Additional Practice Questions and Answers

Chapter 1 – Introduction to Macroeconomics

1. Which of the following is not a topic of macroeconomics?

a. Why nations have different rates of growth.
b. What causes inflation and what can be done about it.
c. What factors contribute to the presence of monopolies in the economy.
d. Why unemployment periodically reaches very high levels.
2. Which of the following factors are most important for determining the economic growth of a
country?
a. The country’s level of resources.
b. The independence of the country’s central bank.
c. The country’s rate of savings and investment.
d. The level of sophistication of a country’s financial markets.
3. In analyzing macroeconomic data during the past year, you have discovered that average labor
productivity fell, but total output increased. What was most likely to have caused this?
a. There is nothing unusual in this outcome because this is what normally occurs.
b. The capital/output ratio probably rose.
c. There was an increase in labor input.
d. Unemployment probably increased.
4. The business cycle describes the
a. Progression of an industry’s structure from monopoly to perfect competition.
b. Progression of an industry’s structre from perfect competition to monopoly.
c. Expansion and contraction of an individual industry within the economy.
d. Expansion and contraction of economic activity in the economy as a whole.
5. Recessions
a. Don’t occur in developed countries, like the United States.
b. Cause the unemployment rate to increase.
c. Neve last more than two consecutive quarters.
d. Are always followed by long periods of high rates of real economic growth.
6. When national output declines, the economy is said to be in
a. An expansion.
b. A deflation.
c. A recovery.
d. A recession.
7. The unemployment rate is the
a. Number of unemployed divided by the number of employed.
b. Number of employed divided by the number of unemployed.
c. Number of unemployed divided by the labor force.
d. Labor force divided by the number of unemployed.
8. The average price of goods in the United States
a. Was relatively constant over the 1800-1945 period.
b. Was relatively constant over the decade of the 1980s.
 c. Declined over the decade of the 1970s.
d. Is always constant in the long run.
9. Historical evidence shows that consumer prices in the United States
a. Deflated between the 1920s and World War II, but inflated afterward.
b. Inflated between the 1920s and World War II, but deflated afterward.
c. Have shown a continuous inflationary pattern since the 1920s.
d. Have displayed no clear-cut trend since the 1920s.
10. A country is said to be experiencing deflation when
a. Prices of most goods and services are rising over time.
b. Prices of most goods and services are falling over time.
c. Total output is rising over time.
d. Total output is falling over time.
11. An open economy is a national economy that
a. Doesn’t interact economically with the rest of the world.
b. Has a stock market and financial relationships with other national economies.
c. Has extensive trading and financial relationships with other national economies.
d. Has established diplomatic relations with most other national economies.
12. In most years during the 1980s and 1990s, the U.S. trade balance
a. Was in equilibrium.
b. Was a trade deficit.
c. Was a trade surplus.
d. Was cyclical, fluctuating annually between trade deficits and trade surpluses.
13. U.S. exports are goods and services
a. Produced abroad and sold to Americans.
b. Produced in the United States and sold to Americans.
c. Produced abroad and sold to foreigners.
d. Produced in the United States and sold to foreigners.
14. In 1999, a country had imports of $50 billion, exports of $60 billion, and GDP of $300 billion.
The trade surplus was what percent of GDP in 1999?
a. 3.3%
b. 10.0%
c. 16.7%
d. 20.0%
15. A country’s monetary policy is controlled by
a. Private citizens.
b. The central bank.
c. Large banks.
d. The legislature.
16. Fiscal policy determines _____ while monetary policy determines _____ .
a. Government spending and taxation; the growth of the money supply.
b. Government’s capital; government’s investment.
c. The rate of growth of the economy; the rate of growth of prices.
d. The inflation rate; the rate of growth of prices.
17. Which of the following fiscal policies to Keynesians recommend to help the economy recover
from a recession?
a. An increase in government spending.
b. An increase in taxes.
c. An increase in the money supply.
d. An increase in saving.
18. The large government budget deficits of the 1980s and the early-to-mid 1990s coincided with
a. High inflation rates.
b. Large trade deficits.
c. Low unemployment rates.
d. Keynesian policies.
19. Since the Great Depression, the share of national income collected in taxes and spent by the
federal government in the United States has
a. Increased from less than 10% to more than 20%.
b. Remained relatively stable at 15%.
c. Remained relatively stable at 35%.
d. Declined from about 40% to less than 15%.
20. In 1999, a government of Anchovy collected receipts of $100 billion and had expenditures of
$125 billion. Its GDP was $400 billion. The government’s deficit was what percent of GDP in
1999?
a. 6.25%
b. 12.50%
c. 25.00%
d. 100.00%
21. The process of adding together individual economic variables to obtain economywide totals is
called
a. Macroeconomics.
b. Aggregation.
c. Agglomeration.
d. Data development.
22. Assumptions for economic theories and models should be
a. Rejected if they are not total realistic.
b. Logical rather than empirically testable.
c. Simple and reasonable rather than complex.
d. Maintained until overwhelming evidence to the contrary occurs.
23. The principal distinction between positive analysis and normative analysis is that
a. Positive analysis is useful and normative analysis is not useful.
b. Positive analysis is optimistic and normative analysis is neutral.
c. Economists always agree on the conclusions of positive analysis but could disagree on
the conclusions of normative analysis.
d. Positive analysis tells us “what is,” but normative analysis tells us “what ought to be.”
24. Which of the statements below is primarily normative in nature?
a. There is an unequal distribution of income in the United States.
b. The distribution of income is more unequal in the United States than it is in Japan.
 c. The inequality of income that exists in the United States is partly caused by an unequal
distribution of wealth.
d. The distribution of income in the United States should be more equal than it is.
25. Classical economists who assume the “invisible hand” works reasonably well do not argue that
a. The government should have a limited role in the economy.
b. Government policies will be ineffective and counterproductive.
c. The government should actively intervene in the economy to eliminate business cycles.
d. Wages and prices adjust quickly to bring the economy back to equilibrium.
26. The Classical approach to macroeconomics assumes that
a. Wages, but not prices, adjust quickly to balance quantities supplied and demanded in
markets.
b. Wages and prices adjust quickly to balance quantities supplied and demanded in
markets.
c. Prices, but not wages, adjust quickly to balance quantities supplied and demanded in
markets.
d. Neither wages nor prices adjust quickly to balance quantities supplied and demanded in
markets.
27. Equilibrium in the economy means
a. Unemployment is zero.
b. Quantities demanded and supplied are equal in all markets.
c. Prices aren’t changing over time.
d. Tax revenues equal government spending, so the government has no budget deficit.
28. John Maynard Keynes disagreed with the classical economists in assuming that
a. Wages and prices adjusted slowly.
b. International trade played a major role in the macroeconomy.
c. Government intervention in the economy could not reduce business cycles.
d. Unemployment would be eliminated quickly by the invisible hand of the market.

