HOMEWORK II

1) The main subject of macroeconomics deals with:

a) The factors that influence the production of particular products, and the behaviour of
individual industries;
b) Household income and the determination of individual prices;
c) The sum of individual decisions, or the aggregate behaviour of consumers, firms, and the
economy as a whole;
d) The reasons behind the flexibility of prices and the tendency of all markets to converge
toward equilibrium--where quantity supplied equals quantity demanded;
e) All of the above.

HINT: The key word here is aggregate, or total, behavior. Macroeconomics focuses on the behavior
of economic aggregates and the economy as a whole

2) The prolonged period of unemployment that existed during the Great Depression gave rise to the
following thinking in the economics discipline:
a) The classical revolution;
b) The Marxist Revolution;
c) The Keynesian Revolution;
d) The monetarist revolution;
e) The reversal of diminishing returns.
3) Which of the following ideas was central in Keynesian theory?
a) The invisible hand. The forces of supply and demand ensure that a market will quickly adjust
to deviations from equilibrium;
b) Self-correcting prices and wages determine the level of output and employment in the
economy;
c) Fiscal policy can and should be used to correct any deviations of output away from the full-
employment level of output;
d) Manipulation of the money supply is an ideal tool to correct the level of aggregate demand for
goods and services;
e) The use of monetary policy does more harm than good, particularly in an economy of our
size.

HINT: Keynes believed that governments could intervene in the economy and affect the level of
output and employment, preferably with fiscal policy.

4) Being a human being who buys goods and services to satisfy unlimited wants and needs would put
you in the:
a) household sector;
b) business sector;
c) government sector;
d) foreign sector;
e) market sector.

5) In the circular flow model, households are responsible for __________ while business are
responsible for:
a) production, consumption
b) consumption, production
c) the flow of payments, the flow of physical commodities
d) the flow of physical commodities, the flow of payments
e) factor markets, product markets.
6) If I earn and receive $1000 of income this month, spend $500 for food, $300 for rent on my
apartment, $150 for shares of Microsoft stock, and $50 for cable television services, my saving for
the month is:
 a) $0.
b) $50.
c) $150.
d) $300.
e) $500.
7) Refer to the figure below. Which of the following money flows corresponds to the letter G?

a) Taxes;
b) Transfers;
c) Purchases of goods and services;
d) Dividends, profits, and rent;
e) No correct answer.
Hint: This arrow shows wages, interest, and transfer payments paid by government to households.
8) Refer to the above figure. Which flow arrow(s) represent taxes?
a) F and G;
b) D and E;
c) E and F;
d) E only;
e) G only.
9) An increase the total volume of the circular flow results from a(n):
a) diversion of income from investment to consumption.
b) diversion of income from saving to taxes.
c) decrease in net exports.
d) increase in exports.
e) increase in imports.
10) Which of the following is not an injection into the circular flow of income?
a) Consumption
b) Investment
c) Government spending
d) Exports
e) None of the above.

11) Which one of the following is an injection into the circular flow of income?
a) Investment
b) Consumption
c) Taxation
d) Saving
e) None of the above.
12) In the circular flow we would expect leakages to ____________ injections:
a) Equal;
b) be less than;
c) be greater than;
d) be less or greater than;
e) cannot be measured.
13) Investment may be defined as:
a) that part of household income which is saved rather than spent
b) all types of spending by the government sector
c) spending on goods and services by consumers
d) spending which adds to the capital stock of a country
e) none of the above

14) In which case is total expenditure in an economy not equal to total income?

a) if total saving is larger than total investment;

b) if net exports are not zero;

c) if inventory investment is negative;

d) none of the above--they are always equal;

e) a+b.

15) Suppose that a farmer grows wheat and sells it to a baker for 1 m.u. (monetary units), the baker
makes bread and sells it to a store for 2 m.u., and the store sells it to the customer for 3 m.u. This
transaction increases GDP by :

a) 1m.u.;

b) 2 m.u.;

c) 3 m.u;

d) 6 m.u.;

e) no correct answer is

Hint: GDP includes only the value of final goods.

16) If production remains the same and all prices double, then real GDP:

a) and nominal GDP are both constant;

b) is constant and nominal GDP is reduced by half;

c) is constant and nominal GDP doubles;

d) doubles and nominal GDP is constant;

e) no correct answer.
 Hint: Real GDP is measured in constant prices, so it is unaffected by a price increase. Nominal GDP is
measured in current prices.

17) GDP is :

a) a stock;

b) a flow;

c) both a stock and a flow;

d) neither a stock nor a flow;

e) no correct answer.

18) An increase of 10% in nominal GDP indicates that:

a) Real output has increased by 10%;

b) The aggregate price level has increased by 10%;

c) Real output and the aggregate price level have increased by 5% each;

d) It is possible that all of the increase was caused by an increase in the aggregate price level;

e) The increase must have been caused by a variable other than real output or the aggregate price
level.

Hint: It is possible that all of the increase was caused by an increase in the aggregate price level.
Nominal GDP = Aggregate price level * Real Output.

19) What are the limitations of the GDP concept?

a) Domestic activities such as childcare and housework are not counted in GDP, although they
amount to real production;

b) GDP does not reflect social losses associated with changes in output, such as crime and
pollution although they represent real social losses;

c) GDP does not measure the effects of redistributive policies or the distribution of output and
income among individuals in a society;

d) GDP is neutral about the kinds of goods the economy produces;

e) All of the above.

20) The sum of wages, interest, rent, profit, and proprietors' income is:

a) disposable income;
 b) personal income;
c) national income;
d) net domestic product;
e) gross domestic product.

21) Disposable income can be calculated by subtracting __________ from personal income:

a) personal taxes;
b) indirect business taxes;
c) capital consumption allowance;
d) income earned but not received;
e) income received but not earned.

22) Nominal GDP is calculated by:

a) adding up all of the goods and services produced in the economy, valued in current year
market prices;
b) adding up all of the goods and services produced in the economy, valued in base year market
prices;
c) adding up all of the final goods and services produced in the economy, valued in current year
market prices;
d) adding up all of the final goods and services produced in the economy, valued in base year
market prices;
e) none of the above.

23) Which of the following statements describes the difference between nominal and real GDP?

a) Real GDP includes only goods; nominal GDP includes goods and services;

b) Real GDP is measured using constant base-year prices; nominal GDP is measured using
current prices;

c) Real GDP is equal to nominal GDP less the depreciation of the capital stock;

d) Real GDP is equal to nominal GDP multiplied by the CPI;

e) No correct answer.

24) Real GDP equals:

a) nominal GDP minus net exports;

b) nominal GDP divided by the GDP deflator;

c) nominal GDP multiplied by the GDP deflator;

 d) GDP minus depreciation.

e) GDP deflator divided by nominal GDP.

25) Suppose that a Romanian citizen crosses the border each day to work in the Bulgaria. Her income
from this job would be counted in:
a) Bulgaria GNP and Romania GNP;
b) Bulgaria GNP and Romanian GDP;
c) Bulgaria GDP and Romanian GNP;
d) Bulgarian GDP and Romanian GDP.
e) No correct answer.

