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Macroeconomics Study Questions
Macroeconomics Study Questions
Chapter 2:
1. Which of the following is a flow variable?
A. The value of the house in which you live
D. Inventory investment
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3. GDP is
A. a stock.
B. a flow.
C. both a stock and a flow.
D. neither a stock nor a flow.
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9. Which of the following statements describes the difference between nominal and real
GDP?
A. Real GDP includes only goods; nominal GDP includes goods and services.
B. Real GDP is measured using constant base-year prices; nominal GDP is measured
using current prices.
C. Real GDP is equal to nominal GDP less the depreciation of the capital stock.
D. Real GDP is equal to nominal GDP multiplied by the CPI.
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A. 1/4.
B. 1/2.
C. 1.
D. 2.
Production/Price
Production/Price
1995
2000
20/ $0.50
10/ $1.00
10/$1.00
10/$0.50
If 1995 is the base year, what is the GDP deflator for 2000?
A. 0
B. between 0 and 1
C. 1
D. greater than 1
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The correct answer is C. The CPI measures the change in the price
of the typical consumer's basket of goods. Since the price of the
basket was $2 in 1986, and it is $3 in 1996, the CPI for 1996 is
equal to 3/2. See Section 2-2.
19. Consider the following table:
Year
1995
2000
Consumption Goods
Nonconsumption Goods
Production Price
20/$0.50
10/$1.00
Production Price
10/$1.00
10/$0.50
B. 1/2.
C. 1.
D. 2.
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20. Which of the following statements about the CPI and the GDP deflator is true?
A. The CPI measures the price level; the GDP deflator measures the production of an
economy.
B. The CPI refers to a base year; the GDP deflator always refers to the current year.
C. The weights given to prices are not the same.
D. The GDP deflator takes the price of imported goods into account; the CPI does not.
The correct answer is C. For a discussion of the CPI and the GDP
deflator, see Section 2-2.
21. All other things equal, if the price of foreign-made cars rises, then the GDP deflator
A. and the CPI will rise by equal amounts.
B. will rise and the CPI will remain the same.
C. will remain the same and the CPI will rise.
D. and the CPI will rise by different amounts.
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C. Labor force
D. Labor-force participation rate
The correct answer is A. The factory worker willingly leaves her job
so she is not considered to be unemployed. See Section 2-3.
26. Suppose that the size of the labor force is 100 million and that the unemployment rate
is 5 percent. Which of the following actions would reduce the unemployment rate the most?
A. 1 million unemployed people get jobs.
B. 2 million unemployed people leave the labor force.
C. 3 million people join the labor force and they all get jobs.
D. 10 million people join the labor force and half of them get jobs.
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Chapter 3:
1. The returns to scale in the production function Y = K0.5 L0.5 are
A. decreasing.
B. constant.
C. increasing.
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Capital
Output
(i)
1,000
1,000
10,000
(ii)
2,002
2,000
20,010
Assuming that the production function displays constant returns to scale, what is the
marginal product of labor when labor and capital are both equal to 1,000?
A. 1
B. 5
C. 10
D. 20
Output
3
6
8
By how much does the marginal product of labor decrease as labor input increases from 1 to 2
and from 2 to 3?
A. 0
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B. 1
C. 2
D. 3
The answer is A. Euler's theorem states that if each factor is paid its
marginal product, then the sum of these factor payments equals
output. This implies that economic profit is zero. See Section 3-2 for
a more detailed explanation of Euler's theorem.
8. If a firm with a constant returns to scale production function pays all factors their marginal
products, then
A. economic and accounting profits are both zero.
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The answer is A. For an explanation of the properties of the CobbDouglas production function, see Appendix to Chapter 3.
15. In the Cobb-Douglas production function, Y = K a L 1-a , the fraction of income spent in
payments to labor is
A. a.
B. 1 - a.
C. dependent on the amount of labor employed.
D. dependent on the amount of capital employed.
The correct answer is B. Since the real wage equals the marginal
product of labor (MPL), payments to labor (L) equal MPL * L. As
shown in Section 3-2, the MPL of the above production function
equals (1 - a)Y/L. Therefore payments to labor equal (1 - a)Y and
(1 - a) is the fraction of income spent in payments to labor.
16. In a closed economy, the supply of goods and services must be equal to
A. consumption.
B. consumption + investment.
C. consumption + investment + government purchases.
D. consumption + investment + government purchases - taxes.
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B. $0.70.
