Chapter 6 Macro Economics

Macroeconomics, 9e, Global Edition (Abel/Bernanke/Croushore)
Chapter 6 Long-Run Economic Growth
6.1 The Sources of Economic Growth
1) Between 1870 and 2010, among the United States, Germany, Japan, and Australia, ________
grew at the fastest rate and ________ grew at the slowest rate.
A) United States; Germany
B) Germany; United States
C) Australia; Japan
D) Japan; Australia
Answer: D
Diff: 2
Topic: Section: 6.1
Question Status: Revised
2) The elasticity of output with respect to capital
A) is the increase in output resulting from an increase in the capital stock.
B) is the percentage increase in output resulting from a 1 % increase in the capital stock.
C) is always greater than one.
D) is the inverse of the elasticity of output with respect to labor.
Answer: B
Diff: 1
Topic: Section: 6.1
Question Status: Previous Edition
3) 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.
Answer: C
Diff: 2
Topic: Section: 6.1
4) Suppose the current level of output is 5000 and the elasticity of output with respect to capital
is 0.4. A 10% increase in capital would increase the current level of output to
A) 5020.
B) 5050.
C) 5200.
D) 5500.
Answer: C
Diff: 2
Topic: Section: 6.1
Copyright © 2017 Pearson Education, Ltd.
17) 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 0.3 and 0.7, respectively, how much did
productivity grow?
A) 0.5%
B) 1.0%
C) 2.2%
D) 2.8%
Answer: D
Diff: 2
Topic: Section: 6.1
productivity grow?
A) 2.0%
B) 2.6%
C) 3.0%
D) 3.3%
Answer: B
Diff: 2
Topic: Section: 6.1
productivity grow?
A) 0.5%
B) 1.0%
C) 1.5%
D) 2.0%
Answer: D
Diff: 2
Topic: Section: 6.1
20) Labor productivity increased so much in the second half of the 1990s because of
A) improved information and communications technologies.
B) higher levels of educational attainment by workers.
C) cheaper foreign imports used in production.
D) increased foreign competition.
Answer: A
Diff: 1
Topic: Section: 6.1
21) The computerization of police departments throughout the country has greatly reduced the
crime rate. What macroeconomic variable is likely to be directly affected by this change?
A) Productivity
B) Inflation
C) The real interest rate
D) The trade deficit
Answer: A
Diff: 1
Topic: Section: 6.1
22) Edward Denison found that labor's contribution to output growth in the United States since
1929 was attributable to all the factors below except
A) rising population.
B) an increase in the percentage of the population in the labor force.
C) an increase in the number of hours worked per person.
D) higher educational levels.
Answer: C
Diff: 1
Topic: Section: 6.1
23) Edward Denison's analysis of the American economy found that
A) total factor productivity was the largest source of economic growth since 1948.
B) the contribution of labor growth has been more variable than the contribution of capital
growth.
C) productivity growth has been positive over every period of more than five years since
WorldWar II.
D) the contribution of labor growth has been greater than the contribution of capital growth.
Answer: D
Diff: 2
Topic: Section: 6.1
Question Status: New
24) All of the following are explanations of the post-1973 productivity slowdown except
A) problems in measuring productivity.
B) changes in the legal and human environment.
C) higher oil prices.
D) greater competition from foreign imports.
Answer: D
Diff: 1
Topic: Section: 6.1
25) The idea that measurement problems could explain the productivity slowdown since 1973 is
based on the fact that
A) official output measures make no adjustment for quality.
B) output can't be measured.
C) capital can't be measured.
D) quality improvements aren't fully accounted for in the data.
Answer: D
Diff: 1
Topic: Section: 6.1
26) A new pollution law requires businesses to pay for inspections of their plants by independent
pollution-monitoring firms. What effect is this likely to have?
A) Increase productivity
B) Increase the capital stock
C) Reduce productivity
D) Increase the demand for labor in those firms
Answer: C
Diff: 1
Topic: Section: 6.1
27) Why do some people think that the productivity slowdown since 1973 is just a return to
normalcy after fast productivity growth during the previous 25 years?
A) Productivity growth of the previous 25 years was abnormally low.
B) The Great Depression and World War II had prevented technological opportunities from
being exploited.
C) The United States is the only country to face the slowdown, due to poor regulatory decisions.
D) The United States has allowed countries like Japan to steal its technological breakthroughs.
Answer: B
Diff: 1
Topic: Section: 6.1
28) Greenwood and Yorukoglu view the post-1973 productivity slowdown as resulting from
A) the information technology revolution.
B) high oil prices.
C) measurement errors.
D) technological depletion.
Answer: A
Diff: 1
Topic: Section: 6.1
29) Use the growth accounting equation to calculate productivity growth, given output growth of
3.5%, capital stock growth of 5%, labor employment growth of 2%, the output elasticity of
capital of 0.3, and the output elasticity of labor of 0.7.
Answer: The growth accounting equation is ΔY/Y = ΔA/A + a ΔK/K + a ΔN/N.

K N
Therefore productivity growth is ΔA/A = ΔY/Y - a ΔK/K - a ΔN/N.

K N
For the given values, productivity growth = 3.5% - (0.3)(5%) - (0.7)(2%) = 0.6%.
Diff: 2
Topic: Section: 6.1
30) From one year to the next, a country's output rose from 4000 to 4500, its capital stock rose
from 10,000 to 12,000, and its labor force declined from 2000 to 1750. Suppose a = 0.3 and
K
a = 0.7.
N
(a) How much did capital contribute to economic growth over the year?
(b) How much did labor contribute to economic growth over the year?
(c) How much did productivity contribute to economic growth over the year?
Answer:
(a) a ΔK/K = 0.3(2000 / 10,000) = 6%.

K
(b) a ΔN/N = 0.7 (-250 / 2000) = -8.75%.

