Multiple Choices

1. If a Hong Kong construction company hire local Chinese worker to built a

road in mainland China, this activity would be

A) fully included in Mainland GNP

B) fully included in Mainland GDP.
C) excluded from Hong Kong GNP.
D) included in Hong Kong GDP but not in Hong Kong GNP.

2. Suppose consumption C=100+0.5YD and Investment I=100. Every things

equal, an increase in the propensity to consume from 0.5 to 0.75 will
definitely lead to

A) a decrease in total saving.

B) the effects on both total saving and consumption are unknown.
C) an increase in consumption.
D) a decrease in consumption.

3. Every other thing equal, an increase in the risk of investment return

would cause the IS curve to

A) remain unchanged
B) shift down and to the left
C) shift up and to the right
D) remain unchanged if the risk is small.

4. Suppose investment spending is very not sensitive to the interest rate.

Given this information, we know that:

A) the IS curve should be relatively steep

B) the IS curve should be relatively flat
C) the LM curve should be relatively flat
D) the LM curve should be relatively steep

5. According to IS-LM model, under which circumstance, the increase in

money is most effective in boosting the economy?

A) investment is not sensitive to output change at all.

B) IS curve is vertical
C) IS curve is flat
D) Investment is fixed.
6. For this question, assume that individuals hold NO currency (i.e., c = 0.0).
If the ratio of reserves to deposits is .25, a purchase of $1000 of bond by
the central bank will leads to ____increase in money supply:

A) $4000 B) $3000 C) $5000 D) $1000

7. Based on our understanding of the labor market model presented in

Chapter 6, the new labor law in China which increases the protection of
workers to be laid off would leads to :

A) a reduction in the equilibrium real wage

B) an increase in the equilibrium real wage
C) a reduction in the natural rate of unemployment
D) an increase in the natural rate of unemployment

8. Based on our understanding of the labor market model presented in

Chapter 6, an increase in oil price will make,

A) a reduction in the equilibrium unemployment rate

B) a rise in the real wage
C) a rise in the aggregate price
D) a rise in natural rate of output

9. Based on your understanding of the AS/AD model, which of the following

is an INCORRECT statement about the short-run adjustment process for the
macro economy?

A) A reduction in employment leads to lower prices

B) An increase in output above the natural level leads to higher nominal
wages
C) Output in excess of the natural level leads to higher prices
D) none of the above

10. Based on your understanding of the AS/AD model, an permanently

reduction in government spending will lead to ___in the medium run

A) an increase in consumption
B) a decrease in consumption
C) an increase in investment
D) a decrease in investment
11. Which of the following will cause the velocity of money to decrease?

A) the introduction of credit cards into the economy

B) a reduction in the interest rate
C) an increase in the interest rate
D) all of the above
E) none of the above

12. Which of the following will cause a rightward shift in the money demand
curve?

A) an increase in the money supply

B) a reduction in the interest rate
C) a reduction in income
D) all of the above
E) none of the above

13. Suppose the economy is operating on the LM curve but not on the IS
curve. Given this information, we know that:

A) the money market and goods market are in equilibrium and the bond
market is not in equilibrium.
B) neither the money, bond, nor goods markets are in equilibrium.
C) the money market and bond markets are in equilibrium and the goods
market is not in equilibrium.
D) the money, bond and goods markets are all in equilibrium.
E) the goods market is in equilibrium and the money market is not in
equilibrium.

14. Which of the following represents the medium-run effect of a reduction

in the money supply?

A) a decline in output
B) a decrease in the price level
C) an increase in the interest rate
D) all of the above
E) none of the above

15. Assume the economy is initially operating at the natural level of output.
Now suppose a budget is passed that calls for a tax cut. This fiscal expansion
will, in the medium run, have no effect on which of the following?

A) the price level

B) the interest rate
C) employment
D) all of the above
E) none of the above

16. Assume the economy is initially operating at the natural level of output.
Which of the following events will NOT change the composition of output (i.e.,
the percentage of GDP composed of consumption, investment, etc.) in the
medium run?

