Macroeconomic Policy
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Course Introduction
Macroeconomic Policy explores the strategies and decisions employed by governments and central banks to influence a countrys overall economic performance. The course examines key policy tools such as fiscal policy (taxation and government spending), monetary policy (interest rates and money supply), and exchange rate interventions. Students will analyze how these policies are used to address issues like inflation, unemployment, economic growth, and financial stability. Through theoretical models and real-world case studies, the course emphasizes the challenges, effectiveness, and potential unintended consequences of macroeconomic policy in both domestic and global contexts.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Page 2
Chapter 1: A Tour of the World
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Q1) Discuss the types of policies that could be implemented to reduce European unemployment.
Answer: There are basically two sets of policies.First,policy makers could reduce labor market rigidities that some economists believe have contributed to the high unemployment.Some examples of labor market rigidities are high unemployment benefits,high minimum wages,and excessive job protection regulations.The second set of policies includes bad labor relations and inadequate macroeconomic policies.
Q2) The standard of living typically refers to A)the rate of unemployment.
B)output per capita.
C)wealth per capita.
D)all of the above
Answer: B
Q3) The most recent financial crisis started in A)stock market.
B)bond market.
C)foreign exchange market.
D)housing market.
Answer: D
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Chapter 2: A Tour of the Book
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Q1) Changes in GDP in the medium run are determined primarily by A)demand factors.
B)supply factors.
C)monetary policy.
D)all of the above
Answer: B
Q2) In a given year,suppose a company spends $100 million on intermediate goods and $200 million on wages,with no other expenses.Also assume that its total sales are $800 million.The value added by this company equals
A)$200 million.
B)$300 million.
C)$500 million.
D)$700 million.
E) $800 million.
Answer: D
Q3) Explain why economists care about inflation.
Answer: Inflation will cause relative prices to change.It will also cause changes in the distribution of income.Inflation will lead to other distortions such as tax distortions and uncertainty.
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Chapter 3: The Goods Market
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Q1) Suppose that,at a given level of disposable income,consumers decide to save more.Explain what effect this decision will have on equilibrium income.Also,explain what effect this decision will have on the level of saving once the economy has reached the new equilibrium.
Answer: This is the paradox of saving.Here,consumption will fall causing a reduction in demand and a reduction in output.Despite the initial increase in saving at the initial level of income,saving will return to the initial level as income falls in order to maintain the alternative equilibrium condition: S = I.So,the initial increase in the desire to save will have no permanent effect on the level of saving.
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) 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) An increase in income will cause
A)a reduction in the supply of central bank money.
B)a reduction in the demand for currency.
C)an increase in the demand for reserves.
D)none of the above
Q2) The money demand curve will shift to the left when which of the following occurs?
A)a reduction in the interest rate
B)an increase in the interest rate
C)an open market sale of bonds by the central bank
D)an increase in income
E) none of the above
Q3) Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950.Given this information,we know that the interest rate on the bond is A)5.3%.
B)9.5%.
C)10%.
D)90%.
E) 110%.
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) Suppose the economy is operating on the LM curve but not on the IS curve.Given this information,we know that
A)the goods market is in equilibrium and the money market is not in equilibrium.
B)the money market and bond markets are in equilibrium and the goods market is not in equilibrium.
C)the money market and goods market are in equilibrium and the bond market is not in equilibrium.
D)the money, bond and goods markets are all in equilibrium.
E) neither the money, bond, nor goods markets are in equilibrium.
Q2) Based on your understanding of the IS-LM model,graphically illustrate and explain what effect a reduction in consumer confidence will have on output,the interest rate,and investment.
Q3) Increases in the budget deficit are believed to cause reductions in investment.Based on your understanding of the IS-LM model,will a fiscal policy action that causes a reduction in the budget deficit cause an increase in investment? Explain.
Q4) Explain in detail what effect a reduction in government spending will have on: (1)the LM curve; and (2)the IS curve.
Q5) First,define the LM curve.Second,explain why it has its particular shape.
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) Suppose bank A has assets of 100,liabilities of 80,and capital of 20.Its leverage ratio is A)4.
B)5.
C)10.
D)9.
Q2) AIG provide CDS against
A)insolvency.
B)default risk.
C)illiquidity.
D)none of the above
Q3) Securitization can not help financial intermediaries
A)diversify their portfolios.
B)avoid bankruptcy.
C)attract more investors to buy and hold their securities.
D)decrease the cost of borrowing.
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Chapter 7: The Labor Market
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Q1) An increase in the minimum wage will tend to cause which of the following?
