Applied Macroeconomics
Test Preparation
Course Introduction
Applied Macroeconomics explores the practical application of macroeconomic theory to real-world economic issues and policy debates. The course covers key topics such as economic growth, inflation, unemployment, fiscal and monetary policy, and open-economy macroeconomics. Students will learn to interpret economic indicators, analyze macroeconomic trends, and assess the impact of government policies using empirical data and models. Through case studies and hands-on exercises, the course emphasizes critical thinking and quantitative skills necessary for understanding the broader economic environment and for making informed decisions in both public and private sector contexts.
Recommended Textbook
Macroeconomics 11th Edition by Michael Parkin
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Page 2
Chapter 1: What Is Economics
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Sample Questions
Q1) A scatter diagram will be most useful
A) in discerning a possible relationship between height and weight for individuals.
B) in resolving a dispute over two normative assertions.
C) in predicting next year's rate of unemployment.
D) All of the above are correct.
Answer: A
Q2) To graph a relationship among several variables,we hold all but ________ variable(s) constant and use the ________ assumption.
A) one; scarcity
B) two; ceteris paribus
C) three; marginal benefit
D) one; ceteris paribus
Answer: B
Q3) A normative statement is
A) about what ought to be.
B) about what is.
C) always true.
D) one that is based on an economic experiment.
Answer: A
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Page 3
Chapter 2: The Economic Problem
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Sample Questions
Q1) If Hong Kong continues to devote more resources to accumulating capital than the United States,Hong Kong will continue to grow more rapidly than the United States.
A)True
B)False
Answer: True
Q2) The above table shows production points on Sweet-Tooth Land's production possibilities frontier.A movement from ________ represents the greatest opportunity cost of increasing cola production.
A) point E to point D
B) point D to point C
C) point C to point B
D) point B to point A
Answer: D
Q3) A circular flow diagram shows the flows from the goods and resources markets.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Demand and Supply
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Sample Questions
Q1) At a price of $10 in the above figure,there is
A) a surplus of 200 units.
B) a shortage of 200 units.
C) a surplus of 400 units.
D) a shortage of 400 units.
Answer: C
Q2) If the price of a good changes but everything else influencing suppliers' planned sales remains constant,there is a
A) new supply curve that is to the right of the initial supply curve.
B) new supply curve that is to the left of the initial supply curve.
C) movement along the supply curve.
D) rotation of the initial supply curve around the initial price.
Answer: C
Q3) A decrease in the price of bowling shifts the
A) demand curve for bowling balls leftward.
B) demand curve for bowling balls rightward.
C) supply curve of bowling balls leftward.
D) supply curve of bowling balls rightward.
Answer: B
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Chapter 4: Measuring GDP and Economic Growth
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Sample Questions
Q1) The horizontal axis on a time-series graph
A) measures the variable being graphed.
B) measures units of time such as years.
C) runs parallel to the y-axis.
D) measures how the variable being graphed changes.
Q2) Nominal GDP is
A) real GDP adjusted for price changes.
B) GDP valued at prices of that year.
C) GDP valued at constant prices.
D) real GDP valued at base year prices.
Q3) The presence of ________ creates a difference in the value between the market price and the factor cost of a product.
A) indirect taxes and consumption
B) subsidies and direct taxes
C) corporate profits and subsidies
D) indirect taxes and subsidies
Q4) Explain how gross investment,depreciation,net investment,and the capital stock are related.
Q5) Explain the relationship between real GDP and potential GDP during the two phases of the business cycle.
6
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Chapter 5: Monitoring Jobs and Inflation
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Sample Questions
Q1) When an individual is frictionally unemployed,the unemployment arises in part from A) a short-term elimination of jobs because of a slowdown in business activity.
B) individuals searching for appropriate employment.
C) the permanent elimination of jobs because of a change in the structure of the economy.
D) a reduction in the overall demand for workers' skills.
Q2) The current U.S.population is about 300 million yet the current U.S.labor force is only about 150 million.What subtractions are made from the population number to set it equal to the labor force?
Q3) Can frictional unemployment ever be totally eliminated? Explain your answer.
Q4) Inflation is a problem when
A) it is unpredictable.
B) it causes the value of money to vary unpredictably.
