Macroeconomics

MACROECONOMICS
Applications
10 MACROECONOMICS Applications
Applications 11
ACADEMIA DE STUDII ECONOMICE DIN BUCUREŞTI
Gabriel STAICU Anisia POPESCU
MACROECONOMICS
Applications
Editura ASE
Bucureşti
2008
Copyright © 2008, Editura ASE

Toate drepturile asupra acestei ediţii sunt rezervate editurii.
Editura ASE
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cod 010374
www.ase.ro
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Descrierea CIP a Bibliotecii Naţionale a României

STAICU, GABRIEL, POPESCU, ANISIA
Macroeconomics: applications / Gabriel Staicu,
Anisia Popescu. - Bucureşti : Editura ASE, 2008
ISBN 978-973-594-
330.101.542
ISBN 978-973-594-
Editura ASE
Tehnoredactare computerizată: Doroty Ionescu
Copertă: Simona Buşoi
Applications 13
Preface
For those who want to know how the world works,

macroeconomics is one of the most relevant and interesting subjects.
It is enough to listen to everyday news or to read the newspapers and
notice the main headlines referring to GDP growth, budget deficits,
central banks announcing changes in the benchmark interest,
stock-exchanges trembling amid recessions and so on. The state of the
economy affects everyone and nowadays macroeconomic issues are
often central both to domestic politics and to world politics.
The main objective of this book is to offer students a better
understanding of the macroeconomics topics, as well as an opportunity
to apply the corresponding concepts and models in simple, but
meaningful situations. The authors wrote this booklet in order for the
students to have a training tool for the exam but also to benefit from a
number of applications as exercises that could not be covered in the
restrictive time of the seminars.
This first edition of Macroeconomics – Applications is divided
into 14 chapters, each corresponding to a main topic covered by the
courses foreseen for one semester. Each chapter has a number of
True/False questions and multiple choice questions. Some questions
refer more to the theoretical aspects, while others need to be solved
using calculus or graphical representations. There are also a number of
fill in questions complemented by graphical illustrations, as an extra
help for the students. For the most difficult applications we offer a
detailed answer at the end of the book, sometimes with the
corresponding calculus and/or graphical illustrations. However, we
strongly suggest trying first to find a solution yourselves and resist the
temptation to look directly to the right answer or solved exercise at the
end of the book.
Perhaps using the textbooks and solving the exercises seems like
a lot of work. But keep in mind that study and learning necessarily
entail work on your part. Also, remember that keeping up to date by
reading specialized publications and listening to the economic news will
help you develop the ability to see models and concepts in real-life
situations.
We would welcome any feedback from our students that would
help us improve in the future.
The Authors
Applications 15
Table of Contents
Part I: Applications ................................................. 5

1. Measuring a Nation’s Income .................................... 6
2. Measuring the Cost Of Living .................................. 15
3. Production and Growth ........................................... 25
4. Saving, Investment, and the Financial System. ......34
5. The Basic Tools of Finance ......................................44
6. Unemployment and Its Natural Rate ...................... 53
7. The Monetary System ..............................................62
8. Money Growth and Inflation ...................................70
9. Open Economy Macroeconomics -
Basic Concepts ......................................................... 79
10. A Macroeconomic Theory of the Open Economy. .. 88
11. Aggregate Demand and Aggregate Supply ..............96
12. The Influence of Monetary and Fiscal Policy
on the Aggregate Demand .......................................114
13. The Short-Run Tradeoff between Inflation
and Unemployment. The Phillips Curve ............... 130
14. European Monetary Union .................................... 139
Part II: Solutions .................................................. 147
Part III: Some Applications Solved ........................... 162
Bibliography ........................................................188
Applications 17
PART I
– Applications –
Applications 19
1. Measuring a Nation’s Income
True & False Questions
1. GDP measures the market value of all final and intermediate goods
produced within a country in a given period of time.
2. GDP includes tangible goods, but not intangible services.
3. Net domestic product is calculated as the difference between GDP

and depreciation.
4. The GDP deflator is determined as the ratio between nominal GDP

and real GDP times 100.
5. Because real GDP is not affected by changes in prices, changes in real

GDP reflect only changes in the amount of goods being produced over
time.
6. For an economy as a whole, income must be greater than

expenditure.
7. The study of inflation is a macroeconomic issue.
8. GDP is not a perfect measure of economic well-being because it

excludes, for example, the value of a clean environment.
9. Net exports are the main component of GDP.
10. If a family buys a new house, this transaction is reflected in

consumption.
Multiple Choice Questions
1. Macroeconomics is the study of:

a) the choices that individuals and firms make;
b) the way consumers’ choices are influenced by governments;
c) how firms and consumers interact with one another in the
markets for factors of production;
d) the economy-wide phenomena like inflation, unemployment, and
economic growth;
2. Which of the following is an example of macroeconomic question:

a) Why do production and employment expand in some years and
contract in others?
b) Why are more Europeans buying minivans and fewer buying
SUVs?
c) Why does the price for ice-cream rise in the summer time?
d) What might be the effects of rent control on housing in
Bucharest?
3. Which of the following is false?

a) GDP measures the total income of everyone in the economy;
b) GDP measures the total expenditure on the economy’s output of
goods and services;
c) for an economy as a whole, income exceeds expenditure;
d) for an economy as a whole, income must equal expenditure.
Applications 21
4. GDP is the market value of all ……… goods and services ………. within
a ………. in a given period of time:
a) final, sold, region;
b) intermediate, produced, country;
c) intermediate and final, produced, region;
d) final, produced, country.
5. One of the following is not included in GDP:

a) you buy a CD of your favorite band;
b) you buy a ticket to a concert in Bucharest;
c) you buy vegetables at the grocery store;
d) you grow and consume vegetables from your garden.
6. Which of the following is false:

a) GDP is a good measure of economic well-being, but it excludes,
for example, the value of a clean environment and the value for
leisure;
b) because every transaction has a buyer and a seller, the total
expenditure in the economy must equal the total income in the
economy;
c) when an individual buys a good from abroad, this purchase
increases imports, reduces net exports, and reduces GDP;
d) if prices rise from one period of time to another, nominal GDP
tends to grow faster than real GDP.
7. Which of the following items is an example of intermediate goods:

a) the fertilizer bought by a tomato farmer;
b) a newspaper that you bought today;
c) banking services purchased by a student;
d) a new Logan bought by a cab company.
8. Let’s suppose that a car produced in 2001 is traded on the second-

hand-car market in 2005. The amount paid for the car is part of:
a) consumption in 2001;
b) GDP in 2001;
c) GDP in 2005;
d) a and b.
9. Which of the following equations describes GDP:

a) Y = C + I + G + NX;
b) Y = C + I + G - NX;
c) Y = C - I + G + NX;
d) Y = C + G + NX;
10. The total income earned by a nation’s permanent residents

(nationals) is called:
a) gross domestic product;
b) net domestic product;
c) gross national product;
d) net national product.
11. Net national product is:

a) the national income minus indirect business taxes (such as VAT);
b) the total income earned by nationals minus losses from
depreciation;
c) the income that households and noncorporate business receive;
d) the disposable personal income plus personal taxes.
Applications 23
12. Suppose that a Romanian citizen owns a factory in Bulgaria.

His company’s production is part of:
a) Bulgaria’s GDP;
b) Romania’s GNP;
c) both of these;
d) none of these.
13. Suppose that a family purchases a new house. This form of household
spending is included in GDP as:
a) investment;
b) consumption;
c) export;
d) import.
14. When the Romanian government buys a Boeing airplane, this

transaction will:
a) decrease net exports;
b) raise government purchases;
c) not affect Romania’s GDP;
d) all of these.
15. Which of the following is considered part of the transfer payments:

a) the government pays the salary for your professor;
b) the government pays a scholarship to one of the students;
c) the government pays a social benefit to one of the elderly;
d) b) and c).
16. During 2006 on Plenty Island, consumption expenditure was

$30 billion, government purchases were $12 billion, investment was
$15 billion, net taxes were $10 billion, import was $3 billion, and
export was $6 billion. Calculate GDP, net exports (NX), and the
budget deficit:
a) 4; 70; 2;
b) 3; 60; 2;
c) 3; 66; -2;
d) -3; 60; 22.
17. Which component accounts for the highest fraction of the GDP?
a) consumption;
b) government purchases;
c) investment;
d) net exports.
18. Which of the following describes accurately the difference between

nominal GDP and real GDP:
a) nominal GDP represents the production of goods and services
valued at constant prices, while real GDP is the production of
goods and services valued at current prices;
b) real GDP is a measure of the total quantity of goods and services
the economy is producing that is not affected by changes in the
prices of those goods and services, while nominal GDP uses
current prices to place a value on the production of goods and
services;
c) by evaluating current production using current prices, real GDP
shows how the economy’s overall production of goods and
services changes over time;
d) nominal GDP uses constant base-year prices to place a value on
the economy’s production of goods and services.
Applications 25
19. The GDP deflator is calculated as follows:

a) GDP deflator = (Nominal GDP /
Real GDP) * 100;
b) GDP deflator = (Real GDP / Nominal
GDP)* 100;
c) GDP deflator = Nominal GDP * Real
GDP;
d) GDP deflator = 1/(Nominal GDP * Real
GDP) * 100;
20. The GDP deflator:

a) measures the current level of prices relative to the level of prices
in the base year;
b) is calculated as the ratio of nominal GDP to real GDP times 100;
c) for the base year equals 100, because nominal GDP and real GDP
must be the same in the base year;
d) all of these.
21. Which of the following would best measure the economic well-being?
a) GDP;
b) nominal GDP;
c) real GDP/capita;
d) the GDP deflator;
There is a table with some data from the Plenty Island, which is
producing two goods: milk and honey.
Quantity Quantity
Price Price
Year of Milk of Honey
of Milk of Honey
(quarts) (quarts)
2005 $2 300 $1 100
2006 2 400 2 100
2007 4 400 3 200
22. The nominal GDP in 2005 is (in $):

a) 600;
b) 100;
c) 700;
d) none of these.
23. Using 2005 as the base year, the nominal and real GDP in 2006 are
(in $):
a) 1000; 900;
b) 800; 800;
c) 500; 400;
d) 1000; 1000.
24. The GDP deflator in 2006 is (in %):

a) 111.1;
b) 90;
c) 100;
d) 128.5.
25. Using 2005 as the base year, the nominal and real GDP in 2007 are
(in $):
a) 1200; 1000;
b) 1600; 600;
c) 2200; 1200;
d) 2200; 1000.
26. The GDP deflator in 2007 is (in %):

a) 100;
b) 183.3;
c) 220;
d) 266.6.
Applications 27
27. What was the growth rate of real GDP between 2005 and 2006?
a) 128.5;
b) 28.5;
c) 142.8;
d) 42.8.
28. What was the growth rate of nominal GDP between 2006 and 2007?
a) 220;
b) 244.4
c) 120;
d) 144.4.
29. Dorna sells milk to Napolact for $5. Napolact uses the milk to make
ice cream, which is sold on the market for $9. The value of
intermediate goods produced in this economy is (in $):
a) 4;
b) 5;
c) 9;
d) 14.
30. The total contribution of these transactions to GDP is (in $):

a) 4;
b) 5;
c) 9;
d) 14.
2. Measuring the Cost Of Living
1. The consumer price index is a measure of the overall cost of the goods
and services bought by a typical consumer.
2. If the CPI is 175%, then the inflation rate is 75%.
3. The GDP deflator reflects the prices of all goods and services
produced domestically.
4. The CPI reflects the price of all goods and services bought by a typical
consumer.
5. The interest rate corrected for inflation is called the nominal interest
rate.
6. The inflation rate is measured as the percentage change in the real

interest rate.
7. Indexation represents an automatic correction of an amount of

money for the effect of inflation.
8. The real interest rate is calculated as the difference between the

nominal interest rate and the inflation rate.
9. Usually, the CPI tends to overstate the inflation.
10. If a lender does not take into consideration the expected inflation, he
will lose money.
Applications 29
1. The consumer price index (CPI) is:

a) a measure of economic growth of a nation;
b) used to monitor changes in the quantity of goods and services
produced in the economy;
c) a measure of the overall cost of the goods and services bought by
a typical consumer;
d) used to monitor changes in gross national product (GNP).
2. Which of the following is correct?

a) when the CPI rises, the typical family has to spend more money
to maintain the same standard of living;
b) when the CPI decreases, the typical family has to spend more
money to maintain the same standard of living;
c) when the CPI decreases, the typical family has to spend the same
amount of money to maintain its standard of living;
d) when the CPI rises, a family has to spend little money to maintain
the same standard of living.
Consider a hypothetical economy in which consumers buy only two

goods: milk and honey. Use the information from below in order to
answer the following three questions:
Goods Milk Honey

Basket of Goods 5 2
Price in 2004 $10 $20
Price in 2005 $20 $30
Price in 2006 $30 $30
3. The cost of the basket of goods in 2004, 2005, and respectively in

2006 is (in $):
a) 160; 210; 150;
b) 90; 140; 190;
c) 30; 50; 60;
d) 90; 160; 210.
4. The CPI in 2004, 2005, and respectively in 2006 is (in %):

a) 100; 56.25; 131.28;
b) 100; 177.77; 233.33;
c) 90; 177.77; 133.33;
d) 100; 156.25; 33.33.
5. The inflation rate in 2005, respectively in 2006, is (in %):

a) 177.77; 133.33;
b) 177.77; 31.25;
c) 77.77; 133.33;
d) 77.77; 31.25.
6. Consumers buy chicken and quail flesh. Suppose that the prices of
these goods increase by 10 percent. Taking into account the cost of
living, which of the following is false:
a) the price of chicken is more important than the price of quail
flesh and, therefore, should be given a greater weight in
measuring the cost of living;
b) the price of chicken is more important than the price of quail
flesh and, therefore, should be given a smaller weight in
measuring the cost of living;
c) the increase of price of quail flesh has a greater effect on CPI
comparing to the chicken, because, in general, chicken is cheaper.
d) CPI increases with 10 percent because the weights of these goods
in the basket are the same.
Applications 31
7. Which of the following is true:

a) the goal of the CPI is to measure the quantity of intermediate
goods and services bought by consumers;
b) if the CPI increases over time, then the cost of living decreases,
and the consumer has to pay more in order to maintain a
constant standard of living;
c) the goal for the CPI is to measure the cost of a basket of goods
and services bought by firms;
d) if the CPI increases over time, the cost of living increases, and the
consumer has to pay more in order to maintain a constant
standard of living.
8. Identify the problems that occur in measuring the cost of living:

a) because the CPI is computed assuming a fixed basket of goods, it
ignores the possibility for consumer to substitute the good whose
price has risen toward goods that have become relatively cheaper;
b) because the basket is fixed for a relatively long period of time, it
doesn’t take into account the introduction of new goods, and
thus, the change in the purchasing power of a monetary unit;
c) the CPI doesn’t reflect changes in the quality of goods and services;
d) all of these.
9. Suppose bananas are included in the Romanian consumer’s basket of

goods and services. The price of bananas increases by 20 percent.
Considering the difference between GDP deflator and the CPI, which
of the following is correct:
a) the price increase shows up in the GDP deflator but not in the CPI;
b) the price increase is reflected in the CPI but not in the GDP
deflator;
c) the price increase shows up in both indicators;
d) the price increase is not reflected in the CPI or in the GDP deflator.
10. Suppose the Romanian government buys two battle-ships which have
been produced in Galati. If their price increases by 15 percent, this
price change will be reflected:
a) only in the GDP deflator;
b) only in the CPI;
c) in both the GDP deflator and the CPI;
d) in neither the GDP deflator nor the CPI.
11. When the price of oil changes:

a) the CPI rises by more than does the GDP deflator;
b) the CPI falls by more than does the GDP deflator;
c) the CPI rises less than does the GDP deflator;
d) the CPI rises, and the GDP deflator remains constant.
12. The well-known football player Gheorghe Hagi in 1996 had a salary of
$ 500,000 when he was playing for F.C. Real Madrid. In 2006, the
same football club offered a salary of $ 5 million for another player
Adrian Mutu. Consider that the consumer price index in 1996 was
110, and in 2006 was 275. Was Hagi’s salary higher or lower
compared to the salary of Mutu?
a) higher, by $1.25 million;
b) lower, by $1.25 million;
c) higher, by $3.75 million;
d) lower, by $3.75 million.
13. Suppose the CPI in 2005 is 125. The CPI in 2006 is 132.5. What is the
rate of inflation over this period (in %)?
a) 7.5;
b) 6;
c) 25;
d) 32.5.
Applications 33
14. Suppose banks pay an annual interest rate of 8 percent. The rate of
inflation is 6 percent. The real interest rate is (in %):
a) 14;
b) 6;
c) 2;
d) 7.
15. “Northern Rock” Bank raises the annual interest rate it pays for
deposits from 8 percent to 10 percent, while the inflation rate
increases from 6 percent to 7 percent. The real interest rate:
a) falls from 2% to 1%;
b) falls from 10% to 6%;
c) increases from 2% to 3%;
d) increases from 1% to 4%.
16. Which of the following is correct:

a) if the nominal interest rate is greater than the inflation rate, the
real interest rate is negative;
b) the real interest rate is calculated as the ratio between nominal
interest rate and rate of inflation;
c) the real interest rate should be always a positive number;
d) if the real interest rate is negative, then the person who deposits
an amount of money in a bank account is not richer than the
deposit was made.
17. The inflation rate turns out to be higher than everyone expected.
Considering the information mentioned above:
a) the borrower is better off;
b) the lender is better off;
c) the borrower is worse off;
d) both of them will lose from this unexpectedly high inflation.

