Macro-Economic Theory Final Exam (Villanova)

An increase of the real exchange rate in a small open economy could be the result of: a. a domestic tax increase b. an increase in the world interest rate c. a decrease in government spending d. an increase in government spending

An increase in government spending

If nominal wages cannot be cut, then the only way to reduce real wages is by: a. unions. b. adjustments via inflation. c. legislation. d. productivity increases.

adjustments via inflation.

If 4 Swiss francs trade for $1, the U.S. price level equals $1 for a good, and the Swiss price level equals 2 francs for the same good, then the real exchange rate between Swiss goods and U.S. goods is _____ Swiss good(s) per U.S. good. a. 1 b. 2 c. 3 d. 4

2

To follow a monetary policy rule, the central bank raises the nominal interest rate by: a. decreasing the money supply. b. increasing the gross domestic product (GDP) gap. c. decreasing inflation expectations. d. raising the inflation target.

decreasing the money supply.

The assumption that technological progress increases the efficiency of each unit of labor is called: a. endogenous technological progress. b. the efficiency-wage model of economic growth. c. labor-augmenting technological progress. d. the Golden Rule model of economic growth.

labor-augmenting technological progress.

Natural or Full-Employment Output is achieved when: a. the unemployment rate is zero. b. the cyclical unemployment rate is zero. c. the cyclical unemployment rate is positive. d. the frictional unemployment rate is zero.

the cyclical unemployment rate is zero.

Assume that the money demand function is (M / P)^d = 2,200 - 200r, where r is the interest rate in percent. If the price level is fixed at P=2, and the Fed wants to fix the interest rate at 7 percent, it should set the money supply at: a. 1,800. b. 2,000. c. 1,400. d. 1,600.

1,600

If y = k^1/2, there is no population growth or technological progress, 5 percent of capital depreciates each year, and a country saves 20 percent of output each year, then the steady-state level of capital per worker is: a. 8. b. 4. c. 2. d. 16.

16

If the money supply increases 12 percent, velocity decreases 4 percent, and the price level increases 5 percent, then the change in real gross domestic product (GDP) must be _____ percent. a. 11 b. 3 c. 9 d. 4

3

Starting from long-run equilibrium at A with output equal to and the price level equal to P1, if there is an unexpected monetary contraction that shifts aggregate demand from AD1 to AD3, then the long-run neutrality of money is represented by the movement from: a. A to B. b. A to G. c. A to D. d. A to C.

A to B.

In the classical model with fixed output, the supply and demand for goods and services are balanced by: a. government spending. b. taxes. c. fiscal policy. d. the interest rate.

the interest rate.

In the classical model, according to the quantity theory of money and the Fisher equation, an increase in money growth increases: a. the real interest rate. b. output. c. the nominal interest rate. d. velocity

the nominal interest rate.

In the classical model with fixed income, if households and the government want to save more than firms want to invest, then: a. the real interest rate rises. b. output falls. c. the real interest rate falls. d. output increases.

the real interest rate falls.

According to the Phillips curve, the inflation rate depends on all of these EXCEPT: a. previously expected inflation. b. the deviation of output from its natural rate. c. an exogenous supply shock. d. the real interest rate.

the real interest rate.

Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate supply when: a. there are no shocks and inflation is stable. b. dynamic aggregate demand equals dynamic aggregate supply. c. the nominal interest rate equals the real interest rate. d. the demand shock equals the supply shock.

there are no shocks and inflation is stable.

A decrease in the real money supply, other things being equal, will shift the LM curve: a. upward and to the right. b. downward and to the left. c. downward and to the right. d. upward and to the left.

upward and to the left.

A decrease in the price level shifts the _____ curve to the right, and the aggregate demand curve _____. a. LM; does not shift b. LM; shifts to the right c. IS; does not shift d. IS; shifts to the right

LM; does not shift

Suppose the tax system is T=(T_hat)+(t*Y) and includes both a lump-sum tax (T_hat) and a marginal tax rate (t). How is the size of a marginal tax on income related to the size of the government purchases multiplier? a. The larger the marginal tax rate, the smaller the government purchases multiplier. b. The larger the marginal tax rate, the larger the government purchases multiplier. c. The larger the lump-sum tax, the smaller the government purchases multiplier. d. They are not related.