N
(c) ΔY/Y = 500/4000 = 12.5%.
ΔA/A = ΔY/Y - a ΔK/K - a ΔN/N

K N
= 12.5% - 6% - (-8.75%)
= 15.25%.
Diff: 3
Topic: Section: 6.1
31) Over the past year, an economy's labor supply increased from 100 to 102, its capital stock
increased from 1000 to 1030, and its output increased from 500 to 525. All measurements are in
real terms. Calculate the contributions to economic growth of growth in capital, labor, and
productivity if a = 0.2 and a = 0.8.

K N
Answer:
One Year Ago Today Percent Change
Y 500 525 5%
K 1000 1030 3%
N 100 102 2%
ΔA/A = ΔY/Y - a ΔK/K - a ΔN/N
K N
= 5% - (0.2 × 3%) - (0.8 × 2%)
= 5% - 0.6% - 1.6%
= 2.8%
Capital growth contributed 0.6% (a ΔK / K), labor growth contributed 1.6% (a ΔN / N),
K N
productivity growth was 2.8%.
Diff: 3
Topic: Section: 6.1
6.2 Long-Run Growth: The Solow Model
1) The per-worker production function in the Solow model assumes
A) constant returns to scale and increasing marginal productivity of capital.
B) constant returns to scale and diminishing marginal productivity of capital.
C) increasing returns to scale and diminishing marginal productivity of capital.
D) decreasing returns to scale and diminishing marginal productivity of capital.
Answer: B
Diff: 1
Topic: Section: 6.2
2) The bowed shape of the per-worker production function is caused by
A) wealth effects that reduce labor supply.
B) diminishing marginal productivity of capital.
C) increasing marginal productivity of labor.
D) increasing marginal productivity of capital.
Answer: B
Diff: 1
Topic: Section: 6.2
10
3) In the Solow model, if productivity doesn't change,
A) the economy must eventually reach a steady state.
B) the capital—labor ratio must decline.
C) the capital—labor ratio must rise.
D) there can be no saving.
Answer: A
Diff: 1
Topic: Section: 6.2
4) In a steady state
A) both consumption per worker and the capital—labor ratio are constant.
B) consumption per worker is constant, but the capital—labor ratio can change.
C) capital and labor, by definition, are inversely related to one another.
D) consumption per worker can change, but the capital—labor ratio is constant.
Answer: A
Diff: 2
Topic: Section: 6.2
5) Which of the following best describes a steady state?
A) Political stability is maintained by the state.

B) The standard of living is increasing at a stable rate.
C) Each firm in the economy receives a steady stream of income.
D) Output per worker, consumption per worker, and capital per worker are constant.
Answer: D
Diff: 1
Topic: Section: 6.2
6) Steady-state investment per worker is positively related to the capital—labor ratio because the
higher the capital—labor ratio
A) the lower the capital depreciation rate.
B) the greater the amount of resources available for capital investment.
C) the more investment per worker is required to replace depreciating capital.
D) the less the economy needs to equip new workers with the same high level of capital.
Answer: C
Diff: 2
Topic: Section: 6.2
11
7) In the absence of productivity growth, in a steady-state economy
A) output per worker and consumption per worker remain constant over time.
B) output per worker remains constant over time, but consumption per worker grows over time.
C) output per worker grows over time, but consumption per worker remains constant over time.
D) output per worker and consumption per worker both grow over time.
Answer: A
Diff: 2
Topic: Section: 6.2

8) According to the Solow model, an increase in the capital—labor ratio will
A) always reduce steady-state consumption per worker.
B) always increase steady-state consumption per worker.
C) reduce steady-state consumption per worker if the capital—labor ratio is below the Golden
rule capital stock.
D) increase steady-state consumption per worker if the capital—labor ratio is below the Golden
rule capital stock.
Answer: D
Diff: 2
Topic: Section: 6.2
9) Steady-state consumption per worker is
A) larger in the short run than in the long run.
B) less than steady-state investment per worker.
C) less than steady-state saving per worker.
D) steady-state production per worker minus steady state investment per worker.
Answer: A
Diff: 2
Topic: Section: 6.2
10) The level of the capital—labor ratio that maximizes consumption per worker in the steady
state is known as the
A) Solow residual capital—labor ratio.
B) Golden Rule capital—labor ratio.
C) q theory capital—labor ratio.
D) dynamically efficient capital—labor ratio.

Answer: B
Diff: 1
Topic: Section: 6.2
12
11) The Golden Rule capital—labor ratio is the level of the capital—labor ratio that, in the
steady state,
A) maximizes output per worker.
B) maximizes investment per worker.
C) maximizes consumption per worker.
D) maximizes capital per worker.
Answer: C
Diff: 1
Topic: Section: 6.2
12) If the steady-state capital—labor ratio is equal to the Golden Rule capital—labor ratio, then
in the steady state
A) output per worker equals investment per worker.
B) output per worker equals depreciation per worker.
C) investment per worker is as large as possible.
D) consumption per worker is as large as possible.
Answer: D
Diff: 1
Topic: Section: 6.2

13) If the capital—labor ratio is above the Golden Rule capital—labor ratio, then in the steady
state,
A) capital per worker is above its maximum.
B) output per worker is less than it would be at the Golden Rule capital—labor ratio.
C) investment per worker exceeds output per worker.
D) consumption per worker is not at its maximum.
Answer: D
Diff: 1
Topic: Section: 6.2
14) The idea that saving equals investment in the Solow model means that a steady state can be
reached only when
A) s = k.
B) s = n + d.
C) sf(k) = (s + d)k.
D) sf(k) = (n + d)k.
Answer: D
Diff: 1
Topic: Section: 6.2
13
0.5
15) In the Solow model, if f(k) = 2k , s = 0.3, n = 0.05, and d = 0.15, what is the value of k at
equilibrium?
A) 1
B) 3
C) 6
D) 9
Answer: D
Diff: 2
Topic: Section: 6.2
0.5
equilibrium?
A) 1
B) 2
C) 3
D) 4
Answer: D
Diff: 2
Topic: Section: 6.2
0.5
17) In the Solow model, if f(k) = 2k , s = 0.1, n = 0.1, and d = 0.05, what is the value of f(k) at
equilibrium?
A) 2/3
B) 4/3
C) 2
D) 8/3
Answer: D
Diff: 3
Topic: Section: 6.2

