Macroeconomic Theory
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Course Introduction
Macroeconomic Theory provides a rigorous exploration of the foundational principles and models that govern the behavior of economies at an aggregate level. The course examines key concepts such as national income, inflation, unemployment, economic growth, fiscal and monetary policy, and international trade. Emphasis is placed on the development and application of theoretical frameworks, such as the IS-LM model, aggregate demand and supply analysis, and the study of long-run and short-run economic fluctuations. Through analytical tools and real-world case studies, students develop the skills necessary to critically assess macroeconomic policies and understand their impact on global and national economic performance.
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Macroeconomics 11th Edition by Michael Parkin
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Chapter 1: What Is Economics
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Q1) The term "opportunity cost" points out that
A) there may be such a thing as a free lunch.
B) not all individuals will make the most of life's opportunities because some will fail to achieve their goals.
C) executives do not always recognize opportunities for profit as quickly as they should.
D) any decision regarding the use of a resource involves a costly choice.
Answer: D
Q2) Why do economists use graphs?
Answer: Graphs help economists,and others,to visualize the relationships between economic variables.Graphs that plot variables together help economists understand if the variables are related and how they are related.Graphs also help provide a visual picture of economic models that link different variables.Indeed,many other disciplines use such visual models.For example,architects work with blueprints (their model) and the blueprints represent every detail of a building.Economists' models do not reflect of every detail of the real world,but the graphs that they use nonetheless are valuable because they help clarify the linkages between the variables.
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Chapter 2: The Economic Problem
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Q1) Using the values for the marginal benefit and the marginal cost of a bushel of apples given in the table above,what is the allocatively efficient quantity of apples?
Suppose 10 million bushels of apples are produced.Should the quantity be increased or deceased?
What if 20 million bushels are produced; should the quantity be increased or decreased?
Answer: The allocatively efficient quantity of apples is 15 million bushels because this is the quantity at which the marginal benefit equals the marginal cost.If 10 million bushels of apples are produced,the marginal benefit exceeds the marginal cost,so more apples should be produced.If 20 million bushels of apples are produced,the marginal cost exceeds the marginal benefit and so fewer apples should be produced.
Q2) Specialization and trade allow countries to consume beyond their PPFs. A)True
B)False
Answer: True
Q3) Explain how the production possibilities frontier illustrates scarcity.
Answer: The PPF illustrates scarcity because we cannot attain the points outside the frontier.
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Chapter 3: Demand and Supply
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Q1) Consumers can use either natural gas or heating oil to warm their houses.Suppose the price of natural gas increases.Use a demand and supply diagram to show the impact of the higher price of natural gas on the market for home heating oil.
Answer: 11ea5ba7_d8a1_0ab8_b1f3_77959cacbbf2_TB5273_00 Natural gas and home heating oil are substitutes.The increase in the price of natural gas increases the demand for home heating oil,so the demand curve for home heating oil shifts rightward,as illustrated above.As a result,the price rises and quantity increases.
Q2) When does a shortage occur?
Answer: A shortage occurs when the price is below the equilibrium price.When the price is less than the equilibrium price,the quantity demanded is greater than the quantity supplied.
Q3) A change in the price of a good
A) shifts the good's demand curve and also causes a movement along it.
B) shifts the good's demand curve but does not cause a movement along it.
C) does not shift the good's demand curve but does cause a movement along it.
D) neither shifts the good's demand curve nor causes a movement along it.
Answer: C
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Chapter 4: Measuring GDP and Economic Growth
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Q1) You believe that the total amount of goods produced in the United States has generally increased over the years.In a time-series graph illustrating the total amount produced,you expect to find
A) an upward trend.
B) no relationship between time and the amount of goods produced.
C) an inverse relationship between time and the amount of goods produced.
D) a linear relationship.
Q2) An indirect tax is a tax paid by consumers
A) to a state or local government.
B) when they purchase goods and services.
C) on unearned income (as opposed to wages and salaries).
D) that is a percentage of the value of their real property.
Q3) In any year,real GDP
A) must always be less than potential GDP.
B) might be greater or less than potential GDP.
C) will always be greater than potential GDP because of the tendency of nations to incur inflation.
D) always equals potential GDP.
Q4) Can nominal GDP ever be less than real GDP?
Q5) Is it possible for nominal GDP to increase while real GDP does not change?
