ECON 510 FINAL ch 8

9. What do economists call a situation in which an increase in the money supply is not followed by a drop in the interest rate? A. Forward guidance B. Liquidity trap C. Expected deflation D. Quantitative easing

B. Liquidity trap

3. What do we call the time between policy action in response to a shock to the economy and the policy's impact on the economy? A. Outside lag B. Policy lag C. Inside lag D. Policy gap

A. Outside lag

10. Central-bank independence is strongly associated with: A. lower average unemployment rates. B. higher real GDP growth. C. lower inflation. D. a less volatile business cycle.

C. lower inflation.

1. Which county's government holds financial assets that exceed its debt? A. Australia B. Germany C. Japan D. Netherlands

A. Australia

4. Which statement about policy lags is TRUE? A. Fiscal policy has a longer inside lag and monetary policy has a longer outside lag. B. Fiscal policy has a shorter inside lag and monetary policy has a shorter outside lag. C. Fiscal policy has a longer inside lag but the outside lag is the same for both fiscal and monetary policy. D. Fiscal policy and monetary policy have the same inside lag but monetary policy has a longer outside lag.

A. Fiscal policy has a longer inside lag and monetary policy has a longer outside lag.

9. Which is NOT a monetary policy mentioned in the chapter? A. Flexible exchange rates B. Steady growth in the money supply C. Nominal GDP targeting D. Inflation targeting

A. Flexible exchange rates

8. Which statement is TRUE when the interest rate is high? A. Income is high on the LM curve and low on the IS curve. B. Income is high on the IS curve and low on the LM curve. C. Income is high on both the IS curve and the LM curve. D. Income is low on both the IS curve and the LM curve.

A. Income is high on the LM curve and low on the IS curve.

6. Which statement is TRUE regarding the Keynesian cross and the IS curve? A. Investment is fixed in the Keynesian cross and a function of the interest rate in the IS diagram. B. Investment is a function of the interest rate in the Keynesian cross and fixed in the IS diagram. C. Investment is a function of the interest rate in both the Keynesian cross and the IS diagram. D. Investment is fixed in both the Keynesian cross and the IS diagram.

A. Investment is fixed in the Keynesian cross and a function of the interest rate in the IS diagram.

6. Which is a valid description of the aggregate demand curve? A. It tells us the possible combinations of the price level and output for a given money supply. B. It tells us the possible combinations of the price level and output for a given interest rate. C. It tells us the short-run equilibrium level of output. D. It tells us the long-run output of the economy.

A. It tells us the possible combinations of the price level and output for a given money supply.

6. If population grows at rate n and workers become more effective at rate g, which variable grows at rate n + g? A. Output B. Output per worker C. Output per effective worker D. Capital per effective worker

A. Output

2. According to Okun's law, how would real GDP change if the unemployment rate rose by 2 percent? A. Real GDP would fall by 1 percent. B. Real GDP would fall by 2 percent. C. Real GDP would fall by 6 percent. D. Real GDP would not change.

A. Real GDP would fall by 1 percent.

3. In the IS-LM model, which will follow a decrease in the money supply? A. The LM curve shifts to the left. B. The LM curve shifts to the right. C. The IS curve shifts to the left. D. The IS curve shifts to the right.

A. The LM curve shifts to the left.

1. In the Solow growth model, which variable is endogenous? A. The capital stock B. The saving rate C. The depreciation rate D. Technological progress

A. The capital stock

7. Which statement does NOT provide evidence for the spending hypothesis, which has been proposed to explain the Great Depression? A. The end of World War I led to a drastic reduction in government purchases. B. Residential overbuilding in the 1920s led to a dramatic decline in investment in the1930s. C. The drop in immigration in the 1930s resulted in a drop in demand for new housing. D. Policymakers sought to raise taxes and cut government spending.

A. The end of World War I led to a drastic reduction in government purchases.

7. Steady-state consumption is the gap between: A. output and depreciation. B. depreciation and investment. C. saving and investment. D. saving and depreciation.

A. output and depreciation.

4. What is the approximate depreciation rate for an economy with a steady-state capital stock of 8 units of capital per worker and a saving rate of 0.4? (Show how you get your answer to get full credit). A. 0.05 B. 0.14 C. 0.32 D. 0.40

B. 0.14

4. Which was NOT a shock that led to the recession of 2001? A. A fall in the stock market B. A financial crisis arising from mortgage defaults C. Widely publicized accounting scandals D. The September 11 terrorist attacks

B. A financial crisis arising from mortgage defaults

5. Which statement is TRUE according to the Solow growth model? A. A higher saving rate results in faster, sustained growth. B. A higher saving rate results in temporarily faster growth. C. A sustained high saving rate will result in a larger capital stock but not more output. D. An increase in the saving rate does not change the steady state but enables the economy to reach it more quickly.