Chapter 2 – The Measurement and Structure of the National Economy

29. The value added of a producer is the

a. Total amount for which all of its products sell minus its change in inventories.
b. Value of its total sales once externalities are accounted for.
c. Value of its output minus the value of the inputs it purchases from other producers.
d. Quality-adjusted amount of its total sales less any commissions paid.
30. The product approach to calculating GDP
a. Adds together the market values of final goods and services produced by domestic and
foreign-owned factors of production within the nation in some time period.
b. Includes the market value of goods and services produced by households for their own
consumption but excludes the value of the underground economy.
c. Is superior to the income approach because, unlike the income approach, it gives us the
real value of output.
d. Adds together the market values of final goods, intermediate goods, and goods added
to inventories.
31. The A company collects bushels of wild berries, which it sells for $2 million to the B company to
be made into jam. The B company’s wild berry jame is sold for a total of $6 million. What is the
total contributed to the country’s GDP from companies A and B?
a. $2 million
b. $4 million
c. $6 million
d. $8 million
32. The fundamental identity of national income accounting tells us that
a. Total production = total income = total expenditure.
b. Total production = total income – total expenditure.
c. Total production = total income + total expenditure.
d. Total production > total income + total expenditure.
33. One problem with using market values to measure GDP is that
a. You cannot compare completely heterogeneous goods by using their dollar values.
b. Some useful goods and services are not sold in markets.
c. Prices for some goods change every year.
d. Market values of exported goods are usually priced in foreign currencies.
34. Unlike final goods and services, intermediate goods and services
a. Are purchased by businesses.
b. Are purchased by government.
c. Are not exported.
d. Are completely used up in the current time period.
35. Capital goods are
a. Not counted in GDP as final goods.
b. Not used to produce other goods.
c. Used up in the same period that they are produced.
d. Goods used to produce other goods.
36. Beautiful Boating purchases five new boats at $200 thousand each to rent to vacationing
fishermen. The firm sells it old boats to the public for $500 thousand. The net increase in GDP
of these transactions was
a. $500,000.
b. $1,000,000.
c. $1,250,000.
d. $1,500,000.
37. Suppose Toyota built a new automobile plant in Mexico using Japanese management practices,
American capital, and Mexican labor. Which of the following statements would be true?
a. The portion of output contributed by American capital would be included in American
GDP.
b. The portion of output contributed by Japanese management would be included in both
Japanese GNP and GDP.
c. The portion of output contributed by Japanese management would be included in
neither Japanese GNP nor GDP.
d. The portion of output contributed by Mexican labor would be included in both Mexican
GNP and GDP.
38. If C = $250, I = $75, G = $50, NX = $20, and NFP = $5, what is GNP?
a. $405
b. $400
c. $395
d. $390
39. In using the expenditure approach to GNP, consumption includes
a. All final and intermediate goods consumed by domestic households and firms.
b. All final and intermediate goods consumed by domestic households produced at home,
but not those produced abroad.
c. All final goods consumed by domestic households produced at home, but not those
produced abroad.
d. All final goods consumed by domestic households produced at home and abroad.
40. Business fixed investment includes purchases of
a. Capital equipment and structures.
b. Land and energy.
c. Long-term bonds.
d. Inventories.
41. Government purchases
a. Account for about half of U.S. GDP.
b. Are larger than private sector purchases in the post-World-War-II U.S. economy.
c. Do not include purchases of foreign goods.
d. Are less than government outlays.
42. Private saving is defined as
a. Private disposable income minus consumption.
b. Net national product minus consumption.
c. Private disposable income minus consumption plus interest.
d. Private disposable income minus consumption plus interest plus transfer payments.
43. Which of the following equations describes a government budget deficit?
a. T – TR – INT < G
b. T – TR – INT > G
c. T + TR + INT < G
d. T + TR + INT > G
44. If a local government collects taxes of $250 thousand, has $175 thousand of government
consumption expenditures, makes transfer payments of $75 thousand, and has not interest
payments or investment, its budget would
a. Show a surplus of $75 thousand.
b. Show a surplus of $50 thousand.
c. Be in balance with neither a surplus nor a deficit.
d. Show a deficit of $75 thousand.
45. The government budget surplus equals
a. Government purchases plus transfers.
b. Government receipts minus outlays.
c. Government outlays minus receipts.
d. Government purchases minus transfers.
46. In 1995 private saving was $1071.8 billion, investment was $1287.2 billion, and the current
account balance was -$135.4 billion. From the uses-of-saving identity, how much was
government saving?
a. -$350.8 billion
b. -$80.0 billion
c. $80.0 billion
d. $350.8 billion
47. In 1992 national saving was $717.8 billion, investment was $796.5 billion, and private saving was
$986.9 billion. How much was the current account balance?
a. $269.1 billion
b. $78.7 billion
c. -$78.7 billion
d. -$269.1 billion
48. Saving is a _____ variable, and wealth is a _____ variable.
a. Stock; flow
b. Stock; stock
c. Flow; flow
d. Flow; stock
49. Use the following information to answer this question about the country of Polity:

2003 2004
----------------------------- -----------------------------
Good Quantity Price Quantity Price
---------------------------------------------------------------------------------------------
Guns 4000 $4 4625 $6
Butter 5000 $3 5200 $2

Using 2003 as the base year, what is the percent change in real output from 2003 to 2004?
a. 8%
b. 10%
c. 12%
d. 15%
50. Nominal GDP in 1970 was $1,015.5 billion, and in 1980 it was $2,732.0 billion. The GDP deflator
is 42.0 for 1970 and 85.7 for 1980, where 1982 is the base year. Calculate the percent change in
real GDP in the decade from 1970 to 1980. Round off to the nearest percentage point.
a. 32%
b. 104%
c. 132%
d. 169%
51. The consumer price index (CPI) is 311.1 for 1994 when using 1967 as the base year (1967=100).
Now suppose we switch and use 1994 as the base year (1994=100). What is the CPI for 1967
with the new base year?
a. 20.2
b. 32.1
c. 48.4
 d. 56.2
52. Nominal GDP was $6,038.5 billion in 1992 and $5,722.9 billion in 1991, while the GDP deflator
was 121.1 in 1992 and 117.7 in 1991. What was the growth rate of real GDP between 1991 and
1992?
a. 5.5%
b. 2.9%
c. 2.6%
d. 1.0%