C) it causes resources to be diverted from productive uses.
D) All of the above answers are correct.
Q5) How does the Current Population Survey determine if a person should be counted in the labor force?
Q6) Why is unemployment a problem?
Page 7
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Chapter 6: Economic Growth
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Sample Questions
Q1) If a nation's population grows,then,
A) growth in real GDP per person will be less than the growth of real GDP.
B) there can be no economic growth.
C) growth in real GDP per person will be greater than the growth of real GDP.
D) there must be an increase in real GDP per person.
Q2) Which theory of economic growth concludes that in the long run real GDP per person will be at its subsistence level?
A) the classical theory
B) the neoclassical theory
C) the new growth theory
D) all of the theories
Q3) Employment and (total) potential GDP increase if the
A) labor supply curve shifts rightward and the labor demand curve does not shift.
B) labor demand curve shifts leftward more than the labor supply curve shifts rightward.
C) labor demand curve shifts leftward and the labor supply curve does not shift.
D) None of the above answers are correct.
Q4) What are the basic arguments of the neoclassical growth theory?
Q5) What is the real wage rate?
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Chapter 7: Finance, Saving, and Investment
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Sample Questions
Q1) A decrease in the real interest rate leads to
A) an increase in investment demand so that the demand for loanable funds curve shifts rightward.
B) a fall in the capital stock.
C) an increase in the expected profit.
D) a movement downward along the demand for loanable funds curve.
Q2) In November 2008,automobile executives from Ford,GM and Chrysler testified to Congress that their firms needed a $25 billion bailout to prevent bankruptcies. The executives stated that part of the cash would be used to re-design production lines. The $25 billion is ________ and the re-designed production lines are ________.
A) financial capital; physical capital
B) gross investment; physical capital
C) physical capital; financial capital
D) net investment; gross investment
Q3) Which of the following is correct?
A) As disposable income increases, the real interest rate increases.
B) As disposable income decreases, saving decreases.
C) As saving decreases, disposable income increases.
D) As saving increases, investment by households decreases.
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Page 9
Chapter 8: Money, The Price Level, and Inflation
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Sample Questions
Q1) The main policy-making body of the Federal Reserve System is the Federal Open Market committee.
A)True
B)False
Q2) Which of the following is NOT a monetary policy tool?
A) last resort loans
B) open market operations
C) required reserve ratio
D) federal funds rate
Q3) Financial innovation is
A) the process of turning assets into a more liquid form.
B) the development of new financial products and services.
C) responsible for credit cards being included as part of money.
D) causing a decrease in bank profits.
Q4) The equation of exchange states that the price level is equal to A) the quantity of money.
B) velocity of circulation multiplied by the quantity of money divided by real GDP.
C) real GDP multiplied by the velocity of circulation divided by nominal GDP.
D) the velocity of circulation.
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Chapter 9: The Exchange Rate and the Balance of Payments
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Sample Questions
Q1) A country's balance of payments accounts include all of the following EXCEPT
A) military account.
B) current account.
C) capital and financial account.
D) official settlements account.
Q2) With everything else the same,in the foreign exchange market the
A) larger the value of U.S. exports, the greater is the quantity of dollars demanded.
B) lower the exchange rate, the smaller the amount of U.S. exports.
C) the lower the exchange rate, the smaller is the expected profit from buying dollars.
D) the higher the exchange rate, the cheaper are U.S.-produced goods and services.
Q3) The supply curve of U.S.dollars shifts leftward.This could have been influenced by
A) a rise in the U.S. interest rate differential
B) a fall in the expected future exchange rate
C) an increase in the U.S. exchange rate
D) a decrease in the U.S. exchange rate
Q4) How do the capital account and the current account differ?
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Chapter 10: Aggregate Supply and Aggregate Demand
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Sample Questions
Q1) What are the substitution effects that affect aggregate demand?
Q2) In a change to immigration policy during 2012,"people younger than 30 who came to the United States before the age of 16,pose no criminal or security threat,and were successful students or served in the military can get a two-year deferral from deportation,Homeland Security Secretary Janet Napolitano said," according to CNN,06/16/2012. If many of these immigrates had previously been afraid to work,now as a result of being able to work legally,
A) the long-run aggregate supply curve shifts leftward and potential GDP decreases.
