ECON

1. The National Income and Product Accounts provides a system for:
A. aggregating the production of all goods and services into a single measure of economic activity.
B. aggregating the production of all goods into a single measure of economic activity.
C

A. aggregating the production of all goods and services into a single measure of economic activity.

The National Income and Product Accounts allows us to relate __________ to __________ to __________.
A. household income; government income; firm income
B. total output; total spending; inflation
C. total output; inflation; total income
D. household incom

E. total output; total spending; total income

According to the expenditure approach, if Y is GDP, C is consumption, I is investment, G is government purchases, and NX is net exports, the national income identity can be written as:
A. Y + C - G = I + NX.
B. Y - C = I + G - NX.
C. Y - C - G - I = NX.
D

C. Y - C - G - I = NX.

In 2005, household expenditures accounted for about __________ of total GDP.
A. 19 percent
B. 40 percent
C. 16 percent
D. 70 percent
E. 11 percent

D. 70 percent

Which of the following are not included in the expenditure approach to National Income Accounting?
A. transfer payments
B. taxes
C. Social Security
D. changes in the stock exchange
E. all of the above

E. all of the above

Since about __________, United States expenditure shares by households, firms, and the government have been relatively __________.
A. 1939; constant
B. the Great Depression era; constant
C. 1950; variable
D. 1950; constant
E. 1929 until 1945; constant

D. 1950; constant

Nominal GDP is the __________ of all goods and services produced in a period of time using __________ prices.
A. value; 1945
B. summation; current
C. value; a previous year's
D. value; current
E. summation; base year

D. value; current

Nominal gross domestic product is defined as:
A. the value of all goods and services produced by an economy, within its borders, over a period of time, at base-year prices.
B. the value of all goods produced by an economy, within its borders, over a perio

C. the value of all goods and services produced by an economy, within its borders, over a period of time, at current prices.

If we calculate the real GDP using the initial period's prices, we are using a __________ index. If, instead, we use the final period's prices, we are using a __________ index.
A. Paasche; chain-weighted
B. Laspeyres; chain-weighted
C. Laspeyres; Paasche

C. Laspeyres; Paasche

Suppose we calculate the percent change in real GDP from year 1 to year 2 using both the Laspeyres and the Paasche indices. With the Laspeyres index we get 12 percent and with the Paasche index we get 9 percent. The chain-weighted growth of real GDP is:
A

E. 10.5 percent.

To get a more accurate view of the size of countries' economies, we first need to convert each country's GDP to the dollar using __________ and then adjust for __________.
A. the interest rate; the exchange rate
B. the exchange rate; price level differenc

B. the exchange rate; price level differences

Define E = $/� as the dollar/pound exchange rate and as the United Kingdom's nominal GDP; then , the United Kingdom's nominal GDP in dollars, is given by:
A. .
B. .
C. .
D. .
E. none of the above

C. .

Nominal GDP means that the value of all goods and services is measured in __________ prices.
A. average
B. last year's
C. the base year's
D. current
E. constant

D. current

Assuming the current rate of economic growth continues, the average parent of a college student will have a lifetime income __________ that of his or her son or daughter.
A. ten times
B. half
C. about the same as
D. five times
E. about twice

B. half

The study of economic growth concentrates on understanding the determinants of
A. the rate of price changes.
B. the short-term change in per capita GDP.
C. the rate of population growth.
D. the long-term change in per capita GDP.
E. none of the above.

D. the long-term change in per capita GDP.

Defining per capita GDP in 2003 as y2003 and per capita GDP in 2004 as , the growth rate of per capita GDP, , from 2003 to 2004 is given by:
A. .
B. .
C. .
D. .
E. .

D 04-03/03

According to the constant growth rate rule, if a variable starts at some initial value at t = 0 and grows at at a constant rate , then the value of the variable in three periods is given by:
A. .
B. .
C. .
D. .
E. .

C. y3=y0(1+g)^3

The rule of 70 states that:
A. if grows at a rate of g percent per year, then the number of years it takes to double is approximately equal to 70/g.
B. if grows at a rate of g percent per year, then the number of years it takes to double is exactly equal

A. if grows at a rate of g percent per year, then the number of years it takes to double is approximately equal to 70/g.

Between 1970 and 1976, Israel's average inflation rate was about 65 percent per year. With that rate of inflation, prices would double about every __________ using the rule of 70.
A. 93 years
B. 107.7 years
C. 0.95 years
D. 1.1 years
E. 9.3 years

D. 1.1 years

Suppose that, in 1950, Japan had an initial per capita GDP of $12,000 per year and China had a per capita GDP of $5,000. But China is growing at 5 percent per year and Japan is growing at 2 percent per year. __________ is richer in 2000 with a per capita

C. China; $57,337

Suppose that, in 1950, Japan has an initial per capita GDP of $15,000 per year and China has a per capita GDP of $2,500. But China is growing at 7 percent per year and Japan is growing at 2 percent per year. In 2000, __________ is the lower-income country

C. Japan; $40,374

Of the industrialized countries, in 2000, __________ had the highest per capita GDP, and in 1950, __________ had the lowest per capita GDP.
A. Japan, the United Kingdom
B. Japan; Japan
C. Germany; Germany
D. the United Kingdom; Germany
E. the United Kingd

B. Japan; Japan

When a lower-income economy's GDP is able to "catch up" with a higher-income economy's GDP, this behavior is related to an important concept in the study of economic __________.
A. growth
B. divergence
C. convergence
D. fluctuations
E. asset markets

C. convergence

Suppose k, l, and m grow at constant rates given by , , and . What is the growth rate of y if ?
A.
B.
C.
D.
E.

