Global Economics Exam Practice Tests
Course Introduction
Global Economics explores the interconnected nature of economies across the world, examining how countries interact through trade, finance, and policy. This course covers foundational concepts such as comparative advantage, exchange rates, balance of payments, international monetary systems, and the impact of globalization on economic growth and development. Students will analyze the roles of international institutions, the effects of global economic events on domestic markets, and contemporary issues such as trade disputes, economic integration, and the challenges faced by developing economies in the global marketplace. Through case studies and real-world examples, the course provides a comprehensive understanding of the dynamic forces shaping the global economic landscape.
Recommended Textbook
Macroeconomics 7th Edition by Olivier Blanchard
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Page 2
Chapter 1: A Tour of the World
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Q1) At what point could the Euro be used as currency?
A)January 1, 1998
B)January 1, 1999
C)January 1, 2000
D)January 1, 2002
Answer: D
Q2) Economists have suggested that the relatively higher unemployment in Europe has been caused by which of the following?
A)relatively high unemployment benefits
B)relatively high level of worker protection
C)inadequate macroeconomic policies
D)increased labor costs
E) all of the above
Answer: E
Q3) The standard of living typically refers to
A)the rate of unemployment.
B)output per capita.
C)wealth per capita.
D)all of the above
Answer: B
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Chapter 2: A Tour of the Book
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Q1) The prices for which of the following goods are included in both the GDP deflator and the consumer price index?
A)goods bought by households
B)goods bought by firms
C)good bought by governments
D)goods bought by foreign households (i.e., exports)
E) all of the above
Answer: A
Q2) For this question,assume that 1980 is the base year.Given macroeconomic conditions in the United States over the past three decades,we know that
A)nominal GDP is always smaller than real GDP since 1980.
B)real GDP and nominal GDP would be equal for the entire period.
C)real GDP is larger than nominal GDP from 2002 to 2008.
D)real GDP and nominal GDP were equal in 1980.
E) none of the above
Answer: D
Q3) Explain Okun's Law.
Answer: It shows the relationship between GDP growth and unemployment rate.If output growth is high,unemployment will decrease.
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Page 4
Chapter 3: The Goods Market
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Q1) Use the ZZ-Y model presented in chapter 3 to illustrate the effects of a reduction in consumer confidence on the economy.Also,explain what effect this reduction in consumer confidence has on the economy.
Answer: The graph is easy.The reduction in consumer confidence will cause a reduction in consumption and demand.As demand falls,firms will cut production.So,this event will cause a lower level of equilibrium output.
Q2) Which of the following events will cause a reduction in equilibrium output?
A)an increase in the marginal propensity to save
B)an increase in taxes
C)a reduction in the marginal propensity to consume
D)all of the above
E) none of the above
Answer: D
Q3) Explain what the multiplier represents.
Answer: The multiplier illustrates the extent to which equilibrium output will change as a result of a given change in autonomous demand.
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Chapter 4: Financial Markets
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Q1) If individuals do not hold checkable deposits,we know that
A)M = CU.
B)H = CU.
C)the money multiplier is 1.
D)all of the above
Q2) The interest rate will increase as a result of which of the following events?
A)an increase in income
B)an open market purchase of bonds by the central bank
C)a reduction in income
D)all of the above
E) none of the above
Q3) In 2006,the average U.S.household held approximately how much currency (dollar bills and coins)?
A)$50
B)$100
C)$600
D)$1600
E) none of the above
Q4) Explain what types of policies a central bank can implement to reduce the interest rate.
Page 6
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) The IS curve will not shift when which of the following occurs?
A)a reduction in government spending
B)a reduction in the interest rate
C)a reduction in consumer confidence
D)all of the above
E) none of the above
Q2) Based on your understanding of the IS-LM model,graphically illustrate and explain what effect a reduction in consumer confidence will have on output,the interest rate,and investment.
