International Macroeconomics
Midterm Exam
Course Introduction
International Macroeconomics explores the dynamics of economies on a global scale, focusing on the interactions between national economies through trade, capital flows, exchange rates, and international monetary systems. The course examines balance of payments, determinants of exchange rates, the role of international organizations, and the effects of macroeconomic policies in open economies. Students will analyze current global economic events, understand models of open-economy macroeconomics, and assess the impacts of globalization and international policy coordination on economic stability and growth.
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) 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
Q2) Inflation represents
A)an increase in output.
B)an increase in the aggregate price level.
C)an increase in the unemployment rate.
D)a recession.
Answer: B
Q3) In 2014 ,the U.S.GDP accounts for ________ of world output.
A)20%
B)23%
C)45%
D)50%
Answer: B
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Chapter 2: A Tour of the Book
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Q1) Explain how the existence of discouraged workers alters the extent to which the official unemployment provides an accurate measure of the use of labor resources.
Answer: Discouraged workers are those individuals who have decided to stop searching for employment because they have become "discouraged" about employment opportunities.At some point,these individuals will no longer be considered as part of the labor force.The existence of discouraged workers will cause the official unemployment rate to provide an under-estimate of the underutilization of labor.
Q2) Explain the difference between the unemployment rate and the participation rate.
Answer: The unemployment rate is the percentage of the labor force (those employed and unemployed)that is unemployed.The participation rate is the percentage of the working age population that is in the labor force.
Q3) Explain Okun's Law.
Answer: It shows the relationship between GDP growth and unemployment rate.If output growth is high,unemployment will decrease.
Q4) Explain why the Phillips curve on average is downward sloping.
Answer: When unemployment becomes very low,the economy is likely to overheat and this will lead to upward pressure on inflation.
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Chapter 3: The Goods Market
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Q1) Why would consumer decrease consumption even if their disposable income has not changed?
Answer: If consumers start worrying about the future and decide to save more,they will decrease c0 and hence consumption.This is what happened at the start of the most recent financial crisis.
Q2) An increase in the marginal propensity to save from .1 to .2 will cause
A)an increase in the multiplier and a given change in autonomous consumption (c )to have a smaller effect on output.
B)an increase in the multiplier and a given change in autonomous consumption (c )to have a larger effect on output.
C)a reduction in the multiplier and a given change in autonomous consumption (c )to have a smaller effect on output.
D)a reduction in the multiplier and a given change in autonomous consumption (c )to have a larger effect on output.
Answer: C
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) When a liquidity trap situation exists,we know that
A)an open market operation will have no effect on the supply of money.
B)an open market operation will have no effect on the monetary base.
C)fiscal policy will have no effect on the demand for goods.
D)expansionary monetary policy will be deflationary.
E) none of the above
Q2) If individuals do not hold currency,we know that
A)M = D.
B)H = R.
C)the money multiplier is 1 / .
D)all of the above
Q3) Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950.Given this information,we know that the interest rate on the bond is A)5.3%.
B)9.5%.
C)10%.
D)90%.
E) 110%.
Q4) What is the difference between saving and savings?
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Chapter 5: Goods and Financial Marketsthe Is-Lm Model
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Q1) Use the IS-LM model to answer this question.Suppose there is a simultaneous increase in government spending and reduction in the money supply.Explain what effect this particular policy mix will have on output and the interest rate.Based on your analysis,do we know with certainty what effect this policy mix will have on investment? Explain.
Q2) Based on our understanding of the IS-LM model that takes into account dynamics,we know that a reduction in the money supply will cause
A)an immediate drop in Y and immediate increase in i.
B)an immediate increase in i and no initial change in Y.
C)a gradual increase in i and gradual reduction in Y.
D)none of the above
Q3) Suppose there is a simultaneous central bank sale of bonds and tax increase.We know with certainty that this combination of policies must cause
A)an increase in the interest rate (i).
B)a reduction in i.
C)an increase in output (Y).
D)a reduction in Y.
Q4) First,define the LM curve.Second,explain why it has its particular shape.
Q5) Graphically derive the IS curve from the goods market equilibrium.
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Chapter 6: Financial Markets Ii: the Extended Is-Lm Model
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Q1) The Case-Shiller index reached its peak in
A)2006.
B)2007.
C)2005.
D)2008.
Q2) The first structured investment vehicle (SIV)was set up by ________ in 1988.
A)J)P. Morgan
B)Chase
C)Citigroup
D)Goldman Sachs
Q3) Although the FDIC was created to prevent bank failures,its existence encourages banks to
A)take too much risk.
B)hold too much capital.
C)open too many branches.
D)buy too much stock.
