Principles of Macroeconomics
Final Exam
Course Introduction
Principles of Macroeconomics provides a comprehensive introduction to the fundamental concepts and tools of macroeconomic analysis. The course examines the behavior and performance of national economies, focusing on aggregate measures such as gross domestic product (GDP), unemployment, inflation, and economic growth.
Students explore the roles of government fiscal and monetary policy in stabilizing the economy, understand the dynamics of business cycles, and analyze issues related to international trade and finance. Emphasis is placed on applying economic models to real-world scenarios in order to understand both short-term fluctuations and long-term trends in economic activity.
Recommended Textbook
Macroeconomics 2nd Edition by Charles I. Jones
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Chapter 1: Introduction to Macroeconomics
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Q1) Which of the following does macroeconomics not endeavor to answer?
i.Why is the typical person in the United States today more than ten times richer than the typical person a century ago?
ii.Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years?
iii.Why has the price of orange juice risen sharply?
A)ii and iii
B)i only
C)ii only
D)i,ii,and iii
E)iii only
Answer: E
Q2) An economic model is an exact replica of the macroeconomy.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Measuring the Macroeconomy
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Q1) In 2005,household expenditures accounted for about __________ of total GDP.
A)19 percent
B)40 percent
C)16 percent
D)70 percent
E)11 percent
Answer: D
Q2) Consider Table 2.3.Using the Laspeyres index,inflation between 2004 and 2005 was about:
A)0 percent.
B)5 percent.
C)1 percent.
D)6 percent.
E)Not enough information is given.
Answer: B
Q3) GDP often is used as a "measure" of economic welfare;it includes all factors that contribute to economic wellbeing.
A)True
B)False
Answer: False
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Chapter 3: An Overview of Long- Run Economic Growth
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Q1) Name three of the fastest growing countries from 1960 to 2000.Name three of the slowest over the same period.Are there any similarities?
Answer: Fast-South Korea,Hong Kong,Thailand,China,Japan,and Ireland;slow-Niger,Nicaragua,Mozambique,Madagascar,and Venezuela.At this point,we can only mention generalities about geographical regions: the fastest tend to be Southeast Asia while the slowest are in Africa and Latin America.More specific reasons won't be given until Chapters 4-6.
Q2) If the population of Romania was about 18.4 million in 1960 and the average population growth rate is 0.5 percent,then Romania's population would have been about __________ in 2000.
A)129.5 million
B)22.4 million
C)23.6 million
D)21.4 million
E)15.8 million
Answer: B
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Chapter 4: A Model of Production
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Q1) What are the three sources of total factor productivity discussed in the text? Can you name other possible sources? Explain your answer.
Q2) Mathematically,an economic model is __________.
A)a fake world
B)a spreadsheet
C)an accurate representation of reality
D)a set of equations
E)the actual macroeconomy
Q3) If MPL < w,the firm:
A)has the optimal amount of labor.
B)should fire some labor until MPL = w.
C)should fire some labor until MPL = 0.
D)should hire more capital until MPK = 0.
E)should hire more capital until MPL = w.
Q4) Which of the following are examples of technology?
A)just-in-time inventory
B)computer chips
C)improved irrigation
D)the Internet
E)all of the above
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Chapter 5: The Solow Growth Model
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Q1) You are asked to make comparisons of two pairs of countries.The first pair are the Latin American countries of Chile and Argentina;the second pair are France and Germany.You are given the following information: the average saving rate in Argentina is 13.4 percent,in Chile it is 21.3 percent,in France it is 22 percent,and in Germany,20.3 percent.Assuming the countries are identical in every other way,which country would the Solow model predict to have the higher per capita real GDP? However,you find out the steady state real per capita GDP in each of the 1.To the instructor,these are not actual steady states,but rather RPCGDP in 2007;these numbers are used for illustrative purposes only.countries is $16,500 in Argentina,$21,548 in Chile,$31,446 in France,and $33,181 in Germany.What is the primary factor which the simple Solow model uses to describe these differences? Give an example.
Q2) In the corn farm example,corn can be used as:
A)only investment.
B)either saving or depreciation.
C)only consumption.
D)either consumption or investment.
E)tax revenue.
