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Fall 2010 Macro Essay 1
Multiple Choice
Identify the choice that best completes the statement or answers the question.
__B__ 1. Suppose a new study finds that eating carbohydrate calories (bread, pasta, cookies, etc.) makes you get fat, but
eating protein calories (meat, poultry, fish, cheese) does not. (This is the premise of the Atkins diet that was all
the rage among middle-aged people a few years ago.) Which of the following describes how the market for
bread is most likely to respond?
a. Bread prices will rise because firms will need to make more money from fewer sales.
b. The price of bread AND the amount of bread produced will both decline.
c. The price of bread will rise and the amount of bread produced will fall.
d. At first there will be a bread shortage or excess demand, but the market will return to the
original equilibrium price and quantity.
e. The price of bread will rise and the amount of bread produced will stay the same.
The following graph shows the market for plywood in a coastal Florida town.
_A___ 2. A hurricane has been spotted headed directly toward the town in which this market is located. The residents
know that the best way to protect their homes is to board up all of their windows with plywood. You would expect
_____ for plywood to shift _______ , and the price of plywood to _______.
a. demand; rightward; increase
b. supply; rightward; increase
c. both supply and demand; rightward; remain the same
d. demand; leftward; decrease
e. supply; leftward; increase
_C___ 3. Consider the market for loans (also known as the credit market or the market for loanable funds). Suppose the
government provides a new tax credit for business investment. Which of the following is the most likely
outcome? HINT: Think about a supply and demand framework, where businesses demand loanable funds,
savers supply loanable funds, and the price is the interest rate.
a. Business investment will fall, saving will rise proportionately and the interest rate will remain
constant.
b. Business investment will rise and the interest rate will fall.
c. Business investment and the interest rate will both rise.
d. There will be a credit surplus.
e. None of the above is correct.
_B___ 4. Suppose the US economy slumps into a recession. What is the likely effect on big ticket items like cars?
a. Car prices will rise because of increased scarcity.
b. Car prices will fall because demand falls (shifts to the left).
c. Car prices will fall because supply falls (shifts to the left).
d. Car prices will rise because supply falls (shifts to the left).
__D__ 5. In a closed economy with no trade and no foreign savings, an increase in the budget deficit
a. may increase, decrease or have no effect on investment.
b. does not affect investment.
c. causes investment to rise.
d. causes investment to fall.
_A___ 6. If the Federal Reserve raises interest rates, then in the short run output will be
a. lower.
b. higher.
c. unchanged.
d. The effect cannot be dtermined iwthout information about unemployment.
_B___ 7. In the current recession, both the Federal Reserve and the federal government are pursuing expansionary
policies. Expansionary policies aim to restore growth in the short run and include
a. high interest rates and government spending cuts.
b. low interest rates and more government spending.
c. low interest rates and cuts in government spending.
d. tax increases and cuts in government spending.
e. tax cuts, government spending cuts and stable interest rates.
_A___ 8. Which of the following policies would immediately reduce the federal budget deficit?
I. Higher tax rates
II. Government spending cuts
III. Consumer spending cuts
IV. Higher interest rates
a.
b.
c.
d.
e.
I & II only.
II only.
I, II & III only.
I, II, III & IV would all reduce the deficit.
IV only.
_D___ 9. Why can’t we have fiscal expansionary policy all the time?
a. If we did, we’d get more inflation.
b. If we did, demand for money would rise and interest rates would rise and aggregate demand
would fall (shift left).
c. If we did, firms would expect higher inflation and the Short Run Aggregate Supply curve
would shift left and output would not rise.
d. All of the above answers are correct.
e. Only a and b above are correct.
__C__ 10. High rates of saving today contribute to _______ in the future.
a. higher tax rates
b. more unemployment
c. a higher standard of living
d. lower tax rates
_B___ 11. Which of the following factors will increase long-run growth?
I. Investment in physical and human capital.
II. Technological advances.
III. Current consumption.
IV. Expansionary monetary policy.
a. I, II, III & IV.
b. I & II only.
c. I, II & IV only.
d. I, II & III only.
e. II & IV only.
__A__ 12. According to economic theory, productivity in New Mexico is low relative to the national average because:
a. Human and physical capital investments are lower.
b. New Mexicans work fewer hours.
c. Much of the rest of the country thinks you need a passport to travel here.
d. All of the above are correct.
_A___ 13. Because Congress fixes the minimum wage in nominal terms, when there is inflation, the nominal minimum
wage _____ and the real minimum wage _____.
a. remains constant; falls
b. remains constant; remains constant
c. remains constant; increases
d. increases; falls
__B__ 14. It is midterm of your last semester in college before you graduate. You hear on the news that the Federal
Reserve Board plans to raise interest rates by ¼ of a percent to combat the threat of inflation. Is the Fed’s
action good or bad for your job prospects?
a. Good, because higher interest rates stimulate the economy and expanding firms are more
likely to hire.
b. Bad, because higher interest rates slow the economy and firms will be reluctant to hire.
c. Good, because higher interest rates mean more investment and growth.
d. Bad, because the money supply will be expanding, meaning that real wages will fall.
_C___ 15. Suppose that a stock market boom causes a large increase in aggregate demand and rising prices. You are
paying off a student loan with an 8 percent interest rate. Higher inflation means
a. Both you and the bank are losing money on the loan.
b. You pay a higher real interest rate than you would pay if inflation was lower.
c. You pay a lower real interest rate than you would pay if inflation was lower.
d. The bank benefits and you are hurt financially, no matter what inflation is.
Essay
16. What are the pros and cons of running a federal government budget deficit?
Fall 2010 Macro Essay 1
Answer Section
MULTIPLE CHOICE
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
ANS:
B
A
C
B
D
A
B
A
D
C
B
A
A
B
C
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
PTS:
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
DIF:
1
1
3
1
2
2
1
1
3
3
2
1
3
2
3
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
OBJ:
B2 MKT MECH
B2 MKT MECH
B2 MKT MECH
B2 MKT MECH
A1 Policy Tradeoffs
A1 Policy Tradeoffs
A1 Policy Tradeoffs
A1 Policy Tradeoffs
A2 Policy Tradeoffs
F1 Long Run Growth
F1 Long Run Growth
F1 Long Run Growth
D2 Social Issues
D2 Social Issues
D2 Social Issues
ESSAY
16. ANS:
Pros—stimulates AD in short run, can pay for investments in K and HK, can pay for wars that benefit future
generations. Cons—may crowd out private investment
PTS: 1
DIF: 2
OBJ: A2 Policy Tradeoffs