Principles of Macroeconomics Review
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Course Introduction
Principles of Macroeconomics introduces students to the foundational concepts and analytical tools used to understand the behavior of the economy as a whole. Topics include national income determination, economic growth, unemployment, inflation, and the roles of fiscal and monetary policy. The course examines how governments use policy tools to influence economic performance, explores the interactions between different sectors of the economy, and considers international trade and finance. Emphasis is placed on understanding economic indicators, models of aggregate demand and supply, and the impact of macroeconomic events on everyday life.
Recommended Textbook
Principles of Economics 4th Edition by N.
Gregory Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) If Japan chooses to engage in trade,it
A)will only benefit if it trades with countries that produce goods Japan cannot produce.
B)cannot benefit if it trades with less developed countries.
C)should first attempt to produce the good itself.
D)can benefit by trading with any other country.
Answer: D
Q2) The basic principles of economics suggest that
A)markets are seldom, if ever, a good way to organize economic activity.
B)government should become involved in markets when trade between countries is involved.
C)government should become involved in markets when those markets fail to produce efficient or equitable outcomes.
D)All of the above are correct.
Answer: C
Q3) Equity means everyone in the economy should receive an equal share of the goods and services produced.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) A circular-flow diagram is a visual model of how an economy is organized.
A)True
B)False
Answer: True
Q2) Refer to Figure 2-2.The figure represents a circular-flow diagram.If the owners of land,labor,and capital are represented by Box B,then
A)the government is represented by Box a.
B)firms are represented by Box C.
C)firms are represented by Box A.
D)firms are sellers in Box B.
Answer: C
Q3) Refer to Figure 2-2.The figure represents a circular-flow diagram.If the outer loop represents flows of dollars,then the inner loop includes
A)flows of goods and services, of which households are sellers.
B)flows of inputs, of which firms are buyers.
C)flows of rent payments paid to owners of land.
D)flows of wages and salaries paid to workers.
Answer: B
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4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) A good that is produced abroad and sold domestically is called A)a quota.
B)a tariff.
C)an import.
D)an export.
Answer: C
Q2) Refer to Figure 3-3.The opportunity cost of 1 pair of tap shoes for Ginger is
A)1/4 pair of ballet slippers.
B)1/3 pair of ballet slippers.
C)3/4 pair of ballet slippers.
D)4/3 pairs of ballet slippers.
Answer: D
Q3) The gains from trade are
A)evident in economic models, but seldom observed in the real world.
B)evident in the real world, but impossible to capture in economic models.
C)a result of more efficient resource allocation than would be observed in the absence of trade.
D)based on the principle of absolute advantage.
Answer: C
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) A demand schedule is a table showing the relationship between A)quantity demanded and quantity supplied, and those quantities are usually positively related.
B)quantity demanded and quantity supplied, and those quantities are usually negatively related.
C)price and quantity demanded, and those quantities are usually positively related. D)price and quantity demanded, and those quantities are usually negatively related.
Q2) Refer to Table 4-4.Which space represents a decrease in equilibrium quantity and an indeterminate change in equilibrium price?
A)a.
B)B.
C)C.
D)D.
Q3) In a market,the price of any good adjusts until quantity demanded equals quantity supplied.
A)True
B)False
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6
Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) Recently,in Smalltown,the price of Twinkies fell from $0.80 to $0.70.As a result,the quantity demanded of Ho-Ho's decreased from 120 to 100.What would be the appropriate elasticity to compute? Using the midpoint method,compute this elasticity.What does your answer tell you?
Q2) Refer to Table 5-2.Along which of the supply curves does quantity supplied move proportionately more than the price?
A)along supply curve B only
B)along supply curves B and C
C)along all three supply curves
D)Quantity supplied moves proportionately more than the price along none of the three supply curves.
Q3) Last year,Sheila bought 6 pairs of shoes when her income was $40,000.This year,her income is $50,000 and she purchased 10 pairs of shoes.Holding other factors constant,it follows that Sheila
A)considers shoes to be a necessity.
B)considers shoes to be an inferior good.
C)considers shoes to be a normal good.
D)has a low price elasticity of demand for shoes.
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Chapter 6: Supply, demand, and Government Policies
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Sample Questions
Q1) Refer to Figure 6-9.The effective price paid by buyers after the tax is imposed is
A)$18.
