakistan exports clothing to the United States and the United States exports airplanes to Pakistan.
C)Japan exports cars to the United States and the United States exports airplanes to Japan.
D)Mexico exports beef to the United States and the United States exports airplanes to Mexico.
Q2) In a single year, the Netherlands can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, Belgium can raise 50 tons of beef or produce 750 boxes of tulips. In autarky, the opportunity cost of 1 ton of beef in the Netherlands is:
A)100 tons of beef.
B)1,000 boxes of tulips.
C)10 boxes of tulips.
D)0.1 box of tulips.
Q3) Economists claim that opening up a market to imports leads to an increase in total surplus but that trade makes winners and losers. How does this work?
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Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) Macroeconomics focuses on:
A)the economy as a whole.
B)individual decisions.
C)wages.
D)the allocation of scarce resources.
Q2) Suppose the business cycle is expanding. Predict how the economic indicators of real gross domestic product, the unemployment rate, and the inflation rate are moving.
Q3) Your boss is impressed with your performance over the past year and has decided to give you a 5% increase in your salary. Are you unambiguously better off with your increased salary? What factors must be considered?
Q4) Business cycles are defined by the expansion, contraction, then expansion again of nominal GDP.
A)True
B)False
Q5) With regard to the aggregate price level, economists generally believe:
A)price stability is desirable.
B)inflation is worse than deflation.
C)deflation is worse than inflation.
D)inflation benefits most retired people.
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) The circular-flow diagram illustrates all of the following in the U.S. economy EXCEPT:
A)growing income inequality.
B)flows of money.
C)flows of goods and services.
D)the purchase and sale of factors of production.
Q2) (Table: Price and Output Data) Look at the table Price and Output Data. Between years 4 and 5, nominal GDP increased by: A)33%.
B)75%.
C)50%.
D)13%.
Q3) The purpose of indexing Social Security payments to the consumer price index is to: A)increase corporate profits.
B)justify continued government funding of the Bureau of Labor Statistics.
C)avoid the privatization of Social Security.
D)maintain the purchasing power of retirees.
Q4) Why do economists bother to compute real GDP? Why can't we just compare nominal GDP from one year to the next?
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) Structural unemployment consists of people who are unemployed because of:
A)temporary changes in jobs.
B)more labor demanded than labor supplied.
C)the time it takes for employers and workers to find each other.
D)more job hunters than jobs.
Q2) When the price level increases, everyone becomes poorer.
A)True
B)False
Q3) (Table: Unemployment and Employment Data) Look at the table Unemployment and Employment Data. If marginally attached workers are included in the labor force and in the unemployment rate, the unemployment rate in this economy is:
A)8.4%.
B)7.8%
C)5%.
D)3%.
Q4) Between 1921 and 1923 Germany underwent:
A)deflation.
B)disinflation.
C)an increase in the purchasing power of its currency.
D)hyperinflation.
Page 9
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) (Figure: Productivity) Look at the figure Productivity. An increase in physical capital per worker with everything else remaining unchanged is shown on the diagram as a movement from:
A)B to C.
B)A to C.
C)A to B.
D)B to A.
Q2) In the 1980s which factor contributed to slow growth in Latin America countries?
A)reliance on the drug trade
B)excessive government intervention in the economy
C)an overly high birth rate
D)excessive reliance on the United States for foreign trade
Q3) An example of human capital is a person's: A)money.
B)job skills.
C)capital goods or machines.
D)stocks and bonds.
Q4) A nation's real GDP per capita increased from $250 billion to $275 billion in one year. Calculate the nation's growth rate.
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) Which index includes smaller companies, many in the technology sector?
A)the Dow Jones Industrial Average
B)the producer price index
C)the S&P 500
D)the NASDAQ
Q2) A business will be likely to borrow to fund projects if:
A)the rate of return on the project is less than the interest rate on the loan.
B)the project will produce a good or service that is in high demand.
C)the rate of return on the project is at least as high as the interest rate on the loan.
D)the minimum efficient scale will be attained.
