Macro Midterm
According to the World Bank, real per capita income in the U.S. increased from $57,640 in 2015 to $58,030 in 2016. What was the approximate annual growth rate? A) 0.7% B) 1.0% C) 6.8% D) $390
A) 0.7% (Growth rate = ($58,030-$57,640)/$57,640 = 0.007 or 0.7%.)
Which of the following statements regarding Adam Smith are correct? A) Adam Smith claimed that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. B) Adam Smith advocated that economic agents were guided entirely by self-interest. C) Adam Smith argued that all markets were characterised by perfect competition. D) Adam Smith believed there should be no government involvement in the economy
A) Adam Smith claimed that coordination among large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it.
If the Federal Reserve increases the reserve requirement, then A) Banks are required to hold a greater amount in reserves, and they have less money available to lend out. B) Banks are allowed to hold a smaller amount in reserves, they will have a greater amount of money available to lend out C) Banks will not change their lending behavior. D) Banks are required to hold a greater amount in reserves, and they have more money available to lend out.
A) Banks are required to hold a greater amount in reserves, and they have less money available to lend out.
When the Federal Reserve wants to change the money supply, it most commonly A) Conducts open market operations. B) Changes the discount rate. C) Changes the reserve requirement D) The Federal Reserve cannot change the money supply.
A) Conducts open market operations.
The 'paradox of thrift' refers to the fact that: A) If we all save more, aggregate income will fall B) The wealthier I become, the more tax I have to pay C) Saving is a waste of time D) Inflation erodes the value of savings.
A) If we all save more, aggregate income will fall
Which of the following statements is correct regarding the model of the labor market? A) In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary. B) Labor-saving technological progress raises unemployment in both the short and long run. C) In the long-run model, the markup is independent of the number of firms. D) In the long-run model, firms enter the market when the markup is low.
A) In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary.
Deflation refers to a situation where prices are generally falling. Why is deflation generally undesirable? A) It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further. B) It disadvantages creditors C) It reduces the value of debts D) It redistributes real income
A) It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further.
The Federal Reserve does all except which of the following? A) Make loans to individuals B) Control the supply of money C) Control the value of money D) Regulate the banking system
A) Make loans to individuals
In Figure 15.4b, when employment is at level C, the real wage lies below the profit curve. Assume inflation is zero. In a competitive system, firms will begin to _____ prices and this will start a process of _____. A) Reduce; deflation B) Reduce; inflation C) Increase; rising unemployment. D) Increase; inflation.
A) Reduce; deflation
The figure below depicts the labor market model. Consider a reduction in the degree of competition faced by the firms. Which of the following statements is correct regarding the effects of reduced competition? A) The equilibrium real wage falls. B) The price-setting curve shifts up. C) The wage-setting curve shifts up. D) The unemployment level falls.
A) The equilibrium real wage falls. (Decreased competition leads to a lower price-setting curve, while the wage-setting curve is unaffected. Therefore the equilibrium (the intersection of the two curves) shifts down and to the left, implying lower real wage and higher unemployment.)
The figure depicts a labor market. Now consider an inflow of half a million immigrant workers who are all looking for employment. Which of the following statements is correct? A) The firms' marginal cost of production is temporarily reduced. B) Unemployment decreases. C) The wage-setting curve temporarily shifts up. D) All immigrants find work.
A) The firms' marginal cost of production is temporarily reduced.
What does US GDP per capita measure? A) The total output of the US's economy, divided by the country's population. B) The total output of Washington DC's economy C) The average disposable income of a US resident. D) The total output of the US residents, divided by the number of the residents
A) The total output of the US's economy, divided by the country's population.
If the Federal Reserve lowers the discount rate it charges to banks, then... A) banks will increase their borrowing of reserves from the Fed and thus increase money supply. B) banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, increasing the money supply. C) banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, decreasing the money supply. D) banks will increase their borrowing of reserves from the Fed and thus decrease money supply
A) banks will increase their borrowing of reserves from the Fed and thus increase money supply.
