Course Introduction
Macroeconomic Theory Exam Preparation Guide
Macroeconomic Theory provides a comprehensive examination of the aggregate behavior of economies, focusing on broad phenomena such as national income, output, employment, inflation, and economic growth. The course explores key models and frameworks used to analyze the functioning of economies, including the classical, Keynesian, and modern approaches to macroeconomic policy. Students will develop an understanding of how governmental fiscal and monetary policies influence economic stability and growth, the determination of interest rates, the interplay of aggregate demand and supply, and the challenges of unemployment and inflation. Emphasis is placed on both theoretical foundations and practical applications to real-world economic issues.
Recommended Textbook
Foundations of Macroeconomics 5th Edition by Robin Bade
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Chapter 1: Getting Started
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Q1) Huey has eaten two hamburgers and is considering a third.The marginal benefit in his decision is the pleasure from consuming
A) the two previous hamburgers.
B) all three hamburgers.
C) just the third hamburger.
D) just the second hamburger.
E) the third hamburger minus the pleasure from consuming zero hamburgers.
Answer: C
Q2) Which of the following is an example of a normative statement?
A) If cars become more expensive, fewer people will buy them.
B) Car prices should be affordable.
C) If wages increase, firms will fire some workers.
D) Fewer people die in larger cars than in smaller cars.
E) Cars emit pollution.
Answer: B
Q3) What does the slope of the line shown in the above figure equal?
Answer: The slope equals the change in variable on the y-axis divided by the change in the variable on the x-axis, or (5 - 10)/(60 - 100) = 0.125.
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Chapter 2: The Usand Global Economies
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Q1) The personal distribution of income shows
A) that labor receives the largest percentage of total income.
B) how profit accounts for the largest fraction of total income.
C) that the richest 20 percent of households receive 23 percent of total income.
D) that interest accounts for most of the income of the richest 20 percent of households.
E) that the poorest 20 percent of households receive less than 4 percent of total income.
Answer: E
Q2) Compare and contrast the world population with that of the United States.Is the United States becoming a larger or a smaller part of the world's population?
Answer: The U.S.population was approximately 306 million in 2009.It is growing at a rate of about one person in every 12 seconds.The world population in 2009 was about 6.8 billion and is growing at a rate of 30 people in the same 12 seconds.Hence the United States is becoming a smaller fraction of the world's population.
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Chapter 3: The Economic Problem
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Q1) The figure above shows the production possibilities frontier for a country.How does the opportunity cost of compact cars forgone per SUV gained moving from point C to point B compare with the movement from point B to point A?
A) The opportunity cost of moving from point C to point B is greater than the movement from point B to point A.
B) The opportunity cost of moving from point C to point B is the same as the movement from point B to point A.
C) The opportunity cost of moving from point C to point B is less than the movement from point B to point A.
D) The opportunity costs cannot be compared because the units of moving from point C to point B differ from the units of moving from point B to point A.
E) More information is needed to determine how the two opportunity costs compare.
Answer: C
Q2) A production point beyond the production possibilities frontier represents what?
Answer: A production point beyond the production possibilities frontier is an unattainable combination of products.
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Chapter 4: Demand and Supply
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Q1) If the price is below the equilibrium price,
A) there is a surplus.
B) there is a shortage.
C) the supply curve will shift rightward.
D) the supply curve will shift leftward.
E) the demand curve will shift leftward.
Q2) If both producers and consumers believe that a product's price will rise in the future, then at the present, demand ________ and supply ________.
A) increases; increases
B) decreases; decreases
C) increases; decreases
D) decreases; increases
E) does not change; does not change
Q3) To be part of the supply for a good, a producer must be
A) only able to supply the good.
B) only willing to supply the good.
C) both able and willing to supply the good.
D) both able and willing to supply the good, and have already identified a buyer.
E) both able and willing to supply the good, and have already sold the good.
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Chapter 5: Gdp: a Measure of Total Production and Income
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Q1) Everything else the same, if government expenditure increases by $400 billion and imports increase by $400 billion, then GDP
A) increases by $400 billion.
B) increases by $200 billion.