The larger the marginal tax rate, the smaller the government purchases multiplier.

According to the Phillips curve, firms raise prices when output is _____ the natural level of output or, equivalently, when the unemployment rate is _____ the natural rate of unemployment. a. below; below b. below; above c. above; below d. above; above

above; below

If the number of dollars per yen rises, this is called a(n): a. appreciation of the yen b. depreciation of the yen c. appreciation of the dollar d. change in the trade balance

appreciation of the yen

An unexpected decrease in the aggregate price level transfers wealth from _____ to _____. (HINT: A loan is based on an ex ante nominal interest rate.) a. borrowers; lenders b. lenders; borrowers c. bourgeoisie; proletariat d. Eagles; Flyers

borrowers; lenders

Assuming velocity is constant, the aggregate demand curve tells us possible: a. combinations of M and P for a given value of Y. b. combinations of M and Y for a given value of P. c. combinations of P and Y for a given value of M. d. results if the Federal Reserve reduces the money supply.

combinations of P and Y for a given value of M.

In this graph, capital-labor ratio k2 is not the steady-state because: a. the investment ratio is too high. b. depreciation is greater than gross investment. c. gross investment is greater than depreciation. d. the saving rate is too high.

depreciation is greater than gross investment.

Private Saving is: a. taxes minus government spending. b. disposable income minus consumption. c. disposable income minus government spending. d. income minus consumption minus government spending.

disposable income minus consumption

When exports exceed imports, all of these are true EXCEPT: a. net capital outflows are positive b. net exports are positive c. domestic output exceeds domestic spending d. domestic investment exceeds national savings

domestic investment exceeds national savings

An increase in the real money supply, other things being equal, will shift the LM curve: a. downward and to the left. b. upward and to the left. c. downward and to the right. d. upward and to the right.

downward and to the right.

The investment function slopes _____ because there are _____ investment projects that are profitable as the interest rate decreases. a. downward; more b. downward; fewer c. upward; fewer d. upward; more

downward; more

In the Solow growth model of an economy with population growth but no technological change, the break-even level of investment must do all of these EXCEPT: a. provide capital for new workers. b. offset the depreciation of existing capital. c. equal the marginal productivity of capital (MPK). d. keep the level of capital per worker constant.

equal the marginal productivity of capital (MPK).

Other things equal, a given change in government spending has a larger effect on demand the: a. flatter the LM curve. b. larger the income sensitivity of money demand. c. steeper the LM curve. d. smaller the interest sensitivity of money demand.

flatter the LM curve.

The (upward-sloping) aggregate supply equation implies that output exceeds natural output when the price level is: a. low. b. high. c. less than the expected price level. d. greater than the expected price level.

greater than the expected price level.

People use money as a store of value when they: a. hold money to gain power and esteem. b. use money to buy goods and services. c. use money as a measure of economic transactions. d. hold money to transfer purchasing power into the future.

hold money to transfer purchasing power into the future.

Graphs that illustrate the time paths of endogenous variables when a shock hits the economy are called: a. monetary policy paths. b. endogenous growth models. c. dynamic shock figures. d. impulse response functions.

impulse response functions.

In the dynamic model, the demand for goods and services will ____ as the natural rate of output increases and _____ as the real interest rate increases. a. decrease; decrease b. decrease; increase c. increase; increase d. increase; decrease

increase; decrease

In a small open economy, if the world interest rate falls, then domestic investment will _____, net exports will _____, and the real exchange rate will _____, holding all else constant. a. increase; decrease; decrease b. increase; decrease; increase c. decrease; stay the same; decrease d. decrease; stay the same; increase

increase; decrease; increase

Crowding out occurs when an increase in government spending _____ the interest rate and investment _____. a. increases; increases b. decreases; decreases c. increases; decreases d. decreases; increases

increases; decreases

Assume that consumption does not depend on the interest rate. Holding other things constant, when the government lowers taxes on business investment, thus increasing investment demand, the quantity of investment: a. decreases and the real interest rate rises. b. and the real interest rate are both unchanged. c. is unchanged and the real interest rate rises. d. increases and the real interest rate rises.

is unchanged and the real interest rate rises.

