Macroeconomic Theory Practice Questions
Course Introduction
Macroeconomic Theory explores the fundamental principles governing the performance, structure, and behavior of economies as a whole. The course examines key concepts such as national income determination, economic growth, inflation, unemployment, monetary and fiscal policy, and international trade. Students will analyze how aggregate demand and supply interact, the roles of government and central banks in managing the economy, and the various schools of thought that have shaped modern macroeconomic policy. By integrating theoretical models with real-world data, the course equips students with the analytical tools necessary to understand and evaluate major economic issues and policy debates.
Recommended Textbook
Economics Today The Macro View 18th Edition by Roger LeRoy Miller
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19 Chapters
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Chapter 1: The Nature of Economics
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Sample Questions
Q1) A theory or a model
A)is a simplified, abstract view of reality.
B)is based on each economist's value judgments.
C)is a detailed analysis of what ought to be.
D)captures all aspects of the real world.
Answer: A
Q2) The impact of an increase in the gasoline tax on SUV sales is
A)a macroeconomics topic because it deals with taxes.
B)a microeconomics topic because it deals with one industry.
C)not an economic issue, but rather a political issue.
D)insignificant.
Answer: B
Q3) The "paired observation" of (-14, -6)means
A)x = -14, y = -6
B)x = -6, y = -14
C)that the distance between the two points will be 8.
D)the origin is at -14 and -6.
Answer: A
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Chapter 2: Scarcity and the World of Trade-Offs
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Sample Questions
Q1) Which of the following is NOT an economic resource?
A)money
B)low-skilled labor
C)coal
D)an engineer
Answer: A
Q2) A tractor used to prepare land for planting is called A)land.
B)labor.
C)physical capital.
D)human capital.
Answer: C
Q3) Explain what is meant by economic efficiency. Does efficiency imply that the fastest production processes or the most powerful equipment must always be used? Explain.
Answer: Efficiency involves a situation in which a given output is produced at lowest cost. Consequently, the fastest-operating or most powerful equipment may not always be efficient.
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4
Chapter 3: Demand and Supply
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Sample Questions
Q1) What type of relationship does the law of demand demonstrate?
A)direct
B)positive
C)inverse
D)static
Answer: C
Q2) What is the difference between a normal good and an inferior good?
How does this relate to the demand curve?
Answer: A normal good is one for which demand increases as income increases, and an inferior good is one for which demand decreases as income decreases. Hence, an increase in income causes the demand curve for a normal good to shift to the right, showing an increase in demand; and an increase in income causes the demand curve for an inferior good to shift to the left, showing a decrease in demand.
Q3) The price that we observe in the market is
A)the law of demand.
B)a substitute.
C)the money price.
D)the relative price.
Answer: C
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Page 5
Chapter 4: Extensions of Demand and Supply Analysis
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Sample Questions
Q1) An economic system in which relative prices change to reflect changes in supply and demand for different commodities is known as a
A)socialist system.
B)communist system.
C)queuing system.
D)market system.
Q2) A price ceiling is
A)the lowest price a seller can charge without losing all of its customers.
B)a legal minimum price below which a good or service cannot be sold.
C)a legal price above which a good or service cannot be sold.
D)a nonprice rationing device.
Q3) Suppose a hurricane causes a great deal of destruction in Florida. After the hurricane, it takes much longer than usual for the reconstruction to take place. A possible explanation for this is
A)greed by suppliers of construction materials increased.
B)government prevented price gouging during the reconstruction period.
C)prices of construction materials fell in the Midwest.
D)environmental restrictions on lumbering in the Pacific Northwest were relaxed.
Q4) Who gains and who loses from rent controls?
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Chapter 5: Public Spending and Public Choice
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Sample Questions
Q1) The free-rider problem is encountered when
A)someone benefits from the consumption of a public good without paying his or her full share.
B)all individuals who consume a public good pay for it.
C)all goods consumed and produced are private goods.
D)all individuals are willing to pay for what they consume.
Q2) An external cost, such as the cost generated by pollution, is
A)a cost paid by consumers of the product.
B)a cost paid by producers of the product.
C)a cost paid by a third party or by society at large.
D)not a true opportunity cost of production.
Q3) Which of the following statements is TRUE?
A)Government spending as a percent of total national income has continuously decreased since the 1950s.
