Macroeconomic Theory
Pre-Test Questions
Course Introduction
Macroeconomic Theory explores the fundamental principles, models, and tools used to analyze the performance and behavior of entire economies. The course examines aggregate economic variables such as national income, output, unemployment, inflation, and economic growth, and investigates how these variables are influenced by government policies, external shocks, and global developments. Students will study key theoretical frameworks, including classical, Keynesian, and modern macroeconomic models, and apply them to current economic issues and policy debates. Emphasis is placed on understanding the interrelationships among macroeconomic variables and the implications for policy-making aimed at achieving economic stability and growth.
Recommended Textbook
Macroeconomics 12th Edition by Roger A. Arnold
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Chapter 1: What Economics Is About
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Sample Questions
Q1) Describe at least three of the key concepts in economics introduced in Chapter 1 of the textbook that define how an economist views the world.
Answer: Economists view the world using a number of key concepts.A few of these concepts introduced in Chapter 1 are: (a)goods and bads; (b)resources; (c)scarcity; (d)opportunity cost; (e)benefits and costs; (f)decisions made at the margin; (g)efficiency; (h)incentives: (i)unintended effects; (j)exchange.
Q2) Several years ago,a bookstore chain extended its closing time from 9 p.m.to 10 p.m.Now it is considering a further extension to 11 p.m.In making this marginal decision,the results of having gone from 9 p.m.to 10 p.m.are
A)no longer relevant to the current decision.
B)relevant if the marginal costs and benefits were unequal.
C)relevant since they are part of the calculation of total costs and benefits.
D)relevant if the marginal costs and benefits were equal.
Answer: A
Q3) Economists sometimes refer to the resource category land as natural resources.
A)True
B)False
Answer: True
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3
Chapter 2: Production Possibilities Frontier Framework
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Sample Questions
Q1) Jose has one evening in which to prepare for two exams and can employ one of two possible strategies:
The opportunity cost of receiving a 90 on the statistics exam is ___________ points on the economics exam.
A)79
B)17
C)11
D)90
Answer: B
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Page 4
Chapter 3: Supply and Demand: Theory
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Sample Questions
Q1) An economist says,"Technological advances have the power to lower the prices of many of the goods we buy." Here is how this works:
A)Technological advances lead to lower demand,which leads to lower prices.
B)Technological advances lead to greater supply,which leads to lower prices.
C)Technological advances lead to greater quantity supplied,which leads to lower prices.
D)Technological advances lead to lower taxes,which lead to greater supply,which leads to lower prices.
E)Technological advances lead to higher taxes,which lead to fewer subsidies,which lead to greater supply,which leads to lower prices.
Answer: B
Q2) Which of the following pairs of goods would be most likely to be substitutes?
A)pasta and pasta sauce
B)olive oil and vegetable oil
C)chips and salsa
D)tires and automobiles
E)all of the above
Answer: B
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Chapter 4: Prices: Free, controlled, and Relative
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Sample Questions
Q1) Refer to Exhibit 4-8.If the wheat market is in competitive equilibrium the total surplus will equal
A)area 1 + 2 + 3 + 4 + 5
B)area 1 + 2 + 3
C)area 2 + 3 + 4 + 5
D)area 4 + 5
Q2) A minimum wage law (that sets the minimum wage above the equilibrium wage)can be expected to
A)clear the market for unskilled workers.
B)increase the number of unskilled workers employed.
C)increase the number of firms in those industries where the law is effective.
D)reduce the number of unskilled workers employed and/or reduce the number of hours worked by unskilled workers.
E)all of the above
Q3) The minimum wage is an example of a
A)price door.
B)price wall.
C)price floor.
D)price ceiling.
Q4) List and describe the two major jobs performed by price.
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Chapter 5: Supply,demand,and Price: Applications
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Sample Questions
Q1) If patients were allowed to sue their HMO,we would expect
A)the demand curve for health care services provided by the HMO to shift to the left and the price of HMO-provided health care coverage to fall.
B)the supply curve for health care services provided by the HMO to shift to the left and the price of HMO-provided health care coverage to rise.
C)the supply curve for health care services provided by the HMO to shift to the right and the price of HMO-provided health care coverage to fall.
D)a and b
E)none of the above
Q2) Good weather in cities such as San Diego
A)is absolutely free for the residents of that city.
B)is allocated using a weather market.
C)imposes indirect payments for the residents of that city.
