Applied Macroeconomic Theory
Test Preparation
Course Introduction
Applied Macroeconomic Theory explores the practical application of macroeconomic principles to real-world economic issues and policy analysis. This course examines the functioning of national and global economies by analyzing aggregate measures such as GDP, unemployment, inflation, and interest rates. Students learn to use macroeconomic models to evaluate the effects of monetary and fiscal policies, understand business cycles, and assess the impact of external shocks. Emphasis is placed on interpreting economic data, forecasting economic trends, and formulating policy recommendations using contemporary macroeconomic tools. Through case studies and empirical analysis, students gain the skills necessary to critically engage with current macroeconomic debates and inform decision-making in government, business, and financial institutions.
Recommended Textbook
Macroeconomics 5th Edition by Stephen D. Williamson
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18 Chapters
966 Verified Questions
966 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Real interest rates were negative during most of the A) 1960s.
B) 1970s.
C) 1980s.
D) 1990s.
Answer: B
Q2) Government debt is different from individual debt because
A) the government can always tax to reduce it.
B) the government cannot declare bankruptcy.
C) the government does not need to pay interest.
D) the government can decide the interest rate.
Answer: A
Q3) When there is positive inflation
A) the nominal interest rate is approximately equal to the real interest rate.
B) the real interest rate is greater than the nominal interest rate.
C) the nominal interest rate is greater than the real interest rate.
D) the real interest rate is negative.
Answer: C
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3
Chapter 2: Measurement
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Sample Questions
Q1) Assume that in an economy with 200M inhabitants,90M work,4M are looking for a job,3M receive unemployment insurance compensation,and 6M receive unemployment insurance compensation and are looking for a job. What is the unemployment rate?
A) 13%
B) 10%
C) 6.5%
D) 5%
Answer: B
Q2) If Year 2 is the base year,the real GDP of Year 1 is
A) $800.
B) $1050.
C) $1900.
D) $2400.
Answer: B
Q3) If Year 1 is the base year,the CPI for Year 2 is approximately A) 100.0.
B) 126.3.
C) 131.3.
D) 181.0.
Answer: C
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Chapter 3: Business Cycle Measurement
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Sample Questions
Q1) If real GDP helps to predict the path of a particular macroeconomic variable,it is said to be a
A) conventional variable.
B) coincident variable.
C) leading variable.
D) lagging variable.
Answer: D
Q2) The official dating of the most recent recession places its timing as A) 2007.
B) 2007-2009.
C) 2008.
D) 2008-2009.
Answer: D
Q3) Employment tends to A) lead the cycle.
B) be coincident with the cycle.
C) lag the cycle.
D) sometimes lead, sometimes lag the cycle.
Answer: C
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Page 5
Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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103 Flashcards
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Sample Questions
Q1) In macroeconomic analysis,the representative consumer
A) denotes the consumer with the average amount of income.
B) plays the role of a stand-in for all consumers in the economy.
C) is the consumer who bargains with firms for all workers in the economy.
D) is always a misleading fiction.
Q2) Which of the following is false?
A) a lump-sum tax does not depend on any action taken by a consumer.
B) in practice, no taxes are lump-sum.
C) lump-sum taxes are realistic.
D) all taxes have distorting effects on the behavior of economic agents.
Q3) An increase in the real wage
A) represents a pure substitution effect.
B) represents a pure income effect.
C) represents a combination of income and substitution effects.
D) causes a parallel shift in the consumer's budget line.
Q4) Theoretically,an increase in the real wage
A) increases leisure.
B) decreases leisure.
C) has an ambiguous effect on leisure.
D) has no effect on leisure.
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Chapter 5: A Closed-Economy One-Period Macroeconomic
Model
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Sample Questions
Q1) Suppose total factor productivity increases. Which of the following is incorrect?
A) Households are better off.
B) Consumption goes up.
C) The real wage goes down.
D) Output goes up.
Q2) In an economic model,an endogenous variable is
A) a stand-in for more complicated variables.
B) determined by the model itself.
C) determined outside the model.
D) a variable that has no effect on the workings of the model.
Q3) An increase in total factor productivity shifts the PPF
A) upward, but does not change its slope.
B) upward, and also changes its slope.
C) downward, but does not change its slope.
D) downward, and also changes its slope.
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Chapter 6: Search and Unemployment
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Sample Questions
Q1) In the Keynesian DMP model
A) There is a fiscal multiplier.
B) The government post vacancies in the labor market.
C) There is no unemployment.
D) There can be more than one wage consistent with equilibrium.
Q2) The unemployment rate is
A) countercyclical
B) procyclical
C) a leading variable
D) smooth
Q3) In the DMP model,a decrease in productivity
A) decreases the unemployment rate.