Hint: Her income is counted as Bulgarian GDP and Romanian GNP. See for the definitions of
gross domestic product (GDP) and gross national product (GNP).

26) Suppose that an Romanian working in Spain renounces his Romanian citizenship and is granted
Spanish citizenship. Which of the following will happen?:
a) Romanian GDP will fall; Spain GNP will rise;
b) Romanian GNP will fall; Spain GNP will rise;
c) Romanian GDP will fall; Spain GDP will rise;
d) Romanian GNP will fall; Spain GDP will rises;
e) No correct answer.
Hint: The worker's income was counted as Romanian GNP and Spanish GDP. After the worker
becomes a Spain citizen, his income is counted as Spanish GNP and GDP. Therefore,
Romanian GNP falls and Spanish GNP rises.

27) To obtain national income, start with GDP and subtract:

a) Depreciation;
b) depreciation and indirect business taxes;
c) depreciation, indirect business taxes, and corporate profits;
d) depreciation, indirect business taxes, corporate profits, and social insurance contributions;
e) no correct answer.

28) The consumer price index (CPI):

a) measures the price of a fixed basket of goods and services;

b) measures the price of a basket of goods and services that constantly changes as the
composition of consumer spending changes;
c) measures the amount of money that it takes to produce a fixed level of utility;
d) is one of the many statistics in the National Income Accounts;
e) no correct answer.

29) Which of the following statements about the CPI and the GDP deflator is true?

a) The CPI measures the price level; the GDP deflator measures the production of an economy;
b) The CPI refers to a base year; the GDP deflator always refers to the current year;
c) The weights given to prices are not the same;
d) The GDP deflator takes the price of imported goods into account; the CPI does not;
e) No correct answer.

30) All other things equal, if the price of foreign-made cars rises, then the GDP deflator :
 a) and the CPI will rise by equal amounts;
b) will rise and the CPI will remain the same;
c) will remain the same and the CPI will rise;
d) and the CPI will rise by different amounts;
e) no correct answer.

Hint: Goods produced abroad do not enter the GDP deflator, but are included in the CPI.

31) GDP per capita is a baseline measure of the standard of living. It equals:

a) GDP divided by the adult population (aged 16+);

b) GDP divided by the number of taxpayers;
c) GDP divided by the total population;
d) GDP divided by the total number of people employed in the economy + the unemployed;
e) none of the above.

32) Which of the following events will cause the unemployment rate to increase?

a) An increase in population, with no change in the size of the labor force;

b) A proportionally equal increase in the labor force and the number of unemployed workers;
c) An increase in the labor force with no change in the number of employed workers;
d) An increase in the number of employed workers with no change in the number of unemployed
workers;
e) No correct answer.

HINT: The unemployment rate is defined as the number of unemployed workers divided by the
labor force. If the labor force increases and employment does not change, the
unemployment rate will increase.

33) Suppose that a factory worker turns 62 years old and retires from her job. Which statistic is not
affected?

a) Number of unemployed;
b) Unemployment rate;
c) Labor force;
d) Labor-force participation rate;
e) No correct answer.

34) Okun's law expresses a relationship between a change in:

a) the price level and a change in real GDP;

b) the price level and a change in the unemployment rate;
c) investment and change in the unemployment rate;
d) real GDP and a change in the unemployment rate;
e) no correct answer.

35) In a closed economy, the supply of goods and services must be equal to:

a) consumption;
b) consumption + investment;
c) consumption + investment + government purchases;
d) consumption + investment + government purchases taxes;
e) consumption + savings + taxes.
 Hunt: In a closed economy, the supply of goods and services is allocated among three uses :
consumption (C ), investment (I ), and government purchases (G ).

36) A linear consumption function with a positive slope less than one means that if income increases,
consumption will:

a) fall
b) not change
c) fluctuate
d) increase
e) none of the above.

37) Suppose we write the Keynesian consumption function as:

C = K + MPC. Y when K > 0 and 0 < MPC < 1

The average propensity to consume can then be written as :

a) K/Y + MPC /Y;

b) K/Y;
c) MPC;
d) K/Y + MPC.
e) No correct answer.

Hint: The average propensity to consume is equal to the consumption function divided by income (Y).

38) If the marginal propensity to consume increases or the tax rate decreases:

a) the slope of the planned expenditure line will decrease;

b) the intercept of the planned expenditure line will increase;
c) the slope of the desired aggregate expenditure function will increase;
d) the intercept of the planned expenditure line will decrease;
e) none of the above.

39) Suppose that a consumer has a marginal propensity to consume (MPC) of 0.8. If this consumer
receives and extra 2 m.u.; of disposable income, her saving would be expected to increase by :

a) 0.40 m.u.;
b) 0.80 m.u.;
c) 1.20 m.u.;
d) 1.60 m.u.;
e) no correct answer.

40) Refer to the graph below. When the consumption function is above the 45 line:
 a) Consumption exceeds income and saving is negative;
b) Consumption is less than income and saving is negative;
c) Consumption exceeds income and saving is positive;
d) Consumption is less than income and saving is negative;
e) No correct answer.

Hint: Consumption exceeds income and saving is negative. For any value of income less than Y 0,
consumption is greater than income; thus, saving is negative.

41) Refer to the graph below. What is the value of the marginal propensity to consume (MPC) ?

a) 1,000;
b) 1.25;
c) 0.20;
d) 0.80;
 e) There is not sufficient information to estimate the value of the marginal propensity to consume.

Hint: Taking two points on the line, the change in consumption (rise) equals (4,200 - 2,000) = 2,200,
while the corresponding change in disposable income (run) equals (4,000 - 1,250) = 2,750.
Dividing rise over run: 2,200/2,750 = 0.8

42) Refer to the graph below. At what level of disposable income is consumption equal to disposable
income?

a) 1,250 m.u;
b) 5,000m.u;
c) 1,000 m.u;
d) 800 m.u;
e) 4,200 m.u.

Hint: Set Yd = C, then solve for Y.

Yd = a + bYd. Then, Yd - bYd = a. Then Yd (1 - b) = a. Finally, Yd = (1/1 - b) * a. Using the corresponding

values of a and b, then: Yd - (1/ 1 - 0.8) * $1,000 = 5 * 1,000 = $5,000.

43) Refer to the graph below. What is the level of saving when Yd = $1,000?
 a) 1,800 m.u.;
b) 1,200 m.u.;
c) 200 m.u.;
d) -800 m.u.;
e) -1,200 m.u.

Hint: To construct the saving function, remember that the saving function is a mirror image of the
consumption function. When a = 1,000, the intercept of the saving function equals - a, or - $1,000. And
when the MPC = 0.8, the MPS = (1 - MPC) = 0.2. Therefore, the saving function equals S = - 1,000 + 0.2
Yd.

When Yd = 1,000, then S = - 1,000 + 0.2 (1,000) = - 1,000 + 200 = - $800.

44) Refer to the graph below. The consumption function is C = 50 + 0.6Yd. What is the value of Y0?
 a) Since the value of saving equals zero at that point, the value of income cannot be estimated;
b) 50;
c) 80;
d) 125;
e) There is not sufficient data to answer the question.