C) decreases by $400 billion.
D) does not change.
E) decreases by $200 billion.
Q2) Gross Domestic Product measures the
A) quantity of the goods and services produced in a given year, listed item by item, within a country.
B) income of the business sector within a country.
C) market value of the final goods and services produced in a given year within a country.
D) measures the market value of the domestic labor in a given year within a country.
E) market value of the final goods and services consumed by households in a given year within a country.
Q3) Explain how the purchases of used goods and of financial assets affect GDP.
Q4) Explain how GDP is measured according to the expenditure and income approaches.
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Chapter 6: Jobs and Unemployment
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Q1) As a percentage of total employment, in the United States the percentage of part-time workers
A) is usually between 15 percent and 20 percent.
B) has fallen from over 25 percent in 1987 to just over 12 percent in 2009.
C) typically falls by about 5 percentage points during recessions.
D) was about 20 percentage points higher in 2009 than in 1999.
E) is usually between 40 percent and 45 percent.
Q2) Bill just graduated with his degree in economics.Through Career Services he submitted his resume to several companies and he will visit them during the next two weeks.Bill is considered
A) not in the labor force.
B) frictionally unemployed.
C) structurally unemployed.
D) cyclically unemployed.
E) employed because he is visiting firms.
Q3) Explain how the labor force participation rate, the unemployment rate, and the percentage of the labor force employed part time change in a recession.
Q4) Can frictional unemployment ever be totally eliminated? Explain your answer.
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Chapter 7: The Cpi and the Cost of Living
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Q1) Mark has a two-year wage contract with his employer.Mark's wage contract specifies a $50,000 salary for the first year, and specifies a salary increase equal to the percentage increase in the CPI during the second year.The percentage increase in the CPI during the year was 4.0 percentage points.If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias.
A) $50
B) $3000
C) $500
D) $1500
E) $2000
Q2) The real interest rate is equal to the
A) nominal interest rate plus the inflation rate.
B) nominal interest rate minus the inflation rate.
C) nominal interest rate times the inflation rate.
D) nominal interest rate divided by the inflation rate.
E) inflation rate minus the nominal interest rate.
Q3) Suppose the base reference period is 1982-1984.If your nominal wage rate is $8.00 per hour when the CPI is 180, what is your real wage rate in 1982-1984 dollars?
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Chapter 8: Potential Gdp and the Natural Unemployment Rate
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Q1) The benefit to the firm of hiring another worker is
A) the nominal wage.
B) the price level.
C) the real wage.
D) the extra output produced by the worker.
E) measured as the height of the production function.
Q2) Job search is defined as
A) the activity of looking for an acceptable, vacant job.
B) saying you are looking for a job when you are actually not looking.
C) attending school to increase your employability.
D) equivalent to job rationing.
E) being paid an efficiency wage.
Q3) Define potential GDP.Under what circumstances does actual real GDP fall short of potential GDP, equal potential GDP, and exceed potential GDP?
Q4) The above figure shows a nation's production function.Point B is
A) unattainable.
B) attainable if the nation uses resources inefficiently.
C) attainable if the nation uses resources efficiently.
D) the maximum amount of real GDP the nation can ever produce.
E) Both answers C and D are correct.
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Chapter 9: Economic Growth
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Q1) Economic growth in neoclassical growth theory stops whenever
A) technology stops advancing.
B) population grows rapidly and lowers real income level to its subsistence level.
C) the government controls too much of economic activity.
D) workers lose the incentive to work.
E) profits diminish.
Q2) If it took 20 years for real GDP to double, what was the growth rate of real GDP?
A) 4.5 percent
B) 3.0 percent
C) 3.5 percent
D) 4 percent
E) 5 percent
Q3) An increase in labor productivity ________ and ________ the demand for labor.
A) leads to a movement upward along the production function; does not change
B) leads to a movement upward along the production function; decreases
C) shifts the production function upward; does not change
D) shifts the production function downward; increases
E) shifts the production function upward; increases
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Chapter 10: Finance, Saving, and Investment
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Q1) In the figure above, the shift in the supply of loanable funds curve from SLF to SLF could be the result of
A) an increase in the real interest rate.