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Chapter 7: The Labor Market
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Q1) Suppose the aggregate production function is given by the following: Y = AN.Given this information,we know that labor productivity is represented by which of the following?
A)1 / A
B)A
C)1 / N
D)N / Y
Q2) First,explain what the PS relation represents.Second,explain why it has its particular shape.
Q3) With the real wage on the vertical axis and employment (N)on the horizontal axis,we know that
A)the WS curve is upward sloping.
B)the WS curve is downward sloping.
C)the PS curve is upward sloping.
D)the PS curve is downward sloping.
Q4) Explain why nominal wages are a function of the expected price level.
Q5) Explain several implications and characteristics of efficiency wage theories.
Q6) Explain what effect a reduction in the unemployment rate will have on the real wage based on: (1)the WS relation; and (2)the PS relation.
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Chapter 8: The Phillips Curve, the Natural Rate of Unemployment, and Inflation
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Q1) The data suggest that in the European Union countries,the natural rate of unemployment
A)is now higher than in the U.S.
B)is no longer a relevant concept.
C)has steadily declined over the past two decades.
D)will soon exceed the percentage of the labor force that is working.
E) has become less "natural," since it is now almost entirely determined by the policies of a few large corporations.
Q2) Which of the following individuals first discovered the relationship between unemployment and inflation for the United States?
A)Solow and Friedman
B)Samuelson and Solow
C)Friedman and Phillips
D)Friedman and Phelps
Q3) How will the crisis affect the natural rate of unemployment?
Q4) Explain how the unexpectedly high rate of productivity growth at the end of the 1990s affected inflation and unemployment during this period.
Q5) Why has the U.S.natural rate of unemployment fallen since the early 1990s?
Q6) Explain what is meant by the "wage-price" spiral.
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Q1) For this question,assume that the economy is initially operating at the natural level of output.An increase in consumer confidence will cause
A)a reduction in the real wage in the medium run.
B)an increase in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.
Q2) 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
Q3) When a government reduces its deficits by increasing taxes,in the medium run, A)output returns to potential.
B)output increases.
C)interest rate is higher.
D)IS curve shifts inward to the left.
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) Given the broadest interpretation of technology,technology will include which of the following?
A)how well firms are run
B)the organization and sophistication of markets
C)the political environment
D)the list of blueprints defining the types of products and the techniques available to produce them
E) all of the above
Q2) Briefly explain what effect an increase in the saving rate will have on growth.
Q3) If output per capita grows by a constant 5% per year,then the standard of living would grow by about ________ over 3 years.
A)12%
B)16%
C)17%
D)18%
E) 20%
Q4) Convergence refers to what phenomenon regarding growth theory?
Q5) Explain each of the following: (1)constant returns to scale; (2)decreasing returns to capital; and (3)decreasing returns to labor.
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Chapter 11: Saving, capital Accumulation, and Output
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Q1) Graphically illustrate and explain the effects of a decrease in the rate of depreciation ( )on the Solow growth model.In your graph,clearly label all curves and equilibria.
Q2) Suppose the following situation exists for an economy: Kt / N = Kt / N.Given this information,we know with certainty that
A)the economy is operating at the golden rule equilibrium in period t.
B)saving per worker is less than depreciation per worker in period t.
C)saving per worker is greater than depreciation per worker in period t.
D)investment per worker equals depreciation per worker in period t.
Q3) Suppose the following situation exists for an economy: Kt / N > Kt / N.Given this information,we know that
A)saving per worker equals depreciation per worker in period t.
B)saving per worker is less than depreciation per worker in period t.
C)saving per worker is greater than depreciation per worker in period t.
D)the saving rate fell in period t.
E) none of the above
Q4) Graphically illustrate and explain the effects of a decrease in the saving rate on the Solow growth model.In your graph,clearly label all curves and equilibria.
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Chapter 12: Technological Progress and Growth
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Q1) Which of the following will cause an increase in the steady-state growth rate of output per worker?
A)an increase in the saving rate
B)a reduction in the population growth rate
C)a reduction in the rate of depreciation
D)a reduction in the saving rate
E) none of the above
Q2) Which of the following best describes a situation where research is considered relatively fertile?
A)research that translates into many new products
B)research that costs the firms relatively little money
C)research that cannot be easily copied by other firms
D)all of the above
E) none of the above
Q3) Graphically illustrate and explain the effects of an increase in the rate of technological progress 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 the rate of technological progress.
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Chapter 13: Technological Progress: the Short, the Medium, and
the Long Run
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Q1) Explain some of the causes of increased wage inequality.
Q2) Since 1971,the annual growth rate of real wages has been
A)remarkably high.
B)positive, but low.
C)zero.
D)negative.
E) impossible to measure accurately, and so has not been reported.