D)b and c
E)none of the above
Q3) Using proper economic terminology,describe why Mexican restaurants often provide chips and salsa for free to their customers.
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Chapter 6: Macroeconomic Measurements, part I: Prices and Unemployment
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Sample Questions
Q1) Some economists argue that the recent relatively high rate of unemployment has resulted in part from the fact that a part of the workforce has not made the adjustment to new technologies.
A)True
B)False
Q2) Suppose the civilian non-institutional population equals 250,000;there are 132,500 employed persons and 10,000 unemployed persons.How many persons are not in the labor force?
A)122,500
B)77,500
C)63,500
D)107,500
Q3) A person in the civilian labor force falls into one of two categories:
A)a person who works in a service industry or a person who works in a manufacturing industry.
B)unemployed or employed.
C)disemployed or unemployed.
D)a self-employed worker or a non-self-employed worker.
Q4) Describe what the term "full employment" means to an economist.
Page 8
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Chapter 7: Macroeconomic Measurements, part II: GDP and
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Sample Questions
Q1) The expenditure approach to measuring GDP sums
A)consumption,investment,government purchases,and net exports.
B)sales,revenues,income,and wages.
C)profits,compensation of employees,consumption,and investment.
D)net exports,consumption,wages,and salaries.
E)consumption,interest,net exports,and federal government purchases
Q2) Which of the following does GDP omit?
A)Jack purchases $2,300 worth of stock in company X.
B)Bob mows his lawn and washes and irons his shirts.
C)Helen receives $4,000 a year in Social Security payments.
D)a and b
E)a,b,and c
Q3) The sum of durable goods,nondurable goods,and services equals
A)investment.
B)fixed investment.
C)government purchases.
D)consumption.
E)net exports.
Q4) List and explain the two different approaches used to measure GDP.
Q5) Explain why GDP figures do not necessarily measure happiness or well-being.
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Chapter 8: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) Which of the following statements is false?
A)Purchasing power and the price level are inversely related.
B)The real balance effect refers to the change in the purchasing power of dollar-denominated assets as a result of a change in the price level.
C)The aggregate demand curve slopes downward because of the real balance,interest rate,and international trade effects.
D)A change in the quantity demanded of Real GDP is directly brought about by a change in interest rates.
Q2) Which of the following statements is false?
A)Some prices in an economy adjust faster than other prices.
B)Aggregate demand curves slope downward.
C)Firms may not adjust their prices immediately because they may be unable to figure out whether a decline in demand is temporary or permanent.
D)The absolute price of a good is the dollar or money price of the good. E)none of the above
Q3) Explain how aggregate demand and aggregate supply may affect your job prospects after you leave college.Support your answer with an appropriate example.
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Chapter 9: Classical Macroeconomics and the
Self-Regulating Economy
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Sample Questions
Q1) Business-cycle macroeconomics involves increases in Real GDP that result from a rightward-shifting LRAS curve.
A)True
B)False
Q2) Refer to Exhibit 9-5.Imagine an AD curve intersecting an SRAS curve at Point M on graph (1).Which point(s)would this correspond to on graph (2)?
A)A or B
B)C
C)E or F
D)F
E)G
Q3) Suppose the AD curve and the SRAS curve intersect to the right of the LRAS curve.Which of the following is true?
A)The economy is in a recessionary gap.
B)The economy is in an inflationary gap.
C)The economy is in a long-run equilibrium.
D)This situation is actually impossible.
Q4) Describe the difference between business-cycle macroeconomics and economic-growth macroeconomics.
Page 11
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Chapter 10: Keynesian Macroeconomics and Economic
Instability: a Critique of the Self-Regulating Economy
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Sample Questions
Q1) Refer to Exhibit 10-5 above.The equilibrium level of Real GDP is
A)$200 billion.
B)$400 billion.
C)$600 billion.
D)$800 billion.
Q2) If people buy more than has been produced, A)the economy is in equilibrium.
B)total expenditures are greater than total production.
C)there will be an increase in inventory.
D)there will be a decrease in total output.
Q3) Which of the following statements is false?
A)MPC plus MPS equals 1.
B)MPC is additional saving divided by additional disposable income.
C)The MPS is the ratio of the change in saving to the change in disposable income.
D)If MPC equals 0.80,autonomous consumption equals $400,and disposable income equals $600,then consumption equals $880.
E)none of the above
Q4) Discuss how the Great Depression contributed to the development of Keynesian economics.