D gy=gm+(1/3)gk+(2/3)gt

Suppose k, l, and A grow at constant rates given by , , and .What is the growth rate of y if , ?
A.
B.
C.
D.
E.

D gy=gA+�gk+(1-�)gl

The costs of economic growth include which of the following?
A. pollution and the depletion of natural resources
B. global warming
C. the gradual release of individuals from physical labor
D. increased productivity
E. a and b

E. a and b

The text uses this analogy of the economic model: "As the model-builder, __________ what actions the robots can take and __________ the raw materials that fill the robot world. After constructing the world, you switch on the power source and __________.

D. you determine; you provide; watch what happens

Mathematically, an economic model is __________.
A. a fake world
B. a spreadsheet
C. an accurate representation of reality
D. a set of equations
E. the actual macroeconomy

D. a set of equations

Which of the following are we likely going to want to explain with an economic model?
i. Why people in the United States are fifty times richer than Ethiopians.
ii. What causes economic growth.
iii. What we think politicians should do with taxes.
A. i onl

D. i and ii.

Which of the following inputs do we generally not consider in a simple production function?
A. capital
B. labor
C. natural resources
D. utilities
E. both c and d

E. both c and d

In the production function Y=F(K,L
)=AK^(1/3)L^(2/3), A represents:
A. an unknown.
B. the amount of capital in an economy.
C. the amount of labor in an economy.
D. a productivity parameter.
E. an error term.

D. a productivity parameter.

Which of the following production functions exhibits constant returns to scale?
A.
B.
C.
D.
E. all of the above

E. all of the above

A firm's profit is simply defined as:
A. zero.
B. revenues plus costs.
C. revenues minus costs.
D. the price of output minus labor costs.
E. the price of output minus labor costs minus capital costs.

C. revenues minus costs.

The solution to the firm's maximization problem is:
A. how much capital and labor to hire given the rental rate of capital and labor's wage rate.
B. how much capital and labor to hire given the rental rate of capital only.
C. how much capital to hire give

A. how much capital and labor to hire given the rental rate of capital and labor's wage rate.

The marginal product of labor is defined as:
A. output divided by labor.
B. the additional output generated by hiring an additional unit of labor.
C. the additional output generated by hiring an additional unit of labor and capital.
D. the additional outp

B. the additional output generated by hiring an additional unit of labor

Consider Figure 4.2. The shape of this production function suggests:
A. a constant marginal product of capital.
B. a diminishing marginal product of capital.
C. a diminishing marginal product of labor.
D. an increasing marginal product of capital.
E. Not

C. a diminishing marginal product of labor.

If MPK = r, the firm:
A. should hire more labor.
B. should hire more capital until MPK= r.
C. should hire more capital until MPK = 0.
D. should get rid of some capital until MPK = r.
E. has the optimal amount of capital.

E. has the optimal amount of capital.

In the Cobb-Douglas production function, labor's share of GDP is _________.
A. two-thirds regardless of how much labor there is
B. two-thirds but can change as more laborers are added
C. one-third regardless of how much labor there is
D. always equal to o

A. two-thirds regardless of how much labor there is

In the Cobb-Douglas production function , if a = 1/4, then:
A. capital's share of GDP is one-fourth.
B. labor's share of GDP is three-fourths.
C. capital's share of GDP is three-fourths.
D. labor's share of income is one-fourth.
E. Both a and b are correc

E. Both a and b are correct.

Suppose the payments to capital and labor are (w
L
)/Y
= 2/3 and (r
K
)/Y
= 2/3, respectively. One implication of this result is:
A. w
L
+ r
K
< Y*.
B. w
L
+ r
K
= Y*.
C. w
L
+ r
K
> Y*.
D. (w
L
/r
K
) = Y*.
E. (w
L
/Y
)(r
K
/Y
) = 1.

C. w
L
+ r
K
> Y*.

You are an economist working for the International Monetary Fund. Your boss wants to know what is the total factor productivity of China, but all you have is data on per capita GDP, y, and the per capita capital stock, k. If you assume that capital's shar

D. A=Y/(k^(1/3))

As a rough approximation, differences in capital per person explain about __________ of the difference in incomes between the richest and poorest countries, while differences in __________ explain __________.
A. one-third; wages; two-thirds
B. one-third;

B. one-third; total factor productivity; two-thirds

To decompose what explains the difference in per capita GDP between any two countries, say, 1 and 2, we would use:
A.
B.
C.
D.
E.

A

Which of the following explain differences in total factor productivity?
A. institutions
B. human capital
C. infrastructure
D. legal structure.
E. all of the above

E. all of the above

Which of the following are essential for economic success?
A. property rights
B. the rule of law
C. contract enforcement
D. the separation of powers
E. all of the above

E. all of the above

In the Solow model, the parameter d denotes __________ and is __________.
A. investment; less than one
B. the depreciation rate; equal to zero
C. consumption; greater than one
D. the depreciation rate; less than one
E. investment; greater than one

D. the depreciation rate; less than one

Which of the following are an exogenous variable in the Solow model?
A. productivity
B. depreciation rate
C. saving rate
D. the initial capital stock
E. all of the above

E. all of the above

The equation sF(Kt,L)-dKt , is called:
A. saving.
B. investment.
C. net investment.
D. the capital stock.
E. depreciation.

C. net investment.

In Figure 5.1, if the economy begins with the initial capital stock at K1, the capital stock will __________ and the economy will __________.
A. decrease, grow
B. increase, grow
C. stay constant, shrink
D. decrease, shrink
E. stay constant, grow

B. increase, grow

If we define the saving rate as s, output as F(Kt,L), and the depreciation rate as d , and if sF(Kt,L) >dKt, the economy is:
A. contracting.
B. at the steady state.
C. growing.
D. in its short-run equilibrium.
E. none of the above

C. growing.

The Solow model assumes:
A. the capital stock is constant.
B. the number of workers is growing.
C. the number of workers is constant.
D. the saving rate changes each period.
E. the depreciation rate changes each period.