B) a decrease in disposable income.
C) an increase in expected rate of profit.
D) a decrease in wealth
E) an increase in expected future disposable income.
Q2) According to the Ricardo-Barro effect, a government budget
A) surplus increases private saving supply.
B) deficit increases private saving supply.
C) deficit decreases private saving supply.
D) surplus decreases private investment demand.
E) deficit decreases private investment demand.
Q3) An increase in the real interest rate
A) has no effect on the loanable funds.
B) increases the quantity of loanable funds supplied.
C) increases current consumption.
D) decreases the quantity of loanable funds supplied.
E) shifts the supply of loanable funds curve rightward.
Q4) Describe two main differences between bonds and stocks.
Page 12
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Chapter 11: The Monetary System
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Q1) M2 equals
A) M1 and is just another name for currency outside of banks.
B) M1 plus savings deposits, small time deposits, and money market fund deposits.
C) M1 minus traveler's checks because they are not really money.
D) currency plus savings deposits, all time deposits, and money market funds and other deposits.
E) M1 plus savings deposits and small time deposits minus money market fund deposits.
Q2) What are the institutions that make up the nation's banking system?
Q3) The Board of Governors of the Federal Reserve System has
A) seven members serving for 12-year terms.
B) 12 members serving for seven-year terms.
C) seven members serving for seven-year terms.
D) seven members serving for 14-year terms.
E) seven members serving life terms.
Q4) Are checks money?
Q5) What is the discount rate?
Q6) How does a currency drain affect the money multiplier?
Q7) List and define the three functions of money.
Page 13
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Chapter 12: Money, Interest, and Inflation
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Q1) Suppose the quantity of money is $1,000, the velocity of circulation is 6, and real GDP is $4,000.Then the price level is
A) 2.5.
B) 2.0.
C) 1.5.
D) 1.1.
E) 6.0.
Q2) If the inflation rate increases,
A) the velocity of circulation increases.
B) potential GDP increases.
C) real GDP growth increases.
D) the nominal interest rate falls.
E) the real interest rate rises.
Q3) In the long run, an increase in the quantity of money ________ the value of money and ________ the price level.
A) raises; raises
B) raises; does not change C) lowers; lowers
D) lowers; does not change E) lowers; raises
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Chapter 13: Aggregate Supply and Aggregate Demand
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Q1) An increase in ________ increases potential GDP and ________ aggregate supply.
A) technology; increases
B) technology; decreases
C) the money wage rate; increases
D) the money price of oil; decreases
E) the money wage rate; decreases
Q2) Based on the figure above, the aggregate demand curve will shift from AD to AD when
A) potential GDP increases.
B) the price level falls.
C) the price level rises.
D) government expenditure decreases.
E) the Federal Reserve lowers the interest rate.
Q3) A recessionary gap occurs when ________ so that real GDP is ________ potential GDP.
A) aggregate supply increases; less than B) aggregate supply decreases; less than
C) aggregate demand increases; greater than D) aggregate demand decreases; less than E) potential GDP decreases; greater than
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Chapter 14: Aggregate Expenditure Multiplier
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Q1) The above table contains information about the nation of Syldavia.There are no income taxes or imports in this nation.When real GDP is $15 billion, firms' inventories experience an unplanned
A) decrease of $10 billion.
B) increase of $4 billion.
C) increase of $10 billion.
D) decrease of $1 billion.
E) increase of $5 billion.
Q2) The aggregate expenditure (AE) curve
A) includes expenditures by domestic residents only.
B) includes expenditures on foreign as well as domestic goods.
C) does not include expenditures on either imports or exports.
D) includes all expenditures on domestic goods.
E) adds expenditures on imports because they are consumed in the nation and subtracts expenditures on exports because they are consumed abroad.
Q3) How does an increase in the price level affect the aggregate planned expenditure curve and the aggregate demand curve?
Q4) Discuss the link between real GDP and imports.
Q5) What effect does an increase in the MPC have on the slope of the AE curve?
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Chapter 15: The Short-Run Policy Tradeoff
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Q1) When all relevant information is used to forecast inflation, the resulting forecast is called
A) a rational expectation.