B)$14.
C)$12.
D)$8.
Q2) Refer to Figure 6-1.In which panel(s)of the figure would there be a shortage of the good at the ceiling price?
A)panel (a) but not panel (b)
B)panel (b) but not panel (a)
C)panel (a) and panel (b)
D)neither panel (a) nor panel (b)
Q3) Price ceilings and price floors that are binding
A)are desirable because they make markets more efficient and more equitable.
B)cause surpluses and shortages to persist since price cannot adjust to the market equilibrium price.
C)can have the effect of restoring a market to equilibrium.
D)are imposed because they can make the poor in the economy better off without causing adverse effects.
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8
Chapter 7: Consumers, producers, and the Efficiency of Markets
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Sample Questions
Q1) Inefficiency can be caused in a market by the presence of A)market power.
B)externalities.
C)imperfectly competitive markets.
D)All of the above are correct.
Q2) Answer each of the following questions about supply and producer surplus.
a.What is producer surplus, and how is it measured?
b.What is the relationship between the cost to sellers and the supply curve?
c.Other things equal, what happens to producer surplus when the price of a good rises? Illustrate your answer on a supply curve.
Q3) Refer to Table 7-5.As the table suggests,the demand curve is a straight line and so is the supply curve.Take this into account and suppose the price is $8,with only 4 pizzas being bought and sold.Total surplus amounts to
A)$20.
B)$30.
C)$36.
D)$40.
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Page 9
Chapter 8: Application: the Costs of Taxation
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Sample Questions
Q1) Refer to Figure 8-6.Suppose a 20th unit of the good were sold by a seller to a buyer.Which of the following statements is correct?
A)On the 20th unit, the difference between the buyer's value and the seller's cost is less than the tax per unit.
B)On the 20th unit, the difference between the buyer's value and the seller's cost is greater than the tax per unit.
C)On the 20th unit, the difference between the buyer's value and the seller's cost is equal to the tax per unit.
D)It makes sense for the buyer to buy, and for the seller to sell, the 20th unit with or without the tax in place.
Q2) Refer to Figure 8-4.Consumer surplus before the tax was levied is represented by area
A)a.
B)A + B + C.
C)D + E + F.
D)F.
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Chapter 9: Application: International Trade
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Sample Questions
Q1) Refer to Figure 9-12.With trade,domestic production and domestic consumption,respectively,are
A)600 and 600.
B)600 and 300.
C)300 and 900.
D)600 and 900.
Q2) Refer to Figure 9-4.If this country allows free trade in wagons,
A)consumers will gain more than producers will lose.
B)producers will gain more than consumers will lose.
C)producers and consumers will both gain equally.
D)producers and consumers will both lose equally.
Q3) Refer to Figure 9-7.The price corresponding to the horizontal dotted line on the graph represents the price of cars
A)after trade is allowed.
B)before trade is allowed.
C)that maximizes total surplus when trade is allowed.
D)that minimizes the well-being of domestic car producers when trade is allowed.
Q4) What are the arguments in favor of trade restrictions,and what are the counterarguments? According to most economists,do any of these arguments really justify trade restrictions? Explain.
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Chapter 10: Externalities
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Sample Questions
Q1) The least expensive way to clean up the environment is for all firms to reduce pollution by an equal percentage.
A)True
B)False
Q2) Refer to Figure 10-4.At Q
A)the marginal consumer values this product less than the social cost of producing it.
B)every consumer values this product less than the social cost of producing it.
C)the cost to society is equal to the value to society.
D)the marginal consumer values this product more than the private cost.
Q3) When a market experiences a positive externality,
A)the demand curve does not reflect the value to society of the good.
B)too much of the good is being produced.
C)the government can internalize the externality by imposing a tax on the product.
D)the private value is greater than the social value.
Q4) When a transaction between a buyer and seller directly affects a third party,the effect is called an externality.
A)True
B)False
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Page 12
Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) The free-rider problem arises when the number of beneficiaries is large and exclusion of any of them is impossible.
A)True
B)False
Q2) One way to eliminate the Tragedy of the Commons is to
A)increase law enforcement in public areas.
B)limit access to the commons.