Q3) For this question,assume that expectations of P and A are correct.Based on price setting behavior,the real wage will be equal to which of the following?
A)A / (1 + m)
B)AP / (1 + m)
C)APF(u,z)
D)P(1 + m)
E) none of the above
Q4) For this question,assume that expectations of productivity growth adjust slowly.Now,suppose that there is a 3% reduction in productivity.Explain how this 3% reduction in productivity can cause changes in the unemployment rate.
Q5) Explain how technological change can cause changes in wage inequality.
Page 15
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Chapter 14: Financial Markets and Expectations
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Q1) Suppose an increase in government spending occurs that is at least partially unexpected.Explain what effect this will have on stock prices.
Q2) Which of the following bonds (of equal maturity)would have the largest risk premium?
A)U)S. government bonds
B)German government bonds
C)the bonds of a financially stable corporation, like IBM
D)Bondsbrated Aaa by Moody's
E) junk bonds
Q3) A share of stock will pay a dividend of $25 in one year,and will be sold for an expected price of $500 at that time.If the current one-year interest rate is 5%,the current price of the stock will be approximately equal to
A)$100.
B)$475.
C)$500.
D)$525.
E) none of the above
Q4) Explain what is meant by the fundamental value of a share of stock.
Q5) Explain what the term structure of interest rates represents.
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Chapter 15: Expectations, consumption, and Investment
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Q1) Which of the following events would likely cause the largest increase in current consumption?
A)a permanent increase in annual salary of $2000
B)a one-time tax cut of $4000
C)a one-time increase in income (e.g. a bonus)of $4000
D)both B and C
Q2) Suppose individuals expect future output to be higher and future interest rates to be higher.Given this information,how will individuals alter consumption in the current period? Explain.
Q3) Explain each of the determinants of the present value of expected profits from a buying a new machine.
Q4) A reduction in which of the following variables will cause a reduction in the user cost of capital?
A)rt
B) t
C) t
D)all of the above
E) none of the above
Q5) Explain how expectations affect consumption.
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Chapter 16: Expectations, output, and Policy
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Q1) Suppose the central bank implements a monetary contraction in the current period and is expected to continue this monetary contraction in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.
Q2) Suppose individuals now believe that there will be a future tax increase.This increase in expected future taxes will cause which of the following to occur in the current period?
A)the LM curve to shift down
B)the LM curve to shift up
C)the IS curve to shift rightward
D)the IS curve to shift leftward
E) none of the above
Q3) Suppose there is a reduction in expected future output.This will cause which of the following to occur?
A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period
Q4) Explain the determinants of aggregate private spending.
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Chapter 17: Openness in Goods and Financial Markets
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Q1) When the dollar depreciates relative to the pound,the pound price of the dollar
A)increases.
B)decreases.
C)does not change.
D)increases or decreases, depending on the amount of the depreciation.
E) changes in the next period.
Q2) From the perspective of the United States,a reduction in the nominal exchange rate will cause which of the following?
A)The dollar becomes more expensive to foreigners.
B)Foreign goods are less expensive to Americans.
C)Foreign currency is less expensive to Americans.
D)American goods are less expensive to foreigners.
E) none of the above
Q3) Suppose there is a real depreciation of the dollar.Which of the following may have occurred?
A)foreign currency has become more expensive in dollars.
B)foreign goods have become more expensive to Americans.
C)the foreign price level has increased relative to the U.S. price level.
D)all of the above
E) none of the above
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Chapter 18: The Goods Market in an Open Economy
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Q1) Assume a country is closed.Given this information,which of the following must occur?
A)demand for domestic goods will be less than the domestic demand for goods
B)demand for domestic goods will be greater than the domestic demand for goods
C)S + T = I + G
D)a budget surplus exists
E) S = I
Q2) A change in which of the following variables will have no direct effect on the level of domestic demand?
A)domestic income
B)the real exchange rate
C)government spending
D)the interest rate (r)
E) none of the above
Q3) Explain why in practice policy coordination is hard to achieve.
Q4) The J-curve illustrates the effects of
A)changes in Y* on NX.
B)changes in Y on NX.
C)changes in the real exchange rate on NX.
D)changes in Y on imports.
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Chapter 19: Output, the Interest Rate, and the Exchange Rate
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Q1) Assume that the interest parity holds and that the dollar is expected to depreciate against the pound.Given this information,we know that
A)U)S. and U.K. interest rates are equal.
B)the U.S. interest rate exceeds the U.K. interest rate.
C)the U.K. interest rate exceeds the U.S. interest rate.
D)individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K. interest rate.