Chapter 3 – Productivity, Output, and Employment

53. Equilibrium in the labor market determines

a. Inflation and employment.
b. Inflation and the real wage.
c. The real wage and employment.
d. Productivity and employment.
54. Suppose the economy’s production function is Y = AK0.3N0.7 . If K = 2000, N = 100, and A = 1,
then Y = 246. If A rises by 10 percent, and K and N are unchanged, by how much does y
increase?
a. 5 percent
b. 10 percent
c. 15 percent
d. 20 percent
55. The factors of production include
a. Capital, labor, energy, and materials.
b. Households, firms, and government.
c. Supply factors and demand factors.
d. Wages, interest, rents, and profits.
56. The production function shows the effect on
a. Labor employment when output is increased.
b. Labor employment when capital is increased.
c. Goods production when production of services declines.
d. Output when labor is increased.
57. An increase in total factor productivity will
a. Increase the unemployment rate.
b. Increase the full-employment level of output.
c. Lower the rate of return to capital.
d. Shift the production function down.
58. In the production function Y = AF(K, N), A is
a. Labor productivity.
b. Total factor productivity.
c. Capital productivity.
d. The marginal productivity of capital.
59. In a graph of the production function relating output to capital, it is not true that
 a. Labor supply increases as capital increases.
b. The marginal product of capital can be measured as the slope of the production
function.
c. The marginal product of capital falls as the capital stock increases.
d. The shape of the production function reflects diminishing marginal productivity.
60. Because of diminishing marginal productivity
a. The labor supply curve is not vertical.
b. Nominal wages are sticky in a downward direction.
c. The labor demand curve is negatively sloped.
d. Households save only a small share of their income.
61. The marginal product of labor
a. Equals the output produced by unit of labor employed.
b. Decreases as more capital is added to the production process.
c. Depends on the product price.
d. Declines as more labor is added to the production process.
62. In the diagram of the production function, a beneficial supply shock is shown by
a. An upward shift in the production function.
b. A movement up along the production function.
c. A downward shift in the production function.
d. An increase in the convexity of the curve.
63. The real wage
a. Is the nominal wage divided by the price level.
b. Automatically increases with the cost of living.
c. Is the price level divided by the nominal wage.
d. Is the nominal wage multiplied by the price level.
64. Which of the following statements is true?
a. Changes in the total capital stock of the economy and in the amount of labor that firms
employ occur quickly.
b. Changes in the total capital stock of the economy and in the amount of labor that firms
employ occur slowly.
c. Changes in the total capital stock of the economy occur slowly, while changes in the
amount of labor that firms employ occur quickly.
d. Changes in the total capital stock of the economy occur quickly, while changes in the
amount of labor that firms employ occur slowly.
65. A favorable supply shock would
a. Shift the production function up and decrease marginal products at every level of
employment.
b. Shift the production function down and decrease marginal products at every level of
employment.
c. Shift the production function down and increase marginal products at every level of
employment.
d. Shift the production function up and increase marginal products at every level of
employment.
66. A decrease in the number of workers hired by a firm could result from
 a. An increase in the marginal product of labor.
b. An increase in the marginal revenue product of labor.
c. An increase in the real wage.
d. A decrease in the real wage.
67. Suppose the marginal product of labor for unskilled labor is given by MPN = 200 – 0.5N. The
supply of unskilled labor is given by 100 + rw. The government imposes a minimum wage of 60.
How much unemployment will this create among unskilled labor?
a. 0
b. 60
c. 80
d. 100
68. The Disk-o Company has the following production function:
---------------------------------------------
Number of Number of
Workers Disk-os Produced
---------------------------------------------
0 0
1 10
2 19
3 26
4 31
5 34
---------------------------------------------
If the company hires 3 workers, which of the following could be the real wage rate?
a. 2
b. 4
c. 6
d. 8
69. The marginal product of labor (measured in units of output) for Acme Corp is given by
MPN = A(200 – N), where A measures productivity, and N is the number of labor hours used in
production. Suppose the price of output is $3 per unit and A = 2.0. What will be the demand for
labor if the nominal wage is $30?
a. 170
b. 185
c. 190
d. 195
70. Suppose the banking industry were to fail, leaving the federal government (through its deposit
guarantee programs) to pay for trillions of dollars in losses; they do so by imposing a tax of 50%
on all individuals’ wealth. What happens to current employment and the real wage rate?
a. Both employment and the real wage rate would increase.
b. Both employment and the real wage rate would decrease.
c. Employment would increase and the real wage would decrease.
d. Employment would decrease and the real wage would increase.
71. A beneficial supply shock increases labor demand. What happens to current employment and
the real wage rate?
a. Both employment and the real wage rate would increase.
b. Both employment and the real wage rate would decrease.
 c. Employment would increase and the real wage would decrease.
d. Employment would decrease and the real wage would increase.
72. If Jeff’s wage rate rises, he decides to work more hours. From this, we can infer that
a. For Jeff, the substitution effect is greater than the income effect.
b. For Jeff, the substitution effect is equal to the income effect.
c. For Jeff, the substitution effect is less than the income effect.
d. Jeff is a nitwit.
73. The labor force participation rate is the percentage of the adult population that is
a. Employed.
b. Willing to work but unable to find jobs.
c. Unemployed.
d. Working or actively looking for work.
74. Discouraged workers are discouraged because
a. Their employers continue to underpay them.
b. They are working part-time, but they want full-time work.
c. They don’t have jobs and are pessimistic about their chances of finding a suitable job.
d. Their employers are too demanding.
75. The type of unemployment for which the net economic costs are most likely to be small is
a. Structural unemployment.
b. Frictional unemployment.
c. Chronic unemployment.
d. Cyclical unemployment.
76. Most of the chronically unemployed workers in the U.S. economy are unemployed because
a. They are too old or too young to work.
b. They are too sick or too disabled to work.
c. They do not want to work; they would rather live on welfare.
d. They do not have the job skills and personal attributes that employers demand.
77. The kind of unemployment created by technological progress and by changes in competition is
called
a. Progressive unemployment.
b. Competitive unemployment.
c. Frictional unemployment.
d. Structural unemployment.
78. What is the unemployment rate if there are 170 million people employed, 25 million people
unemployed, and 35 million not in the labor force?
a. 14.7%
b. 13.7%
c. 12.8%
d. 10.9%
79. Cyclical unemployment is caused by
a. People entering the labor force to search for jobs.
b. Technological progress, which causes some industries to expand employment and
others to reduce employment.
c. Reducing international trade barriers, which causes some industries to expand
employment and others to reduce employment.
d. Business cycle fluctuations.
 80. Assuming that the growth rate of full-employment output is 3%, and that the actual
unemployment rate fell 2 percentage points in the last year, Okun’s Law predicts that output
growth rate over the past year was
a. 1%
b. 3%
c. 5%
d. 7%
81. According to Okun’s Law, if output grew 7 percent and full-employment output rose 3 percent,
what would be the change in the unemployment rate?
a. -4 percentage points.
b. -2 percentage points.
c. 2 percentage points.
d. 4 percentage points.