0.5
equilibrium?
A) 1
B) 4
C) 9
D) 16
Answer: B
Diff: 2
Topic: Section: 6.2
14
0.5
equilibrium?
A) 1
B) 2
C) 3
D) 4
Answer: A
Diff: 2
Topic: Section: 6.2
0.5
20) In the Solow model, if f(k) = 6k , s = 0.1, n = 0.1, and d = 0.2, what is the value of c at
equilibrium?
A) 10
B) 10.4
C) 10.8
D) 11.2
Answer: C
Diff: 3
Topic: Section: 6.2
21) In the Solow model, if k = 8, y = 20, and s = 0.2, what is c?
A) 24
B) 20
C) 16
D) 12
Answer: C
Diff: 3
Topic: Section: 6.2
22) In the Solow model, if k = 8, y = 24, and s = 0.25, what is c?
A) 24
B) 20
C) 18
D) 12
Answer: C
Diff: 3
Topic: Section: 6.2

15
23) The Solow model demonstrates that
A) in the absence of productivity growth, economic growth will turn negative in the long run.
B) in the absence of productivity growth, economic growth will reach a steady state of zero per-
capita growth in the long run.
C) productivity growth must exceed the rate of growth in the population to avoid a steady state in
the long run.
D) productivity growth will inevitably decline due to diminishing marginal productivity.
Answer: B
Diff: 1
Topic: Section: 6.2
24) A striking conclusion of the Solow model is that in the absence of productivity growth, in the
long run
A) the economy reaches a steady state.
B) consumption per worker equals the capital stock per worker.
C) consumption per worker equals output per worker.
D) consumption per worker equals investment per worker.
Answer: A
Diff: 1
Topic: Section: 6.2
25) An earthquake destroys a good portion of the capital stock. How would you expect this to
affect the capital—labor ratio in the long run? There would be
A) a rightward movement along the saving-per-worker curve and an increase in the capital—
labor ratio.
B) no change in the long-run capital—labor ratio.
C) a downward shift in the saving-per-worker curve and a decrease in the capital—labor ratio.
D) a leftward movement along the saving-per-worker curve and a decrease in the capital—labor
ratio.
Answer: B
Diff: 2
Topic: Section: 6.2
26) In the Solow model, if saving per worker initially exceeds investment per worker,
A) the economy will experience inflation.
B) the capital—labor ratio will increase.
C) investment per worker will decline.
D) saving per worker will decline.
Answer: B
Diff: 2
Topic: Section: 6.2
Question Status: Revised
16
27) Which of the following changes would lead, according to the Solow model, to a higher level
of long-run output per worker?
A) A lower level of capital per worker
B) An increase in the saving rate
C) A rise in the rate of population growth
D) A decrease in productivity
Answer: B
Diff: 1
Topic: Section: 6.2
28) An increase in the saving rate in a steady-state economy would cause
labor ratio.
B) an upward shift in the saving-per-worker curve and an increase in the capital—labor ratio.
ratio.
Answer: B
Diff: 1
Topic: Section: 6.2
29) In the long run, an increase in the saving rate in a steady-state economy will cause
A) an increase in the capital—labor ratio and an increase in consumption per worker.
B) an increase in the capital—labor ratio and a decrease in consumption per worker.
C) a decrease in the capital—labor ratio and a decrease in consumption per worker.
D) a decrease in the capital—labor ratio and an increase in consumption per worker.
Answer: A
Diff: 2
Topic: Section: 6.2
30) All else being equal, a permanent decrease in the saving rate in a steady-state economy
would cause

Answer: C
Diff: 2
Topic: Section: 6.2
17
31) An increase in the growth rate of population in a steady-state economy would cause
A) a parallel shift upward in the investment line.
B) a pivot up and to the left in the investment line.
C) a pivot down and to the right in the investment line.
D) a parallel shift downward in the investment line.
Answer: B
Diff: 1
Topic: Section: 6.2
32) In the Solow model, the steady-state capital—labor ratio will decline if
A) the saving rate per worker increases.
B) the consumption rate per worker declines.
C) population growth increases.
D) productivity increases.
Answer: C
Diff: 2
Topic: Section: 6.2