C)increase access to the commons.
D)decrease taxes.
Q3) The national defense of the United States is not rival because
A)my enjoyment of the national defense does not diminish your enjoyment of the national defense of the United States.
B)my enjoyment of the national defense does diminish your enjoyment of the national defense of the United States.
C)my enjoyment of the national defense excludes you from enjoying the national defense of the United States.
D)Both b and c are correct.
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Chapter 12: The Design of the Tax System
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Sample Questions
Q1) According to the benefits principle,it is fair for people to pay taxes based on the benefits they receive from the government.
A)True
B)False
Q2) Refer to Scenario 12-1.How much total consumer surplus do Joan and Jim collectively receive from consuming cheesecake?
A)$3
B)$6
C)$9
D)$13
Q3) A tax on all forms of income will
A)lower the effective rate of interest on savings.
B)have no effect on savings.
C)enhance social welfare because the benefits will outweigh the costs.
D)enhance the incentives to save.
Q4) Vertical equity is not consistent with a regressive tax structure.
A)True
B)False
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Chapter 13: The Costs of Production
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Sample Questions
Q1) If a firm wants to capitalize on economies of scale,it may be able to do so by
A)assigning limited tasks to its employees, so they can master those tasks.
B)employing a smaller number of workers.
C)producing a smaller quantity of output.
D)producing an output level higher than the efficient scale.
Q2) Because of the greater flexibility that firms have in the long run,all short-run cost curves lie on or above the long-run curve.
A)True
B)False
Q3) Some reasons that firms may experience diseconomies of scale include that
A)the firm is too small to take advantage of specialization.
B)large management structures may be bureaucratic and inefficient.
C)if there are too many employees, the work place becomes crowded and people become less productive.
D)average fixed costs begin to rise again.
Q4) If a firm produces nothing,which of the following costs will be zero?
A)total cost
B)fixed cost
C)opportunity cost
D)variable cost
Page 15
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) A competitive firm might choose to set its price below the market price,because
A)this would result in higher average revenue.
B)this would result in higher profits.
C)this would result in lower total costs.
D)None of the above is correct.
Q2) Suppose that a firm is currently maximizing its short-run profit at an output of 50 units.If the current price is $9,the marginal cost of the 50th unit is $9,and the average cost of producing 50 units is $4,what is the firm's profit?
A)$0
B)$200
C)$250
D)$450
Q3) Refer to Scenario 14-1.How large would Mary's accounting profits need to be to allow her to attain zero economic profit?
A)$100,000
B)$125,000
C)$175,000
D)$225,000
Q4) List and describe the characteristics of a perfectly competitive market.
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Chapter 15: Monopoly
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Sample Questions
Q1) When a monopolist is able to sell its product at different prices,it is engaging in A)distribution pricing.
B)quality-adjusted pricing.
C)price differentiation.
D)price discrimination.
Q2) In the majority of cases where there is a natural monopoly,the U.S.government usually deals with the problem
A)by splitting the natural monopoly into smaller companies.
B)through regulation.
C)by turning the natural monopoly into a public enterprise.
D)by doing nothing.
Q3) Airlines often separate their customers into business travelers and personal travelers by giving a discount to those travelers who stay over a Saturday night.
A)True
B)False
Q4) University financial aid can be viewed as a type of price discrimination. A)True
B)False
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Page 17
Chapter 16: Oligopoly
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Sample Questions
Q1) Refer to Scenario 16-2.If Big Petro Inc.were to drill a second well,what would its profit be if Gargantuan Gas did not drill a second well?
A)$22 million
B)$24 million
C)$26 million
D)$28 million
Q2) The commercial jetliner industry,consisting of Boeing and Airbus,would best be described as a (an)
A)perfectly competitive market.
B)monopolistically competitive market.
C)oligopoly.
D)monopoly.
Q3) Refer to Table 16-1.What is the concentration ratio in Industry C?
A)29%
B)39%
C)45%
D)56%
Q4) Tying can be thought of as a form of price discrimination.
A)True B)False
Page 18
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Chapter 17: Monopolistic Competition
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Sample Questions
Q1) Refer to Figure 17-6..Assume the firm in the figure is currently producing 8 units of output and charging $400.The firm
A)will increase its profits if it raises its price and reduces its production level.
