Intermediate Macroeconomic Sample Quizzes

If the currency-deposit ratio equals 0.5 and the reserve-deposit ratio equals 0.1, then the money multiplier equals:

2.5.

If 7 million workers are unemployed, 143 million workers are employed, and the adult population equals 200 million, then the unemployment rate equals approximately ______ percent.

4.7

Exhibit: Supply Shock (Graph) Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

A

The IS curve shifts when any of the following economic variables change except:

the interest rate.

In a simple model of the supply and demand for pizza, the endogenous variables are:

the price of pizza and the quantity of pizza sold.

The equilibrium condition in the Keynesian-cross analysis in a closed economy is:

actual expenditure equals planned expenditure.

The marginal product of capital is:

additional output produced when one additional unit of capital is added.

"Inflation tax" means that:

as the price level rises, the real value of money held by the public decreases.

The IS and LM curves together generally determine:

both income and the interest rate.

To increase the money supply, the Federal Reserve:

buys government bonds.

Private saving is:

disposable income minus consumption.

An increase in taxes shifts the IS curve:

downward and to the left.

Variables that a model tries to explain are called:

endogenous

According to the Phillips curve, other things being equal, inflation depends positively on:

expected inflation.

The ex ante real interest rate is based on _____ inflation, while the ex post real interest rate is based on _____ inflation.

expected; actual

The production function feature called "constant returns to scale" means that if we:

increase capital and labor by 10 percent each, we increase output by 10 percent.

Exhibit: Shift in Aggregate Demand (Graph) Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity.

increase; increase

The quantitative easing operations conducted by the Federal Reserve between 2007 and 2011 resulted in _____ increases in the monetary base and _____ increases in money supply.

large; smaller

Exhibit: Saving, Investment, and the Interest Rate 1 (GRAPH) 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 the government cuts taxes, holding other factors constant?

point A

Consumption depends ______ on disposable income, and investment depends ______ on the real interest rate.

positively; negatively

Exhibit: IS-LM Monetary Policy (Graph) 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:

r3, Y3.

To end a hyperinflation, a government trying to reduce its reliance on seigniorage would:

raise taxes and cut spending.

The percentage of a year's real GDP that must be forgone to reduce inflation by 1 percentage point is called the:

sacrifice ratio.

Exhibit: Market for Real Money Balances (Graph) Based on the graph, if the interest rate is r3, then people will ______ bonds, and the interest rate will ______.

sell; rise

Assume that a firm buys all the parts that it puts into an automobile for $10,000, pays its workers $10,000 to fabricate the automobile, and sells the automobile for $22,000. In this case, the value added by the automobile company is:

$12,000

If currency held by the public equals $100 billion, reserves held by banks equal $50 billion, and bank deposits equal $500 billion, then the monetary base equals:

$150 billion.

If the steady-state rate of unemployment equals 0.125 and the fraction of unemployed workers who find jobs each month (the rate of job findings) is 0.56, then the fraction of employed workers who lose their jobs each month (the rate of job separations) must be:

0.08.

According to the quantity theory of money, a 5 percent increase in money growth increases inflation by ___ percent. According to the Fisher equation, a 5 percent increase in the rate of inflation increases the nominal interest rate by ____ percent.

5; 5

If the real return on government bonds is 3 percent and the expected rate of inflation is 4 percent, then the cost of holding money is ______ percent.

7

Exhibit: Short Run to Long Run (Graph) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____, with a _____ price level.

C; higher

Exhibit: Supply Shock (Graph) In this graph, assume that the economy starts at point A, and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium, and point ______ represents long-run equilibrium.

E; A

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______.

IS; right

Analysis of the short run and long run indicates that the ______ assumptions are most appropriate in ______.

Keynesian; the short run, whereas the classical assumptions are most appropriate in the long run

In the classical model with fixed income, an increase in the real interest rate could be the result of:

an increase in government spending.

The debt-deflation hypothesis explains the fall in income as a consequence of unexpected deflation transferring wealth ______, and that creditors have a ______ propensity to consume than debtors.

from debtors to creditors; smaller

The assumption of flexible prices is a more plausible assumption when applied to price changes that occur:

in the long run.

Which of the following is a flow variable?

income

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium:

output will decrease, but the price level will increase.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run, and ______ increase(s) in the long run.

output; prices

A competitive, profit-maximizing firm hires labor until the:

price of output multiplied by the marginal product of labor equals the wage.

According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker _____ increases.

productivity

Exhibit: IS-LM Fiscal Policy (Graph) Based on the graph, starting from equilibrium at interest rate r1 and income Y1, a tax cut would generate the new equilibrium combination of interest rate and income:

r2, Y3.

An increase in the interest rate:

reduces planned investment because the interest rate is the cost of borrowing to finance investment projects.