A)an upward shift in the WS curve
B)a downward shift in the WS curve
C)an upward shift in the PS curve
D)a downward shift in the PS curve
E) none of the above
Q2) Labor productivity is represented by which of the following?
A)the ratio of output to employment
B)workers per unit of capital
C)capital per worker
D)the ratio of output to population
E) the ratio of output to the labor force
Q3) A reduction in the minimum wage will tend to cause which of the following?
A)an upward shift in the WS curve
B)a downward shift in the WS curve
C)an upward shift in the PS curve
D)a downward shift in the PS curve
E) none of the above
Q4) Explain why nominal wages are a function of the expected price level.
Q5) Explain several implications and characteristics of efficiency wage theories.
Page 9
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) Based on the 'early incarnation' of the Phillips curve,explain what effect an increase in the unemployment rate will have on the inflation rate.
Q2) Explain the natural unemployment rate and its relationship to inflation rate.
Q3) Assume that expected inflation is based on the following: t = t .An increase in will cause
A)an increase in the natural rate of unemployment.
B)a reduction in the natural rate of unemployment.
C)no change in the natural rate of unemployment.
D)inflation in period t to be more responsive to changes in unemployment in period t.
Q4) Which of the following individuals first discovered the relationship between unemployment and inflation?
A)Solow
B)Samuelson
C)Friedman
D)Phillips
Q5) Explain how changes in the proportion of contracts that are indexed affect how a given change in monetary policy will affect economic activity.
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Model
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Q1) In the IS-LM-PC model,which of the following is assumed to be exogenous?
A)G
B)C
C)I
D)Y
Q2) For this question,assume that the economy is initially operating at the natural level of output.An increase in unemployment benefits will cause A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.
Q3) The wage setting relation is
A)downward sloping.
B)upward sloping.
C)vertical.
D)horizontal.
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) Briefly explain what effect a reduction in the saving rate will have on growth.
Q2) Explain each of the following: (1)constant returns to scale; (2)decreasing returns to capital; and (3)decreasing returns to labor.
Q3) Assume that employment decreases by 3%.Holding all other factors constant,we know with certainty that which of the following will occur?
A)output will decrease by 3%
B)output per capita will decrease by 3%
C)output will decrease by less than 3%
D)the capital labor ratio will decrease
E) none of the above
Q4) Assume that constant returns to scale exists and that N and K both decrease by 3%.Given this information,we know that
A)output (Y)will decrease 6%.
B)Y will decrease by 3%.
C)Y will decrease by less than 3%.
D)the capital-labor ratio (K / N)will decrease.
Q5) Explain why economists do not use exchange rates to compare standards of living across countries.Also,discuss what economists do to avoid these problems.
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) Graphically illustrate and explain the effects of an increase in the rate of depreciation ( )on the Solow growth model.In your graph,clearly label all curves and equilibria.
Q2) In the absence of technological progress,we know with certainty that an increase in the saving rate will cause which of the following?
A)increase steady state consumption
B)decrease steady state consumption
C)have no effect on steady state consumption
D)increase steady state consumption only if the increase in saving exceeds the increase in depreciation
E) increase steady state consumption only if the increase in saving is less than the increase in depreciation
Q3) Explain the difference between fully funded social security system and pay-as-you-go social security system.
Q4) Suppose there is an increase in the saving rate.Explain what effect this will have on output,output per worker,the rate of growth of output,and the rate of growth of output per worker.
Q5) Explain the relationship among output,saving,and investment.
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Chapter 12: Technological Progress and Growth
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Q1) What factors determine technological progress?
Q2) Refer to the information above.Given this information,the steady state rate of growth of Y / NA is
A)0)
B)2%.
C)3%.
D)5%.
E) 16%.
Q3) Which of the following represents the appropriability of research?
A)the protection given to new products by the law
B)how R&D spending translates into new ideas
C)the extent to which firms benefit from the results of their own R&D spending
D)the rate of technological progress
E) both B and C
Q4) Convergence of output per capita across countries has come from
A)a convergence of saving rates.
B)a convergence of the accumulation of capital.
C)higher technological progress from the countries that started behind.
D)all of the above
Q5) Explain what factors determine the slope of the required investment line.
Page 14
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) Suppose the aggregate production function is represented by Y = AN.Which of the following expressions represents the number of additional workers required to increase production by one unit?
A)1 / A
B)Y / N
C)1 / N
D)1 / Y
E) none of the above
Q2) Suppose workers' and firms' expectations of the price level and productivity are accurate.In this case,a reduction in productivity will cause which of the following?
