Macroeconomic Theory Exam
Solutions
Course Introduction
Macroeconomic Theory explores the broad principles and analytical frameworks used to understand the functioning of national and global economies. The course covers topics such as the determination of aggregate output, employment, inflation, and economic growth; the roles of fiscal and monetary policy; consumption and investment behavior; and the impacts of government intervention in the economy. Students will engage with both classical and contemporary macroeconomic models, develop quantitative skills in economic analysis, and learn to apply theoretical insights to current macroeconomic issues and policy debates.
Recommended Textbook
Macroeconomics 7th Edition by R. Glenn Hubbard
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19 Chapters
4812 Verified Questions
4812 Flashcards
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Page 2
Chapter 1: Economics: Foundations and Models
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219 Verified Questions
219 Flashcards
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Sample Questions
Q1) Economists assume that
A)individuals behave in unpredictable ways.
B)consumer behavior is explained by the existence of unlimited resources.
C)people put other people's interests ahead of their own.
D)optimal decisions are made at the margin.
Answer: D
Q2) The decision about what goods and services will be produced in a market economy is made by
A)lawmakers in the government voting on what will be produced.
B)workers deciding to produce only what the boss says must be produced.
C)producers deciding what society wants most.
D)consumers and firms choosing which goods and services to buy or produce.
E)consumers dictating to firms what they need most.
Answer: D
Q3) Which of the following generates allocative efficiency in a market economy?
A)national government intervention
B)voluntary exchange between buyers and sellers
C)United Nations rules for competition
D)equity
Answer: B
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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236 Verified Questions
236 Flashcards
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Sample Questions
Q1) The payment received by suppliers of entrepreneurial skills is called profit.
A)True
B)False
Answer: True
Q2) For each pound of salami that Hungary produces,it gives up the opportunity to make 10 bottles of beer.Slovakia gives up the opportunity to produce of 1 pound of salami for every 8 bottles of beer it produces.Which of the following is true about the comparative advantage between the two countries?
A)Hungary has the comparative advantage in salami.
B)Hungary has the comparative advantage in beer.
C)Slovakia has the comparative advantage in salami and beer.
D)Slovakia has the comparative advantage in beer.
Answer: B
Q3) Refer to Table 2-9.If the two countries specialize and trade,who should export rice?
A)There is no basis for trade between the two countries.
B)Japan
C)Thailand
D)They should both be exporting rice.
Answer: B
Page 4
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Chapter 3: Where Prices Come From: The Interaction of
Demand and Supply
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234 Verified Questions
234 Flashcards
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Sample Questions
Q1) Refer to Figure 3-3.The figure above shows the supply and demand curves for two markets: the market for original Michelangelo sculptures and the market for Ray Ban sunglasses.Which graph most likely represents which market?
A)Graph B represents the market for original Michelangelo sculptures and Graph A represents the market for Ray Ban sunglasses.
B)Graph A represents the market for original Michelangelo sculptures and Graph B represents the market for Ray Ban sunglasses.
C)Graph A represents both the market for original Michelangelo sculptures and Ray Ban sunglasses.
D)Graph B represents both the market for original Michelangelo sculptures and Ray Ban sunglasses.
Answer: A
Q2) Refer to Figure 3-5.At a price of $15,the quantity sold
A)is 2 units.
B)is 4 units.
C)is 6 units.
D)cannot be determined.
Answer: A
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Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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212 Verified Questions
212 Flashcards
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Sample Questions
Q1) If the price of garlic is represented by equation P = 25 - Q<sub>D</sub>,then the corresponding quantity of garlic demanded is represented by the equation
A)Q<sub>D</sub> = P - 25.<sub> </sub>
B)Q<sub>D</sub> = P + 25.<sub> </sub>
C)Q<sub>D</sub> = 25 - P.<sub> </sub>
D)Q<sub>D</sub> = -25 + P.
Q2) Juanita goes to the Hardware Emporium to buy a new circular saw.She is willing to pay $120 for a new saw,but buys one on sale for $85.Juanita's consumer surplus from the purchase is
A)$35.
B)$85.
C)$120.
D)$205.
Q3) Is there a difference between the "true burden" of a tax and who is legally required to pay a tax? Briefly explain.
Q4) The additional cost to a firm of producing one more unit of a good or service is equal to producer surplus.
