Principles of Macroeconomics Pre-Test
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Course Introduction
Principles of Macroeconomics introduces students to the fundamental concepts and theories that explain the workings of the economy as a whole. The course covers essential topics such as national income determination, economic growth, unemployment, inflation, fiscal and monetary policy, and international trade. Through the examination of real-world issues and policy debates, students gain a deeper understanding of how major economic forces affect households, businesses, and governments, preparing them to analyze economic events and trends in a global context.
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Macroeconomics 5th Edition by Stephen D. Williamson
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Page 2
Chapter 1: Introduction
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Q1) The U.S. government budget was
A) continuously in surplus from 1959 to the late 1990s.
B) in surplus for most of the period from 1959-1970, but was in deficit for most of the period from 1970 to the late 1990s.
C) in deficit for most of the period from 1959-1970, but was in surplus for most of the period from 1970 to the late 1990s.
D) continuously in deficit from 1959 to the late 1990s.
Answer: B
Q2) A government surplus is
A) when it spends more than its income.
B) when it owes more than what it is owed.
C) when its income is higher than its spending.
D) when it is owed more than what it owes.
Answer: C
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3
Chapter 2: Measurement
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Q1) When a firm produces output,
A) The value of the output produced is included in GDP
B) The firm's output contributes to GDP only to the extent that there is value-added.
C) The firm's output will not count as GDP if it is stored as inventory.
D) The firm's output will not count as GDP if it is exported.
Answer: B
Q2) To study a macroeconomy,we calculate aggregate quantities in real terms because
A) we want to get rid of the illusion of price effects.
B) we want to concentrate on the production of real goods, as opposed to services.
C) it is then easier to take logarithms.
D) it is the only way to reconcile the three approaches to measuring GDP.
Answer: A
Q3) Real GDP values current production at
A) current year prices.
B) the best estimate of next year's prices.
C) the average of price levels over the entire sample period.
D) base year prices.
Answer: D
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Chapter 3: Business Cycle Measurement
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Q1) Macroeconomic forecasting is made more difficult due to the fact that
A) deviations from trend in real GDP are persistent.
B) turning points are hard to predict.
C) there is no regularity in comovements.
D) consumption is smooth.
Answer: B
Q2) If a macroeconomic variable tends to aid in predicting the future path of real GDP,it is said to be a
A) convenient variable.
B) coincident variable.
C) leading variable.
D) lagging variable.
Answer: C
Q3) Which of the following is not a correct characterization of the U.S. business cycle?
A) Employment is procyclical.
B) Consumption is procyclical.
C) Real wages are procyclical.
D) Prices are procyclical.
Answer: D
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Page 5
Chapter 4: Consumer and Firm Behavior: The Work-Leisure
Decision and Profit Maximization
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Q1) A pure positive income shock leads to
A) an increase in leisure and consumption.
B) an increase in leisure and work.
C) an increase in work and consumption.
D) an increase in leisure and taxes.
Q2) The household budget constraint may have a kink because A) there is uncertainty.
B) households prefer diversity.
C) households may substitute consumption for leisure, or the reverse.
D) leisure is limited by the number of available hours.
Q3) When consumption and leisure are both normal goods,after an increase in real dividend income minus taxation,the rational consumer
A) increases consumption and increases labor supply.
B) increases consumption and reduces labor supply.
C) reduces consumption and increases labor supply.
D) reduces consumption and reduces labor supply.
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6
Chapter 5: A Closed-Economy One-Period Macroeconomic Model
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Q1) Fiscal policy refers to a government's choices over its
A) expenditures, taxes, transfers, and borrowing.
B) expenditures, taxes, issuance of money, and borrowing.
C) expenditures, foreign affairs, issuance of money, and borrowing.
D) issuance of money, taxes, environmental regulations, and foreign affairs.
Q2) A competitive equilibrium may fail to be Pareto optimal due to all of the following except
A) inequality.
B) externalities.
C) distorting taxes.
D) non-price-taking firms.
Q3) Much of the writings of Adam Smith are in close agreement with A) the necessity of trade restrictions.
B) the first fundamental theorem of welfare economics.
C) the second theorem of welfare economics.
D) both B and C above.
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7
Chapter 6: Search and Unemployment
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Q1) A decrease in matching efficiency
A) can never happen.
B) is due to a change in the productivity of firms.
C) is not related to sectoral shocks.
D) can explain the shift in the Beveridge curve.
