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Ch 10
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6
Question 1
Assuming that both the price level and the interest rate are constant, if output were equal to Y´...
a) ...there is an excess supply of goods equal to YY´.
b) ...desired demand (Y´C) is lower than output (Y´B) and inventories of unsold goods will
accumulate.
c) ...desired demand (DD´) will shift vertically upward to pass through point B for goods market
equilibrium.
d) ...the government budget will be in surplus and equal to BC.
#...there is an exce
Question 2
Assuming both the price level and the interest rate are constant and government spending increases
from G to G´, the government spending multiplier is equal to...
a) ...the difference (Y-Y´)divided by the difference (DD´- DD)
b) ...the length of the segment BA divided by the difference (Y-Y´)
c) ...the difference (Y-Y´) divided by the difference (G´- G)
d) …the slope of IS or IS´
#...the difference (<
Question 3
The LM curve has a positive slope because...
a) The real money stock falls with increasing Y, and it is the fall in the real money stock that
increases i.
b) Investment spending will increase when the interest rate increases.
c) The demand for money increases with the level of real GDP but decreases with nominal
interest rates.
d) The quantity of money is worth less at higher levels of output, requiring compensation in the
form of higher interest rates.
#The real money s
Question 4
When only such disturbances as changes in technology/tastes or in public spending and taxes can
affect economic growth and employment, whereas changes in the money supply would have no
effect upon economic growth and employment, we have...
a) ...the Keynesian assumption.
b) ...the classical dichotomy.
c) ...sticky prices.
d) …the Taylor rule.
#...the Keynesian a
Question 5
Instead of relying on the price mechanism to match the supply and demand for goods, the Keynesian
approach assumes...
a) ...the real money supply adjusts, changing interest rates to bring about the match between
output and demand.
b) ...output adjusts to demand.
c) ...exogenous disturbances induce spending multiplier effects.
d) ...collective bargaining adjusts the real wage to bring about full-employment.
#...the real money s
Question 6
Monetary policy set according to a Taylor rule under the Keynesian assumption of sticky prices could
be characterized as a compromise between the polar cases of (A)________ and (B)____________.
a) (A) a completely flexible interest rate policy; (B) a completely flexible money supply policy
b) (A) a completely flexible interest rate policy; (B) a rule for the money supply to grow at the
underlying trend growth rate of output.
c) (A) a constant interest rate policy rule; (B) a completely flexible money supply policy
d) (A) a constant interest rate policy rule; (B) a rule for the money supply to grow at the underlying
trend growth rate of output.
Chapter 12
Instructions
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your score.
7
Question 1
The negative relationship between the gap between actual GDP and its trend value and the
difference between actual unemployment rate and its equilibrium value is called:
a) The Aggregate Supply Curve
b) The Battle of the Markups
c) The Phillips Curve
d) Okun's Law
#The Aggregate Su
Question 2
The reason for the long-run stability of the labour share is:
a) Price mark-ups over labour costs have remained relatively constant.
b) Real wages increase with technical progress resulting in a reduction in labour demand so the
product of real wages and employment remains constant.
c) Productivity gains reduce labour costs for given wages making up for losses due to price
inflation.
d) Technical progress has continuously generated higher incomes
#Price mark-ups ov
Question 3
Dividing nominal wages (W) by labour productivity (Y/L) yields:
a) Real unit labour costs.
b) Nominal unit labour costs.
c) Total factor productivity.
d) Labour share of total income.
#Real unit labour c
Question 4
At point A, inflation is equal to the underlying rate of inflation and output is at the level of output
consistent with the equilibrium unemployment rate. If the economy were at point B, you would
expect...
a) ...the underlying rate of inflation to accelerate because the actual inflation rate exceeds the
underlying rate of inflation.
b) ...prices to decline because there is an excess supply of goods (neoclassical assumption).
c) ...output to decline because there is an excess supply of goods (Keynesian assumption).
d) ...consumer spending to decline because goods are more expensive.
#...the underlying ra
Question 5
The critical macroeconomic policy implication of a vertical long-run Phillips Curve is that...
a) ...inflation is everywhere and always a monetary phenomenon.
b) ...big inflations will be stopped by big recession.
c) ...money illusion is the source of the unemployment in the long-run.
d) ...demand policies cannot move the actual unemployment rate permanently away from its
equilibrium level.
#...inflation is every
Question 6
"It is better for an economy to have a 5% rate of inflation over a 5% rate of unemployment."