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Chapter 5: Monitoring Jobs and Inflation
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Q1) If the CPI basket of goods cost $200 in the reference base period and $450 in a later year,the CPI in the later year equals
A) 225.
B) 250.
C) 300.
D) 450.
Q2) Consider the following scenario.Initially the economy has 90 million people working,10 million people unemployed,and 20 million people not in the labor force.Then prospects for the economy improve.Five million people who previously were not in the labor force now join the 10 million previously unemployed in looking for work.For now,the economy remains with 90 million workers.What happens to the unemployment rate?
Q3) In the table above,the official U-3 unemployment rate is
A) 50 percent.
B) 15 percent.
C) 10 percent.
D) 5 percent.
Q4) One way to be considered unemployed is to be without a job and looking for work.
A)True
B)False
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Chapter 6: Economic Growth
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Q1) An assumption of classical growth theory is that when ________ the population growth rate ________.
A) real GDP per person exceeds the subsistence level; increases
B) people become more skilled; decreases
C) the real wage rate falls; increases
D) saving declines; decreases
Q2) Which of the following is used to calculate the standard of living?
A) real GDP/population
B) ((real GDP in the current year - real GDP in previous year)/real GDP in previous year) ×
100
C) the one-third rule
D) real GDP/aggregate hours
Q3) Economic growth tends to be higher in a country that
A) has a low savings rate.
B) has an economy open to international trade.
C) has an undeveloped system of property rights.
D) does not grant patents to inventors.
Q4) Describe ways that governments can promote faster economic growth.
Q5) What is the role of profits in the neoclassical growth theory versus the new growth theory?
Page 8
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Chapter 7: Finance, Saving, and Investment
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Q1) The idea that a government budget deficit decreases investment is called A) government dissaving.
B) the crowding-out effect.
C) the Ricardo-Barro effect.
D) the capital investment effect.
Q2) As the ________ interest rate increases,the quantity of loanable funds demanded ________.
A) real; increases
B) real; decreases
C) nominal; increases D) nominal; decreases
Q3) "An increase in the real interest rate increases the quantity of investment." Is the previous statement correct or incorrect?
Q4) In 2008,Germany had a budget deficit of 37 billion euros. This will budget deficit ________ the supply of loanable funds and ________ the real interest rate. A) increased; lowered B) decreased; raised C) decreased; lowered D) increased; raised
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Chapter 8: Money, The Price Level, and Inflation
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Q1) Suppose that a bank begins with $500 million in deposits and $100 million in reserves and is just meeting its desired reserve ratio.Now suppose a decrease in the required reserve ratio lowers the desired reserve ratio to 10 percent.After the fall in the desired reserve ratio but before the bank makes any changes,the bank's excess reserves are
A) 0.
B) $400 million.
C) $450 million.
D) $50 million.
Q2) A bank can only make a loan if it has
A) excess reserves.
B) a creditworthy customer willing to pay a high interest rate.
C) permission from the Federal Reserve.
D) reserves equal to its deposits.
Q3) An increase in currency held outside the banks is ________.
A) a currency drain
B) income
C) a currency surplus
D) wealth
Q4) Describe how financial innovation has affected the demand for money.
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Chapter 9: The Exchange Rate and the Balance of Payments
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Q1) The country of Pimm exports $500 billion worth of goods and services and imports
$400 billion worth of goods and services.Net interest income paid abroad is $50 billion and net transfers are $0.The current account balance is ________.
A) $50 billion
B) $100 billion
C) $150 billion
D) $975 billion
Q2) As the exchange rate ________,the quantity of dollars ________ on the foreign exchange market ________.
A) rises; supplied; increases
B) falls; supplied; increases
C) rises; demanded; increases
D) falls; demanded; decreases
Q3) Using the data in the above table,if the private sector runs a surplus of $250 billion,imports will equal $1,000 billion if
A) government expenditure equals -$750 billion.
B) investment equals -$1000 billion.
C) government expenditure equals -$1000 billion.
D) the government sector runs a deficit of $750 billion.
Page 11
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Chapter 10: Aggregate Supply and Aggregate Demand
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Q1) Aggregate demand in India increased in 2008.In addition,real GDP grew strongly and inflation approached 10 percent.The best explanation for this inflation is that
A) aggregate supply did not change.
B) potential GDP decreased.
C) there was a movement up along the aggregate demand curve in 2008.
D) potential GDP increased, but at a slower rate than aggregate demand.