Hint: At Y0, the consumption function intersects the 45 line. Consumption is equal to income, and
saving equals zero. Since Y = C, then, Y = 50 + 0.6Y. Solving for Y we obtain: Y - 0.6Y = 50. Therefore,
Y (1 - 0.6) = 50. Then Y = [1/(1 - 0.6)] * 50 = 2.5 * 50 = 125.

45) Refer to the graph below. How much is the level of saving when the level of income equals 50?
 a) -20 m.u.;
b) -30 m.u;
c) -80 m.u;
d) 0 m.u;
e) 20 m.u.

Hint: If a = 50, then - a = - $50. If b = 0.6, then s = 0.4. Then S = - 50 + 0.4 Y. When Y = 50, then S = -
50 + 0.4 (50) = -50 + 20 = - $30

46) Refer to the graph below. What is the value of the marginal propensity to consume (MPC)?
 a) 1,65;
b) 1,5;
c) 7.5;
d) 0,6;
e) 2,5.

Hint: Using the values of two known points, such as point C (250, 250) and the value of the intercept
(0, 100), we can compute the slope of the aggregate expenditure function, which is the same as the
MPC. b = (250 - 100)/(250 - 0) = 0.6.

47) Refer to the above graph. What is the value of the multiplier?

a) 2,5;
b) 4;
c) 5;
d) 3;
e) 100.

Hint: The multiplier equals 1 / (1 - b)= 1/(1-MPC)=1/MPS.Since b = MPC= 0.6, the multiplier equals 1/
(1 0.6) = 1 / 0.4 = 2.5.
48) Refer to the graph below. What is the value of (C + I) at point b?

a) There is insufficient information to arrive at an answer;

b) 400;
c) 450;
d) 500;
e) 1000.

Hint: When income equals 500, consumption equals C = a + 0.6(500), and investment equals I. Then
(C + I) equals (a + 300 + I). The intercept of the aggregate expenditure (C + I)0 equals the sum of (a +
I) = 100. Then (C + I) = (100 + 300) = 400.

49) Refer to the graph below. What could have caused the shift in aggregate expenditure, from (C + I)0 to
(C + I)1?
 a) An increase in disposable income;
b) A decrease in household wealth;
c) The expectation of lower future prices;
d) A decrease in the interest rate;
e) Pessimistic changes in household and business expectations.

Hint: A decrease in the interest rate. Thus investment will increase and AD will increase. So will do
AE. An increase in disposable income would result in a move along a given aggregate expenditure
function.

50) Suppose that Ionescu builds a new house, then she sells it to Florescu, and then Florescu sells it to
Georgescu. The total net investment from these transactions is :

a) Zero;
b) 1 house;
c) 2 houses;
d) 3 houses;
e) 4 houses.

Hint: building a new house counts as investment; selling an existing house does not.

51) Which of the following categories are included in gross private domestic investment?

a) Non-residential investment;
b) Residential investment;
c) Change in business inventories;
d) Depreciation;
e) All of the above.

52) The accelerator model of inventory investment predicts that inventories are a function of the :

a) interest rate;
b) rate of increase in the price of the good held in inventory;
c) time it takes to build a good;
d) change in output;
e) no correct answer.

53) If the real interest rate rises, the quantity of investment demanded:
 a) will fall;
b) will not change;
c) will rise;
d) could rise or fall;
e) no orrect answer.

Hint: To be profitable, the return on an investment must exceed its cost. The real interest rate
represents the cost of investment. Thus, if the real interest rate rises, fewer investment projects are
profitable, so the quantity of investment demanded will fall.

54) The real interest rate is equal to the nominal interest rate minus:

a) accounting profit;
b) economic profit;
c) taxes;
d) inflation;
e) no correct answer.

Hint: The real interest rate is equal to the nominal interest rate minus inflation.

55) In a closed economy that is in equilibrium, investment is equal to:

a) private saving;
b) public saving;
c) private saving plus public saving;
d) disposable income minus consumption;
e) no correct answer.

Hint: In equilibrium, the supply of loanable funds must equal the demand. In a closed economy,
the demand for loanable funds is investment and the supply is the sum of private and public
saving. Thus, investment must equal private saving plus public saving.

56) The government is running a budget deficit if :

a) government spending is greater than tax revenue;

b) tax revenue is greater than government spending;
c) tax revenue is greater than consumption spending;
d) tax revenue is greater than investment spending;
e) no correct answer.

57) Private saving is equal to:

a) income - consumption;
b) income - consumption taxes;
c) income - consumption - government spending;
d) income - consumption - government spending taxes;
e) no correct answer .

58) The supply of loanable funds, or "national saving," is equal to :

a) income consumption;
b) income - consumption taxes;
 c) income - consumption - government spending;
d) income - consumption - government spending taxes;
e) no correct answer.

Hint: National saving is equal to the sum of private and public saving. Since private saving is equal to
income minus consumption and taxes and public savings is equal to taxes minus government spending,
national saving equals income minus consumption and government spending.

59) Suppose that there is a positive shock to investment demand: that is, at every interest rate, the
desired amount of investment rises. In a closed economy with the national saving fixed, the real
interest rate will:

a) Fall;
b) remain constant;
c) rise;
d) first fall and then rise;
e) no correct answer.

Hint: An increase in investment demand represents an increase in the demand for loanable funds. Since
the supply of loanable funds (national saving) is fixed, the real interest rate must rise so that the
quantity of investment demanded will fall and the market for loanable funds will remain in
equilibrium.

60) Short-run equilibrium output means that aggregate demand _________ actual output:

a) is less than;
b) equals;
c) is greater than;
d) fluctuates around;
e) none of the above.

61) The logic behind the aggregate supply and aggregate demand curves is:

a) Identical to the market supply and market demand curves;

b) More abstract than the logic of individual supply and demand curves;
c) More complex than the logic of market supply and demand;
d) Less abstract and complex than the logic of market supply and demand;
e) Irrational because it is impossible to sum all microeconomic decisions.

62) Which one of the following is a component of aggregate demand?

a) Savings
b) Tax revenues
c) Household (consumer) spending
d) The money supply
e) Money demand

63) Economists prefer measuring the economy's average price using the:

a) consumer price index;

b) GDP price deflator;
c) urban market index;
d) real GDP;
 e) nominal GDP.

64) When interest rates increase:

a) consumption expenditures tend to increase;

b) investment expenditures tend to increase;
c) investment expenditures tend to decrease;
d) government expenditures tend to decrease;
e) none of the above.

65) The model of aggregate supply and aggregate demand (AS/AD model) in the short run differs from
our long-run model of the economy because, in the short run :

a) the interest rate is fixed;

b) output is fixed;
c) prices are fixed;
d) employment is fixed;
e) no correct answer.

66. The quantity equation MV = PY implies that the AD curve is:

a) vertical;
b) upward sloping;
c) horizontal;
d) downward sloping;
e) no correct answer.
Hint: If Y rises, P must fall for the above equation to continue to hold. Since the AD curve is plotted in
PY space, the above equation implies it is downward sloping.

67. In the short run, if prices are fixed, the aggregate supply curve is :
a) vertical;
b) upward sloping;
c) horizontal;
d) downward sloping;
e) no correct answer.