Q3) What are the key assumptions of the Solow growth model?
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Chapter 6: Growth and Ideas
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Sample Questions
Q1) According to the combined Solow-Romer model,
A)all countries grow at the same rate in the long run,but actual growth rates can differ across countries for long periods of time.
B)all countries grow at the same rate in the medium and long runs.
C)all countries grow at different rates forever.
D)all countries grow at the same rate as the United States in each period.
E)all countries grow at different rates in the long run,but actual growth rates are the same across countries for long periods of time.
Q2) For the years 2004-2005,output per person in the private sector grew 2.1 percent;capital intensity grew 0.3 percent;and labor composition grew 0.1 percent.What was the growth rate of total factor productivity?
A)1.8 percent
B)2.5 percent
C)1.7 percent
D)0.4 percent
E)Not enough information is given.
Q3) The signals of the TV show House are a rival good.
A)True
B)False
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Page 8
Chapter 7: The Labor Market,wages,and Unemployment
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Q1) If the income taxes on wages increase,the labor supply curve will shift left,but what happens to the unemployment rate?
A)It unambiguously falls because the labor participation rate changes.
B)It unambiguously falls because some workers drop out of the workforce.
C)It unambiguously rises because some workers drop out of the workforce.
D)It is ambiguous because some workers drop out of the workforce.
E)None of the above is correct.
Q2) The labor demand curve slopes downward because:
A)wages are inflexible.
B)wages are higher when demand falls.
C)of the diminishing marginal product of labor.
D)of the income effect.
E)None of the above is correct.
Q3) Unemployment due to workers shuffling from one job to the next is called cyclical unemployment.
A)True
B)False
Q4) The labor demand curve is derived from the marginal product of labor.
A)True
B)False
Page 9
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Chapter 8: Inflation
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Q1) The quote "Inflation is always and everywhere a monetary phenomenon" is attributed to:
A)Karl Marx.
B)Thomas Sargent.
C)Milton Friedman.
D)Alan Greenspan.
E)David Ricardo.
Q2) The right to seignorage is the right to apply income taxes.
A)True B)False
Q3) Consider the end-of-year CPI data in Table 8.1 (base year is 2000).
(a)Calculate the rate of inflation between 1970 and 1975 and between 1995 and 2000.
(b)Calculate the average rate of inflation for 1970-1975 and 1970-1980.
(c)Calculate the average rate of inflation for 1980-1990 and 2000-2009.
(d)Briefly comment on your results.
Q4) The costs associated with changing prices are called small menu costs.
A)True B)False
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Chapter 9: An Introduction to the Short Run
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Q1) John Maynard Keynes is famous for saying,"In the long run __________."
A)there is no tomorrow.
B)we are all dead.
C)the only thing we have to fear is fear itself.
D)the study of economics will be redundant.
E)none of the above
Q2) According to the text,which of the following can be used to approximate potential output?
i.Assume a perfectly smooth trend is passing through the quarter-to-quarter movements in the real GDP.
ii.Survey leading economists.
iii.Gather current data from statistical agencies,such as the Bureau of Economic Analysis.
A)i only
B)ii only
C)ii and iii
D)i and ii
E)iii only
Q3) How is a recession "officially'' determined?
Q4) What three premises does the short-run model operate under?
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Chapter 10: The Great Recession: a First Look
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Q1) The __________ was hastily designed to __________ in September 2008.
A)Troubled Asset Relief Program;prevent financial collapse
B)American Recovery and Reinvestment Act;prevent financial collapse
C)New Deal;prevent tax revenues from falling
D)Savings and Loan bank bailout;prevent declining mortgage applications
E)Sherman Antitrust Act;reduce commercial banks' power over financial markets
Q2) In a typical recession,the only __________ expenditure rises.
A)investment
B)exports
C)imports
D)inflation
E)government
Q3) The Case-Shiller index of housing prices dropped about 10 percent when the housing bubble burst.
A)True
B)False
Q4) The deepest recession in the post-World War II period was the 1982-83 recession.
A)True
B)False
Q5) How does "securitization" reduce overall risk?