Chapter 4 – Consumption, Saving, and Investment

82. Rosencrantz’s base pay last year was $50,000 and he spent $48,000, thus saving $2,000. At the
end of the year, he received a bonus of $2,000 and he spent $1,000 of it, saving the other
$1,000. What is his marginal propensity to consume?
a. .96
b. .50
c. .04
d. .02
83. A small increase in the real interest rate will most likely
a. Increase desired saving, but the effect will be relatively small.
b. Increase desired saving substantially.
c. Decrease desired saving substantially.
d. Decrease desired saving, but the effect will be relatively small.
84. An increase in the personal tax rate on interest income will
a. Increase desired saving because the expected after-tax real rate rises.
b. Decrease desired saving because the expected after-tax real rate rises.
c. Decrease desired saving because the expected after-tax real rate falls.
d. Increase desired saving because the expected after-tax real rate falls.
85. With a nominal interest rate of 4%, an expected inflation rate of 3%, and interest income taxed
at 25%, what is the expected after-tax real interest rate?
a. 3%
b. 2%
c. 1%
d. 0%
86. If an investor has a tax rate on interest income of 30% and the inflation rate is 4%, which bond
has the highest expected after-tax real interest rate?
a. A Treasury bond paying 8%
b. A corporate bond paying 7%
c. A Treasury bond paying 7%
d. A municipal (tax-free) bond paying 6%
87. The relationship between a bond’s maturity and the interest rate it pays is called the
 a. Yield curve.
b. Amortization schedule.
c. Federal funds rate.
d. Desired investment curve.
88. According to the Ricardian equivalence proposition, a temporary government budget deficit
created by cutting taxes
a. Will cause desired consumption to increase.
b. Will cause future taxes to increase but will have no real economic effects.
c. Will have the same real economic effects as a budget deficit created by raising
government spending.
d. Would have the same real effects whether or not consumers expect future taxes to
change.
89. The desired level of the capital stock will increase if the
a. User cost of capital increases.
b. Expected future marginal product of capital increases.
c. Effective tax rate increases.
d. Price of capital increases.
90. An increase in the price of capital goods will
a. Increase the expected future marginal product of capital.
b. Reduce the expected future marginal product of capital.
c. Increase the interest cost and the depreciation cost of capital.
d. Increase the interest cost but not affect the depreciation cost of capital.
91. You have just purchased a new TV to show videos to your customers. The TV cost $500, and you
depreciate it at a rate of 25% each year. You can borrow money from the bank at 10%, or
receive 6% for depositing money at the bank. The expected inflation rate in the coming year is
5%. You used the company’s own funds to purchase the TV. The firm’s user cost of capital for
the first year is
a. $130.
b. $150.
c. $155.
d. $175.
92. Calculate the user cost of capital of a machine that costs $10,000 and depreciates at a 10% rate,
when the nominal interest rate is 6% and the expected inflation rate is 3%.
a. $300
b. $600
c. $1000
d. $1300
93. Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a 25% rate,
when the nominal interest rate is 5% and the expected inflation rate is 10%.
a. $100
b. $1000
c. $1500
d. $5000
94. If a firm’s expected marginal product of capital exceeds its tax-adjusted user cost of capital, the
firm will
a. Increase its investment spending on capital goods.
b. Reduce its investment spending on capital goods.
c. Not change its investment spending on capital goods.
d. Increase the tax-adjusted user cost of capital.
95. Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a 25% rate,
when the real interest rate is 5% and the tax rate on revenue is 25%.
a. $200
b. $275
c. $2000
d. $2750
96. A decrease in the expected real interest rate will
a. Increase the desired capital stock.
b. Decrease the desired capital stock.
c. Have no effect on the desired capital stock.
d. Have the same effect on the desired capital stock as an increase in corporate taxes.
97. In 1998, your firm’s capital stock equaled $10 million, and in 1999 it equaled $15 million. The
average depreciation rate on your capital stock is 20%. Gross investment in 1999 equaled
a. $3 million.
b. $4 million.
c. $5 million.
d. $7 million.
98. In the goods market equilibrium condition for a closed economy, the total demand for goods
equals
a. Cd + Id .
b. Cd + Id + G .
c. C + I + G .
d. C + I + Gd .
99. One way of writing the goods market equilibrium condition for a closed economy is
a. Y + C + G = S .
b. Y + Cd + Gd = S .
c. Sd = Id .
d. Y – Cd – G – Sd = Id .
100. An economy has government purchases of 2000. Desired national saving and desired
investment are given by
Sd = 200 + 5000r + .10Y - .20G
Id = 1000 – 4000r
When the full employment level of output equals 5000, then the real interest rate that clears
the goods market will be
a. 7.78%
b. 10.00%
c. 14.44%
d. 23.33%
101. A higher real interest rate will
 a. Increase the profitability of new investment.
b. Decrease lending of funds from firms to other economic agents.
c. Reduce the desired investment of all firms.
d. Reduce the desired investment of only those firms that have to borrow.
102. In the saving-investment diagram, an increase in current output would
a. Shift the saving curve to the left.
b. Shift the investment demand curve to the left.
c. Not shift the curves.
d. Shift the saving curve to the right.
103. A temporary increase in government purchases would cause
a. A leftward shift in the saving curve and a leftward shift in the investment curve.
b. A leftward shift in the saving curve and a rightward shift in the investment curve.
c. A leftward shift in the saving curve, but no shift in the investment curve.
d. No shift in the saving curve, but a rightward shift in the investment curve.
104. David consumes 140 in the current period and 210 in the future period. The real
interest rate is 5% per period. David’s present value of lifetime consumption is
a. 210.
b. 340.
c. 350.
d. 400.