68. The positive relationship between the price level and the amount of output means that the aggregate
supply curve is:
a) horizontal;
b) upward sloping;
c) vertical;
d) downward sloping.
e) No correct answer.

69. An increase in aggregate demand, such as that due to an increase in government purchases increases :
a) both output and prices in the long run;
b) output in the long run but not in the short run;
c) prices in the short run but not in the long run;
d) output in the short run but not in the long run;
e) no correct answer.
Hint: An increase in government purchases shifts the aggregate demand curve upward. Since the short-
run aggregate supply curve is horizontal, output is higher in the new equilibrium. In the long run,
aggregate supply is vertical, so output must return to its initial level.

70) Most economists believe that the long-run aggregate supply curve is vertical because:
 a) actual output can never exceed, even temporarily, the natural rate of output
b) in the long run, the level of output produced in the economy is determined by the stock of factor
resources and the state of technology rather than changes in the price level
c) a vertical long-run supply curve indicates the maximum level of output that an economy can ever
achieve
d) a vertical long-run supply curve indicates that an increase in aggregate demand will lead to a
larger real output but not a larger nominal output.
e) none of the above

71) Which one of the following would cause a rightward shift in the LONG RUN aggregate supply curve
(LRAS)? An increase in

a) The volume of goods and services exported - this affects AD rather than LRAS
b) The amount of cash in circulation - this would boost AD but have no effect on LRAS
c) Inflation
d) The productivity of labour and capital inputs
e) none of the above

72) At the intersection of AD and AS equilibrium is achieved in

a) the goods market

b) the money market
c) the labour market
d) all of the above
e) none of the above

73) Potential output can be increased by _____________ or by ______________

a) increasing the use of labour, increasing the use of land

b) increasing the use of capital, increasing the use of labour
c) increasing the use of land, increasing the use of capital
d) increasing the use of all inputs, technical advances
e) all of the above.

74) The AD schedule indicates that __________ inflation is associated with ___________ output

a) higher, lower;
b) higher, higher;
c) lower, lower;
d) zero, zero;
e) none of the above.

75. The Solow growth model assumes that the production function exhibits:

a) decreasing returns to scale;

b) constant returns to scale;
c) increasing returns to scale;
d) increasing marginal product;
e) no correct answer.

Hint: The production function used in the Solow growth model exhibits constant returns to scale.

76. In the Solow model, the depreciation rate represents the:

 a) fraction of income taken by taxes;
b) difference between the nominal and real interest rates;
c) inflation rate;
d) fraction of the capital stock that wears out each year;
e) no correct answer.

77. If the capital stock is above the steady-state level, then investment :
a) is smaller than depreciation;
b) is larger than depreciation;
c) is equal to depreciation;
d) could be higher than, lower than, or equal to depreciation;
e) no correct answer.

Hint: Since the capital stock is above its steady-state level, it must be falling. This occurs when
investment is smaller than depreciation.

78. If an economy is initially in a steady state and it experiences an increase in its saving rate, then the
steady-state capital stock will :
a) fall;
b) stay the same;
c) rise;
d) rise only if depreciation also rises.
e) no correct answer.

Hint: If the saving rate rises, the steady state level of the capital stock will also rise.

79. The Golden Rule level of capital accumulation is defined as the level of the capital stock that achieves a
steady state with the:
a) highest rate of savings;
b) highest level of income;
c) highest level of consumption;
d) lowest level of depreciation;
e) no correct answer.

80. At the Golden Rule level of capital accumulation, the marginal product of capital equals the:
a) real interest rate;
b) depreciation rate;
c) savings rate;
d) marginal product of labor;
e) no correct answer.

Hint: For a discussion of the Golden Rule level of capital accumulation, see Solow Model.

81. If two economies are identical except for their rates of population growth, then the economy with the
higher rate of population growth will have:
a) higher steady-state output per worker;
b) higher steady-state capital per worker;
c) higher steady-state consumption per worker;
d) lower steady-state output per worker;
e) no correct answer.

Hint: An economy with a higher rate of population growth will have lower steady-state levels of capital,
output, and consumption per worker.

82. In the Solow growth model with population growth, the Golden Rule steady state is achieved when the
marginal product of capital equals:
 a) the savings rate;
b) the population growth rate;
c) the population growth rate plus the rate of depreciation;
d) the proportion of output that goes to wages;
e) no correct answer.

Hint: At the Golden Rule steady state the marginal product of capital net of depreciation equals the rate
of population growth.

83. In the Solow growth model with population growth (n) and technological progress (g), the steady-state
growth rate of output per worker is:
a) 0;
b) n;
c) g;
d) n + g;
e) no correct answer.

Hint: the steady-state growth rate of output per worker is g.

84. In the Solow growth model with population growth (n) and technological progress (g), the steady-state
growth rate of total output is:
a) 0;
b) n;
c) g;
d) n + g;
e) no correct answer.

Hint: The steady-state growth rate of total output is n + g.

85.A permanent change in the growth rate of total output can arise from a change in the:
a) rate of technological progress;
b) saving rate;
c) ratio of capital per worker;
d) number of workers;
e) no correct answer.

Hint: The steady state growth rate of total output is equal to the rate of population growth (n) plus the
rate of technological progress (g). A change in the rate of technological progress will permanently
change the growth rate of total output.

86. In a Solow model with population growth and technological progress, the steady state level of
consumption is maximized when the steady state marginal product of capital equals the rate of
depreciation plus:
a) the rate of population growth plus the rate of technological change;
b) the rate of population growth;
c) the rate of technological change;
d) none of the above;
e) not enough available informations.

Hint: Steady state consumption is maximized at the Golden Rule level of capital. At this level, the
marginal product of capital equals the rate of depreciation plus the rate of population growth plus
the rate of technological change.

87. In the endogenous growth model, the production function exhibits:

a) decreasing returns;
b) constant returns;
 c) increasing returns;
d) any of the above may be correct;
e) none of the above;

88) The point in which the economy's production has reached it's highest level after rising for several years
is best termed a business cycle:

a) expansion;
b) Recession;
c) Peak;
d) Trough;
e) contraction.

89) Periods in which production increases and unemployment decreases are called

a) macroeconomic expansions;
b) business cycles;
c) recessions, or possibly, depressions;
d) inflation;
e) accounting exercises.

90) In the recession or depression phase of the business cycle,

a) production and employment increase while the inflation rate decreases;

b) production, employment, and the inflation rate decrease;
c) production, employment, and the inflation rate increase;
d) production, unemployment, and the inflation rate increase;
e) none of the above.

91) Refer to the figure below. During which period of time is the economy in a recession in this business
cycle?

a) The period from A to B;

b) The period from C to D;
c) The period from C to E;
d) The period from D to E;
e) From D to F.

92) Refer to the figure above. The period from A to B is part of:

a) A recession;
b) A recovery;
 c) A boom;
d) A contraction;
e) A depression.

93. The theory of real business cycles postulates that:

a) the classical dichotomy does not apply to the short run;
b) business cycles are not an exclusively short-run phenomenon;
c) fluctuations in nominal variables are caused by long-run real changes in the economy;
d) prices are fully flexible, even in the short run;
e) no correct answer.

