Advanced Macroeconomic Theory
Practice Questions
Course Introduction
Advanced Macroeconomic Theory delves into the rigorous analysis of aggregate economic phenomena, emphasizing the development and critical assessment of modern macroeconomic models. The course covers dynamic stochastic general equilibrium (DSGE) models, intertemporal optimization, microfoundations of consumption, investment, and labor supply, as well as the role of expectations and economic policy in shaping macroeconomic outcomes. Students will explore topics such as economic growth, business cycles, monetary and fiscal policy, and overlapping generations models, utilizing mathematical tools and empirical techniques to understand and evaluate current macroeconomic research and policy debates.
Recommended Textbook
Macroeconomics 2nd Edition by Daron Acemoglu
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Chapter 1: The Principles and Practice of Economics
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Sample Questions
Q1) Define the three key principles of economics.
Answer: i)Optimization: optimization refers to the process of choosing the best option from a set of alternatives,given the available information. ii)Equilibrium: equilibrium is a special situation all agents are simultaneously optimizing,so that nobody would benefit personally by changing his or her behavior. iii)Empiricism: empiricism is analysis that is evidence-based-it uses data to test theories and to determine what is causing things to happen in the world.
Q2) Why do trade-offs occur? How are budget constraints related to trade-offs?
Answer: Trade-offs occur because of scarcity-economic agents need to satisfy their wants with limited resources.Therefore,in most cases,some benefits have to be given up to gain other benefits.Budget constraints quantify the relevant trade-offs that an economic agent faces.Once trade-offs are quantified,rational decision making becomes easier,allowing the individual to make an optimal decision.
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Chapter 2: Economic Methods and Economic Questions
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Sample Questions
Q1) A variable that is potentially affected by an experimental treatment is referred to as a(n)________.
A) omitted variable
B) independent variable
C) dependent variable
D) compulsory variable
Answer: C
Q2) Zero correlation between two variables implies that ________.
A) both variables move in the same direction
B) the variables are not related to each other
C) both variables move in the opposite direction
D) change in one variable causes the other to change
Answer: B
Q3) Which of the following statements is true?
A) Empirical arguments can be supported without the use of data.
B) Using a large data set will strengthen the force of an empirical argument.
C) Using fewer observations will strengthen the force of an empirical argument.
D) The number of observations used does not affect the strength of an empirical argument.
Answer: B
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Chapter 3: Optimization: Doing the Best You Can
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Sample Questions
Q1) Refer to the figure above.Which apartment is the best feasible choice for the individual?
A) Apartment 1
B) Apartment 2
C) Apartment 3
D) Apartment 4
Answer: C
Q2) Among a set of alternatives with the same total costs,an individual is said to optimize if she chooses an alternative that has the ________.
A) highest total benefit
B) highest risk
C) lowest opportunity costs
D) highest net costs
Answer: A
Q3) Refer to the scenario above.Which of the following is the optimum choice?
A) Apartment Very Close
B) Apartment Close
C) Apartment Far
D) Apartment Very Far
Answer: D
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Chapter 4: Demand, Supply, and Equilibrium
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Sample Questions
Q1) Explain the role of prices in a market.
Q2) Which of the following factors will NOT cause a shift in the demand for a good?
A) A change in consumer incomes
B) A change in tastes and preferences
C) A change in the number of consumers
D) A change in the market price of the good
Q3) What are the key features of a perfectly competitive market?
Q4) If the demand and supply curves for a commodity both shift to the left by the same amount,then in comparison to the initial equilibrium,the new equilibrium will be characterized by ________.
A) a higher price and quantity
B) the same price and a higher quantity
C) the same price and a lower quantity
D) a lower price and a higher quantity
Q5) Explain how the following will affect the supply curve of coffee.
a)A fall in the wages paid to coffee workers
b)An increase in the availability of high-yielding coffee plants
c)A decrease in the quantity of land under coffee cultivation
Q6) With real-world examples,explain the various factors that can cause a shift in the supply curve of a commodity.
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Chapter 5: The Wealth of Nations: Defining and Measuring
Macroeconomic Aggregates
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Sample Questions
Q1) Refer to the above table.Assuming that 2016 is the base year,what was the GDP deflator in 2017?
A) 102.3
B) 109.5
C) 111
D) 115
Q2) Refer to the table above.The GDP of the country is ________.
A) $452,000
B) $402,000
C) $554,000
D) $352,000
Q3) Jack exported a rare painting illegally.This transaction will ________.