Exhibit: Keynesian Cross (Graph) In this graph, if firms are producing at level Y3, then inventories will ______, inducing firms to ______ production

rise; decrease

If s is the rate of job separation, f is the rate of job finding, and both rates are constant, then the steady state unemployment rate is approximately:

s / (s + f).

Given that M / P = kY, when the demand for money parameter, k, is large, the velocity of money is ______, and money is changing hands ______.

small; infrequently

The unemployment resulting when real wages are held above equilibrium is called ______ unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called ______ unemployment.

structural; frictional

If an earthquake destroys some of the capital stock, the neoclassical theory of distribution predicts that:

the real wage will fall, and the real rental price of capital will rise.

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

A policy that decreases the job separation rate _____ the natural rate of unemployment.

will decrease

If the GDP deflator in 2009 equals 1.25 and nominal GDP in 2009 equals $15 trillion, what is the value of real GDP in 2009?

$12 trillion

Exhibit: Policy Interaction (Graph) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep output constant, the Federal Reserve should _____ the money supply, shifting to _____.

decrease; LM3

If the money supply is held constant, then an increase in the nominal interest rate will ______ the demand for money and ______ the price level.

decrease; increase

When a firm sells a product out of inventory, investment expenditures ______, and consumption expenditures ______.

decrease; increase

According to the imperfect-information model, when the price level falls but the producer did not expect it to fall, the producer:

decreases production.

When the Fed decreases the interest rate paid on reserves, it:

decreases the reserve-deposit ratio (rr).

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M, a higher price level P causes a ______ real money supply M / P, which ______ the interest rate and ______ spending.

lower; raises; reduces

The money supply will increase if the:

monetary base increases.

Assume that a firm is considering building a factory that will cost $5 million. It believes that it can get a profit from this factory of $600,000 per year for many years. The interest rate at which the firm can borrow money is 15 percent. After evaluating whether it should build the factory, the firm decides that it should:

not build because the rate of return on the factory is only 12 percent.

How can the Fed keep the economy from falling into a recession if the budget deficit is reduced? Use the IS-LM model to determine the impact of both the fiscal policy reducing the deficit and the monetary policy, which prevents output from falling. Using words, answer the following questions (and make sure to explain why things are happening to earn full points): - What happens to the curves and equilibrium values in the affected market(s) (i.e., the money market and/or goods market)? Explain. - What shifts in the IS-LM model? Explain. - Are the equilibrium levels of interest rates and income in the IS-LM model different than before the increase in oil prices? If so, how are they different? Explain.

The reduction of the budget deficit requires increases in taxes and/or decreases in government expenditures, both of which decrease planned expenditures (shifts the PE curve to the left) at any given real interest rate. This shifts the IS curve to the left. If the Fed does nothing, in the IS-LM model we see that the equilibrium level of output/income and the interest rate would decrease. The Fed attempts to maintain the original level of output/income by increasing the money supply M. Assuming P is fixed, in the money market this results in a shift of the money supply curve (M/P) to the right, which results in a lower real interest rate r at any level of output/income. This is a rightward shift of the LM curve. The result is that, relative to the original equilibrium, the output is the same, but the interest rate r is much lower, and lower than it would have been had the Fed done nothing. Equilibrium in the goods market maintains the original level of output, because the much lower interest rate after the Fed's action increases investment by enough to offset the decreases in consumption/government spending from the budget deficit reduction.

Consider a competitive economy in which factor prices adjust to keep the factors of production fully employed and the interest rate adjusts to keep the supply and demand for goods and services in equilibrium. The economy can be described by the following set of equations: Y = AKαL(1 - α) Y=C+I+G C = C(Y - T) I = I(r) How does an increase in government spending, holding other factors constant, affect the level of: public saving? private saving? national saving? the equilibrium interest rate? the equilibrium quantity of investment?

a. Public saving equals T - G. An increase in government spending, G, reduces public saving. b. Private saving equals Y - T - C. An increase in government spending does not affect privatesaving. c. National saving equals Y - C - G. An increase in government spending reduces nationalsaving by an amount equal to the increase in government spending. d. The equilibrium interest rate increases to bring desired investment into equilibrium with thereduced quantity of national saving. e. The equilibrium quantity of investment is reduced via the increase in the interest rate by anamount equal to the increase in government spending.

The reason that the income response to a fiscal expansion is generally less in the IS-LM model than it is in the Keynesian-cross model is that the Keynesian-cross model assumes that:

investment is not affected by the interest rate, whereas in the IS-LM model fiscal expansion raises the interest rate and crowds out investment.

The interest rate determines ______ in the goods market and money ______ in the money market.

investment spending; demand

According to the classical theory of money, reducing inflation will not make workers richer because firms will increase product prices ______ each year and give workers ______ raises.

less; smaller