Q3) The IS curve will shift to the right when which of the following occurs?
A)an increase in the money supply
B)an increase in government spending
C)a reduction in the interest rate
D)all of the above
E) none of the above
Q4) We know with certainty that a tax increase must cause which of the following?
A)an increase in investment
B)a reduction in investment
C)no change in investment
D)none of the above
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) The Case-Shiller index is normalized to equal 100 in January
A)1999.
B)1990.
C)2000.
D)2001.
Q2) When individuals make decisions about how much money and bonds to hold,which of the following variables affects those decisions?
A)the real interest rate only
B)the nominal interest rate only
C)the expected inflation rate only
D)either the real interest rate or the expected inflation rate
E) both the nominal and real interest rates
Q3) American Recovery and Reinvestment Act 2009 calls for
A)both tax reductions and government spending reductions.
B)both tax reductions and government spending increases.
C)both tax increases and government spending increases.
D)both tax increases and government spending reductions.
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Chapter 7: The Labor Market
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Q1) As the unemployment rate falls,
A)the proportion of the unemployed finding a job increases.
B)the separation rate increases.
C)the young and unskilled experience larger-than-average decreases in unemployment.
D)both A and C.
E) all of the above
Q2) The price setting equation is represented by the following: P = (1 + m)W.When there is perfect competition,we know that m will equal A)W.
B)P.
C)1.
D)W / P.
E) none of the above
Q3) Explain what effect an increase in the unemployment rate will have on the real wage based on: (1)the WS relation; and (2)the PS relation.
Q4) First,explain what the WS relation represents.Second,explain why it has its particular shape.
Q5) Explain why nominal wages are a function of the expected price level.
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) Explain how changes in the proportion of contracts that are indexed affect how a given change in monetary policy will affect economic activity.
Q2) In which of the following decades did the Phillips curve break down for the U.S.?
A)1940s
B)1950s
C)1960s
D)none of the above
Q3) Assume that expected inflation is based on the following: t = t .An increase in will cause
A)an increase in the natural rate of unemployment.
B)a reduction in the natural rate of unemployment.
C)no change in the natural rate of unemployment.
D)inflation in period t to be more responsive to changes in unemployment in period t.
Q4) Based on the 'early incarnation' of the Phillips curve,explain what effect a decrease in the unemployment rate will have on the inflation rate.
Q5) Explain what is meant by the "wage-price" spiral.
Q6) What is the difference between deflation and disinflation?
Page 10
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Q1) In the short run,an increase in the price of oil will cause
A)an increase in output.
B)a reduction in the price level.
C)an increase in the interest rate.
D)all of the above
E) none of the above
Q2) What is the major reason for oil price to go up in the 2000s?
A)formation of the OPEC
B)fast of growth of emerging economies
C)new energy
D)higher demand from the US
Q3) When the policy rate increases,
A)IS curve does not change.
B)IS curve shifts to the right.
C)IS curve shifts to the left.
D)LM curve shifts upward.
E) LM curve shifts downward.
Q4) Use the IS-LM-PC model to illustrate how the economy adjusts to an increase in taxes both in the short run and in the medium run.
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Chapter 10: The Facts of Growth
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Q1) Which of the following countries had the highest rate of growth of output per capita between 1950 and 2011?
A)United States
B)France
C)Japan
D)United Kingdom
Q2) Explain why economists do not use exchange rates to compare standards of living across countries.Also,discuss what economists do to avoid these problems.
Q3) Briefly explain what effect an increase in the saving rate will have on growth.
Q4) Research by Richard Layard indicates that happiness
A)increases as output per capita increases.
B)decreases as output per capita increases.
C)does not change as output per capita changes.
D)appears to depend on people's relative incomes.
Q5) Explain each of the following: (1)constant returns to scale; (2)decreasing returns to capital; and (3)decreasing returns to labor.
Q6) Explain Mathusian trap.
Q7) Convergence refers to what phenomenon regarding growth theory?