Page 12
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Chapter 11: The Is Curve
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Q1) Recently,Toyota took over the position of the world's largest automobile manufacturer from GM.This is an example of __________ in the United States.
A)a positive aggregate demand shock
B)a negative aggregate demand shock
C)a rightward movement along the IS curve
D)a positive aggregate supply shock
E)Not enough information is given.
Q2) The basic IS model embodies the Life Cycle and Permanent Income hypotheses by:
A)setting consumption proportional to potential output.
B)keeping consumption growth constant.
C)setting consumption proportional to the real interest rate.
D)setting consumption equal to past income.
E)a and b are correct.
Q3) Government spending designed to mitigate short-run fluctuations is called:
A)discretionary spending.
B)fiscal policy.
C)monetary policy.
D)automatic stabilization.
E)a and b are correct.
Q4) Derive Hicks' IS relationship beginning with the national income identity.
Page 13
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Chapter 12: Monetary Policy and the Phillips Curve
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Q1) Consider the Phillips curve in Figure 12.3.At point b,__________,and at point a,__________.
A)the economy is in recession;the economy is booming
B)the economy is in recession;the economy is in its long-run equilibrium
C)the economy is in recession;the economy is in recession
D)the economy is booming;the economy is in recession
E)the economy is in its long-run equilibrium;the economy is in recession
Q2) What tool does the U.S.Federal Reserve use to conduct policy? Explain.How does monetary policy impact the macroeconomy?
Q3) The money demand curve:
A)slopes downward with respect to the discount rate.
B)slopes downward with respect to the nominal interest rate.
C)slopes upward with respect to the nominal interest rate.
D)always is flat with respect to the nominal interest rate.
E)is flat with respect to the inflation rate.
Q4) When the Federal Reserve increases the interest rate,the MP curve shifts up and short-term output falls.
A)True
B)False
Q5) What are the mechanics of lowering interest rates?
Page 14
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Chapter 13: Stabilization Policy and the Asad Framework
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Q1) A monetary policy rule may contain which of the following?
A)price shocks
B)short-term output
C)the unemployment rate
D)the inflation rate
E)all of the above
Q2) Policy is conducted by discretion if policymakers:
A)size up the economy and choose whatever policy seems appropriate at the time.
B)announce in advance how policy will respond to various situations and commit themselves to following through on this announcement.
C)maintain a constant growth rate of the money supply without making their decision public.
D)announce and achieve a balanced government budget.
E)announce and maintain a constant interest rate.
Q3) Since the 1990s,the country with the lowest rate of inflation has been the United States.
A)True
B)False
Q4) What is the Taylor rule? How effective a tool is it?
Q5) Define the steady state in the AS/AD framework.
Page 15
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Chapter 14: The Great Recession and the Short-Run Model
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Q1) If the rate of inflation is -2 percent,the output gap is -5 percent,the nominal interest rate is 5 percent,and the unemployment rate is 8 percent,what is the real interest rate?
A)10 percent
B)0 percent
C)-3 percent
D)7 percent
E)3 percent
Q2) In late September 2008,Fed Chairman told a congressional panel:
A)"In the long run we are all dead."
B)"If we don't do this [the Troubled Asset Relief Program],we may not have an economy on Monday."
C)"A recession is when your neighbor loses his job;a depression is when you lose yours."
D)"Inflation is always and everywhere a monetary phenomenon."
E)"We do not believe that more fiscal stimulus will improve economic performance."
Q3) Banks which are deemed too big to fail leads to adverse selection.
A)True
B)False
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16
Chapter 15: Consumption
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Q1) According to the neoclassical model ___________ over their lifetime,however one study showed that ___________ at retirement.This puzzle was solved when two economist tested the neoclassical model using __________.
A)hold consumption constant;consumption rises sharply;purchases of RVs.
B)slow their consumption;consumption rises;data from Brazil
C)consumption smooth;consumption falls 17 percent;food consumption
D)don't maximize lifetime utility;they have zero income;dividend receipts
E)rely on transitory income;the discount factor is one;cost minimization
Q2) Between 1970 and 2008 household consumption ___________ of GDP.Over this period,___________ to about ___________ of GDP.