33) An increase in population growth will lead to a ________ in the steady-state capital—labor
ratio and a ________ in output per worker.
A) fall; fall
B) fall; rise
C) rise; rise
D) rise; fall
Answer: A
Diff: 2
Topic: Section: 6.2
34) A decrease in population growth will lead to a ________ in the steady-state capital—labor
ratio and a ________ in output per worker.
A) fall; fall
B) fall; rise
C) rise; rise
D) rise; fall
Answer: C
Diff: 2
Topic: Section: 6.2
18
35) A productivity improvement will cause
labor ratio.
B) an upward shift in the saving-per-worker curve and an increase in the capital—labor ratio.
ratio.
Answer: B
Diff: 1
Topic: Section: 6.2
36) In the steady-state diagram of the Solow model, an increase in saving per worker is shown by
A) shifting the saving-per-worker curve down, resulting in a lower steady-state capital—labor
ratio.
B) shifting the saving-per-worker curve up, resulting in a higher steady-state-capital—labor
ratio.
C) shifting the saving-per-worker curve up, resulting in a lower steady-state capital—labor ratio.
D) shifting the saving-per-worker curve down, resulting in a higher steady-state capital—labor
ratio.
Answer: B
Diff: 2
Topic: Section: 6.2
37) An increase in pollution has caused a permanent increase in the rate of capital depreciation.
This would cause
A) an increase in the capital—labor ratio.
B) output per worker to fall.
C) a decline in consumption per worker.
D) the capital—labor ratio to be unaffected.
Answer: B
Diff: 1
Topic: Section: 6.2
38) In the long run, a reduction in productivity will cause
Answer: C
Diff: 2
Topic: Section: 6.2
19
39) In the very long run, the level of consumption per worker can grow continually if
A) the saving rate continually falls.
B) the population growth rate continually rises.
C) productivity continually improves.
D) the depreciation rate continually rises.
Answer: C
Diff: 1
Topic: Section: 6.2
40) Briefly explain the shape of the per-worker production curve in the Solow model. If
investment per worker initially exceeds saving per worker, how is the steady-state capital—labor
ratio achieved?
Answer: The per-worker production curve is positively sloped because adding capital to each
unit of labor increases output per worker. The curve is concave (i.e., increasing at a decreasing
rate) because of diminishing marginal productivity of capital; output increases at a slower rate
than capital when capital is added to production.
The steady-state capital—labor ratio is the capital—labor ratio at which saving per worker [sf(k)]
equals investment per worker [(n + d)k]. If investment per worker initially exceeds saving per
worker, then the initial capital—labor ratio exceeds the steady-state capital—labor ratio. The
capital—labor ratio will decline because saving is insufficient to provide enough capital to
maintain the initial capital—labor ratio. The capital—labor ratio will continue to decline until it
reaches the steady-state capital—labor ratio.
Diff: 1
Topic: Section: 6.2
41) A country has the per-worker production function
y =5,
t
where y is output per worker and k is the capital—labor ratio. The depreciation rate is 0.2 and
t t
the population growth rate is 0.05. The saving function is
S = 0.2Y ,
t t
where S is total national saving and Y is total output.

t t
(a) What is the steady-state value of the capital—labor ratio?
(b) What is the steady-state value of output per worker?
(c) What is the steady-state value of consumption per worker?
Answer:
0.5 0.5
(a) s (k) = (n + d)k, so 0.2 × 5k = 0.25k; or k = 4, so k = 16.
f
0.5
(b) y = 5k = 20.
(c) c = (1 - s)y = 0.8y = 16.
Diff: 3
Topic: Section: 6.2
20
=6,
t
t t
= 0.1Y ,
t t

t t
(a) What is the steady-state value of capital—labor ratio?
Answer:
2/3 1/3
(a) s (k) = (n + d)k, so 0.1 × 6k = 0.2k; or k = 3, so k = 27.
f
2/3
(b) y = 6k = 54.
(c) c = (1 - s)y = 0.9y = 48.6.
Diff: 3
Topic: Section: 6.2

=6,
t
t t
= 0.1Y ,
t t

t t
(a) What is the steady-state value of capital—labor ratio?
Answer:
0.5 0.5
(a) s (k) = (n + d)k, so 0.1 × 6 = 0.2 k ; or k = 3, so k = 9.
f
0.5
(b) y = 6 × k = 6 × 3 = 18.
(c) c = (1 - s)y = 0.9y = 0.9 × 18 = 16.2.
Diff: 3
Topic: Section: 6.2

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Macroeconomics, 9e, Global Edition (Abel/Bernanke/Croushore)
Chapter 7 The Asset Market, Money, and Prices
7.1 What Is Money?
1) A disadvantage of the barter system is that
A) no trade occurs.
B) people must produce all their own food, clothing, and shelter.
C) the opportunity to specialize is greatly reduced.
D) gold is the only unit of account.
Answer: C
Diff: 1
Topic: Section: 7.1
2) The use of money is more efficient than barter because the introduction of money
A) reduces the need for economic specialization.
B) reduces the need to exchange goods.
C) reduces the need for other stores of value.

D) reduces transaction costs.
Answer: D
Diff: 1
Topic: Section: 7.1
3) In economics, money refers to
A) income.
B) wealth.
C) assets used and accepted as payment.
D) cur8rency.
Answer: C
Diff: 1
Topic: Section: 7.1
4) The following are all functions of money except
A) medium of exchange.
B) store of value.
C) unit of account.
D) source of anxiety.
Answer: D
Diff: 1
Topic: Section: 7.1
5) moneys primary role in the economy comes from the benefits of lowering transactions costs
and allowing specialization. This function of money is called
A) store of value.
B) medium of exchange.
C) standard of deferred payment.
D) unit of account.
Answer: B
Diff: 1
Topic: Section: 7.1
6) 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.
Answer: B
Diff: 1
Topic: Section: 7.1
7) Which of the following best illustrates the medium of exchange function of money?
A) The price of a new car is $25,000.
B) A penny saved is a penny earned.
C) A person owes $10,000 on his or her credit card.
D) You pay $3 to purchase a bag of apples.
Answer: D
Diff: 1
Topic: Section: 7.1

