Macroeconomic Theory
Test Questions
Course Introduction
Macroeconomic Theory explores the aggregate behavior of economies by examining key concepts such as national income, inflation, unemployment, economic growth, and fiscal and monetary policy. The course develops analytical tools to understand how macroeconomic variables interact and influence global and national economic performance. Students will study models that explain fluctuations in output and prices, the determinants of economic growth, and the impact of government intervention on economic activity. By integrating theoretical perspectives with real-world issues, the course provides a solid foundation for analyzing economic policy and its effects on society.
Recommended Textbook
Macroeconomics A Contemporary Introduction 9th Edition by William A. McEachern
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Chapter 1: The Art and Science of Economic Analysis
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Sample Questions
Q1) The association-causation fallacy is the error of assuming that what is true for one member of a group must be true for the group.
A)True
B)False
Answer: False
Q2) An entrepreneur
A)always makes a profit
B)generally avoids risky situations
C)claims the residual (i.e., whatever is left over) after other resource suppliers are compensated
D)is a parasite that benefits by not paying other resources for their services
E)is the manager who runs an enterprise and keeps the customers happy
Answer: C
Q3) Economics employs a scientific methodology. In part, this means that
A)all economic laws have been proven true by laboratory tests
B)there is a single economic theory accepted by all economists
C)economic hypotheses are tested to determine their validity
D)personal values never enter into economic policy recommendations
E)assumptions are not necessary in economic science
Answer: C
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Chapter 2: Economic Tools and Economics Systems
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Sample Questions
Q1) Which economic question does the decision to produce butter instead of guns answer?
A)What to produce?
B)How to produce?
C)For whom to produce?
D)Who has a comparative advantage in gun production?
E)Who has an absolute advantage in butter production?
Answer: A
Q2) An outward shift of the production possibilities frontier
A)reflects economic stability
B)reflects economic growth
C)reflects economic decline
D)does not relate to the state of the economy
E)is always a parallel shift
Answer: B
Q3) A point inside the production possibilities curve illustrates a situation in which resources are not fully employed
A)True
B)False
Answer: True
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Chapter 3: Economic Decision Makers
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Sample Questions
Q1) The personal income tax is based on the benefits-received principle of taxation.
A)True
B)False
Answer: False
Q2) The incidence of a tax refers to
A)who receives the benefits from the revenue generated by the tax
B)the changes in the marginal tax rate as income increases
C)whether the tax is regressive, proportional, or progressive
D)who bears the burden of the tax
E)whether the tax is based on the ability-to-pay principle
Answer: D
Q3) Import quotas on sugar result in lower sugar prices in the United States.
A)True
B)False
Answer: False
Q4) To serve the public interest, government sometimes promotes competition by breaking up natural monopolies.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Demand Supply and Markets
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Sample Questions
Q1) Many people argue against increasing the minimum wage because they believe the result would be increased unemployment. Which of the following best summarizes this argument? A higher minimum wage would
A)increase the supply of labor while decreasing the demand for labor
B)decrease the supply of labor while increasing the demand for labor
C)increase the quantity supplied of labor while decreasing the quantity demanded of labor
D)decrease the quantity supplied of labor while increasing the quantity demanded of labor
E)increase the supply of labor while decreasing the quantity demanded of labor
Q2) A surplus occurs whenever
A)current price is greater than equilibrium price
B)quantity supplied exceeds quantity demanded at the equilibrium price
C)quantity demanded is greater than quantity supplied
D)the problem of scarcity of a good is solved
E)some buyers would be willing and able to pay even more for it than they have to at equilibrium
Q3) A rightward shift of a demand curve represents a decrease in demand.
A)True
B)False
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Chapter 5: Introduction to Macroeconomics
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Sample Questions
Q1) The largest and most complex economy in world history is A)China
B)the United States
C)Mexico
D)Liechtenstein
E)None of the answers is correct
Q2) Properly applied, a federal budget deficit can simultaneously reduce inflation and unemployment.
A)True
B)False
Q3) Which of the following is not a flow variable?