94. Real-business-cycle theorists believe that fluctuations in output and employment are:
a) deviations of output and unemployment from their natural rate;
b) caused by price stickiness;
c) changes in the natural rate of output and unemployment;
d) non-existent;
e) no correct answer.

Hint: Real-business-cycle theorists believe that markets clear quickly and that the economy is always at
its natural rate.

95. Intertemporal substitution of labor suggests that if wages were temporarily high, then a worker would :
a) increase his labor supply today relative to next year;
b) decrease his labor supply today relative to next year;
c) be indifferent to working today and working tomorrow;
d) be indifferent between receiving a dollar today and receiving a dollar tomorrow;
e) no correct answer.

Hint: When the wage is temporarily high, the return to working today is high relative to the return to
working tomorrow.

96. According to the theory of real business cycles, if the interest rate rises, then:
a) both employment and output will fall;
b) employment will fall and output will rise;
c) employment will rise and output will fall;
d) both employment and output will rise;
e) no correct answer.
Hint: Real-business-cycle theory predicts that if the interest rate rises, workers will choose to work more
today relative to the future. Employment and output are therefore higher.

97. In real-business-cycle models, aggregate fluctuations are largely caused by:

a) technology shocks;
b) money demand shocks;
c) market imperfections;
d) nominal rigidities;
e) no correct answer.
Hint: Technology shocks cause aggregate fluctuations in real-business-cycle models. Money demand
shocks, market imperfections, and nominal rigidities are either unimportant or do not exist in real-
business-cycle models.

98. New Keynesian economists believe that coordination failures :

a) are valid explanations for booms;
b) cannot occur;
c) are the consequence of people not optimizing;
d) can be avoided if people could coordinate their actions;
e) no correct answer.
Hint: Coordination failure refers to the failure of achieving the better equilibrium. People are
nevertheless behaving optimally, given what they believe the other person is doing. If they could
coordinate their behavior together, they could achieve the better outcome.

99. New Keynesian economists believe that government policies:

a) cannot be used to stabilize the economy;
b) should be used to stabilize the economy;
c) interrupt the natural behavior of the economy;
d) reduce the efficiency of the economy's response to shocks;
e) no correct answer.
Hint: New Keynesian economists believe that price and wage stickiness are market imperfections that
lower economic well-being and are the source of economic fluctuations. They believe that
government policies could alleviate these imperfections.

100. The inside lag is the:

a) time between a shock to the economy and the policy action responding to that shock;
b) time between a policy action and its influence on the economy;
c) time between a shock to the economy and the influence on the economy of a policy action;
d) difference between the time it takes to implement monetary policy and the time it takes to
implement fiscal policy;
e) no correct answer.

Hint: the inside lag is the time between a shock and the policy action responding to that shock.

101. The outside lag is the :

a) time between a shock to the economy and the policy action responding to that shock;
b) time between a policy action and its influence on the economy;
c) time between a shock to the economy and the influence on the economy of a policy action;
d) difference between the time it takes to implement monetary policy and the time it takes to
implement fiscal policy;
e) no correct answer.

Hint: the outside lag is the time between a policy action and its influence on the economy.

102.Suppose that the index of leading indicators leads the business cycle by twelve months. If the inside
lag of monetary policy is three months, then the maximum outside lag that makes monetary policy
effective is:
a) three months;
b) six months;
c) nine months;
d) twelve months;
e) ten month.

Hint: The sum of the inside lag and the outside lag predicts how long it takes for policy to be enacted
and to work. If policymakers know of a shock twelve months in advance and it takes them three
months to enact policy, the policy must take effect in nine months or less to be effective.

103. Automatic stabilizers largely eliminate :

a) the business cycle;
b) active policy;
c) the outside lag;
d) the inside lag;
e) no correct answer.
Hint: With automatic stabilizers, policies go into effect without policymakers having to enact them.
Thus, automatic stabilizers largely eliminate the inside lag.

104. The Lucas critique is based on:

a) the inside lag of economic policy;
b) the Phillips curve;
c) automatic stabilizers;
d) the fact that people's expectations are rational;
e) no correct answer.
Hint: The Lucas critique states that traditional policy evaluations are incorrect because they do not take
into account the fact that people form their expectations rationally.

105.Suppose that the government has been conducting policy according to the following equation for some
time now Money Growth = 3% + (Unemployment Rate - 6%) This kind of policy is called a(n) :
a) passive rule policy;
b) passive discretionary policy;
c) active rule policy;
d) active discretionary policy;
e) no correct answer.

Hint: This situation illustrates a policy rule since policymakers have set in advance the way in which
they will behave. It is considered active because the resulting policy is different depending on
economic conditions.

106. A political business cycle is said to exist when:

a) the economy is managed by Parlament /Congress;
b) politicians manipulate the economy for electoral gain;
c) economic policy is guided by the interests of the corporate sector;
d) business people go into politics and affect the way economic policy is conducted;
e) no correct answer B.

107. The monetary-policy rule that monetarists advocate is:

a) an unemployment target rule;
b) a steady rate of growth of the money supply;
c) nominal GDP targeting;
d) price level targeting;
e) no correct answer.
Hint: Monetarists advocate a steady money growth rate so as to prevent large fluctuations in the
economy.

108. Government debt is an example of a:

a) stock;
b) flow;
c) index;
d) capital account;
e) no correct answer .
Hint: Government debt measures the level of funds owed by the government at a given point in time;
therefore, it is a stock.

109. The budget deficit is an example of a :

a) stock;
b) flow;
c) index;
d) capital account;
e) no correct answer.
Hint: The budget deficit measures the difference between how much the government spends versus how
much it takes in taxes PER YEAR; therefore, it is a flow.

110. One argument against a large government debt is:

a) it will shift the IS curve inward;
b) it will lead to the depreciation of the national currency;
c) it will encourage further deficit spending;
d) it is unfair to future generations;
e) no correct answer.

111) If a person thinks they are better off after a 10% wage increase, and all prices have risen 10%, then
they are experiencing ___________
a) inflation
b) a supply shock
c) crowding out
d) inflation illusion
e) wealth increase

112) Monetarists believe that a reduction in _____________can be achieved by reducing ________

a) unemployment, prices
b) inflation, wages
c) unemployment, wages
d) inflation, the quantity of nominal money
e) there cannot exist inflation

113. The inflation caused by supply shocks is called:

a) expected inflation;
b) wage inflation;
c) demand-pull inflation;
d) cost-push inflation;
e) no correct answer.

114) The Phillips curve shows the trade-off between ____________ and ____________

a) the inflation rate, interest rates

b) the inflation rate, the unemployment rate
c) interest rates, output
d) output, employment
e) the inflation rate and the profitability rate

115. If expected inflation rises, the Phillips curve :

a) shifts upward;
b) shifts downward;
c) becomes steeper;
d) becomes flatter;
e) no correct answer.

116.The approach that assumes that people optimally use all the available information to forecast the future
is called:
a) the sacrifice ratio;
 b) expected inflation;
c) adaptive expectations;
d) rational expectations;
e) no correct answer.

117.The idea that, in the long run, the economy returns to the levels of output and unemployment described
by the classical model is called :
a) the natural-rate hypothesis;
b) hysteresis;
c) rational expectations;
d) coordination failure;
e) no correct answer.