Q2) If N is the working-age population,Q is the labor force,and U is the number of unemployed,then the unemployment rate is measured as A) U/N
B) U/Q
C) U/(N-Q)
D) Q/N
Q3) From 2009 to 2012
A) The Beveridge curve became flat.
B) The Beveridge curve shifted to the right.
C) The Beveridge curve cannot be discerned in the data.
D) The Beveridge curve shifted to the left.
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Chapter 7: Economic Growth: Malthus and Solow
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Q1) One plausible explanation of the U.S. productivity slowdown starting in 1973 is that it was the result of the time needed to adapt to new technology. This explanation would require that
A) workers withdraw from the labor force to learn about the new technology.
B) a large number of new entrants be attracted to the labor force.
C) managers be reluctant to adopt changes.
D) workers time at their jobs be diverted from production to learning the technology.
Q2) Which of the following,if implemented in the Solow growth model,would not lead to a steady state?
A) A higher population growth rate.
B) Decreasing returns to scale in production.
C) A savings rate that decreases as income increases.
D) A constant marginal product of capital.
Q3) The per-worker production function relates output per worker
A) to capital per worker.
B) to the participation rate.
C) to production per worker.
D) in different countries.
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Chapter 8: Income Disparity Among Countries and Endogenous Growth
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Q1) In the endogenous growth model presented in the text,suppose that u represents the fraction of time spent working (as opposed to accumulating human capital)and b represents the efficiency of human capital accumulation. The growth rate of consumption equals
A) u(1 - b) - 1.
B) 1 + b(1 - u).
C) (1 - b)(1 - u).
D) b(1 - u) - 1.
Q2) Which of the following is not a reason for differences in total factor productivity across countries?
A) Differences in the size of population.
B) learning by doing.
C) barriers to the adoption of new technology.
D) inefficient allocation of factors of production across firms in some countries.
Q3) Endogenous growth theory is about
A) welfare of indigenous people.
B) explaining growth.
C) studying education.
D) studying fertility choices.
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Chapter 9: A Two-Period Model: The Consumption-Savings
Decision and Credit Markets
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Q1) A permanent increase in income leads to
A) a small increase in current consumption.
B) a large increase in current consumption.
C) a small decrease in future consumption.
D) a large decrease in future consumption.
Q2) In the basic two-period model,
A) credit markets have frictions.
B) the government borrows at a lower interest rate than do consumers.
C) some consumers will always default on their debts.
D) consumers do not default on their debts.
Q3) The desire to smooth consumption is reflected in A) the consumer's budget constraint.
B) the curvature in a consumer's indifference curves.
C) choice between present and future.
D) the production possibilities frontier.
Q4) For a lender in a (c,c')graph,the optimal consumption bundle is
A) to the left of the endowment point.
B) to the right of the endowment point.
C) on the endowment point.
D) dependent on other factors.
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Chapter 10: Credit Market Imperfections: Credit Frictions,
Crises, and Social Security
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Q1) An interest rate spread is
A) the difference between long-term and short-term interest rates.
B) the difference between nominal and real interest rates.
C) the difference between lending and borrowing interest rates.
D) the difference between public and commercial interest rates.
Q2) In the two-period model,the nature of the asymmetric information is that
A) only the bank knows who the bad borrowers are.
B) only borrowers know whether they are bad or not.
C) only borrowers know the value of their collateral.
D) only banks can value the collateral.
Q3) 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.
Q4) In a fully-funded social security program
A) the young pay for the benefits of the old.
B) the young are forced to save for their own retirement.
C) the young have to buy bonds for the old.
D) the young are forced to save for the retirement of the old.
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Chapter 11: A Real Intertemporal Model with Investment
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Q1) The marginal propensity to consume out of income
A) is larger than one.
B) is equal to one.
C) is smaller than one.
D) varies around one.
Q2) Output supply is increasing in the interest rate because
A) labor demand is increasing in the interest rate.
B) labor demand is decreasing in the interest rate.
C) labor supply is increasing in the interest rate.
D) labor supply is decreasing in the interest rate.
Q3) The intertemporal substitution of leisure effect is used to justify the assumption that current labor supply increases when the
A) current real wage increases.
B) current real wage decreases.
C) real interest rate increases.
D) real interest rate decreases.
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13
Chapter 12: Money, Banking, Prices, and Monetary Policy
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Q1) The supply curve for credit card services is an increasing function of A) the price of credit card services.
B) bank profitability.
C) the real interest rate.
D) the quantity of money.