C. the number of workers is constant.

In the Solow model, if capital is in the steady state, then output:
A. will continue to grow.
B. is also in the steady state.
C. will continue to grow but its rate of growth will slow down.
D. will decline but its rate of growth will be positive.
E. will

B. is also in the steady state.

In the Solow model, the steady-state level of output per worker is a function of:
A. productivity.
B. the initial capital stock, productivity, and the saving rate.
C. the initial capital stock, productivity, and the depreciation rate.
D. the initial capit

E. productivity, the depreciation rate, and the saving rate.

An increase in the __________ leads to a higher steady-state level of output per worker; and a decline in __________ leads to a lower steady-state level of output per worker.
A. productivity; saving rate
B. saving rate; productivity
C. saving rate; deprec

D. Both a and b are correct.

The key difference between the Solow model and the production model is:
A. the Solow model endogenizes the process of capital accumulation.
B. the standard model endogenizes the process of capital accumulation.
C. the Solow model uses different values for

A. the Solow model endogenizes the process of capital accumulation.

If we define and as the saving rates in Countries 1 and 2, respectively; as the depreciation rates in Countries 1 and 2; and as productivity in Countries 1 and 2; and the production function per worker is , the Solow model predicts the difference in GDP p

A

If we define and as the saving rates in Countries 1 and 2, respectively, and and as productivity in Countries 1 and 2, in the Solow model, the equation __________ predicts that __________ contributes the majority to differences in steady-state output per

D. ; productivity differences

58. An implication of the Solow model is that, once an economy reaches the steady state,
A. long-term growth continues indefinitely.
B. long-term growth does not continue.
C. long-term growth accelerates.
D. long-term growth decelerates.
E. None of the ab

B. long-term growth does not continue.

An implication of the Solow model is that, once an economy reaches the steady state,
A. per capita consumption is constant.
B. per capita output is constant.
C. per capita capital is constant.
D. per capita consumption continues to grow.
E. a, b, and c ar

E. a, b, and c are correct.

Among the OECD countries, those that were relatively __________ in 1960 __________ between 1960 and 2000.
A. poor; grew slowly
B. rich; grew quickly
C. poor; grew quickly
D. rich; did not grow
E. poor; did not growth

C. poor; grew quickly

For which of the following does the Solow model not provide adequate explanations?
A. why saving rates differ across countries
B. the cause of productivity differences across countries
C. why population growth rates differ across countries
D. what causes

B. the cause of productivity

Consider Table 7.1. In January 2007, the unemployment rate was:
A. about 4.8 percent.
B. about 4.6 percent.
C. about 33.8 percent.
D. about 3.0 percent.
E. about 9.0 percent.

B. about 4.6 percent.

Using Figure 7.1, which depicts the U.S. unemployment rate, which of the following year(s) are the trough of a recession?
A. 1980
B. 1989
C. 2001
D. all of the above
E. none of the above

E. none of the above

A drawback of unemployment benefits is:
A. it gives workers a disincentive to find work.
B. it costs taxpayers over 50 percent of their income.
C. the payments are too large.
D. it lengthens the time spent unemployed.
E. Both a and d are correct.

E. Both a and d are correct.

The explanation for the upward sloping supply of labor curve is that:
A. the marginal product of capital is positive.
B. as the wage rises the opportunity cost of leisure rises, so people work more.
C. as the wage rises, people want to work less.
D. the m

B. as the wage rises the opportunity cost of leisure rises, so people work more.

In the labor market depicted in Figure 7.2, a decrease in labor regulation:
A. shifts labor supply from to .
B. shifts labor demand from to .
C. shifts labor demand from to .
D. shifts labor supply from to .
E. does none of the above.

B. shifts labor demand from to .

An increase in labor regulations results in:
A. the supply curve shifting left.
B. the labor demand curve shifting left.
C. the labor supply curve shifting left and the labor demand curve shifting right.
D. the labor demand curve shifting right.
E. neithe

B. the labor demand curve shifting left.

Because of the dynamics of the workforce, for example, whether or not workers become discouraged when there are changes in the economy,
A. the unemployment rate is not necessarily an accurate gauge of the labor market.
B. the unemployment rate is a precis

D. Both a and c are correct

The rise in the employment-population ratio largely is due to:
A. a shrinking U.S. population.
B. more teenagers entering the labor force.
C. more women entering the labor force.
D. an increase in immigrant workers.
E. It is unexplained.

C. more women entering the labor force.

Frictional unemployment is the unemployment that results from:
A. workers losing jobs during recession.
B. workers losing their jobs during seasonal changes.
C. workers changing jobs in a dynamic economy.
D. prevailing labor market institutions.
E. worker

C. workers changing jobs in a dynamic economy.

When discussing inflation, we generally speak of it in terms of:
A. the percent change in the consumer price index.
B. the percent change in the GDP deflator.
C. the level of the consumer price index.
D. one over the consumer price index.
E. a or b

E. a or b

In 1979, in the face of rising competition in the fast food hamburger market, McDonald's reduced the price of its cheeseburger to $0.43. If the CPI in 1979 was 36 and the CPI in 2006 was 100, what is the price of a 1979 cheeseburger in 2006 dollars?
A. $0

C. $1.19

Often, when discussing inflation, we use the "core rate of inflation," which excludes __________ from its calculation.
A. energy prices
B. food and energy prices
C. housing prices
D. food and housing prices
E. energy and housing prices

B. food and energy prices

In the United States, money is backed by:
A. oil.
B. gold.
C. silver.
D. nothing.
E. none of the above

D. nothing.

Fiat money has value because:
A. it is backed by gold.
B. people believe it has value.
C. it has intrinsic value.
D. it is backed by silver.
E. none of the above

B. people believe it has value.

Fiat money has value because:
A. people believe it has value.
B. of social convention.
C. it is backed by gold.
D. it has intrinsic value.
E. a and b are correct.