118. Hysteresis is the effect of history on:

a) expected inflation;
b) the sacrifice ratio;
c) cyclical inflation;
d) the natural rate of unemployment;
e) no correct answer.

119) If somebody is prepared to work at the going wage rate but cannot find work then they are victims of

a) voluntary unemployment
b) classical unemployment
c) voluntary unemployment
d) Frictional unemployment
e) Structural unemployment

120) If the income tax rate changes from 30% to 40% on incomes over 30,000 m.u.(monetary units)
and a person's income is 31,000 m.u. then her marginal tax rate is :

a) 30%
b) 10%
c) 70%
d) 40%
e) 15%

121) If the nominal interest rate is 9% and rate of inflation is 6%, the real interest rate is approximately

a) 15%;
b) 3%;
c) 1.5%;
d) -3%;
e) 3.5%

122) If the inflation rate, as measured by the CPI, over the past year was 5%, a basket of goods and services
that cost _____ a year ago would be equivalent to _______ at the current price level.

a) 200,000 m.u.; 210,000 m.u.;

b) 150,000 mu.u; 155,000 m.u.;
c) 50,000 m.u.; 55,000 m.u.;
d) 200,000 m.u.;201,000 m.u.;
e) 250,000 m.u.; 800,000 m.u.;
123) What is stagflation?

a) Stagflation means low inflation accompanied by low unemployment.

b) Stagflation means high inflation accompanied by high unemployment.
c) Stagflation means low inflation accompanied by high unemployment.
d) Stagflation means high inflation accompanied by low unemployment.
e) Stagflation is the regulation by government of inflation and unemployment.

HINT: Stagflation equals stagnation of output (high unemployment) plus inflation

124) Which of the following expressions is the unemployment rate? b

a) ;

b) ;
c) ;
d) ;

e)

125) Unemployment that results from the normal workings of the labor market is a combination of:

a) Frictional and structural unemployment;

b) Cyclical and structural unemployment;
c) Frictional and cyclical unemployment;
d) Higher quantity demanded and lower quantity supplied in the labor market;
e) None of the above.

126. The unemployment caused by the time that it takes to match workers and jobs is called :

a) frictional unemployment;
b) the discouraged-worker effect;
c) structural unemployment;
d) wage rigidity;
e) no correct answer.

127. Efficiency wage theories claim that firms may pay high real wages in order to:
a) avoid the threat of unionization;
b) make workers more productive;
c) discourage unskilled workers from applying;
d) reduce the level of frictional unemployment;
e) no correct answer.

128) The natural rate of unemployment is:

a) The unemployment rate related to the business cycle;

b) The unemployment rate when the economy is in a boom;
c) The unemployment rate when the economy is in a recession;
d) The unemployment rate that prevails when actual real GDP is equal to aggregate potential GDP;
e) The unemployment rate when real and nominal GDP are equal.
129) Frictional unemployment refers to:

a) unemployment that takes place because of business cycles;

b) unemployment that takes place because of government policy;
c) unemployment that takes place because of inefficiencies in the labor market;
d) unemployment that takes place because of ordinary labor turnover;
e) none of the above.

130. Cyclical unemployment can best be described as:

a) The increase in unemployment above the natural rate during and in the aftermath of
recessions;
b) The increase in unemployment when the economy is in a boom;
c) The unemployment associated with workers' lack of skills;
d) The amount of unemployment when real and potential GDP are equal;
e) The amount of unemployment when real and nominal GDP are equal.

Hint: The increase in unemployment above the natural rate during and in the aftermath of recessions.
Cyclical unemployment is the unemployment associated with the business cycle.

131) If a central bank buys government bonds on the open market, it:

a) increases the money supply;

b) reduces the money supply;
c) must increase the interest rate;
d) increases the economy's demand for money;
e) nothing happens.

132. Which of the following is not a function of money?

a) It is a means of production;
b) It is a unit of account;
c) It is a store of value;
d) It is a medium of exchange;
e) No correct answer.

133. Which of the following is/are part of M2?

a) Near monies--or close substitutes--for transactions money;

b) M1--or transactionsmoney;
c) Savings and money market accounts;
d) All of the above;
e) None of the above.

134. On the T-account of a bank:

a) Reserves are on the liability side;

b) Loans are the most important asset;
c) Deposits are the most important asset;
d) Assets plus net worth equal liabilities;
e) Assets are usually greater than liabilities plus net worth.

Hint: Loans are the most important asset

135. Assuming there are no leakages out of the banking system, a money multiplier equal to 10 means that:

a) The reserve ratio equals 10;

b) An additional $10 of reserves create one dollar of deposits;
c) Each additional dollar of deposits creates $10 of reserves;
d) Each additional dollar of reserves creates $10 of additional deposits;
e) No correct answer.

Hint: Each additional dollar of reserves creates $10 of additional deposits.

136. If the National Bank wants to increase the money supply, it will:

a) Increase the discount rate;

b) Increase the reserve requirement;
c) Buy government securities (bonds) in the open market;
d) Print money;
e) Sell gold.

Hint: Buy government securities in the open market. At a higher discount rate, banks borrow less from the
National Bank. Less bank borrowing decreases the money supply.

137) A decrease in the money supply would:

a) increase the price of corporate bonds and reduce the interest rate;
b) increase the price of corporate bonds and raise the interest rate;
c) decrease the price of corporate bonds and reduce the interest rate;
d) decrease the price of corporate bonds and raise the interest rate;
e) never take place.

138) When interest rates are high today and expected to fall:

a) Demand for bonds today is low and money demand is high;

b) Demand for bonds today is high and money demand is low;
c) Both demand for bonds and money demand today are high;
d) Both demand for bonds and money demand today are low;
e) None of the above.

139) Which of the following motives is a better explanation of the inverse relationship between the
interest rate and the demand for money?

a) The transactions motive;

b) The speculative motive;
c) The precautionary motive;
d) The inflationary expectations motive;
e) None of the above.

Hint: The speculative motive. The transaction motive is associated simply with the need to hold money
just to buy things.

140) If a 1,000 m.u. (monetary units) bond pays 100 m.u.per year, the interest rate on the bond equals:

a) 1,000 m.u.;/ 100 m.u. = 10 m.u.;

b) 100 m.u.;
 c) 1,000 m.u.* 100 m.u. = 10,0000 m.u.;
d) 1 percent;
e) 100 m.u.; / 1,000 m.u.= 10%.

Hint: $100 / $1,000 = 10%. The interest rate is stated in percentage terms, not the dollar amount of interest.

141. If the currency-deposit ratio (cr) is 5 percent and the reserve-deposit ratio (rr) is 30 percent then the
money multiplier (m) is :

a) 1.3;
b) 3;
c) 4;
d) 20;
e) no correct answer.

Hint: m is equal to (cr + 1) / (rr + cr). Thus, in this case the money multiplier would be 3.

142.Suppose the monetary base doubles and the money multiplier doubles as well. Consequently, the
money supply:
a) remains the same;
b) doubles;
c) more than doubles;
d) less than doubles;
e) no correct answer.
Hint: Since the money supply is equal to the monetary base multiplied by the money multiplier, it will
increase by a factor four in this case.

