Macroeconomic Theory
Test Questions
Course Introduction
Macroeconomic Theory explores the behavior and performance of economies as a whole, focusing on aggregate measures such as national income, output, employment, inflation, and economic growth. The course examines the foundational models that describe the interactions between different sectors of the economy, including goods and services, labor, and money markets. Students will analyze the influences of government policies, international trade, and financial institutions on economic stability and growth. Emphasis is placed on understanding business cycles, macroeconomic indicators, and the theoretical frameworks used to evaluate fiscal and monetary policy interventions.
Recommended Textbook
Macroeconomics 9th Edition by Andrew B. Abel
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15 Chapters
1566 Verified Questions
1566 Flashcards
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Page 2
Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) An economy that doesn't interact economically with the rest of the world is called ________ economy.
A)a closed
B)an open
C)a surplus
D)an authoritarian
Answer: A
Q2) The highest and most prolonged period of unemployment in the United States over the last 125 years occurred during
A)World War II.
B)the 1890s Depression.
C)the 1990-1991 recession.
D)the Great Depression of the 1930s.
Answer: D
Q3) The main reason that the United States has such a high standard of living is
A)low unemployment.
B)high average labor productivity.
C)low inflation.
D)high government budget deficits.
Answer: B
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Chapter 2: The Measurement and Structure of the National Economy
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Sample Questions
Q1) Historical analysis of real interest rates in the United States shows that
A)real interest rates were unusually low in both the 1970s and 1980s.
B)real interest rates were unusually high in both the 1970s and 1980s.
C)real interest rates were unusually low in the 1970s and unusually high in the 1980s. D)real interest rates were unusually low in the 1980s, spurring the economic growth that occurred during the Reagan administration.
Answer: C
Q2) Monica grows coconuts and catches fish.Last year she harvested 1500 coconuts and 600 fish.She values one fish as having a worth of three coconuts.She gave Rachel 300 coconuts and 100 fish for helping her to harvest coconuts and catch fish,all of which were consumed by Rachel.Monica set aside 200 fish to help with next year's harvest.In terms of fish,consumption would equal
A)700 fish.
B)900 fish.
C)1100 fish.
D)2700 fish.
Answer: B
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Page 4
Chapter 3: Productivity, output, and Employment
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Sample Questions
Q1) Suppose the economy's production function is Y = AK<sup>0.3</sup><sup>N</sup><sup>0.7</sup><sup>.</sup>If K = 2000,N = 100,and A = 1,then Y = 246.If A rises by 10 percent,and K and N are unchanged,by how much does Y increase?
A)5%
B)10%
C)15%
D)20%
Answer: B
Q2) According to Okun's Law,if the natural rate of unemployment is 5% and the actual unemployment rate is 4%,what is the level of full-employment output if output equals $10,125 billion?
A)$10,328 billion
B)$10,226 billion
C)$10,025 billion
D)$9926 billion
Answer: D
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Chapter 4: Consumption, saving, and Investment
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Sample Questions
Q1) An increase in the expected real interest rate tends to
A)raise desired saving only.
B)raise desired investment only.
C)raise both desired saving and desired investment.
D)raise desired saving, but lower desired investment.
Q2) How would the desired capital stock be affected by a decline in the user cost of capital?
Q3) Use a saving-investment diagram to explain what happens to saving,investment,and the real interest rate in each of the following scenarios in a closed economy.
(a)Current output rises due to a temporary productivity increase.
(b)The tax code changes so that business firms face higher tax rates on their revenue (offset by other lump-sum tax changes so there's no overall change in tax revenue).
(c)The government increases spending temporarily for a one-year project to turn mercury into gold.
(d)The average educational level rises,inducing an increase in the future marginal productivity of capital.
Q4) What is the marginal propensity to consume,and why is it always less than one?
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Page 6
Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) The difference between the current account balance and net exports is
A)the capital account.
B)net unilateral transfers plus net factor payments from abroad.
C)adjustments in net foreign assets.
D)income receipts from foreign assets.
Q2) A large open economy reduces its investment demand.This causes the world real interest rate to ________ and the country's current account balance to ________.