E. a and b are correct.

The velocity of money is:
A. how quickly money can be printed.
B. how quickly individuals spend their income.
C. the average number of times a dollar is used in a transaction per year.
D. how many times individuals are paid per year.
E. none of the above

C. the average number of times a dollar is used in a transaction per year.

The velocity of money can be calculated from the quantity equation with:
A. .
B.
C.
D. .
E. .

D. PtYt|Mt

Using the quantity equation, if , Pt = 1.1, and , then the velocity of money is:
A. 10.
B. 9.1.
C. 11.
D. 909.
E. 0.10.

C. 11.

According to the classical dichotomy, in the long run, there is:
A. accelerating economic growth.
B. perfect connectivity between the nominal and real sides of the economy.
C. complete separation of the nominal and real sides of the economy.
D. no growth

C. complete separation of the nominal and real sides of the economy.

In the quantity theory of money, the:
A. price level is exogenous.
B. real GDP, velocity, and money supply are endogenous.
C. real GDP and money supply are endogenous.
D. real GDP, velocity, and money supply are exogenous.
E. real GDP is endogenous.

D. real GDP, velocity, and money supply are exogenous.

If long-run real GDP growth is determined by real changes in the economy, the quantity theory of money implies that:
A. changes in the money growth rate lead one-for-one to changes in the inflation rate in the long run.
B. changes in the money growth rate

A. changes in the money growth rate lead one-for-one to changes in the inflation rate in the long run.

You are the head of the central bank and you want to maintain 2 percent long-run inflation, using the quantity theory of money. If the real GDP growth is 4 percent and velocity is constant, you suggest a __________.
A. 6 percent interest rate
B. 6 percent

B. 6 percent money supply growth

The implications of the quantity theory of money are the main basis for which of the following quotes?
A. "Inflation is always zero in the long run."
B. "Inflation is always and everywhere a fiscal phenomenon."
C. "Inflation is always and everywhere a mon

C. "Inflation is always and everywhere a monetary phenomenon.

Let r denote the real interest rate, i denote the nominal interest rate, and denote the rate of inflation. The equation i=r+pi is called:
A. the money supply.
B. the quantity equation.
C. the Fisher equation.
D. the quantity theory of money.
E. money neut

C. the Fisher equation.

By purchasing a fixed-rate 30-year mortgage, inflation risk:
A. is eradicated.
B. is spread equally to the borrower and lender.
C. is passed from the lender to the borrower.
D. is passed from the borrower to the lender.
E. none of the above

D. is passed from the borrower to the lender.

One problem with inflation is that:
A. it steadily erodes real income.
B. it often comes in surprising and unpredictable ways.
C. nominal interest rates are not indexed to inflation.
D. fixed-rate mortgages are not adjusted for inflation.
E. price stagger

B. it often comes in surprising and unpredictable ways.

If all price setters are not convinced that high inflation rates will end soon, there is:
A. price staggering.
B. a transfer of wealth from one group to the other.
C. substantial menu costs.
D. a coordination problem.
E. negative real interest rates.

E. negative real interest rates.

Which of the following is not an example of a short term macroeconomic "shock"?
A. planned investment expenditures
B. a hurricane
C. increased military spending
D. a change in the tax code
E. new technology

A. planned investment expenditures

Potential output is defined as __________.
A. the amount of total output if all inputs were utilized at their long-run, sustainable levels
B. what an economy produces when it is at capacity
C. the current level of output
D. the amount of output where infl

A. the amount of total output if all inputs were utilized at their long-run, sustainable levels

What is the best definition of the short term in the short-term model?
A. about two years
B. There is no such thing as the short term.
C. the length of time for short-term deviations to return to their long-run values
D. the length of a recession
E. the a

C. the length of time for short-term deviations to return to their long-run values

According to the Phillips curve, short-term changes in inflation are due to
A. changes in interest rates.
B. changes in unemployment.
C. changes in short-term output fluctuations.
D. changes in long-term inflation.
E. changes in long-term output.

C. changes in short-term output fluctuations.

Suppose an economy exhibits a large unexpected increase in productivity growth that lasts for a decade. However, monetary policymakers are slow to recognize that the change is to potential, not current, output, and interpret the increase in output as a bo

A. inflationary; raising; recessionary

According to the text, which of the following can be used to characterize potential output?
i. Assume a perfectly smooth trend is passing through the quarter-to-quarter movements in the real GDP.
ii. Take averages of the surrounding actual GDP numbers.
ii

D. i and ii

According to the text, which of the following can be used to approximate potential output?
i. Assume a perfectly smooth trend is passing through the quarter-to-quarter movements in the real GDP.
ii. Survey leading economists.
iii. Gather current data from

A. i only

Consider Figure 9.1.
A. Area a is where current output is less than potential output, and area b is where current output is greater than potential output.
B. Area a is where current output is greater than potential output, and area b is where current outp

B. Area a is where current output is greater than potential output, and area b is where current output is less than potential output.

According to the Phillips curve presented in the text, a positive macroeconomic shock:
A. increases the rate of inflation.
B. decreases the rate of inflation.
C. has no effect on the rate of inflation.
D. has a negative effect on the unemployment rate.
E.