Q3) (Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. Other things being equal, if there is a decrease in the interest rate below 8%, _____ quantity of loanable funds will be demanded.
A)the same
B)a larger
C)a smaller
D)at first a smaller and then a larger
Q4) Compare stocks and bonds with respect to risk and return.
Page 11
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Sample Questions
Q1) The new stability pact signed in 2011 by the nations that adopted the euro required each country to:
A)balance its budget annually.
B)keep its actual budget deficit below 3% of its GDP.
C)keep its structural budget balance to 0.5% or less of its GDP.
D)supply a certain amount of euros each year.
Q2) Expansionary fiscal policies:
A)make the budget surplus smaller.
B)make the budget deficit smaller.
C)affect only taxes.
D)affect only government purchases of goods and services.
Q3) (Figure: Fiscal Policy Choices) Look at the figure Fiscal Policy Choices. It would be appropriate to use expansionary fiscal policy to shift aggregate demand in _____ from _____.
A)panel (b); AD<sub>1</sub> to AD<sub>2</sub>
B)panel (a); AD<sub>2</sub> to AD<sub>1</sub>
C)panel (a); AD<sub>1</sub> to AD<sub>2</sub>
D)panel (b); AD<sub>2</sub> to AD<sub>1</sub>
Q4) 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) (Table: ABC Bank's Balance Sheet) Look at the table ABC Bank's Balance Sheet. If the minimum reserve ratio for ABC Bank is 10%, then the bank is required to maintain minimum reserves of:
A)$10 million.
B)$15 million.
C)$9.5 million.
D)$7.5 million.
Q2) Using gold as an example, what is the difference between commodity money and commodity-backed money?
Q3) In the U.S. banks are required to keep capital equal to at least 7% of the value of their assets.
A)True
B)False
Q4) All of the following are responsibilities of the Federal Reserve EXCEPT to:
A)control the monetary base.
B)mint bills and coins.
C)oversee and regulate the banking system.
D)set the discount rate.
Q5) What caused the savings and loan crisis of the 1980s?
Q6) Explain how an increase in the discount rate affects the economy. Page 13
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Chapter 15: Monetary Policy
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Sample Questions
Q1) An increase in the supply of money will lead to a(n) _____ in equilibrium real GDP and a _____ equilibrium interest rate.
A)increase; higher B)increase; lower C)decrease; higher D)decrease; lower
Q2) One advantage of inflation targeting over the Taylor rule is that with inflation targeting, because the public knows the target in advance, uncertainty is reduced.
A)True
B)False
Q3) If the economy is in a recession and real GDP decreases, the demand for money will shift to the left.
A)True B)False
Q4) If the economy is operating at potential output, how does a contractionary monetary policy affect short-run and long-run prices and real output?
Q5) What is the goal of expansionary monetary policy, and how does it work in the short run?
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Chapter 16: Inflation, Disinflation, and Deflation
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Sample Questions
Q1) Which of the following is the BEST explanation for an upward-sloping short-run aggregate supply curve?
A)Prices are perfectly flexible.
B)Wages are perfectly flexible.
C)Wages and prices of some goods are sticky in the short run.
D)Wages and prices of some goods are flexible in the short run but sticky in the long run.
Q2) The long-run Phillips curve shows the relationship between:
A)potential aggregate output and the natural rate of unemployment at a given rate of expected inflation.
B)expected inflation and actual inflation after the expectation becomes embedded in people's minds.
C)the aggregate output and the aggregate price level at a given rate of expected inflation.
D)unemployment and inflation after expectations of inflation have had time to adjust to experience.
Q3) Suppose that the natural rate of unemployment is 5% and that the economy is operating at 97.5% of potential output. Use Okun's law to determine the unemployment rate.
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Chapter 17: Crises and Consequences
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Sample Questions
Q1) A credit crunch causes a recession because:
A)potential borrowers can't get loans or must pay very high interest rates, so they cut back on spending.
B)banks have a surplus of funds to loan, so interest rates fall to very low levels.