Chapter 5 – Saving and Investment in the Open Economy

105. A country has a current account surplus if

a. The value of its exports exceeds the value of its imports, assuming net income from
foreign assets and net unilateral transfers have a value of zero.
b. The value of its net exports of services exceeds the value of its net exports of goods.
c. It receives more income from foreign assets than it pays to foreigners for foreign-owned
domestic assets.
d. Its capital inflows exceeds its capital outflows
106. Suppose the current account shows debits of $4.7 billion and credits of $5.3 billion. The
current account balance is _______ , and the capital and financial account balance is _______ .
a. +$0.6 billion; -$0.6 billion.
b. +$0.6 billion; +$0.6 billion.
c. -$0.6 billion; -$0.6 billion.
d. -$0.6 billion; +$0.6 billion.
107. A country’s capital and financial account balance degreases if
a. Its current account balance increases.
b. Its income payment inflows on foreign assets decrease.
c. Its domestic residents working abroad reduce the income they send home to their
families.
d. Foreigners increase their purchases of its existing assets.
108. Suppose output is $35 billion, government purchases are $10 billion, desired
consumption is $15 billion, and desired investment is $6 billion. Net foreign lending would be
equal to
a. -$4 billion.
b. -$2 billion.
c. $2 billion.
d. $4 billion.
109. Absorption refers to
a. The total amount of imports purchased by a country.
b. The net amount of imports purchased by a country.
c. Total spending by domestic residents, businesses, and governments.
d. GDP less desired consumption, desired investment, and government purchases.
110. The goods market equilibrium condition in an open economy shows that
a. NX = Sd – Id
b. Sd + NX = Id
c. Sd + Id = NX
d. Sd = Id
111. In a saving-investment diagram for a small open economy
a. The saving curve is vertical at some fixed level of output.
b. The saving curve is horizontal at some fixed interest rate.
c. The interest rate is fixed at the world real interest rate.
d. Equilibrium requires that Sd = Id.
112. Suppose output is $35 billion, government purchases are $10 billion, desired
consumption is $15 billion, and desired investment is $6 billion. Desired savings is equal to
a. $2 billion.
b. $10 billion.
c. $14 billion.
d. $16 billion.
113. A small open economy increases its desired saving. This causes the world real interests
rate to ________ and the country’s current account balance to ________ .
a. Fall; fall
b. Remain unchanged; rise
c. Fall; rise
d. Remain unchanged; fall
114. If there is a revenue-neutral increase in the tax rate on business firms in a small open
economy, it causes the current account to ________ and saving to ________ .
a. Fall; fall
b. Rise; remain unchanged
c. Fall; remain unchanged
d. Rise; fall
115. A country’s real interest rate would increase if
a. The government imposed capital controls in a large open economy and the current
account had been in deficit.
 b. The government imposed capital controls in a large open economy and the current
account had been in surplus.
c. There were a temporary positive supply shock in a small open economy.
d. There were a temporary negative supply shock in a small open economy.
116. A large open economy
a. Dominates world trade in one or more products.
b. Is physically larger than all small open economies.
c. Has a larger population than all small open economies.
d. Lends or borrows enough in the international capital market to influence the world real
interest rate.
117. In a two-economy model of the United States and another large economy made up of
the rest of the world, if desired saving by the rest of the world declined,
a. The world real interest rate would decline
b. U.S investment would increase.
c. U.S. saving would decrease.
d. All of the above.
e. The world real interest rate would increase.
118. If a large open economy experiences a temporary favorable supply shock, it causes its
current account to ________ and investment to ________ .
a. Fall; rise
b. Rise; remain unchanged
c. Fall; fall
d. Rise; rise
119. If a small open economy experiences a temporary favorable supply shock, it causes its
current account to ________ and investment to ________ .
a. Fall; rise
b. Rise; remain unchanged
c. Fall; fall
d. Rise; rise

Other practice questions:

120. What determines the interest rate in a small open economy?

121. In a small open economy,
S = $20 billion + ($100 billion) rw
d

Id = $30 billion – ($100 billion) rw

Y = $70 billion
G = $20 billion
rw = .04

a. Calculate net exports.

b. Calculate desired consumption.
c. Calculate absorption.
Chapter 6 – Long Run Economic Growth

122. Suppose the current level of output is 5000 and the elasticity of output with respect to labor is
0.7 (e.g., the production function is Y = 2K0.3N0.7). A 10% increase in labor would increase the current
level of output to:
a. 5035.
b. 5070.
c. 5350.
d. 5700.
123. Suppose the current level of output is 5000. A 10% increase in productivity would increase the
current level of output to:
a. 5050.
b. 5100.
c. 5500.
d. 6000.
124. Over the past year, productivity grew 1%, capital grew 2%, and labor grew 2%. If the elasticities
of coutput with respect to capital and labor are 0.3 and 0.7, respectively (e.g., the production
function is Y = 2K0.3N0.7), how much did output grow?
a. 1%
b. 2%
c. 3%
d. 4%
125. The equation ΔY/Y = ΔA/A + αKΔK/K + αNΔN/N is known as:
a. The production function.
b. The Solow model.
c. The productivity formula.
d. The growth accounting equation.
126. In the growth accounting equation, productivity growth is
a. The difference between output growth and labor growth.
b. The difference between output per worker growth and labor per worker growth.
c. The difference between labor growth and capital growth.
d. Output growth minus the sum of labor growth and capital growth, each weighted by their
respective output elasticities.
127. Over the past year, output grew 6%, capital grew 2%, and labor grew 4% If the elasticities of
output with respect to capital and labor are 0.3 and 0.7, respectively (e.g., the production function is
Y = 2K0.3N0.7), how much did productivity grow?
a. 2.0%
b. 2.6%
c. 3.0%
d. 3.3%
128. Over the past year, output grew 5%, capital grew 5%, and labor grew 1%. If the elasticities of
output with respect to capital and labor are 0.5 and 0.5 (e.g., the production function is Y =
2K0.5N0.5), how much did productivity grow?
a. 0.5%
b. 1.0%
c. 1.5%
d. 2.0%
129. Which of the following is not an example of human capital formation?
a. Increases in the educational achievements of the population.
b. Increases in job skills of the labor force.
c. Improvements in the nutrition and health of the labor force.
d. Increases in the birth rate of the population.