A)grew from 63 percent to 70 percent;personal savings rose;7 percent
B)remained at about two-thirds;personal savings fell;-3 percent
C)shrank as a percentage;personal savings rose;12 percent
D)grew from 63 percent to 70 percent;household debt rose;100 percent
E)fell from 66 percent to 63 percent;household debt rose;70 percent
Q3) If the Euler equation did not hold,then the real interest rate would be zero.
A)True
B)False
Q4) Are all households homogeneous and rational,at least as defined by economists?
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Chapter 16: Investment
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Q1) During recessions __________ disproportionately to __________.
A)taxes;income
B)consumption falls;government expenditures
C)consumption rises;income
D)investment falls;consumption
E)output falls;income
Q2) Which of the the following are components of physical investment?
i.Nonresidential fixed investment
ii.Residential fixed investment
iii.Inventory
A)i
B)ii
C)i and iii
D)ii and iii
E)i,ii,and iii
Q3) Discuss the relationship between a random walk and informational efficiency in financial assets.Consider the figure above,which shows the weekly gains/ (losses),in percent,in Microsoft's stock price 2005-2007.Given what you know,could you make a case that this market is efficient?
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Page 18
Chapter 17: The Government and the Macroeconomy
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Q1) According to a Congressional Budget Office report,"A 125-Year Picture of the Federal Government's Share of the Economy,1950 to 2075," the main culprit for the increase in federal government spending to about 40 percent of GDP in 2075 is (are):
A)Medicare.
B)Medicaid.
C)defense spending.
D)all of the above
E)a and b
Q2) We can compensate future generations for the depletion of nonrenewable resources by increasing the stock of knowledge in the present.
A)True
B)False
Q3) Which of the following is not an issue of large deficits and a large debt-to-GDP ratio for the economy?
A)intergenerational equity
B)the importance of economic growth
C)the possibility of high inflation or default
D)the impacts on the overall money supply
E)the extent to which deficits crowd out private investment
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Chapter 18: International Trade
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Q1) Running trade deficits in some periods and trade surpluses in others allows a country to:
A)run budget deficits.
B)increase consumption in every period.
C)smooth consumption.
D)increase interest rates.
E)increase the value of its currency vis-à-vis other currencies.
Q2) Free labor migration is more effective at improving welfare in low-income countries than moving capital because:
A)it moves the labor to the place where productivity is high.
B)low-income countries do not have much capital per person.
C)it moves labor to the place where there is a lot of capital per person.
D)it moves labor to the place where there is not much capital per person.
E)it is cheaper to move labor than capital.
Q3) With intertemporal trade,a country running a trade deficit is in a bad position.
A)True B)False
Q4) With free trade,there are no costs,only benefits.
A)True B)False
Page 20
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Chapter 19: Exchange Rates and International Finance
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Q1) When we include the interest gap in the IS model,the IS curve:
A)becomes shallower,reflecting how the domestic interest rate affects investment and net exports.
B)becomes steeper,reflecting how the domestic interest rate affects investment and net exports.
C)becomes steeper,reflecting how the foreign interest rate affects investment and net exports.
D)keeps the same slope,reflecting how the foreign interest rate affects investment and net exports.
E)Not enough information is given.
Q2) Consider Figure 19.1,which shows the £UK/$US,$US/ ,and £UK/ exchange rates.During the period 2001-2007,the U.S.dollar __________ relative to the euro and __________ relative to the U.K.pound.
A)appreciated;appreciated
B)depreciated;remained somewhat unchanged
C)appreciated;remained somewhat unchanged
D)depreciated;appreciated
E)Not enough information is given.
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21
Chapter 20: Parting Thoughts
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Q1) Which of the following has not contributed to higher standards of living in the long run?
A)the stock of technology
B)investment in physical capital
C)investment in human capital
D)stable monetary policy
E)productivity
Q2) If we cannot accurately measure potential GDP,we might overestimate the severity of a recession.
A)True
B)False
Q3) The policies used by a successful economy can be adopted by aspiring economies.
A)True
B)False
Q4) In the long run,real GDP is determined by:
A)low and stable inflation.
B)real forces in the economy such as investment,productivity,and technology.
C)very low rates of unemployment.
D)low tax rates.
E)low oil prices.
Page 22
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