B) the short-run aggregate supply curve shifts rightward but potential GDP does not increase.
C) the long-run aggregate supply curve shifts rightward and potential GDP increases.
D) neither the short-run nor the long-run supply curve shifts.
Q3) The data in the above table show that when the price level is 120,
A) the unemployment rate is below its natural rate.
B) the unemployment rate is above its natural rate.
C) money wages rates will rise in the future.
D) the long-run aggregate supply curve will shift leftward in the future.
Q4) Explain the reasons why the AD curve slopes downward.
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Page 12
Chapter 11: Expenditure Multipliers
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Sample Questions
Q1) The marginal propensity to consume is found by
A) dividing consumption expenditure by disposable income.
B) dividing disposable income by consumption expenditure.
C) dividing the change in disposable income by the change in consumption expenditure.
D) dividing the change in consumption expenditure by the change in disposable income.
Q2) The above table gives information for the nation of North Hampton.There are no imports to or exports from North Hampton.
a) Find aggregate planned expenditure for each level of real GDP.
b) What is the equilibrium level of real GDP?
Q3) With a steep short-run aggregate supply curve,
A) an increase in government expenditure will not have an impact on the price level.
B) fiscal policy will be an effective tool to reduce unemployment without raising prices too much.
C) an increase in taxes that does not change potential GDP will not decrease real GDP by much.
D) there is a large change in real GDP whenever the price level rises.
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Chapter 12: Inflation, Jobs, and the Business Cycle
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Sample Questions
Q1) According to which theory of the business cycle do changes in the quantity of money never play a role in helping to explain fluctuations in real variables?
A) Keynesian
B) monetarist
C) new Keynesian
D) real business cycle
Q2) The business cycle impulse in the new classical theory of the business cycle is
A) unexpected changes in aggregate demand.
B) expected changes in aggregate demand.
C) fluctuations in money growth with rigid wages.
D) fluctuations in investment coupled with rigid wages.
Q3) Distinguish between the short-run and long-run Phillips curves.
Q4) The Cleveland Federal Reserve Bank's estimate of expected inflation has fallen from 3.5 percent in 2000 to 1.5 percent in 2013.This fall means that
A) the short-run Phillips curve shifted upward.
B) the short-run Phillips curve shifted downward.
C) there was a movement along the short-run Phillips curve.
D) the natural unemployment rate increased.
Q5) What is the impulse in the real business cycle theory of the business cycle?
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Chapter 13: Fiscal Policy
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Sample Questions
Q1) In the above figure,which fiscal policy could help move the economy to potential GDP?
A) decreasing government expenditure
B) decreasing autonomous taxes
C) increasing government expenditure
D) Both answers A and B are correct.
Q2) Suppose the economy is at a short-run equilibrium with real GDP greater than potential GDP.Which of the following fiscal policies would decrease real GDP and the price level?
A) an increase in government expenditure
B) a decrease in taxes
C) an increase in taxes
D) None of the above answers is correct.
Q3) During an expansion,tax revenues ________ and government transfer payments
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q4) How does a tax on labor income affect potential GDP?
Page 15
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Chapter 14: Monetary Policy
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Sample Questions
Q1) The Fed's actions to fight an inflation shift the
A) aggregate demand curve rightward.
B) aggregate demand curve leftward.
C) long-run aggregate supply curve rightward.
D) long-run aggregate supply curve leftward.
Q2) The Taylor rule
A) focuses on only fluctuations in real GDP.
B) ignores price level stability to focus on responding to fluctuations in real GDP.
C) is the rule actually followed by the Fed.
D) shows how the Fed could set the federal funds rate.
Q3) Suppose the economy is in a recession and the Fed lowers the federal funds rate.Then
A) real GDP and the price level will both decrease.
B) real GDP will increase and the price level will decrease.
C) real GDP will decrease and the price level will increase.
D) real GDP and the price level will both increase.
Q4) Discuss how the Fed raising the federal funds rate ripples through the different sectors of the economy.
Q5) Why does the Fed pursue price stability as its ultimate goal?
