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12/6/2014
Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 13
1. If the growth rate of the money supply in an economy is 5 percent, the growth rate of output is 2 percent,
and the velocity of money is constant, what will the inflation rate in this economy be?
a. 7 percent
b. 5 percent
c. 3 percent
d. 2 percent
2. Which of the following would cause the aggregate demand curve to shift to the right?
a. an increase in the growth rate of the money supply
b. a decrease in the velocity of money
c. a decrease in the inflation rate
d. an increase in the growth rate of output
3. If spending grows by 2 percent, real GDP growth is 5 percent, and velocity is stable, then prices will be
______ at a rate of ______ percent according to the dynamic aggregate demand curve.
a. rising; 3
b. falling; 2
c. falling; 3
d. rising; 2
4. An increase in the rate of spending must flow into either higher inflation or
a. lower growth.
b. higher growth.
c. lower inflation.
d. higher deflation.
5. On a dynamic aggregate demand curve, if
rate are likely to be
= 7% and
= 3%, then the real growth rate and inflation
a. 2% and 8% respectively.
b. 3% and 7% respectively.
c. 4% each.
d. 10% each.
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6. Which of the following would shift the Solow growth curve to the right?
a. an increase in the growth rate of spending
b. the invention of a new computer chip that makes assembly production twice as fast
c. a decrease in the rate of inflation
d. a severe drought that decreases crop production and as a result raises prices
7. We would expect a negative real shock, such as a major countrywide drought, to result in
a. a decrease in the inflation rate and a decrease in the growth rate of output.
b. a decrease in the inflation rate and an increase in the growth rate of output.
c. an increase in the inflation rate and an increase in the growth rate of output.
d. an increase in the inflation rate and a decrease in the growth rate of output.
8. The Real Business Cycle (RBC) model implies that
a. business cycles are the result of fluctuations in the money supply.
b. the rate of inflation is closely linked to the real rate of output growth.
c. business cycles are driven by real shocks to the economy.
d. real output will always fluctuate around the aggregate demand curve.
9. A reduction in oil supply will cause the Solow growth curve to
a. become flatter.
b. become steeper.
c. shift outward.
d. shift inward.
10. A real shock is also called a
a. productivity shock, which is any shock that increases or decreases the potential growth rate.
b. demand shock, which is any shock that increases or decreases the aggregate demand.
c. supply shock, which is any shock that increases or decreases the aggregate supply.
d. productivity shock, which is any shock that increases or decreases the level of production.
11. In the United States, the first oil price shock took place in
a. 2007.
b. 1978.
c. 1989.
d. 1973.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 13
12. The short-run aggregate supply curve is upward sloping because
a. wages and prices are sticky in the short run.
b. in the short run, an increase in spending leads to an increase in output.
c. an increase in spending only leads to an increase in prices.
d. wages increase with an increase in output in the short run.
13. Which of the following is an explanation for why prices may be sticky in the short run?
a. money illusion
b. menu costs
c. price expectations
d. Solow growth curve
14. If prices are completely flexible, then an increase in spending growth will lead to an immediate
a. increase in inflation without any change in real output growth.
b. decrease in inflation without any change in real output growth.
c. increase in real output growth without any change in inflation.
d. decrease in real output growth without any change in inflation.
15. When consumers suddenly become more pessimistic about the economy, a negative aggregate demand
shock shifts the
a. Solow curve outward, reducing the real growth rate in the short run.
b. Solow curve inward, reducing the real growth rate in the short run.
c. AD curve outward, reducing the real growth rate in the short run.
d. AD curve inward, reducing the real growth rate in the short run.
16. During the Great Depression, the U.S. aggregate demand curve
a. shifted inward.
b. became flatter.
c. shifted outward.
d. became steeper.
17. Deflation causes the economy's aggregate demand curve to shift inward because debt contracts are
a. not adjusted for changes in the interest rate.
b. adjusted for changes in the interest rate.
c. not adjusted for inflation.
d. adjusted for inflation.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 13
18. The Smoot-Hawley Tariff of 1930 raised tariff rates on tens of thousands of imported goods, and the
results were that
a. imports rose but exports fell, thereby reducing aggregate demand.
b. both exports and imports rose, thereby increasing aggregate demand.
c. both exports and productivity fell, thereby reducing aggregate demand.
d. exports rose but imports fell, thereby increasing aggregate demand.
19. What is the Solow growth rate in this economy?
a. 4%
Correct. This economy is at its long-run equilibrium. This means that the unemployment rate is
at its natural rate and the real growth is equal to the Solow rate.
b. 5%
Incorrect. Recall that
= inflation + real growth. According to the figure this means that 9% =
5% + real growth, so real growth is equal to 4%.
c. 3%
Incorrect. Recall that
= inflation + real growth. According to the figure this means that 9% =
5% + real growth, so real growth is equal to 4%.
d. 9%
Incorrect. Recall that
= inflation + real growth. According to the figure this means that 9% =
5% + real growth, so real growth is equal to 4%.
