Applied Macroeconomic Theory
Exam Materials
Course Introduction
Applied Macroeconomic Theory explores the practical application of macroeconomic concepts and models to understand real-world economic issues, including economic growth, inflation, unemployment, monetary and fiscal policy, and international economic dynamics. The course emphasizes empirical analysis, data interpretation, and policy evaluation, equipping students with the analytical tools necessary to assess the impact of various macroeconomic policies and shocks on different sectors of the economy. Through case studies, quantitative exercises, and policy simulations, students gain a solid foundation in using macroeconomic theory to address contemporary economic challenges and inform decision-making in business and government contexts.
Recommended Textbook
Macroeconomics 8th Edition by Andrew Abel
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15 Chapters
1417 Verified Questions
1417 Flashcards
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Chapter 1: Introduction to Macroeconomics
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Sample Questions
Q1) Aggregation is the process of
A)calculating real GDP based on nominal GDP and the price index.
B)summing individual economic variables to obtain economywide totals.
C)forecasting the components of GDP.
D)predicting when recessions will occur.
Answer: B
Q2) The main reason that the United States has such a high standard of living is
A)low unemployment.
B)high average labor productivity.
C)low inflation.
D)high government budget deficits.
Answer: B
Q3) In the 1980s,1990s,and 2000s,the United States has had a
A)small trade surplus.
B)small trade deficit.
C)large trade deficit.
D)large trade surplus.
Answer: C
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Chapter 2: The Measurement and Structure of the National Economy
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Sample Questions
Q1) Two years ago,the GDP deflator for Old York was 300,and today it is 330.75.Based on this information the annual average inflation rate for the two years was A)5%.
B)5)125%.
C)10%.
D)10.25%.
Answer: A
Q2) The accounting framework used in measuring current economic activity is called
A)the U.S.expenditure accounts.
B)the national income accounts.
C)the flow of funds accounts.
D)the balance of payments accounts.
Answer: B
Q3) The three approaches to measuring economic activity are the A)cost,income,and expenditure approaches.
B)product,income,and expenditure approaches.
C)consumer,business,and government approaches.
D)private,public,and international approaches.
Answer: B
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) The marginal product of capital is the increase in
A)capital needed to produce one more unit of output.
B)output from a one-unit increase in capital.
C)labor needed to accompany a one-unit increase in capital.
D)output from a one-dollar increase in capital.
Answer: B
Q2) The ________ is the number of unemployed divided by the labor force and the ________ is the number of employed divided by the adult population.
A)unemployment rate; employment rate
B)unemployment rate; employment ratio
C)unemployment ratio; participation rate
D)discouraged worker ratio; employment rate
Answer: B
Q3) The income effect of a higher real wage on the quantity of labor supply is the A)idea that workers feel psychologically wealthier when wages are higher,so they work more.
B)effect that income must rise when wages rise.
C)tendency of workers to supply more labor in response to becoming wealthier.
D)tendency of workers to supply less labor in response to becoming wealthier.
Answer: D
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Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) How would the expected real after-tax rate of return be affected by each of the following events?
(1)the tax rate on interest income increases
(2)expected inflation declines
Q2) When a company must consider taxes in determining investment,its desired capital stock is chosen such that
A)MPKf = uc(1-t)
B)MPKf = uc/(1-t)
C)MPKf = t × uc
D)t × MPKf = uc
Q3) Calculate the user cost of capital of a machine that costs $5,000 and depreciates at a 25% rate,when the nominal interest rate is 5% and the expected inflation rate is 10%.
A)$5,000
B)$1500
C)$1000
D)$100
Q4) What is the marginal propensity to consume,and why is it always less than one?
Q5) How would the desired capital stock be affected by a decline in the user cost of capital?
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) In a small open economy,describe what happens when an increase in wealth causes national saving to decline.Explain the impact on the real interest rate,saving,investment,net exports,and absorption in equilibrium.