A. increases the rate of inflation.

If change-in-pi=0, the macroeconomy is:
A. in an expansion.
B. in a recession.
C. at its potential level of output.
D. Not enough information is given.
E. none of the above

C. at its potential level of output.

Consider the Phillips curve at in Figure 9.3.
A. The economy is booming.
B. The economy is inflationary.
C. The economy is in recession.
D. The economy is at potential output.
E. Not enough information is given to determine.

C. The economy is in recession.

According to Okun's law, if the Federal Reserve wants to reduce unemployment, it should __________ interest rates, which would __________ output.
A. reduce; reduce
B. increase; increase
C. reduce; increase
D. reduce; not change
E. not change; increase

C. reduce; increase

According to Okun's law, if the Federal Reserve wants to increase unemployment, it should __________ interest rates, which would __________ output.
A. increase; increase
B. increase; reduce
C. reduce; reduce
D. reduce; not change
E. not change; increase

B. increase; reduce

Taken together, the Phillips curve and Okun's law imply there is a __________ relationship between __________ and unemployment.
A. positive; inflation
B. negative; inflation
C. negative; interest rates
D. positive; interest rates
E. Not enough information

B. negative; inflation

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, is:
A. 4 percent.
B. -4 percent.
C. 2 percent.
D. -2 percent.
E. Not enough information is given.

B. -4 percent.

Every six weeks, or so, the Federal Reserve meets to set the __________.
A. discount rate
B. mortgage rate
C. federal funds rate
D. 10-year bond rate
E. tax rate

C. federal funds rate

The IS curve describes short-run movements in an economy via which of the following?
A.
B.
C.
D.
E.

B

According to the IS curve, when interest rates rise, __________ and __________.
A. governments borrow less; firms produce less
B. firms and households borrow more; firms produce less
C. firms and households borrow less; firms produce less
D. firms and hou

C. firms and households borrow less; firms produce less

In the IS curve, consumption is represented as a constant fraction of __________, and, therefore, is __________ than current output.
A. potential output; more volatile
B. potential output; smoother
C. short-run fluctuations; smoother
D. short-run fluctuat

B. potential output; smoother

In the simple IS curve analysis, which of the following includes both the real interest rate and the potential output?
A. exports
B. consumption
C. government expenditures
D. investment
E. imports

D. investment

If the real interest rate is less than the marginal product of capital, firms are better off:
A. producing at a loss.
B. saving their earnings in an economy-wide financial market.
C. accumulating more inventory.
D. borrowing in financial markets and buyin

D. borrowing in financial markets and buying more capital

In the equation , if b is close to zero,
A. investment is not very sensitive to real interest rate changes.
B. investment is not very sensitive to changes in the marginal product of capital.
C. investment is very sensitive to real interest rate changes.
D

E. a and b are correct.

In the equation , if b equals zero,
A. investment is sensitive to tax rate changes.
B. investment is extremely sensitive to changes in the marginal product of capital.
C. investment is not very sensitive to real interest rate changes.
D. investment is ins

D. investment is insensitive to real interest rate changes.

Consider two economies with the following IS curves, denoted 1 and 2:
IS1:
IS2:
Given these two curves, the economies are identical except that they respond to interest rate changes differently. Suppose we assume , , , . If the real interest rate in each

A. Country 1 will move from its long-run equilibrium to 1 percent above its potential and Country 2 will move from its long-run equilibrium to 0.5 percent above its potential.

Consider Figure 11.5. If there is a positive aggregate demand shock and interest rates remain constant, the economy will move from point e to:
A. point a.
B. point c.
C. point d.
D. point b.
E. none of the above

B. point c.

Consider Figure 11.5. If the interest rate decreases and there is a negative aggregate demand shock, the economy will move from point e to:
A. point b.
B. point c.
C. point d.
D. point f.
E. none of the above

D. point f.

The Permanent Income hypothesis suggests that people will base their consumption on their:
A. permanent income only.
B. temporary income more than their permanent income.
C. permanent income more than their temporary income.
D. temporary income only.
E. f

C. permanent income more than their temporary income.

According to Ricardian equivalence, an increase in government expenditure without a proportional tax increase implies that households:
A. expect future tax increases and will reduce spending today.
B. expect higher current income and will increase spendin

A. expect future tax increases and will reduce spending today.

The MP curve stands for __________ and describes __________.
A. monopoly pricing; how firms set prices
B. monetary policy; how the Federal Reserve sets the inflation rate
C. monetary policy; how the federal government sets short-run output fluctuations
D.

E. monetary policy; how the Federal Reserve sets the real interest rate

Which of the following is the Fisher equation?
A.
B.
C.
D.
E.

D.

Consider the economy presented in Figure 12.2. If the stock market drops sharply, there is a loss in consumer and investor confidence and the economy moves from __________. To prevent a __________, the Fed __________, and the economy moves from __________

B. point d to c; recession; lowers interest rates; point c to b

If prices are sticky and there are no aggregate demand shocks, and if the Fed raises the interest rate, __________ and __________.
A. unemployment falls; potential output falls
B. the real interest rate falls; short-run output falls
C. the unemployment ra

D. the real interest rate rises; short-run output falls

Expected inflation is:
A. equal to zero.
B. equal to the real interest rate.
C. equal to future periods' inflation rate.
D. the rate of inflation that firms believe will prevail in macroeconomy.
E. about 2 percent.

D. the rate of inflation that firms believe will prevail in macroeconomy.

The economywide rate of inflation is given by:
A. .
B. .
C. .
D. .
E. .

C. pi=pi^et+vYt

According to the Phillips curve, if current output equals potential output,
A. unemployment is zero.
B. inflation fluctuates a lot.
C. inflation is steady.
D. unemployment is negative.
E. the economy is booming.

C. inflation is steady.

According to the Phillips curve, if current output is above potential output,
A. inflation falls.
B. inflation rises.
C. unemployment falls.
D. inflation is constant.
E. tax rates rise.

