Macroeconomic Theory
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Course Introduction
Macroeconomic Theory explores the aggregate behavior of economies, focusing on the determination of national income, output, employment, inflation, and economic growth. The course examines the fundamental models and concepts that form the basis of modern macroeconomic analysis, including the analysis of goods and financial markets, the roles of government fiscal and monetary policy, and the effects of international trade. Through a mix of theoretical frameworks and real-world applications, students develop a comprehensive understanding of how macroeconomic policies are formulated and their impact on overall economic stability and performance.
Recommended Textbook
Macroeconomics Principles Applications and Tools 8th Edition by OSullivan SheffrinPerez
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Chapter 1: Introduction: What Is Economics?
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Sample Questions
Q1) Positive relationships are also referred to as inverse relationships.
A)True
B)False
Answer: False
Q2) Which of the following is a microeconomic question?
A) Should the government decrease unemployment benefits to reduce the unemployment rate ?
B) Why do some countries have higher inflation rates than other countries?
C) Should the government subsidize corn farmers to encourage the production of ethanol?
D) Should congress decrease taxes to help stimulate the economy?
Answer: C
Q3) Which of the following is a microeconomic question?
A) Should companies pay for employees' health insurance?
B) Why do some countries have higher economic growth rates than other countries?
C) Should Congress and the president take action to reduce the unemployment rate?
D) Should the Fed attempt to influence the interest rate to control potential inflation?
Answer: A
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3
Chapter 2: The Key Principles of Economics
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Sample Questions
Q1) Joe runs a business and needs to decide how many hours to stay open. Figure 2.2 illustrates his marginal benefit of staying open for each additional hour. Suppose that we observe Joe staying open 3 hours per day. If he is following the marginal principle, what must his marginal cost per hour be?
A) $24
B) $32
C) $40
D) $48
Answer: D
Q2) Refer to the table above. By what percentage did the federal minimum wage increase from 1974 to 2011?
A) 72.41 percent
B) 262.5 percent
C) 362.5 percent
D) 525.0 percent
Answer: B
Q3) What is an opportunity cost?
Answer: An opportunity cost is what you sacrifice to get something.
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4
Chapter 3: Exchange and Markets
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Sample Questions
Q1) In which system are decisions made by thousands of people who have information about resources, production technology and consumer desires?
A) market system
B) centrally planned system
C) command system
D) socialist system
Answer: A
Q2) Explain how patents have been beneficial for markets.
Answer: Patents increase the profitability of inventions, encouraging firms to develop new products and production processes.
Q3) One of the most obvious clues to the relative scarcity of a product is
A) the variations in available sizes.
B) its current market price.
C) the limited selection of colors.
D) the quality of the product.
Answer: B
Q4) Explain why insurance has been beneficial to markets.
Answer: Insurance reduces the risk of entrepreneurs.
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Page 5
Chapter 4: Demand, Supply, and Market Equilibrium
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Sample Questions
Q1) When there is a change in the quantity demanded it means that
A) the hours the customer can buy products each day have increased.
B) the number of products in inventory have increased.
C) the quantity a consumer is willing to buy changes when the price changes.
D) the selling price of the products has not changed.
Q2) If the demand for jelly increases, and the price of grapes (used to make jelly)rises
A) the equilibrium price of jelly rises and the equilibrium quantity of jelly might rise or fall.
B) the equilibrium price of jelly falls and the equilibrium quantity of jelly might rise or fall.
C) the equilibrium price of jelly falls and the equilibrium quantity of jelly rises.
D) the equilibrium quantity of jelly falls and the equilibrium price of jelly might rise or fall.
Q3) Explain what would happen to the equilibrium price and quantity of oranges if the supply of oranges increased while the demand for oranges decreased.
Q4) Explain the difference between a change in quantity supplied and a change in supply.
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Chapter 5: Measuring a Nation's Production and Income
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Sample Questions
Q1) What type of spending is the largest component of the GDP?
A) consumption
B) government purchases
C) net exports
D) investment
Q2) Prior to 1996 the government measured real GDP using 1987 prices. What would the rapid growth in computers and the fall in computer prices tend to do to the difference between true GDP growth and measured real GDP growth, relative to using a later year?
Q3) Which of the following is a category of national income?
A) net interest
B) corporate profits
C) rental income
D) all of the above
Q4) Define transfer payments and explain why they are not included in the government purchases section of the GDP accounts.
Q5) In the GDP accounts, investment includes the purchase of newly issued shares of stock.
A)True
B)False
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Chapter 6:Unemployment and Inflation
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Sample Questions
Q1) People who want to work but have stopped looking for work because they could not find jobs after actively searching are called
A) employed.
B) unemployed.
C) discouraged workers.
D) empowered.
Q2) Recall the Application. If the federal Disability Insurance program leads to a decrease in the labor force participation rate, the ________ will be ________.
A) frictional unemployment rate; higher
B) structural unemployment rate; higher
C) measured unemployment rate; lower
D) measured unemployment rate; higher
Q3) At full employment there is no
A) structural unemployment.
B) cyclical unemployment.
C) frictional unemployment.