Q2) An increase in a small open economy's government budget deficit that reduces national saving and the current account balance causes an A)increase in desired saving.
B)increase in the world real interest rate.
C)increase in exports.
D)increase in absorption.
Q3) What determines the interest rate in a small open economy?
Q4) Consider a large open economy that has a zero current account balance.What are the effects on the world real interest rate,national saving,investment,and the current account balance in equilibrium if (a)future income rises?
(b)business taxes decline?
(c)government purchases decline?
(d)the future marginal product of capital declines?
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) In the textbook model of endogenous growth,long-run output growth would decline if there were either a ________ in the saving rate or a ________ in the depreciation rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q2) 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
Q3) 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?
Q4) Describe the main ideas of endogenous growth theory.What does it have to say about the role of government in economic growth?
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Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) 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.
Q2) 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.
Q3) If the nominal money supply grows 10%,the inflation rate is 6%,and the income elasticity of money demand is 1.0,then real income growth equals A)1%.
B)2%.
C)3%.
D)4%.
Q4) Give five examples of factors that could reduce the demand for money.
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Chapter 8: Business Cycles
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Sample Questions
Q1) Christina Romer argued that
A)measured properly,GNP before 1929 varied substantially less over time than the official statistics showed.
B)measured properly,GNP after 1929 varied substantially more over time than the official statistics showed.
C)measured properly,economic expansions after 1929 were shorter than the official statistics showed.
D)measured properly,economic expansions before 1929 were shorter than the official statistics showed.
Q2) By 1937,when a new recession began in the midst of the Great Depression, A)GDP had almost recovered to its 1929 level,but unemployment was still above the 1929 level.
B)unemployment had almost fallen back to its 1929 level,but GDP had yet to recover to its 1929 level.
C)neither GDP nor unemployment had returned to near their 1929 levels.
D)both GDP and unemployment had returned to near their 1929 levels.
Q3) When a recession occurs,do economists expect it to be a temporary phenomenon? Or is there some degree of permanence? What is the empirical evidence?
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Chapter 9: The IS-LM/AD-AS Model
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Sample Questions
Q1) For each outcome below,tell what type of shift must have taken place in either the aggregate demand curve or the long-run aggregate supply curve.
(a)In the short run,the price level is unchanged and output rises.
(b)In the long run,the price level declines and output is unchanged.
(c)In the long run,the price level rises and output declines.
Q2) Suppose you were a forecaster of the real wage rate,employment,output,the real interest rate,consumption,investment,and the price level.A shock hits the economy,which you think is a temporary adverse supply shock.
(a)What are your forecasts for each of the variables listed above (rise,fall,and no change)?
(b)What if the shock was really due to people's reduced expectations about their future income.Which variables did you forecast correctly,and which did you forecast incorrectly?
Q3) Which of the following curves in the IS-LM model is vertical?
A)The IS curve
B)The LM curve
C)The FE line
D)The AD curve
Q4) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) Which of the following would not be an example of a productivity shock?
A)The introduction of new management techniques
B)A change in government regulations affecting production
C)A change in the level of government transfer programs
D)A spell of unusually good or unusually bad weather
Q2) Prescott's calibrated RBC model showed that the actual and simulated ________ of five key macroeconomic variables were very close.
A)magnitudes
B)slopes
C)volatilities
D)betas
Q3) The theory of rational expectations suggests that
A)people never make forecast errors.
B)people make intelligent use of available information.
C)people make systematic forecast errors.
D)people are slow to incorporate new information into their forecasts.
Q4) Why do many economists believe that money affects output? What is the empirical evidence in support of that belief?
Q5) Define real shocks,define nominal shocks,and give an example of each.
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Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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90 Flashcards
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Sample Questions
Q1) According to the efficiency wage model,during a recession,firms will not reduce real wages because
A)unions would go on strike,reducing profitability.
B)this would reduce worker effort and productivity.
C)the equilibrium real wage has increased.
D)legally,they can't.