B. inflation rises.

In the Phillips curve o is:
A. a demand shock.
B. an inflation shock.
C. a measure of the sensitivity of inflation to demand conditions.
D. a permanent price trend.
E. fiscal policy shock.

B. an inflation shock.

The most immediate and visible form of inflation shock is:
A. the real wage.
B. the price of corn.
C. the price of oil.
D. growth in the stock market.
E. bond prices.

C. the price of oil.

Starting from any point in the Phillips curve in Figure 12.4, an unexpected increase in oil prices will move the economy from:
A. point a to b.
B. point c to b.
C. point a to c.
D. point b to c.
E. Not enough information is given.

C. point a to c.

An increase in interest rate by the Federal Reserve will affect only real interest rates because:
A. inflation is sticky in the short run.
B. the relationship between money growth and inflation does not necessarily hold in the short run.
C. prices are fle

E. a and b are correct.

Which of the following contributed to high levels of inflation in the 1970s?
i. oil price shocks
ii. lower taxes
iii. a productivity slowdown
A. i only
B. ii only
C. iii only
D. i and iii
E. ii and iii

D. i and iii

Which of the following statements is not true?
A. Many agents suffer from money illusion.
B. Small menu prices lead to price stickiness.
C. Under adaptive expectations, prices are perfectly flexible.
D. In the classical dichotomy, all prices are flexible.

C. Under adaptive expectations, prices are perfectly flexible.

If nominal interest rates are high, you:
A. hold only cash.
B. hold less savings and more cash.
C. hold all your money in a different currency.
D. never have any cash in your checking account.
E. hold less cash and more savings.

E. hold less cash and more savings.

When the Federal Reserve loosens money, the __________ and interest rates __________.
A. money supply curve shifts right; rise
B. money supply curve shifts right; fall
C. money demand curve shifts right; rise
D. money demand curve shifts left; rise
E. mon

B. money supply curve shifts right; fall

Starting at any equilibrium in Figure 12.11, if the Fed tightens money, the money market would move from:
A. point C to A.
B. point B to D.
C. point B to C.
D. point A to D.
E. Not enough information is given.

C. point B to C.

In most advanced economies, central banks target __________ to conduct monetary policy.
A. tax rates
B. money supply
C. interest rates
D. government debt
E. exchange rates

C. interest rates

In the simple monetary policy rule , (pi,t-pi) represents:
A. the marginal product of capital.
B. how sensitive monetary policy is to changes in inflation.
C. the deviation of the inflation rate from the target rate.
D. the target rate of inflation.
E. no

C. the deviation of the inflation rate from the target rate.

Consider Figure 13.1, beginning at point e. If there is a change in the inflation rate,
A. there is movement along the AD curve to point b.
B. the AD curve shifts right to point a.
C. the AD curve shifts left to point g.
D. there is movement along the AD

E. Not enough information is given.

Consider Figure 13.2. Each of the aggregate demand curves pictured represents a different economy. In which economy would fighting inflation have the biggest impact on real output?
A. Economy 1
B. Economy 2
C. Economy 3
D. Economy 4
E. Not enough informat

B. Economy 2

Consider Figure 13.2. Each of the aggregate demand curves pictured represents a different economy. In which economy is the central bank most concerned with inflation?
A. Economy 4
B. Economy 1
C. Economy 3
D. Economy 2
E. Not enough information is given.

D. Economy 2

A change in which of the following parameters would cause a movement along the AD curve ?
A.
B.
C.
D.
E. a and b

B. Pi,t

The aggregate supply curve is derived from:
A. Okun's law.
B. the Phillips curve.
C. the Fisher equation.
D. the monetary policy rule.
E. the interaction of the IS and MP curves.

B. the Phillips curve.

Which of the following is the aggregate supply curve?
A.
B.
C.
D.
E. none of the above

D. Pi,t=Pi,t-1+vY+o

Consider Figure 13.3. If there is a positive inflation shock, ceteris paribus, the economy would move from point __________ to point __________.
A. c; d
B. c; b
C. c; e
D. b; e
E. Not enough information is given.

C. c; e

In the short-run model, the steady state is characterized by:
A. .
B. .
C. .
D. all of the above
E. none of the above

D. all of the above

The central bank often deviates from simple policy rules because:
A. the rules are always wrong.
B. they have new and more detailed information.
C. they are ordered to by the president.
D. they have no discretion.
E. the federal government is more interes

B. they have new and more detailed information.

When the central bank pursues expansionary monetary policy and all other economic agents build this into their decision making, __________ with no economic benefit; this is called the __________ problem.
A. output rises; policy lag
B. unemployment rises;

D. inflation rises; time inconsistency

Consider Figure 13.5. If the Fed sets a lower inflation target, under rational expectations, the economy moves from point __________ to point __________.
A. c; a instantly
B. a; c slowly
C. c; d instantly
D. c; b slowly
E. b; a instantly

A. c; a instantly

The model used to treat consumption is called the ___________ consumption model.
A. Stone-Geary
B. Keynesian
C. Solow
D. neoclassical
E. classical

D. neoclassical

The intertemporal budget constraint is written as:
A. .
B. .
C. .
D. .
E. .