A)the amount of spending by consumers this holiday season
B)the number of times a dollar bill is spent in a day
C)the amount of sales taxes collected in a state per year
D)the number of shares of stock traded on Wall Street per week
E)the $100 Susan keeps in her purse, in case an emergency arises
Q4) Given an aggregate supply curve that slopes upward, an increase in aggregate demand would decrease real GDP.
A)True
B)False
Page 7
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Chapter 6: Tracking the Us Economy
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Sample Questions
Q1) Which of the following would not be included in the calculation of GDP?
A)Jim purchases a new automobile.
B)Joe pays a plumber $100 to fix a broken pipe.
C)Sandy, who is on welfare, receives $100 in food stamps.
D)Kurt purchases an airline ticket for $500 just before a big reduction in fares.
E)Laurie pays $15 for a haircut.
Q2) Gross Domestic Product equals the
A)total output of all goods and services produced by resources located in the U.S.
B)market value of all goods and services produced by resources located in the U.S.
C)market value of all final goods and services produced by resources located in the U.S.
D)value added to the economy by intermediate goods and services minus original cost
E)value of total sales of goods and services produced in the U.S.
Q3) Chain-weighted indexes have less bias compared to fixed-weight indexes.
A)True
B)False
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Chapter 7: Unemployment and Inflation
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Sample Questions
Q1) Suppose U = the number of adults who are unemployed; E = the number of adults who are employed; and NLF = the number of adults not in the labor force. Which expression would equal the unemployment rate?
A)U/(E + NLF)
B)U/E
C)U/(U + E)
D)U/(U + E - NLF)
Q2) The unemployment rate does not measure all of the "unemployment problem." Which of the following groups is not counted as unemployed in the official unemployment statistics?
A)the underemployed and the cyclically unemployed
B)the underemployed and the discouraged workers
C)the discouraged workers and the frictionally unemployed
D)the frictionally unemployed and the structurally unemployed
E)the cyclically unemployed and the frictionally unemployed
Q3) The nominal interest rate is determined in the market for loanable funds.
A)True
B)False
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Chapter 8: Productivity and Growth
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Sample Questions
Q1) Labor productivity tends to fall as the capital-labor ratio rises.
A)True
B)False
Q2) Which of the following is not an example of an event that fosters instability?
A)September 11, 2001
B)A greater threat to airport security
C)The Frankfurt Book Fair where publishers from around the world gather
D)Suicide bombers attacking shops and restaurants
E)All of the answers foster instability
Q3) You are a management consultant in the last half of the 1990s. To help your clients to increase productivity, you focus on
A)the high price of personal computers
B)reprogramming machine tools for different tasks
C)dropping semiconductor prices
D)building more computers in the U.S.
E)None of the answers is correct
Q4) Over the long run, technological change increases both labor productivity and unemployment rates.
A)True
B)False
Page 10
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Chapter 9: Aggregate Expenditure
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Sample Questions
Q1) Economists assume that the fundamental motive of investors is
A)to maximize profit
B)to maximize income
C)to maximize the firm's growth
D)to promote economic growth for the economy as a whole
E)the desire to save
Q2) An increase in wealth will
A)shift the consumption function upward
B)make the consumption function steeper
C)cause a movement upward along the consumption function
D)cause a movement downward along the consumption function
E)make the consumption function flatter
Q3) On a graph showing investment along the vertical axis and income along the horizontal axis,
A)the investment line slopes downward
B)the investment line would shift upward if income increased
C)the investment line would shift downward if the interest rate increased
D)investment is the independent variable and income is the dependent variable
E)the investment line would shift downward if income increased
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Chapter 10: Aggregate Expenditure and Aggregate Demand
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Sample Questions
Q1) If the marginal propensity to consume is 3/4, the simple multiplier is A)3
B)7
C)4
D)25
E)3/10
Q2) In an economy without a government and without international transactions, aggregate expenditure at each level of income is equal to
A)consumption plus saving
B)planned investment plus saving
C)disposable income plus the price level
D)consumption plus planned investment
E)planned investment minus saving
Q3) Increases in the marginal propensity to consume, other things constant,
A)increase the value of the multiplier
B)decrease the value of the multiplier
C)never change the value of the multiplier
D)shift the aggregate expenditure curve downward
E)cause a downward movement along an aggregate expenditure curve
Page 12
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Chapter 11: Aggregate Supply
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Sample Questions
Q1) Which of the following is true of an expansionary gap?