a) changes in quality are reflected in the CPI;
b) the CPI is based on a fixed basket of goods and services;
c) the GDP deflator might be greater or lower than the CPI;
d) the GDP deflator and the CPI tend to converge.
19. The producer price index (PPI) is:

a) a measure of the cost of living;
b) a price index which describes changes in price level of goods
imported from abroad;
c) a measure of the cost of a basket of goods and services bought by
firms;
d) a measure of the cost of a basket of goods and services bought by
consumers.
20. The rate of inflation from year n-1 to year n is calculated as:
IPCn  IPCn 1
a) IRn   100
IPCn 1
IPCn 1  IPCn
b) IRn   100
IPCn 1
IPCn  IPCn 1
c) IRn   100
IPCn
IPCn  IPCn 1
d) IRn   100
IPCn
Applications 35

a) to compare a dollar figure from the past to a dollar figure today,
the older figure should be inflated using a macroeconomic
indicator like GDP;
b) the GDP deflator differs from the CPI because it reflects the price
change of goods and services consumed rather than produced;
c) the GDP deflator automatically changes the group of goods and
services over time, whereas the CPI uses a fixed basket of goods
and services over time;
d) the nominal interest rate takes into account changes in the value
of a monetary unit over time.
22. When you decide to save a part of your income for retirement, you
should especially pay attention to:
a) nominal interest rate;
b) real interest rate;
c) inflation rate;
d) none of these.
23. Suppose that the Bureau of Statistics sets the following weights for
bread and cigarettes: 6 % and 9%. According to these figures, we can
conclude that:
a) cigarettes are relatively less important for a typical consumer
than bread;
b) the price for bread is more important than the price for
cigarettes;
c) the price for cigarettes is more important than the price for
bread;
d) the 10 percent increase in the price of bread has a greater effect
on the CPI than the 7 percent increase in the price of cigarettes.
24. The inflation rate is 6 percent. The nominal interest rate is 4 percent.
According to this example:
a) the real interest rate is positive, and each monetary unit now buys
less than it did a year ago;
b) the real interest rate is negative, and each monetary unit now
buys more than it did a year ago;
c) the real interest rate is negative, and each monetary unit now
buys less than it did a year ago;
d) the real interest rate is positive, and each monetary unit now buys
more than it did a year ago.
a) the CPI tends to underestimate the inflation rate because it fails

to consider that consumers will purchase less of those goods and
services that increase most in price;
b) the CPI tends to overestimate the inflation rate because it fails to

consider that consumers will purchase less of goods and services
that increase most in price;
c) the GDP deflator tends to overestimate the inflation rate because

it fails to consider that consumers will purchase less of goods and
services that increase most in price;
d) both the CPI and GDP deflator implicitly assume that consumers
substitute away from goods and services that increase most in
price.
Applications 37
3. Production and Growth
True&False Questions
1. Economic growth is reflected by the growth rate of the nominal GDP

per person.
2. Human capital is an important determinant of productivity.
3. If national saving increases, then investment is encouraged.
4. The standard of living in an economy depends on its ability to

produce goods and services.
5. Governments can encourage economic growth by imposing

restrictions on foreign ownership of domestic capital.
6. Because of diminishing returns, the return to capital is higher in poor

countries than in rich ones.
7. Political instability is one way to attract foreign investment.
8. A university degree can by considered an investment in human

capital.
9. If a country runs a trade deficit, then the economy’s growth rate

increases.
10. The catch-up effect reflects the characteristic whereby countries that
start off poor tend to grow more rapidly than countries that start off
rich.
1. Which of the following is considered to be the most appropriate tool

to measure economic progress?
a) level of real GDP;
b) level of CPI;
c) nominal GDP growth;
d) real GDP growth.
2. Over the last years, average income in Romania (as measured by real
GDP per person) has grown by about 5 percent per year. Other things
being equal, this rate of growth implies that average income doubles
every:
a) 12 years;
b) 14 years;
c) 20 years;
d) 25 years.
3. Some nations enjoy higher living standards than others. This can be
explained using the economic concept of:
a) growth of money supply;
b) consumption price index;
c) productivity;
d) decrease of GDP deflator.
4. A nation’s productivity increases if:

a) the stock of physical capital that is used to produce goods and
services increases;
b) the nation is confronting with the migration of human capital;
c) new and better ways to produce goods are discovered;
d) a and c.
Applications 39
5. The most important determinants of a nation’s productivity are:

a) physical capital;
b) human capital;
c) technological knowledge;
d) all of these.
6. The relationship between the quantity of factors of production and

the quantity of output is described by the following production
function Y  AF ( L, K , H , N ) , where Y denotes the quantity of
output, A the available technologies, L the quantity of labor, K the
quantity of physical capital, H the quantity of human capital, and N
the quantity of natural resources. If this function has constant returns
to scale, then:
a) a doubling of all inputs causes the amount of output to double as
well;
b) a doubling of all inputs causes the amount of output to increase
more than double;
c) a doubling of all inputs causes the amount of output to increase
less than double;
d) a doubling of K and H causes the amount of output to double as
well.

a) by investing more current resources in the production of physical
capital, a nation can raise future productivity;
b) having a larger stock of physical capital, the economy is able to
produce more goods and services;
c) devoting more resources to produce physical capital requires to
sacrifice a part of present consumption of goods and services;
d) capital accumulation is an example of “free lunch”.
8. If a society decides to ……………. capital accumulation, it must

consume ……………., and save ……………of its current income:
a) increase, more, less;
b) increase, less, more;
c) reduce, more, more.
d) increase, less, less.
9. Countries that devote a ………… share of GDP to ……………., tend to

have ………….. growth rates:
a) larger, investment, higher;
b) smaller, investment, higher;
c) larger, consumption, higher;
d) larger, government purchases, higher.
10. The law of diminishing returns illustrates:

a) the property whereby the benefit from an extra unit of an input
declines as the quantity of the input increases;
b) the property whereby the benefit from an extra unit of an input
increases as the quantity of the input increases;
c) the property whereby the benefit from an extra unit of an input
declines permanently no matter the size of the stock of this input;
d) the property whereby the benefit from an extra unit of an input
increases permanently no matter the size of the stock of this
input.
11. Because of diminishing returns:

a) an increase in the saving rate leads to higher economic growth
only for a while;
b) by accumulating more capital, the benefits from additional
capital become smaller over time, and growth slows down;
c) in the long run, a higher saving rate leads to a lower growth of
productivity and income;
d) all of these.
Applications 41
12. Suppose Romania and USA devoted a similar share of GDP to

investment. Taking into account the catching-up effect, we can
conclude that:
a) Romania’s benefits from capital accumulation are greater than
the benefits of USA;
b) Romania will experience a lower growth rate than USA;
c) an additional capital has a small effect on productivity in
Romania than in USA, because Romania is less developed;
d) the productivity in Romania increases with the same rate as in USA.

a) the government should encourage investment from abroad to
increase the domestic stock of capital;
b) the government should encourage only domestic investment in
order to promote economic prosperity;
c) the government should impose restrictions on foreign ownership
of domestic capital;
d) the government should encourage foreign investment only if the
domestic investment is too low.
14. Political stability is favorable to economic growth because:

a) it secures property rights and creates incentives for more
investments;
b) it promotes a stable legislative system;
c) it encourages people to do business;
d) all of these.
15. What should the policy makers do in order to raise productivity and
living standards?
a) encourage saving and investment;
b) protect property rights and to promote free trade;
c) encourage education;
d) all of these.
16. Which of the following is the most important obstacle to the

economic growth of a poor country?
a) the lack of natural resources;
b) the relatively high skilled workers;
c) the negative rate of demographic process;
d) the low rate of capital accumulation caused by legislative
instability and difficulties to protect property rights.
17. An university degree is a form of:

a) human capital investment;
b) physical capital investment;
c) human and physical investment;
d) none of these.

a) allowing free trade is a way to achieve more rapid economic
growth;
b) the society must sacrifice present consumption in order to enjoy
higher consumption in the future;
c) the protection of property rights is strong when the judicial
system does not work properly;
d) the government could promote economic growth by encouraging
capital accumulation.
19. Consider the following macroeconomic data of a closed economy.

The consumption function is C = a + c’ * Yd, the investment function
is I = i, and government expenditures are described by G = g. Where:
a – autonomous consumption;
c’ – marginal propensity to consume;
Yd – disposable income, which is income (Y) minus taxes (T) plus
transfer payments (Tr).
Applications 43
The equilibrium level of output is described by the following equation:

1
a) Y (a  c'T  c'Tr  g  i )
1  c'
1
b) Y (a  c'T  c'Tr  g  i )
1  c'
1
c) Y (a  c'T  c'Tr  g  i )
1  c'
1
d) Y (a  c'T  g  i )
1  c'
20. The investment multiplier (k) is:

a) 1 – c’;
b) 1 + c’;
c) 1 / (1 - c’);
d) 1 / (1 + c’).
21. Suppose the marginal propensity to consume is 0.8. The investment

multiplier is:
a) 8;
b) 1.25;
c) 5;
d) 1.6.
22. Suppose the investment multiplier is 2.5, the initial level of output
(Y0) is 200, and the investment in the economy increases by 4.
The economic growth is (in %):
a) 10;
b) 5;
c) 4;
d) 2.5.
23. Consider a closed economy described by the following equations:

C = 100 + 0.8Yd
I = 100
G = 40
T = 70
Tr = 20
The equilibrium level of output is:

a) 900;
b) 980;
c) 1000;
d) 1400.
24. The government decides to promote economic growth by encouraging

private investment. Suppose it sets a target of 10% GDP growth.
In order to meet this target, investment in the economy should
increase by an amount of:
a) 12.5;
b) 20;
c) 62.5;
d) 80.
25. Which of the following can be considered favorable to investment

process?
a) lack of property rights;
b) an increase in the interest rate;
c) a decrease in the interest rate;
d) high marginal tax rates.
Applications 45
4. Saving, Investment,
and the Financial System
1. The income that households are left with after paying for taxes and
consumption is called national saving.
2. For a closed economy, national saving equals investment.
3. If the government spends more money than it receives in tax revenue,

then the government runs a budget surplus.
4. When the government runs a budget deficit, the public saving is

negative.
5. The national saving equals private saving minus public saving.
6. If the national saving increases, then the interest rate decreases.
7. The crowding out effect explains why investment decreases when the
government runs a budget surplus.
8. An increase in national saving is reflected by a shift to the right of the

supply of loanable funds.
9. The demand for loanable funds comes from investors.
10. When the government budget deficit crowds out investment, it

reduces the capital accumulation, and hence the GDP.
1. Which of the following is not correct regarding the financial system:

a) it helps to match one person’s saving with another person’s
investment;
b) it is made up of financial institutions that help coordinate savers
and borrowers;
c) it is divided into two main components: financial markets and
financial intermediaries;
d) it includes only banks and mutual funds.
2. Among financial intermediaries we can find:

a) bond market;
b) stock market;
c) mutual funds;
d) financial markets.

a) because a municipal bond owner is not required to pay income
tax on the interest income, the interest rate paid by the state is
usually lower than bonds issued by corporations;
b) long-term bonds are riskier than short-term bonds, thus they
usually pay higher interest rates;
c) bonds represent ownership in a firm and is, therefore, a claim to
the firm’s profit;
d) bonds issued by the state are safer than bonds issued by
companies and, therefore, pay very high interest rates.
Applications 47
4. The difference between stocks and bonds is that:

a) compared to bonds, stocks offer the holder a lower risk and, thus,
lower returns;
b) the stockholder is a creditor of the corporation, whereas
bondholders get the profit;
c) a stock can be traded on the stock exchange, whereas bonds
cannot;
d) a stock is a claim to partial ownership in a firm, whereas a bond
is a certificate of indebtedness.
5. In a closed economy, private saving is described by the following

identity:
a) Y – C + T;
b) Y – T + G;
c) Y – T – C;
d) Y – T – G – C.
6. In a closed economy, national saving is described by the following

identity:
a) public saving minus private saving;
b) S = (Y – T – C) + (T – G);
c) S = Y – T + C – G;
d) S = (Y + T – C) + (T – C).
7. Suppose the government spends more than it receives from taxes. In

this case, the government runs a ………………………., and national
saving ……………….. :
a) budget deficit; increases;
b) trade deficit; increases;
c) budget surplus; decreases;
d) budget deficit; decreases.

a) the government runs a budget surplus if it receives less money
than is spends;
b) investment is the source of the demand for loanable funds;
c) saving is the source of the supply of loanable funds;
d) for the economy as a whole, saving and investment are equal.
9. In Romania, families tend to save larger fraction of their income

comparing to the previous decade. This means that:
a) families’ income has been reducing constantly;
b) the stock of physical capital available in the economy tends to
increase;
c) the economic well-being of population decreases;
d) the economy is experiencing a deeply recession.
10. Consider a closed economy described by the following

macroeconomic data: national income (Y) $10 billion, taxes (T)
$2 billion, private saving $3 billion, public saving $1 billion.
Consumption (C) and government purchases (G) are:
a) 1; 5;
b) 5; 1;
c) 3; 3;
d) 1; 3.
11. Consider the following information regarding a closed economy:

national income (Y) $10 billion, taxes (T) $2 billion, government
purchases (G) $4 billion, and private saving $3 billion. Determine the
budget deficit, national saving, and consumption:
a) 6; -3; 9;
b) 4; 1; 9;
c) 2; 1; 5;
d) -2; 5; 1.
Applications 49
12. Refer to the figure 1. If the market rate of interest were r2:
Interest D S
Rate
r0
r1
r2
Loanable
Funds
q0 q1 q2
Figure 1
a) the quantity of loanable funds supplied is greater than the

quantity of loanable funds demanded;
b) the quantity of loanable funds demanded is equal to the quantity
of loanable funds supplied.
c) the interest rate will rise, reducing the quantity of loanable funds
demanded and increasing the quantity of loanable funds
supplied.
d) the interest rate will fall, increasing the quantity of loanable
funds demanded and decreasing the quantity of loanable funds
supplied.
13. Suppose the Romanian government cuts income taxes. Which of the
following can be considered an effect of this policy?
a) households would increase their saving;
b) the supply of loanable funds shifts to the right;
c) the equilibrium interest rate would be lower;
d) all of these.
14. Suppose the Romanian government institutes an investment tax

credit in order to make investment more attractive. Taking into
account that the tax credit would reward firms that borrow and invest
in new capital, identify the changes that occur in the loanable market:
a) the demand for loanable funds shifts to the right, and the
equilibrium interest rate increases;
b) the equilibrium quantity of loanable funds is lower;
c) the supply for loanable funds shifts to the right, and the
equilibrium interest rate falls;
d) the demand for loanable funds shifts to the left, and the
equilibrium interest rate falls.
15. Many economists have proposed reforming the tax code to encourage
households to save a greater fraction of their income. Which of the
following is not an effect of this policy?
a) greater saving determines a decrease of the equilibrium interest
rate, and stimulates investment in the economy;
b) greater saving increase the cost of borrowing, and, thus,
discourages investment;
c) greater saving stimulates investment and growth;
d) greater saving tend to increase competition among lenders, and
interest rate would be driven down.
16. The government runs a budget deficit. When it borrows to finance its
deficit, it …………… the ………………… of loanable funds available for
financing private investment, and ……………. the equilibrium interest
rate:
a) reduces; supply; raises;
b) increases; supply; lowers;
c) reduces; demand; raises;
d) increses; demand; lowers.
Applications 51
17. Consider the government decides to raise its purchases, other things
equal. We can conclude that:
a) trade deficit decreases;
b) government runs a budget surplus;
c) public saving decreases;
d) national saving increases.
18. Which of the following represents an investment from a macroeconomic

perspective?
a) a person deposits the unspent income in a bank account;
b) a corporation buys a new technology;
c) a person “invests” money in bonds;
d) a person uses the unspent income to buy stocks from Rompetrol.
19. The crowding-out effect reveals the most important lesson about
budget deficit. This is:
a) when the government reduces national saving by running a
budget deficit, the interest rate rises, and investment falls;
b) when the government increases national saving by running a
budget deficit, the interest rate falls, and investment falls too;
c) when the government reduces national saving by running a
budget deficit, the interest rate falls, and investment rises;
d) when the government increases national saving by running a
budget deficit, the interest rate rises, and investment falls.