B. A higher saving rate results in temporarily faster growth.

4. In the model developed in the chapter, what would follow an unexpected increase in inventories? A. An increase in the price level B. An increase in the unemployment rate C. An increase in government revenues D. An increase in real output

B. An increase in the unemployment rate

10. What is meant by quantitative easing? A. Reducing the federal funds rate B. Buying long-term government bonds, mortgage-backed securities, and corporate debt C. Increasing the M2 money supply D. Buying short-term government bonds

B. Buying long-term government bonds, mortgage-backed securities, and corporate debt

9. Which statement is TRUE when the economy starts with LESS capital than the Golden Rule level? A. Depreciation must be reduced to reach the Golden Rule level of capital. B. Current generations must sacrifice to maximize future consumption. C. To maximize consumption, the current saving rate must fall. D. Increasing the capital stock to the Golden Rule level benefits both current and future generations.

B. Current generations must sacrifice to maximize future consumption.

3. According to the text, what is the most likely reason for climbing healthcare costs? A. An aging population B. Expensive new medical advances C. Unnecessary testing and treatment D. Lawsuits

B. Expensive new medical advances

10. Which is NOT likely to follow a rapid and large increase in government debt? A. Crowding out of private investment B. Increased foreign direct investment in the domestic economy C. Capital flight from the domestic economy D. Loss of political influence

B. Increased foreign direct investment in the domestic economy

1. In the Solow growth model, which expression defines the marginal product of capital? A. MPK = f (k + 1)/f (k ) B. MPK = f (k + 1) − f (k ) C. MPK = f (k + 1) + f (k ) D. MPK = f (k ) − f (k + 1)

B. MPK = f (k + 1) − f (k )

7. What is the political business cycle? A. The six-year period of a Senator's term, which includes elections for the House and the President B. Manipulation of the economy prior to an election to improve the electoral prospects of an incumbent government. C. The term of the Chairperson of the Federal Reserve System D. The outcome(s) of elections occurring between two peaks of the business cycle

B. Manipulation of the economy prior to an election to improve the electoral prospects of an incumbent government.

7. What is the hypothesis that consumers will increase saving rather than spending after a tax cut? A. Adaptive expectations B. Ricardian equivalence C. Uncounted liabilities D. Rational expectations

B. Ricardian equivalence

7. Why do the short-run and long-run aggregate supply curves have different slopes? A. Technological advances B. Sticky prices C. Inflation expectations D. Stochastic shocks

B. Sticky prices

1. Which law first established the federal government's responsibility for macroeconomic performance? A. The National Labor Relations Act B. The Employment Act of 1946 C. The Fair Labor Standards Act of 1938 D. The Full Employment and Balanced Growth Act (Humphrey-Hawkins Act)

B. The Employment Act of 1946

6. What is a cyclically adjusted budget deficit? A. The component of the deficit caused by changes in the business cycle B. The estimated budget deficit at full employment C. The portion of the deficit that becomes part of the government debt D. The measured deficit at the trough in the business cycle

B. The estimated budget deficit at full employment

2. Which variable links the IS and LM curves in the IS-LM model? A. The real wage rate B. The real interest rate C. The M1 money supply D. Potential real GDP

B. The real interest rate

1. What is the main target of Keynes's critique of classical economics? A. The doctrine of monetary neutrality B. The view that aggregate supply alone determines national income C. The assumption that prices are flexible in the long run D. The preference for monetary over fiscal policy as a stabilization tool

B. The view that aggregate supply alone determines national income

4. Which economist predicted that humanity's long-run prospect is poverty? A. Paul Romer B. Thomas Malthus C. Michael Kramer D. Robert Solow

B. Thomas Malthus

5. In the steady state in the Solow model, which is NOT one of the uses of new capital? A. To replace depreciating capital B. To replace capital exported to other countries C. To provide capital for new 'effective workers' created by technological progress D. To provide capital for new workers

B. To replace capital exported to other countries

9. In the IS-LM model, which variables are endogenous? A. G and T B. Y and r C. M and P D. There are no endogenous variables.

B. Y and r

1. The IS-LM model is best equipped to help economists analyze: A. the long run. B. the short run. C. the supply side of the economy. D. inflationary pressures.

B. the short run.

9. What is NOT an argument for optimal fiscal policy versus a balanced budget amendment? A. Optimal fiscal policy enables the government to avoid distortions to incentives that might arise if the government had to frequently change tax rates to follow a balanced budget rule. B. Optimal fiscal policy enables the government to spend heavily on emergencies, such as wars, and place some of the tax burden for these outlays on future generations, who also benefit from such spending. C. A government budget deficit may crowd out capital and depress economic growth in the long run. D. A balanced budget amendment would prevent automatic stabilization of the economy through taxes and transfers.

