1)If workers are laid off due to a negative demand shock, this is referred to as unemployment?

a) frictional b) cyclical

c) structural d) separation

2)How could the liquidity premium theory of the term structure of interest rates explain a flat yield curve?

a) Investors expect short-term interest rates to decrease in the future

b) Investors expect short-term interest rates to stay constant in the future c) Long-term bonds can be perfectly substituted with short-term bonds d) The demand for long-term and short-term bonds is the same

e) Both (b) and (d) are correct

3)Inspection of historical data reveals that the yield to maturity on municipal bonds is (often) lower than the yield to maturity on government bonds. This observation is:

a) Reasonable when viewed from a risk perspective, because municipal bonds are safer than government bonds

b) Reasonable when viewed from a risk perspective, because municipal bonds are riskier than government bonds

c) Puzzling when viewed from a risk perspective, yet it can be rationalized by the superior liquidity of municipal bonds

d) Puzzling when viewed from a risk perspective, yet it can be rationalized by the favorable tax treatment of municipal bonds

4)The FED plans to raise interest rates. From this information you conclude that

a) Short-run output will fall as the IS curve shifts to the left pushing the economy

towards a recession

b) Short-run output will rise as the IS curve shifts to the right pushing the economy

towards an expansion

c) Short-run output will fall along the IS curve pushing the economy towards a reces-

sion

d) Short-run output will rise along the IS curve pushing the economy towards an

expansion