8) In some countries, prices in stores are listed in terms of U.S. dollars, rather than in units of the
local currency. That's most likely because
A) the country's political system is unstable.
B) interest rates are higher using U.S. dollars than using the local currency.
C) there is no other store of value.
D) the country has experienced high rates of inflation.
Answer: D
Diff: 1
Topic: Section: 7.1
9) The number of units of one good that trade for one unit of alternative goods can be determined
most easily when
A) there is one unit of account.
B) the goods all weigh about the same.
C) the goods are all new.
D) the goods are actively traded through barter.
Answer: A
Diff: 1
Topic: Section: 7.1
10) A good that is used as a medium of exchange as well as being a consumption good is called
A) a barter money.
B) a commodity money.
C) a legal tender.
D) a debased money.
Answer: B
Diff: 1
Topic: Section: 7.1
11) Why do people keep currency in their pockets when bank deposits pay interest?
A) Because banks might steal your money.
B) Because currency is more liquid.
C) Because bank deposits lose value due to inflation.
D) Because bank deposits lose value due to changes in interest rates.
Answer: B
Diff: 1
Topic: Section: 7.1
12) One of moneys primary roles in the economy comes from the use of money to transfer
purchasing power to the future. This role of money is called
A) store of value.
B) unit of account.
C) medium of exchange.
D) standard of deferred payment.
Answer: A
Diff: 1
Topic: Section: 7.1
4
13) Which of the following measures is the best measure of money as a medium of exchange?
A) M1
B) M2
C) M3
D) None of the above
Answer: A
Diff: 1
Topic: Section: 7.1
14) Suppose your bank raises its minimum-balance requirement for free checking on checking
accounts by $500. You take $500 out of your passbook savings account and put it in your
checking account. What is the overall effect on M1 and M2?
A) M1 rises by $500, M2 falls by $500.
B) M1 is unchanged, M2 is unchanged.
C) M1 rises by $500, M2 is unchanged.
D) M1 is unchanged, M2 falls by $500.
Answer: C
Diff: 3
Topic: Section: 7.1
15) M1 does not include
A) MMMFs.
B) travelers' checks.
C) currency.
D) transaction accounts.
Answer: A
Diff: 1
Topic: Section: 7.1
16) Which of the following is not part of M1?
A) Transaction accounts
B) Checking accounts
C) Time deposits
D) Traveler's checks
Answer: C
Diff: 1
Topic: Section: 7.1
17) Which of the following statements about M1 and M2 is true?
A) Demand deposits are not part of M1.
B) M2 is more liquid than M1.
C) M1 is larger than M2.
D) Savings deposits are part of M2.
Answer: D
Diff: 1
Topic: Section: 7.1
18) Which of the following statements about M1 and M2 is not true?
A) Transaction accounts are part of M1.
B) M2 is more liquid than M1.

C) M2 is larger than M1.
D) Transaction accounts are part of M2.
Answer: B
Diff: 2
Topic: Section: 7.1
19) M2 includes
A) large-denomination time deposits.
B) institutional MMMFs.
C) commercial paper.
D) M1.
Answer: D
Diff: 1
Topic: Section: 7.1
20) M2 does not include
A) Treasury bonds.
B) passbook savings accounts.
C) small-denomination time deposits.
D) M1.
Answer: A
Diff: 1
Topic: Section: 7.1

21) Which of the following is not included in M2?
A) Money market mutual funds held by individuals
B) Money market deposit accounts
C) Money market mutual funds held by institutions
D) Small-denomination time deposits
Answer: C
Diff: 1
Topic: Section: 7.1
22) Over half of U.S. currency is
A) held abroad.
B) used in the underground economy.
C) held by banks as reserves.
D) held by businesses, especially retailers, for making transactions.
Answer: A
Diff: 1
Topic: Section: 7.1
23) People in other countries want to hold U.S. dollars as a
A) medium of exchange.
B) store of value.
C) unit of account.
D) standard of deferred payment.
Answer: B
Diff: 1
Topic: Section: 7.1

24) We shouldn't be concerned about U.S. currency held abroad because
A) the currency will never return to the United States.
B) foreigners use it to buy U.S. bonds.
C) it represents an interest-free loan to the United States.
D) foreigners can't spend it in their own countries.
Answer: C
Diff: 1
Topic: Section: 7.1
25) What's the most common way for a central bank to reduce the money supply?
A) Collect higher taxes
B) Sell bonds to the public
C) Buy bonds from the government
D) Buy bonds from the public
Answer: B
Diff: 1
Topic: Section: 7.1
26) Suppose you read in the paper that the Federal Reserve plans to expand the money supply.
The Fed 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.
Answer: B
Diff: 1
Topic: Section: 7.1
27) A developing country does not have enough taxes to cover its expenditures and is unable to
borrow. This government would be most likely to cover its deficit by
A) purchasing government bonds from the public.
B) selling government bonds to the public.
C) selling newly issued government bonds directly to the central bank.
D) buying newly issued government bonds directly from the central bank.
Answer: C
Diff: 2
Topic: Section: 7.1
28) What are the major components of M1? What are the major components of M2? Describe
each component.
Answer: The principal components of M1 are currency, transaction accounts, and traveler's
checks. Currency includes coins and Federal Reserve notes (i.e., paper money). Transaction
accounts are those against which checks may be drawn. Traveler's checks are a substitute for
currency that can be replaced if lost or stolen. The principal components of M2 are M1, savings
account deposits including money market deposit accounts (MMDAs), small time deposits, and
money market mutual funds (MMMFs). Small time deposits are certificates of deposit (CDs) of
less than $100,000 denomination. MMMFs invest their shareholders' funds in short-term
securities, pay market-based interest rates, and allow holders to write a limited number of
checks. MMDAs are like MMMFs, except they are offered by banks or thrift institutions such as
savings and loan associations.
Diff: 2
Topic: Section: 7.1
29) What function is money playing in each of these situations:
a. You walk into a store in Germany and see that all the prices are in euros.
b. You buy a candy bar for $1.25.
c. Your Aunt Jane keeps $100 bills tucked into many books in her house.
Answer: a. unit of account; b. medium of exchange; c. store of value.
Diff: 2
Topic: Section: 7.1
30) What happens to M1 and M2 due to each of the following changes?
(a) You take $500 out of your checking account and put it into a passbook savings account.
(b) You take $1000 out of your checking account and buy traveler's checks.
(c) You take $1500 out of your money—market mutual fund and deposit into your checking
account.
(d) You cash in $2000 in savings bonds and invest the money in a certificate of deposit.
Answer:
(a) M1 falls $500, M2 is unchanged (remember that M1 is part of M2).
(b) M1 and M2 are both unchanged.
(c) M1 rises $1500, M2 is unchanged.
(d) M1 is unchanged, M2 rises $2000.
Diff: 2
Topic: Section: 7.1