A)It develops when the expected price level exceeds the actual price level.
B)In the long run, this gap will close when resource suppliers negotiate lower resource payments.
C)It measures the amount by which actual output falls short of the economy's potential.
D)In the long run, this gap will close when the short-run aggregate supply curve shifts rightward.
E)In the long run, this gap will close when resource suppliers negotiate higher resource payments.
Q2) Given the aggregate demand curve, an increase in the supply of a productive resource will
A)increase output but leave prices unchanged
B)decrease both output and prices
C)increase the price level and decrease output
D)decrease the price level and increase output
E)increase the price level but leave output unchanged
Q3) If wages are flexible, the long-run aggregate supply curve is vertical.
A)True
B)False
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Page 13
Chapter 12: Fiscal Policy
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Sample Questions
Q1) In an economy characterized by Exhibit 12-3, there is a recessionary gap.
A)True
B)False
Q2) When spending by the federal government exceeds net taxes,
A)the price level tends to fall
B)the money supply must fall
C)the aggregate demand curve shifts rightward
D)aggregate supply moves rightward
E)there is a federal budget surplus
Q3) If autonomous net taxes equal $1 trillion at all levels of real GDP, then we can safely assume that net taxes
A)are too burdensome
B)are autonomous
C)equal transfer payments
D)depend on the level of real GDP
E)equal zero when GDP equals zero
Q4) If government purchases and autonomous net taxes increase by the same amount, the equilibrium level of real GDP will be unchanged.
A)True
B)False
Page 14
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Chapter 13: Federal Budgets and Public Policy
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Sample Questions
Q1) What has been the practical effect on macroeconomic policy of the huge U.S. federal budget deficits of the 1980s?
A)The automatic stabilizers no longer functioned.
B)It was tough gaining support to cut taxes or raise government purchases of goods and services during cyclical downturns.
C)Monetary policy has become less useful than fiscal policy because the deficits are so large that they have a greater impact than the money supply.
D)There has been more emphasis on fine-tuning the economy than there was previously.
E)There is now a consensus among economists that a balanced budget amendment should be adopted.
Q2) The federal budget deficit becomes __________ during recessions because
A)smaller; transfer payments increase and tax revenues decline
B)larger; transfer payments increase and tax revenues decline
C)larger; both transfer payments and tax revenues increase
D)smaller; both transfer payments and tax revenues increase
E)smaller; both transfer payments and tax revenues decrease
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Chapter 14: Money and the Financial System
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Sample Questions
Q1) The first bankers were probably
A)carpenters
B)stock brokers
C)goldsmiths
D)sea captains
E)grain merchants
Q2) The chairman of the Fed must resign when a new president is elected.
A)True
B)False
Q3) Some financial institutions are classified as depository institutions based on
A)the way they acquire funds
B)the number of customers they have
C)the number of loans they make
D)the size of the loans they make
E)the amount of reserves they hold
Q4) Each member of the Federal Reserve's Board of Governors is appointed for life.
A)True
B)False
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Page 16
Chapter 15: Banking and the Money Supply
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Sample Questions
Q1) Narrowly defined, the M1 money supply consists primarily of A)coins
B)currency
C)cash held by banks
D)checkable deposits
E)money market mutual fund accounts
Q2) When a check is cleared against Bank A after being deposited at Bank B,
A)both Bank A's and Bank B's liabilities increase
B)both Bank A's and Bank B's liabilities decrease
C)Bank A's liabilities increase and Bank B's liabilities decrease
D)Bank A's liabilities decrease and Bank B's liabilities increase
E)there is no change in either bank's liabilities
Q3) The liquidity of an asset indicates
A)its buying power
B)the ease with which it can be converted into the medium of exchange without a significant loss of value
C)the ease with which it can be converted into another asset
D)how likely people are to convert it into the medium of exchange without a significant loss of value
E)how easy it is to buy with a check
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Chapter 25: The Algebra of Income and Expenditure
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Sample Questions
Q1) Increases in consumption that result from increases in investment are called induced consumption.
