Principles of Macroeconomics
Chapter Exam Questions
Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and tools used to understand the functioning of an economy as a whole. Key topics include national income determination, unemployment, inflation, economic growth, fiscal and monetary policy, international trade, and the role of government in stabilizing the economy. Through analysis of aggregate economic indicators and models, students learn how policy decisions impact broad economic outcomes and develop a framework for interpreting real-world economic events and trends.
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Macroeconomics 4th Edition by Paul Krugman
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2
Chapter 1: First Principles
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Q1) When markets fail:
A)government intervention may help.
B)the market realizes the maximum possible gains from trade given the available resources.
C)there may still be an efficient allocation of resources.
D)no goods and services are produced.
Answer: A
Q2) The problem of determining what goods and services society should produce:
A)exists because we can produce more than we need or want.
B)exists because there are not enough resources to provide all of the goods and services that people want.
C)would not exist if all goods and services were scarce.
D)would not exist if government owned all of the resources.
Answer: B
Q3) Which of the following is an example of individual choice?
A)The government announces plans to ban smoking in all Florida restaurants.
B)Lauren spends her allowance on pillows for her bed.
C)France decides to withhold funding to rebuild Iraq.
D)Africa decides to accept U.S. aid for humanitarian efforts.
Answer: B
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Chapter 2: Economic Models
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Q1) (Figure: Wine and Wheat) Look at the figure Wine and Wheat. If this economy is producing at point A and wants to produce at point B, it must:
A)trade with another country.
B)increase its resources.
C)decrease production.
D)use its existing resources efficiently.
Answer: D
Q2) Mark and Julie are going to sell brownies and cookies for their third annual fundraiser bake sale. In one day, Mark can make 40 brownies or 20 cookies, and Julie can make 15 brownies or 15 cookies. What is Mark's opportunity cost to produce one brownie?
A)1 cookie
B)1 brownie
C)0.5 cookie
D)0.5 brownie
Answer: C
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Chapter 3: Supply and Demand
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Q1) The law of demand implies that:
A)consumers are not responsive to price changes.
B)consumers will buy more at lower prices.
C)sellers will offer more on the market at higher prices.
D)sellers will offer less on the market at lower prices.
Answer: B
Q2) (Figure: Demand for Coconuts) Look at the figure Demand for Coconuts. If there is an increase in preference for coconuts, it will be represented in the figure as a movement from:
A)A to C.
B)B to A.
C)C to A.
D)B to E.
Answer: A
Q3) After graduation many students' demand for used cars decreases. This may be because used cars are considered a normal good to college graduates.
A)True
B)False
Answer: False
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Page 5
Chapter 5: International Trade 5
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Q1) (Figure: The Market for Oranges in South Africa) Look at the figure The Market for Oranges in South Africa. In autarky, the price of oranges in South Africa is P<sub>1</sub>. When the economy is opened to trade, the price falls to P<sub>W</sub>. South Africa will _____ oranges and the volume of trade will equal _____.
A)import; C<sub>T</sub> - Q<sub>T</sub> B)export; C<sub>T</sub> - Q<sub>T</sub>
C)import; Q<sub>1</sub> - Q<sub>T</sub>
D)export; C<sub>T</sub> - Q<sub>1</sub>
Q2) If a nation imports a good when the economy is opened to trade, the domestic price of the good will _____ and domestic consumption will _____.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) A tax on imported goods or services is a: A)quota. B)tariff.
C)nontariff barrier.
D)trade embargo.
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Page 6
Chapter 6: Macroeconomics: the Big Picture
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Q1) The trade balance is the difference between the value of:
A)the trade deficit and the budget deficit.
B)exports and the imports.
C)the exchange rates of two countries that are engaged in international trade.
D)the national debt and the foreign debt.
Q2) With regard to the aggregate price level, economists generally believe:
A)price stability is desirable.
B)inflation is worse than deflation.
C)deflation is worse than inflation.
D)inflation benefits most retired people.
Q3) (Figure: The Business Cycle) Look at the figure The Business Cycle. Point B on this graph shows a(n):
A)peak.
B)trough.
C)expansion.
D)recession.
Q4) Explain what is meant by the paradox of thrift.
Q5) Fiscal policy entails changes in the quantity of money or the interest rate.
A)True
B)False
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Chapter 7: Gdp and Cpi: Tracking the Macroeconomy
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Q1) If nominal GDP of 2012 was higher than nominal GDP of 2011:
A)production in 2012 was higher than production in 2011, while prices remained unchanged.
B)production or prices or both were higher in 2012 than in 2011.
C)prices in 2012 were higher than prices in 2011, while production remained unchanged.
D)production in 2012 went down and prices increased.
Q2) In the factor markets:
A)households supply goods and services.
B)households supply resources.
C)firms demand goods and services.
D)firms supply goods and services.
Q3) Which of the following transactions would NOT be counted in GDP?
