MAKRO MIDTERM
Based on wage setting behavior, we know that an increase in the unemployment rate will cause: A) no change in the real wage. B) a reduction in the real wage. C) an increase in the real wage. D) an upward shift of the WS curve.
B
A consol bond promises to pay $1000 each year, forever, starting next year. If the nominal interest rate is 5%, the present discounted value of this consol is a. $900.00 b. $995.00 c. $2,500.00 d. $20,000.00 e. $25,000.00
D
A monetary expansion will, in the short run, cause: (a) the AD curve to shift leftward. (b) the price setting curve to shift down. (c) the wage setting curve to shift upward. (d) an increase in the nominal wage. (e) the wage setting curve to shift downward.
D
An increase in oil prices, such as the oil shocks in the 70s, lead to _______ thereby causing ________ a) a movement along the AS curve; cost-push inflation b) a leftward shift in the AS curve; demand-pull inflation c) a rightward shift in the AS curve; cost-push inflation d) a leftward shift in the AS curve; cost-push inflation
D
Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the short run, cause an increase in: (a) the nominal wage. (b) the price level. (c) the interest rate. (d) all of the above (e) none of the above
D
4) Suppose the economy is operating at a point where output is less than the natural level of output. Which of the following statements is correct given this information? (a) the price level is less than the expected price level (b) the unemployment rate is less than the natural unemployment rate (c) the price level will be higher next period than this period (d) all of the above (e) none of the above
A
According to the life‐cycle model, the short‐run consumption function will not continue to hold in the long run because: A) increases in wealth shift the short‐run function upward. B) decreases in the average propensity to consume shift the short‐run function downward. C) increases in income shift the short‐run function upward. D) increases in the average life span shift the short‐run function upward.
A
Which of the following is an asset for both a bank and a central bank? A) currency B) deposits C) bonds D) all of the above E) none of the above
C
If u > un, we know with certainty that: (a) P > Pe. (b) Y > Yn. (c) P = Pe. (d) P < Pe.
D
Suppose the central bank implements contractionary monetary policy. Which of the following will occur in the short run? (a) An increase in the price level (b) a decrease in output (c) an increase in the interest rate (d) all of the above (e) none of the above
D
According to the neoclassical model of investment, business fixed investment does not depend on: A) the realized profits of firms. B) the marginal product of capital. C) the interest rate. D) tax rules affecting firms.
A
If consumers obey the permanent‐income hypothesis and have rational expectations, then ______ policy changes influence consumption. A) only unexpected B) only expected C) both expected and unexpected D) neither expected nor unexpected
A
In equilibrium, other things being equal, all of the following changes will increase the real rental price of capital except: A) a lower quantity of labor employed. B) a lower stock of capital. C) better technology. D) a higher labor-capital ratio.
A
Milton Friedman argued that, although household studies showed that high‐income households generally have lower average propensities to consume, this phenomenon is due to the fact that these households have, on average: A) positive transitory income. B) negative transitory income. C) higher permanent income. D) lower permanent income.
A
Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950. Given this information, we know that the interest rate on the bond is A) 5.3%. B) 9.5%. C) 10%. D) 90%. E) 110%.
A
Suppose the Phillips curve is represented by the following equation: πt - πt-1 = 20 - 2ut. Given this information, we know that the natural rate of unemployment in this economy is: A) 10%. B) 20%. C) 6.5%. D) 5%. E) none of the above
A
1) In the aggregate supply relation, a reduction in current output causes: (a) an increase in the expected price level and an upward shift of the AS curve. (b) a reduction in the current price level. (c) an increase in the markup over labor costs. (d) a change in the expected price level this year. (e) a shift of the aggregate supply curve.
B
16) The short-run aggregate supply curve (AS) presented in the textbook has its particular shape because of which of the following explanations? (a) An increase in the aggregate price level causes an increase in nominal money demand and an increase in the interest rate. (b) A reduction in output causes a reduction in employment, an increase in unemployment, a reduction in the nominal wage and a reduction in the price level. (c) A drop in the nominal wage causes an increase in the amount of output that firms are willing to produce. (d) A reduction in the aggregate price level will cause a reduction in the interest rate and an increase in output.
