Macroeconomic Theory Exam Bank
Course Introduction
Macroeconomic Theory explores the fundamental principles and models that describe the behavior of economies as a whole. The course examines key topics including national income determination, economic growth, business cycle fluctuations, unemployment, inflation, and government fiscal and monetary policies. Students will study classical and contemporary macroeconomic models to understand aggregate demand and supply, analyze the effects of economic shocks, and discuss policy interventions designed to stabilize and steer the economy. Emphasis will be placed on both theoretical frameworks and real-world applications to help students critically assess current macroeconomic issues and debates.
Recommended Textbook
Macroeconomics 4th Edition by Paul Krugman
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Chapter 1: First Principles
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Sample Questions
Q1) Mr. Freezee operates a fleet of ice cream trucks that drive around neighborhoods selling ice cream. He is trying to decide whether he should buy another ice cream truck to add to his fleet. He determines that one more truck will add $750 to his revenue but that the truck will also increase his costs by $1,000. Based on marginal analysis, Mr. Freezee decides:
A)that he should not purchase the truck, since the costs outweigh the benefits.
B)that he should purchase the truck, since the benefits outweigh the costs.
C)that he should purchase the truck, since his profits will rise by $250.
D)to purchase several trucks with the same costs and benefits.
Answer: A
Q2) A friend comes up to you and offers you a free ticket to a professional baseball game that night. You decide to attend the game. The game takes five hours and costs you $15 for transportation. If you had not attended the game, you would have worked at your part-time job for $8 an hour. What is the cost to you of attending the game?
A)The cost is zero-the ticket is free.
B)$65
C)$40
D)$55
Answer: D
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Page 3
Chapter 2: Economic Models
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Sample Questions
Q1) In the circular-flow diagram, the factor market is where:
A)households buy factors of production.
B)households buy goods and services.
C)businesses buy goods and services.
D)businesses buy factors of production.
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) In the circular-flow diagram firms buy _____ in the _____ market.
A)goods and services; product
B)goods and services; factor
C)resources; product
D)resources; factor
Answer: D
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Page 4
Chapter 3: Supply and Demand
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Q1) Customers used to pay inside before pumping gas. When gas stations introduced paying at the pump, thus decreasing production costs, there was a shift to the _____ in the _____ curve and _____ pressure on gas prices.
A)right; supply; eased
B)left; supply; increased
C)right; demand; increased
D)left; demand; eased
Answer: A
Q2) Which of the following best exemplifies the law of demand?
A)As income taxes rise, fewer new cars are purchased.
B)As the price of corn rises, more acres of corn are planted.
C)As the price of a car rental rises, fewer cars are rented.
D)As the population rises, more electricity is consumed.
Answer: C
Q3) A decrease in supply means:
A)a shift to the left of the entire supply curve.
B)a movement down the supply curve as prices go down.
C)that less will be demanded at every price.
D)that more will be supplied at every price.
Answer: A
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Chapter 5: International Trade 5
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Sample Questions
Q1) (Figure: The Production Possibilities for Two Countries) Look at the figure The Production Possibilities for Two Countries. If Indonesia specializes completely in the production of the good of its comparative advantage, it will produce:
A)600 radios.
B)800 radios.
C)800 tires.
D)1,200 tires.
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. Consumer surplus after international trade is equal to the area:
A)A.
B)A + B.
C)A + B + D + E.
D)A + B + D + E - C.
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?
Q4) Explain the difference between comparative advantage and absolute advantage.
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Page 6
Chapter 6: Macroeconomics: the Big Picture
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Sample Questions
Q1) During a recession, one will often observe:
A)rising aggregate output.
B)rising unemployment rates and falling aggregate output.
C)rising employment rates.
D)zero unemployment rates.
Q2) A pattern of expansion, then recession, then expansion again is a(n):
A)annual trend.
B)secular trend.
C)business cycle.
D)consumer cycle.
Q3) Changing the level of government spending is an example of _____ policy.
A)fiscal
B)interest rate
C)monetary
D)exchange rate
Q4) The alternation between recessions and expansions is known as the:
A)unemployment rate.
B)long-run economic growth.
C)business cycle.
D)macroeconomy.
Page 7
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Sample Questions
Q1) (Scenario: Real GDP) Look at the scenario Real GDP. Using year 1 as the base year, the growth rate of real GDP from year 1 to year 2 is:
A)10%.
B)7.8%.
C)19.7%.
D)8.8%.
Q2) Which of the following is included in the calculation of GDP?
A)expenditure on new construction
B)a retiree's monthly Social Security check
C)buying a house built 10 years ago
D)buying shares of Home Depot stock
Q3) The inflation-adjusted measure of aggregate output typically used by economists is called:
A)aggregate output.