Q8) Briefly explain what effect a reduction in the saving rate will have on growth.
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) An increase in the saving rate will affect which of the following variables in the long run?
A)output per worker
B)capital per worker
C)the level of investment
D) all of the above
Q2) In the model where it is assumed that the state of technology does not change,what parameters and / or variables cause changes in steady state output per worker?
A)savings rate
B)depreciation rate
C)human capital per worker
D)all of above
E) none of above
Q3) When an economy is operating at the steady state,we know that
A)steady state saving equals consumption.
B)steady state saving is less than total consumption.
C)steady state saving is equal to depreciation per worker.
D)steady state saving exceeds depreciation each year by a constant amount.
E) none of the above
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Chapter 12: Technological Progress and Growth
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Q1) Suppose there is an increase in the saving rate.Explain what effect this increase in the saving rate will have on the rate of growth of output per worker.
Q2) Let represent labor's share of total output.The Solow residual is represented by A)g - [ gN + (1 - )gK].
B)g .
C)gK.
D) gN. E) 1 / (1 - ).
Q3) Graphically illustrate and explain the effects of an increase in population growth on the Solow growth model.In your answer,you must clearly label all curves and the initial and final equilibria.In your answer,explain what happens to the rate of growth of output per worker and the rate of growth of output as the economy adjusts to this increase in population growth.
Q4) Explain what is meant by the fertility and appropriability of the research process.
Q5) To what extent can changes in the rate of technological progress cause permanent changes in the rate of growth of output per worker? Explain.
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) For this question,assume that the aggregate production function is represented by Y = A.Which of the following represents the marginal cost of producing an additional unit of output?
A)W
B)W / A
C)A / W
D)(1 +A)W
Q2) When was the last year that GDP per capita in North Korea was approximately equal to GDP per capita in South Korea?
A)1950
B)1970
C)1990
D)2000
E) none of the above
Q3) "Churning" refers to
A)changes in the real wage over the business cycle.
B)changes in the markup over the business cycle.
C)structural change associated with technological progress.
D)the increase in productivity caused by an increase in output.
Page 15
E) the increase in output caused by an increase in productivity.
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Chapter 14: Financial Markets and Expectations
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Q1) Which of the following represents a form of equity finance?
A)stock
B)loans
C)bonds
D)all of the above
E) none of the above
Q2) Which of the following represents a stock's fundamental value?
A)the price the stock would sell at in the midst of a rational bubble
B)the price the stock would sell at if the interest rate were zero
C)the present value of its expected future dividend payments
D)the simple sum of its future dividend payments
E) none of the above
Q3) The length of time over which a bond promises to make payments to the holder is called which of the following?
A)the term structure of interest rates
B)the face value
C)the yield to maturity
D)the holding period
E) none of the above
Q4) Explain what is meant by the fundamental value of a share of stock.
Page 16
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Chapter 15: Expectations, consumption, and Investment
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Q1) A reduction in the rate of depreciation will cause the discounted present value of expected profits to A)decrease.
B)increase.
C)remain unchanged if the real interest rate increases by the same amount.
D)none of the above
Q2) The data for the U.S.show that investment and profits
A)have a strong negative relationship.
B)are positively related during recessions, and negatively related during expansions.
C)move independently.
D)are positively related during expansions, and negatively related during recessions.
E) none of the above
Q3) Investment accounts for ________ of US GDP.
A)15%
B)20%
C)50%
D)70%
Q4) Explain the difference between "profitability" and "cash flow."
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Chapter 16: Expectations, output, and Policy
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Q1) Rational expectations assumes that individuals
A)can accurately predict the future.
B)make predictions based on the past behavior of the economy.
C)form their predictions of macroeconomic variables randomly.
D)have perfect foresight.
E) none of the above
Q2) Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations.
Q3) The IS curve shifts to the left where there is
A)a reduction in current taxes.