A)True
B)False
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Chapter 5: The Economics of Health Care
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166 Verified Questions
166 Flashcards
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Sample Questions
Q1) Doctors have ________ incentive to control their costs when consumers ________ for a visit to the doctor's office.
A)more; only pay a deductible
B)less; only pay a deductible
C)less; pay entirely out of pocket
D)more; have a third-party payer that pays
Q2) By the year 2017,health care spending on Medicare,Medicaid,and other U.S.government programs as a percentage of GDP had reached a level of
A)2.2 percent.
B)7 percent.
C)17.5 percent.
D)21.5 percent.
Q3) The health care system in ________ is referred to as a universal health insurance system,under which every resident is required to enroll in either a private or the government-provided health insurance program.
A)Canada
B)Japan
C)the United Kingdom
D)the United States
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Page 7
Chapter 6: Firms, the Stock Market, and Corporate Governance
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251 Verified Questions
251 Flashcards
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Sample Questions
Q1) A member of a corporate board of directors that does not have a direct management role in the firm is known as
A)a shareholder.
B)an inside director.
C)an outside director.
D)a corporate governor.
Q2) If you own a bond with a six percent coupon rate and new bonds are paying six percent,what will happen to your bond's market price?
Q3) Walmart wants to raise $250 million to finance the renovation of their retail stores,and the company wishes to raise the funds through indirect finance.Which of the following methods could it use?
A)It could issue $250 million in stock.
B)It could sell $250 million in bonds.
C)It could borrow $250 million from a bank.
D)It could choose either A or B.
Q4) Angelica wants to open a restaurant and is thinking of setting it up as a corporation.What are the advantages and disadvantages she will face by setting up the business as a corporation as opposed to a sole proprietorship or a partnership?
Page 8
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Chapter 7: Comparative Advantage and the Gains From International Trade
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188 Flashcards
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Sample Questions
Q1) Refer to Table 7-6.What is the opportunity cost to produce 1 sword in Morocco?
A)1/2 of a belt
B)1 belt
C)1.5 belts
D)2 belts
Q2) Refer to Figure 7-2.As a result of the tariff,domestic producers increase their quantity supplied by
A)6 million pounds of coffee.
B)9 million pounds of coffee.
C)12 million pounds or coffee.
D)15 million pounds of coffee.
Q3) Dumping refers to countries exporting unwanted and inferior products to other countries.
A)True
B)False
Q4) One of the main sources of comparative advantage is natural resources.
A)True
B)False
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Q5) Explain why international trade is less important to the United States than it is to many other countries.
Chapter 8: GDP: Measuring Total Production and Income
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Sample Questions
Q1) If a country passes a labor law limiting the number of hours of work per week,GDP would ________ and leisure would ________.
A)decrease; increase
B)increase; increase
C)decrease; decrease D)increase; decrease
Q2) Because workers in the United States work fewer hours per week,on average,than they did over 100 years ago
A)workers in the United States are worse off than they were over 100 years ago.
B)workers in the United States earn less income than they did over 100 years ago.
C)GDP is lower than it would be if U.S.workers worked the same workweek they had 100 years ago.
D)GDP is higher than it would be if U.S.workers worked the same workweek they had 100 years ago.
Q3) The table below describes the value added in the production of a gallon of gasoline by each stage of production.(The values are hypothetical.)
Q4) Why do we subtract import spending from total expenditures?
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Chapter 9: Unemployment and Inflation
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289 Verified Questions
289 Flashcards
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Sample Questions
Q1) Refer to Table 9-7.Suppose that the data in the table above reflect price levels in the economy.What is the inflation rate between 2017 and 2018?
A)2.9%
B)3.5%
C)4.6%
D)5%
E)7.5%
Q2) Refer to Figure 9-1.Based on the graph of the labor market above,if a minimum wage is set at $5 per hour,which of the following will occur?
A)The unemployment rate will rise.
B)The unemployment rate will fall.
C)The level of unemployment will rise,but the percentage of the labor force unemployed will not change.
D)None of the above will occur.
Q3) A central concept in macroeconomics is the idea of the natural rate of unemployment.Why does it make sense to define full employment to occur when the unemployment rate equals the natural rate of unemployment,instead of when the unemployment rate equals zero? Elaborate and explain carefully.