According to the revised version of the Phillips curve, as shown in Figure 15.7 (Links to an external site.), if the rate of inflation last year was 3 percent and the bargaining gap this year and next year is 1 percent, then inflation this year and next will be: A) 3% then 4% B) 4% then 5% C) 4% then 3% D) 3% then 2%
B) 4% then 5%
Imagine an economy that grows at a constant rate for the 21st century. A plot of the level of GDP over time will fit: A) A straight upward-sloping line on a linear scale, and a convex line on a linear scale. B) A convex line on a linear scale, and a straight upward-sloping line on a ratio scale. C) A concave line on a linear scale, and a straight upward-sloping line on a ratio scale. D) A downward-sloping line on both a linear scale and a ratio scale
B) A convex line on a linear scale, and a straight upward-sloping line on a ratio scale.
An overseas bank announces that it is introducing a new type of savings account paying a 3 percent fixed rate of interest for deposits of one year duration. This 3 percent is: A) A real rate of interest B) A nominal rate of interest C) A post-tax rate of interest D) A long-term rate of interest.
B) A nominal rate of interest
Cuts in public expenditure do not guarantee a reduction in the government's deficit because: A) Firms will try to pay less tax B) Aggregate demand will fall, reducing government revenue C) Aggregate demand falls, and firms invest less D) There is a fall in autonomous consumption
B) Aggregate demand will fall, reducing government revenue
Which of the following statements about the wage-setting curve is correct? A) The wage-setting curve depicts the workers' reservation wage for different levels of economy-wide employment B) At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate. C) A lower unemployment rate shifts the wage-setting curve down. D) A higher unemployment rate shifts the wage-setting curve down.
B) At each point on the wage-setting curve, the workers are choosing their best response effort level
Which of the following might help to minimize the costs of adapting to new technology? A) Strict regulation of new start-ups B) Government re-training schemes C) A poorly developed financial sector. D) A shortage of skilled labor
B) Government re-training schemes
The wage-setting curve shows that at relatively low levels of unemployment, economy-wide real wages will be relatively: A) Low B) High
B) High
Suppose that everyone who had been looking for a job for more than six months gave up in despair and stopped looking for a job. What would happen to the unemployment rate? A) It would increase B) It would decrease C) It would not change D) It would change, but the effect cannot be predicted
B) It would decrease (If unemployed individuals stop looking for a job, that means they are now no longer 'unemployed' but now merely out of the labor force. This means the unemployment rate would fall. This is an issue in that many might see this as a sign of macroeconomic improvement, but these individuals still do not have work)
The introduction of a new labor-saving technology results in: A) Higher wage share of output and higher income inequality in the short run. B) Lower wage share of output and higher income inequality in the short run C) Lower wage share of output and lower income inequality in the short run. D) Higher unemployment, lower wage share of output, and higher income inequality in the long run.
B) Lower wage share of output and higher income inequality in the short run
Which of the following statements are correct? A) Your material wealth is the largest amount that you can consume without borrowing, which includes the value of your house, car, financial savings, and human capital. B) Net income is the maximum amount that you can consume and leave your wealth unchanged. C) In economics, investment means saving in financial assets such as stocks and bonds. D) Depreciation is the loss in your financial savings due to unfavorable movements in the market.
B) Net income is the maximum amount that you can consume and leave your wealth unchanged.
Which of the following statements is correct? A) In the credit market, asymmetric information regarding the quality of the project leads to a principal-agent problem, where the borrower is the principal and the lender is the agent. B) Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. C) Borrowers whose limited wealth makes it impossible to get a loan at any interest rate are termed 'credit-constrained'. D) The amount that the lender puts into the project is called the equity.
B) Providing collateral is a signal to the lender that the project is of sufficient quality to succeed.
Unemployment is a stock. The size of that stock will increase if: A) The rate of job destruction is 4% per year and the rate of job creation is 5% per year. B) The rate of job destruction is 2% per year and the rate of job creation is 1% per year. C) The rate of job destruction is 4% per year and the rate of job creation is 4% per year. D) The government restricts access to unemployment benefits.
B) The rate of job destruction is 2% per year and the rate of job creation is 1% per year.
Which of the following statements regarding fiscal policy is correct? A) Expansionary fiscal policy (e.g. increasing the government deficit or reducing the surplus) always has a stabilizing effect on the economy. B) Unemployment benefits and a proportional tax system are both automatic stabilizers. C) In a recession, the aim of a government fiscal expansion is to override the effects of automatic stabilizers. D) As a family worried about mounting debts should cut spending and save more, so should an economy adopt austerity measures when its debt level is high, to restore its public finances to balance.