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20. If newspapers and magazines report a lot of good news about the economy, what is likely to happen to
velocity?
a. It will fall.
Incorrect. Consumption growth and investment growth are likely to rise as a result of the good
news, and this will increase the growth in velocity.
b. It will fall in the short run and rise in the long run.
Incorrect. Consumption growth and investment growth are likely to rise as a result of the good
news, and this will increase the growth in velocity.
c. It will remain unchanged.
Incorrect. Consumption growth and investment growth are likely to rise as a result of the good
news, and this will increase the growth in velocity.
d. It will rise.
Correct. Consumption growth and investment growth are likely to rise as a result of the good
news.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 14
1. All of the following are transmission mechanisms EXCEPT
a. irreversible investments.
b. time bunching.
c. shocks to the Solow growth rate.
d. intertemporal substitution.
2. Historical data on India's rainfall amounts and real GDP growth show that
a. economic fluctuations have no correlation with any shocks.
b. economic fluctuations are negatively correlated with real shocks.
c. real shocks affect only long-term economic growth but not short-run economic fluctuations.
d. economic fluctuations are positively correlated with real shocks.
3. Intertemporal substitution refers to
a. the decision on how to allocate time between work and leisure.
b. the preference for households to smooth their consumption over time.
c. the tendency to work more when the returns to work are higher.
d. the decision to substitute one television show for another during the same time slot.
4. Which of the following is NOT an example of intertemporal substitution?
a.
Sandy works 10-hour days as a ski instructor during the winter months but takes a three-week
vacation during the summer.
b.
David decides to go to college after high school, since he has graduated in the middle of a big
recession and jobs are hard to come by.
c. Thomas studies economics two hours every night in order to get a good grade in the course.
d. Luke is an accountant who works overtime during tax season.
5. The supply of labor
a. decreases during a boom and increases during a recession.
b. increases during booms and recessions alike.
c. increases during a boom and decreases during a recession.
d. decreases during booms and recessions alike.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 14
6. Tom works as an editor for a textbook company and devotes some of his time to his dream of writing a
novel. Will he devote more time to writing the novel when the textbook company is busy and pays him
overtime or when work is slow and no overtime pay is available?
a. Equal amounts of time under both conditions.
b. When work is busy.
c. He will only talk about his novel; he will never actually write it.
d. When work is slow.
7. Intertemporal substitution tends to magnify
a. both negative and positive shocks.
b. positive shocks only.
c. neither negative nor positive shocks.
d. negative shocks only.
8. Which of the following is the best example of an irreversible investment?
a. the decision to work an extra 2 hours per week
b. hiring a new employee
c. starting a new automobile line
d. a first date
9. Which of the following is widely considered to be the most irreversible decision for a typical person?
a. Buying a house.
b. Having a baby.
c. Getting engaged with a loved one.
d. Buying a car.
10. Uncertainty tends to keep resources
a. in less productive uses.
b. moving from country to country.
c. in more productive uses.
d. fully employed.
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11. After the 9/11 attacks
a. the Solow growth rate increased.
b. people rushed to invest in New York City.
c. the need for information about the future went out the window.
d.
people held off on business investment until it became clear that the attacks would not become
regular occurrences.
12. Labor adjustment costs are
a. valuable assets that are pledged to a lender to secure a loan.
b. reductions in the value of collateral.
c. the costs of shifting workers from declining sectors of the economy to the growing sectors.
d. the tendency for economic activities to be coordinated at common points in time.
13. If it takes people more time to make employment decisions, then a given negative economic shock will
cause a decline in economic growth
a. smaller in size but longer in duration.
b. larger in size and longer in duration.
c. larger in size but shorter in duration.
d. smaller in size and shorter in duration.
14. Many economic activities tend to cluster together in time because
a. the returns to working are lower in the evening hours.
b. the returns to coordinating with others are high.
c. of cultural norms that tell us we are supposed to work during the day.
d. the opportunity cost is higher than when these activities are not clustered.
15. Time bunching tends to amplify business cycles because
a.
the returns to work are higher in booms than in recessions, so people work more during booms
and less during recessions.
b. assets are typically worth more in booms than in recessions.
c.
the uncertainty of recessions tend to increase people's job search time, while greater certainty
decreases search time during booms.
d.
the returns to investment are higher when others are investing as well, thus we see more
investment during booms and less during recessions.