Q2) The money supply is vertical because
A) prices are indeterminate.
B) prices have no real impact.
C) the money supply is set by policy.
D) prices are counter-cyclical.
Q3) As means of payment currency,credit cards,and debit cards differ according to A) whether they pay interest.
B) whose liability they represent.
C) transactions costs.
D) all of the above.
Q4) Credit cards are not a form of money because A) money needs to be tangible (not virtual).
B) credit cards just extend a loan.
C) credit cards just relate to an account.
D) credit card balances are in fact counted as money.
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Chapter 13: Business Cycle Models with Flexible Prices and Wages
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Q1) The real business cycle model best explains the procyclicality of the nominal money supply by
A) an unpredictable Federal Reserve.
B) exogenous money.
C) endogenous money.
D) uncorrelated money.
Q2) A reduction in financial liquidity,producing deficient liquid assets
A) shifts the output supply curve to the right.
B) shifts the output demand curve to the right.
C) shifts the output supply curve to the left.
D) shifts the output demand curve to the left.
Q3) There are several competing models of the business cycle because
A) none currently captures all facets of the business cycle.
B) they are all rooted in different philosophical traditions.
C) different shocks need different models.
D) they depend on the type of policy that is adopted.
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Chapter 14: New Keynesian Economics: Sticky Prices
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Q1) If prices in the New Keynesian model were perfectly flexible,then
A) there would be a role for monetary policy.
B) the output gap would be positive.
C) the equilibrium real interest rate would be the natural rate of interest.
D) the output gap would be negative.
Q2) A price may be sticky because
A) of monetary policy.
B) of menu costs.
C) of total factor productivity shocks.
D) of the monetary illusion.
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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Q1) In a two-period model with default,if the nation defaults on its debts in the future period
A) there are no consequences.
B) it bears a cost v.
C) collateral is seized.
D) it faces a higher interest rate.
Q2) In a two-period model with production,an anticipated future increase in domestic total factor productivity
A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) has no effect on domestic output and increases the current account surplus.
D) has no effect on domestic output and decreases the current account surplus.
Q3) In a two-period model with production,an increase in current domestic total factor productivity
A) increases domestic output and increases the current account surplus.
B) increases domestic output and decreases the current account surplus.
C) decreases domestic output and increases the current account surplus.
D) decreases domestic output and decreases the current account surplus.
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17
Chapter 16: Money in the Open Economy
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Q1) The balance of payments equals
A) the current account surplus plus the capital account surplus.
B) the current account surplus plus the capital account deficit.
C) the current account deficit plus the capital account surplus.
D) the current account deficit plus the capital account deficit.
Q2) An agreement among countries to adopt a common currency is called a
A) central bank consolidation.
B) currency union.
C) monetary compact.
D) common banking treaty.
Q3) 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.
Q4) The supply of euros is managed by
A) the European Monetary Union.
B) the European Monetary System.
C) the European Central Bank.
D) the European Bank for Reconstruction and Development.
Page 18
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Chapter 17: Money, Inflation, and Banking
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Q1) Salt,for example,as it is used in part of Ethiopia,is an example of A) commodity money.
B) commodity-backed paper currency.
C) barter currency.
D) fiat money.
Q2) The double coincidence of wants problem is solved by A) credit markets.
B) government intervention.
C) the use of money.
D) specialization.
Q3) The founding of the U.S. FDIC was primarily in response to A) serious inflation after the Civil War.
B) the bank panic of 1907.
C) the Great Depression.
D) the Volker recession in 1981-1982.
Q4) Circulating private bank notes
A) have never been used in the United States.
B) were widely used in the Free Banking Era.
C) were widely used in the United States during the Great Depression.
D) are still currently in use in Canada.
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Chapter 18: Inflation, the Phillips Curve, and Central Bank Commitment
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Q1) The time consistency problem implies that
A) the central bank should not commit.
B) central bank commitment is useful.
C) discretion is better than tying your hands.
D) there are problems we cannot solve.
Q2) The Phillips curve shifts because
A) private behavior adapts to monetary policy.
B) expected inflation changes.
C) the central bank attempts to exploit the Phillips curve.
D) all of the above.
Q3) A Phillips curve is
A) the correlation between money growth and the inflation rate.
B) the negative correlation between the unemployment rate and the vacancy rate.
C) the positive observed correlation between the inflation rate and the nominal interest rate.
D) an observed positive correlation between the inflation rate and some measure of aggregate economic activity.
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Page 20