Chapter 7 – The Asset Market, Money, and Prices

130. A system in which people trade goods they don’t want to consume for goods they do want to
consume is called
a. An indirect exchange economy.
b. A commodity money system.
c. A barter system.
d. A fiat money system.
131. The following are all functions of money EXCEPT
a. Medium of exchange.
b. Store of value.
c. Source of anxiety.
d. Unit of account.
132. For something to satisfy the medium of exchange function of money, it must be
a. Backed by gold.
b. Readily exchangeable for other goods.
c. Issued by a central bank.
d. An inherently valuable commodity.
133. Which of the following statements about M1 and M2 is not true?
a. Demand deposits are part of M1.
b. M2 is more liquid than M1.
c. M2 is larger than M1.
d. Savings accounts are part of M2.
134. Suppose you read in the paper that the central bank of the United States plans to expand the
money supply. The central bank is most likely to do this by
a. Printing more currency and distributing it.
b. Purchasing government bonds from the public.
c. Selling government bonds to the public.
d. Buying newly issued government bonds directly from the government itself.
135. You are putting together a portfolio of assets. The three most important characteristics of the
assets you will choose are
 a. Expected return, risk, and liquidity.
b. Expected return, risk, and collateral.
c. Expected return, risk, and maturity.
d. Expected return, liquidity, and maturity.
136. Which of the following portfolio allocation decisions represents the best individual response to
an increase in the interest rate on nonmonetary assets?
a. Sell some stocks and use the money to buy some bonds.
b. Sell some bonds and use the money to buy some stocks.
c. Trade some money for nonmonetary assets.
d. Sell some land and use the money to buy nonmonetary assets.
137. A 1% increase in real income usually leads to _____ in money demand.
a. A decrease.
b. No change.
c. An increase of less than 1%.
d. An increase of 1%.
138. Which of the following is most likely to lead to an increase of 1% in the nominal demand for
money?
a. An increase in real income of ½ %.
b. A decrease in real income of ½ %.
c. A decline of 1% of the price level.
d. An increase of 1% of the price level.
139. During the past year, there was an increase in the price level and an increase in interest rates on
financial assets, but a fall in personal incomes. The overall demand for money fell. Which of the
following factors was most likely to have contributed to this fall in the demand for money?
a. Changes in the price level and in interest rates.
b. Changes in interest rates and personal income.
c. Changes in the price level and personal income.
d. Changes in personal incomes only.
140. Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times,
and will shift $10,000 into bonds from his checking account for each percentage point that the
interest rate on bonds exceeds the interest rate on his checking account. If the interest rate on
checking accounts is 4% and the interest rate on bonds is 9%, how much does Mr. Pierpont keep in
his checking account?
a. $50,000
b. $70,000
c. $130,000
d. $150,000
141. Mr. Pierpont has wealth of $200,000. He wants to keep at least $80,000 in bonds at all times,
and will shift $10,000 into bonds from his checking account for each percentage point that the
interest rate on bonds exceeds the interest rate on his checking account. Currently he keeps
$100,000 in bonds, which pay him 7%. What is the current interest rate on checking accounts?
a. 5%
b. 7%
c. 9%
 d. 10%
142. Money demand is given by Md/P = 1000 + .2Y – 1000i. Given that P = 200, Y = 2000, and I = .10,
nominal money demand is equal to
a. 1,300
b. 1,500
c. 260,000
d. 300,000
143. According to the quantity theory of money, velocity
a. Increases with nominal income.
b. Is positively related to the real interest rate.
c. Is constant.
d. Is proportional to the price level.
144. If nominal GDP is $7 trillion, the price leel is 200, and the nominal money stock is $1 trillion, then
velocity is
a. 1/7
b. 2
c. 3.5
d. 7
145. Suppose velocity is 6, real output is 6000, and the price level is 200. What is the level of real
money demand in this economy?
a. 1,000
b. 2,000
c. 20,000
d. 200,000

Chapter 8 – Business Cycles

146. Business cycles all display the following characteristics EXCEPT

a. A period of expansion followed by one of contraction.
b. Comovement of many economic variables.
c. Rising prices during an expansion and falling prices during the contraction.
d. They last a period of one to twelve years.
147. The fact that business cycles are periodic but not recurrent means that
a. Business cycles occr at predictable intervals, but do not last a predetermined length of time.
b. The business cycle’s standard contraction-trough-expansion-peak pattern has been
observed to recur over and over again, but not at predictable intervals.
c. Business cycles occur at predictable intervals, but do not all follow a standard contraction-
trough-expansion-peak pattern.
d. Business cycles last a predetermined length of time, but do not all follow a standard
contraction-trough-expansion-peak pattern.
148. The high point in the business cycle is referred to as the
a. Expansion.
b. Boom.
c. Peak.
 d. Turning point.
149. Turning points in business cycles occur when
a. A new business cycle is initiated at a trough.
b. The economy hits the peak or trough in the business cycle.
c. The business cycle begins to follow a new pattern that differs from previous business cycles.
d. A new business cycle is initiated at the peak.
150. Christina Romer’s estimates of the business cycles prior to World War II showed that
a. The business cycle had greater fluctuations before World War II than previous estimates had
shown.
b. The business cycle had smaller fluctuations before World War II than previously estimated,
but still larger fluctuations than after World War II.
c. The business cycle had smaller fluctuations before World War II.
d. There was no difference in the size of business fluctuations prior to and after World War II.
151. When the values of coincident, procyclical variables are declining, aggregate economic activity
a. Will begin to decline within six months.
b. Might start to decline in the next year.
c. Has been declining for at least six months.
d. Is declining.
152. Lagging procyclical variables are aggregate economic variables that
a. Reach a peak after leading variables but before coincident variables.
b. Reach a peak after coincident variables reach a peak.
c. Reach a peak two or more years after aggregate economic activity reaches a peak.
d. Are insensitive to business cycles.
153. Wars, new inventions, harvest failures, and changes in government policy are examples of what
economists refer to as
a. The components of GDP.
b. Propagation mechanisms.
c. Shocks (either supply shocks or demand shocks).
d. Demand innovations.
154. When plotted with the aggregate price level on the vertical axis and output on the horizontal
axis, the aggregate demand curve
a. Slopes upward.
b. Slopes downward.
c. Is vertical.
d. Is horizontal.
155. An increase in government spending on the park system would cause
a. The aggregate demand curve to shift to the right.
b. The aggregate demand curve to shift to the left.
c. A movement down and to the right along the aggregate demand curve.
d. A movement up and to the left along the aggregate demand curve.
156. When plotted with the aggregate price level on the vertical axis and output on the horizontal
axis, the short-run aggregate supply curve (in the absence of misperceptions)
a. Slopes upward.
b. Slopes downward.
 c. Is vertical.
d. Is horizontal.
157. In the long run, an increase in government purchases of military equipment would cause output
to _____ and the aggregate price level to _____.
a. Stay constant; rise
b. Rise; rise
c. Rise; stay constant
d. Stay constant; stay constant