B)will increase its profits if it lowers its price and expands its production level.
C)is maximizing profits.
D)will increase its profits if it raises its prices and expands its production level.
Q2) The debate over the efficiency of markets in which products with brand names are sold
A)is framed by the role of regulation in advertising.
B)is likely to be resolved by reference to anecdotal evidence.
C)hinges on whether consumers are rational in their choices.
D)hinges on the effectiveness of advertising which identifies price differences.
Q3) Assume the role of a defender of advertising.Describe the characteristics of advertising that enhance the effectiveness of markets and increase the social welfare of society.
Q4) List five goods that are likely sold in a monopolistically competitive market.
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Page 19
Chapter 18: The Markets for the Factors of Production
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Sample Questions
Q1) A household member's decision on how much labor to supply is most closely linked to
A)the supply of factors of production other than labor.
B)technological change.
C)the tradeoff between leisure and work.
D)immigration trends.
Q2) When a firm decides to retain its earnings instead of paying dividends,the stockholders necessarily suffer.
A)True
B)False
Q3) Among the people who are characterized below,who has the highest opportunity cost of leisure?
A)an attorney who earns $200 per hour and who plays golf during her leisure time
B)a medical doctor who earns $210 per hour and who sleeps during his leisure time
C)a retail clerk who earns $15 per hour and who watches TV during her leisure time
D)a waiter who earns $12 per hour and who reads poetry during his leisure time
Q4) Using the theory of wage determination,explain why wages in developing countries are typically quite low.
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Chapter 19: Earnings and Discrimination
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Sample Questions
Q1) The theory of efficiency wages suggests that firms may pay above-equilibrium wages
A)to reduce employee turnover.
B)to prevent unions from recruiting members.
C)to reduce the need for minimum wage laws.
D)to increase the demand for better-skilled workers.
Q2) Since 1995,global manufacturing employment has declined,yet global industrial output has risen.
A)True
B)False
Q3) John is an Asian 23-year-old male,and Ken is an Asian 43-year-old male.Both John and Ken are economics majors,and they graduated from the same college with the same GPA - John in 2001 and Ken in 1981.John and Ken both are both financial advisers at the same brokerage firm.John earns $48,000 a year,and Ken earns $78,000 a year.Select the best explanation for this wage difference.
A)John has more human capital relative to Ken.
B)John has less human capital relative to Ken.
C)John has been discriminated against because he is young.
D)Ken has been discriminated against because he is old.
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Page 21
Chapter 20: Income Inequality and Poverty
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Sample Questions
Q1) Labor earnings make up what part of total income in the U.S.economy?
A)all of it
B)three-fourths
C)one-half
D)one-fourth
Q2) Why is it difficult to compare household income distributions among countries?
A)Countries collect data in different ways.
B)Some countries collect data on expenditures instead of incomes.
C)The task is not difficult because international agreements require countries to standardize their income accounting procedures.
D)Both a and b are correct.
Q3) When incentives to earn income are distorted by income redistribution programs, A)losses can exceed potential gains from greater equality of income.
B)total income in an economy can fall.
C)total utility in society can fall.
D)All of the above are correct.
Q4) Explain what is meant by "in-kind transfer" programs.Briefly outline the advantages and disadvantages of an in-kind transfer program.
Q5) Explain the relationship between labor earnings and the distribution of income.
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Chapter 21: The Theory of Consumer Choice
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Sample Questions
Q1) Each of the following are characteristics of an indifference curve map except
A)moving northeast to a new indifference curve will increase utility.
B)points on the same indifference curve yield equal utility.
C)the axes represent levels of utility for each of the goods.
D)indifference curves cannot cross.
Q2) The theory of consumer choice examines
A)the determination of output in competitive markets.
B)the tradeoffs inherent in decisions made by consumers.
C)how consumers select inputs into manufacturing production processes.
D)the determination of prices in competitive markets.
Q3) When two goods are perfect complements they will have
A)indifference curves with a positive slope.
B)indifference curves that are right angles.
C)indifference curves with a constant marginal rate of substitution.
D)Both b and c are correct.
Q4) When two goods are perfect substitutes,the marginal rate of substitution
A)is constant along the indifference curve.