B) Unemployment benefits and a proportional tax system are both automatic stabilizers.
In an economy where the MPC is 0.7, the proportional tax rate is 0.25 and the marginal propensity to import is 0.2, the multiplier will be: A) 0.675 B) 2.1 C) 1.48 D) 2.35
C) 1.48
Which of the following cases would the wage-setting curve shift up? A) Better monitoring by the employer B) Lower unemployment rate. C) A more generous unemployment insurance scheme. D) A sudden influx of immigration
C) A more generous unemployment insurance scheme.
Which of the following is likely to lead to a fall in the level of investment spending? A) A rise in interest rates and increased optimism about future demand B) An easing of monetary policy by the central bank C) An official forecast of a downturn in the economy D) A rise in the expected rate of profit.
C) An official forecast of a downturn in the economy
Which of the following statements about the price-setting curve is correct? A) The price-setting curve simply depicts the firms' profit-maximizing price level for different levels of economy-wide employment. B) Firms have to pay a higher real wage when the employment rate is higher. Therefore the price-setting curve is upward-sloping. C) At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. D) At points above the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level.
C) At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level.
Imagine that the rate of inflation has been 10 percent per year for a number of years. The central bank then introduces a 'tight' monetary policy and the rate of inflation comes down to 5 per cent per year. This reduction is an example of: A) Deflation B) Falling prices C) Disinflation D) Austerity
C) Disinflation
Which of the following statements is correct regarding disposable income? A) Disposable income is the amount of income that is given away. B) Disposable income is total income from wages, profit, rent, and interest. C) Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions. D) Disposable income is the exact measure of one's wellbeing
C) Disposable income is the maximum amount of expenditure possible without having to borrow or sell possessions.
Which of the following variables has NOT followed the so-called 'hockey-stick' trajectory? Recall, the 'hockey-stick' trajectory refers to graphs which illustrate that there has been little to no growth for most of history, followed by a sudden and sharp change to a positive growth rate. A) GDP per capita B) Labor productivity C) Inequality D) Global carbon emissions from burning fossil fuels
C) Inequality (There is no unidirectional trend in inequality over time. While early hunter-gatherer tribes were undoubtedly almost perfectly equal, economies in the modern era have varied from highly equal to highly unequal.)
The Beveridge curve will shift downward (toward the origin) if: A) Vacancies are increasingly concentrated in given sector of the economy B) Vacancies are increasingly concentrated in a geographical region C) Information about job vacancies improves. D) Unemployment benefits become more generous.
C) Information about job vacancies improves.
Capitalism is an economic system based on A) Private property B) Private property and markets C) Private property, markets, and firms D) Markets and state-owned firms
C) Private property, markets, and firms
A fall in the world price of commodities will: A) Shift the price-setting curve down and the Phillips curve up. B) Create a positive bargaining gap. C) Shift the price setting curve up and the Phillips curve down. D) Trigger accelerating inflation
C) Shift the price setting curve up and the Phillips curve down.
The historical process which led to requiring fewer inputs to produce the same output is referred to as... A) Capitalism B) Specialization C) The technological revolution D) History's hockey stick
C) The technological revolution
A household's net worth (or equity) is best described as: A) The total value of its assets. B) The value of its house and other consumer durables. C) The total value of assets minus the total value of its liabilities D) The value of its house minus the amount of the outstanding mortgage.
C) The total value of assets minus the total value of its liabilities
Which of the following is a distinctive characteristic of 'inclusive unions'? A) They bargain for the highest possible wage, regardless of the consequences B) They bargain for the maximum degree of job protection by the government C) They set their wage demands in accordance with the productivity of labor D) They aim to push up the wage curve regardless of productivity growth
C) They set their wage demands in accordance with the productivity of labor
Which of the following best describes the short-run relationship between inflation and unemployment? A) Unemployment falls; inflation falls B) Unemployment falls; inflation falls at a faster rate C) Unemployment rises; inflation falls D) There is no relationship between unemployment and inflation.