C)unemployment falls to very low levels, causing a problem of inflation.
D)interest rates are so low that investors' incomes fall, and they decrease their spending.
Q2) In a bank run:
A)the bank has a surplus of deposits and must turn customers away.
B)bank customers try to withdraw their deposits.
C)the bank runs out of money to lend to customers.
D)the bank runs out of profitable investments for the funds of its depositors.
Q3) Describe the financial contagion that occurred during the Irish banking crisis in 2008.
Q4) By acting as a lender of last resort, the central bank:
A)causes a vicious cycle of deleveraging.
B)prevents a vicious cycle of deleveraging.
C)is decreasing the amount of reserves that a bank is required to hold.
D)may keep interest rates low but will likely drive unemployment up.
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Chapter 18: Events and Ideas
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Sample Questions
Q1) The recommendation to use monetary policy to stabilize the economy and use fiscal policy only when monetary policy is ineffective is consistent with _____ macroeconomics.
A)classical
B)Keynesian
C)monetarist
D)Great Moderation consensus
Q2) The Great Moderation consensus is that discretionary fiscal policy can be destabilizing because of lags in adjusting policy.
A)True
B)False
Q3) The main reason that the Great Depression ended was:
A)effective monetary policy by the Fed under the leadership of Paul Volcker.
B)the defeat of Adolf Hitler in Germany in the 1930s.
C)Winston Churchill's foreign policy.
D)deficit spending in the United States to finance World War II.
Q4) Monetarists argue that discretionary monetary policy does more harm than good.
A)True
B)False
Q5) Why did the adoption of Keynesian economics come out of the Great Depression?
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Chapter 19: Open-Economy Macroeconomics
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Sample Questions
Q1) (Scenario: Purchasing Power Parity) Look at the scenario Purchasing Power Parity. For there to be purchasing power parity, the nominal exchange rate for the dollar must be:
A)£2.
B)£1.25.
C)£1.
D)£0.40.
Q2) A country has a financial account surplus if the balance on the:
A)financial account is negative.
B)financial account is positive.
C)current account is zero.
D)current account is positive.
Q3) If the U.S. is in an inflationary gap, the appropriate policy is to _____ the money supply to _____ interest rates.
A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease
Q4) Explain two purposes of devaluation and revaluation in a fixed exchange rate regime.
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Chapter 20: Graphs in Economics
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Sample Questions
Q1) If two variables are positively related:
A)as one goes up in value, the other must go up in value, too.
B)as one goes up in value, the other must go down in value.
C)there is always a trade-off between the two.
D)one variable is always the reciprocal of the other.
Q2) If a supply curve is represented by the equation Q = 10 + 2P, what is its slope?
A)1/2
B)1
C)2
D)5
Q3) The scaling of the axes of a time-series graph:
A)is not a critical element in presenting the intended information.
B)may change the interpretation of the data.
C)generally places the time period on the vertical axis.
D)generally puts values of a variable, such as the unemployment rate, on the vertical axis.
Q4) A linear curve has the same slope between every pair of points.
A)True
B)False
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Chapter 21: toward a Fuller Understanding of Present Value
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Sample Questions
Q1) Your grandmother has promised you $1,000 when you graduate in two years. At a 6% annual interest rate, you can borrow $890 and pay it all back with your grandmother's gift at graduation.
A)True
B)False
Q2) Which of the following statements is INCORRECT?
A)The dollar amount of a future payment is more than its present value.
B)The present value of a future payment is approximately the same as its future dollar amount.
C)The present value of a future payment is less than its future dollar amount. D)The bigger the future payment, the more its present value, all other things held constant.
Q3) You have recently graduated from high school and are debating whether to attend college or get a job. Assume that you can spend $50,000 today for tuition and receive your college degree in only one year. When you graduate, you will receive a job that pays you $100,000 immediately and $100,000 the following year. If you begin working immediately, you can earn $35,000 today and each of the next two years. If the annual interest rate is 10%, should you go to college?
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