B)decreases as the scarcity of one good increases.
C)increases as the scarcity of one good increases.
D)changes to reflect the consumer's changing preferences for the goods.
Page 23
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Chapter 22: Frontiers of Microeconomics
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Sample Questions
Q1) Explain what is meant by "asymmetric information." Identify and explain the two basic types of problems that arise when there is asymmetric information.
Q2) Economist Kenneth Arrow wrote a famous book in 1951 in which he took up the question,
A)Is there a perfect voting system?
B)Are preferences transitive?
C)Is a dictatorship a good form of government?
D)Should the president of the United States be elected to a single, six-year term?
Q3) The median voter's preferred outcome is the same as the
A)average preferred outcome.
B)outcome preferred by the greatest number of voters.
C)outcome produced by majority rule.
D)outcome preferred by Arrow's "perfect" voter.
Q4) Severe adverse-selection problems may result in
A)too few good used cars being offered for sale.
B)wages that are too low relative to equilibrium levels.
C)too many good drivers buying too much automobile insurance.
D)people with average health buying too much health insurance.
Q5) Explain the Condorcet paradox.To which type of voting system does it apply?
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Chapter 23: Measuring a Nations Income
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Sample Questions
Q1) Refer to Table 23-1.Disposable personal income for this economy is
A)$61
B)$56.
C)$47.
D)$41.
Q2) National income is defined as
A)GDP minus losses from depreciation.
B)GDP plus personal income.
C)GDP minus taxes paid by U.S.residents.
D)the total income earned by a nation's residents in the production of goods and services.
Q3) The income that households and noncorporate businesses receive is called
A)personal income.
B)net national product.
C)disposable personal income.
D)national income.
Q4) The basic tools of supply and demand analysis are as central to macroeconomic analysis as they are to microeconomic analysis.
A)True
B)False
Page 25
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Chapter 24: Measuring the Cost of Living
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Q1) If the consumer price index was 100 in the base year and 107 in the following year,the inflation rate was
A)107 percent.
B)10.7 percent.
C)7 percent.
D)1.07 percent.
Q2) Indexation refers to
A)a process of adjusting the nominal interest rate so that it is equal to the real interest rate.
B)using a law or contract to automatically correct a dollar amount for the effects of inflation.
C)using a price index to deflate dollar values.
D)an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.
Q3) To calculate the CPI,the Bureau of Labor Statistics uses
A)all prices of all goods and services produced domestically.
B)the prices of all final goods and services.
C)the prices of all consumer goods.
D)the prices of some consumer goods.
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Page 26
Chapter 25: Production and Growth
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Q1) In the long run,a higher saving rate
A)cannot increase the capital stock.
B)means that people must consume less in the future.
C)increases productivity.
D)None of the above is correct.
Q2) If they could increase their growth rates slightly,countries with low income would catch up with rich countries in about ten years.
A)True
B)False
Q3) Over the past century in the United States,real GDP per person has grown by about
A)1 percent per year.
B)2 percent per year.
C)3 percent per year.
D)4 percent per year.
Q4) Accumulating capital
A)requires that society sacrifice consumption goods in the present.
B)allows society to consume more in the present.
C)decreases saving rates.
D)has no tradeoffs.
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Chapter 26: Saving, investment, and the Financial System
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Sample Questions
Q1) A budget deficit
A)raises the interest rate and investment.
B)reduces the interest rate and investment.
C)raises the interest rate and reduces investment.
D)reduces the interest rate and raises investment.
Q2) If the government currently has a budget deficit,then
A)it does not necessarily have a debt.
B)its debt is increasing.
C)government expenditures are greater than taxes.
D)All of the above are correct.
Q3) The slope of the supply of loanable funds curve represents the
A)positive relation between the real interest rate and investment.
B)positive relation between the real interest rate and saving.
C)negative relation between the real interest rate and investment.
D)negative relation between the real interest rate and saving.
Q4) If a share of stock in Skylight Chili sells for $75,the retained earnings per share are $5,and the divided per share is $2,then the price-earnings ratio is 15.
A)True
B)False
Q5) Draw and label a graph showing equilibrium in the market for loanable funds.