A)True
B)False
Q2) Equilibrium output can be found by solving for the value of Y in the expression a + b(Y - NT) + I + G + X - M(Y - NT).
A)True B)False
Q3) If C = 10 + 0.8Y, a $100 increase in Y would increase consumption by
A)$10
B)$20
C)$50
D)$80
E)$100
Q4) If C = $3,000 + 0.9Y and income is $20,000,
A)consumption is $20,000
B)consumption is $18,000
C)saving is $0
D)saving is -$1,000
E)income will increase to $200,000
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Chapter 16: Monetary Theory and Policy
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Sample Questions
Q1) Which of the following would cause an increase in the velocity of money?
A)increased use of credit cards
B)an increase in the money supply
C)an increase in demand for money
D)a decrease in interest rates
E)a decrease in nominal GDP and a constant money supply
Q2) If interest rates are __________ to changes in the money supply and planned investment expenditures are __________ to interest rate changes, then monetary policy will be ineffective in changing aggregate demand.
A)responsive; sensitive
B)responsive; insensitive
C)not responsive; sensitive
D)not responsive; insensitive
E)none of the above
Q3) As a result of expansionary monetary policy,
A)both aggregate expenditure and aggregate demand increase
B)both aggregate expenditure and aggregate demand decrease
C)aggregate expenditure increases and aggregate demand decreases
D)aggregate expenditure decreases and aggregate demand increases
E)aggregate expenditure remains unchanged; aggregate demand increases
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Chapter 17: Macro Policy Debate: Active or Passive
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Sample Questions
Q1) If the price level increases by more than expected, output can be expected to decrease as a result.
A)True
B)False
Q2) In the 1992 presidential campaign, Clinton's biggest political liabilities were the sluggish recovery and ballooning federal deficits.
A)True
B)False
Q3) Those who favor an active approach to policy believe that
A)discretionary monetary policy cannot be used to help the economy since monetary policy lags are long
B)discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long
C)lags associated with implementing policies are too long and unstable for discretionary policy to be effective
D)despite the lags involved, implementing discretionary policy is preferable to inaction
E)none of the above
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Page 20
Chapter 26: The Algebra of Demand-Side Equilibrium
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Sample Questions
Q1) In which of the following situations will the combination of the marginal propensity to consume and the proportional income tax rate (t) result in the largest multiplier?
A)Both the MPC and t are large.
B)Both the MPC and t are small.
C)The MPC is large; t is small.
D)The MPC is small; t is large.
E)The MPC equals t.
Q2) In a model with a proportional income tax rate (t), real disposable income equals
A)t * real GDP
B)(1 - t) * real GDP
C)real GDP/t
D)real GDP/(1 - t)
E)real GDP - (1 - t)
Q3) The balanced budget multiplier is always negative.
A)True
B)False
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21
Chapter 18: International Trade
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Sample
Questions
Q1) In Exhibit 18-3, if the world price of tulips is $4 and there are no trade restrictions, The Netherlands will
A)produce 10,000, consume 4,000, and import 6,000 tulips
B)produce 10,000, consume 4,000, and export 6,000 tulips
C)produce 4,000, consume 10,000, and import 6,000 tulips
D)produce no tulips
E)import all of the tulips that it consumes
Q2) If the country illustrated in Exhibit 18-4 is initially trading without restrictions at a world price of $1.00, the gain in producer surplus as a result of a tariff of $0.50 per unit is represented by area
A)c + h
B)h
C)c
D)c + g
E)g
Q3) International trade increases world economic efficiency for the same reasons that domestic trade increases national economic efficiency.