Page 12
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Chapter 11: Fiscal Policy and the Federal Budget
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Sample Questions
Q1) Refer to Exhibit 11-2.Compare points A and B.Which of the following is true?
A)At A and B,the tax rates are the same,but tax revenues are different.
B)At A tax rates are higher than at B,but tax revenues are the same at both points.
C)At B tax rates are higher than at A,but tax revenues are the same at both points.
D)none of the above
Q2) The deficit that exists when the economy operates at full employment is called the __________ deficit.
A)net
B)gross
C)cyclical
D)structural
Q3) According to the textbook,if the government had taxed everyone who earned more than $1 million an income tax rate of 100 percent in 2012,the budget deficit for that year would have been completely eliminated.
A)True
B)False
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Chapter 12: Money,banking,and the Financial System
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Sample Questions
Q1) In a barter economy,people are _________ to specialize in the production of one good or service,compared to in a money economy.
A)more likely
B)less likely
C)equally likely
D)almost always going
Q2) To a bank,checkable deposits are classified as a liability.
A)True
B)False
Q3) According to the textbook,many people believe that the character Dorothy,in the book The Wonderful Wizard of Oz,represents A)presidential candidate Barry Goldwater.
B)President Abraham Lincoln.
C)President William McKinley.
D)presidential candidate William Jennings Bryan.
Q4) Credit cards are a widely accepted form of money.
A)True
B)False
Q5) Describe the differences between M1 and M2.
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Chapter 13: The Federal Reserve System
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Sample Questions
Q1) The members of the Board of Governors of the Federal Reserve are
A)elected by a vote of the Federal Reserve District Bank presidents.
B)appointed by the President of the United States with approval by the Senate.
C)appointed by the Congress with approval by the President of the United States.
D)elected by a general election of the citizens of the United States.
Q2) The Federal Reserve System
A)is the central bank of the United States.
B)controls the money supply.
C)is the lender of last resort.
D)handles the sale of U.S.Treasury securities.
E)all of the above
Q3) Which of the following statements is false?
A)The Fed serves as the lender of last resort for banks.
B)The Fed serves as a fiscal agent for the U.S.Treasury.
C)A major responsibility of the Fed is to control the nation's money supply.
D)The federal government is the Fed's banker.
Q4) The Fed is one of the largest departments within the U.S.Treasury.
A)True
B)False
Q5) Summarize the history of how the Federal Reserve came to have twelve districts.
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Chapter 14: Money and the Economy
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Sample Questions
Q1) The liquidity effect is the
A)decrease in the interest rate due to an increase in the supply of loanable funds.
B)increase in the interest rate due to an increase in national income.
C)increase in the interest rate due to a higher expected inflation rate.
D)increase in the interest rate due to an increase in the price level.
Q2) In the equation of exchange,"Q" stands for A)the interest rate.
B)quality.
C)GDP.
D)Real GDP.
Q3) One-shot inflation can originate
A)only on the demand side of the economy.
B)only on the supply side of the economy.
C)on the demand side or the supply side of the economy.
D)on neither the demand side nor the supply side of the economy.
Q4) Both the monetarist view of the economy and the simple quantity theory of money hold that velocity is constant.
A)True
B)False
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Chapter 15: Monetary Policy
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Sample Questions
Q1) The Taylor Rule provides policymakers with a target for
A)the federal funds rate.
B)the discount rate.
C)the inflation rate.
D)the unemployment rate.
E)c and d
Q2) According to the Keynesian transmission mechanism (and assuming there is no liquidity trap and investment is not interest insensitive),if the money supply increases,the interest rate __________,investment spending __________ and the AD curve shifts to the __________.
A)falls;falls;left
B)rises;rises;right
C)falls;rises;left
D)falls;rises;right
E)rises;falls;right
Q3) Nonactivists favor
A)the use of fiscal policies to manage the economy.
B)the use of monetary polices to manage the economy.
C)fine-tuning.
D)rules for conducting monetary and fiscal policies.
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Chapter 16: Expectations Theory and the Economy
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Sample Questions
Q1) The terms rational expectations and adaptive expectations are two different names for the same concept.
A)True
B)False
Q2) Which of the following changes would not be considered a likely source of changes in Real GDP according to real business cycle theory?
A)a natural disaster
B)a technological change
C)a change in the price of an important input
D)a change in the money supply
E)none of the above
Q3) Real business cycle theory emphasizes that an adverse supply shock will shift the LRAS curve leftward and cause a decline in Real GDP.