31) Why is per-capita U.S. currency demand so large? Who is holding large amounts of U.S.
currency and why are they doing so? Should U.S. policymakers be concerned about this? Why?
Answer: Currency demand is large mostly because foreigners hold many dollars. They do so
because of inflation or political instability in their countries. Policymakers shouldn't be very
concerned, since foreigners' dollar holdings represent an interest-free loan to the United States.
However, a cause for concern may be that fluctuations in our money supply may reflect
conditions abroad that are unrelated to the U.S. economy.
Diff: 1
Topic: Section: 7.1
7.2 Portfolio Allocation and the Demand for Assets
1) You are putting together a portfolio of assets. The four most important characteristics of the
assets you will choose are expected return, time to maturity,
A) risk, and liquidity.
B) risk, and collateral
C) risk, and reward.
D) liquidity, and standard issue size.
Answer: A
Diff: 1
Topic: Section: 7.2
2) People's best guesses about returns on assets are called
A) expected returns.
B) liquidity.
C) risk.
D) the term structure of returns.
Answer: A
Diff: 1
Topic: Section: 7.2
3) The set of assets that a holder of wealth chooses to own is called
A) an asset assortment.
B) a wealth strategy.
C) a portfolio.
D) an investment envelope.
Answer: C
Diff: 1
Topic: Section: 7.2
4) The uncertainty about the return an asset will earn is
A) liquidity.
B) risk.
C) time to maturity.
D) stochastic dominance.
Answer: B
Diff: 1
Topic: Section: 7.2
5) The risk premium is
A) the amount by which the expected return on a risky asset exceeds the return on an otherwise
comparable safe asset.
B) a measure of the riskiness of the overall economy in a domestic country compared with a
foreign country.
C) the amount an investor must pay to insure his or her stock portfolio to protect against a fall in
value.
D) the amount an investment bank charges to guarantee an annuity that pays a fixed rate of
return in the future.
Answer: A
Diff: 1
Topic: Section: 7.2
10
6) The amount by which the expected return on a risky asset exceeds the return on an otherwise
comparable safe asset is known as the
A) CDS spread.
B) risk premium.
C) VIX.
D) term spread.
Answer: B
Diff: 1
Topic: Section: 7.2
7) The existence of a ________ means that the interest rate on a two-year bond will exceed the
average interest rate on two successive one-year bonds.
A) risky asset.
B) securitization premium.
C) term structure.
D) risk premium.
Answer: D
Diff: 1
Topic: Section: 7.2
8) The ease and quickness with which an asset can be exchanged for goods, services, or other
assets is its
A) risk.
B) time to maturity.
C) velocity.
D) liquidity.
Answer: D
Diff: 1
Topic: Section: 7.2
9) Time to maturity refers to the amount of time until
A) an asset repays the principal to an investor.
B) an asset pays interest for the first time.
C) a bond can be sold on the secondary market.
D) the yield curve shows an upward slope.
Answer: A
Diff: 1
Topic: Section: 7.2

11
10) Compared with money, bonds have
A) less risk and less liquidity.
B) less risk and more liquidity.
C) more risk and less liquidity.
D) more risk and more liquidity.
Answer: C
Diff: 1
Topic: Section: 7.2
11) AAA Company stock has a higher expected rate of return than ZZZ Company stock. All else
being equal, you would expect that relative to ZZZ, AAA company stock provides
A) less risk and less liquidity.
B) less risk and more liquidity.
C) more risk and less liquidity.
D) more risk and more liquidity.
Answer: C
Diff: 1
Topic: Section: 7.2
12) The least liquid asset on this list is
A) money.
B) bonds.
C) houses.
D) stocks.
Answer: C
Diff: 1
Topic: Section: 7.2
13) In the early 2000s, lenders began issuing mortgage loans to people who would normally not
be qualified to take out loans because they did not meet lending standards. Those borrowers are
known as
A) alternative borrowers.
B) weak borrowers.
C) subprime borrowers.
D) credit risks.
Answer: C
Diff: 1
Topic: Section: 7.2
12
14) The financial crisis occurred in 2008 in large part because of losses on securities consisting
of bundles of mortgage loans known as
A) home loan loss reserves.
B) credit default swaps.
C) mortgage-backed securities.
D) naked put options.
Answer: C
Diff: 1
Topic: Section: 7.2
15) A one-year bond has an interest rate of 5% today. Investors expect that in one year, a one
year bond will have an interest rate equal to 7%. According to the expectations theory of the term
structure of interest rates, in equilibrium, a two-year bond today will have an interest rate equal
to
A) 3.0%.
B) 5.0%.
C) 5.5%.
D) 6.0%.
Answer: D
Diff: 1
Topic: Section: 7.2
16) The idea that investors today compare the returns on bonds with differing times to maturity
to see which is expected to give them the highest return is the underlying principle behind the
________ of the term structure of interest rates.
A) expectations theory
B) investors' viewpoint analysis
C) segmented-markets theory
D) yield comparison theory
Answer: A
Diff: 1
Topic: Section: 7.2
17) The interest rate on long-term bonds is somewhat higher than suggested by the expectations
theory because
A) the expectations theory doesn't account for taxes.
B) a risk premium exists.
C) an inflation premium must be added to long-term bonds.