D) all of the above
Q4) Why is the line between frictional and structural unemployment sometimes hard to draw?
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Chapter 7:The Economy at Full Employment
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Sample Questions
Q1) When the share of government spending in GDP increased in the United States during World War II,
A) consumption's share of GDP fell.
B) consumption's share of GDP increased.
C) government spending was crowded out.
D) investment's share of GDP increased.
Q2) A decrease in the population of an economy is likely to lead to lower wages and a lower quantity of labor used.
A)True
B)False
Q3) Table 7.1 exemplifies the principle of
A) real vs. nominal costs.
B) marginal costs.
C) diminishing returns.
D) full employment equilibrium.
Q4) When firms increase capital stock, the productivity of their workers increases. A)True
B)False
Q5) Explain the difference between an open economy and a closed economy.
Q6) Explain the difference between nominal wages and real wages.
Page 9
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Chapter 8: Why Do Economies Grow?
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Sample Questions
Q1) Increases in net investment generally result in
A) lower levels of capital stock and lower levels of depreciation.
B) lower levels of capital stock and higher levels of depreciation.
C) higher levels of capital stock and higher levels of depreciation.
D) higher levels of capital stock and lower levels of depreciation.
Q2) Suppose that real GDP starts at 200 and grows at a rate of 9 percent per year for two years. In the third year real GDP would be
A) 183.49.
B) 236.
C) 237.62.
D) 239.24.
Q3) Which of the following uses of tax revenues collected by the government leads to increased capital deepening in the United States?
A) providing food to a nation suffering from a famine
B) foreign aid given to Mexico to build new schools
C) higher salaries for members of Congress
D) subsidizing airport construction in Seattle
Q4) What are the trade-offs involved in shortening the length of a patent for pharmaceuticals?
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Chapter 9: Aggregate Demand and Aggregate Supply
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Sample Questions
Q1) The relationship between the level of income and investment spending is known as the consumption function.
A)True
B)False
Q2) A supply shock is an ________ event that shifts the aggregate ________ curve.
A) internal; supply
B) external; supply
C) internal; demand
D) external; demand
Q3) Define "autonomous consumption spending."
Q4) Recessions occur because of
A) real adverse shocks to the economy.
B) shocks to technology.
C) difficulties in coordinating economic affairs.
D) all of the above
Q5) What are the four components of aggregate demand?
Q6) What are supply shocks? Explain what effect adverse and favorable supply shocks have on the supply curve.
Q7) Name a supply shock that has affected the U.S. economy on more than one occasion.
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Chapter 10: Fiscal Policy
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Sample Questions
Q1) The fact that it takes time for government to take action, even after a problem has been diagnosed, is one reason for the occurrence of
A) inside lags.
B) outside lags.
C) crowding out.
D) the multiplier effect.
Q2) In 2003, the Bush administration revised the tax bill to include provisions to
A) delay tax increases from the 2001 bill.
B) decrease the child tax credit.
C) lower taxes on dividends.
D) increase taxes on capital gains.
Q3) The supply-side motivated tax cuts of 1981 during the Reagan administration were aimed at
A) increasing aggregate demand.
B) increasing aggregate supply.
C) decreasing aggregate supply.
D) balancing the federal budget.
Q4) The federal budget has three components. Name them.
Q5) What is meant by the term "outside lags"?
Q6) What is the federal government's largest source of revenue?
Page 12
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Chapter 11: The Income-Expenditure Model
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Sample Questions
Q1) Let C = 120 + 0.8y. Assume no government or foreign sectors. At the equilibrium level of income, y* = 200, the level of saving is
A) -80.
B) -30.
C) 96.
D) 160.
Q2) Let C = 40 + 0.8y and I = 10. Autonomous consumption is A) 10.
B) 32.
C) 40.
D) 50.
Q3) The income-expenditure model focuses on changes in A) output levels. B) price.
C) import restrictions.
D) operational lags.
Q4) The slope of the consumption function is equal to the level of autonomous consumption.
A)True
B)False
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Chapter 12: Investment and Financial Markets
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Sample Questions
Q1) Investment spending is countercyclical.
A)True
B)False
Q2) If Table 12.2 represents all the investments available to the economy, the nominal interest rate is 4.5 percent and there is no inflation, what will be the level of investment in the economy?
A) $200
B) $500
C) $600
D) $800
Q3) If you want to purchase a new sailboat in two years for $9,000, how much would you presently need to have in your bank account to have $9,000 in two years? Assume your bank account pays 3 percent interest.
A) $8,484
B) $8,613
C) $8,738
D) $8,822
Q4) How do financial intermediaries reduce risk?
Q5) Explain why it is difficult to determine expected real rates of interest.
Q6) What is a broad definition for an investment?
Page 14
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Chapter 13: Money and the Banking System
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Sample Questions
Q1) When money is used to express the value of goods and services, it is functioning as a A) medium of exchange.
B) store of value.
C) unit of account.
D) store of purchasing power.
Q2) Explain liabilities and assets as they relate to a bank's balance sheet.