Q2) The gift exchange motive suggests that
A)workers value benefits like health insurance more than job security.
B)workers prefer a nice work environment,even if they must accept lower wages.
C)workers who feel well treated will work harder and more efficiently.
D)workers will shirk if they are paid a low wage.
Q3) In the Keynesian model,what are the effects (on output,the real interest rate,and the price level)of an adverse productivity (i.e.,aggregate supply)shock?
Q4) Why might firms pay an efficiency wage rather than a market-clearing wage?
Q5) According to Keynesians,the primary source of business cycle fluctuations is
A)aggregate demand shocks.
B)productivity shocks.
C)oil price shocks.
D)consumer confidence shocks.
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) Phillips's research looked at British data on
A)unemployment and inflation.
B)unemployment and nominal wage growth.
C)inflation and nominal wage growth.
D)unemployment and output.
Q2) The costs of disinflation would be low if
A)expected inflation falls as inflation falls.
B)wage and price controls were used.
C)the Phillips curve were nearly horizontal.
D)the Phillips curve adjusted slowly to changes in inflation.
Q3) Based on the expectations-augmented Phillips curve,if the natural rate of unemployment is 0.06,and if the actual inflation rate exceeds the expected inflation rate,then the unemployment rate is
A)less than 0.06
B)0)06.
C)more than 0.06.
D)0)06 plus 0.5 times the difference between actual and expected inflation.
Q4) What are the pros and cons of using cold turkey disinflation compared to a policy of gradualism?
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Chapter
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) According to the "beachhead effect," in order to undo the effects of a strong-dollar period,the real value of the dollar
A)must fall to at least half of its value before appreciation of the dollar began.
B)must fall to the value it had before appreciation of the dollar began.
C)must fall to a much lower level than it had before appreciation of the dollar began.
D)must actually appreciate before it depreciates to undo the effects of a strong-dollar period.
Q2) Purchasing power parity means that
A)enom = PFor / P.
B)P = PFor.
C)P = enom / PFor.
D)enom = mc2.
Q3) When the domestic currency buys fewer units of foreign currency,the
A)nominal exchange rate rises.
B)nominal exchange rate falls.
C)real exchange rate rises.
D)real exchange rate falls.
Q4) What is purchasing power parity? Why might it not hold?
Page 15
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) In response to an unanticipated tightening of monetary policy,the price level ________ at first,then ________ after a year.
A)rises; returns most of the way to its original value
B)falls; returns most of the way to its original value
C)remains roughly unchanged; begins to rise
D)remains roughly unchanged; begins to fall
Q2) Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1.The Federal Reserve carries out open-market operations,purchasing $1 million worth of bonds from banks.This action will increase the money supply by
A)$1 million.
B)$2 million.
C)$3 million.
D)$4 million.
Q3) The Federal Open Market Committee consists of all the following people EXCEPT
A)the Board of Governors of the Federal Reserve System.
B)five presidents of Federal Reserve Banks,on a rotating basis.
C)the chairman of the President's Council of Economic Advisors.
D)the President of the Federal Reserve Bank of New York.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) The average cost of the distortion created by taxes
A)increases proportionately with the tax rate.
B)is lower when the tax rate is constant than when it fluctuates.
C)is higher when the tax rate is constant than when it fluctuates.
D)equals the square root of the tax rate.
Q2) Assume that the lost output due to tax distortions is proportional to the square of the tax rate.If the average cost of the distortion created by taxes is currently $1000,and the tax rate is increased from 40% to 50%,the average cost of the distortion created by taxes will increase to
A)$383.33.
B)$450.00.
C)$640.
D)$1562.50.
Q3) The primary deficit is equal to A)outlays - tax revenues.
B)government purchases + transfers + net interest - tax revenues.
C)outlays + net interest - tax revenues.
D)government purchases + transfers - tax revenues.
Q4) Who bears the burden of the government debt? Explain why.Under what circumstances is there no burden to be borne?
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