When firms experience unplanned inventory accumulation, they typically: a. call for more government spending. b. hire more workers and increase production. c. lay off workers and reduce production. d. build new plants.

lay off workers and reduce production.

If an economy has a steady state MPK of 0.15 and a depreciation rate of 0.10, then the economy has _____ capital than the golden rule level and a(n) _____ in saving rate will lead to an increase in the consumption per worker in the long run. a. more; decrease b. less; decrease c. less; increase d. more; increase

less; increase

The economy begins in equilibrium at point E, representing the real interest rate r1 at which saving S1 equals desired investment I1. What will be the new equilibrium combination of real interest rate, saving, and investment if there is a technological innovation that increases the demand for investment goods? a. point C b. point A c. point B d. point D

point B

In the Solow growth model, the steady-state level of output per worker would be lower if the _____ increased or the _____ decreased. A. depreciation rate; population growth rate B. saving rate; depreciation rate C. population growth rate; saving rate D. population growth rate; depreciation rate

population growth rate; saving rate

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____. a. output; prices b. prices; prices c. prices; output d. output; output

prices; output

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a decrease in government spending would generate the new equilibrium combination of interest rate and income: a. r2, Y2. b. r2, Y3. c. r1, Y2. d. r3, Y2.

r3, Y2.

Based on the graph, starting from equilibrium at interest rate r1 and income Y1, an increase in the money supply would generate the new equilibrium combination of interest rate and income: a. r3, Y2. b. r2, Y2. c. r2, Y3. d. r3, Y3.

r3, Y3.

Stabilization policy refers to policy actions aimed at: a. maintaining constant shares of output going to labor and capital. b. preventing increases in the poverty rate. c. equalizing incomes of households in the economy. d. reducing the severity of short-run economic fluctuations.

reducing the severity of short-run economic fluctuations.

In this graph, if firms are producing at level Y3, then inventories will _____, inducing firms to _____ production. a. rise; increase b. fall; increase c. rise; decrease d. fall; decrease

rise; decrease

The Solow model shows that a key determinant of the steady-state ratio of capital to labor is the: a. saving rate. b. level of output. c. capital elasticity in the production function. d. labor force.

saving rate.

In the Solow growth model, the steady-state level of output per worker would be higher if the _____ increased or the _____ decreased. a. saving rate; depreciation rate b. population growth rate; depreciation rate c. depreciation rate; population growth rate d. population growth rate; saving rate

saving rate; depreciation rate

Although our models assume only one value for the MPC, which of the following is a reasonable assumption regarding how the MPC might vary across individuals? A. An individual's MPC increases as their wealth increases. B. An individual's MPC decreases as their wealth increases. C. An individual's MPC remains constant as their wealth increases. D. An individual's MPC increases as their wealth remains constant.

An individual's MPC decreases as their wealth increases.

If the LM curve is horizontal and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by: a. G / (1 - MPC). b. more than zero but less than G / (1 - MPC). c. G. d. zero.

G / (1 - MPC).

If the LM curve is horizontal and both government spending and lump-sum taxes rise by the same amount X, in the IS-LM analysis, then equilibrium income rises by: a. X / (1 - MPC). b. more than zero but less than X / (1 - MPC). c. X. d. zero.