A)True
B)False
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Page 22
Chapter 19: International Finance
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Sample Questions
Q1) An exchange rate is
A)the rate at which goods are traded between countries
B)the rate of the net difference between exports and imports
C)the denomination of currency used to purchase imports
D)the price of one currency in terms of another
E)the price at which one good trades for another
Q2) A nation has an unfavorable balance of trade when
A)it has a surplus in its balance of payments
B)it has a deficit in its balance of payments
C)the value of its imports of goods is greater than the value of its exports of goods
D)its current account is in surplus and its capital account is in deficit
E)it has high tariffs
Q3) Between 1917 and 1982, the US ran a financial account deficit.
A)True
B)False
Q4) China has completely ignored concerns about its trade surpluses.
A)True
B)False
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23
Chapter 20: Economic Development
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Sample Questions
Q1) Labor productivity depends on the
A)the effectiveness of government
B)the size of the economy
C)the proportion of the labor force that is unionized
D)the amount of capital
E)All of the answers are correct
Q2) A problem for developing countries is that the prices of primary products fluctuate more widely than do the prices of finished goods because
A)crop supply changes very little despite the weather
B)crop supply fluctuates with the weather
C)weather never varies
D)crops go in and out of fashion as new diets are developed
E)crop demand fluctuates with the weather
Q3) Countries with reliable phone service have difficulty not only communicating, but also reaping the benefits of other technology advances, such as the Internet.
A)True
B)False
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Chapter 21: National Income Accounts
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Sample Questions
Q1) Disposable Income is Personal Income minus personal taxes.
A)True
B)False
Q2) Given the following data: depreciation = $450; net indirect business taxes = $400; employee compensation = $3,000; proprietor's income = $200; corporate profits = $400; net interest = $300; rental income = $50; national income equals
A)$3,100
B)$3,500
C)$3,550
D)$3,950
E)$4,400
Q3) In Exhibit 6-5, Gross private domestic investment is equal to
A)$30 billion
B)$40 billion
C)$60 billion
D)$70 billion
E)$80 billion
Q4) Disposable income is personal income after taxes. A)True B)False
Page 25
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Chapter 22:Understanding Graphs
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Sample Questions
Q1) Point a in Exhibit 1-1 represents
A)the origin
B)x = 0, y = 50
C)x = 50, y = 0
D)x + y = 50
E)y = 0; no information is given about x
Q2) The slope of the straight line in Exhibit 1-5 is
A)greater at point a than at point b
B)the same at points a and b
C)zero because the line is straight
D)negative because an inverse relation is shown
E)positive because the line lies to the right of the y-axis
Q3) The slope of a U-shaped curve is infinity at the bottom of the U.
A)True
B)False
Q4) The slope of an inverted U-shaped curve is infinity at the top of the curve.
A)True
B)False
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Chapter 23:Variable Net Exports
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Sample Questions
Q1) If imports are plotted on the vertical axis and disposable income on the horizontal axis, the import line
A)slopes downward, but we can tell nothing about its steepness
B)slopes downward with a slope less than -1
C)is a horizontal line
D)slopes upward with a slope less than 1
E)slopes upward, but we can say nothing about its steepness
Q2) An increase in U.S. consumers' incomes will decrease U.S. exports.
A)True
B)False
Q3) A decrease in the value of the U.S. dollar relative to other currencies will shift the net export function upward.
A)True
B)False
Q4) As U.S. income falls, U.S. exports will fall.
A)True
B)False
Q5) U.S. economic growth does not contribute to a U.S. trade deficit.
A)True
B)False
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Chapter 24: Variable Net Exports Revisited
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Sample Questions
Q1) The formula for the spending multiplier when variable net exports are included in aggregate expenditures is
A)1/(MPS + MPM)
B)1/MPS
C)MPS * MPM
D)1/(MPC * MPM)
E)1/(1 - MPC - MPM)
Q2) If the MPC equals 0.7 and the MPM equals 0.10, then the spending multiplier equals A)10
B)9
C)5
D)3.3
E)1.1
Q3) The spending multiplier with variable net exports is
A)(1 + MPC)/MPM
B)1/(1 - MPC)
C)1/(1 - MPC + MPM)
D)1/(1 - MPC - MPM)
E)MPC/MPM
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