A)rise; fall
B)rise; rise
C)fall; rise
D)fall; fall
Q3) If the Federal Reserve buys $3 billion worth of Japanese yen,$6 billion of euros,and sells $5 billion of British pounds,how does this affect the balance of payments?
A)Falls by $4 billion
B)Rises by $4 billion
C)Rises by $9 billion
D)Falls by $5 billion
Q4) What determines the interest rate in a small open economy?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) Greenwood and Yorukoglu view the post-1973 productivity slowdown as resulting from
A)the information technology revolution.
B)high oil prices.
C)measurement errors.
D)technological depletion.
Q2) The per-worker production function in the Solow model assumes
A)constant returns to scale and increasing marginal productivity of capital.
B)constant returns to scale and diminishing marginal productivity of capital.
C)increasing returns to scale and diminishing marginal productivity of capital.
D)decreasing returns to scale and diminishing marginal productivity of capital.
Q3) The level of the capital-labor ratio that maximizes consumption per worker in the steady state is known as the
A)Solow residual capital-labor ratio.
B)Golden Rule capital-labor ratio.
C)q theory capital-labor ratio.
D)dynamically efficient capital-labor ratio.
Q4) Describe the main ideas of endogenous growth theory.What does it have to say about the role of government in economic growth?
Q5) What types of government policies can increase long-run living standards?
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Chapter 7: The Asset Market, money, and Prices
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Sample Questions
Q1) If nominal money supply grows 3% and real money demand grows 8%,the inflation rate is
A)-5%.
B)8/3%.
C)5%.
D)11%.
Q2) People's best guesses about returns on assets are called A)expected returns.
B)liquidity.
C)risk.
D)the term structure of returns.
Q3) Time to maturity refers to the amount of time until A)an asset repays the principal to an investor. B)an asset pays interest for the first time.
C)a bond can be sold on the secondary market.
D)the yield curve shows an upward slope.
Q4) Why is per-capita U.S.currency demand so large? Who is holding large amounts of U.S.currency and why are they doing so? Should U.S.policymakers be concerned about this? Why?
Q5) Give five examples of factors that could reduce the demand for money.
Page 9
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Chapter 8: Business Cycles
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Sample Questions
Q1) After a shift in the aggregate demand curve,which variable adjusts to restore general equilibrium?
A)price level
B)real interest rate
C)consumption spending
D)investment spending
Q2) A variable that tends to move at the same time as aggregate economic activity is called
A)a leading variable.
B)a coincident variable.
C)a lagging variable.
D)an acyclical variable.
Q3) One of the first organizations to investigate the business cycle was
A)the Federal Reserve System.
B)the National Bureau of Economic Research.
C)the Council of Economic Advisors.
D)the Brookings Institution.
Q4) When a recession occurs,do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?
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Chapter 9: The Is-Lmad-As Model
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Sample Questions
Q1) Suppose the Federal Reserve's short-run response to any change in the economy is to change the money supply to maintain the existing real interest rate.What would happen to money supply if there were a reduction in government purchases? Given the Fed's policy,what would happen in the very short run (before general equilibrium is restored)to output and the real interest rate? What must happen to the LM curve and the price level to restore general equilibrium?
Q2) An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?
A)The LM curve
B)The IS curve
C)The FE line
D)The labor demand curve
Q3) A decline in expected future output would cause the IS curve to
A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.
Q4) Identify changes in three variables that would cause the FE line to shift to the right.
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Page 11
Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) Suppose the economy's production function is Y = A(300N - N<sup>2</sup>).The marginal product of labor is MPN = A(300 - 2N).Suppose that A = 10.The supply of labor is NS = 0.05w + 0.005G.
(a)If G is 26,000,what are the real wage,employment,and output?
(b)If G rises to 26,400,what are the real wage,employment,and output?
(c)If G falls to 25,600,what are the real wage,employment,and output?
(d)In cases (b)and (c),what is the government purchases multiplier; that is,what is the change in output divided by the change in government purchases?
Q2) Which of the following statements is true about the misperceptions theory?
A)Both anticipated and unanticipated changes in the nominal money supply have real effects on the economy.
B)Neither anticipated nor unanticipated changes in the nominal money supply has real effects on the economy.
C)Unanticipated changes in the nominal money supply have real effects, but anticipated changes are neutral.