B) reduces the vacancy rate.
C) increases the unemployment rate.
D) increases the size of the labor force.
Q4) In the DMP model,
A) Firms maximize profits.
B) Firms determine how much effort they should put into filling job vacancies.
C) Firms decide whether or not to enter the labor market by posting vacancies.
D) Firms decide whether or not to retain or fire workers.
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Chapter 7: Economic Growth: Malthus and Solow
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Sample Questions
Q1) In Solow's exogenous growth model,the steady-state growth rate of capital can be increased by
A) higher population growth.
B) higher depreciation rate.
C) higher saving rate.
D) higher interest rate.
Q2) Before the Industrial Revolution,standards of living differed
A) greatly over time and across countries.
B) little over time, but differed greatly across countries.
C) greatly over time, but differed little across countries.
D) little over time and across countries.
Q3) If an epidemic hits a Malthusian economy,the immediate consequence is
A) an increase in the standard of living.
B) a reduction in the standard of living.
C) no change in the standard of living.
D) dependent on the population growth rate.
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9
Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Sample Questions
Q1) In the endogenous growth model,an increase in a worker's level of human capital
A) increases the amount of additional human capital she can produce, but does not increase the amount of output she can produce.
B) increases the amount of additional output she can produce, but does not increase the amount of human capital she can produce.
C) increases both the amount of additional human capital she can produce and the amount of output she can produce.
D) increases neither the amount of additional human capital she can produce nor the amount of output she can produce.
Q2) What characteristic do both human and physical capital share?
A) Both are controlled by the government.
B) Current costs are incurred for future benefits.
C) The use of both exhibits rivalry.
D) They can easily be transferred to new ownership.
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10
Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Sample Questions
Q1) If current income increases as much as future income decreases
A) current consumption decreases.
B) current consumption stays the same.
C) current consumption increases.
D) We do not know.
Q2) When different consumers pay different amounts of taxes,Ricardian equivalence may fail because
A) alternative ways of collecting the same tax revenue can affect the distribution of income.
B) consumers can become jealous of one another.
C) such differences in taxes create credit market imperfections.
D) higher taxes on more talented people may be politically popular.
Q3) The Ricardian equivalence theorem implies that
A) government debt policy must be handled correctly for the economy to prosper.
B) the amounts of government spending are neutral.
C) an increase in government spending has no effect on the economy, as long as there is an equal change in taxes.
D) the timing of taxes collected by the government is neutral.
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Chapter 10: Credit Market Imperfections: Credit Frictions,
Crises, and Social Security
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Sample Questions
Q1) Pay-as-you-go social security
A) can never improve economic welfare for everyone.
B) can improve welfare for everyone if the population growth rate is large enough.
C) is always inefficient.
D) is not used by any countries in the world.
Q2) Limited commitment means
A) one cannot credibly promise something.
B) one saves only part of what is optimal.
C) only some households are allowed to save.
D) there is rationing on the credit market.
Q3) Which of the following is not a reason for studying credit market frictions?
A) explaining features of financial crises.
B) explaining key elements of financial market behavior.
C) understanding why Ricardian equivalence may not work.
D) explaining why collateral does not matter.
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Chapter 11: A Real Intertemporal Model with Investment
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Sample Questions
Q1) An increase in credit market frictions
A) decreases labor supply.
B) decreases labor demand.
C) decreases consumption demand.
D) decreases investment demand.
Q2) At the end of the future period,in the real intertemporal model with investment
A) the firm's capital becomes useless and is thrown away.
B) the firm's capital is used to produce more capital for the distant future.
C) the firm can convert capital one-for-one into consumption goods.
D) the firm's capital is converted into labor.
Q3) Labor demand depends on the interest rate because
A) household savings depend on the interest rate.
B) firms discount future profits.
C) of Ricardian equivalence.
D) Labor demand actually does not depend on the interest rate.
Q4) If the interest rate goes up,what happens to the investment demand curve?
A) It shifts to the right.
B) It shift to the left.
C) It stays put.
D) We cannot tell.
Page 13
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Chapter 12: Money, Banking, Prices, and Monetary Policy
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Sample Questions
Q1) Money is neutral in the model economy we discussed because
A) the money supply is exogenous.
B) the money supply is intertemporal.
C) prices are fully flexible.
D) it is a barter economy.
Q2) Which of the following decreases money demand?
A) Bonds become more risky.
B) The introduction of online banking.
C) Disruptions in the banking system.
D) An increase in ATM fees.
Q3) The opportunity cost of holding money is
A) zero.
B) the inflation rate.