C. $1.40.
D. $1.70.
B. A car dealer stores some of this year's models for next year.
C. An individual purchases several pieces of antique furniture.
D. A firm buys a computer for word processing.
20. Suppose that Jones builds a new house, then she sells it to Smith, and then Smith sells it to
Williams. The total net investment from these transactions is
A. zero.
B. 1 house.
C. 2 houses.
D. 3 houses.
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B. nominal, increase
C. real, decrease
D. nominal, decrease
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A. income - consumption.
B. income - consumption - taxes.
C. income - consumption - government spending.
D. income - consumption - government spending - taxes.
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A. consumption falls.
B. national saving rises.
C. the real interest rate falls.
D. investment falls.
B. remain constant.
C. rise.
D. first fall and then rise.
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B. Decrease in consumption
C. Decrease in investment
D. Increase in government debt
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D. unit of account.
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14. The quantity theory of money states that if the money supply doubles and output is
constant, prices will
A. fall by half.
B. remain the same.
C. double.
D. fall only if velocity rises.
The correct answer is A. The real interest rate (r) and the nominal
interest rate (i) are related by the equation i = r + inflation. The
difference between the two interest rates is inflation. See Section 44.
16. The Fisher equation states that a 1 percent rise in the rate of inflation causes a 1
percent rise in the
A. real interest rate.
B. nominal interest rate.
C. money supply.
D. number of transactions.
The correct answer is B. The Fisher equation states that the nominal
interest rate is the sum of the real interest rate and inflation. Since
the real interest rate is determined by savings and investment, a 1
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percent rise in the inflation rate will cause a 1 percent rise in the
nominal interest rate. See Section 4-4.
17. The ex ante real interest rate differs from the ex post real interest rate only when
A. the money supply grows at a constant rate.
B. the money supply remains the same.
C. the money supply falls at a constant rate.
D. actual inflation differs from expected inflation.
The correct answer is A. The nominal interest rate is just the sum of
inflation and the real interest rate. See Section 4-4.
19. Consider the following table
Year
Inflation Rate
Nominal Interest Rate
1
5%
10%
2
10%
5%
By how much has the real interest rate changed between year 1 and year 2?
A. It has increased 5 percent.
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The correct answer is D. Since the real interest rate is equal to the
nominal interest rate minus the inflation rate, it was equal to 5
percent in year 1 and -5 percent in year 2. Between year 1 and year
2, it decreased by 10 percent. See Section 4-4.
20. The expected rate of inflation does not influence the
A. demand for real money balances.
B. ex post real interest rate.
C. nominal interest rate.
D. current price level.
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The correct answer is A. The nominal interest rate is the sum of the
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ex ante real interest rate and the expected inflation rate. Real
money balances depend on the opportunity cost of holding money
which is the nominal interest rate. See Section 4-5.
28. If an individual is to hold lower money balances on average, she must make more
frequent trips to the bank to withdraw money. This inconvenience of reducing money
holding is called
A. a menu cost.
B. a shoeleather cost.
C. an inflation tax.
D. seignorage.
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Chapter 5:
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100
900
20
180
0
500
100
B. 120
C. 1,000
D. 1,580
The correct answer is B. Imports are the sum of consumption of
foreign goods and services, investment of foreign goods and
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100
900
20
180
0
500
100
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A. 50
B. -50
C. 150
D. -150
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B.
spending.
C. A shrinking trade deficit.
D.
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23 Assume that the nominal exchange rate for the euro is .75
euros per dollar. Suppose that a Volkswagen Golf costs 10,000
euros in Germany, while it costs $12,000 in the United States.
What is the real exchange rate?
A. 0.75
B. 0.9
C. 1.2
D. 1.1
The answer is B. See Section 5-3 for an explanation of how to
calculate the real exchange rate.
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B. 45 percent
C. 50 percent
D. 90 percent
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B. wage rigidity.
C. the discouraged-worker effect.
D. insiders versus outsiders.
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C. efficiency wages.
D. conflict between insiders and outsiders.
The answer is B. Unions may force wages above their marketclearing level, causing labor supply to be higher than labor demand.
The resulting form of unemployment is called "structural
unemployment." See Section 6-3.
18. Efficiency wage theories claim that firms may pay high real wages in order to
A. avoid the threat of unionization.
B. make workers more productive.
C. discourage unskilled workers from applying.
D. reduce the level of frictional unemployment.
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C. 13 percent
D. 50 percent
The answer is B. If there are individuals who want jobs, but are
discouraged and no longer looking for them, actual unemployment
will be higher than measured unemployment. See Section 6-4.
24. Discouraged workers who want jobs, but have stopped looking for jobs are
A. frictionally unemployed.
B. unemployed due to structural unemployment.
C. no longer in the labor force.
D. helped by minimum-wage legislation.
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unemployment.
D. economic inequality.
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