X

Which of these would be represented by a negative value of the random demand shock? a. a decrease in the central bank's inflation target b. an aggressive increase in oil prices by a cartel c. an irrational wave of optimism among investors d. a decrease in government spending

a decrease in government spending

If a country's government imposed new regulations that generally decreased the attractiveness of investing in that country (all else constant), we would expect the nominal exchange rate of that country to: a. increase b. decrease c. remain constant d. unknown (might increase or decrease)

decrease

If the money supply is held constant, then an increase in the nominal interest rate will _____ the demand for money and _____ the price level. a. decrease; increase b. decrease; decrease c. increase; increase d. increase; decrease

decrease; increase

If inflation was 6 percent last year and a worker received a 4 percent nominal wage increase last year, then the worker's real wage: a. decreased 2 percent. b. increased 4 percent. c. increased 2 percent. d. decreased 6 percent.

decreased 2 percent.

Assume that an increase in consumer confidence raises consumers' expectations of future income and thus the amount they want to consume today for any given level of disposable income. This shift, in a neoclassical economy, will: a. raise both investment and the interest rate. b. lower both investment and the interest rate. c. lower investment and raise the interest rate. d. raise investment and lower the interest rate.

lower investment and raise the interest rate.

Assume that two economies are identical in every way except that one has a higher population growth rate. According to the Solow growth model, in the steady state, the country with the higher population growth rate will have a _____ level of output per person and _____ rate of growth of output per worker compared to the country with the lower population growth rate. a. lower; a lower b. lower; the same c. higher; a higher d. higher; the same

lower; the same

Which of these statements is NOT true about the steady state of the basic Solow model? a. The marginal product of capital always is equal to the depreciation rate. b. The saving and consumption per worker are constant. c. The investment per worker is always equal to the depreciation per worker. d. The capital per worker and output per worker are constant.

The marginal product of capital always is equal to the depreciation rate.

The ex post real interest rate will be greater than the ex ante real interest rate when the: a. actual rate of inflation is less than the expected rate of inflation. b. rate of inflation is increasing. c. rate of inflation is decreasing. d. actual rate of inflation is greater than the expected rate of inflation.

actual rate of inflation is less than the expected rate of inflation.

Long-run equilibrium output is determined by _____ and short-run equilibrium output is determined by _____. a. aggregate supply; aggregate demand b. aggregate demand; aggregate supply c. aggregate supply; aggregate supply d. aggregate demand; aggregate demand

aggregate supply; aggregate demand

Which of these would be represented by a positive value of the demand shock? a. an aggressive increase in oil prices by a cartel b. an irrational wave of optimism among investors c. an increase in the central bank's inflation target d. a decrease in government spending

an irrational wave of optimism among investors

The household demand for real money balances, L(r,Y)L(r,Y), includes all of the following EXCEPT: a. balances kept in checking and savings accounts. b. balances kept in retirement portfolios. c. balances kept in mattresses. d. balances used for immediate purchases.

balances used for immediate purchases.

In the Keynesian-cross analysis, assume that the analysis of taxes is changed so that taxes, T, are made a function of income, as in T = T + tY, where T and t are parameters of the tax code and t is positive but less than 1. As compared to a case where t is zero, the multiplier for government purchases in this case will: a. not change. b. be equal to 1. c. be bigger. d. be smaller.

be smaller.

Short-run fluctuations in output and employment are called: a. the classical dichotomy. b. productivity slowdowns. c. business cycles. d. sectoral shifts.

business cycles.

Based on the graph, if the interest rate is r1, then people will _____ bonds, and the interest rate will _____. a. buy; rise b. buy; fall c. sell; fall d. sell; rise

buy; fall

In the Keynesian-cross model, fiscal policy has a multiplying effect on income because fiscal policy: a. is government spending and, therefore, more powerful than private spending. b. increases the amount of money in the economy. c. changes income, which changes consumption, which further changes income. d. changes the interest rate.

changes income, which changes consumption, which further changes income.

In the Solow model with technological change, the Golden Rule level of capital is the steady state that maximizes: a. output per worker. b. consumption per worker. c. consumption per effective worker. d. output per effective worker.

consumption per effective worker.