A)True
B)False
Q4) As long as some people anticipate policy,the economic consequences may be the same as if all persons do so.
A)True
B)False
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Chapter 17: Economic Growth: Resources, technology, ideas, and Institutions
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Sample Questions
Q1) When a production function is graphed with Real GDP on the vertical axis and labor on the horizontal axis,a rise in labor ________________________which shifts the LRAS curve ____________ resulting in ______________________.
A)shifts the production function up;rightward;economic growth
B)shifts the production function down;leftward;a shrinking economy
C)moves us up along a given production function;rightward;economic growth
D)moves us down along a given production function;leftward;a shrinking economy
Q2) _______________________ specifies the relation between technology and the factor inputs to output.
A)Neoclassical growth theory
B)Meta-ideas
C)The LRAS curve
D)A production function
Q3) An increase in nominal GDP
A)is absolute real economic growth.
B)is per capita real economic growth.
C)is both per capita and absolute real economic growth.
D)does not necessarily mean either absolute or per capita real economic growth.
Q4) List and describe four factors that can contribute to economic growth.
Page 19
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Chapter 18: The Financial Crisis of 2007-2009
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Q1) Which of the following statements is false?
A)In 2006,some people with subprime and other nontraditional loans were not able to make their monthly payments on their mortgage loans.
B)The leverage ratio is the ratio of assets to capital.
C)John Taylor argued that the global savings glut was the reason for the low interest rates in the early-2000s and for the rise in housing prices that followed.
D)It is possible for a bank to have the value of its liabilities greater than the value of its assets.
E)none of the above
Q2) In the early 2000s,Fannie Mae and Freddie Mac came under political pressure to buy nontraditional loans.
A)True
B)False
Q3) The downside to a bank having a high leverage ratio is that a decline in asset value magnifies losses.
A)True
B)False
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Chapter 19: Debates in Macroeconomics Over the Role and Effects
of Government
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Sample Questions
Q1) "In two hours the polls will close.I know I should probably vote,but it is raining,and besides,there is a basketball game on TV tonight,so I'll just stay in." This person is exhibiting A)median voter preferences.
B)rational ignorance.
C)decision making based on cost-benefit considerations. D)logrolling.
Q2) Competition for votes between two political parties will cause those parties to A)produce quite different policy proposals.
B)have very similar policy proposals.
C)find ways to clearly distinguish themselves in order to give voters a clear choice. D)a and c
E)none of the above
Q3) Why do many prospective voters choose to watch sports on television rather than watching the news or political roundtables? In your answer,be sure to mention the role played by rational ignorance.
Q4) What is the median voter model? Describe four different ways in which this theory is predicted to impact the behavior of political candidates.
Page 21
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Chapter 20: Public Choice and Special-Interest-Group
Politics
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Q1) If a person gives a gift to another person,an economist would say that it is because
A)the marginal benefit of giving the gift is at least as great as the marginal cost of giving the gift.
B)the marginal cost of giving the gift is at least as great as the marginal benefit of giving the gift.
C)he expects to receive a gift in return.
D)none of the above
Q2) Explain what it means to say that a theory is falsifiable or refutable? Give a specific example to help support your answer.
Q3) Smith says that criminals are rational and that they consider both the benefits and costs of criminal activity.Jones disagrees.He says criminals are irrational and can't possibly be considering both the benefits and costs of criminal activity.If they did,he argues,they wouldn't be criminals.An economist who wants to figure out if criminals are rational,would most likely build a
A)falsifiable theory built on a rational criminal and then test the theory.
B)non-falsifiable theory built on a rational criminal and then test the theory.
C)falsifiable theory built on a rational criminal,but not test the theory.
D)non-falsifiable theory built on a rational criminal,but not test the theory.
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Chapter 21: Building Theories to Explain Everyday Life: From
Observations to Questions to Theories to Predictions
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Q1) Arguments made against free trade include all of the following except
A)national defense considerations justify producing certain goods domestically whether the country has a comparative advantage in their production or not.
B)infant industries should be protected from free trade so that they may have time to develop and compete on an even basis with older,more established foreign industries.
C)dumping is an unfair trade practice that puts domestic producers of substitute goods at a disadvantage that they should be protected against.
D)free trade is inflationary and should be restricted in the domestic interest.
