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principles of macroeconomics

Questions and Answers of Principles Of Macroeconomics

3. According to the traditional view of government debt, a debt-financed tax cuta. increases output in both the short run and the long run.b. decreases output in both the short run and the long
2. In times of inflation, the government’s budget deficit is because government expenditure includes the interest payments on government debt.a. overstated, nominalb. overstated, realc.
1. Throughout U.S. history, the most common cause of large increases in government debt has beena. recessions, which cause tax revenue to decline.b. supply-side policies that promote growth with tax
6. List three policy rules that the Fed might follow. Which one would you support? Why?
4. How does a person’s interpretation of macroeconomic history affect her view of macroeconomic policy?
1. What are the inside lag and the outside lag? Which has the longer inside lag: monetary policy or fiscal policy? Which has the longer outside lag? Why?
6. International evidence indicates that countries with more independent central banksa. experience lower average inflation.b. have more volatile unemployment.c. raise more revenue in seigniorage.d.
5. Since the 1980s, many central banks around the world have adopted a policy of targetinga. nominal GDP.b. real GDP.c. the money supply.d. the inflation rate.
4. The time inconsistency of discretionary policy arises because policymakersa. want to renege on announced plans after people have acted on their expectations.b. believe they are better at
3. According to the Lucas critique, traditional methods of macroeconomic policy evaluation are flawed because they fail to considera. the lags inherent in the policymaking process.b. how changes in
2. The lag is the time between when a policy action is taken and when it influences the economy. It is particularly long for policy.a. inside, monetaryb. inside, fiscalc. outside, monetaryd. outside,
1. The lag is the time between when a shock hits the economy and when a policy responds to it. It is particularly long for policy.a. inside, monetaryb. inside, fiscalc. outside, monetaryd. outside,
4. A central bank has a new head, who decides to increase the responsiveness of interest rates to inflation. How does this change in policy alter the response of the economy to a supply shock? Give
3. A central bank has a new head, who decides to raise the target inflation rate from 2 to 3 percent. Using a graph of the dynamic AD–AS model, show the effect of this change.What happens to the
6. According to the Taylor principle, to ensure the stability of inflation, the central bank should increase the nominal interest rate by than 1 percentage point in response to a 1-percentage-point
5. When setting its policy parameters in the dynamic model, the central bank chooses betweena. a low inflation target and robust long-run growth.b. stable inflation and stable output.c. low inflation
4. If the central bank responds aggressively to the output gap, a supply shock will havea. a larger impact on inflation but a smaller impact on output.b. a smaller impact on inflation but a larger
3. An increase in the central bank’s inflation target the nominal interest rate in the short run but the nominal interest rate in the long run.a. increases, decreasesb. increases, leaves
2. In the long-run equilibrium of the dynamic model, the natural rate of interest equals thea. inflation rate.b. expected inflation rate.c. nominal interest rate.d. real interest rate.
1. In the dynamic model of aggregate demand and aggregate supply presented in this chapter, the central banka. ensures that the money supply grows at a constant rate.b. keeps the real interest rate
1. Explain the two theories of aggregate supply. On what market imperfection does each theory rely? What do the theories have in common?
6. A central bank can reduce inflation at the smallest cost if people’s expectations of inflationa. respond quickly to new policy regimes.b. adjust slowly to changes in policy.c. treat policy
5. A rightward shift in aggregate shifts the short-run Phillips curve so that the economy experiences inflation for any level of unemployment.a. supply, higherb. supply, lowerc. demand, higherd.
4. A rightward shift in aggregate moves the economy along the short-run Phillips curve to a point with inflation.a. supply, higherb. supply, lowerc. demand, higherd. demand, lower
3. As a result of a contraction in aggregate demand, the declines, but over time it returns to its former level as the expected price level .a. price level, risesb. price level, fallsc. level of
2. An increase in the expected price level shifts the aggregate supply curve to the .a. long-run, leftb. long-run, rightc. short-run, leftd. short-run, right
1. The sticky-price model of aggregate supply explains whya. output declines when prices fall below expected prices.b. expected inflation responds slowly to changing policies.c. recessions leave
5. Describe the impossible trinity.
4. What are the advantages and disadvantages of floating exchange rates and fixed exchange rates?
3. In the Mundell–Fleming model with floating exchange rates, explain what happens to income, the exchange rate, and the trade balance when a quota on imported cars is removed. What would happen if
2. In the Mundell–Fleming model with floating exchange rates, explain what happens to income, the exchange rate, and the trade balance when the money supply is reduced.What would happen if exchange
1. In the Mundell–Fleming model with floating exchange rates, explain what happens to income, the exchange rate, and the trade balance when taxes are raised. What would happen if exchange rates
6. If a nation wants to pursue an independent monetary policy, it cannot have both capital flows and a exchange rate.a. restricted, floatingb. restricted, fixedc. free, floatingd. free, fixed
5. If a country has a floating exchange rate and some event leads people to believe that its currency will be worth less in the future, then today the interest rate in that country will , and its
4. A country with a fixed exchange rate can expand aggregate demand by its currency to net exports.a. revaluing, increaseb. revaluing, decreasec. devaluing, increased. devaluing, decrease
3. In the Mundell–Fleming model with a floating exchange rate, if a country restricts imports, the value of its currency will , while its net exports will .a. rise, fallb. rise, remain unchangedc.