a) higher investment means greater capital accumulation and more
rapid economic growth;
b) if the government runs a budget surplus, it increses national
saving, the interest rate falls, and investment raises;
c) government budget deficit crowds out private borrowers who are
trying to finance investment;
d) by running a budget deficit, the government stimulates the
economy’s growth rate.
21. When the government runs a budget surplus:

a) public saving decreases;
b) the supply of loanable funds shifts to the left;
c) the equilibrium interest rate falls;
d) investment falls.
22. When the government runs a budget ……………….., it ……………………

national saving, the interest rate ……………….., and investment
……………………:
a) surplus; increases; falls; raises;
b) surplus; decreases; falls; lowers;
c) deficit; decreases; raises; raises;
d) deficit; increases; falls; raises.
23. Suppose the government finances its budget deficit by borrowing in
the bond market. Which of the following is correct?
a) government debt increases;
b) investment falls;
c) the demand for loanable funds shifts to the right;
d) a and b.
24. Refer to the figure 2.
Interest D S0
Rate
S1
r0
r1
Loanable
Funds
q0 q1
Figure 2
Applications 53
Which of the following could have as effect a shift to the right of the
supply for loanable funds?
a) government enacts a tax law that discourage saving;
b) entrepreneurs’ expectation are favorable for investment;
c) government runs budget surplus;
d) households tend to save a smaller fraction of their income.
25. Suppose the market for loanable funds is not in equilibrium. Which of
the following factors must change in order to bring supply and
demand into balance?
a) real interest rate;
b) nominal interest rate;
c) inflation rate;
d) growth rate.
5. The Basic Tools of Finance
1. The future value represents the amount of money in the future that
an amount of money will yield, given the prevailing interest rate.
2. The discount factor is expressed by (1-r)n .
3. The future value of a sum of money is calculated as the ratio between

the present value and the discount rate.
4. The higher the interest rate, the more attractive is getting money
today.
5. Only few people are risk averse.
6. A person can reduce risk using insurance.
7. The time preference argument is used to explain why people value

more a sum of money in the future than the same sum of money
today.
8. If a person decides to replace a single risk with a large number of

smaller and unrelated risks, we can conclude he/she is risk friendly.
9. Because government bonds have a lower risk than stocks, they pay
higher returns.
10. The car insurance is an example of a situation called moral hazard.

Applications 55
1. Suppose someone is offering you the same amount of money ($500)

today or in five years. You will prefer to get money today because:
a) money today is less valuable than money in the future;
b) money today is more valuable than money in the future;
c) we tend to prefer future goods rather than present goods;
d) you don’t trust the financial system.
2. The present value of any future sum of money is:

a) the amount in the past that would be needed, at current interest
rate, to produce that future sum;
b) the amount in the past that would be needed, at current interest
rate, to produce a present sum;
c) the amount today that would be needed, at current interest rate,
to produce that future sum;
d) the amount of money in the future that an amount of money
today will yield, given prevailing interest rate.
3. The general formula for present value (PV) is:

FV
a) PV  , where FV is future value;
(1  r ) n
FV
b) PV  ;
(1  r ) n
c) PV  FV  (1  r ) n ;
(1  r ) n
d) PV  .
FV
4. The interest rate is 10 percent. The present value of $200 to be

received in 10 years is:
a) 71.75;
b) 69.24;
c) 518.7;
d) 77.11.
5. The future value of any present sum of money is:

a) the amount in the past that would be needed, a current interest
rate, to produce that future sum;
b) the amount in the past that would be needed, a current interest
rate, to produce a present sum;
c) the amount today that would be needed, a current interest rate,
to produce that future sum;
d) the amount of money in the future that a given amount of money
today will yield, given prevailing interest rate.
6. The general formula for future value (FV) is:
PV
a) FV  , where PV is the present value;
(1  r ) n
b) FV  PV  (1  r ) n ;
c) FV  PV  (1  r ) n ;
(1  r ) n
d) FV  .
PV
Applications 57
7. Someone is offering you either $100 today or $200 in ten years time.
Suppose the prevailing interest rate is 10 percent. Which option
would you prefer?
a) you choose $100, because present money is always more valuable
than money in the future;
b) you choose $200, because you get $100 more, time being not so
important;
c) you choose $100, because the future $200 has a present value of
$77.11, which is lower than $100.
d) you choose $200, because you are better off waiting for the
future sum.
8. The ……………… the interest rate, the …………….. you can earn by
depositing your money at the bank, so the more attractive is the
……………… money:
a) higher; more; present;
b) higher; more; future;
c) lower; less; present;
d) lower; more; future.
9. After three years you are going to be paid $180. Consider that the
interest rate that prevails is 25 percent. What is the present value of
this future payment?
a) 51.2;
b) 144;
c) 92.16;
d) 192,16.
10. An investment involves initial costs of $250 million. Estimated

returns in the next three years are V1 - $70 million,
V2 – $130 million, and V3 – $150 million. Consider that the interest
rate that prevails is 10 percent. The present value of the future
returns is:
a) 318.18;
b) 289.25;
c) 283.75;
d) 262.96.
11. Taking into account the application from above, what do you think
entrepreneur should do?
a) to invest, because the present value of the future returns is
greater than the cost of investment;
b) to give up to the investment, because he can earn more by
depositing the money in a bank account;
c) to give up to the investment, because the present value of the
future returns equals the cost of investment, and thus he gets
nothing;
d) to invest, because he has a profit of $100 million.
12. Now suppose that the interest rate increases from 10 percent to
20 percent. What is the present value of future returns, and what
decision should be made?
a) 252.76; invest;
b) 235.40; give up;
c) 283.04; invest;
d) 202.54; give up.

a) if the present value of future return of an investment exceeds the
cost, the firm will decide to forgo the project;
b) few people are risk adverse;
c) most people are risk adverse;
d) the discount rate of a future value is (1-r)n.
Applications 59
14. Most people are risk adverse. It means that:

a) they prefer to risk;
b) they dislike bad things more than they like comparable good
things;
c) they sometimes dislike bad things happening to them;
d) they appreciate more risky investment rather than less risky one.
15. Economists explain risk aversion using the concepts of utility and
diminishing marginal utility. According to these concepts:
a) the more wealth a person has, the less utility that person gets
from an additional dollar;
b) the utility lost from loosing a dollar is greater than the utility
gained from winning it;
c) both of these;
d) none of these.
16. A possible way that a risk-adverse person might reduce the risk
he/she faces is:
a) insurance;
b) diversification;
c) the risk-return tradeoff;
d) all of these.
17. The role of an insurance contract is to:

a) eliminate risks;
b) transfer the risks from a person who pays a fee to an insurance
company;
c) reduce the risk by buying this insurance;
d) none of these.
18. The moral hazard represents:

a) a problem that the market of insurance confronts;
b) the situation in which, after having bought an insurance, people
have less incentives to be careful about their risky behavior;
c) a situation in which a high-risk person is more likely to apply for
insurance than a lower-risk person;
d) a and b.
19. The adverse selection represents:

a) a problem that arises in the market of insurances;
b) a situation in which a high-risk person is more likely to apply for
insurance than a lower-risk person.
c) the situation in which, after having bought an insurance, people
have less incentives to be careful about their risky behavior;
d) a and b.
20. A person buys from the grocery 100 eggs. The advice of the grocer
was to put the eggs in two separate baskets. This is an practical advice
of:
a) diversification, in order to reduce the risk of transportation;
b) diversification, in order to raise the risk of transportation;
c) adverse selection;
d) moral hazard.
21. The stockholder A increases the number of stocks from 1 to 10 stocks.

At the same time, B increases the stock portofolio from 100 to
120 stocks. Which one gets more diversification?
a) A;
b) B;
c) A and B get the same diversification;
d) there is no correct answer.
Applications 61
22. Compare stocks and government bonds. Which of the following is

correct:
a) stocks are riskier, and, therefore, pay a lower average return;
b) stocks are riskier, and, therefore, pay a higher average return;
c) bonds are riskier, and, therefore, pay a lower average return;
d) stocks are less risky, and, therefore, pay a higher average return.
23. An investor would prefer to buy:

a) those stocks whose price is lower than the value of asset;
b) those stocks whose price is greater than the value of asset;
c) overestimated stocks;
d) none of these.
24. Which of the following is false?

a) health insurance is a classical example of behavior that can be
called adverse selection;
b) health insurance is a classical example of behavior that can be
called moral hazard;
c) diversification reduces the risk;
d) diversification cannot eliminate the risk.
25. A person gains an annual $100.000 income from rent. Considering

the market interest rate of 5 percent, what is the market value for his
assets?
a) $2 million;
b) $1 million;
c) $95,238.09;
d) $1.5 million.
6. Unemployment and Its Natural Rate
1. Higher employment leads to lower unemployment.
2. Lower unemployment leads to higher wages.
3. The natural unemployment rate is the unemployment rate at which

the inflation remains constant.
4. The natural rate of unemployment depends on many factors that

differ across countries and change over time.
5. Redundancies are the single cause of unemployment.
6. Unemployment is always a bad thing.
7. The unemployment rate tends to be high in recessions and small in

expansions.
8. In Europe, the natural unemployment rate has increased a lot since

the 1960s.
9. The natural rate of unemployment is unaffected by policy making.
10. Unemployment is measured both in absolute and relative terms using

a standard statistical method.
Applications 63
1. A young graduate who is actively looking for a job but hasn’t yet
found a placement is considered part of the:
a) voluntary unemployment;
b) structural unemployment;
c) frictional unemployment;
d) cyclical unemployment;
2. Suppose that by collective bargaining, trade unions impose wages

above the equilibrium level. In this case we can expect:
a) a lower unemployment rate;
b) a higher unemployment rate;
c) a decreased poverty rate;
d) a reduction in unemployment rate among low-skill workers.
3. The unemployment rate depends on:

a) the ratio between the employed and the unemployed;
b) the ratio between job separation and job finding;
c) the ratio between people finding a job and the total labor force;
d) the ratio between people who lose a job and the total population.
3. The unemployment caused by the time it takes workers to search for a

job is called:
a) temporary unemployment;
b) structural unemployment;
c) frictional unemployment;
d) unavoidable unemployment.
4. Which of the following does not influence the natural rate of

unemployment?
a) job loss;
b) job finding;
c) redundancies;
d) labor turnover.
5. The theory of efficiency wages assumes that:

a) high wages are sticky because unions have bargaining power;
b) efficiency is not applicable to macroeconomics;
c) companies face the moral hazard of people being less efficient
when paid higher wages;
d) high wages make workers more productive.
6. The natural rate of unemployment is:

a) the steady-state rate of unemployment;
b) the frictional unemployment minus the structural unemployment;
c) higher in recessions;
d) lower for industrialized countries.
7. Using economic policy instruments, governments:

a) are powerless in influencing cyclical unemployment;
b) are powerless in influencing frictional unemployment ;
c) are powerless in influencing structural unemployment;
d) can influence economy’s natural rate of unemployment.
8. Frictional unemployment is 4%, structural unemployment is 4% and

the economy is in a recession. The people losing jobs because of the
slowing down aggregate demand are estimated to 3 %. In this case,
the natural rate of unemployment is:
a) 3%;
b) 4%;
c) 7%;
d) 8%.
Applications 65
9. Suppose more men decided to stay at home to raise their pre-school

age children. We would expect:
a) the labour force participation rate for males to increase;
b) the labour force participation rate for males to decrease;
c) the labour force participation rate for males to remain the same;
d) a better education of the children.
10. The total population of a country is 20 million people and the labor
force is estimated to 10 million. 2 million people are registered as
unemployed. In this case, the unemployment rate is:
a) 10%;
b) 12%;
c) 20%;
d) impossible to be determined.
11. Which of the following is an example of cyclical unemployment?

a) a worker that loses his job in a recession period;
b) a worker who loses his job because the rising price of gasoline
determines the decrease in consumer’s demand for gasoline;
c) a wife who leaves her job because her family moves to another
town;
d) a fresh graduate who cannot find a placement because he/she
lacks experience.
12. In labor economics, the reservation-wage is defined as:

a) the minimum wage set by the law;
b) a “rainy day” fund created by the unions for their members in
case of redundancy;
c) the lowest remuneration that someone would accept to perform
paid work;
d) a “happy day” fund for the remuneration of employees on
Christmas.
13. In an economy with a elastic labor supply:

a) people move slowly from unemployment to employment;
b) the unemployment rate is generally high;
c) there is always a large number of people employed in the black
labor market;
d) an increase in employment is accompanied by a less than
corresponding decrease in unemployment, if any.
14. Okun’s Law shows:

a) a positive correlation between unemployment and the GDP;
b) a negative correlation between inflation and the GDP;
c) a negative correlation between unemployment and the GDP;
d) a negative correlation between unemployment and inflation.
15. The estimated Okun’s law for the United States

Yt  Yt 1
u t  u t 1  0.4( 100  3%) . The potential GDP of a
Yt 1
country is 10.000 billion USD and the current GDP is 9000 billion
USD. Economists estimate the rate of unemployment to 4% in the
reference year. According to Okun’s Law, the unemployment rate
would become:
a) 9.2%;
b) 5.2%;
c) 4%;
d) %;
e) 6%.
Applications 67
16. The labour market is in equilibrium at an average level of salary of

1500 m.u. If the union succeeds in negotiation a minimum level of
salary of 1750 m.u., then:
a) the supply of labour increases;
b) the demand for labour decreases;
c) there will be a higher involuntary unemployment
d) all the above.
17. The statistics reveal an unemployment rate of 18% for a country

where 7% is estimated to be the structural unemployed and 3% the
frictional unemployment. Based on these, we can conclude that the
percentage of the people who are jobless because of the recession is:
a) 10%;
b) 6%;
c) 15%;
d) 8%.
18. The natural rate of unemployment is:

a) the level of unemployment socially acceptable;
b) the same for all countries;
c) the one corresponding to the potential output;
d) an illustration of the recessionary gap.
19. Suppose the equation illustrating Okun’s law is the following:

Percentage change in Real GDP = 3% - 2* Change in the
Unemployment rate. From this we can deduce that when the
unemployment rate remains the same, then:
a) There is no relation ship between unemployment and output;
b) Nominal GDP increases by 3%;
c) Real GDP increases by 3%;
d) Real GDP decreases by 2%.
20. Which of the following functions is the one that best illustrates
Okun’s law?
Yt  Yt 1
a) 100  3%  2(u  u n ) ;
Yt
Yt
b)  3  2.5(u  u n ) ;
Yt 1
Yt  Yt 1
c)  3%  2.u ;
Yt 1
Y tYt 1
d)  3(u  u n ) .
Yt
21. Suppose that 1 percent of the employed lose their jobs each month.
Suppose further that about 40% of the unemployed find a job each
month. Then, the steady-state rate of unemployment is about:
a) 1%;
b) 2.5%;
c) 6.3%;
d) 1.6%.
22. Often, governments are expected to adopt policy measures in order to

foster employment. Which of the following is true about a policy
aimed at reducing the natural rate of unemployment?
a) it should decrease the rate of job separation and/or decrease the
rate of job finding;
b) it should increase the rate of job finding and/or decrease the rate
of job separation;
c) it should increase public spending;
d) it should increase public transfers for the unemployed.
Applications 69
23. The ratio between the unemployed and the employed is 1:4.
The unemployment rate with respect to the active population is:
a) 5%;
b) 25%;
c) 20%;
d) 25%.
24. Which of the following is not considered a cause for unemployment:

a) job search;
b) minimum wage laws;
c) public transfers;
d) efficiency wages.
25. According to a Labor Force Survey of Country Utopia, the total adult
population is 20 million people, with 8 million employed. For this
economy, the total labor force is 10 million. The participation rate
and the unemployment rate are, respectively:
a) 40% and 8% ;
b) 80% and 10%;
c) 40% and 2%;
d) 40% and 20%.
7. The Monetary System
1. The most important function of money in the economy is medium of

exchange.
2. A saving deposit is not included in the money stock M1.
3. The reserve ratio is the fraction of deposits that banks hold as

reserves.
4. When banks hold only a fraction of deposits in reserve, banks do not

influence the money supply.
5. The higher is the reserve ratio, the higher is the money multiplier.
6. When the Central Bank sells government bonds, the money supply
decreases.
7. The reserve requirements are the regulations on the minimum

amount of reserves that banks cannot lend to the public.
8. An increase in reserve requirements decreases the money supply.
9. If the Central Bank increases the discount rate, it discourages banks

from borrowing reserves from it.
10. The monetary policy in an economy is led by the federal government.