A. c(today)+c(future)/(1+R)=f(today)+y)today)+y(future)/(1+R

The intertemporal budget constraint basically states that:
A. the present value of consumption must equal lifetime income only.
B. total consumption equals total income.
C. the present value of consumption must equal lifetime wealth.
D. there is no future

C. the present value of consumption must equal lifetime wealth.

The consumer chooses her ________ to maximize her __________.
A. consumption; income
B. income; consumption
C. wealth; profits
D. consumption; utility
E. interest rate; wealth

D. consumption; utility

If consumption exhibits diminishing marginal utility, then:
A. utility can never be equal to zero.
B. the utility function is downward sloping.
C. additional units of consumption after some threshold make you worse off.
D. more consumption leads to declin

E. additional units of consumption raises utility by smaller and smaller amounts.

Consider the utility functions in Figure 15.1 above. Curve b exhibits:
A. risk-taking behavior.
B. constant marginal utility.
C. diminishing marginal utility.
D. consumption smoothing.
E. c and d

E. c and d

In the utility functions in Figure 15.1, curve b exhibits:
A. diminishing marginal utility.
B. economies of scale.
C. risk seeking.
D. satiation.
E. unrealistic behavior.

A. diminishing marginal utility.

The � in the utility function represents __________.
A. consumption
B. the level of uncertainty
C. any number greater than one
D. consumer patience
E. life expectancy

D. consumer patience

If you have maximized your lifetime utility, you get which of the following?
A.
B.
C.
D.
E.

D.

The Euler equation states:
A. "The total supply of money is equal to nominal GDP divided by velocity."
B. "The real interest rate is the nominal interest rate minus inflation."
C. "A consumer must be indifferent between consuming today or in the future.

C. "A consumer must be indifferent between consuming today or in the future.

If c(future) > c(today) then:
A. and consumption shrinks.
B. and consumption grows.
C. and you decide to save.
D. because you make higher income in the future.
E. because you have drawn your savings down to zero.

B. and consumption grows.

Using the neoclassical model of consumption, an implication of the permanent income hypothesis is ___________ because of __________.
A. consumption smoothing; diminishing marginal utility
B. permanent income follows a random walk; aggregate demand shocks

A. consumption smoothing; diminishing marginal utility

If the government lowers taxes to stimulate the economy, but then raises taxes in the future, according to the neoclassical consumption model, ___________ because of __________.
A. consumption will rise today, but fall in the future; the lack of consumpti

E. present value of wealth remains unchanged and consumption today does not change; Ricardian equivalence

Precautionary savings leads households to act as if they are ___________ when they are not.
A. going to last forever
B. facing declines in the stock market
C. staring death in the eye
D. credit constrained
E. unemployed

D. credit constrained

Behavioral economics blends economics with:
A. psychology.
B. marketing.
C. physics.
D. anthropology.
E. a and b

A. psychology.

Between 1970 and 2008 household consumption ________ of GDP. Over this period, ________ to about _______ of GDP.
A. grew from 63 percent to 70 percent; personal savings rose; 7 percent
B. remained at about two-thirds; personal savings fell; -3 percent
C.

D. grew from 63 percent to 70 percent; household debt rose; 100 percent

In macroeconomics investing includes purchases of:
A. roads.
B. buildings.
C. stocks and bonds.
D. a and b
E. a and c

D. a and b

In the equation change-in-P,k , is the:
A. capital gain.
B. real interest rate.
C. rate of return to capital.
D. marginal product of capital.
E. opportunity cost of capital.

A. capital gain.

In the equation , RxP,k is the:
A. capital gain of capital.
B. return to stock prices.
C. return to capital.
D. user cost of capital if taxes are zero.
E. return to a bank account.

E. return to a bank account.

If the real interest rate is 4 percent, the marginal product of capital is 2 percent, the depreciation rate is 10 percent, the tax rate is 0 percent, and capital gain is 1 percent, what is the user cost of capital?
A. 30 percent
B. -4 percent
C. 13 percen

C. 13 percent

For the profit-maximizing firm, if the real interest rate is greater than the marginal product of capital, the firm should
A. invest in more capital.
B. get rid of some capital.
C. keep its capital stock the same, as there is a risk premium attached to th

B. get rid of some capital.

If R is the real interest rate; w is the real wage; MPK is the marginal product of capital; and MPL is the marginal product of labor, which of the following conditions informs the profit-maximizing firm how much capital to invest in?
A. R = MPK
B. R = w
C

A. R = MPK

If capital gain rises, a firm should:
A. consider shutting down.
B. invest in financial assets, like stocks.
C. invest in more capital.
D. lower its output prices.
E. lay off some of its workers.

C. invest in more capital.

A decline in the corporate income tax will __________and the firm will __________.
A. rise the user cost of capital; put more money in the bank
B. increase corporate profits; offset higher capital gains by hiring more labor
C. lower the capital user cost;

C. lower the capital user cost; invest in more capital

Consider Figure 16.1 above. If there is an increase in capital gains, then curve __________ would shift to curve __________.
A. d; c
B. b; a
C. c; d
D. a; b
E. not enough information

C. c; d

Consider Figure 16.1 above. If there is an increase in the marginal product of capital, then curve __________ would shift to curve __________.
A. d; c
B. b; a
C. c; d
D. a; b
E. not enough information

D. a; b

Consider Figure 16.1. If there is a decrease in the corporate tax rate, then curve __________ would shift to curve __________.
A. d; c
B. b; a
C. c; d
D. a; b
E. not enough information

C. c; d

Consider Figure 16.1. If there is an increase in the real interest rate, then curve __________ would shift to curve __________.
A. d; c
B. b; a
C. c; d
D. a; b
E. not enough information

A. d; c

Consider Figure 17.2, which shows the federal government receipts and outlays for the period 1934-2006. The only period(s) in which the federal government ran a budget surplus since 1970 was (were):
A. 1998-2002.
B. 1970.
C. 1973-2001.
D. none of the abov

E. a and b

Since 1940, the largest gross federal debt-to-GDP ratio occurred during __________, when it reached about __________.
A. 9/11; 120 percent
B. the oil crisis; 120 percent
C. World War II; 50 percent
D. World War II; 120 percent
E. 9/11; 65 percent

D. World War II; 120 percent

The difference between the gross federal debt and the debt by the public is debt held by:
A. other government entities.
B. the Social Security administration.
C. foreign central banks.
D. all of the above
E. a and b only

E. a and b only

is called the __________, and is called the __________.
A. total deficit; primary deficit
B. primary deficit; total deficit
C. primary deficit; secondary deficit
D. state and local deficit; federal deficit
E. budget surplus; government debt

B. primary deficit; total deficit

The difference between the primary and total deficits is that the primary deficit:
A. is always balanced.
B. includes spending on interest.
C. excludes spending on interest.
D. is never balanced.
E. equals zero.