Page 28
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Chapter 27: The Basic Tools of Finance
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Q1) Three people go to the bank to cash in their accounts.Amy had her money in an account for 25 years at 4 percent interest.Bill had his money in an account for 20 years at 5 percent interest.Celia had her money in an account for 5 years at 20 percent interest.If each of them originally deposited $500 in their accounts,which of them gets the most money when they cash in their accounts?
A)Amy
B)Bill
C)Celia
D)They each get the same amount.
Q2) Fundamental analysis shows that stock in FaceIt! Cosmetics Corporation has a present value that is higher than its price.
A)This stock is overvalued; you should consider adding it to your portfolio.
B)This stock is overvalued; you shouldn't consider adding it to your portfolio.
C)This stock is undervalued; you should consider adding it to your portfolio.
D)This stock is undervalued; you shouldn't consider adding it to your portfolio.
Q3) Give two conditions that are important to the efficient market theory.List one implication of the efficient market theory.
Q4) Discuss the statistical evidence concerning the efficient markets hypothesis.
Q5) List three different ways that a risk-averse person can reduce financial risk.
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Chapter 28: Unemployment
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Q1) Efficiency wages
A)increase frictional unemployment by keeping wages above equilibrium.
B)decrease frictional unemployment by keeping wages at equilibrium.
C)increase structural unemployment by keeping wages above equilibrium.
D)decrease structural unemployment by keeping wages at equilibrium.
Q2) Which of the following causes of unemployment is not associated with a wage rate above the equilibrium level?
A)unions
B)efficiency wages
C)job search
D)minimum-wage laws
Q3) Sally is on a temporary layoff from her factory job.If Sally participates in the BLS survey,she will be classified as
A)unemployed and in the labor force.
B)unemployed and out of the labor force.
C)employed and in the labor force.
D)employed and out of the labor force.
Q4) A minimum wage above equilibrium creates a surplus in the labor market. A)True B)False
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Chapter 29: The Monetary System
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Q1) During recessions,banks typically choose to hold more excess reserves relative to their deposits.This action
A)increases the money multiplier and increases the money supply.
B)decreases the money multiplier and decreases the money supply.
C)does not change the money multiplier, but increases the money supply.
D)does not change the money multiplier, but decreases the money supply.
Q2) M1 includes A)currency.
B)demand deposits.
C)travelers' checks.
D)All of the above are correct.
Q3) Explain why banks can influence the money supply if the required reserve ratio is less than 100 percent.
Q4) If the reserve ratio is 4 percent,the money multiplier is A)25
B)20
C)4
D)2
Q5) If the reserve ratio is 20 percent,how much money can be created from $100 of reserves? Show your work.
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Chapter 30: Money Growth and Inflation
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Q1) The irrelevance of monetary changes for real variables is called monetary neutrality.Most economists accept monetary neutrality as a good description of the economy in the long run,but not the short run.
A)True
B)False
Q2) The price level rises from 120 to 150.What was the inflation rate?
A)30%
B)25%
C)20%
D)None of the above is correct.
Q3) An associate professor of economics gets a $100 a month raise.She figures that with her current monthly salary she can't buy as many goods as she could last year.
A)Her real and nominal salary have risen.
B)Her real and nominal salary have fallen.
C)Her real salary has risen and her nominal salary has fallen.
D)Her real salary has fallen and her nominal salary has risen.
Q4) Explain the adjustment process in the money market that creates a change in the price level when the money supply increases.
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) In the 1970s and 1980s the U.S.dollar depreciated against the German mark and appreciated against the Italian lira because the United States experienced more inflation than Germany but less inflation than Italy.
A)True
B)False
Q2) If purchasing-power parity holds,then the value of the
A)real exchange rate is equal to one.
B)nominal exchange rate is equal to one.
C)real exchange rate is equal to the nominal exchange rate.
D)real exchange rate is equal to the difference in inflation rates between the two countries.
Q3) When Microsoft establishes a distribution center in France,U.S.net capital outflow
A)increases because Microsoft makes a portfolio investment in France.
B)decreases because Microsoft makes a portfolio investment in France.
C)increases because Microsoft makes a direct investment in capital in France.
D)decreases because Microsoft makes a direct investment in capital France.
Q4) How do we find the real exchange rate from the nominal exchange rate?
Q5) Why are net exports and net capital outflow always equal?