B
3) Suppose that the current price level is equal to the expected price level. Given this information, we know with certainty that: (a) The output level is higher than natural rate of output. (b) the unemployment rate is equal to the natural rate of unemployment. (c) the unemployment rate is zero. (d) both the price level and the expected price level are equal to one. (e) none of the above
B
A consumer spending excessively today, intending to start saving for retirement tomorrow, but deciding to continue spending when tomorrow arrives is an example of: A) an income effect offsetting a substitution effect. B) time‐inconsistent preferences. C) spending out of permanent income, but not out of transitory income. D) an intertemporal budget constraint.
B
A reduction in unemployment benefits will tend to cause which of the following? A) an upward shift in the WS curve B) a downward shift in the WS curve C) an upward shift in the PS curve D) a downward shift in the PS curve E) none of the above
B
Assume that expected inflation is based on the following: πe t = θπt-1. If θ = 1, we know that: A) a reduction in the unemployment rate will have no effect on inflation. B) low rates of unemployment will cause steadily increasing rates of inflation. C) the actual unemployment rate will not deviate from the natural rate of unemployment. D) the Phillips curve illustrates the relationship between the level of inflation rate and the level of the unemployment rate.
B
Assume the economy is initially operating at the natural level of output. Which of the following events will NOT change the composition of output (i.e., the percentage of GDP composed of consumption, investment, etc.) in the medium run? (a) a reduction in the desire to save (b) an increase in the money supply (c) a cut in taxes (d) an increase in consumer confidence (e) a reduction in government spending
B
For a firm facing financing constraints on its investment spending, the most important determinant of how much it invests is the: A) firm's expected future profitability. B) firm's current profitability. C) interest rate. D) firm's cost of capital.
B
If a country experiences persistently low inflation, which of the following tends NOT to occur? A) wage indexation will become less important B) nominal wages will be set for shorter periods of time C) the markup over labor costs will decrease D) all of the above
B
Suppose workers and firms expect the overall price level to increase by 5%. Given this information, we would expect that: A) the nominal wage will increase by less than 5%. B) the nominal wage will increase by exactly 5%. C) the nominal wage will increase by more than 5%. D) the real wage will increase by 5%. E) the real wage will increase by less than 5%.
B
The natural level of output is the level of output that occurs when: A) the goods market and financial markets are in equilibrium. B) the economy is operating at the unemployment rate consistent with both the wage-setting and price-setting equations. C) the markup (m) is zero. D) the unemployment rate is zero. E) there are no discouraged workers in the economy
B
The pull of instant gratification may lead consumers to save ______ they would like to save: A) more than B) less than C) approximately the amount D) precisely the amount.
B
Use the following Phillips curve equation to answer this question: πt - πt-1 = (m + z) - αut. Which of the following will cause an increase in the natural rate of unemployment? A) a reduction in m B) an increase in z C) an increase in α D) a reduction in expected inflation E) none of the above
B
When the prices of all the equipment that are installed in a firm increase by 1.5 times at time t, the Tobin's q of that firm at time t-1 was at 1.4 and the market value of the firm in time t has not changed since time t-1. What should the manager of the firm do? A) Keep the capital at the same level as before B) Let the capital depreciate and do not invest in new capital C) Buy more capital D) Issue more shares
B
13) Assume the economy is initially operating at the natural level of output. Now suppose that individuals decide to reduce their desire to save. We know with certainty that which of the following will occur in the short run as a result of decreased desire to save? (a) no change in the economy at all (b) less investment (c) an increase in the nominal wage (d) greater investment (e) higher output and lower investment
C
15) The aggregate demand (AD) curve presented in the textbook has its particular shape because of which of the following explanations? (a) An increase in P will cause a reduction in the real wage, an increase in employment, and an increase in output. (b) As P decreases in a closed economy, goods and services become relatively cheaper and individuals respond by increasing the quantity demanded of goods and services. (c) An increase in the aggregate price level (P) will cause an increase in the interest rate and a reduction in output. (d) An increase in the money supply (M) will cause a reduction in the interest rate, an increase in investment, and an increase in output.