Applications 71
1. Which of the following best describes money as a medium of

exchange:
a) the yardstick people use to post prices;
b) an item that buyers give to sellers for the good they purchase;
c) an item that people can use to transfer purchasing power from
the present to the future;
d) the yardstick people use to record debts.
2. The most important function that money has in the economy is:
a) store of value;
b) unit of account;
c) medium of exchange;
d) instrument to measure inflation.
3. Which of the following assets has the lowest liquidity:

a) currency;
b) credit card;
c) a “Microsoft” stock;
d) a house.
4. The central bank is not an institution:

a) designed to oversee the banking system;
b) designed to regulate the quantity of money in the economy;
c) which accepts only small time deposits from population or firms;
d) designed to ensure the health of the nation’s banking system.
5. In a system of 100-percent-reserve banking:

a) banks hold only a part of deposits in reserve and, therefore,
banks do not influence the money supply;
b) banks hold only a part of deposits in reserve and, therefore, they
can create money;
c) banks hold all deposits in reserves and, therefore, they do not
influence the money supply;
d) banks hold all deposits in reserves and, therefore, they can raise
the money supply.
6. Consider a system of 100-percent-reserve banking. A person deposits

$100 in a bank account. The bank’s reserves, loans, and liabilities are:
a) 100; 0; 100;
b) 100; 50; 50;
c) 0; 100; 100;
d) 50; 50; 100.
7. Which of the following is false in a system of fractional-reserve

banking:
a) banks keep a part of deposits in reserve, and loan out the rest;
b) the money supply increases, and the economy is wealthier than
before;
c) the economy is more liquid in the sense that there is more money
as a medium of exchange;
d) banks may hold reserves above the reserve requirement.
8. Consider a system of 20-percent-reserve banking. A person deposits

$100 in a bank account. The bank’s reserves, loans, and liabilities are:
a) 80; 20; 100;
b) 100; 0; 100;
c) 100; 80; 20;
d) 20; 80; 100.
Applications 73
9. Refer to the previous application. If the bank lends an amount of $80,

in the first instance, the bank increase the money supply by:
a) $80;
b) $180;
c) $20;
d) $100.
10. The amount of money the banking system generates with each dollar
in deposits is called:
a) the investment multiplier;
b) the reserve ratio;
c) the money multiplier;
d) the change in money supply.
11. The reserve ration is 20 percent. The money multiplier is:

a) 20;
b) 5;
c) 1/5;
d) 1/20.
12. If the reserve ratio is 20 percent, deposits would be ……….. times

reserves, the money multiplier would be …………, and each dollar of
reserves would generate …………. dollar of money:
a) 5; 5; 5;
b) 20; 5; 20;
c) 20; 20; 20.
d) 5; 5; 20.
13. The ……………….. the reserve ratio, the ……………….. of each deposit
banks loan out, and the ………………… the money multiplier:
a) higher; less; greater;
b) lower; more; smaller;
c) lower; less; smaller;
d) higher; less; smaller.
14. Which of the following is not a tool of monetary control:

a) open-market operations;
b) the discount rate;
c) reserve requirements;
d) marginal income tax.
15. To reduce the money supply, the Central Bank should:

a) print money;
b) buy government bonds;
c) sell government bonds;
d) reduce the reserve requirements.
16. Suppose that the Fed decides to buy government bonds. Which of the
following is correct:
a) this action increases the number of dollars in circulation;
b) this action decreases the number of dollars in circulation;
c) this action does not influence the money supply;
d) none of these.
17. The Central Bank increases the money supply by buying government
bonds. Some of these new dollars are held as currency, and some are
deposited in bank accounts. One of the following is false:
a) each new dollar held as currency increases the money supply by
$5, if the money multiplier is 5;
b) each new dollar held as currency increases the money supply by
exactly $1, no matter the money multiplier is;
c) each new dollar held in a bank account increases the money
supply to a greater extent because of the amount of money that
the banking system can create;
d) money creation refers only to deposits, not to currency.
Applications 75
18. The discount rate is:

a) the interest rate paid by the banks to depositors;
b) the interest rate on the loans that the Central Bank gives to the
banking system;
c) a regulation on the minimum amount of reserves that banks must
hold against deposits;
d) the interest rate asked by the bank to borrowers.
19. The Board of the Central Bank of Romania decides to raise the Euro
reserve requirements from 20 percent to 40 percent. This measure
reflects that the Board is trying to:
a) determine banks to offer fewer loans in Euro;
b) encourage banks to offer more loans in Euro;
c) stimulate banks to reduce the interest rate for loans in Euro;
d) none of these.
20. A(n) ……………… in the reserve requirements ………………. the reserve

ratio, ………………. the money multiplier, and ………………… the money
supply:
a) decrease; raises; lowers; increases;
b) increase; raises; raises; decreases;
c) decrease; lowers; raises; increases.
d) increase; lowers; raises; decreases.
21. A lower discount rate:

a) encourages banks from borrowing reserves from the Central
Bank;
b) discourages banks from borrowing reserves from the Central
Bank;
c) tends to increase the money supply;
d) a and c.
22. Why cannot the Central Bank control the money supply perfectly?
a) because it cannot impose the amount of loans that banks should
lend;
b) because bank can choose to hold excess reserves;
c) because the Central Bank cannot predict the human behavior;
d) all of these.
23. Currency is the only form of money in the Robinson Crusoe’s Island.
Suppose the total quantity of currency in this island is $500.
The Island Bank has a reserve ratio of 10 percent and receives a
deposit of $100 from Crusoe. The reserves, loans, and liabilities of
this bank are:
a) 10; 90; 100;
b) 90; 10; 100;
c) 100; 0; 100;
d) 10; 100; 90.
24. The money multiplier and the amount of money that the banking
system can create are:
a) 10; 100;
b) 100; 1000;
c) 10; 1000;
d) 1000; 100.
25. The total money supply on this island is:

a) 1000;
b) 140;
c) 1400;
d) 400.
Applications 77
8. Money Growth and Inflation
1. An increase in the price level makes money less valuable.
2. The neutrality of money is the proposition that changes in the money

supply do not affect real variables.
3. The neutrality of money hypothesis works only in the short run.
4. When the Central Bank raises the money supply, the price level
increases.
5. The inflation tax affects everyone who holds money.
6. When the Central Bank sells government bonds, the money supply
decreases, and the value of money increases.
7. According to the Fisher effect, a higher inflation is reflected in a

higher real interest rate.
8. When a country is experiencing inflation, the resources are

misallocated in the economy.
9. An unexpected inflation causes an arbitrary redistribution of wealth.
10. According to the quantity theory of money, the growth rate in the
quantity of money available in the economy determines the inflation
rate.

a) an increase in the overall level of prices is called inflation;
b) an decrease in the overall level of prices is called deflation;
c) when the overall price level rises, the value of money rises too;
d) if the money has a lower value, then each dollar buys a smaller
quantity of goods.
2. During the 1970s, in USA prices rose by 7 percent per year.

This means that the price level doubled in:
a) 7 years;
b) 70 years;
c) 10 years;
d) 5 years.
3. Suppose the overall price level rises by 25 percent. The value of

money ………. by …….. percent:
a) increases; 25;
b) decreases; 20;
c) increases; 20;
d) decreases; 25.
4. The demand for money is downward sloping, indicating that:

a) when the value of money is low, people demand a larger quantity
of it to buy goods and services;
b) when the value of money is high, people demand a larger quantity
of it to buy goods and services;
c) when the price level is high, people demand a smaller quantity of
money to buy goods and services;
d) when the price level is low, people demand a larger quantity of
money to buy goods and services.
Applications 79
5. In the long run, the equilibrium between supply and demand for
money determines:
a) the interest rate;
b) the price level;
c) the value of money;
d) b and c.
6. Refer to figure no. 3.
Value MS Price
of Level
Money MD
(high) (low)
1 1
1/2 2
¼ 4
(low) (high)
Quantity of
money
Figure -3-
Which is the value of money and the price level that brings the
quantity of money supplied and demanded into balance?
a) 1; 1;
b) ½; 2;
c) ¼; 4;
d) ½; 1.
7. Suppose the price level is 4, above the equilibrium level. Which of the
a) people want to hold more money than the banking system has
created, so the price level must fall to balance supply and
demand;
b) people want to hold less money than the banking system has
created, so the price level must fall to balance supply and
demand;
c) people want to hold more money than the banking system has
created, so the price level must raise to balance supply and
demand;
d) the value of money must fall.
8. The Romania’s National Bank buys government bonds. This monetary

policy causes:
a) an increase in the money supply, which decreases both the value
of money and the price level;
b) a decrease in the money supply, which increases the value of
money, and decreases the price level;
c) an increase in the money demand, which decreases the value of
money, and increases the price level;
d) an increase in the money supply, which decreases the value of
money, and increases the price level.
9. The result of a(n) ……………. in the money supply is a(n) …………….. in

the price level that makes each dollar …………… valuable:
a) increase; decrease; more.
b) decrease; increase; less.
c) decrease; decrease; more;
d) increase; increase; more.
Applications 81
10. One of the following is not correct:

a) the classical dichotomy represents a theoretical separation of
nominal and real variables;
b) relative prices are nominal variables;
c) an increase in the price level has as result an increase in the
quantity of money demanded;
d) the quantity of money supplied in the economy is controlled by
the Central Bank.
11. The neutrality of money:

a) is the proposition that changes in the money supply do not affect
real variables;
b) is the proposition that changes in the money supply do only affect
nominal variables;
c) works only in the long run;
d) all of these.
12. The distinction between nominal variable and real variables was
firstly suggested by the:
a) neoclassical economists;
b) Keynesian economists;
c) classical economists;
d) monetarist economists.
13. The quantity theory of money is described by the following equation:

a) M V  P  Y ;
b) M  P  V Y ;
c) M Y  P /V
d) M /V  P Y .
14. Consider an economy described by the data from below. The money
supply (M) is 500, the velocity of money (V) is 2, and the overall price
level (P) is 1.25. The nominal GDP and the real GDP are, respectively:
a) 1,250; 1000;
b) 800; 1000;
c) 1000; 800;
d) 625; 800.
15. If inflation is less than expected, who will benefit?

a) debtors;
b) creditors;
c) both of them;
d) none of them.
16. The velocity of money decreases by 10 percent. The real GDP growth
rate is 6 percent. If the Central Bank targets an inflation rate of
4 percent, it should …………….. the money supply by …… percent:
a) increase; 22;
b) decrease; 9;
c) increase; 12;
d) decrease; 1.
17. Take into consideration the quantity theory of money. Because the
velocity of money is relatively stable over time and the real output
depends primarily on the ……………………….. , when the Central Bank
………………….. the money supply, the result is ……………… :
a) nominal interest rate; increases; a higher growth rate;
b) resources available in the economy; decreases; inflation;
c) real interest rate; decreases; deflation;
d) resources available in the economy, increases; a high rate of
inflation.
Applications 83

a) in the long run, the changes in the money supply are irrelevant
for real variables;
b) when the Central Bank raises the required reserves, the result is a
higher inflation;
c) the value of money decreases as the overall price level increases;
d) the velocity of money refers to the rate at which money changes
hands.
19. Government is using few ways to pay for its spending. Which of the
following is known as inflation tax:
a) levying a tax;
b) borrowing from public;
c) printing money;
d) selling government bonds.
20. According to Fisher effect, when the Central Bank ………….. the rate of
money growth, the result is a …………………… inflation rate and a
……………… nominal interest rate:
a) increases; lower; higher;
b) decreases; higher; higher;
c) increases; higher; higher;
d) decreases; higher; lower.
21. The Central Bank of a country increases the growth rate of the money
supply from 5 percent per year to 25 percent per year. What happens
to prices? What happens to nominal interest rates?
a) fall; raise;
b) fall; fall;
c) raise; raise;
d) raise; fall.
22. Suppose your university professor receives an annual raise of

5 percent of his annual income. If inflation rate is 6.7 percent, then:
a) the real value of that raise is 1.7 percent;
b) the real value of that raise is 11.7 percent;
c) inflation reduces the real income by approximately 1.7 percent;
d) your professor income’s raise is not affected by inflation because
nominal income tend to keep pace with inflation.
23. Which of the following is not considered a cost of inflation:

a) shoeleather costs;
b) the misallocation of resources;
c) arbitrary redistribution of wealth;
d) a fall in purchasing power.
24. Consider the following information. In an economy without inflation,

the nominal interest rate is 4 percent, and the interest income tax is
25 percent. The before-tax real interest rate, after-tax nominal
interest rate, and after-tax real interest rate are (in %):
a) 4; -21; -17;
b) 29; 3; 4;
c) 4; 3; 3;
d) 4; 1; 3.
25. In an economy, the inflation rate is 8 percent, the real interest rate is
8 percent, and the interest income tax is 25 percent. The before-tax
nominal interest rate, after-tax nominal interest rate, after-tax real
interest rate are:
a) 16; 12; 4;
b) 16; 14; 6;
c) 16; -9; -1;
d) 16; 16; 8.
Applications 85
9. Open economy
macroeconomics -
basic concepts
1. In a closed economy, net exports are positive.
2. The trade deficit occurs when government spending is higher than tax
revenues.
3. The price of goods at home and abroad is an important factor that

might influence net exports.
4. If the real interest rate increases, then the net capital outflow of this
country increases.
5. For an economy as a whole, net capital outflow is always greater than

net exports.
6. In an open economy, a nation’s saving must equal its domestic

investment plus its net capital outflow.
7. An increase in the value of a currency measured in the amount of

foreign currency it can buy is called depreciation.
8. An increase in the real exchange rate means that domestic goods have
become cheaper relative to foreign goods.
9. A decrease in the real exchange rate tends to raise the net exports.
10. According to the theory of purchasing-power parity, the real exchange

rate equals 1.
1. Net export is:

a) the value of a nation’s imports minus the value of its exports;
b) also called trade deficit;
c) determined as the difference between exports and imports;
d) calculated as exports divided by the imports.
2. Which of the following reflects an increase of Romania’s net exports:

a) Altex imports LCD’s from Germany;
b) OMV buys stocks in the Petrom corporation;
c) Vel Pitar sells breadstuff in Hungry;
d) Flamingo sells computers to households.
3. The Romanian net exports are negative. This means that:

a) exports are greater than imports, and our country runs a trade
surplus;
b) Romania sells fewer goods and services abroad than it buys from
other countries, and thus it runs a trade deficit;
c) exports are less than imports, and our country runs a trade
deficit;
d) b and c.
4. The statistics show that the Romanian population’s income has been
increasing for several years. What component of the net export might
be influenced by this factor and how?
a) exports; increase;
b) imports; increase;
c) net exports; decrease;
d) b and c.
Applications 87
5. One of the following factors has a positive influence over net exports:
a) consumers tend to prefer foreign goods;
b) the price of goods at home is lower than the price for the same
goods from abroad;
c) the income of Romanians increases constantly;
d) the price of goods at home is greater than the price for goods
from abroad.
6. Net capital outflow (net foreign investment) refers to:

a) the purchase of foreign assets by domestic residents minus the
purchase of domestic assets by foreigners;
b) the purchase of domestic assets by foreigners minus the purchase
of foreign assets by domestic residents;
c) a measure of flow of domestic and foreign capital;
d) a and c.
7. When Renault buys Dacia Pitesti, this purchase:

a) raises Romania’s net capital outflow, because it raises the
domestic assets held by foreigners;
b) reduces Romania’s net capital outflow, because it raises the
domestic assets held by foreigners;
c) reduces Romania’s net capital outflow, because it reduces the
foreign assets held by domestic residents;
d) raises Romania’s net capital outflow, because it increases the
foreign assets held by corporations from France.
8. In 1998, the well known Romanian corporation Policolor has bought

the company Orgachim from Bulgaria. This purchase:
a) raises the foreign assets held by domestic residents, and increases
the Romania’s net capital outflow;
b) raises the foreign assets held by domestic residents, and
decreases the Romania’s net capital outflow;
c) raises the foreign assets held by domestic residents, but doesn’t
influence the Romania’s net capital outflow;
d) none of these.
9. Which of the following is not considered an example of domestic

asset (from the view of Romanians):
a) a Romanian government bond;
b) a Policolor stock;
c) a municipal bond issued by a local government;
d) a Microsoft stock.
10. Suppose you’re an investor who has to decide whether to buy Serbian
government bonds or Romanian government bonds. In order to make
a decision, you should pay attention to:
a) the real interest being paid of foreign assets vs. domestic assets;
b) the economic and political risks of holding assets abroad;
c) the Serbian government policies regarding foreign ownership of
domestic assets;
d) all of these.
11. Now suppose the Serbian government offers a higher bond’s interest
rate (Consider other things equal). What should you do?
a) buy foreign assets, because they are less attractive;
b) buy domestic assets, because they are more attractive;
c) buy foreign assets, because they are more attractive;
d) none of these.
12. Refer to the previous application. What happens to the stock of

foreign assets held by domestic residents and to the NCO?
a) raises; decreases;
b) raises; increases;
c) falls; decrease;
d) falls; increases.
13. For an economy as a whole, the relationship between net exports

(NX) and net capital outflow (NCO) is illustrated by one of the
following equation:
a) NX = NCO;
b) NX > NCO;
c) NX < NCO;
d) NX  NCO.
Applications 89
14. Elvila sells furniture to a German store for €1 million. After a while,
the board of this Romanian company decides to buy stocks in
Daimler Benz Corporation for €1 million. These transactions:
a) raise Romania’s exports by €1 million;
b) raise Romania’s net capital outflow by €1 million, because raise
the foreign assets bought by domestic residents;
c) Romania’s NX and NCO rise by an equal amount;
d) all of these.
15. Suppose national income (Y) is 1000, consumption (C) 600, the
government purchases (G) 100, investment (I) 200. Determine the
national saving (S), net exports (NX), and the NCO:
a) 600; 100; 100;
b) 300; 200; 100;
c) 100; 700; 700;
d) 300; 100; 100.
16. According to the last problem:

a) the national saving (200) is used for domestic investment (100)
and for investment abroad (100);
b) the national saving cannot be used to finance the purchase of
capital abroad;
c) in an open economy, always national investment equals domestic
investment, and NCO is zero;
d) in a closed economy, the net capital outflow is greater than zero.
17. Consider a country with a trade surplus. Which of the following

equations is correct:
a) NX > 0;
b) S > I;
c) NCO >0;
d) all of these.
18. Romania runs a trade deficit. What can you deduce regarding the net
capital outflow? Does it correspond to reality?
a) national saving is lower than (domestic) investment, and net
capital outflow equals zero;
b) national saving is greater than investment, and net exports are
positive;
c) national saving is lower than investment, and net capital outflow
is negative;
d) national saving is lower than investment, and net export are positive.
19. The National Bank of Romania determines a change in the nominal

exchange rate for one Euro from RON 3.5 to RON 3.6. This change is
called:
a) an appreciation of RON;
b) a depreciation of EUR;
c) an appreciation of EUR;
d) an appreciation of RON, because one EUR buys more RONs.
20. The real exchange rate is:

a) the rate at which a person can trade the goods and services of one
country for the goods and services of another;
b) expressed as units of the foreign good per unit of the domestic
good;
c) the rate at which a person can trade the currency of one country
for the currency of another;
d) a and b.
21. The real exchange rate is illustrated by the following equation:

a) Real exchange rate = (Nominal exchange rate  Domestic price) /
Foreign price;
b) Real exchange rate = (Nominal exchange rate  Foreign price) /
Domestic price;
c) Real exchange rate = (Foreign price  Domestic price) / Nominal
exchange rate;
d) Real exchange rate = Nominal exchange rate / (Domestic price 
Foreign price).
Applications 91
22. Consider the following example. The price of Romanian honey is

RON 10 per kg. A kg of Dutch honey sells for EUR 4. The nominal
exchange rate is EUR 0.28 per RON. The real exchange rate between
Romanian and Dutch honey is:
a) 2.8;
b) 1.42;
c) 0.7;
d) 0.11.
23. The Romania’s real exchange rate falls. This means that Romanian
goods have become ………………… compared to foreign goods.
Thus, Romanian exports ……………., and Romanian imports ……....….:
a) cheaper; fall; rise;
b) cheaper; rise; fall;
c) more expensive; fall; rise;
d) more expensive; rise; fall.
24. According to the purchasing-power parity:

a) a unit of all currencies must have the same real value in every country;
b) the nominal exchange rate between the currencies of two
countries must reflect the different price levels in those countries;
c) a unit of any given currency should be able to buy the same
quantity of goods in all countries;
d) all of these.
25. When the National Bank of Romania ……………….. the money supply,
it causes the price level to …………………, and it also causes that
Romanian currency to …………………. relative to other currencies in
the world.
a) increases; rise; depreciate;
b) increase; fall; depreciate;
c) decrease; rise; appreciate;
d) decrease; fall; depreciate.
10. A Macroeconomic Theory of the Open

Economy
1. Trade deficits arise when a country buys more from aboard than sells.
2. Net export is always negative.
3. A twin deficit arises when there is a budget deficit and the trade
balance is negative.
4. The equilibrium in the market for foreign currency exchange is

reached when net capital outflow is equal to the net export.
5. A government budget deficit reduces the supply of loanable funds and

drives the interest rate up.
6. An appreciation of the domestic currency would make export less

expensive.
7. Net capital outflow is zero when the country has no budget deficits.
8. Trade policy is the instrument used by the central bank to help the
currency appreciate or depreciate.
9. Because the euro has appreciated in value, Airbus will find it harder
to compete with Boeing.
10. Capital flight is a large and sudden decrease in the demand for assets
located in a country.
Applications 93
1. In Romania, the real interest rate increases by 5 percentage points.

This change:
a) raises the quantity of loanable funds supplied;
b) discourages domestic investment;
c) reduces Romania’s net capital outflow;
d) all from above.
2. In an open economy, the equilibrium in the market for loanable funds
is described by the following identity:
a) S = I + NCO;
b) S – I > NCO;
c) S + NCO = I;
d) I = S + NCO.
3. The Romanian economy is running a trade deficit. Which of the
a) Romanians are spending more on foreign goods and services
than they are earning from abroad;
b) the trade deficit might be financed by foreign investments and,
therefore, Romania’s net capital outflow is negative;
c) the trade deficit might be financed by foreign investments and,
therefore, Romania’s net capital outflow is positive;
d) a and b.
4. In the market for foreign-currency exchange, the supply of dollars
(to be exchanged into foreign currency) comes from NCO, and the
demand for dollars comes from net exports. If the real exchange rate
is greater than the equilibrium exchange rate, then:
a) the demand for dollars exceeds the supply for dollars, and the
real exchange rate increases;
b) the demand for dollars is less than the supply for dollars, and the
real exchange rate increases;
c) the supply of dollars exceeds the demand for dollars, and the real
exchange rate falls;
d) the demand for dollars exceeds the supply for dollars, and the
real exchange rate falls.
5. Consider the market for foreign-currency exchange. An increase in

the real exchange rate might be caused by:
a) a shift to the right of the supply of national currency;
b) an increase in the demand for national currency;
c) a decrease in the demand for national currency;
d) none of these.
6. Consider an open economy. Which of the following represents a

source of supply in the market for loanable funds?
a) national saving;
b) domestic investment;
c) net capital outflow;
d) b and c.
7. If the real interest rate is ……………. the equilibrium level, the quantity
of loanable funds supplied is …………….. than the quantity demanded.
As a result, the interest rate will ………………..:
a) above; lower; increase;
b) above; greater; decrease;
c) below; lower; decrease;
d) below; greater; increase.
8. In an open economy, government budget deficits ……………… real

interest rates, ………………. domestic investment, cause the currency to
……………………., and push the trade balance toward ………………:
a) raise; decrease; appreciate; deficit;
b) raise; decrease; depreciate; deficit;
c) lower; increase; appreciate; surplus;
d) lower; decrease; depreciate; deficit.
Applications 95
9. Suppose Romania is confronted with a deep political instability.

This of the following is an implication of the capital flight:
a) foreign investors decide to sell Romanian assets;
b) the Romanian net capital outflow increases;
c) the real interest rate increases;
d) all of these.
10. The inflation rate in Romania increases by 3 percentage points, other

things being equal. The real exchange rate ………………………., and the
domestic goods become ………………… than foreign goods:
a) appreciate; cheaper;
b) depreciate; more expensive;
c) depreciate; cheaper;
d) appreciate; more expensive.
Suppose that Romanians decide to spend a smaller fraction of their

income. Taking into account this situation, answer to the questions from
below.
11. What would be the effect on saving?

a) increases;
b) decreases;
c) remains constant;
d) none of these.
12. What would be the effect on interest rate, and investment?

a) falls; increases;
b) falls; decreases;
c) rises; increases;
d) rises; decreases.
13. What would happen to the net capital outflow (NCO)?

a) increases;
b) decreases;
c) remains constant;
d) none of these.
14. What effect would have the change in NCO on the real exchange rate?
a) appreciation;
b) depreciation;
c) the real exchange rate is not affected by the changes in the NCO;
d) none of these.
15. What effect would have a depreciation of the real exchange rate on
the trade balance?
a) it would tend to push the trade balance toward deficit, because
domestic goods become cheaper relative to foreign goods;
b) it would tend to push the trade balance toward deficit, because
domestic goods become more expensive compared to foreign
goods;
c) it would tend to push the trade balance toward equilibrium, if
this economy has had trade surplus before;
d) it would tend to push the trade balance toward equilibrium, if
this economy used to have trade deficit before.
16. An increase in the budget deficits will:

a) increase trade deficit;
b) reduce the real interest rate;
c) increase net capital outflows;
d) determine a shift to the right of the supply for loanable funds.
Applications 97
17. A decrease of the net capital outflow might be caused by:

a) an increase of the real exchange rate;
b) a decrease of the real exchange rate;
c) an increase of the real interest rate;
d) a decrease of the real interest rate.
18. Which one of the following would increase the demand for Euro in
the foreign-currency exchange market?
a) the spending of Danish tourists in Maramures;
b) the purchase of Logan by a Danish tourist;
c) the purchase of LCD’s from abroad by Romanian consumers;
d) Elvila’s exports of furniture in Germany.
19. Suppose Romanian government imposes a tax on imported second-

hand cars. Which one of the following is not considered an effect of
this trade policy:
a) new cars producers (domestic and foreigners) are better off;
b) the import of used cars decreases;
c) in the first instance, the net exports decreases;
d) in the end, because there is no change in NCO, there can be no
change in net exports, even though the import tax has reduced
imports.
20. In an open economy, an increase in the real interest rate:

a) discourages domestic investment, and increases the net capital
outflow;
b) encourages domestic investment, and decreases the net capital
outflow;
c) discourages domestic investment, and reduces the net capital
outflow;
d) encourages domestic investment, and increases the net capital
outflow.
21. China runs a trade surplus. This means that:

a) it imports more than exports;
b) it exports more than imports;
c) its exports equals imports;
d) none of these.
22. Which of the following might be the reason for the Chinese trade
surplus:
a) domestic goods are cheaper than goods from abroad;
b) the Chinese pay attention especially to quality;
c) domestic goods are more expensive compared to foreign goods;
d) none of these.
23. The Chinese net capital outflow is:

a) zero;
b) positive;
c) negative;
d) none of these.
24. The concept of twin deficit explains:

a) a relationship between national saving and budget deficit;
b) the fact that a budget deficit tend to grow when the government
cuts taxes;
c) a relationship between budget deficit and trade deficit;
d) why a trade deficit can lead to a budget deficit.
25. In 1980s, the US government enacted large cuts in taxes, but did not
cut government spending. What might have been an implication of
this economic policy?
a) the US government runs a large budget deficit, and the national
saving decreases;
b) the real interest rate increases, crowds out domestic investment,
and the net capital outflow decreases;
c) the real exchange rate appreciates, and US net exports fall;
d) all of these.
Applications 99
11. Aggregate Demand and Aggregate Supply
1. Aggregate demand as the demand for output at a given price is

derived from equilibrium in both goods and financial markets.
2. An increase in the overall level of prices tends to diminish the

aggregate demand.
3. The aggregate supply relation shows the price level at which firms are
willing and able to supply a given level of output.
4. The aggregate supply is perfectly inelastic in the long run.
5. SRAS is an L shaped curve.
6. If prices are sticky, the aggregate supply is perfectly elastic.
7. Aggregate expenditure is the sum of all possible expenditure for

goods and services produced within one country and it is synonymous
to the aggregate demand relationship.
8. The aggregate supply relation implies that an increase in output leads

to an increase in the price level.
9. The aggregate demand relation suggests that at a higher price level,

consumers wish to purchase fewer goods.
10. Keynesian economics is also known as the management of the

aggregate demand.
1. The aggregate expenditure is the sum of:

a) private consumption, investment and export;
b) private consumption, public consumption and export;
c) final consumption, investment and net export;
d) none.
2. Aggregate demand is represented by:

a) a perfectly horizontal line;
b) a perfectly vertical line;
c) a negatively sloped curve;
d) a positively sloped curve.
3. Which of the following statements is false?

a) private consumption accounts for the highest fraction of the
aggregate demand;
b) public consumption is always negative;
c) investment is the most volatile component of the aggregate
demand;
d) exports and imports depend on the exchange rate developments.
4. The aggregate supply is represented by:

a) an L shaped curve;
b) a vertical line;
c) a horizontal line;
d) different shapes on the long run and on the short run.
Applications 101
5. The perfectly elastic aggregate supply illustrates the hypothesis that

on the short run:
a) prices are relatively constant;
b) producers can produce an infinite amount of goods;
c) output is fixed;
d) nothing.
6. A perfectly elastic aggregate supply is also known as the part of the

SRAS corresponding to the:
a) classical range;
b) Keynesian range;
c) Marshallian range;
d) Tobin’s q.
7. The short run aggregate supply in its Keynesian range is:

a) perfectly inelastic;
b) perfectly elastic;
c) unitary elastic;
d) negatively sloped.
8. The long run aggregate supply is illustrated by:

a) an L shaped curve;
b) a vertical line;
c) a horizontal line;
d) a positively sloped curve.
9. The economy is in equilibrium when:

a) the SRAS is equal to the LRAS;
b) the LRAS is equal to the AD;
c) the AD is equal to the SRAS;
d) the AD is equal to the LRAS.
10. The aggregate supply is not influenced by:

a) taxation;
b) the price of oil in the world market;
c) the changes in the level of wages;
d) government purchases.
11. Which of the following will determine a reduction on the SRAS?