B)Transfer payments are money payments made by the government for which no goods or services are currently received.
C)Education is the largest category of federal government expenditures.
D)Transfers in kind include Welfare, Social Security, and unemployment insurance benefits.
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Page 7
Chapter 6: Funding the Public Sector
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Sample Questions
Q1) The average tax rate can be calculated by which of the following formulas?
A)the change in taxes due divided by the change in taxable income
B)the change in taxable income divided by the change in taxes due
C)total taxes due divided by total taxable income
D)total taxable income divided by total taxes due
Q2) The government budget constraint implies that
A)government borrowings = government spending+ transfers - taxes and user charges.
B)government borrowings = taxes and user charges + government spending - transfers
C)government spending = transfers - taxes and user charges - government borrowing.
D)government spending = government borrowing - transfers - taxes and user charges
Q3) An excise tax is a tax that is levied on
A)the value of a piece of property.
B)the purchase of a given good or service.
C)the value of an estate.
D)that part of a person's income coming from interest payments.
Q4) Explain how corporate profits are taxed twice.
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Chapter 7: The Macroeconomy: Unemployment, Inflation, and Deflation
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Sample Questions
Q1) Frictional unemployment is
A)related to job search difficulties for potential workers.
B)a result of a poor match of worker's abilities and skills with current requirements of employers.
C)a result of business recessions that occur when aggregate demand is insufficient to create full employment.
D)a result of the seasonal pattern of work in specific industries.
Q2) The CPI tends to overstate the true inflation rate because
A)we cannot know what the true inflation rate is.
B)it fails to consider the effects of new products in the marketplace.
C)the market basket actually selected is inappropriate.
D)the market basket fails to weigh housing costs sufficiently.
Q3) A business fluctuation when the pace of economic activity is slowing down is called
A)a reduction.
B)a contraction.
C)a depression.
D)a slowdown.
Q4) Describe the major types of unemployment.
Q5) In what ways is the consumer price index flawed?
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Chapter 8: Global Economic Growth and Development
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Sample Questions
Q1) A change in the growth rate of a country of one percentage point annually has
A)very little impact on the economy of a country.
B)a large impact in the future due to compounding.
C)a small impact in the current year, and smaller impact in the future because of compounding.
D)a large impact on the economy in the current year, but not in the future.
Q2) New growth theory is concerned with
A)finding a good way to measure economic growth.
B)increasing the savings rate in the U.S.
C)understanding the forces that increase productivity.
D)understanding how compounding works.
Q3) Entrepreneurship functions better when
A)patent laws are not strongly enforced since they make imitation difficult.
B)government provides technical support to entrepreneurs.
C)a system of private property rights permits entrepreneurs to capture the rewards from their entrepreneurial activities.
D)universities provide research that is closely interrelated with the entrepreneurial activities.
Q4) Why might population growth and immigration stimulate economic growth?
Q5) What is the economic role of a patent?
Page 10
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Chapter 9: Real GDP and the Price Level in the Long Run
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Sample Questions
Q1) Which of the following will NOT shift the aggregate demand curve?
A)a change in the domestic marginal tax rates
B)a change in government expenditures
C)a change in the domestic price level
D)depreciation in the value of the national currency
Q2) If the price level increases, then
A)the exchange rate will increase, causing U.S. goods to become cheaper and increasing total planned real expenditures.
B)imports increase but exports do not change. Therefore, there is no effect on total planned real expenditures.
C)foreign residents buy fewer U.S. goods, leaving more goods for U.S. residents and an increase in total planned real production by firms.
D)domestic goods are more expensive relative to foreign goods, which reduces total planed real expenditures.
Q3) Economic growth can be shown by
A)a leftward shift in the aggregate supply curve.
B)no change in the aggregate supply curve.
C)a rightward shift in the aggregate supply curve.
D)a leftward shift in the production possibilities curve.
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Page 11
Chapter 10: Classical and Keynesian Macro Analyses
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Sample Questions
Q1) The short-run aggregate supply (SRAS)curve represents the relationship between
A)the price level and the real Gross Domestic Product (GDP)without full adjustment or full information.
B)the price level and the real Gross Domestic Product (GDP)without full adjustment but with full information.
C)the price level and the nominal Gross Domestic Product (GDP).