If the saving rate increases, the: a. economy will grow at a faster rate forever. b. capital-labor ratio will eventually decline. c. economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached. d. capital-labor ratio will increase forever.

economy will grow at a faster rate until a new, higher, steady-state capital-labor ratio is reached.

The government raises lump-sum taxes on income by $100 billion, and the neoclassical economy adjusts so that output does not change. If the marginal propensity to consume is 0.6, private saving: a. rises by $40 billion. b. falls by $60 billion. c. rises by $60 billion. d. falls by $40 billion.

falls by $40 billion.

Most economists believe that prices are: a. sticky in both the short and long runs. b. flexible in the short run but many are sticky in the long run. c. flexible in the long run but many are sticky in the short run. d. flexible in both the short and long runs.

flexible in the long run but many are sticky in the short run.

The basic aggregate supply equation implies that output exceeds natural output when the price level is: a. greater than the expected price level. b. low. c. less than the expected price level. d. high.

greater than the expected price level.

The Paradox of Thrift applies only in the short run. In the long run, any decrease in consumption would result in a(n) ______ in _____, so long-run output _____. a. increase; government spending; remains unchanged b. decrease; savings; decreases c. increase; investment; remains unchanged d. increase; savings; increases

increase; investment; remains unchanged

Money's liquidity refers to the ease with which: a. money can be converted into goods and services. b. illegally obtained money can be laundered. c. loans can be floated. d. coins can be melted down.

money can be converted into goods and services

A central bank that chooses a small value of θπ and a large value of θ Y is choosing less _____ at the expense of more _____. a. inflation; output b. inflation variability; output variability c. output; inflation d. output variability; inflation variability

output variability; inflation variability

The rate of inflation is the: a. median level of prices. b. average level of prices. c. measure of the overall level of prices. d. percentage change in the overall level of prices.

percentage change in the overall level of prices.

Along a short-run aggregate supply curve, output is related to unexpected movements in the _____. Along a Phillips curve, unemployment is related to unexpected movements in the _____. a. inflation rate; price level b. unemployment rate; price level c. price level; inflation rate d. price level; level of output

price level; inflation rate

Along an upward-sloping short-run aggregate supply curve, output is related to unexpected movements in the _____. Along a Phillips curve, unemployment is related to unexpected movements in the _____. a. price level; inflation rate b. inflation rate; price level c. unemployment rate; price level d. price level; level of output

price level; inflation rate

Some firms do not instantly adjust the prices they charge in response to changes in demand for all of these reasons EXCEPT: a. some prices are set by long-term contracts between firms and customers. b. prices do not adjust when there is perfect competition. c. it is costly to alter prices. d. they do not want to annoy their frequent customers.

prices do not adjust when there is perfect competition.

National Saving is: a. public saving. b. private saving minus public saving. c. private saving plus public saving. d. private saving.

private saving plus public saving

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation ____ its target or output ____ its natural level. a. rises above; rises above b. falls below; rises above c. rises above; falls below d. falls below; falls below

rises above; rises above

The costs of unexpected inflation, but not of expected inflation, are: a. the arbitrary redistribution of wealth between debtors and creditors. b. menu costs. c. unintended distortions of individual tax liabilities. d. the costs of relative price variability.

the arbitrary redistribution of wealth between debtors and creditors.

The interaction of the IS curve and the LM curve determines: a. the level of output and the price level. b. the equilibrium level of the interest rate and output. c. investment and the money supply. d. the price level and the inflation rate.

the equilibrium level of the interest rate and output.

Which of these would be represented by a positive value of the random supply shock? a. an irrational wave of optimism among investors b. an increase in the central bank's inflation target c. an increase in government spending d. widespread drought leading to large increases in food prices

widespread drought leading to large increases in food prices

If the LM curve is vertical and government spending rises by G, in the IS-LM analysis, then equilibrium income rises by: a. G / (1 - MPC). b. more than zero but less than G / (1 - MPC). c. zero. d. G.

zero.