a) an increase in the market price of oil;
b) an increase in the subsidies for farmers;
c) a decrease of the minimum salary;
d) a decrease in the rental price of apartments.
12. Which of the following will determine a shift of the AD to the right?
a) a lower governmental spending for goods and services;
b) a higher propensity to consume;
c) increased interest rates;
d) a higher negotiation power of the labor unions.
13. If labor unions succeed in negotiating an increase in salaries which

surpasses the increase in productivity we expect:
a) lower inflation;
b) a reduction of the costs for most companies;
c) a decrease of the short run aggregate supply;
d) an increase of the short run aggregate supply.
Applications 103
14. The aggregate demand curve is a curve reflecting:

a) the quantity of goods and services that households want to buy at
each price level;
b) the quantity of goods and services that companies want to sell at
each price level;
c) the quantity of goods and services that households, firms and
government want to buy at each price level;
d) the quantity of output that the both national and foreign
households want to buy from both the domestic producers at
each price level .
15. Which of the following is not a factor which explains the downward
sloping curve of the aggregate demand?
a) the wealth effect;
b) the exchange rate effect;
c) the interest rate effect;
d) the Fischer effect.
16. The wealth effect illustrates that:

a) the more money people have, the more they spend for imported
goods;
b) the richer people become, the higher their savings are;
c) a lower price level increases real wealth, which encourages
spending on consumption;
d) a higher price level reveals a higher purchasing power, that is
higher wealth level in the economy.
17. Which of the following shows the interest-rate effect?

a) a higher budget deficit financed by domestic borrowings causing
a higher interest rate;
b) a lower price level reducing the interest rate, which encourages
spending on investment;
c) a higher price level which encourages business to invest more,
driving the interest rate up;
d) none of the above.
18. According to the exchange rate effect hypothesis, a lower price level
causes the …………………. exchange rate to ………………………, which
encourages spending on ……………………………….. ;
a) real, decrease, net exports;
b) nominal, decrease, investment;
c) real, increase, import
d) nominal, increase, net import.
19. Which of the following factors arising from labor will lead to a shift to
the left of the aggregate supply?
a) an increase in immigration abroad;
b) a substantial rise of the minimum wage, rising the natural
unemployment;
c) a reform of the unemployment insurance leading to lower aids
and/or shorter time coverage;
d) all of the above.
20. Amongst the shifts arising from natural resources and leading to a
higher aggregate supply can be caused by:
a) a change in weather patterns that makes farming more difficult;
b) a discovery of new mineral deposits;
c) a ban on imports of raw materials from abroad;
d) a higher price of the oil imposed by the OPEC in the world
market.
21. Which theory can be used to explain the upward sloping short run
aggregate supply?
a) the sticky wage theory;
b) the sticky price theory;
c) the misperceptions theory;
d) all the above.
Applications 105
22. According to common economic theory, output deviates from its

natural rate when the price level deviates from the price level that
people expected. This can be expressed mathematically by:
a) Y = Yp + a(P – Pe);
b) Y = Yp / a(P – Pe)
c) Yp = Y + (P – Pe);
d) none.
Where Y is the quantity of output supplied, Yp is the natural rate of

output, P is the actual price level and Pe is the expected price level.
23. A decrease in the aggregate demand causes output to ………………… in

the short run, but over the time, the ………… aggregate supply curve
shifts to the ………………………………… and the output returns to it’s
…………………………….:
a) fall, short-run, right, natural rate;
b) increase, long run, right, natural rate;
c) fall, short-run, left, natural rate;
d) increase, short-run, left, natural rate.
24. Accommodating an adverse shift in the aggregate supply means that

when the short-run aggregate supply falls, policy makers can
accommodate the shift by ………………………………… the aggregate
demand, which causes the price level to ………………….. further, but
keeps output at its ………………………:
a) expanding, rise, natural rate;
b) expanding, fall, natural rate;
c) expanding, rise, expansion rate;
d) none.
25. The actual GDP is 110 billion and the potential output is 100 billion.
The marginal propensity to consume from the disposable income is
75% and the rate of taxation is 20%. In this case:
a) there is an inflationary gap of 10;
b) there is a natural tendency to move to deflation;
c) there is an inflationary gap of 4;
d) the NAIRU is equal to 4%.
26. Consider the following IS-LM model: C = 250 + 0.5Yd; I = 150-1000i;

G = 150; T = 100; (M/P)d = 4Y - 8000i; M/P = 1600. Based on these
relationships, the IS relation will be:
a) Y=400 – 2000i;
b) Y=500-1000i;
c) Y=1000-2000i;
d) Y=1100-2000i;
Hint! You need an equation with Y on the left side, all else on the right,
and you start from the equilibrium in the goods market. That means we
do not take into account the last two relations corresponding to the
money market. We only deal with the variables from the goods market.
27. Consider the same IS-LM model: C=225+0.25Yd; I=50+0.25Y-1000i;

G=150; T=100; (M/P)d=4Y-8000i; M/P=1600. Based on this
information, the LM relation will be:
a) i=-0.2+0.0005Y;
b) i=0.5+0.25Y;
c) i=1600+2Y;
d) i=0.2+0.00025Y.
Hint! You need an equation that links real output and the equilibrium in
the money market, so it will be convenient to rewrite the equation with i
on the left side for later use, all else on the right.
Applications 107
28. Consider the same IS-LM model: C = 225 + 0.25Yd; I = 50 + 0.25Y -1000i;
G = 150; T = 100; (M/P)d = 2Y - 8000i; M/P = 1600. Using the IS-LM
relations, the equilibrium real output and the equilibrium interest
rate will be:
a) Ye= 1000, ie= 0.15
b) Ye= 700, ie= 0.35
c) Ye= 800, ie=0.35
d) Ye= 700, ie=0.15
Hint! You want to get a real output and an interest rate that would
bring both the market for goods and the money market into equilibrium.
29. Suppose there is an increase in the marginal propensity to consume

illustrated in the Marshallian cross below (see figure 4.). The final
equilibrium level of output and the average level of prices will be:
a) Y1, P1;
b) Y2, P2;
c) Y3, P3;
d) P1, Y3.
Prices AD0 AD1 SRAS
P1
P2
P3
Y1 Y2 Y3 Real output
Figure 4. The change in the AD caused by an increase

in the marginal propensity to consume
30. Which of the following can determine a change in the real level of
output and the average level of prices as illustrated in the figure 5?
a) an increase in corporate taxes;
b) an increase in the VAT;
c) an increase in the price of labor;
d) an increase in labor productivity.
Prices AD SRAS0
SRAS1
P0
P1
Y
Ye0 Ye1 Output
Figure 5. Shifting the SRAS caused by an increase

in labor productivity
31. Which policy can determine a shift in the LM as represented in the

graph below, leading to a higher level of output and to cheaper
investment (see figure 6)?
a) an expansionary fiscal policy;
b) a restrictive fiscal policy;
c) an expansionary monetary policy;
d) a restrictive monetary policy.
Applications 109
i IS LM0
LM1
i0
i1
Y
Ye0 Ye1 Output
Figure 6. Shifting the LM curve caused

by an expansionary monetary policy
32. Which of the following could lead to a rightward shift of the short-run
aggregate supply, causing a deflationary effect?
a) a shift of the IS to the right, leading to higher output and higher

prices;
b) a shift of the IS to the right, leading to higher output and lower

prices;
c) a shift of the LM to the right, leading to higher output and lower

prices;
d) supply side-policies that are not reflected in the IS-LM model.

33. Consider an economy experiencing a contraction in the aggregate

demand as in the figure 7. This change causes output to ……….………
in the ………………….…., but over the time, the short-run aggregate
supply curve shifts …………………………., and output returns to it’s
………………………
a) increase, short run, right, long run inflationary level;
b) decrease, short run, right, natural rate;
c) increase, long run, right, long run equilibrium level;
d) decrease, long run, right, depression rate.
Prices AD LRAS SRAS1
SRAS0
AD1
P0
P1
Y
Ye1 Ye0 Output
Figure 7. Contraction in the AD and its effect over time

Applications 111
34. Consider an adverse shift in the aggregate supply. If the central bank
chooses to accommodate this effect as suggested by the graph below,
than we expect (see figure 8):
a) the output level to increase to Y1 and the average level of prices to
stay constant at P0;
b) the economy to move to the long run equilibrium Y0 and to
experience inflation, with prices increasing from P0 to P2;
c) the economy to move to the long run equilibrium output Y1 and
for the consumers to buy at lower level of prices P0 as compared
to P1;
d) the economy to move to the long run equilibrium output Y0 and
for the economy to experience inflation with prices moving from
P1 to P2.
Prices AD1 LRAS SRAS1
SRAS0
AD0
P2
P1
P0
Y
Ye0 Ye1 Output
Figure 8. Accommodating an adverse shift in the SRAS

35. Suppose the economy is experiencing a recession as illustrated in the

figure 9. In order to close a deflationary gap, aggregate demand
should …………………......, leading to a …………..………… real output,
corresponding to the ………..……………….. output, as reflected by the
…………………………
a) increase, higher, potential, LRAS;
b) decrease, lower, potential, SRAS;
c) increase, higher, better, SRAS;
d) increase, lower, potential, LRAS.
Average ADp LRAS

Price SRAS
Level AD
Pe1
Peo
Ye0 Yp Level of output
Figure 9. A recessionary gap

Applications 113
36. Consider an economy that experiences an inflationary gap as

illustrated by the figure 10. In this case, we expect:
a) employment to be higher than its natural rate;
b) unemployment to be higher than its natural rate;
c) unemployment to be zero;
d) unemployment to be lower than its natural rate.
Average LRAS
Price SRAS
Level AD
ADp
Pe0
Pe1
Figure 10. An inflationary gap
37. In the figure 10, in order to close the inflationary gap, aggregate
demand should shift ……………………….., leading to a ………………………
real output, the one corresponding to the ……………………………………….
a) downward, lower, long run equilibrium;
b) upward, higher, short run equilibrium;
c) downward, lower, economic growth.
d) upward, higher, long run equilibrium.
38. Suppose an economy that is producing on the inelastic SRAS and

experiencing an increase in prices (as shown in the graph no. 11).
Which of the following factors is not likely to have caused such a
change?
a) an increase in the marginal propensity to consume;
b) a higher optimism of the investors;
c) an appreciation of the national currency;
d) a depreciation of the national currency.
Average AD1
Price SRAS
Level AD0
Pe1
Pe0
Y Level of output
Figure 11. A rightward shift of AD

in the classical range of the SRAS
Applications 115
39. Suppose an economy experiencing inflation induced by a

demand-side shock as illustrated in the graph above (see figure 11).
In order to avoid the inflationary pressure as shown by the increase in
the average level of prices from Pe0 to Pe1:
a) the SRAS curve should shift to the right;
b) the SRAS curve should shift to the left;
c) the AD curve should shift to the left;
d) the AD curve should remain constant.
40. Suppose an economy where banks are offering cheaper loans for
consumption. The effect on the real output will be highest when:
a) consumers are buying more imported goods;
b) the economy is producing at its potential level;
c) prices are relatively constant;
d) no prediction can be made about the effect on the production.
12. The Influence of Monetary

and Fiscal Policy on the Aggregate
Demand
1. Any policy measure can have an operational lag.
2. On the short run, fiscal policy influences aggregate demand while

monetary policy influences aggregate supply.
3. The theory of liquidity preference explains how changes in the money

supply can affect the interest rates.
4. The crowding in reflects a situation with the opposite effect of the

crowding out.
5. Automatic stabilizers are instruments that would lead to lower

amplitudes of aggregate demand shocks.
6. The Keynesian model assumes rigid price whereas the Marshallian

model assumes flexible prices.
7. Fiscal policy can influence both the aggregate demand and the
aggregate supply.
8. Monetary policy can be used to influence the aggregate demand.
9. The long run aggregate supply is the result of the short run
equilibriums.
10. There is no such thing as a natural output for the economy.

Applications 117
1. Suppose that the NBR (Romania’s Central Bank) decreases the

money supply. As a result, in the short-run we would expect :
a) investment, real output, and the price level to be lower;
b) investment is higher, real output and the price level to be lower;
c) investment and real output to remain unchanged, and the price

level to be lower;
d) investment, real output, and the price level are to be all higher;
Hint! Try to use the shifts in demand in the Marshallian cross model
as suggested in figure no. 12.
Prices AD0 SRAS
AD1
P2 E0
P1 E1
Y
Ye1 Ye0 Output
Figure 12
2. Suppose Government decide a consumption tax decrease. In the short-

run:
a) aggregate demand shifts left, the price level falls, and real output
falls;
b) aggregate demand shifts right, the price level rises, and real
output rises;
c) aggregate supply shifts right, the price level falls, and real output
decline;
d) aggregate supply shifts left, the price level rises, and real output
falls.
Hint! Try to use the shifts in demand in the Marshallian cross model
as suggested in figure no. 12.
Prices AD1 SRAS
AD0
P1 E1
P0 E0
Y
Ye0 Ye1 Output
Figure 13
Applications 119
3. When the central bank decides to sell bonds in the open market, we
expect:
a) a demand side shock with no effect on the output;
b) a supply side shock with no effect on the output;
c) a demand side shock and no effect on output if supply is perfectly
inelastic;
d) a supply side shock and no effect on the output if demand is
perfectly elastic.
4. A decision by the US Government to increase its spending by

50 billion would have the largest impact on the aggregate demand in
the US if financed by selling bonds to:
a) US banks;
b) US insurance companies;
c) the Fed;
d) the general public.
5. Which of the following best describes Ricardian equivalence?

a) budgetary policy has a clear impact on the aggregate demand,
with a one to one increase in deficit spending and increase in the
aggregate output;
b) budgetary policy has a clear impact on the aggregate demand,
with a one euro increase in deficit spending and more than one
euro increase in aggregate demand;
c) individuals with rational expectations would increase their
spending when governments announce taxes cuts;
d) deficit-financed increase in government spending will not lead to
an increase in aggregate demand.
6. If a country has a government primary surplus, then:

a) its budget balance is positive;
b) its budget balance is negative;
c) its debt-to-GDP ration will decrease;
d) it no longer pays interest for borrowings.
7. A GDP gap measures:

a) the difference between a nation’s highest and lowest output rate
over the business cycle;
b) the difference between a nation’s actual output and estimated
potential output at any particular point in time;
c) the difference between a nation’s aggregate demand and
aggregate supply.
d) the difference between a nation’s current output and the output
corresponding to a reference year.
8. Which of the following is not an indirect tax:

a) the VAT;
b) the Tax on Global Income;
c) excises;
d) custom duties.
9. Which of the following forms of financing budgetary deficits has the

highest inflationary effect?
a) foreign credits;
b) domestic borrowings;
c) printing money;
d) increased taxation.
Applications 121
10. Which of the following is not a direct tax:

a) the corporate tax;
b) the taxes on Wages;
c) the VAT;
d) the tax on the global income.
11. What budgetary policy can be used in the recession phase of the
business cycle?:
a) increasing the public purchases;
b) increased taxation;
c) “freezing” prices;
d) lowering the interest rate.
12. When total revenue is greater that the public expenditure, then:
a) there is a budgetary deficit;
b) there will be a reduction of the public debt;
c) there will be an increased public debt;
d) the state could lend money to foreign countries.
13. When the total revenue to the state budget is lower than the total
expenditure from the budget then:
a) there is a budget surplus;
b) the public debt decreases;
c) there is an increase in the public debt;
d) the government must reduce taxation in order to bring the budget
in equilibrium.
14. A budget deficit will:

a) discourage the production on the short run;
b) encourage production in the short run;
c) stimulate the economy on the long run;
d) help reduce the public debt.
15. A reduction in the budget deficit is also called:

a) fiscal contraction;
b) fiscal consolidation;
c) fiscal policy;
d) a and b.
16. An increased taxation will lead to (ceteris paribus):

a) lower tax evasion;
b) narrower underground economy;
c) lower budget deficit;
d) increase in the disposable income of economic agents.
17. Lower taxation will lead to:

a) lower investment;
b) increased unemployment;
c) lower public debt;
d) increased disposable income of the economic agents.
18. Which of the following is a clear example of automatic stabilizers?