A) cause the GDP of his country to increase
B) cause the GDP of his country to decrease
C) not affect the calculation of his country's GDP
D) cause an increase in the GDP of the country he has exported it to
Q4) What are the drawbacks (that is,the categories not accounted for)in the calculation of the GDP of a country?
Q5) How does the presence of negative externalities affect the calculation of GDP?
Q6) Explain the difference between the GDP deflator and the Consumer Price Index. Page 7
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Chapter 6: Aggregate Incomes
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Sample Questions
Q1) The GDP of a small country with a population of 200,000 is $56,000,000.The income per capita in the country is ________.
A) $50
B) $100
C) $200
D) $280
Q2) Refer to the scenario above.How will a one-unit increase in the efficiency units of labor change output in Red Country relative to Purple Country?
A) Output will increase more in Red Country.
B) Output will decrease more in Red Country.
C) Output will increase less in Red Country.
D) Output will decrease less in Red Country.
Q3) An international agency uses the prices of iPads in different countries to compute the exchange rate between the currencies of these countries.Which of the following measures follows a similar approach?
A) The Big Mac index
B) The GDP deflator
C) The midcap index
D) The Human Development Index
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Chapter 7: Economic Growth
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Sample Questions
Q1) For the U.S.economy,on average,the growth resulting from ________.
A) technology is smaller than the growth resulting from human capital
B) technology is smaller than the growth resulting from physical capital
C) physical capital is greater than the growth resulting from human capital
D) physical capital is smaller than the growth resulting from human capital
Q2) This is the process that enables the economy to achieve a higher level of GDP for given levels of its factors of production,physical capital stock,and total efficiency units of labor.
A) technological change
B) output multiplication
C) economic facilitation
D) offshoring
Q3) Income inequality in the United States was not constant throughout the twentieth century.When was it lowest?
A) From the 1940s to the 1970s
B) In the 1920s and 1930s
C) From the 1980s onward
D) From the 1900s to the 1930s
Q4) Describe the Malthusian Cycle.
Q5) What is the physical capital accumulation equation used by Solow?
Page 10
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Chapter 8: Why Isn't the Whole World Developed?
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Q1) If the geography hypothesis holds,then ________.
A) poorer countries are permanently disadvantaged
B) poorer countries are likely to catch up with richer countries very fast
C) living standards in poorer countries can be substantially improved
D) cultural beliefs can be considered an important source of economic prosperity
Q2) If the institutions in an economy limit the legal backup that protects the interests of entrepreneurs,the returns-to-entrepreneurship curve in the economy will ________.
A) shift leftward
B) shift rightward
C) become horizontal
D) become vertical
Q3) If the geography hypothesis holds,what will be its implication for poorer nations that have unfavorable geographic conditions?
Q4) Which of the following is a characteristic of an institution?
A) Institutions are determined by individual opinions without considering the government's preferences.
B) Institutions place constraints on the behavior of economic agents.
C) Institutions have very little influence on a nation's economic prosperity.
D) The institutions of a nation are permanent and cannot be changed over time.
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Chapter 9: Employment and Unemployment
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Sample Questions
Q1) Areas where whole industries disappear will most likely experience ________.
A) decreases in the wage rate
B) increases in the wage rate
C) no change in the wage rate
D) increases in the wage rate for some and decreases in the wage rate for other workers
Q2) Collective bargaining can ________.
A) reduce wages
B) increase unemployment
C) increase the profitability of firms
D) make it easier for workers outside a union to get jobs
Q3) Refer to the figure above.What are the equilibrium employment and the wage rate after the demand curve shifts to LD ?
A) 15 units of labor and $20
B) 20 units of labor and $35
C) 5 units of labor and $15
D) 10 units of labor and $10
Q4) How do efficiency wages help increase a firm's profits?
Q5) Which categories of people are excluded when estimating the number of potential workers in the United States?
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Chapter 10: Credit Markets
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Sample Questions
Q1) What was one of the reasons for creating the FDIC regulatory system in 1933?
A) To reverse the Great Depression
B) To discourage banks to take irresponsible risks with their depositors' money
C) To encourage banks to achieve greater returns on investment
D) To restructure the financial system
Q2) An asset is liquid if ________.
A) it offers a positive rate of interest
B) its value does not change from day to day
C) it can be easily converted into cash without loss of value
D) its value is more likely to increase in future
Q3) Refer to the table above.If the required reserve ratio increases to 25 percent,what could Poor Baby Bank do to satisfy the reserve requirements?
A) Nothing. It has enough reserves.
B) Increase its reserves by $3 by liquidating some of its long-term investments.
C) Increase its reserves by $4.50 by borrowing more from other banks.
D) Increase its deposits by $5.