B) an expected forecast.
C) a natural expectation.
D) an expansionary expectation.
E) the expected expectation.
Q2) When the natural unemployment rate increases, the short-run Phillips curve ________ and the long-run Phillips curve ________.
A) shifts upward; does not shift
B) shifts downward; does not shift
C) does not shift; shifts leftward
D) shifts upward; shifts rightward
E) shifts downward; shifts rightward
Q3) An increase in the expected inflation rate
A) leads to a movement downward along the short-run Phillips curve.
B) leads to a movement upward along the short-run Phillips curve.
C) shifts the short-run Phillips curve rightward.
D) shifts the short-run Phillips curve leftward.
E) shifts the long-run Phillips curve rightward.
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Chapter 16: Fiscal Policy
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Q1) If a change in the tax laws leads to a $100 billion decrease in tax revenue, then aggregate demand
A) increases by $100 billion.
B) increases by less than $100 billion.
C) increases by more than $100 billion.
D) decreases by $100 billion.
E) decreases by more than $100 billion.
Q2) If government expenditure increases by $200 billion and taxes simultaneously increase by $200 billion, then aggregate demand
A) remains the same.
B) decreases no matter what happens to aggregate supply.
C) increases no matter what happens to aggregate supply.
D) increases only if aggregate supply increases.
E) increases only if aggregate supply decreases.
Q3) In the figure above, the ________ gap is equal to ________.
A) recessionary; $1 trillion
B) inflationary; $1 trillion
C) inflationary; $12 trillion
D) inflationary; $13 trillion
E) recessionary; $12 trillion
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Chapter 17: Monetary Policy
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Q1) By using open market operations, the Federal Reserve
A) adjusts the supply of reserves to keep the federal funds interest rate equal to its target.
B) adjusts the supply and demand of reserves to keep the federal funds interest rate equal to its target.
C) adjusts the demand of reserves to keep bank rates in line with the federal funds rate target.
D) controls banks' demand for reserves, thereby keeping the federal funds rate equal to its target.
E) None of the above answers is correct.
Q2) If the Federal Reserve uses open market operations to offset a recession, the Fed ________ government securities in order to ________ the federal funds rate.
A) sells; raise
B) sells; lower
C) buys; raise
D) buys; lower
E) buys; not change
Q3) What is the Taylor rule and how does it work?
Q4) Describe inflation targeting rule as a monetary policy.What are its benefits?
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Chapter 18: International Trade Policy
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Q1) In the 1950s, crude oil and natural gas imports were restricted to keep the domestic industries viable in case of a war.The rationale for this protection is the ________ argument for protection.
A) save domestic jobs
B) national security
C) anti-dumping
D) infant-industry
E) penalizing lax environmental standards
Q2) If the United States exports planes to Brazil and imports ethanol from Brazil, the price received by U.S.producers of planes ________ and the price received by Brazilian producers of ethanol ________.
A) does not change; does not change
B) rises; rises
C) rises; falls
D) falls; rises
E) falls; falls
Q3) After NAFTA was signed, the United States allowed more tomatoes to be imported from Mexico.What happened to the price of tomatoes in the United States when the United States allowed more tomatoes to be imported?
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Chapter 19: International Finance
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Questions
Q1) A nation that is a net borrower each year over time will become a ________ nation. A nation that is a net lender each year over time will become a ________ nation. Since the early 1980s, the United States has been a ________ due to the current account
A) debtor; creditor; net lender; surpluses
B) creditor; debtor; net lender; surpluses
C) creditor; debtor; net borrower; deficits
D) debtor; creditor; net borrower; deficits
E) creditor; debtor; net lender; deficits
Q2) A country that is borrowing more from the rest of the world than it is lending is called a
A) net lender.
B) net borrower.
C) net debtor.
D) net creditor.
E) net loaner country.
Q3) What happens in the foreign exchange market if the U.S.interest rate increases? What is the effect on the exchange rate?
Q4) What balance of payment account records foreign investment between countries?
Q5) What are the "deep" factors that change exchange rate expectations?
Page 21
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