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Chapter 10: Economic Growth, the Financial System, and Business Cycles
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251 Verified Questions
251 Flashcards
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Sample Questions
Q1) In terms of economic growth,the key measure of the standard of living is A)real GDP.
B)nominal GDP.
C)real GDP per capita.
D)nominal GDP per capita.
Q2) If taxes are less than transfers plus government spending,then
A)there is positive saving.
B)there is a balanced budget.
C)there is a budget surplus.
D)there is public dissaving.
Q3) The key to sustained economic growth is increasing labor productivity.
A)True
B)False
Q4) The budget deficit is defined as
A)T - (G + TR),and this is negative.
B)T - (G + TR),and this is positive.
C)T + (G - TR),and this is negative.
D)T + (G + TR),and this is negative.
Page 12
Q5) How are unemployment,inflation,and the business cycle related?
Q6) Define the two categories of saving in the economy.
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Chapter 11: Long-Run Economic Growth: Sources and Policies
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261 Verified Questions
261 Flashcards
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Sample Questions
Q1) Which of the following countries actually experienced negative economic growth from 1960 to 2014?
A)Israel
B)Singapore
C)Niger
D)Malaysia
Q2) Draw a graph of "catch-up" that shows where you would expect to see a country with low saving rates and low levels of health and education.How would you expect real GDP per capita to grow in a country like this? Explain.
Q3) In 2016,GDP per capita was ________ in the United States than in China,and since 1980,the growth rate of real GDP per capita has been ________ in the United States than in China.
A)higher; higher
B)higher; lower
C)lower; higher
D)lower; lower
Q4) Most economic growth in the world occurred between 1,000,000 B.C.and 1300 A.D.
A)True
B)False
14
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Chapter 12: Aggregate Expenditure and Output in the Short Run
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Sample Questions
Q1) Refer to Figure 12-1.At point J in the figure above,which of the following is true?
A)Aggregate expenditure is less than GDP.
B)The economy has achieved macroeconomic equilibrium.
C)Actual inventories are less than planned inventories.
D)GDP will be decreasing.
Q2) An example of assets that are included in ________ would be stocks,bonds,and savings accounts.
A)household wealth
B)household income
C)planned investment
D)consumer purchases
Q3) Which of the following will raise consumer expenditures?
A)an increase in interest rates
B)a general decline in housing prices
C)an increase in expected future income
D)an increase in the price level
Q4) Explain how a stock market crash has the potential to lead to a recession in an economy.
Q5) Given Table 12-8 below,fill in the values for saving.Assume there are no taxes.
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Chapter 13: Aggregate Demand and Aggregate Supply Analysis
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284 Verified Questions
284 Flashcards
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Sample Questions
Q1) Refer to Figure 13-1.Ceteris paribus,a decrease in interest rates would be represented by a movement from
A)AD<sub>1</sub> to AD<sub>2</sub>.
B)AD<sub>2</sub> to AD<sub>1</sub>.
C)point A to point B.
D)point B to point A.
Q2) A decrease in disposable income will shift the aggregate demand curve to the left.
A)True
B)False
Q3) When the price level rises from 110 to 115,the aggregate level of GDP supplied rises from $80 billion to $120 billion.This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level.
A)negative; short-run
B)positive; short-run
C)negative; long-run
D)positive; long-run
Q4) Explain how the aggregate demand and aggregate supply model can be made more dynamic.
Page 16
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Chapter 14: Money,Banks,and the Federal Reserve System
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276 Verified Questions
276 Flashcards
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Sample Questions
Q1) The quantity theory of money was derived from the quantity equation by asserting that
A)real output was fixed.
B)the money supply was fixed.
C)the velocity of money was fixed.
D)the velocity of money was zero.
Q2) During the German hyperinflation of the 1920s,the large increases in the money supply were generated by the German government
A)significantly lowering the required reserve ratio to enable German businesses to obtain loans.
B)significantly raising the required reserve ratio to reduce business loans.
C)printing large quantities of German marks.
D)selling large quantities of government bonds to the central bank,the Reichsbank.
Q3) Liquidity increases as we move from the M1 to the M2 definition of the money supply.
A)True
B)False
Q4) How do open market operations work?
Q5) What is the principle monetary policy tool used by the Fed.Why?
