True/False

The high rate of unemployment in Europe started when a group of major European countries adopted a common currency.

False, European unemployment rates have been high for several decades, possibly from too much protection of workers.

The price of food is higher in poor countries than it is in rich countries.

False, Prices are lower in poor countries.

The overall real value of the stock market does not fluctuate very much over a year.

False, The stock market is very volatile.

World output growth recovered to its prerecession level after 2009.

False, although the output growth returned to a positive value, the level of output growth was lower after the 2009 recession.

The real money supply is constant along the LM curve.

False, as output rises, the demand for real money rises and the central bank must increase the supply of real money to keep interest rates constant.

All assets held for one year should have the same expected rate of return.

False, assets vary in risk.

All bonds have equal risk of default and thus pay equal rate of interest.

False, bonds vary significantly in terms of default risk.

Capital accumulation does not affect the level of output in the long run, only technological progress does.

False, capital formation cannot sustain growth alone but it does contribute to long-term growth.

The Federal Reserve can determine the money supply, but it cannot change interest rates.

False, except when the economy is in a liquidity trap. The federal reserve can do both.

Government spending including transfers, was equal to 18.1% of GDP in 2014.

False, government spending excluding transfers was 18.1% of GDP in 2014.

The term investment, as used by economists, refers to the purchase of bonds and shares of stock.

False, investment refers to the purchase of productive equipment.

Output growth was negative in both advanced as well as emerging and developing countries in 2009.

False, output growth dropped but did not achieve negative numbers in emerging markets.

In virtually all the countries of the world, output per person is converging to the level of output per person in the United States.

False, output per person is converging across many countries but most still lag far behind the U.S.

House prices have risen constantly since the year 2000.

False, prices fell significantly beginning in 2006.

Stock prices around the world fell between 2007 and 2010 and the recovered to the prerecession levels.

False, stock prices in emerging economies picked up but not in the US and Europe.

Interest rates in the United States were at or near zero from 2009 to 2015.

True

When a bank has leverage and low liquidity, it may have to sell assets at fire sale prices.

True.

If the nominal money supply rises from $400 billion to $420 billion and the price level rises from an index value of 100 to 102, the real money supply rises.

True. The nominal money supply rose by 10%. The price level rose by 2%. The ration M/P increased.

For about 1,000 years after the fall of the Roman Empire there was essentially no growth in output per person in Europe because because any increase in output led to a proportional increase in population.

True. This was called the Malthusian era.

The aggregate production function is a relation between output on one hand and labor and capital on the other.

True. Y=F(K,N)

The present discounted value of a stream of returns can be calculated in real or nominal terms.

True.

The rate of unemployment in the United Kingdom is much lower than in much of the rest of Europe.

True.

The yield curve generally slopes up.

True.

An increase in government spending leads to a decrease in investment in the IS-LM model.

An increase in government spending will lead to an increase in investment.

If government spending and taxes increase by the same amount, the IS curve does not shift.

False, the balanced budget multiplier is positive, so the IS curve shifts right.

The propensity to consume has to be positive, but otherwise it can take on any positive value.

False, the propensity to consume must be less than one for our model to make sense.

If the nominal money supply is $400 billion and the price level rises from an index value of 100 to an index value of 103; the real money supply rises.

False, the real money supply falls when the nominal money supply is constant and the price level rises.

The real borrowing rate and the real policy rate always move in the same direction.

False, there could be a change in the risk premium.

Income and financial wealth are both examples of stock variables.

False, wealth is a stock and income is a flow.

The IS curve is downward sloping because goods market equilibrium implies that an increase in taxes leads to a lower level of output.

False.

The equilibrium condition for the goods market states that consumption equals output.

False. Aggregate demand=aggregate output.

In a bubble the value of the asset is the expected present value of its future returns.

False. Bubbles are when prices are pushed above the expected present value of future returns.

One year interest rates are normally expected to be constant over time.

False. Interest rates change frequently as market conditions change.

An increase in the propensity to consume leads to a decrease in output.

False. It will lead to a decline in a multiplier, but higher C and Y in the current period.

The demand for money does not depend on the interest rate because only bonds earn interest.

False. Money demand describes the portfolio decision to hold wealth in the form of money rather than in the form of bonds. The interest rate on bonds is relevant to this decision.

An increase of one unit in government spending leads to an increase of one unit in equilibrium output.

False. The increase in equilibrium output is one times the multiplier. So output will increase by a factor of more than one.

China's seemingly high growth rate is a myth: it is a product of solely misleading official statistics.

False. There are problems wit statistics but the consensus is that growth in China has been high.

The central bank can increase the supply of money by selling bonds in the market for bonds.

False. This would decrease the money supply.

The largest component of GDP is consumption.

True

When expected inflation increases, the real rate of interest falls.

True if the nominal rate of interest does not change.

Indexed bonds protect the holder against unexpected inflation.

True, though there may be a lag in protection.

An increase in income (GDP) will always be accompanied by an increase in interest rates when the money supply is not increased.

True, unless in a liquidity trap.

A large proportion of U.S. currency appears to be held outside of the United States.

True.

An increase in a bank's leverage ratio tends to increase both the expected profit of the bank and the risk of the bank going bankrupt.

True.

As long as expected inflation remains roughly constant, the movements in the real interest rate are roughly equal to the movements in the nominal interest rate.

True.

Banks and other financial intermediaries have assets that are less liquid than their liabilities.

True.

Bond prices and interest rates always move in opposite directions.

True.

Fiscal policy describes the choice of government spending and taxes and is treated as exogenous in our goods market model.

True.

House Prices are a claim to a sequence of expected future rents over a number of years.

True.

If all the exogenous variables in the IS relation are constant, then a higher level of output can be achieved only by lowering the interest rate.

True.

It can be difficult to value assets of banks and other financial intermediaries, particularly in a financial crisis.

True.

On a logarithmic scale a variable that increases at 5% per year will move along an upward-sloping line with a slope of 0.05.

True.

One factor in the 2009 recession was a drop in the value of the parameter c0.

True.

Output per person is different in the Euro area, the United States, and China.

True.

Stocks are a claim to a sequence of dividend payments over a number of years.

True.

The Federal Reserve lowers interest rates when it wants to avoid recession and raises interest rates when it wants to slow the rate of growth in the economy.

True.

The LM curve is horizontal at the central bank's policy choice of the interest rate.

True.

The fiscal stimulus program adopted by the United States in response to the financial crisis helped offset the decline in aggregate demand and reduce the size of the recession.

True.

The fiscal stimulus program adopted by the United States included a large increase in the deficit measured as a percent of GDP.

True.

The higher the one-year interest rate, the lower the present discounted value of a payment next year.

True.

The main determinants of investment are the level of sales and the interest rate.

True.

The nominal interest rate is measured in terms of goods; the real interest rate is measured in terms of money.

True.

The nominal policy interest rate is set by the central bank.

True.

The nominal policy interest rate was at the zero lower bound in the United States in 2013.

True.