A)a decrease in both the real wage and the natural rate of unemployment
B)an increase in both the real wage and the natural rate of unemployment
C)a decrease in the real wage and no change in the natural rate of unemployment
D)an increase in the real wage and a decrease in the natural rate of unemployment
E) none of the above
Q3) Suppose an economy experiences an increase in productivity.Explain both the short-run and medium-run effects of this increase in productivity on output,employment,and the unemployment rate.
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Chapter 14: Financial Markets and Expectations
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Q1) Which of the following represents a stock's fundamental value?
A)the price the stock would sell at in the midst of a rational bubble
B)the price the stock would sell at if the interest rate were zero
C)the present value of its expected future dividend payments
D)the simple sum of its future dividend payments
E) none of the above
Q2) For this question,assume that the Fed is expected to respond to any event by keeping output constant (i.e.,equal to its initial level).An unexpected increase in government spending will cause
A)stock prices to fall.
B)stock prices to rise.
C)no change in stock prices.
D)an ambiguous effect on stock prices.
Q3) For this question,assume that there is perfect arbitrage in the stock market.Given this assumption,economists believe that
A)movements in stock prices can be easily predicted.
B)movements in stock prices are largely unpredictable.
C)most stocks will diverge from their fundamental value.
D)stocks will generally earn a lower rate of return than bonds.
E) the rate of return on stocks will be equal to the rate of return on bonds.
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Chapter 15: Expectations, consumption, and Investment
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Q1) Which of the following is a reason that consumption depends on current income,and not just on total wealth?
A)Banks will not always lend money to those who want to consume more than their income.
B)The anticipation of future financial distress makes some people reluctant to borrow.
C)Low income people may prefer to postpone some consumption until later years, when their incomes are higher.
D)all of the above
E) none of the above
Q2) Suppose firms expect future output to be lower and future interest rates to be lower.Given this information,how will firms alter investment in the current period? Explain.
Q3) A reduction in sales will generally cause
A)an increase in profit per unit of capital.
B)a decrease in profit per unit of capital.
C)no change in profit per unit of capital.
D)ambiguous effects on profit per unit of capital.
E) none of the above
Q4) What is Tobin's q? How tight is the relation between Tobin's q and investment?
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Chapter 16: Expectations, output, and Policy
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Q1) Compare the following three ways to model expectations: animal spirits,adaptive expectations,and rational expectations.
Q2) Suppose there is a simultaneous reduction in expected future output and reduction in the future expected interest rate.This will cause which of the following to occur?
A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period
E) an ambiguous effect on the position of the IS curve in the current period
Q3) Suppose there is a reduction in the expected future interest rate.This will cause which of the following to occur?
A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period
Q4) Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output.
Q5) Explain the determinants of aggregate private spending.
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Chapter 17: Openness in Goods and Financial Markets
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Q1) 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
Q2) A nominal appreciation of the Japanese yen (against all currencies)indicates that
A)the yen price of the U.S. dollar has increased.
B)the yen price of the U.K. pound has increased.
C)the number of units of foreign currency that one can obtain with one yen has increased.
D)all of the above
Q3) Explain what factors determine the expected return on a foreign bond.
Q4) Suppose the interest parity condition holds.Also assume that the one-year interest rate in the United States is 6% and that the one-year interest rate in Canada is 6%.What does this imply about the current versus future expected exchange rate (for the U.S.and Canadian dollars)? Explain.
Q5) What is uncovered interest parity? Explain.
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Chapter 18: The Goods Market in an Open Economy
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Q1) Which of the following represents the demand for domestic goods?
A)C + I + G
B)C + I + G + X
C)C + I + G - IM
D)C + I + G + X + IM
E) C + I + G + X - IM /
Q2) Explain what the J-curve is and why it occurs.
Q3) 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.
Q4) The evidence suggests that in rich countries,a depreciation
A)immediately improves the trade balance.
B)eventually improves the trade balance.
C)first improves, but then worsens the trade balance.
D)has no effect on the trade balance.
E) none of the above
Q5) Explain the determinants of exports and imports.
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Chapter 19: Output, the Interest Rate, and the Exchange Rate
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Q1) Assume that policy makers are pursuing a fixed exchange rate regime.Now suppose that the foreign interest rate falls.Discuss what policy makers must do to maintain the pegged exchange rate.Also discuss what effect this will have on domestic output and net exports.
Q2) In a flexible exchange rate regime,an increase in the foreign interest rate (i*)will cause
A)the IP curve to shift to the left / up.
B)the IP curve to shift to the right / down.
C)a movement along the IP curve.
D)neither a shift nor movement along the IP curve.
Q3) Under a fixed exchange rate regime,the central bank must act to keep
A)P = P*.
B)the real exchange rate fixed.
C)i = i*.
D)E = 1.