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Chapter 15: Monetary Policy
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278 Verified Questions
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Sample Questions
Q1) Falling interest rates can
A)increase a firm's stock price,which causes firms to issue more stock shares,and thus increases funds for investment.
B)raise the cost of borrowing for firms and decrease investment.
C)raise the cost of buying new homes and fewer new homes will be purchased.
D)lower the cost of buying new homes and fewer new homes will be purchased.
Q2) The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply.
A)True
B)False
Q3) Present two arguments as to why the Fed should adopt inflation targeting as a framework for monetary policy.
Q4) What is a banking panic,and what role did banking panics play in the decision by Congress to establish the Federal Reserve?
Q5) The Fed can use expansionary monetary policy to lower interest rates to stimulate aggregate demand.
A)True
B)False
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Chapter 16: Fiscal Policy
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Sample Questions
Q1) If government increases taxes by the same amount it increases government spending,there will be no effect on aggregate demand: the increase in government spending is offset by an equal decrease in consumption spending by households.
A)True
B)False
Q2) What is the government purchases multiplier if the tax rate is 0.1 and the marginal propensity to consume is 0.9? Assume the economy is closed.
A)5.3
B)10
C)11.1
D)100
Q3) The tax multiplier equals the change in ________ divided by the change in
A)taxes; equilibrium real GDP
B)equilibrium real GDP; taxes
C)taxes; consumption spending
D)consumption spending; taxes
Q4) List the five categories of federal government expenditures.
Q5) What is the difference between federal purchases and federal expenditures?
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Chapter 17: Inflation, Unemployment, and Federal Reserve Policy
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Sample Questions
Q1) In the 1960s,many economists and policymakers considered the trade-off between inflation and unemployment revealed in the Phillips curve to be permanent.This belief was challenged by ________,who argued that there is not trade-off between inflation and unemployment in the long run.
A)Robert Lucas and Thomas Sargent
B)Finn Kydland and Edward Prescott
C)Paul Samuelson and James Tobin
D)Milton Friedman and Edmund Phelps
Q2) Fed Chairman Alan Greenspan managed to keep the rate of inflation low as the economy was growing at a brisk pace by setting and hitting low money supply growth rate targets.
A)True
B)False
Q3) Assume weak growth in aggregate demand keeps the economy below potential GDP,so unemployment rises but inflation falls.This explains the ________ slope of the short-run Phillips curve.
A)positive
B)negative
C)zero
D)infinite
Page 20
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Chapter 18: Macroeconomics in an Open Economy
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Sample Questions
Q1) A decision by foreign central banks to sell their holdings of U.S.Treasury bonds will
A)lower bond prices and interest rates in the United States.
B)increase bond prices and interest rates in the United States.
C)increase bond prices and lower interest rates in the United States.
D)lower bond prices and increase interest rates in the United States.
Q2) If the government finances an increase in government purchases with an increase in taxes,which of the following would you expect to see?
A)an increase in the exchange rate
B)a decrease in the interest rate
C)a decrease in aggregate demand
D)an increase in net exports
Q3) Japan has a fairly high saving rate and the level of saving in Japan is above domestic investment.Use the saving and investment equation to explain what Japan is doing with this excess of saving above domestic investment.
Q4) A rise in the dollar price of the Chinese yuan signals an appreciation of the yuan and a depreciation of the dollar.
A)True
B)False
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Page 21
Chapter 19: The International Financial System
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Sample Questions
Q1) Refer to Figure 19-8.The equilibrium exchange rate is originally at A,$1.25/euro.Suppose the European Central Bank pegs its currency at $1.00/euro.Speculators expect that the value of the euro will rise and this shifts the demand curve for euro to D<sub>2</sub>.If the European Central Bank abandons the peg,the equilibrium exchange rate would be
A)$1.00/euro.
B)$1.25/euro.
C)$1.50/euro.
D)$1.75/euro.
Q2) Under the Bretton Woods system,central bankers could obtain foreign currency loans from the
A)U.S.Treasury Department.
B)World Trade Organization.
C)International Monetary Fund.
D)Bank of England.
Q3) What is the difference between a devaluation and a revaluation of a currency?
Q4) What determined the exchange rates among currencies under the gold standard,and what caused the gold standard to collapse?
Q5) What are the three main exchange rate systems,and how do they operate?
Page 22
Q6) What does it mean when one currency is "pegged" against another currency?
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