A)Nike builds a retail store.
B)Your mother buys a pound of Washington-grown apples.
C)Your mother buys 100 shares of Nike stock.
D)The Indiana state government pays for repair of a damaged bridge over the Wabash River.
Q4) Why do economists bother to compute real GDP? Why can't we just compare nominal GDP from one year to the next?
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Chapter 8: Unemployment and Inflation
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Q1) When labor unions successfully bargain for wage rates that are _____ than the equilibrium wage rate, they may cause _____.
A)lower; frictional unemployment.
B)equal to; shortages in that labor market.
C)higher than; an increase in structural unemployment.
D)higher than; shortages in that labor market.
Q2) When the actual rate of unemployment is equal to the natural rate of unemployment, we conclude that there is no cyclical unemployment.
A)True
B)False
Q3) If the U.S. dollar were replaced with a "new dollar" at an exchange rate of 1 new dollar for 4 old dollars, then an hourly wage of $10 would become an hourly wage of _____ new dollars.
A)2.50
B)6
C)10
D)60
Q4) Explain the difference between shoe-leather costs and menu costs of inflation.
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9
Chapter 9: Long-Run Economic Growth
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Q1) The aggregate production function shows how productivity depends on natural resources and financial capital.
A)True
B)False
Q2) The main reason South Korea has grown so rapidly is that because it was so poor:
A)it could take advantage of international financial aid for poor countries.
B)people left to go to more prosperous countries.
C)it could skip forward, or leapfrog, to use new-generation technology as it developed.
D)it could import highly trained engineers from other countries.
Q3) U.S. real GDP per capita in 2010 was _____ as much per person as in 1900.
A)16%
B)129%
C)46%
D)758%
Q4) In the long run, an increase in saving will generally:
A)reduce the rate of economic growth.
B)leave the rate of economic growth unchanged.
C)increase the rate of economic growth.
D)increase consumption simultaneously.
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Chapter 10: Savings, Investment Spending, and the Financial System
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Q1) All other things unchanged, an increase in demand for loanable funds would most likely be caused by a(n):
A)decrease in expected business opportunities.
B)increase in the market interest rate.
C)increase in corporate income tax rates.
D)increase in government borrowing.
Q2) Borrowers who cannot be served by the stock and bond markets:
A)can use banks for their financing needs.
B)can use the government for their financing needs.
C)are crowded out of the market.
D)must hold all of their assets in liquid form.
Q3) An illiquid asset:
A)cannot be sold.
B)provides the owner no return or income.
C)is a tangible asset.
D)cannot quickly be converted into cash with little loss of value.
Q4) Interest rates decreased during the 1980s because expectations of future inflation were lower.
A)True
B)False
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Chapter 13: Fiscal Policy Appendix Taxes and the Multiplier
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Q1) Changes in the budget balance may be the result of economic policy, or they may be caused by fluctuations in the economy.
A)True
B)False
Q2) If policy makers want to increase real GDP by $100 billion and the marginal propensity to consume is 0.75, they should increase government transfers by $75 billion.
A)True
B)False
Q3) Expansionary fiscal policy includes:
A)decreasing taxes.
B)increasing taxes.
C)increasing the money supply.
D)decreasing government expenditures.
Q4) Sales taxes, property taxes, income taxes, and fees of various kinds:
A)fund government spending at the federal level.
B)provide revenue for state and local governments.
C)are the state governments' least used types of revenue generation.
D)are implicit liabilities.
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Chapter 14: Money, Banking, and the Federal Reserve System
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Q1) Which of the following is TRUE?
A)Currency in circulation is not part of the monetary base.
B)Bank reserves are part of the monetary base.
C)Most of the monetary base consists of checkable deposits.
D)The money multiplier is the ratio of the monetary base to the money multiplier.
Q2) Which of the following is (are) a tool(s) of monetary policy used by the Federal Reserve?
I. open market operations
II. government purchases of goods and services
A)I only
B)II only
C)I and II
D)neither I nor II
Q3) Commodity-backed money is:
A)a medium of exchange with no intrinsic value.
B)equivalent to commodity money.
C)a medium of exchange with alternative economic uses.
D)gold and silver coins used for exchange.
Q4) What caused the savings and loan crisis of the 1980s?
Page 13
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Chapter 15: Monetary Policy
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Q1) In the long run, an increase in the quantity of money:
A)increases real output.
B)increases prices but not long-run output.
C)increases real interest rates.
D)has no effect on the economy.
Q2) Between 1970 and the present, research comparing similar wealthy countries found that increases in the money supply:
A)and increases in the price level were roughly proportional.
B)had little effect on prices.
C)caused large increases in real GDP.
D)caused large decreases in real GDP.
Q3) Usually there is an inverse relationship between the federal funds rate and the output gap.
A)True
B)False
Q4) One advantage of inflation targeting over the Taylor rule is that the central bank's policy can be evaluated by seeing how close to the target actual inflation rates are.
