MACROECONOMICS - TEST I

Fall 2009
PART 1
3 points each

Name: _____________________________

1.

Evidence from the past 40 years in the United States supports the
Fisher effect and shows that when the inflation rate is high, the
____ interest rates tends to be ____.
a. nominal; low
b. nominal; high
c. real; low
d. real; high

2.

At any particular point in time, the output of the economy:

a. is fixed because the supplies of capital and labor and the technology
are fixed.
b. is fixed because the demand for goods and services is fixed.
c. varies because the supplies of capital and labor vary.
d. varies because the technology for turning capital and labor into
goods and services varies.

3.

Assume that a tire company sells 4 tires to an automobile company for

$400, another company sells a compact disc player for $500, and the
automobile company puts all of these items in or on a car that it sells
for $20,000. In this case, the amount from these transactions that
should be counted in GDP is:
a. $20,900.
b. $20,000 less the automobile companys profit on the car.
c. $20,000.
d. $20,900 less the profits of all three companies on the items that
they sold.

4.

The natural rate of unemployment in the United States since 1952 has
averaged between _____ and _____ percent.
a. 0; 1
b. 1; 3
c. 5; 6
d. 10; 15

5.

According to the neoclassical theory of distribution, if firms are

competitive and profit maximizing, total income in the economy is
distributed:
a. only to the labor used in production.
b. partly between labor and capital used in production, with the
surplus going to the owners of the firm as profits.
c. equally between the labor and capital used in production.
d. between the labor and capital used in production, according to their
marginal productivities.

A1

6.

Real GDP is a better measure of economic well-being than nominal

GDP, because real GDP:
a. excludes the value of goods and services exported abroad.
b. includes the value of government transfer payments.
c. adjusts the value of goods and services produced for changes in
the foreign exchange rate.
d. measures changes in the quantity of goods and services produced
by holding prices constant.

7.

Two economies are identical except that the level of capital per worker
is higher in Highland than in Lowland. The production functions in both
economies exhibit diminishing marginal product of capital. An extra
unit of capital per worker increases output per worker:
a. in Highland, but not in Lowland.
b. more in Highland.
c. more in Lowland.
d. by the same amount in Highland and Lowland.

8.

If the consumption function is given by C = 150 + 0.85Y and Y

increases by 1 unit, then savings:
a. decreases by 0.85 unit.
b. decreases by 0.15 unit.
c. increases by 0.85 unit.
d. increases by 0.15 unit.

9.

When the real wage is above the level that equilibrates supply and
demand:
a. there is no unemployment.
b. the labor market clears.
c. the quantity of labor supplied exceeds the quantity demanded.
d. the quantity of labor demanded exceeds the quantity supplied.

10. It was recently reported that inflation in Iraq was very high,
exceeding 50 percent. Inflation of this magnitude is likely to:
i.
increase the demand for the dinar (Iraqi currency)
ii. increase the velocity of the dinar
iii. decrease the demand for the dinar
a. i. only
b. ii. only
c. i. and ii.
d. ii. and iii.
11.

In the steady state, the capital stock does not change because
investment equals:
a. consumption.
b. output per worker.
c. the marginal product of capital.
d. depreciation.

12.

The
a.
b.
c.
d.

opportunity cost of holding money is the:

real interest rate.
nominal interest rate.
rate of inflation.
prevailing Treasury bill rate.
A2

13.

An increase in the price of imported goods will show up in:

a. both the CPI and the GDP deflator.
b. neither the CPI nor the GDP deflator.
c. the CPI but not in the GDP deflator.
d. the GDP deflator but not in the CPI.

14.

All
a.
b.
c.
d.

15.

of the following are causes of structural unemployment except:

unemployment insurance.
minimum-wage laws.
the monopoly power of unions.
efficiency wages.