C. A government budget deficit may crowd out capital and depress economic growth in the long run.

2. What do we call the time between a shock to the economy and the enactment of policies to counter the shock? A. Outside lag B. Policy lag C. Inside lag D. Policy gap

C. Inside lag

3. In the Solow model with population growth and static technology, what is the Golden Rule condition? A. MPK = δ − n B. MPK + n = δ C. MPK − δ = n D. MPK + δ = n

C. MPK − δ = n

8. How does the economy move from a short-run equilibrium to its long-run equilibrium? A. Flexible prices become sticky at their equilibrium levels. B. Shifts occur in the long-run aggregate supply curve. C. Shifts occur in the short-run aggregate supply curve. D. Shifts occur in the aggregate demand curve.

C. Shifts occur in the short-run aggregate supply curve.

2. In the IS-LM model, which will follow a decrease in government purchases? A. The LM curve shifts to the left. B. The LM curve shifts to the right. C. The IS curve shifts to the left. D. The IS curve shifts to the right.

C. The IS curve shifts to the left.

8. How do the long-run predictions of the Solow growth model and endogenous growth model compare? A. Both predict an eventual steady-state equilibrium. B. Both recognize the possibility of unlimited growth. C. The Solow model predicts an eventual steady-state equilibrium, and the endogenous growth model allows for continued growth. D. The endogenous growth model predicts an eventual steady-state equilibrium, and the Solow model allows for continued growth.

C. The Solow model predicts an eventual steady-state equilibrium, and the endogenous growth model allows for continued growth.

9. What is the expected result of a decrease in the velocity of money in the long run? A. The price level and output will both rise. B. The price level will remain constant, and output will fall. C. The price level will fall, and output will not change. D. The price level and output will both fall.

C. The price level will fall, and output will not change.

7. How do the Fisher effect and the theory of liquidity preference explain the link between monetary policy and nominal interest rates? A. Tighter (looser) money leads to lower (lower) nominal interest rates in the short run but higher(higher) nominal interest rates in the long run. B. Tighter (looser) money leads to higher (lower) nominal interest rates in both the short run and the long run. C. Tighter (looser) money leads to higher (lower) nominal interest rates in the short run but lower(higher) nominal interest rates in the long run. D. Tighter (looser) money leads to lower (higher) nominal interest rates in both the short run and the long run.

C. Tighter (looser) money leads to higher (lower) nominal interest rates in the short run but lower(higher) nominal interest rates in the long run.

8. What lesson do we draw from the debt-deflation theory? A. Deflation is stabilizing because lower prices push the economy back to full employment. B. Debtors tend to adjust spending less than creditors when there is a demand-side shock. C. Unexpected deflation enriches creditors and impoverishes debtors. D. Deflation leads to debtors spending more and creditors spending less.

C. Unexpected deflation enriches creditors and impoverishes debtors.

4. For macroeconomists, what distinguishes the short run and the long run? A. The ability to change the factors of production employed B. A time period shorter or longer than two quarters C. Whether prices are sticky or flexible D. A time period shorter or longer than the time from trough to trough in the business cycle

C. Whether prices are sticky or flexible

3. Assuming the production function is 𝑦 = √𝑘, what is the steady-state capital stock for an economy with a saving rate of 0.4 and a depreciation rate of 0.2? (Show how you get your answer to get full credit). A. 0.25 B. 0.5 C. 2 D. 4

D. 4

5. What is capital budgeting? A. The budgeting process in the capital B. Creating a budget for the capital separate from that for the rest of the nation C. The budget for capital expenditures, separate from the budget for labor D. A budget that considers both assets and liabilities

D. A budget that considers both assets and liabilities

6. Which is an implication of the Lucas critique? A. There is no short-run tradeoff between inflation and unemployment. B. There is no long-run tradeoff between inflation and unemployment. C. Fiscal policy has a longer inside lag than monetary policy. D. A credible announcement of a change in monetary policy will shift the Phillips curve.

D. A credible announcement of a change in monetary policy will shift the Phillips curve.

1. What criterion does the NBER's Business Cycle Dating Committee use to determine when the economy goes into recession? A. Two consecutive quarters of negative growth B. Two consecutive quarters of growth at a rate lower than in the same quarters in the previous year C. A fall in economic output of 3 percent or more in any given quarter D. A variety of data and its professional judgment.

D. A variety of data and its professional judgment.

10. What might Joseph Schumpeter have called the rise of online retailing at the expense of brick-and-mortar retail outlets? A. Monopoly power B. A negative externality C. A steady state D. Creative destruction

D. Creative destruction

10. Which statement is TRUE when the economy starts with MORE capital than the Golden Rule level? A. Depreciation must be increased to reach the Golden Rule level of capital. B. Current generations must sacrifice to maximize future consumption. C. To maximize consumption, the current saving rate must rise. D. Decreasing the capital stock to the Golden Rule level benefits both current and future generations.