E) none of the above
Q2) For this question,assume that policy makers are pursuing a fixed exchange rate regime.Now suppose a budget is passed that calls for a reduction in government spending.This reduction in government spending will cause which of the following to occur?
A)a reduction in i and an increase in E
B)a reduction in investment
C)no change in output
D)no change in net exports
E) an increase in imports
Q3) To what extent can monetary policy be used to affect output in a fixed exchange rate regime? Explain.
Page 21
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Chapter 20: Exchange Rate Regimes
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Q1) 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.
Q2) Does Europe constitute an optimal common currency area? Why?
Q3) Explain why exchange rates are more volatile than is suggested by the relatively simply interest parity condition presented earlier in the course.
Q4) Under the Gold Standard,
A)exchange rates could float.
B)real interest rates were fixed.
C)real exchange rates were fixed.
D)nominal interest rates were fixed.
E) none of the above
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Chapter 21: Should Policy Makers Be Restrained
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Q1) Which of the following was one of the main rules in the 1990 "Budget Enforcement Act"?
A)flat tax rate
B)spending caps
C)indexation of income tax brackets
D)consumption tax
E) none of the above
Q2) Wars of attrition arise in which of the following contexts?
A)fiscal policy
B)deficit reduction
C)hyperinflation
D)all of above
E) A and B
Q3) During republican presidential administration since 1948,economic growth was highest in ________ year of the administration?
A)first
B)second
C)third
D)fourth
Q4) What are the main rules of the Budget Enforcement Act of 1990?
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Chapter 22: Fiscal Policy: a Summing up
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Q1) "Debt repudiation" occurs when
A)a government announces it will no longer run nominal deficits.
B)a government announces it will no longer run real deficits.
C)a government announces it will no longer honor its debt obligations.
D)a central bank will no longer monetize the debt.
Q2) Explain seignorage.
Q3) Explain "haircuts" when a government defaults its debt.
Q4) The United States financed the additional government spending during World War II through
A)an increase in the deficit.
B)an increase in taxes.
C)an increase in imports.
D)increases in both the deficit and taxes.
E) increases in both the deficit and imports.
Q5) Suppose the Ricardian Equivalence proposition holds (i.e.,it is correct).What does this imply about the ability of fiscal policy to affect GDP? Explain.
Q6) What are the factors that will determine the size of some future required tax increase to pay off all debt?
Q7) Explain what can occur to cause an increase in the debt ratio.
Page 24
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Chapter 23: Monetary Policy: a Summing up
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Q1) In the United States,day-to-day decisions about monetary policy are carried out by
A)the Board of Governors.
B)the Chairman of the Board of Governors.
C)the Federal Open Market Committee.
D)the Open Market desk in New York.
E) none of the above
Q2) Discuss and explain each of the instruments of monetary policy.
Q3) Suppose an economy experiences an increase in inflation.Explain the possible macroeconomic benefits of this increase in inflation.
Q4) In the medium run,a reduction in inflation causes
A)a reduction in the opportunity cost of holding money.
B)an increase in the opportunity cost of holding money.
C)no change in the opportunity cost of holding money.
D)individuals to switch from holding money to bonds and reduce their real money balances.
Q5) What are the factors that will determine the optimal inflation rate?
Q6) What are some of the questions about the macro prudential tools?
Q7) Discuss the current debate on the optimal inflation target.
Q8) Discuss the relationships among the various monetary aggregates.
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Chapter 24: Epilogue: the Story of Macroeconomics
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Q1) The more staggered are labor contracts,
A)the more rapidly the economy will adjust to changes in aggregate demand.
B)the less rapidly the economy will adjust to changes in aggregate demand.
C)the greater the inflationary effects of a given change in money growth in the medium run.
D)the less inflationary effects of a given change in money growth in the medium run.
Q2) As the IS curve becomes steeper,we know that
A)a given change in the money supply will cause a larger change in output.
B)a given change in the money supply will cause a smaller change in output.
C)a given change in the money supply will cause the same change in output.
D)monetary policy becomes more effective.
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.
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Chapter 25: Appendix
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Q1) If GDP is less than GNP,we know with certainty that A)a budget deficit exists.
B)a trade surplus exists.
C)a trade deficit exists.
D)none of the above
Q2) Which of the following problems would lead an economist to use instrument variable methods?
A)The dependent variable has an impact on the independent variable.
B)There are too few quarters of data.
C)There are too many independent variables.
D)The R² is too high.
E) The residuals are too small.
Q3) "Ordinary least squares" is a technique that can be used to A)identify the best model.
B)determine which variables in a model are endogenous and which are exogenous.
C)obtain a bar graph showing successive quarterly increases in output.
D)obtain a line describing consumption behavior in the real world.
E) determine the direction of causation between consumption and income.
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