D)Anticipated changes in the nominal money supply have real effects, but unanticipated changes are neutral.
Q3) Define real shocks,define nominal shocks,and give an example of each.
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Page 12
Chapter 11: Keynesianism: the Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) In the Keynesian model in the short run,an increase in the money supply will cause
A)an increase in output and a decrease in the real interest rate.
B)a decrease in the real interest rate but no change in output.
C)an increase in the real interest rate and an increase in output.
D)no change in either the real interest rate or output.
Q2) The 1980s were characterized by ________ monetary policy and ________ fiscal policy.
A)tight; easy
B)tight; tight
C)easy; easy
D)easy; tight
Q3) The theory that firms will be slow to change their products' prices in response to changes in demand because there are costs to changing prices is called
A)transactions cost theory.
B)cost-benefit theory.
C)menu cost theory.
D)gift exchange theory.
Q4) Why might firms pay an efficiency wage rather than a market-clearing wage?
Page 13
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) In the expectations-augmented Phillips curve, = <sup>e</sup> - 3(u - 0.06).When = 0.06 and <sup>e</sup> = 0.03,the unemployment rate is
A)0)04.
B)0)05.
C)0)06.
D)0)07.
Q2) Consider the following misperceptions model of the economy.
AD: Y = 600 + 10(M/P)
SRAS: Y = \( \bar{\gamma} \) + P - P<sup>e</sup> \( \bar{\gamma} \)
Okun's Law: (Y - \( \bar{\gamma} \) )/ \( \bar{\gamma} \) = -2(u - \( \bar u \) )
Let \( \bar{\gamma} \) = 750,= 0.05,M = 600,and P<sup>e</sup> = 40.
(a)What is the price level?
(b)Suppose there is an unanticipated increase in the nominal money supply to 800.What is the short-run equilibrium level of output,the unemployment rate,and the price level?
(c)When price expectations adjust fully,what is the price level?
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Chapter 13: Exchange Rates, business Cycles, and
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) Monetary policy in the European Monetary Union is determined by A)the Bundesbank.
B)the European Union Senate.
C)the European Central Bank.
D)None of the above.
Q2) Describe how the euro was created.What are the benefits of the monetary union? What are the costs?
Q3) A temporary decrease in government purchases would ________ the domestic real interest rate and ________ net desired saving (desired saving less desired investment)in the economy.
A)lower; increase
B)lower; decrease
C)raise; increase
D)raise; decrease
Q4) An optimum currency area is a geographic region
A)with inflation near zero.
B)that allows exchange rates to float.
C)that has fixed exchange rates.
D)for which the benefits of having a common currency exceed the costs.
Page 15
Q5) What is purchasing power parity? Why might it not hold?
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) Monetarists suggest doing which of the following?
A)Maintain a steady growth rate of the money supply.
B)Use fiscal policy to combat unemployment in the short run.
C)Use monetary policy to combat unemployment in the long run.
D)Use fiscal policy to combat inflation in the long run.
Q2) The Fed can reduce the money supply by reducing A)the currency-deposit ratio.
B)the monetary base.
C)reserve requirements.
D)the discount rate.
Q3) From 2007 to 2015,the amount of assets owned by the Fed approximately A)doubled.
B)tripled.
C)quadrupled.
D)quintupled.
Q4) Describe the Taylor rule.If the Fed were following the rule,what would the nominal Fed funds rate be if inflation over the past year were 4% and output were 1% below its full-employment level?
Page 16
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) Provisions in the budget that cause government spending to rise or taxes to fall without legislation when GDP falls are known as
A)primary deficit enhancers.
B)expansionary fiscal stimulus.
C)non-political fiscal policy.
D)automatic stabilizers.
Q2) Suppose that all workers place a value on their leisure of 40 goods per day.The production function relating output per day Y to the number of people working per day N is Y = 200N - 2N<sup>2</sup>
And the marginal product of labor is MPN = 200 - 2N.
A 20% tax is levied on wages.Output per day would be
A)5625.
B)7250.
C)9375.
D)11,250.
Q3) How is real seignorage revenue related to inflation? How does the quantity of real seignorage revenue change as inflation rises from zero to a positive level,to still higher levels?
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Page 17