C
2) When the current price level is equal to the expected price level, we know that: A) the unemployment rate is zero. B) the goods market and financial markets are in equilibrium. C) the output is equal to the natural level of output. D) the money market is in equilibrium. E) none of the above
C
20) For this question, assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following? (a) an increase in the aggregate price level, no change in output and no change in the interest rate in the medium run (b) a reduction in employment and no change in the nominal wage in the short run (c) an increase in investment in the medium run (d) a reduction in output and no change in the aggregate price level in the short run
C
23) For this question, assume that the economy is initially operating at the natural level of output. A one-time 7% increase in the nominal money supply will cause: (a) a 7% reduction in the interest rate (i) in the medium run. (b) a 7% increase in the real money supply in the medium run . (c) a 7% increase in the price level in the medium run . (d) all of the above
C
6) For this question, assume that the economy is initially operating at the natural level of output. A simultaneous reduction in taxes and reduction in the money supply will cause which of the following? A) an increase in output and an increase in the aggregate price level in the short run B) a reduction in output and a reduction in the nominal wage in the short run C) a reduction in investment in the medium run D) a reduction in the interest rate in the medium run
C
According to Franco Modigliani's life‐cycle hypothesis, the time of life at which an individual has the largest amount of wealth is at: A) birth. B) death. C) retirement. D) his or her parents' death.
C
According to the efficient markets hypothesis, stock price changes reflect ______, but according to Keynes, stock price changes often reflect ______. A) the inventory accelerator; changes in Tobin's q B) changes in the real cost of capital; financing constraints C) changes in the underlying economic fundamentals; irrational waves of optimism or pessimism D) reductions in investment tax credits; the use of historical cost rather than replacement cost in computing depreciation costs
C
Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the medium run, have no effect on which of the following? (a) the price level (b) the interest rate (c) employment (d) all of the above (e) none of the above
C
At any given level of the interest rate, expectations are likely to be ________ optimistic and planned investment is likely to be _______ when _____ is growing rapidly than when it is growing slowly or falling. a) less; higher; output b) more; higher; output c) less; lower; unplanned investment d) more; lower; unplanned investment
C
For this question, assume that the economy is initially operating at the natural level of output. A reduction in consumer confidence will cause: (a) ambiguous effects on the real wage in the medium run. (b) an increase in the real wage in the medium run. (c) no change in the real wage in the medium run. (d) a reduction in the real wage in the medium run.
C
In Irving Fisher's two‐period consumption model, if Y1 = 20,000, Y2 = 15,000, and the interest rate r is 0.50 (50 percent), then the maximum possible consumption in period one is: A) 20,000. B) 25,000. C) 30,000. D) 35,000.
C
Suppose that increased international trade makes product markets more competitive in the U.S. Given this information, we would expect to observe which of the following? A) an upward shift in the WS curve B) a downward shift in the WS curve C) an upward shift in the PS curve D) a downward shift in the PS curve E) none of the above
C
The price setting equation is represented by the following: P = (1+m)W. When there is perfect competition, we know that m will equal A) W. B) P. C) 0. D) W/P. E) none of the above
C
Which of the following events will cause an increase in the aggregate price level (a) an increase in the unemployment rate (b) a reduction in Pe (c) an increase in the unemployment benefits (d) a reduction in the markup (e) none of the above
C
Which of the following will cause the aggregate demand curve will shift to the left? (a) a rise in the price level (b) a decrease in the price level (c) an increase in taxes (d) an increase in consumer confidence (e) an increase in the money supply
C
19) Which of the following events will cause the largest rightward shift (as measured horizontally) of the AD curve? (a) a 15% reduction in the nominal wage (b) a 15% reduction in the aggregate price level (c) a tax increase (d) a 10% increase in the nominal money supply (e) none of the above
D
2) The aggregate supply curve will shift right when which of the following occurs? (a) a reduction in unemployment benefits (b) a reduction in the expected price level (c) a reduction in firms' markup over labor costs (d) all of the above (e) none of the above
D
3) When the economy is operating at a point where output is greater than the natural level of output, which of the following occurs? A) the unemployment rate is less than the natural unemployment rate. B) the price level is greater than the expected price level. C) the price level will be higher next period than it is this period. D) all of the above
D
4) Which of the following represents a short-run effect of a monetary expansion? A) an increase in output B) a reduction in the interest rate C) an increase in the price level D) all of the above
D
For this question, assume that the economy is initially operating at the natural level of output. A monetary expansion will cause: (a) no change in the nominal wage in the medium run. (b) a reduction in the interest rate in the medium run. (c) an increase in investment in the medium run. (d) no change in the real wage in the medium run.