D)the decisions of producers and the decisions of consumers.
Q2) The condition of fully flexible wages and prices was assumed by
A)the classical economists.
B)the Keynesian economists.
C)modern economists.
D)no economists.
Q3) All the following are assumptions of the classical model EXCEPT
A)pure competition exists.
B)buyers and sellers react to nominal money prices rather than to relative prices.
C)people are motivated by self-interest.
D)wages and prices are flexible.
Q4) What is Say's law and what does it mean?
Q5) Using a graph, show the effects of a weaker dollar on the economy. Explain.
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Chapter 11: Consumption, Real GDP, and the Multiplier
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Sample Questions
Q1) Which of the following theories predicts that current consumption increases when a person expects an increase in future income?
A)the life-cycle theory of consumption
B)the permanent income hypothesis
C)the Keynesian theory of consumption
D)all of the above
Q2) Suppose government spending decreases by $100 billion and the marginal propensity to consume (MPC)is 0.8. Given this information, this decrease in government spending will cause a(n)
A)increase in equilibrium real GDP equal to $500 billion.
B)increase in equilibrium real GDP equal to $800 billion.
C)decrease in equilibrium real GDP equal to $500 billion.
D)decrease in equilibrium real GDP equal to $800 billion.
Q3) The multiplier effect tends to
A)generate instability.
B)promote stability of the general price level.
C)magnify small changes in spending into much larger changes in real Gross Domestic Product (GDP).
D)increase the MPC.
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Page 13
Chapter 12: Fiscal Policy
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Sample Questions
Q1) If the price level is fixed, then an increase in government spending will lead to
A)a larger increase in nominal GDP than in real GDP.
B)a smaller increase in nominal GDP than in real GDP.
C)no increase in either nominal GDP or real GDP.
D)an increase in nominal GDP by the same amount as an increase in real GDP.
Q2) When real Gross Domestic Product (GDP)falls, which of the following will automatically occur?
A)a decrease in all tax rates
B)a decrease in income tax revenues
C)a decrease in unemployment compensation expenditures
D)an increase in income tax revenues
Q3) If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should
A)reduce aggregate demand by cutting government spending or raising taxes.
B)reduce aggregate demand by increasing government spending or cutting taxes.
C)increase aggregate supply by cutting government spending or raising taxes.
D)increase aggregate supply by increasing government spending or lowering taxes.
Q4) What is discretionary fiscal policy and what is its purpose?
Q5) What is supply-side economics?
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Chapter 13: Deficit Spending and the Public Debt
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Sample Questions
Q1) If no foreign residents owned any of the U.S. public debt, then it would be true that
A)there would be no distributional consequences associates with he public debt.
B)U.S. residents would essentially owe the public debt to themselves.
C)there would be no interest payments on the public debt.
D)the public debt would naturally disappear over time.
Q2) An increase in the public debt would most likely indicate that
A)the budget deficit has increased.
B)the budget deficit has decreased.
C)the trade deficit has decreased.
D)national saving has increased.
Q3) When government revenues exceed government outlays in a particular year, this is called
A)a budget surplus.
B)a budget deficit.
C)the national debt.
D)fiscal policy.
Q4) What are the macroeconomic consequences of a budget deficit when the economy is operating at full employment?
Be sure to discuss the effects in the short-run and in the long-run.
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Chapter 14: Money Banking and Central Banking
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Sample Questions
Q1) As a "lender of last resort," the Fed
A)is obligated to bail out any depository institution in the country that is in financial difficulty.
B)protects the deposits of $100,000 or less in all commercial banks in the country.
C)provides loans to banks experiencing temporary liquidity problems.
D)bails out any corporation the government has decided should not fail.
Q2) A highly liquid asset
A)has high transaction costs associated with its sale.
B)must be held for a substantial period of time.
C)generally has a very limited market for its resale.
D)can be disposed of easily without loss of value.
Q3) Which one of the following statements is TRUE?
A)Not all forms of currency are accepted equally well by the public as a medium of exchange.
B)Checkable and debitable account balances are not money, but currency is.
C)Checkable and debitable accounts are considered money by law in only 15 states.
D)The value of the dollar rises along with the increases in the consumer price index.