C) Unemployment rises; inflation falls
Which of the following statements regarding labor unions and wage bargaining is correct? A) Labor unions have no bargaining power when bargaining for their wages. B) A labor union can set both the wage level and the employment level. C) Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level. D) The unions' bargaining power comes from their ability to shut down firms.
C) Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level.
The price-setting curve shows how output per worker is split between: A) Unions (dues) and workers (real wage) B) Firm owners (real profit) and unions (dues) C) Workers (real wage) and firm owners (real profit) D) None of the above.
C) Workers (real wage) and firm owners (real profit)
In an imaginary economy, GDP falls from $100 billion to $95 billion while output per worker rises from $5000 to $5020. In this economy there has been: A) An increase in production and a fall in productivity B) An increase in production and an increase in productivity C) A fall in production and a fall in productivity D) A fall in production and an increase in productivity.
D) A fall in production and an increase in productivity.
Interest rates can influence the macroeconomy by influencing A) Households' decisions to borrow and spend B) Businesses' decisions to invest in new projects C) The attractiveness of holding equities D) All of the above
D) All of the above
People are more productive when they specialize (focus on a limited range of activities) due to: A) Difference in ability B) Learning by doing C) Economies of scale D) All of the above
D) All of the above
Potential solutions to the principal-agent problem in the credit market include: A) Lenders refusing to lend B) The borrower setting aside some collateral C) The lender requiring the borrower to put some of her wealth into the project D) Both b. and c.
D) Both b. and c.
The Federal Reserve helps prevent bank runs by... A) Providing deposit insurance B) Operating as banks' lender of last resort C) Outlawing bank runs D) Both by providing deposit insurance and by operating as banks' lender of last resort
D) Both by providing deposit insurance and by operating as banks' lender of last resort
It is often said that independent central banks are more likely to run a successful monetary policy than governments because their commitment to low inflation is more 'credible' than government promises. One reason for this is that: A) Independent central banks are better at economic forecasting. B) People who work in central banks have a strong dislike of inflation. C) Central banks can set interest rates D) Central banks are less subject to political pressures (e.g. for lower unemployment) than governments.
D) Central banks are less subject to political pressures (e.g. for lower unemployment) than governments.
The weakness of the original Phillips curve is that it ignored: A) Time B) Household preferences C) Policymaker preferences D) Expectations
D) Expectations
In periods of rapid inflation, which of the following groups tend to lose out? A) Low-income households. B) Households with substantial financial wealth. C) Borrowers (debtors). D) Lenders (creditors)
D) Lenders (creditors)
Which of the following statements is correct? A) In economics, money refers to the coins and notes in circulation. B) I can exchange my apples for your oranges. Therefore apples can be classified as money. C) Banks must exist for money to do its work. D) Money allows purchasing power to be transferred between consumers.
D) Money allows purchasing power to be transferred between consumers
In the short run, successive additions to capital produce smaller and smaller increases in output. In the long run, however, GDP continues to rise. This is because: A) Workers work harder. B) Government policy encourages economic growth. C) Economies benefit from economies of scale. D) New capital equipment incorporates the latest technological developments.
D) New capital equipment incorporates the latest technological developments.
Which of the following statements regarding the multiplier is correct? A) If two countries were identical except for the share of credit-constrained households, then the country with the higher share would have a smaller multiplier B) The multiplier is constant over the business cycle C) An increase in exports leads to a higher multiplier D) Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier.
D) Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier.
The relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force) is known as: A) The Phillips curve B) The labor demand curve C) The wage curve D) The Beveridge curve
D) The Beveridge curve
The widespread introduction of new technology into an economy takes time. The length of time between first appearance and general acceptance is known as: A) The innovation lag B) The time gap C) The knowledge lag D) The diffusion gap
D) The diffusion gap
In the expression for aggregate consumption C=C0+C1Y C = C0 + C1Y , the term C1 is known as: A) Autonomous Consumption B) The average propensity to consume. C) The multiplier D) The marginal propensity to consume
D) The marginal propensity to consume
In the context of aggregate demand, which of the following constitutes investment: A) Putting money in a savings account. B) Buying company shares. C) Buying a new car for personal use. D) Upgrading your firm's IT equipment.
D) Upgrading your firm's IT equipment.