143. Decreasing the reserve-deposit ratio will :

a) raise the money supply by raising the money multiplier;
b) raise the money supply by raising the currency-deposit ratio;
c) lower the money supply by lowering the money multiplier;
d) lower the money supply by lowering the currency-deposit ratio;
e) no correct answer.
Hint: Decreasing the reserve-deposit ratio raises the money supply by raising the money multiplier.

144. Theories of money demand that emphasize the role of money as a medium of exchange are called:

a) transactions theories;
b) portfolio theories;
c) quantity theories;
d) q theories;
e) a+b.

145.In the Baumol-Tobin model of cash management, if the nominal interest rate rises, individuals would
be expected to hold:

a) less money and make fewer trips to the bank;

b) less money and make more trips to the bank;
c) more money and make fewer trips to the bank;
d) more money and make more trips to the bank;
e) no correct answer.

Hint: If the nominal interest rate rises, the opportunity cost of holding cash rises. This means that
individuals will choose lower average cash balances and make more trips to the bank.
146. Refer to the graph below. What could have caused the shift in the demand for money?

a) An increase in the price level;

b) A decrease in the level of income;
c) A decrease in the interest rate;
d) All of the above;
e) None of the above.

Hint: A decrease in the level of income. A decrease in income results in a lower amount of transactions
taking place, thus lower demand for money.

147) If the Central Bank wants to increase the money supply, it will:

a) Increase the discount rate;

b) Increase the reserve requirement;
c) Buy government securities in the open market;
d) Print money;
e) Sell gold.

148.Refer to the graph below. Suppose that the Central Bank adopts a target the level of the interest rate. If
the Central Bank wants to maintain the interest rate constant at r0, it will have to:
 a) Increase the money supply when the demand for money increases;
b) Leave the money supply unchanged regardless of changes in the demand for money;
c) Decrease the reserve requirement when the demand for money shifts to the left;
d) None of the above. The Central Bank cannot target and never has targeted the interest rate.
e) Decrease money supply.

Hint: Increase the money supply when the demand for money increases. This would cause an even
greater disparity between supply and demand for money.

149. Refer to the graph below. Starting at point a, the reaction of the Fed to the increase in money
demand during a period of easy monetary policy can be best described by:

a) The move from a to b;

b) The move from a to c;
c) A move somewhere between a to b, and a to c;
d) No move at all in response to the increase in demand;
e) A move not described in the graph because the money supply would decrease under easy monetary
policy.
Hint: The move from a to c. An increase in the money supply in response to an increase in the demand
for money prevents the interest rate from rising, which could slow down economic activity

150) When the economy reaches full employment, the budget deficit is:

a) A combination of cyclical and structural deficits;

b) Zero;
c) Equal to the cyclical deficit;
d) Equal to the structural deficit;
e) Always averted by higher tax revenues.

151) If the expected inflation rate increases, the demand for money will ________ and the velocity of
money will ________:

a) decrease; increase
b) increase; decrease
c) increase; increase
d) decrease; decrease
e) stay constant; stay constant

152) If the money supply increases by 8%, velocity decreases by 2%, and real GDP grows by 3%, then
the price level

a) will increase by 9%;

b) will increase by 13%;
c) will increase by 3%;
d) will increase 7%;
e) stay constant.

153) If the real GDP is equal to $10 trillion, the stock of money is equal to $3 trillion, and the velocity
of money is equal to 5, the price level would be equal to

a) 16.7;
b) 1.5;
c) 6;
d) 10.6;
e) 1.

154) If the central bank buys financial securities in the open market to increase the monetary base, this
is an example of ____________

a) lender of last resort;

b) financial intermediation;
c) open market operations;
d) financial regulation;
e) financial deregulation.

155) If I keep some money available in case I see a bargain, this is an example of _____________

a) asset demand for money

b) transactions demand for money
c) token demand for money
d) precautionary demand for money.
 e) transactions motive

156. In the quantity equation, V represents the:

a) total number of transaction during some period of time;

b) price of a typical transaction;
c) rate at which money circulates in the economy;
d) quantity of money;
e) no correct answer.

157. According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then:

a) real income increases by approximately 5 percent;

b) the price level increases by approximately 5 percent;
c) the nominal interest rate increases by approximately
5 percent;
d) nominal income increases by approximately 5 percent;
e) no correct answer.

Hint: The quantity equation implies:

% Change in M + % Change in V = % Change in P + % Change in Y

The right hand side of the equation is % Change in nominal income. A 3 percent increase in M
and a 2 percent increase in V causes a 5 percent increase in nominal income.

158. Which component of the quantity equation is assumed constant by the quantity theory of money?
a) The money supply;
b) The velocity of money;
c) The level of income;
d) The price level;
e) No correct answer.
Hint: See the explanation of the quantity theory of money.

159. Which of the following statements is false?

a) If inflation is higher than the real interest rate, then the nominal interest rate must be negative;
b) If inflation is higher than the nominal interest rate, then the real interest rate must be negative;
c) If the nominal interest rate is higher than the real interest rate, then inflation must be positive;
d) If the nominal interest rate is higher than inflation, then the real interest rate must be positive;
e) No correct answer.

Hint: The nominal interest rate is just the sum of inflation and the real interest rate.

160. Consider the following table :

Year Inflation Rate Nominal Interest Rate
1 5% 10%
2 10% 5%

By how much has the real interest rate changed between year 1 and year 2?

a) It has increased 5 percent;

b) It has decreased 5 percent;
c) It has increased 10 percent;
 d) It has decreased 10 percent;
e) No correct answer.

Hint: Since the real interest rate is equal to the nominal interest rate minus the inflation rate, it was equal
to 5 percent in year 1 and -5 percent in year 2. Between year 1 and year 2, it decreased by 10
percent. See Section 4-4.

161.One effect of an unexpected rise in inflation is that wealth is redistributed from:

a) borrowers to lenders;
b) lenders to borrowers;
c) young people to old people;
d) government to firms;
e) no correct answer.

Hint: An unexpected rise in inflation reduces the ex post real return paid by the borrower to the
lender. Therefore, it redistributes wealth from lenders to borrowers. See Section 4-6.

163. According to the classical dichotomy, which of these magnitudes is affected by monetary policy?
a) The price level;
b) The real wage;
c) The real interest rate;
d) The rate of growth of real GDP;
e) no correct answer.
Hint: According to the classical dichotomy, changes in the money supply influence only nominal
variables such as the price level.

164. Which of the following policy measures are considered fiscal policy measures?

a) The government cuts taxes or raises spending to get the economy out of a slump;
b) The government changes the quantity of money supplied to affect the price level, interest
rates, and exchange rates;
c) The government stimulates aggregate supply to stimulate the potential growth of output and
income;
d) The government does nothing;
e) The government restricts imports and stimulates exports.

HINT: Fiscal policy is the manipulation of government spending and taxation.