D) the Fed can only control short-term interest rates.
Answer: B
Diff: 1
Topic: Section: 7.2
13
18) By spreading her investments out over many different assets, an investor achieves
A) a higher expected return.
B) increased risk.
C) diversification.
D) greater liquidity.
Answer: C
Diff: 1
Topic: Section: 7.2
19) Suppose that you could buy a one-year bond today, which has an interest rate of 3%. If you
wait a year and buy a one-year bond then, the interest rate will be 4%. Two years from now, a
one-year bond is expected to offer an interest rate of 5%. According to the expectations theory of
the term structure of interest rates, what is the interest rate on a two-year bond today? What is the
interest rate on a three-year bond today?
Answer: Two-year bond: (3% + 4%)/2 = 3.5%; Three-year bond: (3% + 4% + 5%)/3 = 4%.
Diff: 2
Topic: Section: 7.2
20) Suppose that:

1) The interest on a one-year bond today is 3%;
2) The interest on a one-year bond starting one year from now is expected to be 4% per year;
3) The interest on a one-year bond starting two years from now is expected to be 5% per year;
4) The risk premium on a two-year bond is 0.5%; and
5) The risk premium on a three-year bond is 1.0%.
Use that information to answer the following questions.
a) According to the expectations theory, what is the interest rate today on a two-year bond?
Show your work.
b) According to the expectations theory, what is the interest rate today on a three-year bond?
Show your work.
c) Plot the yield curve.
Answer: a) (3% + 4%)/2 + 0.5% = 4.0%
b) (3% + 4% + 5%)/3 + 1.0% = 5.0%
c) plot 3 points with 1, 2, and 3 years to maturity vs. yields of 3%, 4%, and 5%.
Diff: 2
Topic: Section: 7.2
14
7.3 The Demand for Money
1) A 10% decrease in real income usually leads to ________ in money demand.
A) an increase
B) no change
C) a decrease of less than 10%
D) a decrease of 10%
Answer: C
Diff: 1
Topic: Section: 7.3
2) A 5% increase in real income usually leads to ________ in money demand.
A) a decrease
B) no change
C) an increase of less than 5%
D) a decrease of 5%
Answer: C
Diff: 1
Topic: Section: 7.3
3) Which of the following is most likely to lead to a decrease of 10% in the nominal demand for
money?
A) An increase in real income of 5%
B) A decrease in real income of 5%
C) A decline of 10% in the price level
D) An increase of 10% in the price level
Answer: C
Diff: 2
Topic: Section: 7.3
4) 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 0.5%
B) A decrease in real income of 0.5%

C) A decline of 1% in the price level
D) An increase of 1% in the price level
Answer: D
Diff: 2
Topic: Section: 7.3
15
5) The opportunity cost of holding currency decreases when
A) income decreases.
B) the interest rate on bonds decreases.
C) the interest rate on money decreases.
D) wealth decreases.
Answer: B
Diff: 1
Topic: Section: 7.3
6) An increase in the real interest rate would cause an increase in the real demand for money
A) no matter what the change in expected inflation.
B) if expected inflation fell by less than the rise in the real interest rate.
C) if expected inflation fell by the same amount as the rise in the real interest rate.
D) if expected inflation fell by more than the rise in the real interest rate.
Answer: D
Diff: 2
Topic: Section: 7.3

7) An increase in expected inflation is likely to cause
A) a decline in the demand for real balances.
B) an increase in the demand for real balances.
C) no change in the demand for real balances.
D) no change in the demand for real balances only if the income elasticity of real money demand
is zero.
Answer: A
Diff: 1
Topic: Section: 7.3
8) 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
Answer: B
Diff: 1
Topic: Section: 7.3
16
9) 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%
Answer: A
Diff: 1
Topic: Section: 7.3
10) Money demand is given by
d
M /P = 1000 + .2Y - 1000i.
Given that P = 200, Y = 2000, and i = .10, real money demand is equal to
A) 1300.
B) 1500.
C) 260,000.
D) 300,000.
Answer: A
Diff: 2
Topic: Section: 7.3
11) Over time, the wealth of society increases and payments technologies get more efficient.
What is the effect on money demand of these two changes?
A) Money demand rises proportionately to the rise in wealth.
B) Money demand rises, but less than proportionately to the rise in wealth.
C) The overall effect is ambiguous.
D) Money demand declines.
Answer: C
Diff: 2
Topic: Section: 7.3
12) If there is a financial panic and increased uncertainty about the returns in the stock market
and bond market, what is the likely effect on money demand?
A) Money demand declines first, then rises when inflation increases.
B) Money demand rises.
Answer: B
Diff: 2
Topic: Section: 7.3
17
13) Suppose a new law imposes a tax on all trades of bonds and stock. What is the likely effect
on money demand?
A) Money demand declines first, then rises when inflation increases.
B) Money demand rises.
Answer: B
Diff: 2
Topic: Section: 7.3

14) If real income rises 4%, prices rise 1%, and nominal money demand rises 4%, what is the
income elasticity of real money demand?
A) 3/4
B) 4/5
C) 5/6
D) 1
Answer: A
Diff: 3
Topic: Section: 7.3
15) If real income rises 5%, prices rise 3%, and nominal money demand rises 7%, what is the
income elasticity of real money demand?
A) 3/4
B) 4/5
C) 5/6
D) 6/7
Answer: B
Diff: 3
Topic: Section: 7.3
16) If the interest elasticity of money demand is -0.1, by what percent does money demand
change if the nominal interest rate rises from 2% to 3%?
A) -0.1%
B) 5%
C) 0%
D) -5%
Answer: D
Diff: 2
Topic: Section: 7.3
18
17) If the income elasticity of money demand is 3/4 and the interest elasticity of money demand
is -1/4, by what percent does money demand rise if income rises 10% and the nominal interest
rate rises from 4% to 5%?
A) 7.50%
B) 6.25%
C) 5.00%
D) 1.25%
Answer: D
Diff: 3
Topic: Section: 7.3
18) Velocity is defined as
A) nominal money stock/nominal GDP.
B) nominal GDP/nominal money stock.
C) real money stock/real GDP.
2
D) mc .
Answer: B
Diff: 1
Topic: Section: 7.3