Chapters 9 and 11 – The IS-LM/AS-AD Model: A General Framework for Macroeconomic Analysis

158. Which of the following would shift the FE line to the right?
a. An adverse supply shock
b. A decrease in labor supply
c. An increase in the capital stock
d. An increase in the future marginal productivity of capital
159. A beneficial supply shock would cause the FE line to
a. Shift to the right.
b. Shift to the left.
c. Remain unchanged.
d. Remain unchanged if the shock is temporary; shift to the right if the shock is permanent.
160. A revenue-neutral increase in the effective tax rate on capital would cause the IS curve to
a. Shift up and to the right.
b. Shift down and to the left.
c. Remain unchanged.
d. Remain unchanged if taxes are fully deductible from income; otherwise, shift up and to the
right.
161. An increase in wealth would cause the is curve to
a. Shift up and to the right.
b. Shift down and to the left.
c. Remain unchanged.
d. Shift up and to the right only if people face borrowing constraints.
162. The IS curve will shift down and to the left when
a. Desired saving declines.
b. Government purchases increase.
c. Consumption increases.
d. Expected future marginal product of capital declines.
163. The LM curve illustrates that when income increases, the
a. Price level must increase to clear the asset market.
b. Real interest rate on nonmonetary assets must increase to clear the asset market.
c. Price level must increase to clear the goods market.
d. The real interest rate on nonmonetary assets must increase to clear the goods market.
164. Looking only at the asset market, an increase in output would cause
a. The LM curve to shift down and to the right.
 b. The LM curve to shift up and to the left.
c. An increase in the real interest rate along the LM curve.
d. A decrease in the real interest rate along the LM curve.
165. A revenue-neutral decrease in the effective tax rate on capital would cause the IS curve to _____
and the LM curve to _____.
a. Shift down and to the left; shift up and to the left
b. Shift down and to the left; shift up and to the right
c. Shift up and to the right; be unchanged
d. Shift up and to the right; shift up and to the left
166. The IS-LM model predicts that a temporary adverse supply shock
a. Reduces output, national saving, and investment, but not the real interest rate.
b. Reduces output, national saving, and the real interest, but not investment.
c. Reduces the real interest rate, investment, and output, but not national saving.
d. Reduces output, national saving, investment, and the real interest rate.
167. After a temporary adverse supply shock hits the economy, general equilibrium is restored by
a. A shift down and to the left of the IS curve.
b. A shift to the left of the FE line.
c. A shift up and to the left of the LM curve.
d. A shift down and to the right of the LM curve.
168. An increase in the money supply causes the real interest rate to _____ and output to _____ in
the short run, before prices adjust to restore equilibrium.
a. Rise; rise
b. Rises; fall
c. Fall; rise
d. Fall; fall
169. Suppose the intersection of the IS and LM curves is to the right of the FE line. An increase in the
price level would most likely eliminate a disequilibrium among the asset, labor, and goods markets
by
a. Shifting the LM curve up and to the left.
b. Shifting the IS curve up and to the right.
c. Shifting the IS curve down and to the left.
d. Shifting the FE curve to the left.
170. A decrease in taxes (when Ricardian equivalence doesn’t hold) causes the real interest rate to
_____ and the price level to _____ in general equilibrium.
a. Rise; rise
b. Rise; fall
c. Fall; rise
d. Fall; fall
171. In the Classical (not Keynesian) IS-LM analysis, the effects of a decline in desired investment
include
a. A decline in output.
b. An increase in the price level.
c. A decline in the real interest rate.
d. An increase in unemployment.
172. The theory of monetary neutrality suggests that
a. Starting at full employment, a change in the nominal money supply has no long-run effect
on real variables.
b. Changes in the real money supply will not affect the real interest rate.
c. Money is not an asset.
d. A decline in nominal money supply growth could create a recession.
173. Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most
likely eliminate a disequilibrium among the asset, labor, and goods markets?
a. A rise in the price level, shifting the LM curve up and to the left.
b. A fall in the price level, shifting the LM curve down and to the right.
c. A rise in the price level, shifting the IS curve up and to the right.
d. A fall in the price level, shifting the IS curve down and to the left.
174. Classical economists believe that a market economy will normally
a. Suffer from extended periods of sustained unemployment.
b. Achieve full-employment output.
c. Degenerate into pure monopolies in most industries.
d. Eliminate the problem of economic scarcity.
175. Keynesians contend that in a recession caused by a decline in aggregate demand, a policy of
increasing the nominal money supply would
a. Raise the level of aggregate demand, which would help return the economy to full-
employment output.
b. Lower the level of aggregate demand, which would help return the economy to full-
employment output.
c. Shift the LM curve to the left, which would help return the economy to full-employment
output.
d. Not affect the position of the LM curve, because the real money supply would not change.
176. At a given output level, a temporary reduction in government purchases will
a. Increase desired saving, causing the IS curve to shift down and to the left.
b. Increase desired saving, causing the IS curve to shift up and to the right.
c. Decrease desired saving, causing the IS curve to shift down and to the left.
d. Degrease desired saving, causing the IS curve to shift up and to the right.
177. Which of the following changes shifts the AD curve up and to the right?
a. A temporary decrease in government purchases
b. A decline in the nominal money supply
c. An increase in corporate taxes
d. An increase in consumer confidence
178. Which of the following changes shifts the AD curve down and to the left?
a. A decline in the nominal money supply
b. A decrease in income taxes
c. A decrease in the risk on nonmonetary assets
d. An increase in the future marginal productivity of capital
179. When the money supply declines by 10%, in the short run, output _____ and the price level
_____.
a. Is unchanged; is unchanged
 b. Declines; falls
c. Is unchanged; falls
d. Declines; is unchanged
180. A revenue-neutral increase in the effective tax rate on capital causes the real interest rate to
_____ and the price level to _____ in general equilibrium.
a. Rise; rise
b. Rise; fall
c. Fall; rise
d. Fall; fall
181. In the Keynesian model, if equilibrium output is less than the full-employment level of output in
the short run,
a. The price level will rise in th long run.
b. The price level will decline in the long run.
c. The LM curve will shift up and to the left in the long run.
d. The FE line will shift to the left in the long run.
182. Because of price stickiness in the Keynesian model, a decline in investment demand will not
cause the
a. LM curve to shift down and to the right in the short run.
b. LM curve to shift in the long run.
c. IS curve to shift down and to the left in the short run.
d. IS curve to shift in the long run.
183. In the Keynesian model in the short run, an increase in the money supply will cause
a. An increase in output and a decrease in the real interest rate.
b. A decrease in the real interest rate but no change in output.
c. An increase in the real interest rate and an increase in output.
d. No change in either the real interest rate or output.
184. In the Keynesian model in the long run, an increase in the money supply will cause
a. An increase in output and a decrease in the real interest rate.
b. A decrease in the real interest rate but no change in output.
c. An increase in the real interest rate and an increase in output.
d. No change in either the real interest rate or output.
185. In the Keynesian model, which curve is horizontal?
a. LRAS
b. SRAS
c. AD
d. NS
186. In the Keynesian model in the long run, an increase in the money supply will cause _____ in the
real interest rate and _____ in the price level.
a. An increase; an increase
b. A decrease; an increase
c. No change; an increase
d. No change; no change
187. Using the Keynesian model, the effect of a revenue-neutral decrease in the effective tax rate on
capital would be to cause _____ in the real interest rate and _____ in output in the short run.
 a. A decrease; a decrease
b. A decrease; no change
c. An increase; an increase
d. No change; a decrease
188. In the Keynesian model in the long run, a decrease in taxes causes the price level to _____ and
the real interest rate to _____.
a. Fall; rise
b. Fall; fall
c. Rise; rise
d. Rise; fall
189. Tight (i.e., contractionary) monetary policy and easy (i.e., stimulative) fiscal policy lead to
a. High real interest rates.
b. Low real interest rates.
c. Roughly unchanged real interest rates.
d. Roughly unchanged real interest rates only when Ricardian equivalence holds; otherwise,
low real interest rates.
190. During a severe and persistent recession, Keynesians would most likely propose
a. Tax increases.
b. A tight monetary policy.
c. Annually balanced federal budgets.
d. Macroeconomic stabilization.
191. In the long run in the Keynesian model, a sharp decline in oil prices would leave the economy
with a _____ level of output and a _____ real interest rate.
a. Higher; lower
b. Lower; higher
c. Lower; lower
d. Higher; higher
192. In practice, one of the principal problems with aggregate demand management is that
a. Changes in aggregate demand do not affect output.
b. Changes in aggregate demand cannot reduce unemployment.
c. Changes in aggregate demand are highly inflationary.
d. Stabilization policies could change aggregate demand too much and at the wrong times,
leading to overshooting – thereby exacerbating cyclical swings in aggregate economic
activity.