C. excludes spending on interest.

. The government's intertemporal budget constraint is a simple two-period case in which:
A. .
B. .
C. .
D. .
E. .

C. .

The economic meaning of the intertemporal budget constraint of government is that:
A. the government's budget never has to balance.
B. the government's budget must balance period by period.
C. the present discounted value of the government's budget must b

C. the present discounted value of the government's budget must balance.

If investors begin to doubt the ability to finance spending with __________, markets will demand __________.
A. borrowing; more bonds
B. only taxes; higher interest rates
C. taxes and borrowing; higher interest rates
D. borrowing; less government spending

C. taxes and borrowing; higher interest rates

The idea that present generations benefit from borrowing what future generations must pay is called:
A. the budget deficit.
B. intertemporal substitution.
C. the intertemporal budget constraint.
D. generational accounting.
E. discretionary spending.

D. generational accounting.

An explanation of why governments are willing to burden future generations with debt to finance a war today is:
A. only present generations enjoy peace.
B. future generations will enjoy peace and must pay nothing.
C. future generations will enjoy peace an

C. future generations will enjoy peace and must pay something.

The national income identity can be rearranged to show that __________ equals __________.
A. Private saving + Government saving + Foreign saving; investment
B. Private saving - Government saving + Investment; the budget deficit
C. Private saving - Governm

A. Private saving + Government saving + Foreign saving; investment

Income minus taxes is often called:
A. government expenditures.
B. consumption.
C. investment.
D. gross income.
E. none of the above

E. none of the above

Which of the following is (are) possible causes of rising health care expenditures?
A. people's preferences
B. the falling cost of health insurance
C. anecdotes about doctors who induce patients to spend less on medical care when they are young and health

A. people's preferences

According to the law of diminishing returns, the longer we live,
A. the more we will be willing to pay more for medical care than for other goods and services.
B. the larger the burden on taxpayers to finance retirement for retirees.
C. the less energy we

A. the more we will be willing to pay more for medical care than for other goods and services.

About __________ percent of the U.S. GDP is exported.
A. 5
B. 15
C. 10
D. 20
E. 40

C. 10

Imports' share of GDP is about __________ percent.
A. 5
B. 10
C. 15
D. 20
E. 40

C. 15

U.S. imports' share of GDP is about __________percent, while exports' share is about __________ percent.
A. 10; 15
B. 15; 10
C. 5; 10
D. 15; 15
E. 20; 40

B. 15; 10

Worldwide, the trade balance must be:
A. unsure.
B. negative.
C. positive.
D. zero.
E. dependent on the country.

E. dependent on the country.

Economists call an economy in which each person produces all of the goods that he or she consumes a(n) __________ economy.
A. simple
B. Robinson Crusoe
C. two-good
D. island
E. benevolent planner

B. Robinson Crusoe

If Country A runs a trade deficit against Country B for one year, then:
A. it must compensate Country B during that year with a promissory note.
B. it must compensate Country B by exporting its excess production in the future.
C. it may continue to run a

E. a and b are correct.

From the national income identity,
A. if .
B. if .
C. if .
D. if .
E. a and b are correct.

B. if .

Consider Table 18.1. Which of the following statements is true?
A. The West has an absolute advantage in the production of both fish and chips and has a comparative advantage in the production of chips.
B. The East has an absolute advantage in the product

A. The West has an absolute advantage in the production of both fish and chips and has a comparative advantage in the production of chips.

Consider Table 18.1. In the East, with autarky, per person consumption of fish is __________ and per person chip consumption is __________, assuming people spend half their income on each good.
A. 10; 30
B. 100; 50
C. 12,000; 4,000
D. 30; 10
E. Not enough

D. 30; 10

Consider Table 18.1. With free trade, the __________ specializes in chips, producing 100 percent of the world supply, or __________ kilos.
A. East; 8,000
B. West; 10,000
C. West; 20,000
D. East; 10,000
E. East; 24,000

B. West; 10,000

Under free trade,
A. losses generally are concentrated in specific industries but benefits are felt economywide.
B. losses generally are concentrated in all industries but benefits are felt economywide.
C. losses generally are concentrated in specific ind

A. losses generally are concentrated in specific industries but benefits are felt economywi

Because free trade __________, it is incumbent on an economy __________.
A. creates losses for specific sectors; to redistribute the gains
B. generates gains for all sectors; to raise taxes
C. generates gains for specific sectors only; to tax them less he

A. creates losses for specific sectors; to redistribute the gains

According to economic theory, fast-growing countries should be running __________; but the evidence is that in fast-growing countries, __________.
A. trade deficits; the permanent income hypothesis holds
B. trade surpluses; the permanent income hypothesis

C. trade deficits; the causality is from exports to growth

From the national income identity in the United States, if NX < 0, this must equal:
A. the additional borrowing the United States does to finance the gap between investment and domestic savings.
B. the additional lending the United States does to finance

A. the additional borrowing the United States does to finance the gap between investment and domestic savings.

Which of the following can be used to finance a trade deficit?
A. stocks
B. money
C. bonds
D. all of the above
E. none of the above

B. money