B)an increase in expected future taxes.
C)an increase in expected future output.
D)all of the above
E) none of the above
Q4) Which of the following will cause aggregate private spending to increase?
A)an increase in government spending
B)a reduction in expected future interest rates
C)a reduction in expected future taxes
D)all of the above
E) none of the above
18
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Chapter 17: Openness in Goods and Financial Markets
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Q1) A nominal appreciation of the Mexican peso (against all currencies)indicates that
A)the peso price of foreign currency has risen.
B)the Mexican real exchange rate will not change if the price level in Mexico falls.
C)the peso price of, for example, the U.K. pound has decreased.
D)the number of units of foreign currency that one can obtain with one peso has increased.
Q2) For this question,suppose the domestic interest rate is 4% and that the foreign interest rate is 7%.And finally,assume that the domestic currency is expected to depreciate by 3% during the coming year.Given this information,we know that
A)individuals will only hold domestic bonds.
B)individuals will only hold foreign bonds.
C)individuals will be indifferent about holding domestic or foreign bonds.
D)the interest parity condition holds.
Q3) Suppose the one-year nominal interest rate is 2.0% in the United States and 5.0% in Canada.Should you hold Canadian bonds or U.S.bonds? Explain.
Q4) Explain the difference between gross domestic product and gross national product.
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Chapter 18: The Goods Market in an Open Economy
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Q1) Explain why the demand for domestic goods curve (ZZ)has a different shape than the domestic demand curve (DD).
Q2) An increase in domestic demand will have which of the following effects in an open economy?
A)a smaller effect on output than in a closed economy and a positive effect on the trade balance
B)a smaller effect on output than in a closed economy and a negative effect on the trade balance
C)a larger effect on output than in a closed economy and a positive effect on the trade balance
D)a larger effect on output than in a closed economy and a negative effect on the trade balance
Q3) Which of the following represents the domestic demand for goods?
A)C + I + G
B)C + I + G + X
C)C + I + G - IM /
D)C + I + G + X - M /
E) C + I + G + X + IM
Q4) Explain what the Marshall-Lerner condition represents.
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Chapter 19: Output, the Interest Rate, and the Exchange Rate
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Q1) In practice,under the EMS,a member country
A)could never change its interest rate.
B)could change its interest rate only if other countries changed theirs as well.
C)must apply to a special European Commission in order to change its interest rate.
D)had complete freedom in choosing the interest rate it wanted.
E) had complete freedom in choosing its interest rate only if it is a very small country.
Q2) A real appreciation will tend to cause
A)an increase in exports.
B)a reduction in imports.
C)an increase in net exports.
D)a reduction in demand for domestic goods.
E) none of the above
Q3) In a flexible exchange rate regime,an increase in the expected future exchange rate will cause
A)the IP curve to shift to the left / up.
B)the IP curve to shift to the right / down.
C)a movement along the IP curve.
D)neither a shift nor movement along the IP curve.
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Chapter 20: Exchange Rate Regimes
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Q1) A country which does not devalue when financial markets expect it to will probably suffer
A)a real appreciation of its currency.
B)higher interest rates.
C)a default on its national debt.
D)all of the above
E) none of the above
Q2) Assume that policy makers are pursuing a fixed exchange rate regime and that the economy is initially operating at the natural level of output.Which of the following will occur as a result of a revaluation?
A)The real exchange rate will be permanently higher in the medium run.
B)The real exchange rate will be permanently lower in the medium run.
C)The effects of this revaluation on the real exchange rate will be ambiguous in the medium run.
D)The real exchange rate will be unchanged in medium run.
E) The nominal exchange will initially fall in the short run and then increase in the medium run.
Q3) Assume a country is in a fixed exchange rate regime.Explain what factors might cause individuals to expect that a country will devalue its currency.
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Chapter 21: Should Policy Makers Be Restrained
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Q1) Which of the following is not an example of the issue of time inconsistency?