Q2) In a short-run macroeconomic equilibrium,potential GDP exceeds real GDP.If aggregate demand does not change,then the
A) short-run aggregate supply curve will shift rightward as the money wage rate falls.
B) short-run aggregate supply curve will shift leftward as the money wage rate rises.
C) long-run aggregate supply curve will shift leftward as the money wage rate rises.
D) long-run aggregate supply curve will shift leftward as the money wage rate falls.
Q3) How does the aggregate demand curve reflect an increase in aggregate demand?
Q4) How do changes in the money wage rate affect the LAS and SAS curves?
Explain your answer.
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Chapter 11: Expenditure Multipliers
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Q1) In the above table,suppose investment decreases by $0.1 trillion.The multiplier equals A) 5.0.
B) 9.0.
C) 10.0.
D) None of the above answers are correct.
Q2) The larger the multiplier,the ________ the AE curve and the ________ the AD curve from an increase in investment.
A) steeper; smaller the shift in B) steeper; larger the shift in C) flatter; larger the movement along D) flatter; smaller the movement along
Q3) Suppose that firms find that their inventories are less than planned.In this case,what is the initial relationship between aggregate planned expenditure and real GDP? Using the aggregate expenditure model,what adjustments,if any,take place?
Q4) Components of aggregate expenditure include saving,consumption expenditure,investment and government expenditure.
A)True
B)False
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Chapter 12: Inflation, Jobs, and the Business Cycle
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Q1) Both new Keynesian and new classical cycle theories claim that ________.
A) animal spirits can trigger a business cycle
B) shifts in the SAS curve are the main impulse for a business cycle
C) unexpected changes in aggregate demand trigger a business cycle
D) expected changes in the quantity of money can trigger a business cycle
Q2) Suppose that managers forecasted a large decline in expected sales and profits and so their confidence plummets.According to the ________,this forecast might start a business cycle.
A) Keynesian cycle theory
B) circular flow theory
C) monetarist cycle theory
D) new classical cycle theory
Q3) A rise in the expected inflation rate leads to ________ in the long-run Phillips curve and ________ in the short-run Phillips curve.
A) an upward shift; no shift
B) a leftward shift; an upward shift
C) no shift; no shift
D) no shift; an upward shift
Q4) Describe how a demand-pull inflation can occur.
Q5) Distinguish between the short-run and long-run Phillips curves.
Page 14
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Chapter 13: Fiscal Policy
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Q1) Ignoring any supply-side effects,how does the magnitude of the government expenditure multiplier compare to the magnitude of the tax multiplier?
Explain your answer.
Q2) Beginning in 2013,Americans will pay an additional Medicare tax of 0.9 percent on all wage income that exceeds $200,000.By increasing the amount the current generation pays for Medicare,this tax ________ the generational imbalance.
A) increased
B) did not change
C) decreased
D) None of the above answers are correct because the impact on the generational imbalance depends on factors other than the Medicare tax.
Q3) All of the following are part of fiscal policy EXCEPT
A) setting tax rates.
B) setting government spending.
C) choosing the size of the government deficit.
D) controlling the money supply.
Q4) What is fiscal policy and what are its purposes?
Q5) How does a tax on labor income affect potential GDP?
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Chapter 14: Monetary Policy
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Q1) Suppose the economy is in a recession and the Fed lowers the federal funds rate.Then
A) real GDP and the price level will both decrease.
B) real GDP will increase and the price level will decrease.
C) real GDP will decrease and the price level will increase.
D) real GDP and the price level will both increase.
Q2) Does an open market operation in which the Fed buys securities from the general public decrease or increase the banking system's reserves?
Q3) If the Fed fears inflation it will undertake an open market ________ of securities,the federal funds rate will ________ and the long-term real interest rate will ________.
A) sale; rise; fall
B) sale; rise; rise
C) purchase; rise; fall
D) purchase; fall; rise
Q4) During the financial crisis of 2008-2009,the Fed was concerned about
A) the bubble that was forcing asset prices higher.
B) the publics rush to deposit its currency into banks.
C) keeping the federal funds rate from falling too far.
D) providing the banking system with enough liquidity.
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Chapter 15: International Trade Policy
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Q1) Why do nations engage in international trade?
Q2) An import quota is a
A) tariff imposed on goods that are dumped in the country.
B) law that prevents ecologically damaging goods from being imported into a country.
C) market-imposed balancing factor that keeps prices of imports and exports in equilibrium.