Q6) What is the logic behind the theory of purchasing-power parity?
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) Other things the same,when an Australian company imports sporting equipment from the U.S.,the open-economy macroeconomic model treats this transaction as an increase in the quantity of dollars demanded in the U.S.foreign-currency exchange market.
A)True
B)False
Q2) In the open-economy macroeconomic model,the supply curve of currency is vertical because the quantity of currency supplied does not depend on the real exchange rate.
A)True
B)False
Q3) Other things the same,if the Canadian real interest rate were to increase,Canadian net capital outflow
A)and net capital outflow of other countries would rise.
B)and net capital outflow of other countries would fall.
C)would rise, while net capital outflow of other countries would fall.
D)would fall, while net capital outflow of other countries would rise.
Q4) What do trade policies do to the standard of living?
Page 34
Q5) How are the identities S = NCO + I and NCO = NX related to the foreign currency exchange market and the loanable funds market?
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) The initial impact of the repeal of an investment tax credit is to shift
A)aggregate demand right.
B)aggregate demand left.
C)aggregate supply right.
D)aggregate supply left.
Q2) Which of the following is not a determinant of the long-run level of real GDP?
A)the price level
B)the supply of labor
C)available natural resources
D)available technology
Q3) Imagine two economies that are identical except that for a long time,economy A has had a money supply of $1,000 billion while economy B has had a money supply of $500 billion.It follows that
A)real GDP and the price level are lower in country B.
B)real GDP, but not the price level, is lower in country B.
C)the price level, but not real GDP is lower in country B.
D)neither the price level or real GDP is lower in country B.
Q4) Explain how an increase in the price level changes interest rates.How does this change in interest rates lead to changes in investment and net exports?
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) An increase in government spending on goods to build or repair infrastructure
A)shifts the aggregate demand curve to the right.
B)has a multiplier effect.
C)shifts the aggregate supply curve to the right, but this effect is likely more important in the long run.
D)All of the above are correct.
Q2) According to liquidity preference theory,the money supply curve is
A)upward sloping.
B)downward sloping.
C)vertical.
D)horizontal.
Q3) When the government reduces taxes,which of the following decreases?
A)consumption
B)take-home pay
C)household saving
D)None of the above is correct.
Q4) Describe the process in the money market by which the interest rate reaches its equilibrium value if it starts above equilibrium.
Page 36
Q5) What is the difference between monetary policy and fiscal policy?
Q6) Explain how unemployment insurance acts as an automatic stabilizer.
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Chapter 35: The Short Run Trade Off Between Inflation and Unemployment
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Q1) Suppose that the economy is at an inflation rate such that unemployment is above the natural rate.How does the economy return to the natural rate of unemployment if this lower inflation rate persists? Use sticky-wage theory to explain your answer.
Q2) Suppose that a central bank increases the money supply.According to the logic of the Phillips curve this should make
A)prices, output, and employment rise.
B)prices and output rise, employment fall.
C)prices rise and output and employment fall.
D)prices fall, output, and employment rise.
Q3) The sacrifice ratio of the Volcker disinflation was larger than previous estimates had predicted.
A)True
B)False
Q4) Faced with an adverse supply shock,policymakers can increase
A)aggregate demand, which increases prices and output.
B)aggregate demand, which decreases prices and increases output.
C)aggregate supply, which increases prices and output.
D)aggregate supply, which decreases prices and increases output.
Q5) Why does a downward-sloping Phillips curve imply a positive sacrifice ratio?
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) If a central bank were required to target inflation at zero,then when there was a negative aggregate supply shock the central bank
A)would have to increase the money supply.This would move unemployment closer to the natural rate.
B)would have to increase the money supply.This would move unemployment further from the natural rate.
C)would have to decrease the money supply.This would move unemployment closer to the natural rate.
D)would have to decrease the money supply.This would move unemployment further from the natural rate.
Q2) If the central bank has discretion to make policy,it may create economic fluctuations that reflect the electoral calendar.This is called the political business cycle.
A)True
B)False
Q3) Suppose a country has had a high and relatively stable inflation rate for a long time.How might this affect the costs and benefits of inflation reduction?
Q4) Why do many economists advocate a consumption tax rather than an income tax?
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