C) the real interest rate.
D) the nominal interest rate.
Q4) An open-market operation refers to
A) changing the money supply by changing taxes.
B) changing the money supply by changing government spending.
C) an exchange of money for interest-bearing debt by the monetary authority.
D) an exchange of domestic money for foreign money by the monetary authority.
Page 14
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Sample Questions
Q1) In the real business cycle model,an increase in current total factor productivity leads to
A) an increase in investment.
B) a decrease in investment.
C) no change in investment.
D) an ambiguous response of investment.
Q2) Extraneous events that are completely unrelated to economic fundamentals are called
A) moonbeams.
B) black holes.
C) sunspots.
D) time warps.
Q3) In the coordination failure model,we mention sunspots because
A) they influence business cycles.
B) apparently irrelevant events may influence business cycles.
C) in central banker speak, they are synonymous with open market operations.
D) seasonal sunshine has an impact on the business cycle.
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Page 15
Chapter 14: New Keynesian Economics: Sticky Prices
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Sample Questions
Q1) In the New Keynesian model, A) money is neutral.
B) money is fixed.
C) monetary policy has a real impact.
D) prices are countercyclical.
Q2) Stabilization policy is policy that seeks to A) get zero inflation.
B) eliminate fluctuations.
C) eradicate unemployment.
D) maximize output.
Q3) To support the argument for an active role for government in stabilizing the economy,it must be true that
A) consumers are not rational and that not all wages and prices are flexible.
B) not all wages and prices are flexible and that government must be able to react quickly enough.
C) government must be able to react quickly enough and that shocks to the economy be primarily due to aggregate supply shocks.
D) shocks to the economy be primarily due to aggregate supply shocks and that consumers are not rational.
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Page 16
Chapter 15: International Trade in Goods and Assets
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Sample Questions
Q1) When current account deficits are used to finance investment spending,such deficits may be self-correcting because
A) they promote more responsible government policies.
B) the resulting increase in the capital stock over time shifts the output supply curve to the right.
C) the resulting increase in the capital stock over time shifts the output demand curve to the right.
D) the resulting increase in national indebtedness increases labor demand.
Q2) In a two-period model,holding everything else constant,an increase in future taxes
A) unambiguously increases the current account surplus.
B) unambiguously decreases the current account surplus.
C) has an uncertain effect on the current account surplus.
D) has no effect on the current account surplus, as long as Ricardian equivalence holds.
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Chapter 16: Money in the Open Economy
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Sample Questions
Q1) In the New Keynesian open economy model,suppose the exchange rate is flexible and there is a decline in total factor productivity
A) expansionary fiscal policy is necessary.
B) contractionary monetary policy is necessary.
C) expansionary monetary policy is necessary.
D) no policy intervention is necessary.
Q2) Under a flexible exchange rate,an increase in the domestic money supply leads to
A) a devaluation of the domestic currency.
B) a revaluation of the domestic currency.
C) a depreciation of the domestic currency.
D) an appreciation of the domestic currency.
Q3) The real exchange rate is the
A) domestic currency price of foreign currency.
B) foreign currency price of domestic currency.
C) price of domestic goods in terms of foreign goods.
D) price of foreign goods in terms of domestic goods.
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18
Chapter 17: Money, Inflation, and Banking
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Sample Questions
Q1) There is a double coincidence of wants when
A) person 1 has what person 2 wants, who in turn wants what person 3 has.
B) person 1 has what person 2 wants, and person 2 has money.
C) person 1 has what person 2 wants, and person 2 has what person 1 wants.
D) person 1 has money, and person 2 has what person 1 wants.
Q2) Some early forms of money,like commodity money,did not survive because A) they were outlawed.
B) quality control was difficult.
C) people disagreed on which good to use.
D) paper quality was poor.
Q3) The causal link between money growth and inflation is most closely associated with A) Jevons.
B) Kiyotaki and Wright.
C) Friedman and Schwartz.
D) Diamond and Dybvig.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Sample Questions
Q1) The Phillips curve shifts because
A) fiscal policy changes over time.
B) of total factor productivity shocks.
C) of economic development.
D) none of the above.
Q2) Time inconsistency means
A) taking different decisions at different times despite facing the same situation.
B) making policy choices that violate the intertemporal budget constraint.
C) deciding to do something tomorrow, and then doing something different tomorrow.
D) adding a random factor to decisions.
Q3) A)W. Phillips' study of unemployment and inflation in the United Kingdom specifically looked at the empirical relationship between the unemployment rate and the
A) rate of change in prices.
B) rate of change in nominal wages.
C) rate of change in real wages.
D) level of nominal wages.
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