D. Decreasing the capital stock to the Golden Rule level benefits both current and future generations.

2. In the Solow model, which two variables have similar effects on the capital stock per worker? A. Depreciation and technological change B. The saving rate and depreciation C. Population growth and technological change D. Depreciation and population growth

D. Depreciation and population growth

3. Which variable enables actual expenditure to differ from planned expenditure? A. The real interest rate B. Fiscal policy C. The money supply D. Inventories

D. Inventories

2. Assuming the labor force and technology are fixed, why is there a limit to capital accumulation? A. Over time, consumers become unwilling to save. B. The current generation is unwilling to sacrifice for future generations. C. There is a finite limit on output. D. More capital means more capital must be replaced.

D. More capital means more capital must be replaced.

8. According to the idea of Ricardian equivalence, what effect will a debt-financed tax cut have on saving? A. Only public saving will change. B. National saving will rise. C. Public saving will rise and private saving will fall. D. National saving will not change.

D. National saving will not change.

8. Why might the strict monetarist prescription of steady growth in the money supply not be the best possible policy? A. The growth rate might be subject to political pressure. B. A steady growth rate in the money supply may keep the growth rate of GDP low. C. The neutrality of money makes the money supply irrelevant. D. Shocks may change the velocity of money.

D. Shocks may change the velocity of money.

5. What do we call the observation that traditional methods of policy evaluation do not adequately account for the impact of policy on expectations? A. Rational expectations B. Adaptive expectations C. The Fisher effect D. The Lucas critique

D. The Lucas critique

3. Which is NOT part of the index of leading economic indicators? A. Manufacturers' new orders for consumer goods and materials B. Manufacturers' new orders for nondefense capital goods, excluding aircraft C. Average weekly initial claims for unemployment insurance D. The M2 money supply.

D. The M2 money supply.

7. How do the Solow growth model and endogenous growth model view the marginal product of capital? A. Both assume diminishing returns to capital. B. Both assume constant returns to capital. C. The Solow model assumes constant returns, and the endogenous growth model assumes diminishing returns to capital. D. The Solow model assumes diminishing returns, and the endogenous growth model assumes constant returns to capital.

D. The Solow model assumes diminishing returns, and the endogenous growth model assumes constant returns to capital.

8. At the Golden Rule level of capital, what must the marginal product of capital equal? A. Zero B. The saving rate C. The interest rate D. The depreciation rate

D. The depreciation rate

9. Which indicates that firms are NOT engaging in TOO MUCH research activity? A. The positive 'standing on shoulders' externality equals the negative 'stepping on toes' externality. B. The positive 'standing on shoulders' externality is less than the negative 'stepping on toes' externality. C. The positive 'standing on shoulders' externality minus the negative 'stepping on toes' externality equals the investment rate. D. The positive 'standing on shoulders' externality is greater than the negative 'stepping on toes' externality.

D. The positive 'standing on shoulders' externality is greater than the negative 'stepping on toes' externality.

6. Which variable is constant in the IS-LM model? A. The interest rate B. The money supply C. Nominal output D. The price level

D. The price level

4. What impact does a high inflation rate have on the government debt? A. The government can pay its debt with dollars that are worth more. B. The government must offer higher interest rates to attract borrowers. C. Crowding out becomes a more serious issue. D. The real debt rises much less than the nominal debt.

D. The real debt rises much less than the nominal debt.

10. From a macroeconomic theory perspective, what is unusual about the Covid-19 recession? A. Despite the enormity of the shock, policy response was fairly muted. B. The recession was almost entirely a supply-side phenomenon. C. Policymakers used both fiscal and monetary strategies to fight the recession. D. There was a shift in the economy's potential output

D. There was a shift in the economy's potential output

5. When does the classical dichotomy NOT hold? A. When the Fed maintains a steady money supply growth rate B. When the economy moves from peak to peak in the business cycle C. When the goods market and the money market are both in equilibrium D. When not all prices are flexible

D. When not all prices are flexible

2. Which statement is TRUE regarding government debt in the United States? A. The debt-to-GDP ratio has always been below 1. B. The debt-to-GDP ratio was about 0.4 after the Revolutionary War and has remained at about that level since. C. Among historical events, the Great Depression had the greatest impact on the U.S. debt-to-GDP ratio. D. With a few exceptions, wars have resulted in steep spikes in the debt-to-GDP ratio.

D. With a few exceptions, wars have resulted in steep spikes in the debt-to-GDP ratio.

6. The Golden Rule level of capital maximizes: A. output. B. the growth rate. C. the steady state. D. consumption.

D. consumption.

5. If government purchases increase by ΔG, output will: A. decrease by ΔG. B. increase by ΔG. C. increase by less than ΔG. D. increase by more than ΔG.

D. increase by more than ΔG.