Q4) What are the three functions that banks perform as financial intermediaries?
Q5) List four reasons people save.
Q6) List the various categories into which a bank's assets are divided.
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Q7) Differentiate between asset management companies and venture capital funds.
Chapter 11: The Monetary System
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Q1) Which of the following is likely to happen when the interest rate falls?
A) The equilibrium wage rate will fall.
B) The labor demand curve will shift to the right.
C) Economic activity will reduce.
D) The nominal GDP will decrease.
Q2) Suppose that the rate of inflation in a country is 5 percent.Which of the following statements is accurate?
A) This means all prices rise by 5 percent.
B) This means all prices rise, with an average rise of 5 percent.
C) This means all prices rise by at least 5 percent.
D) This means prices increase on average by 5 percent.
Q3) If the growth rate of real GDP and the rate of inflation in an economy are 2 percent and 1 percent,respectively,the growth rate of nominal GDP in the economy must be
A) 1 percent
B) 2 percent
C) 3 percent
D) 5 percent
Q4) What is meant by the term "inflation targeting"? What is the Fed's objective regarding inflation?
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Chapter 12: Short-Run Fluctuations
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Sample Questions
Q1) The Great Depression and World War II both caused major deviations from trend GDP.The Great Depression resulted in real GDP moving significantly ________ trend GDP; World War II resulted in real GDP moving significantly ________ trend GDP. A) above; above B) above; below C) below; above D) below; below
Q2) Stock prices in Richland declined suddenly after one of the largest banks in Richland faced bankruptcy.If animal spirits play an important role in shaping Richland's economy and assuming all else remains equal,which of the following is likely to happen?
A) Richland's consumption expenditure will increase.
B) Investment by firms in Richland will increase.
C) Wage levels in Richland will fall.
D) Unemployment in Richland will fall.
Q3) What happened during the Great Depression?
Q4) How is a firm's labor demand affected during a recession if wages are downwardly rigid?
Q5) Explain the term "labor hoarding."
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Chapter 13: Countercyclical Macroeconomic Policy
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Sample Questions
Q1) Which of the following statements is true?
A) Countercyclical monetary policy stimulates an economy during a recession by shifting the labor demand curve to the left.
B) Countercyclical monetary policy stimulates an economy during a recession by shifting the labor demand curve to the right.
C) Countercyclical monetary policy stimulates an economy during a recession by shifting the labor supply curve to the left.
D) Countercyclical monetary policy stimulates an economy during a recession by shifting the labor supply curve to the right.
Q2) If the Fed increases the supply of bank reserves,________.
A) the federal funds rate falls
B) the inflation rate falls
C) consumption falls
D) investment falls
Q3) Briefly describe the sequence of events in a typical expansionary monetary policy process.
Q4) Give two disadvantages of using an expenditure-based fiscal policy over a taxation-based fiscal policy.
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Chapter 14: Macroeconomics and International Trade
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Sample Questions
Q1) Which of the following statements is true?
i.Specialization does not work without trade.
ii.Trade does not work without specialization.
A) i) and ii) are both true
B) i) and ii) are both false
C) i) is true and ii) is false
D) i) is false and ii) is true
Q2) What are some of the anti-globalization trends that have emerged since 2016 in the United States and Europe?
Q3) Elena is a Greek citizen who is currently studying music in the United States.In the official international trade accounts,she is considered a ________.
A) citizen and resident of a foreign country
B) citizen of a foreign country and domestic resident of the United States
C) citizen and resident of the United States
D) citizen of the United States and domestic resident of a foreign country
Q4) What are the potential consequences of renegotiating NAFTA and raising tariffs on goods imported in the United States from China and Mexico?
Q5) Why do current account deficits always match financial account inflows?
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Chapter 15: Open Economy Macroeconomics
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Sample Questions
Q1) Domestic interest rates influence the real exchange rate.
A)True
B)False
Q2) The Chinese government allowed the U.S.dollar to depreciate against the yuan during ________ and to appreciate against the yuan since ________.
A) 1998-2005; 2005
B) 1998-2005; 2009
C) 2005-2008; 2009
D) 2005-2008; 2014
Q3) Everything else being equal,a depreciation of the dollar will cause ________.
A) the U.S. unemployment rate to fall
B) the U.S. unemployment rate to rise
C) U.S. exports to decrease
D) U.S. imports to increase
Q4) An increase in the interest rates in a country ________.
A) reduces net exports
B) increases net exports
C) does not affect net exports
D) results in a an outflow of capital from the country
Q5) What was the main reason the Chinese authorities kept the dollar overvalued?
Page 18
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