B)nominal gross national product.
C)net domestic product.
D)real gross domestic product.
Q4) Income tax brackets are indexed to the consumer price index.
A)True
B)False
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Chapter 8: Unemployment and Inflation
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Sample Questions
Q1) If Jim's income is $80,000 and the price level is 4, then Jim's real income is:
A)$20,000.
B)$320,000.
C)$84,000.
D)$80,000.
Q2) An increase in the number of discouraged workers in the economy tends to:
A)raise the official unemployment rate.
B)lower the official unemployment rate.
C)lower the number of people who are frictionally unemployed.
D)increase the number of people who are structurally unemployed.
Q3) (Figure: The Effect of a Minimum Wage) Look at the figure The Effect of a Minimum Wage. Suppose the labor market is in equilibrium at E when the government imposes a minimum wage of W<sub>F</sub>. The quantity of labor supplied may_____, resulting in structural unemployment.
A)decrease to Q<sub>D</sub>
B)stay at Q<sub>E</sub>
C)increase to Q<sub>S</sub>
D)stay at W<sub>E</sub>
Q4) Explain the difference between shoe-leather costs and menu costs of inflation.
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Chapter 9: Long-Run Economic Growth
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Sample Questions
Q1) In 1820, Mexico had a higher real GDP per capita than Japan. Yet now Japan is one of the richest countries in the world and Mexico is poor. Japan's high rate of economic growth can be explained by all of the following EXCEPT a high:
A)investment in physical capital.
B)investment in human capital.
C)investment in technological progress.
D)level of government interference.
Q2) (Figure: Technological Progress and Productivity Growth) Look at the figure Technological Progress and Productivity Growth. Which of the following changes in real GDP is most likely to have resulted from an increase in domestic savings?
A)A to B
B)B to A
C)C to B
D)C to A
Q3) One factor contributing to a slow rate of economic growth in Latin America is that broad basic education has been underemphasized in most countries.
A)True
B)False
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Chapter 10: Savings, Investment Spending, and the Financial System
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Sample Questions
Q1) A firm does NOT want to borrow money for a project when:
A)the interest rate is higher than the rate of return on the project.
B)the interest rate is lower than the rate of return on the project.
C)the interest rate is positive.
D)the rate of return on the project is positive.
Q2) Physical capital is purchased through investment spending, which in turn is mostly financed out of:
A)taxes.
B)savings.
C)import tariffs.
D)consumption expenditure.
Q3) (Figure: Crowding Out) Look at the figure Crowding Out. If the demand for loanable funds curve shifts to the right, the result will be a(n) _____ in the interest rate and a(n) _____ in the total amount of borrowing in the funds market.
A)increase; increase B)increase; decrease C)decrease; decrease D)decrease; increase
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) Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.
A)right; inflationary
B)right; recessionary
C)left; inflationary
D)left; recessionary
Q2) If the actual output lies below potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
A)increase government purchases; AD; left
B)increase transfer payments; AS; right
C)increase tax rates; AD; right
D)increase government purchases; AD; right
Q3) A budget deficit necessarily indicates that fiscal policy is expansionary.
A)True
B)False
Q4) Why does a $1,000 tax cut generate a smaller multiplier effect than a $1,000 increase in government purchases?
Q5) The economy is in an inflationary gap. What are the fiscal policy options available to the government?
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Chapter 14: Money, Banking, and the Federal Reserve System
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Q1) The _____ multiplier is equal to _____.
A)reserve; the required reserve ratio
B)bank loan; the required reserve ratio divided by 1
C)money; 1 divided by the required reserve ratio
D)excess reserve; change in reserves divided by the change in deposits
Q2) The Federal Reserve regional banks and the Board of Governors supervise, examine, and regulate commercial banks.
A)True
B)False
Q3) When you discover money in your coat that you put there last winter, you unexpectedly find you were using money primarily as a(n):
A)medium of exchange.
B)expander of economic activity.
C)factor of production.
D)store of value.
Q4) In the federal funds market, governments of different countries obtain long-term loans from the governments of other countries.
A)True
B)False
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Chapter 15: Monetary Policy
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Sample Questions
Q1) According to the liquidity preference model, the equilibrium interest rate is determined by:
A)the supply of and demand for loanable funds.
B)the supply of and demand for money.
C)the level of investment spending and saving.
D)the International Monetary Fund.
Q2) If the Federal Reserve wants to close an inflationary gap, it will _____ the money supply and _____ the interest rate, thus _____ investment spending and GDP. The AD curve will shift to the _____.
A)increase; raise; increasing; right
B)increase; lower; lowering; left
C)decrease; raise; lowering; left
D)decrease; lower; lowering; right
Q3) If the Federal Reserve wants to lower the interest rate, it will:
A)decrease the money supply.