E)if foreign governments subsidize their exports,foreign firms that export are given an unfair advantage that domestic producers should be protected against.
Q2) Refer to Exhibit 34-6.Which of the following terms of trade would both countries agree on?
A)1 unit of wine = 2.5 units of cheese
B)1 unit of wine = 1.5 units of cheese
C)2.5 units of wine = 1 unit of cheese
D)1.5 units of wine = 1 unit of cheese
E)none of the above
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Chapter 22: International Trade
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Q1) If the equilibrium exchange rate between U.S.dollars and Japanese yen is $0.008 = 1 yen,but currently the exchange rate is $0.007 = 1 yen,then with flexible exchange rates the dollar price of a yen will __________,and the dollar will __________. A)increase;appreciate B)decrease;appreciate C)increase;depreciate D)decrease;depreciate
Q2) When exports of American goods increase,this __________ the demand for U.S.dollars and at the same time __________ foreign currencies. A)increases;increases the supply of B)decreases;increases the supply of C)increases;decreases the supply of D)increases;increases the demand for E)none of the above
Q3) The U.S.real interest rate rises relative to Japan's.As a result, A)the yen will depreciate and the dollar will appreciate. B)the yen will appreciate and the dollar will depreciate. C)both the dollar and the yen will depreciate. D)both the dollar and the yen will appreciate.
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Chapter 23: International Finance
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Sample Questions
Q1) Suppose the supply of Malaysian rubber increases.If U.S.producers purchase this rubber as an input,in the United States,this would cause a
A)rightward shift of the AD curve.
B)leftward shift of the AD curve.
C)rightward shift of the SRAS curve.
D)leftward shift of the SRAS curve.
Q2) When the dollar depreciates,this shifts the AD curve rightward and the SRAS curve leftward,leading to a higher price level.
A)True
B)False
Q3) Dollar depreciation raises United States Real GDP when the __________ shift of the AD curve exceeds the _________________ shift of the SRAS curve.
A)rightward;rightward
B)rightward;leftward
C)leftward;rightward
D)leftward;leftward
Q4) Describe at least three forces in the world which could change to push the world in the direction of antiglobalization.
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Chapter 24: Globalization and International Impacts on the Economy
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Q1) Special interest group X receives a 1/150<sup>th</sup> slice of the economic pie.Its net benefits from an economic growth policy are $7,000,which are the same as its net benefits from a transfer policy.What is the change in the size of the economic pie (Real GDP)that is required to bring about this result?
A)$1,050,000
B)$46.67
C)$150,000
D)$2,500,000
E)none of the above
Q2) Government can overcome the free rider problem by collecting taxes and using the funds to provide individuals with nonexcludable public goods that they want to buy but the market cannot provide.
A)True
B)False
Q3) If the government grants tax credits to first-time homebuyers,the supply of houses would increase and the price of housing would fall.
A)True
B)False
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Chapter 25: The Economic Case for and Against
Government: Five Topics Considered
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Q1) A bond is
A)a claim on the assets of a corporation such that the purchaser has an ownership right in the corporation.
B)anything of value to which the firm has a legal claim.
C)a means of assuring that the business firm will pay its debts or fulfill other legal obligations.
D)a promise to pay for the use of someone else's money.
Q2) When you purchase a share of stock,you are
A)borrowing funds from the corporation.
B)lending funds to the corporation.
C)selling an ownership right in the corporation.
D)acquiring an ownership right in the corporation.
E)b and d
Q3) A futures contract is a contract in which the seller agrees to provide a given good to the buyer on a predetermined future date at an agreed-upon price.
A)True
B)False
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Page 27
Chapter 26: Stocks, bonds, futures, and Options
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Q1) Suppose the price elasticity of demand of for soy beans is 0.85.When the price of soybeans rises by 20 percent,the quantity demanded of soybeans falls by approximately _____________ percent.
A)0.024
B)26.67
C)23.53
D)17.00
Q2) Increased productivity in the agricultural sector in conjunction with an inelastic demand curve for agricultural goods has caused a(n)__________ in output,a(n)__________ in price,and __________ revenues for farmers. A)increase;decrease;higher B)increase;decrease;lower C)decrease;increase;higher D)decrease;increase;lower E)increase;increase;higher
Q3) Explain how the combination of major changes in the weather and price inelasticity of demand for a food item can lead to wide fluctuations in a farmer's income from year to year.
Q4) Explain how nonrecourse loans operate and how they help to support crop prices.
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