165. In macroeconomics, the debate over the role of government includes the views of Keynesian
economists who believe that:

a) The government is incapable of stabilizing the economy;

b) The government could intervene to smooth out fluctuations in the business cycle, but it is
preferable to leave the economy alone and wait for self-correction;
c) The government could increase aggregate expenditure and thereby stimulate aggregate output by
manipulating the money supply;
d) The government could increase aggregate expenditure and thereby stimulate aggregate output by
manipulating taxes and spending;
e) The government could manipulate consumption and investment to bring the economy out of a
recession.
 Hint: Activist, discretionary fiscal policy is the preferred Keynesian way of bringing the economy out
of a recession

166. All of the following except one are tools of fiscal policy. Which one?:

a) Policies regarding the government purchase of goods and services;

b) Policies regarding taxes;
c) Policies regarding transfer payments;
d) Policies regarding the nation's money supply;
e) None of the above. All of the above are tools of fiscal policy

Hint: Manipulation of the money supply to affect the business cycle is called discretionary monetary
policy, not fiscal policy.

167. What is the form of the consumption function when taxes (T) create a difference between income (Y)
and disposable income (Yd)?

a) C = a + bY + bT;
b) C = a + b T;
c) C = a + b (Yd T);
d) C = a + bYd T;
e) C = a + b (Y T).

Hint: C = a + bYd, and Yd = Y - T. Then C = a + b (Y T)

168. Refer to the graph below. Assume that the government imposes a lump-sum tax of $100, while
embracing a balanced-budget fiscal policy strategy. How much is the value of autonomous
expenditures under these circumstances?

a) 175;
b) 250;
c) 300;
d) 500;
e) 750.

Hint: Autonomous expenditures equal a - bT + I + G=50-0,75.100+200=200-25=175

169.Refer to the graph below. Assume that the government imposes a lump-sum tax of $100, while
embracing a balanced-budget fiscal policy strategy. How much is the value of Y 0 under these
circumstances?
 a) 1300;
b) 750;
c) 700;
d) 1400;
e) 500.

Hint: A balanced-budget strategy (G=T) means that the government will spend $100, as much as it
collects from the tax of $100. In this economy, a = 50, b = 0.75, (a + I + G) = 250, G =100, then I
= 100, and T = 100. Equilibrium income equals: (1/(1 - b) * (a - bT + I + G) = (1/(1 - 0.75) * (50 -
(0.75 100) + 100 + 100) = 4 * (50 - 75 + 100 + 100) = 4 * 175 = 700.; Y=700

250+0,75(Y-100)=Y
250-75=0,25Y
175=0,25Y
Y=175/0,25=17500/25=350/5=700
Y=700

170.The leakages/injections approach to determining equilibrium, given the impact of government

spending and taxation, states that:

a) Y = a + b(Y - T) + I + G;
b) Y = 1/(1 - b) * (a - bT + I + G);
c) S + T = I + G;
d) - T * (b/(1 - b);
e) C + S = I + G.

Hint:

This approach sets the amount of leakages equal to the amount of injections in the economy. In
equilibrium, C + S + T = C + I + G

171. The impact of higher government spending on equilibrium income is identical to the impact of:

a) An increase in investment;
b) A decrease in taxation;
c) An increase in the marginal propensity to consume;
 d) A decrease in autonomous spending;
e) All of the above.

Hint: The multiplier of autonomous investment is the same as the multiplier of government spending: 1/ (1
- b).

172.Fill in the blanks. The positive stimulus of an increase in government spending is __________ than the
negative stimulus of a tax increase because the effect of the increase in government spending on
planned aggregate expenditure is __________ and the effect of the tax is __________

a) greater; direct; direct;

b) greater; direct; indirect;
c) less; indirect; direct;
d) less; direct; indirect;
e) less; direct; direct.

Hint: This is the reason why the balanced-budget multiplier is positive (equal to one).

173. Automatic stabilizers refer to:

a) Inherent stock market mechanisms that automatically cause stock market gains to be cancelled out
by losses, which make expected long-run returns equal to zero;
b) Invisible hand mechanisms to automatically bring the economy out of a recession;
c) Government revenue and expenditure items that change automatically in response to changes in
economic activity;
d) Discretionary monetary policy maneuvers designed to keep inflation automatically under control;
e) None of the above.

174. The structural budget deficit is the size of the budget deficit when:

a) The unemployment rate equals zero;

b) Real and potential GDP are equal;
c) The economy falls into a recession;
d) There is a spending balance, or balanced budget;
e) The balance of trade is in balance.

Hint: The balanced budget is not necessarily equal to the structural budget.

175. When the economy reaches full employment, the budget deficit is:

a) A combination of cyclical and structural deficits;

b) Zero;
c) Equal to the cyclical deficit;
d) Equal to the structural deficit;
e) Always averted by higher tax revenues

Hint: The structural deficit is the deficit that remains when the economy is at full employment.

176. The sum of all domestic spending on foreign goods is called :

a) Consumption;
b) Imports;
c) Exports;
d) net exports;
 e) no correct answer.

Hint: the sum of all domestic spending on foreign goods is called imports.

177. Consider the following table :

Consumption of foreign goods and services 100

Consumption of domestic goods and services 900
Investment of foreign goods and services 20
Investment of domestic goods and services 180
Government purchases of foreign goods and services 0
Government purchases of domestic goods and services 500
Exports 100
Based on the data, what are total imports?
a) 0;
b) 120;
c) 1,000;
d) 1,580;
e) no correct answer.

Hint: Imports are the sum of consumption of foreign goods and services, investment of foreign goods
and services and government purchases of foreign goods and services. The above table indicates
that imports are equal to 120.

178. If net exports are positive, which of the following is false? :

a) Domestic output exceeds domestic spending;
b) Domestic saving exceeds domestic investment;
c) Net capital outflow is positive;
d) There is a balance of trade deficit;
e) no correct answer.
Hint: If net exports are positive, there is a trade surplus.

179. Consider the following data on a hypothetical economy:

Y = 1,000

C = 700

G = 150

I = 250 - 10r*

The world interest rate is 5 percent. What are net exports of a hypothetical economy?

a) 50;
b) -50;
c) 150;
d) -150;
e) no correct answer.

Hint: Investment is 200, and so total domestic spending is 1,050. Since domestic output is 1,000, net
exports must be -50.
180. The price of one currency in terms of another currency is an example of :
a) a nominal exchange rate;
b) a real exchange rate;
c) purchasing-power parity;
d) a constant world interest rate;
e) no correct answer.

181. If a country's real exchange rate falls (depreciates), then:

a) net exports rise;

b) net exports fall;
c) exports and imports rise by the same amount;
d) exports and imports fall by the same amount;
e) no correct answer.

Hint: If the real exchange rate falls, exports are relatively less expensive to foreigners and imports are
relatively more expensive to the domestic population. This means that exports will rise and
imports will fall. Therefore, net exports will rise.

182. Consider the following table

Domestic inflation: 5%
Foreign inflation: 6%
Change in nominal exchange rate: 3%
Based on the data, what is the change in the real exchange rate?
a) 2 percent;
b) 3 percent;
c) 5 percent;
d) 8 percent;
e) no correct answer.

Hint: The change in the real exchange rate equals the change in the nominal exchange rate minus the
difference between inflation abroad and domestic inflation. In this case, the change in the real
exchange rate is 2 percent.