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Page 16
Chapter 15: Domestic and International Dimensions of Monetary Policy
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Sample Questions
Q1) Suppose the economy currently has some underutilized resources. The Fed engages in expansionary monetary policy. The impact of expansionary monetary policy will be to
A)increase aggregate demand, increase prices and increase real GDP.
B)increase aggregate demand, increase prices and decrease real GDP.
C)increase short-run aggregate supply, decrease in prices and decrease in real GDP.
D)increase short-run aggregate supply, decrease prices and increase real GDP.
Q2) According to proponents of the interest-rate-based monetary policy transmission mechanism, any increase in the money supply
A)is effective in increasing Gross Domestic Product (GDP)only if it causes an outward shift of the aggregate supply curve.
B)will increase Gross Domestic Product (GDP)only if interest rates fall and investment is sensitive to decreasing interest rates.
C)causes velocity to increase, and so in the short run nominal Gross Domestic Product (GDP)must increase.
D)will move the economy from the "liquidity trap" during times of recession if interest rates fall enough to stimulate private investment.
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Page 17
Chapter 16: Stabilization in an Integrated World Economy
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Sample Questions
Q1) The stagflation experienced in the U.S. during the late 1960s and the 1970s showed us that
A)the Phillips curve accurately represents the trade-off between unemployment and inflation.
B)both inflation and economic expansion could exist simultaneously.
C)the relationship between unemployment and inflation was not as clear-cut as presented on the Phillips curve.
D)it is possible to alleviate economic stagflation through the government discretionary fiscal policy.
Q2) If the rate of growth in the money supply is predetermined on the basis of a monetary rule, this is known as
A)direct policy making.
B)active policy making.
C)passive policy making.
D)fiscal policy making.
Q3) What is the Phillips curve?
What does the Phillips curve suggest about optimal policy?
Q4) How do rational expectations models differ from traditional classical economics? How does the new Keynesian model differ from the traditional Keynesian view?
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Chapter 17: Policies and Prospects for Global Economic Growth
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Q1) What are some of the criticisms that have been levied on the World Bank and the International Monetary Fund concerning adverse selection and moral hazard?
Q2) If the World Bank makes loans to nations that can attract private funds
A)the increase in growth in that nation will spill over to other nations that are developing.
B)these loans will interfere in the private market for capital goods and can lead to inefficient investment.
C)the World Bank's loans will crowd out the private funds made to developing nations to encourage economic growth.
D)the presence of the World Bank's loans will lead to even more private funds being attracted to that country.
Q3) The term "economic freedom" means
A)the right to own private property.
B)the right to trade goods and services.
C)the right to own financial assets.
D)all the above.
Q4) How have government inefficiencies contributed to the creation of dead capital in the world's developing nations?
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Chapter 18: Comparative Advantage and the Open Economy
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Sample Questions
Q1) A significant advantage to being a member of a trade bloc is
A)higher tariff collections from member countries.
B)reduced or eliminated tariffs among member countries.
C)reduced tariff rates only for the largest member countries.
D)None of the above; there is no economic advantage to a trade bloc.
Q2) Comparative advantage is defined as
A)the ability to produce more output of one good relative to another good than another country can.
B)the ability to produce more output from given inputs of resources than others can.
C)the ability to use more input of resources than others can.
D)having a lower average fixed cost in the production of a good than does someone else.
Q3) A government-imposed restriction on the quantity of a specific good that may be imported to and sold in the United States is called a
A)tariff system.
B)quota system.
C)reverse-trade system.
D)union trade system.
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Chapter 19: Exchange Rates and the Balance of Payments
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Sample Questions
Q1) The foreign exchange rate describes the A)balance of trade.
B)balance of payments.
C)law of comparative advantage.
D)price of foreign currency in terms of domestic currency.
Q2) Suppose the foreign exchange market is in equilibrium. Then, the U.S. government increases borrowing, causing American interest rates to increase. What will happen to the price of the Japanese yen? Why?
Q3) An increase in the market clearing exchange value of the home nation's currency in terms of the currency of another nation is a home currency
A)appreciation.
B)depreciation.
C)devaluation.
D)revaluation.
Q4) How are deficit and surplus items determined in the balance of payments?
Q5) Distinguish between the balance of payments and the balance of trade.
Q6) Explain the three categories of balance of payments transactions.
Q7) Why does the supply curve of Japanese yen slope up?
Page 21
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