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16. Which quarter of the year produces the most economic output?
a. the fourth
b. the third
c. the second
d. the first
17. Collateral shocks tend to amplify business cycles because
a.
assets are typically worth more in booms than in recessions, and the value of assets tends to be
positively correlated to firms' ability to obtain investment funding.
b.
the returns to investment are higher when others are investing as well; thus we see more
investment during booms and less during recessions.
c.
the returns to work are higher in booms than in recessions, so people work more during booms
and less during recessions.
d.
the uncertainty of recessions tends to increase people's job search time, while greater certainty
decreases search time during booms.
18. If a house is worth $600,000, its owner owes $400,000 on the mortgage, and the value of the house
falls to $300,000, how much equity will the owner have?
a. $200,000
b. $0
c. –$100,000
d. $100,000
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 15
1. The paper currency circulated in the United States is called
a. a Federal Reserve note.
b. a bank note.
c. a United States note.
d. an American note.
2. The monetary base consists of currency
a. with the inclusion of coins.
b. plus checkable deposits.
c. plus total reserves held at the Fed.
d. plus checkable and savings deposits.
3. A liquid asset is
a.
an asset that cannot be used for payments or quickly and without loss of value be converted to an
asset that can be used for payments.
b. a very narrowly accepted means of payment.
c. gold and only gold.
d.
an asset that can be used for payments or quickly and without loss of value be converted to an
asset that can be used for payments.
4. Which of the following money supply components is the smallest?
a. monetary base
b. M1
c. M2
d. currency
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5. Table: The Definition of the Money Supply
Type of money
Currency and reserves held by banks at the Fed
Currency
Checkable deposits
Savings deposits
Money market mutual funds
Small time deposits
Amount (millions)
$50
$100
$250
$150
$25
$10
Reference: Ref 15­1
(Table: The Definition of the Money Supply) What is the M1 money supply?
a. $250 million
b. $400 million
c. $300 million
d. $150 million
6. Table: The Definition of the Money Supply
Type of money
Currency and reserves held by banks at the Fed
Currency
Checkable deposits
Savings deposits
Money market mutual funds
Small time deposits
Amount (millions)
$50
$100
$250
$150
$25
$10
Reference: Ref 15­1
(Table: The Definition of the Money Supply)What is the M2 money supply?
a. $585 million
b. $575 million
c. $400 million
d. $550 million
7. If the average reserve ratio in the banking system is 20 percent and the Fed increases bank reserves by
$100,000, what will be the total potential increase in the money supply?
a. $2 million
b. $120,000
c. $500,000
d. $100,000
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8. The effective reserve ratio is determined primarily by
a. The size of banks' vaults.
b. How liquid banks wish to be.
c. How greedy banks wish to be.
d. The number of bank employees.
9. Which of the following is NOT one of the three major tools the Fed uses to control the money supply?
a. open market operations
b. printing paper money
c. paying interest on reserves held by banks at the Fed
d. discount rate lending and the term auction facility
10. When the Fed buys short-term Treasury securities, short-term interest rates
a. fall.
b. rise.
c. could rise or fall.
d. stay the same.
11. If instead of buying short-term Treasury securities, the Fed decides to purchase the country's supply of
paper clips, the money supply
a. will not change.
b. will contract.
c. will expand.
d. might expand or contract.
12. The federal funds rate is the
a. interest rate on short-term Treasury securities.
b. interest rate banks pay when they borrow directly from the Fed.
c. ratio of reserves to deposits.
d. overnight lending rate from one major bank to another.
13. The discount rate is the
a. interest rate on short-term Treasury securities.
b. overnight lending rate from one major bank to another.
c. ratio of reserves to deposits.
d. interest rate banks pay when they borrow directly from the Fed.
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14. Tyler owes $100,000, but he owns Mexican Amati paintings that he could sell immediately for $80,000
or within a few months for $120,000. If these are all the assets and liabilities that Tyler has, Tyler is
a. insolvent but liquid.
b. insolvent and illiquid.
c. solvent but illiquid.
d. solvent and liquid.
15. ______ refers to the Federal Reserve's purchase of longer-term government bonds or other securities.
a. An open market sale
b. Quantitative tightening
c. Quantitative easing
d. An open market purchase
16. The Fed recapitalizes banks
a. on a regular basis as a way to increase the money supply.
b. as a way of earning profits, which in turn are passed on to the federal government.
c. only in dire emergencies to avoid insolvency.
d. as an attempt to limit the number of new loans extended by banks.
17. Systemic risk is present when
a. the failure of one financial institution will bring down other institutions as well.
b. the Fed increases the money supply when it should decrease it.
c. the U.S. government will default on Treasury securities.
d.
a bank or other financial institution acts recklessly, hoping that the Fed and regulators will later
bail them out.