A)True
B)False
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Chapter 16: Inflation, Disinflation, and Deflation
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Q1) As a result of a downturn in the economy, a firm cuts back on workers' hours but does not fire workers. Following Okun's law, this is one reason:
A)the relationship between the output gap and the unemployment rate is positive.
B)the relationship between the output gap and the unemployment is negative and less than a one-to-one relationship.
C)a negative output gap is associated with an unusually low unemployment rate.
D)a positive output gap is associated with an unusually high unemployment rate.
Q2) When the output gap is negative, the actual unemployment rate is:
A)above the natural rate.
B)below the natural rate.
C)equal to the natural rate.
D)The actual and natural unemployment rates are not related to the output gap.
Q3) Irving Fisher argued that deflation is MOST likely to:
A)expand the economy because the cost of goods has fallen.
B)increase aggregate supply.
C)increase aggregate demand.
D)decrease aggregate demand.
Q4) Explain how the output gap is related to the unemployment rate and the natural unemployment rate.
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Chapter 17: Crises and Consequences
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Q1) To put an end to the bank failures during the 1930s President Franklin Roosevelt declared a bank holiday and temporarily closed all banks.
A)True
B)False
Q2) Following a severe banking crisis, the average length of time that it takes the unemployment rate to begin to fall is _____ years.
A)2
B)4.8
C)10.5
D)25
Q3) Before the 2008 financial crisis, shadow banks were:
A)much smaller than depository banks.
B)strictly regulated and therefore offered their customers lower rates of return than depository banks.
C)required to hold more reserves than depository banks.
D)not subject to regulations, such as capital requirements and reserve requirements.
Q4) What caused the banking crises in the 1990s in Finland, Sweden, and Japan?
Q5) Why are banking-crisis recessions so bad?
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Chapter 18: Events and Ideas
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Q1) In a liquidity trap:
A)fiscal policy becomes ineffective because of the high budget deficit.
B)monetary policy becomes ineffective because the nominal interest rate is close to the zero bound.
C)the aggregate price level becomes downwardly sticky.
D)any increase in government spending drives out planned investment spending.
Q2) According to Keynes, changes in business confidence are often responsible for business cycles.
A)True
B)False
Q3) Prior to the 1930s, the _____ model dominated thinking about how the economy worked.
A)Keynesian
B)classical
C)monetarist
D)real business cycle
Q4) A monetarist rule would be to vary the money growth rate between set limits, such as 3% to 5% annual growth.
A)True
B)False
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Chapter 19: Open-Economy Macroeconomics
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Q1) (Scenario: Gizmovia) Look at the scenario Gizmovia. If Gizmovia uses monetary policy to bring the exchange rate for the gizmo to $0.50, it should _____ interest rates by _____ the money supply.
A)decrease; decreasing B)decrease; increasing C)increase; increasing D)increase; decreasing
Q2) (Table: Balance of Payment) Refer to the table Balance of Payments. In this case, the country's balance of payments on goods and services is:
A)$375 billion.
B)-$375 billion.
C)$4,045 billion.
D)$355 billion.
Q3) In the early twenty-first century, the United States has had a current account: A)surplus.
B)deficit.
C)balance equal to zero.
D)deficit and a capital account deficit.
Q4) What are the advantages and disadvantages of fixed and floating exchange rates?
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Chapter 20: Graphs in Economics
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Q1) (Figure: Y = f(X) Look at the figure Y = f(X). The slope of the relation between x and y:
A)is positive and constant.
B)is negative and getting steeper.
C)is positive and getting steeper.
D)is positive and getting flatter.
Q2) Professor Macro wants to use a numerical graph to show the percentage of government spending accounted for by its various components. Which of the following graphs is most suitable for this purpose?
A)bar graph
B)pie chart
C)time-series graph
D)scatter diagram
Q3) In a time-series graph, large changes can be made to appear trivial by:
A)changing the scale of the axes.
B)labeling more intervals.
C)defining the dependent variable.
D)defining the independent variable.
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19
Chapter 21: toward a Fuller Understanding of Present Value
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Q1) Your grandmother has promised you $1,000 when you graduate in two years. At a 6% annual interest rate, you can borrow $890 and pay it all back with your grandmother's gift at graduation.
A)True
B)False
Q2) Your friend wants to borrow $2,000 and pay it back in one year. She is someone who keeps her word. She agrees to repay you $2,080 in one year. The bank annual interest rate is 5%. Which of the following statements is TRUE?
A)You will be financially worse off if you make the loan rather than deposit $2,000 in the bank.
B)You will be financially better off if you make the loan rather than deposit $2,000 in the bank.
C)The present value of $2,080 payable in one year with an interest rate of 5% is $1,904.76, which is less than the value of the $2,000 you have been asked to lend.
D)None of the statements is true.
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