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Chapter 15: International Trade Policy
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Sample Questions
Q1) If a country imposes a tariff on an imported good,the tariff ________ the price in the importing country and ________ the quantity of imports. A) raises; decreases B) raises; increases C) raises; does not change D) lowers; does not change
Q2) A tariff ________ the quantity of the good imported and ________ the domestic price of the imported good. A) decreases; decreases B) decreases; increases C) increases; lowers D) does not change; increases
Q3) Suppose the country of Mooland imposes tariffs on imported beef from the country of Aqualand.As a result of the tariffs,the A) price of beef in Mooland falls.
B) quantity of beef exported by Mooland increases.
C) quantity of beef imported by Mooland decreases.
D) quantity of beef imported by Mooland increases.
Q4) Explain the effects of a quota.
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Chapter 16: Introduction
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Sample Questions
Q1) If OPEC cuts oil production,then the
A) demand for gasoline will decrease.
B) price of gasoline will fall.
C) demand for gasoline will increase.
D) supply of gasoline will decrease.
Q2) If the wood used to produce houses rises in price,then the ________ houses
A) demand for; increases
B) demand for; decreases
C) supply of; increases
D) supply of; decreases
Q3) According to the principle of comparative advantage,if the United States trades with Mexico,most likely,
A) the United States will benefit and Mexico will lose.
B) the United States will lose and Mexico will benefit.
C) neither of the countries will benefit.
D) both countries will benefit.
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Chapter 17: Monitoring Macroeconomic Performance
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Sample Questions
Q1) A significant decline in activity spread across the economy,lasting more than a few months is called
A) a recession.
B) an expansion.
C) a peak.
D) inflation.
Q2) In the United States,over time GDP
A) stays relatively constant with occasional increases.
B) increases most of the time and decreases occasionally.
C) increases and decreases roughly about the same amount.
D) decreases more often than it increases.
Q3) The difference between nominal GDP and real GDP is that real GDP eliminates the effects from A) depreciation.
B) inflation.
C) the unemployment rate. D) changes in productivity.
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Chapter 18: Macroeconomic Trends
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Sample Questions
Q1) Purchasing new capital ________.
A) creates an upward movement along the aggregate production function
B) creates a downward movement along the aggregate production function
C) shifts the aggregate production function upward
D) shifts the aggregate production function downward
Q2) The opportunity cost of holding money is the
A) price level.
B) real interest rate.
C) velocity of circulation.
D) nominal interest rate.
Q3) An increase in the amount of capital leads to ________ the aggregate production function and a technological advance leads to ________ the aggregate production function.
A) a movement along; a movement along
B) a movement along; an upward shift
C) an upward shift; an upward shift
D) a downward shift; an upward shift
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Chapter 19: Macroeconomic Fluctuations
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Sample Questions
Q1) The order for the chain of events for the Keynesian model is for a change in ________ to lead to a change in ________,which is then multiplied resulting in a change in ________.
A) investment; animal spirits; the price level
B) business confidence; investment; real GDP
C) the Fed's intermediate targets; the Fed's goals; real GDP
D) real GDP; income; consumption
Q2) If the Fed increases the quantity of money,________ economists believe that the
A) Keynesian; aggregate supply curve shifts rightward
B) Keynesian; structural deficit increases
C) monetarist; cyclical deficit increases
D) monetarist; aggregate demand curve shifts rightward
Q3) At potential GDP
A) there is no unemployment but there is not necessarily full employment.
B) there is no unemployment and there is full employment.
C) unemployment is at its natural rate.
D) None of the above is correct.
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Chapter 20: Macroeconomic Policy
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Sample Questions
Q1) If the Fed makes an open market ________ of government securities,the federal funds rate will ________ as the quantity of money ________.
A) purchase; rise; increases
B) sale; fall; increases
C) purchase; fall; decreases
D) sale; rise; decreases
Q2) An economy has real GDP of $300 billion and potential GDP of $240 billion.To move the economy to potential GDP,the government should ________ taxes and/or ________ government expenditure.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Q3) A decrease in the reserves of commercial banks could be the result of A) an increase in the velocity of circulation.
B) the sale of government securities by the Federal Reserve.
C) a decrease in the velocity of circulation.
D) an increase in the required reserve ratio.
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22