Without getting into a debate on the relative costs of unemployment and inflation yet, why do we
know this statement is not helpful for policy makers, even if the prime minister says this explicitly?
a) The economy is dichotomized in the short-run because of the Taylor rule.
b) Wage-negotiations are subject to money illusion so that real wages would fall to an
unsustainable level.
c) Even if we could reduce unemployment to 0% today at a cost of an increase in inflation of 5%,
there is no guarantee that underlying inflation in the economy would remain unchanged.
d) The battle of the mark-ups determines wages and prices only so long as there is no supply
shock.
#The economy is d
Question 7
Which of the following events would not involve a supply shock that would shift the aggregate supply
curve?
a) The OPEC cartel for oil prices collapses due to political disagreements.
b) Financial crisis results in a freezing of interbank lending.
c) Drought destroys half of a country's crops.
d) Tax for energy use introduced to help reduce global emissions.
Chapter 13
Instructions
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your score.
7
Question 1
The above figure represents a short-run equilibrium of a small economy in a fixed exchange rate
regime.
The reason that the long-run aggregate demand curve is horizontal at the rate of inflation of the rest
of the world π* is...
a) ...in the long-run the price level is assumed perfectly flexible.
b) ...under fixed exchange rates, the money supply is exogenous.
c) ...the marginal propensity to import is assumed to be a constant fraction of GDP.
d) ...the principle of long-run PPP.
#...in the long-run th
Question 2
The AD curve is downward sloping for a small economy in a fixed exchange rate system because (A)
__________ weakens the country's external competitiveness, which (B) ____________ for domestic
goods.
a) (A) positive domestic inflation; (B) reduces domestic and foreign demand
b) (A) positive domestic inflation; (B) increases the domestic demand
c) (A) rising domestic inflation; (B) reduces domestic and foreign demand
d) (A) rising domestic inflation; (B) increases the domestic demand
#(A) positive dome
Question 3
For a small economy in a fixed exchange rate system in the long run, the domestic underlying rate of
inflation must equal the foreign rate of inflation because:
a) Otherwise the real exchange rate would change.
b) The Principle of Purchasing Power Parity would be violated.
c) This is inconsistent with Okun's Law.
d) Each must equal the domestic rate of inflation so that AS does not shift and the relative
competitiveness of domestic goods does not change.
#Otherwise the rea
Question 4
For a small economy in a fixed exchange rate system that begins in period 0 at the long-run
equilibrium point A, the government cuts net taxes moving the aggregate demand curve from its
initial position AD to AD´ so that the economy is in short-run equilibrium in period 1 at point B.
Assume the backward looking component of core-inflation dominates the forward looking component.
Which of the following observations will not be true of the ultimate long-run that this economy will
attain after the policy change of period 1?
a) All non-zero output gaps imply core and actual inflation differ.
b) The fiscal expansionary policy must eventually be reversed for fiscal sustainability.
c) The domestic rate of inflation cannot deviate from the foreign rate of inflation.
d) The new long-run equilibrium will have higher inflation and higher unemployment (i.e.
stagflation).
#All non-zero outpu
Question 5
For a small economy in a flexible exchange rate system that begins in long-run equilibrium point, a
higher rate of inflation in the short run will be followed by:
The central bank responding with (A)________ which will result in a (B)______________.
a) (A) an increase in the exchange rate ; (B) decline in net exports.
b) (A) a decrease in the exchange rate ; (B) an increase in net exports.
c) (A) contractionary monetary policy ; (B) real exchange rate appreciation.
d) (A) expansionary monetary policy ;(B) real exchange rate depreciation.
#(A) an increase in
Question 6
Consider a small economy in a flexible exchange rate system that begins in long-run equilibrium at
point A.
After a permanent increase in the central bank's inflation target, the line TR goes down because an
increase in the permanent inflation target of the central bank is (A) _____________ monetary policy.
The IFM line shifts up because the higher rate of inflation implies (B)___________ of the exchange
rate.
a) (A) a contractionary ; (B) depreciation
b) (A) a contractionary ; (B) appreciation
c) (A) an expansionary; (B) depreciation
d) (A) an expansionary; (B) appreciation
#(A) a contractiona
Question 7
In the period that it occurs, an adverse supply shock simultaneously (A)____________ and increases
(B) ______________.
a) (A) changes the Taylor rule; (B) actual inflation
b) (A) changes the Taylor rule; (B) underlying inflation
c) (A) lowers output ; (B) actual inflation
d) (A) lowers output; (B) underlying inflation