Q3) Suppose Darrell has $4,000 in currency which he deposits in his bank. If the reserve ratio is 25 percent, this will lead to a maximum increase of ________ in M1 throughout all banks.
A) $0
B) $4,000
C) $6,000
D) $12,000
Q4) List and explain the three subgroups of the Federal Reserve System.
Q5) If the reserve ratio is 4 percent, the money multiplier is equal to 25.
A)True
B)False
Q6) Why is the money multiplier in the United States smaller than the inverse of the required reserve ratio?
Page 15
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Chapter 14: The Federal Reserve and Monetary Policy
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Sample Questions
Q1) When the Fed ________ interest rates, bond prices ________.
A) raises; rise
B) lowers; rise
C) raises; do not change
D) lowers; do not change
Q2) Suppose that the interest rate available to you on a long-term bond is 4 percent. If you hold $1,000 of your wealth in currency instead of in the form of a bond, the annual opportunity cost is
A) $0.04.
B) $4.
C) $40.
D) $400.
Q3) An increase in the reserve requirement will lead to increased net exports.
A)True
B)False
Q4) A U.S. company that wishes to sell more to other countries would favor
A) an appreciation of the dollar.
B) a depreciation of the dollar.
C) neither an appreciation nor a depreciation of the dollar.
D) higher interest rates.
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Chapter 15: Modern Macroeconomics: From the Short Run
to the Long Run
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Sample Questions
Q1) When the economy is producing below full employment, the wage-price spiral cannot occur.
A)True
B)False
Q2) If GDP is ________ potential output, then we expect to see ________ wages, causing the short-run aggregate supply curve to shift up.
A) above; increasing B) above; decreasing C) below; increasing D) below; decreasing
Q3) In ________, monetary policy can change the level of output.
A) the long run only
B) both the short run and the long run
C) neither the short run nor the long run
D) the short run only
Q4) Refer to Figure 15.1. At point a
A) unemployment is above the natural rate.
B) unemployment is below the natural rate.
C) GDP is equal to potential output.
D) GDP is below potential output.
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Chapter 16: The Dynamics of Inflation and Unemployment
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Q1) Increases in unanticipated inflation will impact employment levels, but once workers recognize higher inflation rates, they will incorporate them into their expectations of inflation. This will tend to cause
A) unemployment to fall below the natural rate.
B) unemployment to return to its natural rate.
C) the natural rate of unemployment to rise.
D) the natural rate of unemployment to fall.
Q2) If, on average, the velocity of money is low
A) interest rates fall.
B) people hold onto money for a long period of time.
C) people hold onto money for a short period of time.
D) interest rates rise.
Q3) Recall the Application. If the natural rate of unemployment has been underestimated and is actually higher than is commonly perceived, reducing the unemployment rate to the perceived natural rate will tend to
A) increase anticipated inflation.
B) decrease anticipated inflation
C) increase unanticipated inflation.
D) decrease unanticipated inflation.
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Page 18
Chapter 17: Macroeconomic Policy Debates
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Q1) If a government had a debt of $300 billion and then ran deficits of $200 billion each year for the next three years, by the end of the third year its total debt would be
A) -$300.
B) $300 billion.
C) $600 billion.
D) $1,200 billion.
Q2) The standard way to measure the effects of debt in an economy is to look at the stock of debt relative to
A) total government spending.
B) federal tax revenue.
C) GDP.
D) the total budget.
Q3) The policy of running deficits and only gradually increasing taxes later to service the debt is referred to as A) crowding out.
B) tax-smoothing.
C) generational accounting.
D) Ricardian equivalence.
Q4) Explain what is meant by the term "monetizing the deficit."
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Chapter 18: International Trade and Public Policy
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Sample Questions
Q1) Would consumers benefit more from a tariff or a quota on imports?
Q2) Refer to Figure 18.4. With an import ban, what is the equilibrium price of gloves in Duckland?
A) $0
B) $8
C) $9
D) $12
Q3) Refer to Figure 18.1. The opportunity cost of hang gliders in Canada is
A) 1/4 of a bicycle.
B) 1/2 of a bicycle.
C) 2 bicycles.
D) 4 bicycles.
Q4) What is a voluntary export restraint?
Q5) The case of Airbus, an airplane manufacturing consortium in Europe, which receives large subsidies from several European countries, best exemplifies which rationale for protectionist policies?
A) shielding workers from foreign competition
B) protecting infant industries
C) prevention of dumping in local markets
D) helping domestic firms establish monopolies in world markets
Page 20
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Chapter 19: The World of International Finance
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Q1) A(n)________ in U.S. prices will cause a decrease in the demand for U.S. dollars and a(n)________ in the (per dollar)exchange rate.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q2) If the yen to dollar exchange rate moves from 105 to 115 yen per dollar, then the dollar has ________ and the yen has ________.
A) depreciated; depreciated
B) depreciated; appreciated
C) appreciated; depreciated
D) appreciated; appreciated
Q3) Although it declined in the first quarter of 2009, the United States was still running a trade deficit., which means that the United States would have to A) devalue the dollar.
B) increase the money supply.
C) decrease the value of its financial account.
D) sell some of its assets to foreigners.
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