2. In the Mundell–Fleming model with a fixed exchange rate, which of the following increases income?a. an increase in the money supplyb. a decrease in the money supplyc. an increase in taxesd. a
1. In the Mundell–Fleming model with a floating exchange rate, which of the following increases income?a. an increase in the money supplyb. a decrease in the money supplyc. an increase in taxesd. a
6. The severity of the Great Depression may be partly explained by an increase in expecteda. inflation, which raised nominal interest rates above real interest rates.b. inflation, which raised real
5. If output is above its natural level, over time the price level will , shifting the curve and moving the economy toward its long-run equilibrium.a. rise, ISb. rise, LMc. fall, ISd. fall, LM
4. Suppose that a heightened risk of terrorist attack reduces consumer confidence, inducing people to save more. To stabilize aggregate demand, the Fed shoulda. increase the money supply to raise
3. If the Fed holds the interest rate constant in response to an increase in government purchases, the money supply will, and the impact on income will be than if the money supply were held
2. In the IS–LM model, which of the following causes both the interest rate and income to decline?a. an increase in taxesb. a decrease in taxesc. an increase in the money supplyd. a decrease in the
1. In the IS–LM model, which of the following causes income to decline and the interest rate to rise?a. an increase in taxesb. a decrease in taxesc. an increase in the money supplyd. a decrease in
6. At the intersection of the IS and LM curves,a. the economy is at full employment.b. the economy has the right balance of inflation and unemployment.c. the goods market and money market are both in
5. The LM curve slopes upward because income increases money and, in turn, the interest rate.a. higher, supplyb. higher, demandc. lower, supplyd. lower, demand
4. According to the theory of liquidity preference, the central bank can increase the of money and the interest rate.a. supply, raiseb. supply, lowerc. demand, raised. demand, lower
3. The IS curve slopes downward because a interest rate reduces and thus income.a. higher, planned investmentb. higher, money demandc. lower, planned investmentd. lower, money demand
2. According to the Keynesian cross model, if the marginal propensity to consume is 2/3, a tax cut of $120 billion increases equilibrium income by billion.a. $160b. $180c. $240d. $360
1. According to the Keynesian cross model, if the marginal propensity to consume is 2/3, an increase in government purchases of $120 billion increases equilibrium income by billion.a. $160b. $180c.
6. If the Fed responds to an adverse supply shock by expanding the money supply, it willa. stabilize aggregate demand at its previous level.b. make the resulting recession deeper than it otherwise
5. Stagflation — lower output and higher prices — is caused bya. an expansion in aggregate demand.b. a contraction in aggregate demand.c. a favorable shock to aggregate supply.d. an adverse shock
4. An expansion in aggregate demand increases in the short run. In the long run, however, it increases only the .a. real GDP, price levelb. real GDP, velocity of moneyc. the unemployment rate, price
3. If a computer glitch at credit card companies makes stores start accepting only cash payments, the demand for money will . If the money supply is held constant, the aggregate demand curve will
2. Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely?a. a rise in stock pricesb. a rise in building permitsc.
1. In a typical recession, consumption .Investment moves in the same direction but proportionately .a. rises, moreb. rises, lessc. falls, mored. falls, less
5. Give an example of an institutional difference between countries that might explain the differences in income per person.
4. What does growth in total factor productivity measure?
3. How can policymakers influence a nation’s saving rate?
2. What data would you need to determine whether an economy has more or less capital than in the Golden Rule steady state?
1. In the steady state of the Solow model, at what rate does output per person grow? At what rate does capital per person grow? How does this compare with the U.S.experience?
6. The stark contrast between the economic development of North Korea and South Korea illustrates the importance of a nation’sa. institutions.b. saving rate.c. historical traditions.d. language.
5. The U.S. economy has capital than at the Golden Rule steady state, suggesting that it may be desirable to the rate of saving.a. more, increaseb. more, decreasec. less, increased. less, decrease
4. If the capital stock is 2 times annual GDP, depreciation is 8 percent of GDP, and capital income is 20 percent of GDP, what is the net marginal product of capital?a. 2b. 4c. 5d. 6
3. Total factor productivity typically during recessions, which could be due to labor hoarding or shocks to technology.a. falls, favorableb. falls, adversec. rises, favorabled. rises, adverse
2. The economy of Macro Island is described by the following data:Labor’s share of income is one-third.Output grows by 8 percent per year.The capital stock grows by 9 percent per year.The labor
1. In the steady state of the Solow model with technological progress, which of the following variables is not constant?a. capital per effective workerb. the capital–output ratioc. the real rental
3. How does endogenous growth theory explain persistent growth without the assumption of exogenous technological progress? How does this differ from the Solow model?