B)increase the money supply.
C)keep the money supply unchanged.
D)mandate a lower interest rate.
Q4) What is the goal of contractionary 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 happen(s) when real GDP grows more slowly than potential GDP?
A)The output gap becomes more positive.
B)The output gap and the unemployment rate both increase.
C)The output gap and the unemployment rate both decrease.
D)The unemployment rate rises.
Q2) The difference between the growth rate of actual and potential GDP is the output gap.
A)True
B)False
Q3) Expectations of a higher inflation rate shift the short-run aggregate supply curve to the _____, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _____.
A)left; down
B)right; up
C)left; up
D)right; down
Q4) Explain how the output gap is related to the unemployment rate and the natural unemployment rate.
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Chapter 17: Crises and Consequences
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Sample Questions
Q1) The special office created by the Dodd-Frank Act to police financial industry practices and protect borrowers is called the:
A)Food and Drug Administration.
B)Consumer Financial Protection Bureau.
C)Board of Governors.
D)Consumer Protection Agency.
Q2) Proponents argued that fiscal stimulus was appropriate after the 2008 financial crisis because:
A)austerity would only increase inflation and unemployment.
B)political instability in the Middle East was causing a depreciation of the euro and the dollar.
C)the lag associated with automatic stabilizers was too long.
D)the effectiveness of monetary policy was limited by the zero bound on interest rates.
Q3) The panic of 1893 began when:
A)the Treaty of Paris was signed, ending the American Revolution.
B)the Titanic sank.
C)real estate developers built too many office buildings.
D)the Philadelphia and Reading Railroad failed.
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Chapter 18: Events and Ideas
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Sample Questions
Q1) The argument that households and firms view an increase in government spending as a sign that taxes will rise in the future and decrease current spending in anticipation of higher future taxes is called:
A)debt overhang.
B)the natural rate hypothesis.
C)supply-side economics.
D)Ricardian equivalence.
Q2) Nearly all economists agree that increases in government spending can _____ aggregate _____.
A)increase; supply B)decrease; supply C)decrease; demand
D)increase; demand
Q3) According to the Great Moderation consensus, fiscal policy should be the main stabilization tool.
A)True B)False
Q4) Classical economics is based primarily on the works of John Maynard Keynes. A)True B)False
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Chapter 19: Open-Economy Macroeconomics
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Q1) Suppose that China's target exchange rate for the yuan is below its equilibrium exchange rate. What is the possible disadvantage of using monetary policy to achieve the target exchange rate?
Q2) Since they reduce uncertainty, fixed exchange rates are good for business.
A)True B)False
Q3) After a revaluation, all other things equal, probably exports will increase and imports will decrease.
A)True
B)False
Q4) Suppose that the value of the euro fell from $1.32 on April 30, 2012, to $1.24 on July 5, 2012. This implies that during this period the euro _____ and the dollar _____.
A)depreciated; appreciated
B)appreciated; depreciated
C)depreciated; fluctuated
D)appreciated; did not change
Q5) Britain, Sweden, and Switzerland chose not to adopt the euro in 1999. A)True B)False
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Chapter 20: Graphs in Economics
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Sample Questions
Q1) (Figure: Demand and Supply of Shirts) Look at the figure Demand and Supply of Shirts. In the graph, if the line labeled D shows how many shirts per week will be demanded at various prices, then it is clear that as the price of shirts falls:
A)fewer shirts will be demanded.
B)more shirts will be demanded.
C)the same quantity of shirts will be demanded.
D)it is unclear what will happen to the demand for shirts.
Q2) If two variables are negatively related, 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.
Q3) A bar graph:
A)shows the relative amounts attributable to different categories.
B)may be shown by vertical bars to illustrate the comparative sizes of different observations.
C)may be shown by horizontal bars to illustrate the comparative sizes of different observations.
D)A, B, and C.
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Chapter 21: toward a Fuller Understanding of Present Value
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Q1) You have won the lottery and have been given the choice of receiving $5 million today or $10 million after 10 years. Assume that the interest rate remains fixed at 10% per year for the entire 10-year period. You should choose:
A)$10 million after 10 years, since this is more than you would get if you invested $5 million for 10 years at an annual rate of interest of 10%.
B)$10 million after 10 years, since that is a larger amount than the present value of $5 million paid after 10 years.
C)$5 million today, since it would be worth more than $10 million after 10 years if the $5 million earned interest at the rate of 10% per year.
D)$10 million after 10 years, since it is the larger amount.
Q2) If a firm considering the purchase of an asset determines that the asset's net present value is greater than zero, then _____ the asset will _____ profits.
A)not buying; increase
B)purchasing; increase C)purchasing; decrease D)not buying; decrease
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