a) public transfer payments;
b) a progressive rate of taxation;
c) the accelerator coefficient;
d) a and b.
Applications 123
19. An expansionary fiscal policy will determine:

a) a shift to the left of the IS curve, causing Y and r to increase in the
short run if prices are variable;
b) no change in the potential output and higher inflation in the long run;
c) a shift to the right of the IS curve, causing Y and r to decrease in
the short run;
d) a and b;
e) b and c.
20. The government decides to use fiscal policy measures in order to

close the inflationary gap illustrated by the figure 14. Which of the
following cannot be taken into account as an adequate measure?
a) diminishing a part of the public transfers;
b) cutting budgetary expenditure;
c) cutting taxation;
d) cutting subsidies to farmers.
Average LRAS
Price SRAS
Level AD0
AD1
Pe0
Pe1
Figure 14. An inflationary gap

21. In the figure 14, in order to close the inflationary gap, aggregate
demand should shift ……………………….., leading to a ………………………
real output, the one corresponding to the ……………………………………….
a) downward, lower, long run equilibrium;
b) upward, higher, short run equilibrium;
c) downward, lower, economic growth.
d) upward, higher, long run equilibrium.
22. Consider an economy experiencing a recession as illustrated by figure

15. Stimulating aggregate via increased budget deficits can have as an
adverse effect:
a) an recessionary bias, as the LRAS is perfectly elastic;
b) higher unemployment;
c) an inflationary pressure, moving the prices from Pe0 to Pe1;
d) social tensions when redistributing the extra money via public
transfers.
Average AD1 LRAS

Price SRAS
Level AD0
Pe1
Peo
Figure 15. A recessionary gap

Applications 125
23. In an economy C = 200+0.8Yd; G=350; I=250; X=250; M=150+0.1Y

and the flat rate of taxation is 25%. If the potential output is 2000,
then in order to bring the output to its long-run trend:
a) G should increase by 100 to close the GDP gap of 200;
b) T should decrease by 100 to close the GDP gap of 200;
c) G should increase by 50 to close the GDP gap of 100;
d) G should decrease by 50 to close the GDP gap of 100.
Hint! You want first to determine the GDP gap and then the
inflationary/recessionary gap. The change in public purchases should
bring the aggregate demand to its potential level. Start from the
equilibrium condition: ∆Y=k*∆A, where Y is the level of output and A is
the autonomous part of the aggregate demand (the one not depending
on output, which includes autonomous consumption, investment, public
purchases, export and so on).
24. The actual GDP is 110 billion and the potential output is 100 billion.
The marginal propensity to consume from the disposable income is
75% and the rate of taxation is 20%. In this case, in order to close the
existing gap, the government should:
a) increase public purchase by 10 billion;
b) decrease public purchase by 10%;
c) decrease public purchase by 4 billion;
d) increase public purchase by 4%.
Hint! Recall that Y=k*A, where k is the government purchases multiplier

and A is the autonomous part of the aggregate expenditure.
Consequently, ∆Y=k*∆A. Also recall that government purchases are
autonomous, so they will directly influence the aggregate expenditure.
25. A change in the aggregate demand due to an increase in government

purchases when the economy is in equilibrium on the perfectly
inelastic short run aggregate supply (SRAS) will determine:
a) an increase in the output;
b) a decrease in the national income;
c) a decrease in the average level of prices and an increase in output;
d) an increase in the average level of prices but no effect on output.
26. Suppose the same economy illustrated by the same relations:

C=250+0.5Yd, I=150-1000i, G=150, T=100, (M/P)d=4Y-8000i, but
the central bank decides to increase money supply from 1600 to
2000. The change in the equilibrium output and the new interest rate
will be:
a) ∆Y=+700, i=0.35;
b) ∆Y=+50 , i= 0.125;
c) ∆Y= -50, i= 0.15;
d) ∆Y= +750, i=0.125.
27. The crowding out effect shows that when budget deficits are financed
via borrowings from the domestic market for loanable funds, then we
expect the interest rate to:
a) stay constant, leading to a multiplied effect on the output;
b) increase, discouraging private investment;
c) decrease, encouraging investment;
d) be higher than the inflation rate.
28. A budgetary surplus when the economy is in equilibrium at a level of

output corresponding to the perfectly inelastic short run aggregate
supply will lead to:
a) an increase in output and the average level of prices;
b) a reduction of the inflation;
c) a lower output and hyperinflation;
d) stagflation.
Applications 127
29. An expansionary fiscal policy will determine:

a) a shift to the right of the IS curve and, hence, an increase in the
aggregate demand;
b) a shift to the left of the IS curve and, hence, a decrease in the
aggregate demand;
c) a shift to the right of the IS curve and, hence, a decrease in the
aggregate demand;
d) a shift to the left of the IS curve and, hence, an increase in the
aggregate demand.
30. An expansionary monetary policy will determine:

a) a shift to the right of the LM curve and, hence, an increase in the
aggregate demand;
b) a shift to the left of the LM curve and, hence, a decrease in the
aggregate demand;
c) a shift to the right of the LM curve and, hence, a decrease in the
aggregate demand;
d) shift to the left of the LM curve and, hence, an increase in the
aggregate demand.
31. If the economy is experiencing a downturn and the government

decides to increase the governmental purchases, this will determine:
a) a reduction of the budget deficit;
b) a restrictive fiscal policy;
c) a reduction of the crowding out;
d) none.
32. A tight fiscal policy will lead to:

a) a shift to the right of the IS curve, causing an increase in both the
output and the equilibrium interest rate;
b) a shift of the LM curve to the right, causing an increase in output
and a lower interest rate;
c) a shift to the left of the IS curve, causing a decrease in both the
output and the equilibrium interest rate;
d) a shift to the left of the LM curve, causing a higher interest rate
and a lower output.
33. Adjusting the recessionary gap using demand side policies will
determine:
a) a higher money demand for transaction purposes;
b) a lower money demand;
c) a higher unemployment;
d) a reduction of the real output.
34. A move from direct to indirect taxation

a) increases the overall progressivity of the tax;
b) decreases the overall progressivity of the tax;
c) enlarges the corporate tax base;
d) would imply lower VAT rates but higher excise-duty rates.
35. A large twin deficit in an open economy, that is a high current

account and general budget deficit:
a) is very frequently encountered in catching up economies;
b) normally exerts a downward pressure on the nominal exchange
rate;
c) normally exerts an upward pressure on the nominal exchange
rate;
d) does not influence the nominal exchange rate, but the real
exchange rate.
36. The output gap captures the difference between:

a) a nation’s output and the best performer output in an economic
union expressed in m.u. in one year;
b) actual output and estimated potential output at a specified point
in time;
c) the lowest and the highest output growth rate of a national
economy over a 10 year’s time span;
d) a nation’s lowest and highest output over the business cycle
expressed in m.u.
Applications 129
37. The changes in fiscal policy that stimulate aggregate demand when
the economy goes into a recession, without policy makers having to
take any deliberate action are know as:
a) automatic stabilizers;
b) non-keynesian effects;
c) discretionary policy instruments;
d) crowding-in instruments.
38. Suppose an adverse shock of the short-run aggregate supply
presented in the figure 16. In order to bring the economy to the long
run equilibrium, the central bank will:
a) increase in the minimum reserve requirements, helping
companies retain profit and, thus, leading to a higher investment
represented by the rightward shift of the aggregate demand;
b) increase the money supply, leading to cheaper credits, stimulating
investment and shifting aggregate demand to the right;
c) decrease the money supply to force companies become more
efficient, which would increase in the interest rate and drive
prices up, from P0 to P2;
d) sell bonds in the open market, thus giving more money for
government purchases and driving aggregate demand up.
Prices AD1 LRAS SRAS1
SRAS0
AD0
P2
P1
P0
Y
Ye2 Ye0 Ye1 Output
Figure 16
39. Suppose Romania’s economy is producing at its potential level. In an

electoral year, the indexation of pensions and increasing the salaries
of employees from non-tradable sector would lead to:
a) a better use of all available resources;
b) higher NAIRU;
c) higher prices;
d) a better governance.
40. Which of the following is not true about impounding?

a) it is a fiscal policy measure;
b) it is a expansionary policy measure;
c) it allows surplus funds to stay idle, thus extracting and
withholding purchasing power from the economy;
d) is more contractionary than the use of the surplus to retire public
debt.
Applications 131
13. The Short-Run Tradeoff between

Inflation and Unemployment.
The Phillips Curve
1. The original Phillips curve is the negative relation between

unemployment and inflation first observed in the USA.
2. The original Phillips curve relation has proven to be very stable across
countries.
3. The original Phillips curve relation has proven to be very stable over
time.
4. Policy makers can only exploit this inflation-unemployment trade-off

temporarily.
5. We may experience either high inflation, or high unemployment, but

we will never experience both together.
6. The natural rate of unemployment is constant for a given country.
7. In the late 1960’s, Milton Friedman said that policy makers could
achieve as low a rate of unemployment as they wanted.
8. The short-run Phillips curve is a downward sloping curve.
9. Edmund Phelps won the Nobel prize in economics for his work
related the natural rate of unemployment.
10. On the long run, Phillips curve has a zero slope.

1. If the economic agents correctly anticipate inflation, the Phillips

curve on the long run will be:
a) a horizontal line;
b) an L shaped curve;
c) an U shaped curve;
d) a vertical line;
2. Which of the following will lead to a shift to the left of the Phillips
Curve?:
a) an increase in the natural rate of unemployment, ceteris paribus;
b) an increase in unemployment;
c) an increase of the inflation rate;
d) a decrease in the expected inflation, ceteris paribus;
e) an increased inflation and a reduced unemployment.
3. Which of the following could be the reason for which the Phillips
Curve did not prove valid in the 1970’s?:
a) the significant variation of the expected inflation;
b) the significant variation of the natural unemployment rate;
c) a relatively constant expected inflation rate and natural rate of
unemployment;
d) the low inflation rate.
4. The long-run Phillips curve: :

a) has a negative slope, showing a trade off between inflation and
unemployment;
b) shows that higher nominal wages can increase employment;
c) takes the shape of a vertical line showing the neutrality of money
in the long run;
d) takes the L shape showing the non-neutrality of money.
Applications 133
5. The Phillips curve is actually another expression of the aggregate

supply equation that is expressed like:
a) NRU = Unemployment rate – a*(Expected inflation – Actual
inflation);
b) NRU = Unemployment rate – a*(Actual inflation–Expected
inflation) ;
c) Unemployment rate = NRU – a*(Expected inflation – Actual
inflation);
d) Unempoyment rate = NRU – a*(Actual inflation–Expected
inflation);
6. Expansionary policy moves the economy up along the short run

Phillips curve but, in the long run:
a) expected inflation rises and the short run Phillips curve shifts to
the right;
b) expected inflation diminishes and the short run Phillips curve
shifts to the left;
c) expected inflation rises and the short run Phillips curve shifts to
the left;
d) expected inflation diminishes and the short run Phillips curve
shifts to the right.
7. The higher the expected rate of inflation:

a) the higher is the short run trade-off between inflation and
unemployment;
b) the lower is the short run trade-off between inflation and
unemployment;
c) the bigger will be the output;
d) the lower will be the nominal salary.
8. The view according to which unemployment eventually returns to its

natural rate, regardless of the rate of inflation is called:
a) the natural-rate hypothesis;
b) effectiveness of the aggregate demand management;
c) crowding-in effect;
d) the Ballasa-Samuelson Effect.
9. Which of the following is a strong argument for Central Bank

Independence?
a) the fact that there is a short-run trade-off between inflation and
unemployment;
b) the fact that there is no long-run trade off between inflation and
unemployment;
c) the fact that the governor is a human being that can make
mistakes;
d) the fact that the government cannot influence inflation.
10. Which of the following factors can lead to a shift to the right of the
short-run Phillips curve:
a) people having higher inflation expectations;
b) a higher price in the world market for oil;
c) an increase in the total unemployment ;
d) a and b.
11. An event that directly alters firm’s costs and prices, shifting the
economy’s aggregate supply and thus, Phillips curve is called:
a) hysteresis;
b) Phillips effect;
c) Fisher effect;
d) supply shock.
Applications 135
12. An adverse shift in the SRAS:

a) gives policy makers a less favorable trade-off between
unemployment and inflation;
b) gives policy makers a more favorable trade-off between
unemployment and inflation;
c) is desirable for the central banker, as it can accommodate the
supply side shock easer;
d) none of the above.
13. Contractionary policy moves the economy …………………… along the

……………………………. Phillips curve, but in the ………………………….,
expected inflation falls, and the sort-run Phillips curve shifts to the
…………………………………….. :
a) down, short-run, long-run, left;
b) up, short-run, long-run, right;
c) down, long-run, short-run, left;
d) down, short-run, short run, right.
14. The theory according to which people optimally use all the
information they have, including information about government
policies, when forecasting the future is known as :
a) the Phillips curve;
b) the rational expectations theory;
c) Thatcher hypothesis ;
d) the adaptive expectations theory.
15. The sacrifice ratio is :
a) the number of percentage points of annual output lost in the

process of reducing inflation by 1 percentage point;
b) the number of percentage points of unemployed due to the

reduction of inflation by 1 percentage point;
c) the number of percentage points of inflation needed to decrease

unemployment rate by 1 percentage point;
d) the number of percentage points from to be paid extra to the

nominal salary in the case of inflation so that the purchasing
power of employees is not affected.
16. The Phillips curve is yet another way of illustrating:
a) the IS-LM model;
b) shifts in the aggregate supply model considering flexible prices;
c) the equilibrium in the labor market;
d) the difficulty of the macroeconomic stabilization.
17. The Phillips curve in its modern form states that the inflation rate
depends on three forces. Which of the following is not one of the
three?
a) expected inflation;
b) the deviation of unemployment from its natural rate;
c) aggregate supply shocks;
d) aggregate demand shocks.

Applications 137
18. The three forces that influence the inflation rate can be expressed
using the Phillips curve in the following equation:
a)    e   (u  u n )   ;
b)  e     (u  u n   ) ;
c)    e  (u  u n ) ;
d)    e  u  un .
Where  is the actual inflation,  is the expected inflation, u  u
e n
is the cyclical unemployment and  is a shock in the supply.
19. The aggregate supply equation can be written as:

1
a) P  Pe  (Y  Yp) ;

1
b) Pe  P  (Y  Yp) ;

1
c) P  Pe  Yp ;

1
d) P (Y  Yp) .

20. Hysteresis is a term used by economist to describe:

a) the long-lasting influence of history on the natural rate;
b) a controversial theory showing that recessions can have
permanent effects if it changes the people who became
unemployed;
c) a theory that helps explain persistently high unemployment in
Europe;
21. Suppose an economy that has a Phillips curve described by
   e  0.7(u  0.1)   From this equation, we can deduce that

the natural unemployment for this economy is estimated to:
a) 7%;
b) 0.7%;
c) 10%;
d) 0.1%.
22. Suppose an economy described by the following Phillips curve
   e  0.5(u  0.06)   . If the inflation if running at 8%, how

much cyclical unemployment will be needed to reduce it to 5%?
a) 10%;
b) 8%;
c) 12%;
d) 6%.
   e  0.5(u  0.1)   . Currently, the economy is running at an

inflation rate of 10%. How much will inflation rate be if the cyclical
unemployment will increase from 4% to 8%:
a) 11%;
b) 8%;
c) 12%;
d) 6%.
Applications 139

   e  0.5(u  0.06)   . If the inflation if running at 8%, how
much cyclical unemployment will be needed to reduce it to 5%?
a) 10%;
b) 8%;
c) 6%;
d) 12%.
25. An expansionary policy measure moves the economy up along the

short-run Phillips curve, but in the long run:
a) expected inflation increases, and the short-run Phillips curve

shifts to the right;
b) expected inflation increases, and the short-run Phillips curve

c) expected inflation increases, and the short-run Phillips curve

d) expected inflation increases, and the short-run Phillips curve

shifts to the right.
14. European Monetary Union
1. USA is a federation, while European Union is a only a custom union.
2. An optimum currency area is a space where different national

currencies as freely exchanged at floating rates.
3. Broadly speaking, a custom union is a free trade agreement with a

common tariff.
4. A monetary union needs not necessarily imply a common monetary

policy, but only a common currency accepted by all member states.
5. By instituting a monetary board, a country loses its right to

segniorage.
6. The greater the amount of trade between a group of countries, the

less they will benefit from adopting a common currency.
7. The single European currency officially came into existence on 1

January 1999.
8. “EMU” stands for “European Monetary Union”.
9. The Stabiliy and Growth Pact was adopted in order to avoid the
possible free-rider problem that arises in fiscal policy in a currency
union.
10. The Euro-Area is probably not at present an optimum currency area.