D) government-imposed restriction on the quantity of a specific good that can be imported.
Q3) The U.S.-Colombia Trade Promotion Agreement was signed on November 22,2006,in Washington,D.C.This comprehensive trade agreement eliminated tariffs and other barriers to goods and services.Colombia will immediately eliminate tariffs on wheat,barley,peanuts,and many other products in which Columbia does not have a comparative advantage.This policy means that the price of peanuts in Columbia will become
A) equal to the free trade price
B) lower than the free trade price
C) higher than the price when a tariff was in place
D) higher than the free trade price
Q4) Define comparative advantage and discuss its role in international trade.
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Chapter 16: Introduction
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Q1) The table above lists six points on the production possibilities frontier for cheese and DVDs.From this information you can conclude that production is inefficient if this economy produces
A) 2 tons of cheese and 56 thousand DVDs.
B) 8 tons of cheese and 21 thousand DVDs.
C) 5 tons of cheese and 48 thousand DVDs.
D) 7 tons of cheese and 20 thousand DVDs.
Q2) Jelly beans and popcorn are substitutes.A fall in the price of a bag of jelly beans will ________ the demand for popcorn and the price of popcorn will ________.
A) increase; rise
B) increase; fall
C) decrease; fall
D) decrease; rise
Q3) Which of the following is NOT a factor of production?
A) mineral resources
B) money
C) a computer programmer
D) a commercial aircraft
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Chapter 17: Monitoring Macroeconomic Performance
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Q1) GDP is defined as
A) gross demanded prices.
B) generally demanded product.
C) gross domestic product.
D) generally demanded prices.
Q2) In the United States,over time GDP
A) stays relatively constant with occasional increases.
B) increases most of the time and decreases occasionally.
C) increases and decreases roughly about the same amount.
D) decreases more often than it increases.
Q3) At full employment,
A) real GDP equals potential GDP.
B) the unemployment rate is zero.
C) real GDP is above potential GDP.
D) the business cycle is at its peak.
Q4) The labor force is defined as
A) all people aged 16 and over and not institutionalized.
B) the entire population.
C) those people employed and unemployed.
D) only those people with jobs.
Page 19
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Chapter 18: Macroeconomic Trends
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Q1) When money is accepted as payment in a market transaction,it is functioning as A) a factor that shifts the aggregate production function B) the velocity of circulation. C) a medium of exchange.
D) the real interest rate.
Q2) If the U.S.interest rate differential ________,the demand for dollars ________ and the U.S.exchange rate ________.
A) increases; increase; appreciates B) decreases; increase; appreciates C) increases; decrease; depreciates D) decreases; decreases; appreciates
Q3) The ________ growth theory assumes that population growth is not driven by real GDP per person and the ________ growth theory predicts that differences in the economic growth rate can last indefinitely. A) new; classical
B) neoclassical; new C) classical; neoclassical
D) neoclassical; neoclassical
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Chapter 19: Macroeconomic Fluctuations
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Q1) Business cycles result when
A) aggregate demand grows faster than potential GDP.
B) the labor force participation rate changes.
C) aggregate supply and aggregate demand change at an uneven pace.
D) real GDP equals potential GDP.
Q2) Japan's population increased by 3 percent in 2010. As a result,which of the following occurred?
I. an increase in potential GDP
II. a rightward shift in the long-run aggregate supply curve
III. a rightward shift in the short-run aggregate supply curve.
A) I, II and III.
B) III only.
C) I and II only.
D) II and III.
Q3) The growth rate of productivity is a major feature of
A) Keynesian and monetarist economists.
B) monetarist economists.
C) real business cycle economists.
D) why the marginal propensity to consume is less than 1.0.
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Chapter 20: Macroeconomic Policy
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Q1) If the Fed makes an open market ________ of government securities,the federal funds rate will ________ as the quantity of money ________.
A) purchase; rise; increases
B) sale; fall; increases
C) purchase; fall; decreases
D) sale; rise; decreases
Q2) A decrease in the reserves of commercial banks could be the result of
A) an increase in the velocity of circulation.
B) the sale of government securities by the Federal Reserve.
C) a decrease in the velocity of circulation.
D) an increase in the required reserve ratio.
Q3) A fiscal action that is triggered by the state of the economy is called
A) monetarist policy.
B) the tax wedge.
C) automatic fiscal policy.
D) the multiplier.
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