18. The interest rate that the Fed has the most control over is the
a. long-term government bond rate.
b. federal funds rate.
c. prime rate.
d. mortgage loan rate.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 16
1. In the case of a negative shock to aggregate demand, the central bank should
a. decrease the rate of growth in the price level to keep real growth high.
b. increase the rate of growth in the money supply to restore spending growth.
c. decrease the rate of growth in the money supply to control inflation.
d. do nothing.
2. Which of the following is a reason it might be hard for the Fed to restore aggregate demand in the face of
a nominal shock?
a. The Fed might run out of money.
b. Banks usually don't do what the Fed demands of them.
c. The economy responds to the Fed's actions with no lag.
d.
The Fed must operate in real time, when a lot of the data about the state of the economy are
unknown.
3. In the face of a shock to consumer confidence, politicians are on the fence about whether to implement
policies based on the advice of economists or to make decisions on the basis of Tarot card readings.
What would happen during the period in which they are making up their minds about which strategy to
pursue?
a.
would rise.
b.
would rise.
c.
would fall.
d.
would rise.
4. If the Federal Reserve wished to avoid short-run increases in the unemployment rate, the correct
response to a negative AD shock would be
a. an increase in money supply growth.
b. an increase in government spending growth.
c. a tax cut.
d. a lower goal for inflation.
5. Increased uncertainty will cause the economy's AD to
a. become steeper.
b. shift inward.
c. become flatter.
d. shift outward.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 16
6. Shortly after September 11, 2011, the Federal Reserve
a. decreased its lending to individuals.
b. decreased its lending to banks.
c. increased its lending to individuals.
d. increased its lending to banks.
7. Nobel Prize–winner Milton Friedman advocated which of the following as an adequate monetary policy?
a.
a strict rule in which the money supply should grow at the rate of the long-run economic growth
rate
b.
a discretionary rule in which the money supply should be adjusted to counteract aggregate demand
shocks
c.
a strict rule in which the money supply should grow 2 percent higher than the long-run economic
growth rate
d.
a discretionary rule in which the money supply should be adjusted to control the level of inflation
rate
8. Disinflation in the 1980s was a result of
a. leftward shifts in the aggregate demand curve due to money supply reductions.
b. leftward shifts in the aggregate supply curve due to sticky wages and prices.
c. the gradual return of the economy toward the Solow growth curve.
d. leftward shifts in the Solow growth curve due to negative real shocks.
9. Uncertainty drives people away from
a. investment spending and toward less liquid assets.
b. more liquid assets and toward more investment spending.
c. less liquid assets and toward more investment spending.
d. investment spending and toward more liquid assets.
10. If the Fed reduces
occur?
to fight inflation after a negative real shock, which of the following should
a. higher inflation
b. high real growth
c. low real growth
d. no change
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11. If the economy is hit by a negative real shock that reduces real GDP growth below the Solow growth
rate, which of the following is the appropriate monetary policy to move real GDP growth back to the
Solow growth rate without raising inflation?
a. Increase the growth rate of the money supply.
b. Decrease the growth rate of the money supply.
c. No monetary policy can achieve that goal.
d. Keep the growth rate of the money supply constant while lowering interest rates.
12. When facing a real shock, a central bank will encounter a dilemma that forces it to choose between
a. too low a rate of growth or too high a rate of inflation.
b. too high a rate of growth or too low a rate of inflation.
c. too high a rate of growth or too high a rate of inflation.
d. too low a rate of growth or too low a rate of inflation.
13. Which of the following does NOT explain why the 1997–2006 housing boom increased aggregate
demand?
a. Homeowners felt wealthier as they saw their homes rising in value every year.
b.
Homeowners tended to spend more money and even borrow money, hoping that rising wealth
from the home values will let them repay the money in the future.
c. During the boom, some builders were working 60 or 80 hours a week instead of 40.
d. The construction sector created new employment and higher wages.
14. In the late 1990s, America's economy
a. experienced stagflation: high inflation and low real growth.
b. grew at its historical pace.
c. was booming and unemployment was very low.
d. suffered from several severe nominal shocks, producing low inflation and growth.
15. Low interest rates in 2003–2004
a. made it more difficult to borrow.
b. increased demand for homes.
c. decreased demand for homes.
d. lowered real growth.
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Introduction to Macroeconomics (11f14) - Graded Homework - Chapter 16
16. U.S. housing prices peaked in
a. 2008.
b. 2006.
c. 1997.
d. 2001.
17. When a bubble arises, asset prices are driven by
a. changes in aggregate demand and aggregate supply.
b. shifts in market psychology and successive waves of irrational exuberance.
c. policymakers.
d. shifts in money growth rate.
18. Many economists worry about the Federal Reserve overstimulating the economy because such
overstimulation will lead to rising
a. inflation.
b. Solow growth.
c. output growth.
d. unemployment.
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