A)a central bank announced to maintain low inflation and at the same time increased money supply
B)a government stated that they will not negotiate with hostage takers. When someone is taken hostage, it negotiates
C)a mom says to her kids no cookie before meals and she never gives cookies before her kids eat their meals
D)a person on diet eats ice cream for dinner
Q2) In macroeconomics,game theory focuses on the strategic interactions between which of the following groups of agents?
A)individuals; firms
B)individuals and firms; policy makers
C)policy makers; economic forecasters
D)individuals and firms; economic forecasters
Q3) Balanced budget amendments are believed to be destabilizing.Explain why this is so.
Q4) Use "wars of attrition" to explain the debate about deficit reduction.
Q5) Explain what a PAYGO rule is.
Q6) What are the new rules of the Euro Plus Pact adopted in 2011?
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Chapter 22: Fiscal Policy: a Summing up
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Q1) The Ricardian equivalence proposition states that an increase in the deficit causes
A)consumption to decrease.
B)savings to decrease.
C)investment to decrease.
D)all of the above
E) none of the above
Q2) First,define and explain the cyclically adjusted deficit.Second,explain what effect a recession caused,for example,by a reduction in consumer confidence will have on the size of the cyclically adjusted deficit.
Q3) Suppose the central bank decreases the rate of growth of the money supply.What effect will this decrease in money growth have on seignorage in: (1)the short run; and (2)the medium run? Explain.
Q4) Suppose the central bank increases the rate of growth of the money supply.What effect will this increase in money growth have on seignorage in: (1)the short run; and (2)the medium run? Explain.
Q5) Explain what is meant by automatic stabilizers and how they work to minimize fluctuations in economic activity.
Q6) Explain what can occur to cause an increase in the debt ratio.
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Chapter 23: Monetary Policy: a Summing up
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Q1) Which of the following is part of "M2" but not "M1"?
A)money market mutual fund shares
B)saving deposits
C)time deposits (under $100,000)
D)all of the above
E) none of the above
Q2) M2 is also referred to as which of the following?
A)currency
B)narrow money
C)near money
D)high powered money
E) none of the above
Q3) Since the 1980s,"NOW" accounts have been included in
A)M1, but not M2.
B)M2, but not M1.
C)both M1 and M2.
D)the monetary base and M1, but not M2.
E) neither M1 nor M2.
Q4) What are some of the questions about the macro prudential tools?
Q5) What are the factors that will determine the optimal inflation rate?
Page 25
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) Explain several of the key contributions of Keynes.
Q2) In the 1960s,there was significant debate between Keynesians and monetarists.Explain several aspects of this debate.
Q3) The neoclassical synthesis
A)was a name coined by Keynes himself for his new theories.
B)rejected virtually all of Keynes' insights.
C)held that econometric models of the economy could not be used to predict the future.
D)held that economy always operated at or very near the natural rate of unemployment.
E) was the dominant school of thought among economists in the 1950s and 1960s.
Q4) The IS-LM model was developed by
A)Friedman and Phelps.
B)Hicks and Hansen.
C)Modigliani and Friedman.
D)Lucas and Sargent.
E) none of the above
Q5) Explain what is meant by "new Keynesians" and discuss some of the research conducted in this area.
Q6) Discuss new classical economics and real business cycle theory.
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Chapter 25: Appendix
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Q1) Net national product (NNP)is equal to A)personal income minus taxes.
B)GNP minus consumption of fixed capital.
C)GDP plus consumption of fixed capital.
D)national income plus consumption of fixed capital.
Q2) Changes in business inventories will be negative when
A)production exceeds sales.
B)production is less than sales.
C)a trade surplus exists.
D)a budget surplus exists.
Q3) Suppose exports are less than imports.Given this information,we know with certainty that
A)a trade deficit exists.
B)GNP > GDP.
C)GNP < GDP.
D)the change in business inventories is positive.
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