A) an increase in consumer confidence

B) a reduction in government spending
C) an increase in the money supply
D) a cut in taxes
E) a reduction in the desire to save

17. Answer this question using the AS/AD model presented in the textbook.
Which of the following would cause a reduction in the natural level of output
in the medium run?

A) an increase in taxes
B) a decrease in government spending
C) a decrease in the money supply
D) both A and C
E) none of the above

18. At the current level of output, suppose the actual price level is greater
than the price level that individuals expect (i.e., 𝑃𝑡 > 𝑃𝑡𝑒 ). We know that:

A) the nominal wage will tend to decrease as individuals revise their

expectations of the price level.
B) output is currently below the natural level of output.
C) the AS curve will tend to shift down over time.
D) the interest rate will tend to rise as the economy adjusts to this situation.
E) none of the above

19. Assume the economy is initially operating at the natural level of output.
Which of the following events will initially cause a shift of the aggregate
supply curve?

A) an increase in consumer confidence

B) an increase in the money supply
C) an increase in government spending
D) all of the above
E) none of the above
20. Suppose the economy is operating at the steady state and that there is
no technological progress. Which of the following is true given this
information?

A) The growth of output per worker is zero.

B) The growth of output per worker is equal to the rate of investment.
C) The growth of output per worker is equal to the rate of depreciation.
D) The growth of output per worker is equal to the rate of saving.
E) none of the above

21. Suppose in an economy without technology progress and population

growth, an increase in depreciation rate, 𝛿 will lead to total deprecation (𝛿𝐾)
to__?

A) increase.
B) decrease
C) unchanged.
D) increase if and only the saving rate is above the golden rule level.
E) decrease if and only the saving rate is above the golden rule level.

22. Suppose there is a reduction in the saving rate. This reduction in the
saving rate must cause a reduction in consumption per capita in the long run
when:

A) the saving is used for education rather than physical capital.

B) capital per worker already is less than the golden-rule level.
C) the rate of saving exceeds the rate of depreciation.
D) there is no technological progress.
E) there is no population growth.

23. Suppose two countries are identical in every way with the following
exception. Economy A has a higher rate of depreciation (δ) than economy B.
Given this information, we know with certainty that:

A) steady state consumption in A is lower than in B.

B) steady state consumption in A and in B are equal.
C) steady state growth of output per worker is higher in A than in B.
D) steady state consumption in A is higher than in B.
E) none of the above

24. At the current steady state capital-labor ratio, assume that the steady
state level of per capita consumption, (C/N)*, is less than the golden rule
level of steady state per capita consumption. Given this information, we can
be certain that:
A) a reduction in the saving rate will have an ambiguous effect on (C/N)*.
B) an increase in the saving rate will cause an increase in the steady state
level of per capita consumption ((C/N)*).
C) the capital labor ratio will tend to decrease over time.
D) the capital labor ratio will tend to increase over time.
E) a reduction in the capital-labor ratio will cause a reduction in (C/N)*.

25. Suppose an economy experience a 4% increase in each of the following

variables: N, K,if the production exhibits constant return to scale and no
change in technology. Other things equal, Given this information, we know
with certainty that:

A) Y will increase by less than 4%.

B) Y will increase by exactly 4%.
C) Y will increase by more than 4%.
D) Y will increase by less than 8% but by more than 4%.
E) none of the above

26. Suppose policy makers want to increase Y and and keep NX unchanged,
Which of the following policies would most likely achieve this?

A) a real appreciation
B) an increase in the real exchange rate
C) an increase in government spending and a depreciation in the real
exchange rate
D) a reduction in government spending
E) encourage the countryʹs trading partners to implement policies that will
cause a reduction in foreign income (Y*)

27. For this question, assume that there is a tax cut. In a fixed exchange
rate regime, we know with certainty that:

A) consumption will increase.