E) none of the above
Q4) 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.
Page 21
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Chapter 20: Exchange Rate Regimes
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Q1) Suppose output is above the natural level of output.In a fixed exchange rate regime,explain the two ways the economy can return to the natural level of output.
Q2) Suppose foreign exchange markets anticipate a devaluation for country A.Further assume that policy makers in country A will continue to fix its nominal exchange rate.In order to peg the currency at its original level,which of the following must occur?
A)increase the domestic interest rate
B)increase the domestic price level
C)convince trading partners to raise their interest rates
D)all of the above
E) none of the above
Q3) Euro coins and bank notes were introduced in January A)2002.
B)2001. C)2000.
D)1999.
Q4) Explain each of the following and why each might be used: hard pegs,currency boards,and dollarizations.
Q5) Does Europe constitute an optimal common currency area? Why?
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Chapter 21: Should Policy Makers Be Restrained
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Q1) In the United States,presidential elections occur every four years.If a political business cycle exists in the United States,in which year of a presidential term,all else fixed,would we expect output growth to be highest?
A)the first year
B)the second year
C)the third year
D)the fourth year
Q2) Arguments for placing restraints on policy makers fall into which of the following?
A)policy makers understand completely how the economy operates
B)policy makers have good intentions, but end up doing more harm than good
C)policy makers do what is best for them, not necessarily what is best for the country
D)all of the above
E) both B and C
Q3) The PAYGO rule was allowed to expire in which year?
A)1990
B)1991
C)2002
D)the PAYGO rule still exists
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Chapter 22: Fiscal Policy: a Summing up
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Q1) Explain the economic costs of hyperinflation.
Q2) In the medium run,a tax increase that causes a reduction in the budget deficit will
A)affect only the price level.
B)not affect the price level but will alter the composition of output.
C)not affect the level of output, but will affect the composition of output.
D)affect both the level and composition of output.
Q3) Using taxes to finance a war,rather than deficits,
A)leads to a greater future capital stock.
B)is generally not proposed by economists.
C)shares less of the burden of the war with future generations.
D)all of the above
E) none of the above
Q4) If the Ricardian equivalence proposition is correct,then
A)deficits harm future generations.
B)deficits reduce investment spending.
C)deficits stimulate the economy in the short run.
D)all of the above
E) none of the above
Q5) Explain fiscal dominance.
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Chapter 23: Monetary Policy: a Summing up
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Q1) In the medium run,an increase in the rate of growth of nominal money will cause
A)lower nominal and lower real interest rates.
B)lower nominal interest rates and no change in the real interest rate.
C)an increase in inflation and an increase in output growth.
D)a proportionate increase in inflation.
Q2) LTV ratio appears to be positively related to A)bond price.
B)stock price.
C)housing price.
D)none of the above
E) all of the above
Q3) Chairmen of the Federal Reserve Board
A)serve 14-year terms as chairmen.
B)serve 4-year renewable terms as chairmen.
C)also serve as members of the administration.
D)serve 4-year non-renewable terms as chairmen.
E) none of the above
Q4) Discuss the current debate on the optimal inflation target.
Q5) Explain the macroeconomic effects of changes in monetary policy in: (1)the short run; and (2)the medium run.
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) Work by Doug Diamond and Philip Dybvig in the 1980s had clarified the nature of A)unemployment.
B)bank runs.
C)inflation.
D)growth.
Q2) The crisis reflects a major intellectual failure of macroeconomics to understand the macroeconomic importance of A)financial system.
B)growth.
C)unemployment.
D)inflation.
Q3) The main debate during the 1960s was
A)between Keynesians and classicals.
B)between new Keynesians and new classicals.
C)between Keynesians and monetarists.
D)between new Keynesians and monetarists.
Q4) Discuss the consensus on the adjustment process after the crisis.
Q5) First,what is the Lucas critique? Second,explain how it might relate to the implementation of monetary policy.
Q6) Briefly discuss new growth theory.
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Chapter 25: Appendix
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Q1) If GDP is less than GNP,we know with certainty that A)a budget deficit exists.
B)a trade surplus exists.
C)a trade deficit exists.
D)none of the above
Q2) Which of the following is not included in National Income?
A)indirect taxes
B)wages and salaries
C)net interest
D)rental income of persons
Q3) Changes in business inventories will be positive when A)production exceeds sales.
B)production is less than sales.
C)a trade surplus exists.
D)a budget surplus exists.
Q4) Net national product (NNP)is equal to A)personal income minus taxes.
B)GNP minus consumption of fixed capital.
C)GDP plus consumption of fixed capital.
D)national income plus consumption of fixed capital.
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