Applications 141
1. Which of the following is not considered a benefit of a Single

Currency:
a) elimination of transaction costs;
b) reduction in price discrimination;
c) reduction in foreign exchange rate variability;
d) unavailability of the monetary policy as a policy instrument at
national level.
2. A group of countries for which it is optimal to adopt a common

currency and for a currency union forms what economists call:
a) an optimum currency area;
b) a monetary union;
c) an economic and monetary union;
d) Eurozone.
3. The Stability and Growth Pact refers to:

a) a set of informal rules agreed by the Member States of the
Eurozone;
b) a set of formal rules agreed by the Member States of the EU;
c) a set of formal rules that only applies to the Schengen states;
d) a set of formal rules agreed by the Member States of the
Eurozone.
4. How many countries are currently members of the Eurozone?

a) 12;
b) 13;
c) 15;
d) 27.
5. Which of the following are not members of the Eurozone:

a) Slovenia, UK, Irland;
b) Romania, Sweden, Malta;
c) UK, Sweden, Denmark;
d) France, Malta, Cyprus.
6. Which of the following groups of countries are Eurozone members:

a) Slovenia, Malta, Cyprus;
b) France, Greece, Spain;
c) France, Germany, Italy;
7. Once a member of the Eurozone, a member state should comply with

the conditions foreseen by:
a) the Copenhagen criteria;
b) the Stability and Growth Pact;
c) the Maastricht criteria;
d) the convergence criteria.
8. Some economists have proposed that central banks should use the
following rule for choosing its target interest rate (r):
r  2%  p  1 / 2( y  y*) / y * 1 / 2( p  p*) , where p is the
agerate of the inflation rate of past year, y is the real GDP as recently
measured, y* is an estimate of the natural rate of output and p* is the
central bank’s target rate of inflation. This kind of rule relating the
target interest-rate to the output gap and the deviation of inflation
from its target is called:
a) the Fischer effect;
b) the Taylor rule;
c) inflation targeting;
d) monetary targeting.
9. A country that wants to adopt the Euro must fulfill the so-called:
a) Copenhagen criteria;
b) Maastricht criteria;
c) SGP conditions;
d) no condition is required, but all existing member states should
unanimously vote yes to accepting the candidate.
Applications 143
10. Which of the following is true for the European Central Bank?
a) is has a twofold mandate of maintaining price stability and
fostering economic growth;
b) is has a dual mandate of maintaining price stability and fostering
employment;
c) is has a primary mandate to maintain price stability and, without
prejudice to this, to support the economic policies of the
European Community;
d) its objectives are decided jointly by the European Parliament and
the Ecofin Council in the first session of October each year for the
next year.
11. Which of the following is not a precondition for an optimum currency

area?
a) labor mobility;
b) capital mobility and price and wages flexibility;
c) an automatic fiscal transfers mechanism;
d) a flat rate of taxation.
12. Which Nobel Prize winner in economics was awarded this distinction
for his work on the theory of the optimum currency area?
a) Edmund Phelps;
b) Milton Friedman;
c) Maurice Allais;
d) Robert Mundell.
13. Which of the following would best define a common currency area?
a) a geographical area throughout which a single currency circulates
as a medium of exchange;
b) a group of countries that are part of a common market;
c) a group of economies which are signatories of a free trade
agreement;
d) a geographical area where there are no barriers to the exchange of
the different national currencies.
14. How many countries are currently Members of the European Union:
a) 6;
b) 12;
c) 25;
d) 27.
15. The major cost to an economy in joining a common currency area

relates to:
a) giving up its national currency, hence giving up its possibility to
use monetary policy as a tool of macroeconomic adjustment;
b) giving up its national stronger currency for a common weaker
currency;
c) giving up is national symbols and hence sovereignty;
d) there is no major cost to an economy joining a common currency
area.
16. One of the main arguments against the European Union being an
optimum currency area refers to:
a) the existence of asymmetric shocks;
b) the existence of capital mobility;
c) low labor mobility;
d) the existence of symmetric shocks.
17. The key characteristics of an optimum currency area do not refer to:
a) a high degree of trade integration;
b) real wage flexibility;
c) financial capital mobility;
d) nominal wage flexibility.
18. Which one is not among the convergence criteria?:

a) low inflation;
b) sound public finances;
c) functioning market economy;
d) low interest rates.
Applications 145
19. The European Central Bank has its headquarters in:

a) Frankfurt am Main, Germany;
b) Strasbourg, France;
c) Brussels, Belgium;
d) Maastricht, the Netherlands.
20. Which of the following is considered “the father” of the common

currency in the European Union:
a) Pierre Werner;
b) Jacques Delors;
c) Maurice Allais;
d) Milton Friedman.
21. Which of the following best corresponds to the concept of fiscal

federalism:
a) a fiscal system for a group of countries involving a common
currency;
b) a fiscal system for a group of countries involving a common fiscal
budget and a system of taxes and fiscal transfers across countries;
c) a fiscal system for a group of countries involving a common
budget spend in all member states;
d) a fiscal system for a group of countries with a general budget and
national budgets.
22. Can the European Union be considered a system of fiscal federalism:

a) yes, because it has a common Budget, with revenues and
expenditures coming from and flowing to all member states;
b) yes, because it has both a common currency and a common
Budget;
c) no, because although it has a common Budget, there is no
common system of taxes and fiscal transfers across countries;
d) no, because not all the countries are members to the Eurozone.
23. Which is the best definition of the Single European Market?

a) a customs union throughout which labor, capital, goods and
services can move freely;
b) a free trade agreement with free movement of capital;
c) a regional form of integration with free movement of goods,
services, capital and labor and a system of common external
tariffs implemented against countries which are not members of
the SEM;
d) both a and c.
24. When a country experiences a Balassa-Samuelson effect, we can

conclude that, all others being constant:
a) the higher inflation it registers compared to other countries will
not have any negative effects on its trade balance;
b) the nominal exchange rates will continue to increase;
c) the prices in the tradable goods sector and the prices in the
non-tradable goods sector have converged;
d) the inflation will spill over the lower inflation countries in the
European Union.
25. Which of the following is not a necessary precondition for a group of

countries to form an optimum currency area as defined by Mundell?
a) an automatic mechanism of fiscal transfers between the
members;
b) low levels of budget deficits for the member states;
c) full mobility of labor between the regions;
d) full capital mobility between the regions.
Applications 147
PART II
– Solutions –
Applications 149
1. Measuring a Nation’s Income
True & False
1. F; 2. F; 3. T; 4. T; 5. T; 6. F; 7. T; 8. T; 9. F; 10. F.
1. d 16. b
2. a 17. a
3. c 18. b
4. d 19. a
5. d 20. d
6. c 21. c
7. a 22. c
8. d 23. a
9. a 24. a
10. c 25. d
11. b 26. c
12. c 27. b
13. a 28. c
14. d 29. b
15. d 30. c
2. Measuring the Cost Of Living
1. T; 2. T; 3. T; 4. T; 5. F; 6. F; 7. T; 8. T; 9. T; 10. T.
1. c 14. c
2. a 15. c
3. d 16. d
4. b 17. a
5. d 18. a
6. a 19. c
7. d 20. a
8. d 21. c
9. b 22. b
10. a 23. c
11. a 24. c
12. d 25. b
13. b
Applications 151
3. Production and Growth
True & False
1. F; 2. T; 3. T; 4. T; 5. F; 6. T; 7. F; 8. T; 9. F; 10. T.
1. d 14. d
2. b 15. d
3. c 16. d
4. d 17. a
5. d 18. c
6. a 19. a
7. d 20. c
8. b 21. c
9. a 22. b
10. a 23. c
11. d 24. b
12. a 25. c
13. a
4. Saving, Investment,
and the Financial System
1. F; 2. T; 3. F; 4. T; 5. F; 6. T; 7. F; 8. T; 9. T; 10. T.
1. d 14. a
2. c 15. b
3. b 16. a
4. d 17. c
5. c 18. b
6. b 19. a
7. d 20. d
8. a 21. c
9. b 22. a
10. b 23. d
11. c 24. c
12. c 25. a
13. d
Applications 153
5. The Basic Tools of Finance
1. T; 2. F; 3. F; 4. T; 5. F; 6. T; 7. F; 8. F; 9. F; 10. T.
1. b 14. b
2. c 15. c
3. a 16. d
4. d 17. b
5. d 18. d
6. c 19. d
7. c 20. a
8. a 21. b
9. c 22. b
10. c 23. a
11. a 24. b
12. b 25. a
13. c
6. Unemployment and Its Natural Rate
True & False
1. T; 2. T; 3. T; 4. T; 5. F; 6. F; 7. T; 8. T; 9. F; 10. F.
1. c 14. c
2. b 15. a
3. b 16. d
4. c 17. d
5. d 18. c
6. a 19. c
7. d 20. a
8. d 21. c
9. b 22. b
10. a 23. c
11. a 24. c
12. c 25. d
13. d
Applications 155
7. The Monetary System
1. T; 2. T; 3. T; 4. F; 5. F; 6. T; 7. T; 8. T; 9. T; 10. F.
1. b 14. d
2. c 15. c
3. d 16. a
4. c 17. a
5. c 18. b
6. a 19. a
7. b 20. c
8. d 21. d
9. a 22. d
10. c 23. a
11. b 24. c
12. a 25. c
13. d
8. Money Growth and Inflation
1. T; 2. T; 3. F; 4. T; 5. T; 6. T; 7. F; 8. T; 9. T; 10. T.
1. c 14. c
2. c 15. b
3. b 16. a
4. a 17. d
5. d 18. b
6. b 19. c
7. a 20. c
8. d 21. c
9. c 22. c
10. b 23. d
11. d 24. c
12. c 25. a
13. a
Applications 157
9. Open Economy
Macroeconomics -
Basic Concepts
1. F; 2. F; 3. T; 4. F; 5. F; 6. T; 7. F; 8. F; 9. T; 10. T.
1. c 14. d
2. c 15. d
3. d 16. a
4. d 17. d
5. b 18. c
6. d 19. c
7. b 20. d
8. a 21. a
9. d 22. c
10. d 23. b
11. c 24. d
12. b 25. a
13. a
10. A Macroeconomic Theory of the Open

Economy
1. T; 2. F; 3. T; 4. T; 5. T; 6. F; 7. F; 8. F; 9. T; 10. F.
1. d 14. b
2. a 15. d
3. d 16. a
4. c 17. c
5. b 18. c
6. d 19. c
7. b 20. c
8. a 21. b
9. d 22. a
10. c 23. b
11. a 24. c
12. a 25. d
13. a
Applications 159
11. Aggregate Demand and Aggregate Supply
1. T; 2. F; 3. T; 4. T; 5. F; 6. T; 7. F; 8. T; 9. T; 10. T.
1. c 21. d
2. c 22. a
3. b 23. a
4. d 24. a
5. a 25. c
6. b 26. c
7. d 27. a
8. b 28. d
9. c 29. d
10. d 30. d
11. a 31. c
12. b 32. d
13. c 33. b
14. c 34. b
15. d 35. a
16. c 36. d
17. b 37. a
18. a 38. c
19. d 39. c
20. b 40. c
12. The Influence of Monetary and Fiscal

Policy on the Aggregate Demand
True & False Questions:
1. T; 2. F; 3. T; 4. T; 5. T; 6. T; 7. T; 8. T; 9. T; 10. F.
1. a 21. a
2. b 22. c
3. c 23. a
4. c 24. c
5. d 25. d
6. a 26. b
7. b 27. b
8. b 28. b
9. c 29. a
10. c 30. a
11. a 31. d
12. b 32. c
13. c 33. a
14. b 34. b
15. d 35. c
16. c 36. b
17. d 37. a
18. d 38. b
19. b 39. c
20. c 40. b
Applications 161
13. The Short-Run Tradeoff between

Inflation and Unemployment.
The Phillips Curve
1. F; 2. F; 3. F; 4. T; 5. F; 6. F; 7. T; 8. T; 9. T; 10. F.
1. d 14. b
2. d 15. a
3. c 16. b
4. c 17. d
5. d 18. a
6. a 19. a
7. a 20. d
8. a 21. c
9. b 22. d
10. d 23. b
11. d 24. d
12. a 25. a
13. a
14. European Monetary Union
1. F; 2. F; 3. T; 4. F; 5. T; 6. F; 7 T; 8. F; 9. T; 10. T.
1. d 14. d
2. a 15. a
3. d 16. c
4. c 17. d
5. c 18. c
6. d 19. a
7. b 20. a
8. b 21. b
9. a 22. c
10. c 23. d
11. d 24. c
12. d 25. b
13. a
Applications 163
Bibliography
1. Mankiw, N. Gregory Economics, Thomson Learning,

Taylor, Mark P. London, 2006
2. Mankiw, N. Gregory Macroeconomics, European

Taylor, Mark P. Edition, Worth Publishers, 2008
3. Blanchard, Olivier Macroeconomics, 4th edition,

Pearson Prentice Hall, 2007
4. McConnell, Campbell Economics. Principles, Problems,

Brue, Stanley R. and Policies, 13th edition,
McGraw-Hill, 1996
5. Dolan, Edwin G. Economics, 5th ed., The Dryden

Lindsey, David Press, New York, 1998

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ACADEMIA DE STUDII ECONOMICE DIN BUCUREŞTI

Gabriel STAICU Anisia POPESCU

Copyright © 2008, Editura ASE

Descrierea CIP a Bibliotecii Naţionale a României

For those who want to know how the world works,

Part I: Applications ................................................. 5

Part II: Solutions .................................................. 147

Part III: Some Applications Solved ........................... 162

1. Measuring a Nation’s Income

True & False Questions

2. GDP includes tangible goods, but not intangible services.

3. Net domestic product is calculated as the difference between GDP

4. The GDP deflator is determined as the ratio between nominal GDP

5. Because real GDP is not affected by changes in prices, changes in real

6. For an economy as a whole, income must be greater than

7. The study of inflation is a macroeconomic issue.

8. GDP is not a perfect measure of economic well-being because it

9. Net exports are the main component of GDP.

10. If a family buys a new house, this transaction is reflected in

Multiple Choice Questions

1. Macroeconomics is the study of:

2. Which of the following is an example of macroeconomic question:

3. Which of the following is false?

5. One of the following is not included in GDP:

6. Which of the following is false:

7. Which of the following items is an example of intermediate goods:

8. Let’s suppose that a car produced in 2001 is traded on the second-

9. Which of the following equations describes GDP:

10. The total income earned by a nation’s permanent residents

11. Net national product is:

12. Suppose that a Romanian citizen owns a factory in Bulgaria.

14. When the Romanian government buys a Boeing airplane, this

15. Which of the following is considered part of the transfer payments:

16. During 2006 on Plenty Island, consumption expenditure was

18. Which of the following describes accurately the difference between

19. The GDP deflator is calculated as follows:

20. The GDP deflator:

22. The nominal GDP in 2005 is (in $):

24. The GDP deflator in 2006 is (in %):

26. The GDP deflator in 2007 is (in %):

30. The total contribution of these transactions to GDP is (in $):

2. Measuring the Cost Of Living

True & False Questions

2. If the CPI is 175%, then the inflation rate is 75%.

6. The inflation rate is measured as the percentage change in the real

7. Indexation represents an automatic correction of an amount of

8. The real interest rate is calculated as the difference between the

9. Usually, the CPI tends to overstate the inflation.

Multiple Choice Questions

1. The consumer price index (CPI) is:

2. Which of the following is correct?

Consider a hypothetical economy in which consumers buy only two

Goods Milk Honey

3. The cost of the basket of goods in 2004, 2005, and respectively in

4. The CPI in 2004, 2005, and respectively in 2006 is (in %):

5. The inflation rate in 2005, respectively in 2006, is (in %):

7. Which of the following is true:

8. Identify the problems that occur in measuring the cost of living:

9. Suppose bananas are included in the Romanian consumer’s basket of

11. When the price of oil changes:

16. Which of the following is correct:

18. Which of the following is false:

19. The producer price index (PPI) is:

Macroeconomics - Staicu&Popescu

Macroeconomics - Staicu&Popescu