ANSWERS ARE ON NEXT PAGE

ANSWERS:

1. C
2. C
3. C
4. D
5. B
6. D
7. C
8. A
9. A
10. B
11. C
12. B
13. D
14. A
15. B
16. A
17. A
18. B
19. A
20. A
21. B
22. B
23. D
24. D
25. C
26. B
27. B
28. A

Chapter 2 – The Measurement and Structure of the National Economy

29. C
30. A
31. C
32. A
33. B
34. D
35. D
36. B
37. D
38. B
39. D
40. A
41. D
42. A
43. A
44. C
45. B
46. C
47. C
48. D
49. B
50. A
51. B
52. C

Chapter 3 – Productivity, Output, and Employment

53. C
54. B
55. A
56. D
57. B
58. B
59. A
60. C
61. D
62. A
63. A
64. C
65. D
66. C
67. B
68. C
69. D
70. C
71. A
72. A
73. D
74. C
75. B
76. D
77. D
78. C
79. D
80. D
81. B
Chapter 4 – Consumption, Saving, and Investment

82. B
83. A
84. C
85. D
86. D
87. A
88. B
89. B
90. C
91. A
92. D
93. B
94. A
95. C
96. A
97. D
98. B
99. C
100. A
101. C
102. D
103. C
104. B

Chapter 5

105. A
106. A
107. A
108. D
109. C
110. A
111. C
112. B
113. B
114. B
115. A
116. D
117. E
118. D
119. B
120. The world real interest rate is determined by the aggregate supply of saving and demand for
investment in the international capital market. Changes in domestic saving or investment in a small
open economy do not affect the interest rate.
121. The values of NX, C, and (C+I+G), respectively, are
a. -$2 billion
b. $26 billion
c. $72 billion

Chapter 6 – Long Run Economic Growth

122. C
123. C
124. C
125. D
126. D
127. B
128. D
129. D

Chapter 7 – The Asset Market, Money, and Prices

130. C
131. C
132. B
133. B
134. B
135. A
136. C
137. C
138. D
139. B
140. B
141. A
142. C
143. C
144. D
145. D

Chapter 8 – Business Cycles

146. C
147. B
148. C
149. B
150. B
151. D
152. B
153. C
154. B
155. A
156. D
157. A

Chapters 9 and 11 – The IS-LM/AS-AD Model: A General Framework for Macroeconomic Analysis

158. C
159. A
160. B
161. A
162. D
163. B
164. C
165. C
166. A
167. C
168. C
169. A
170. A
171. C
172. A
173. A
174. B
175. A
176. A
177. D
178. A
179. D
180. D
181. B
182. A
183. A
184. D
185. B
186. C
187. C
188. C
189. A
190. D
191. A
192. D