2. In the Solow model, what determines the steady-state rate of growth of income per worker?
1. In the Solow model, how does the rate of population growth affect the steady-state level of income? How does it affect the steady-state rate of growth?
6. Models of Schumpeterian creative destruction aim to explaina. why economies grow quickly after suffering the ravages of war.b. how entrepreneurs with new products displace incumbent producers.c.
5. The purpose of growth theory is to explain technological progress. Some of these models do so by questioning the Solow model’s assumption of returns to capital.a. endogenous, diminishingb.
4. In the Solow model with population growth and technological progress, at the Golden Rule steady state, the marginal product of capital MPK equalsa. n.b. g.c. n + g.d. n + g + δ.
3. Suppose an economy is described by the Solow model. The rate of population growth is 1 percent, the rate of technological progress is 3 percent, the depreciation rate is 5 percent, and the saving
2. Thomas Malthus believed thata. larger populations are more innovative because they have more scientists and inventors.b. larger populations strain an economy’s capacity to provide enough food.c.
1. In the Solow model, an increase in the rate of population growth increases which of the following in the steady state?a. output per workerb. capital per workerc. consumption per workerd. the
3. Might a policymaker choose a steady state with more capital than in the Golden Rule steady state? Might a policymaker choose a steady state with less capital than in the Golden Rule steady state?
6. If the economy has more capital than in the Golden Rule steady state, reducing the saving rate will steady-state income and steady-state consumption.a. increase, increaseb. increase, decreasec.
5. In the basic Solow model, at the Golden Rule steady state, the marginal product of capital equalsa. the saving rate.b. the depreciation rate.c. output per worker.d. consumption per worker.
4. According to the Solow model, if an economy increases its saving rate, then in the new steady state, compared with the old one, the marginal product of capital will be and the growth rate will be
3. In the steady state of the basic Solow model, investment equalsa. output per worker.b. the marginal product of capital.c. consumption.d. depreciation.
2. An economy without population growth or technological progress has the production function y = 20k1/2. The current capital stock is 100, and the depreciation rate is 12 percent. For income per
1. Which of the following production functions has constant returns to scale?a. Y = K + Lb. Y = K2 + Lc. Y = K2Ld. Y = K1/3L1/3
5. Do Europeans work more or fewer hours than Americans?List three hypotheses that have been suggested to explain the difference.
3. Give three explanations of why the real wage may remain above the level that equilibrates labor supply and labor demand.
6. One explanation for the differing number of hours worked in the United States and western Europe is thea. higher level of taxes in Europe.b. stronger unions in the United States.c. greater taste
5. If an economy has many discouraged workers,a. the unemployment rate will be high, and the employment-to-population ratio will be low.b. the unemployment rate will be high, but the
4. Unions and collective bargaining have an especially small role ina. Italy.b. Sweden.c. the United States.d. Australia.
3. According to the theory of efficiency wages, paying an above-equilibrium wage may increase all the following excepta. the natural rate of unemployment.b. worker turnover.c. worker effort.d. the
2. Although not a goal of the unemployment-insurance system, one effect is that the system reducesa. the rate of job finding.b. the rate of job separation.c. frictional unemployment.d. workers’
1. The main goal of the unemployment-insurance system is to reducea. the rate of job finding.b. the rate of job separation.c. frictional unemployment.d. workers’ uncertainty about their incomes.
4. If a small open economy bans the import of Japanese video game systems, what happens to saving, investment, the trade balance, the interest rate, and the exchange rate?
2. Define nominal exchange rate and real exchange rate.
1. Define net capital outflow and trade balance. Explain how they are related.
6. Suppose the price of a cup of coffee is $3 in Boston and 6 euros in Berlin. According to the theory of purchasing power parity, the exchange rate is euros per dollar.a. 1/3b. 1/2c. 2d. 3
5. Which of the following events would cause a currency to depreciate?a. a tax cutb. an investment boomc. a tax increase abroadd. a rise in the price level
4. If an import restriction does not influence domestic investment or saving, it causes a country’s currency toa. appreciate, resulting in unchanged imports.b. depreciate, resulting in unchanged
3. Other things equal, an increase in the world interest rate pushes the trade balance toward and causes the currency to .a. surplus, appreciateb. surplus, depreciatec. deficit, appreciated. deficit,
2. Other things equal, an increase in government purchases of goods and services pushes the trade balance toward and causes the currency to .a. surplus, appreciateb. surplus, depreciatec. deficit,
1. When a nation runs a trade deficit,a. it experiences a capital inflow.b. its saving exceeds its domestic investment.c. its output exceeds the sum of its consumption, investment, and government

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