D
If the aggregate supply curve is vertical in the long-run, _______ has (have) an effect on the aggregate output in the long run a) sometimes monetary and/or fiscal policy (i.e. it depends) b) monetary policy does but fiscal policy does not c) monetary policy does not but fiscal policy does d) neither monetary policy nor fiscal policy
D
In the Phillips curve equation, which of the following will cause a reduction in the current inflation rate? A) a reduction in the expected inflation rate B) an increase in the unemployment rate C) a reduction in the markup, m D) all of the above E) none of the above
D
The ___________ lag for fiscal policy is generally ______ than it is for monetary policy. a) recognition; shorter b) recognition; longer c) implementation; shorter d) implementation; longer
D
The neutrality of money is consistent with which of the following statements? (a) Changes in the money supply will not affect employment in the short run. (b) Changes in the money supply will not affect the price level in the medium run. (c) Changes in the money supply will not affect the price level in the short run. (d) Changes in the money supply will not affect employment in the medium run.
D
What is the money multiplier if no one holds cash? A) 1/(1-c). B) 1/[c + θ(1-c)]. C) [c + θ(1-c)]. D) 1/θ.
D
Which of the following events will cause a reduction in the size of the sacrifice ratio? a. decrease in β b. increase in β c. decrease in α d. increase in α e. none of the above
D
1) Suppose the actual unemployment rate increases. This will cause: A) an upward shift in the WS curve. B) a downward shift in the WS curve. C) an upward shift in the PS curve. D) a movement along the WS and the PS curves.
D Changes in actual unemployment rate or wage rate, cause a movement along the WS and the PS curves, not a shift. So what causes movements? As we have F(un, z) =1 / 1 + m, we may see that the positions of the wage-setting and price-setting curves, and thus the equilibrium unemployment rate, depend on both z and m. Consider two examples: (1) An increase in unemployment benefits. An increase in unemployment benefits can be represented by an increase in z: Since an increase in benefits makes the prospect of unemployment less painful, it increases the wage set by wage setters at a given unemployment rate. So it shifts the wage-setting relation up. The economy moves along the PS line. The natural rate of unemployment increases. In words: At a given unemployment rate, higher unemployment benefits lead to a higher real wage. A higher unemployment rate is needed to bring the real wage back to what firms are willing to pay. (2) A less stringent enforcement of existing antitrust legislation. To the extent that this allows firms to collude more easily and increase their market power, it will lead to an increase in their markup—an increase in m. The increase in m implies a decrease in the real wage paid by firms, and so it shifts the price-setting relation down. The economy moves along WS. The equilibrium moves and the natural rate of unemployment increases. In words: By letting firms increase their prices given the wage, less stringent enforcement of antitrust legislation leads to a decrease in the real wage. Higher unemployment is required to make workers accept this lower real wage, leading to an increase in the natural rate of unemployment.
24) For this question, assume that the economy is initially operating at the natural level of output. A simultaneous reduction in taxes and reduction in the money supply will cause which of the following? (a) a reduction in the interest rate in the medium run (b) a reduction in output and a reduction in the nominal wage in the short run (c) an increase in output and an increase in the aggregate price level in the short run (d) an increase in the aggregate price level, no change in output, and no change in the interest rate in the medium run (e) a reduction in investment in the medium run
E
5) Answer this question using the AS/AD model presented in the textbook. Which of the following would cause a reduction in the natural level of output in the medium run? A) a decrease in government spending B) a decrease in the money supply C) an increase in taxes D) both A and C E) none of the above
E
8) Assume the economy is initially operating at the natural level of output. Which of the following events will initially cause a shift of the aggregate supply curve? (a) an increase in the money supply (b) an increase in consumer confidence (c) an increase in government spending (d) all of the above (e) none of the above
E
Answer this question using the AS/AD model presented in the textbook. Which of the following would cause a reduction in the natural level of output in the medium run? (a) a decrease in government spending (b) an increase in taxes (c) a decrease in the money supply (d) both A and C (e) none of the above
E
As product markets become more competitive and the markup decreases, we would expect which of the following to occur? a. no change in the real wage in the medium run b. an increase in the aggregate price level and an increase in output in the medium run c. an increase in the interest rate in the medium run d. no change in output in the medium run e. an increase in the real wage in the medium run
E
For this question, assume that the Phillips curve equation is represented by the following equation: πt - πt-1 = (m + z) - αut. Given this information, the natural rate of unemployment will be equal to: A) m + z. B) (m + z - α). C) α(m + z). D) 0. E) none of the above
E
The money demand curve will shift to the left when which of the following occurs? A) a reduction in the interest rate B) an increase in the interest rate C) an open market sale of bonds by the central bank D) an increase in income E) none of the above.
E