B) investment will increase
C) money supply will increase
D) output will increase.
E) all of the above

28. For this question, assume the Marshal-Lerner condition holds. Which of
the following would occur as a result of an increase in the real exchange rate?
A) an increase in domestic output
B) an improvement of the trade balance
C) a reduction in the quantity of imports
D) all of the above
E) none of the above

29. In an open economy under flexible exchange rates, a reduction in the

money supply will always cause

A) a reduction in output
B) an appreciation in the nominal exchange rate, E
C) a decrease in the interest rate
D) all of the above
E) only A and B

30. In an open economy under fixed exchange rate policy, an increase in

government spending will make
A) Output to increase
B) Money supply to increase
C) Investment to increase
D) Only A and B
E) A, B and C.
Short Essay Question

1. Unemployment Benefits varies a lot across countries and regions. For example,
in Sweden, the unemployed will receive about 70 percent of his or her normal
income during the last 12 months for about one and a half year. While in Hong
Kong and Singapore, there is no comparable system available.

The unemployment rate in Sweden is 7.9% 4.0% in Hong Kong and 2.2 in
Singapore in the December of 2010.

a. Use the labor diagram we learn in Chapter 6 to explain why Sweden has a
higher unemployment rate than Hong Kong and Singapore?

b. The reason why the Administration in Hong Kong and Singapore does not
support the establishment of an unemployment assistance system is that in their
opinion, what the unemployed need is a job rather than a cash hand-out.

Provide a Pro (for) and a Con (against ) to such opinion.

2. Suppose that one economy is initially at the natural level of output.

a. Using the AS/AD, IS/LM diagrams to analyze the effect of a decline in

consumer's confidence on consumption, output, investment and interest
rate in the short run, in the medium run.

b. suppose that the central bank is making decision on monetary policy to

maintain the natural level output. Should the central bank increase money
supply or decrease money supply? Briefly explain why.

3. The growth model. Suppose there is population and technology level is

constant. The production function is

𝑌 = √𝐾𝑁

a. Does this production satisfy Constant-Return-Scale property?

Y K
b. Write down y = f(k) , where y = N is the output per worker and k = N is
capital per worker.
c. Assume there is no government, and the private saving rate is a constant
fraction of the household disposable income, s=0.3. And depreciation rate,
δ, is 0.1. Solve for the steady-state k ∗ , y ∗ and c ∗ .

d. solve for the golden-rule level of saving rate in the above economy with
no government. And recommend a tax policy for the government to achieve
the golden-rule of capital, output and consumption.

4. Suppose an economy with the following information

𝐶 = 6 + 0.8(𝑌 − 𝑇),
𝐺 = 15; 𝑇 = 20,
𝐼 = 10 + 0.2𝑌 − 100𝑖,
𝑁𝑋 = 10 − 0.25𝑌 − 50(𝜀 − 1),
Where 𝜀 is real exchange rate. Suppose the foreign interest rate is 5% and
expected normal interest rate 𝐸 𝑒 = 1.05. Price level is equal to 1 in both
countries, namely 𝑃 = 𝑃∗ = 1.

a) Write down the real exchange rate as a function of normal interest rate 𝑖.
b) Derive the IS curve in the open economy

We have the following information regarding the financial market:

𝑀
= 𝑌 − 100𝑖
𝑃
The total money supply is M=30.

c) Solve for 𝑌, 𝑖, 𝐶, 𝐼, 𝑁𝑋, 𝜀 𝑎𝑛𝑑 𝐸 for this economy under flexible exchange rate

d) Now consider the government wants to achieve 𝑌 = 40, 𝑎𝑛𝑑 𝑁𝑋 = 0. How

should the money supply be? If the government keeps 𝑇 = 20 to achieve
𝑌 = 40, 𝑎𝑛𝑑 𝑁𝑋 = 0. How should government set its government spending?

e) Now consider the original case with M=30, and 𝐺 = 15; 𝑇 = 20, but the
economy is under fixed change rate with 𝐸 = 1. What is the
equilibrium𝑌, 𝑖, 𝐶, 𝐼, 𝑁𝑋, 𝑎𝑛𝑑 𝜀? What is the money supply to be consistent with
the equilibrium condition under fixed exchange rate policy?

f) In order to achieve trade balance 𝑁𝑋 = 0, 𝐺 = 15 how should the

government set its Taxes?