19) If real GDP is $4 billion, the price level is 1.25, and the nominal money stock is $500
million, then velocity is
A) 0.1.
B) 1.
C) 10.
D) 100.
Answer: C
Diff: 2
Topic: Section: 7.3
20) Money demand is given by
d
M /P = 1000 + .2Y - 1000i.
Given that P = 200, Y = 2000, and i = .10, velocity is equal to
A) 0.65.
B) 0.75.
C) 1.33.
D) 1.54.
Answer: D
Diff: 2
Topic: Section: 7.3
19
21) Suppose velocity is 3, real output is 9000, and the price level is 1.5. What is the level of real
money demand in this economy?
A) 2000
B) 3000
C) 6000
D) 30,000
Answer: B
Diff: 2
Topic: Section: 7.3
22) Suppose real money demand is 1000, real output is 6000, and the price level is 200. What is
the level of velocity in this economy?
A) 2
B) 3
C) 6
D) 12
Answer: C
Diff: 2
Topic: Section: 7.3
23) Suppose velocity is constant at 4, real output is 10, and the price level is 2. From this initial
situation, the government increases the nominal money supply to 6. If velocity and output remain
unchanged, by how much will the price level increase?
A) 2.4%
B) 20%
C) 24%
D) 50%
Answer: B
Diff: 3
Topic: Section: 7.3
20
24) What happens to real money demand (rise, fall, no change) due to a change in each of the
following factors?
(a) A tax on stock market transactions is introduced.
(b) Computerized bond trading reduces transactions costs.
(c) People's average level of wealth rises.
(d) The threat of a recession increases the riskiness of stocks and bonds.
(e) The interest rate paid on checking account balances declines.
(f) The price level falls in a one-time jump.
Answer:
(a) Rises
(b) Falls
(c) Rises
(d) Rises
(e) Falls
(f) Is unchanged
Diff: 1
Topic: Section: 7.3
25) Give five examples of factors that could reduce the demand for money.
Answer: Lower price level, lower real income, higher real interest rate, higher expected
inflation, lower nominal interest rate on money, lower wealth, lower risk on alternative assets,
higher risk on money, increased liquidity of alternative assets, or increased efficiency of

payments technologies.
Diff: 2
Topic: Section: 7.3
26) Suppose the money demand function is
d e
/P = 1000 + 0.2Y - 1000 (r + π ).
e
(a) Calculate velocity if Y = 2000, r = .06, and π = .04.
s
(b) If the money supply (M ) is 2600, what is the price level?
s
(c) Now suppose the real interest rate rises to 0.11, but Y and M are unchanged. What happens
to velocity and the price level? So if the nominal interest rate were to rise from 0.10 to 0.15 over
the course of a year, with Y remaining at 2000, what would the inflation rate be?
Answer:
(a) V = PY/M = Y/(M/P). From the money demand function, M/P = 1300. So V = 2000/1300 =
1.54.
s d
(b) P = M /(M /P) = 2600/1300 = 2.
d s d
(c) Now M /P = 1250. So V = 2000/1250 = 1.6. P = M /(M /P) = 2600/1250 = 2.08. The
inflation rate would be 4%.
Diff: 3
Topic: Section: 7.3

Chapter 6 Macro Economics

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Chapter 6 Macro Economics

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Macroeconomics, 9e, Global Edition (Abel/Bernanke/Croushore)

Chapter 6 Long-Run Economic Growth

6.1 The Sources of Economic Growth

A) United States; Germany

B) Germany; United States

Topic: Section: 6.1

Question Status: Revised

2) The elasticity of output with respect to capital

A) is the increase in output resulting from an increase in the capital stock.

C) is always greater than one.

D) is the inverse of the elasticity of output with respect to labor.

Topic: Section: 6.1

Question Status: Previous Edition

the current level of output to

Topic: Section: 6.1

Question Status: Previous Edition

Topic: Section: 6.1

Question Status: Previous Edition

Copyright © 2017 Pearson Education, Ltd.

Topic: Section: 6.1

Question Status: Previous Edition

Topic: Section: 6.1

Question Status: Previous Edition

Topic: Section: 6.1

Question Status: Previous Edition

B) higher levels of educational attainment by workers.

C) cheaper foreign imports used in production.

D) increased foreign competition.

Topic: Section: 6.1

Question Status: Previous Edition

Copyright © 2017 Pearson Education, Ltd.

C) The real interest rate

D) The trade deficit

Topic: Section: 6.1

Question Status: Previous Edition

1929 was attributable to all the factors below except

B) an increase in the percentage of the population in the labor force.

C) an increase in the number of hours worked per person.

D) higher educational levels.

Topic: Section: 6.1

Question Status: Previous Edition

23) Edward Denison's analysis of the American economy found that

Topic: Section: 6.1

Question Status: New

A) problems in measuring productivity.

B) changes in the legal and human environment.

C) higher oil prices.

D) greater competition from foreign imports.

Topic: Section: 6.1

Question Status: Previous Edition

Copyright © 2017 Pearson Education, Ltd.

A) official output measures make no adjustment for quality.

B) output can't be measured.

C) capital can't be measured.

D) quality improvements aren't fully accounted for in the data.

Topic: Section: 6.1

Question Status: Previous Edition

pollution-monitoring firms. What effect is this likely to have?

B) Increase the capital stock

D) Increase the demand for labor in those firms

Topic: Section: 6.1

Question Status: Previous Edition

normalcy after fast productivity growth during the previous 25 years?