According to the quantity theory of money:

a. The growth rate of money equals the growth rate of output minus
the growth rate of prices.
b. The growth rate of prices equals the growth rate of money plus
the growth rate of output.
c. The growth rate of money minus the growth rate of output equals
inflation
d. The percentage change in inflation equals the percentage change
in money minus the percentage change in output.

16.

In the classical model with fixed income, if households want to save

more than firms want to invest, then:
a. output increases.
b. output falls.
c. the interest rate rises.
d. the interest rate falls.

17.

In the United States since the end of World War II:

a. the labor force participation rates of both men and women have
increased.
b. the labor force participation rates of both men and women have
decreased.
c. the labor force participation rate of men has decreased, while
the labor force participation rate of women has increased.
d. the labor force participation rate of men has increased, while
the labor force participation rate of women has decreased.

18.

Analysis of population growth around the world concludes that countries

with high population growth tend to:
a. have high income per worker.
b. have the same standard of living as other parts of the world.
c. have a lower level of income per worker than other parts of the
world.
d. tend to be the high-income-producing nations of the world.

19.

The
a.
b.
c.
d.

classical dichotomy:
cannot hold if money is neutral.
arises because money depends on the nominal interest rate.
is said to hold when the values of real variables can be determined
without any reference to nominal variables or the existence of
money.
fully describes the world in which we live, especially in the short
run.
A3

20. Which of the following best describes the Fisher Equation?

a. It demonstrates how the real interest rate is determined.
b. It shows that two forces can cause nominal interest rates to
change.
c. It indicates that fiscal policy quickly and directly affects
nominal interest rates.
d. It shows that inflation is included in real interest rates.
21.

If a neutral
neoclassical
a. both the
b. both the
c. the real
rise.
d. the real
fall.

technological advance improves the production function, the

theory of distribution predicts:
real wage and the real rental price of capital will fall.
real wage and the real rental price of capital will rise.
wage will fall and the real rental price of capital will
wage will rise and the real rental price of capital will

22.

A price index like the CPI _____ the change in the cost of
living because it _____ take into account that people can substitute
less expensive goods for ones that have become more expensive.
a. overestimates; does
b. overestimates; does not
c. accurately estimates; does
d. underestimates; does not

23.

According to the Solow model, persistently rising living standards can

only be explained by:
a. technological progress.
b. population growth.
c. capital accumulation.
d. saving rates.

24. Which of the following statements best demonstrates the long run
neutrality of money?
a. The Fed increases the money supply to reduce the likelihood of a
recession.
b. Congress votes to give tax rebate checks to most households to reduce
the likelihood of a recession.
c. A nations ability to produce is only a function of its capital,
labor and technology, not money.
d. An increase in savings account deposits causes an increase in money
as measured by M2.

A4

Refer to the following paragraph to answer the next 3 question:

In March 2009, the Federal Reserve began a program called quantitative
easing. Here, the central bank creates money be buying bonds and other
assets owned by banks. The result has been an annualized money growth
rate of 18.5% (M1) and 7.8% (M2). Some fear this excess liquidity will
reinflate the housing bubble.
25. Which statements are true?
i.
This high growth rate of money is already creating inflation
in the US.
ii.
The demand for money is unusually high right now holding
inflation down.
iii. Rising home prices are a form of inflation.
a.
b.
c.
d.

ii only.
ii. and iii.
i. and iii.
i., ii., and iii.

26. It is reasonable to expect:

a. Nominal interest rates to rise with excess liquidity.
b. Real interest rates to rise with excess liquidity.
c. Nominal interest rates to fall with excess liquidity.
d. Neither real nor nominal interest rates to be affected by
excess liquidity.

27.How is this excess liquidity likely to affect future lending and

why?
a. lenders will charge a fixed rate to keep their real
profitability constant.
b. lenders will charge a fixed rate to allow their real
profitability to vary.
c. lenders will charge a floating rate to keep their real
profitability constant.
d. lenders will charge a floating rate to allow their real
profitability to vary.

A5