Principles of Macroeconomics Study Guide
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Course Introduction
Principles of Macroeconomics introduces students to the foundational concepts and theories that explain the functioning of an economy as a whole. The course covers major topics such as supply and demand, national income, gross domestic product (GDP), unemployment, inflation, monetary and fiscal policy, and the role of government in economic stabilization. Students gain an understanding of how economic indicators are measured and analyzed, how markets interact on a national and global scale, and how policy decisions impact overall economic performance and societal welfare. The course provides essential tools for analyzing current economic issues and developing informed perspectives on economic policy debates.
Recommended Textbook
Macroeconomics 2nd Edition by Charles I. Jones
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Chapter 1: Introduction to Macroeconomics
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Q1) Which of the following does macroeconomics not endeavor to answer?
i.Why is the typical person in the United States today more than ten times richer than the typical person a century ago?
ii.Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years?
iii.Why has the price of orange juice risen sharply?
A)ii and iii
B)i only
C)ii only
D)i,ii,and iii
E)iii only
Answer: E
Q2) The three main variables we discuss in the short run are:
A)economic fluctuations;interest rates;unemployment.
B)economic fluctuations;inflation;money.
C)economic fluctuations;inflation;unemployment.
D)interest rates;money supply;taxes.
E)economic fluctuations;interest rates;money.
Answer: C
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Chapter 2: Measuring the Macroeconomy
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Q1) The price level can be derived as __________ and is called the __________.
A)Price level = Nominal GDP ÷ Real GDP;CPI
B)Price level = Nominal GDP \(\times\)Real GDP;CPI
C)Price level = Real GDP \(\times\)Nominal GDP;GDP deflator
D)Price level = Real GDP ÷ Nominal GDP;GDP deflator
E)Price level = Nominal GDP ÷ Real GDP;GDP deflator
Answer: E
Q2) To get a more accurate view of the size of countries' economies,we first need to convert each country's GDP to the dollar using __________ and then adjust for
A)the interest rate;the exchange rate
B)the exchange rate;price level differences
C)price level differences;the interest rate
D)the exchange rate;fiscal policy
E)fiscal policy;the exchange rate
Answer: B
Q3) The largest GDP expenditure share historically has been government expenditure.
A)True
B)False
Answer: False
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Chapter 3: An Overview of Long- Run Economic Growth
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Q1) Between 1970 and 1976,Israel's average inflation rate was about 65 percent per year.With that rate of inflation,prices would double about every __________ using the rule of 70.
A)93 years
B)107.7 years
C)0.95 years
D)1.1 years
E)9.3 years
Answer: D
Q2) The compression of the vertical axis at "key doubling points" is called:
A)the quadratic scale.
B)the logarithmic scale.
C)the exponential scale.
D)the ratio scale.
E)the geometric scale.
Answer: D
Q3) Economic growth is defined as the percentage change in per capita income or GDP.
A)True
B)False
Answer: True
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Chapter 4: A Model of Production
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Sample Questions
Q1) Consider Figure 4.2.The shape of this production function suggests:
A)a constant marginal product of capital.
B)a diminishing marginal product of capital.
C)a diminishing marginal product of labor.
D)an increasing marginal product of capital.
E)Not enough information is given.
Q2) Suppose the payments to capital and labor are (w*L*)/Y* = 2/3 and (r*L*)/Y* = 1/3,respectively.One implication of this result is:
A)(w*L*/r*K*)= Y*.
B)w*L* - r*K* = Y*.
C)w*L* \(\times\) r*K* = Y*.
D)w*L* + r*K* = Y*.
E)(w*L*/Y*)(r*K*/Y*)= 0.
Q3) Which of the following does not explain differences in total factor productivity?
A)institutions
B)the labor stock
C)human capital
D)natural resources
E)technology
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Chapter 5: The Solow Growth Model
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Q1) Which of the following best answers the question,Can growth in the labor force lead to overall economic growth?
A)Population growth can produce growth in the Solow model in the aggregate but not in output per person.
B)Total capital and total production can grow as the population of the economy grows.
C)Never-only capital contributes to aggregate economic growth.
D)Population growth can produce growth in the Solow model in the aggregate and in output per person.
E)a and b are correct.
Q2) The endogenous variables in the Solow model are:
A)the capital stock,labor,and output.
B)consumption,investment,the capital stock,labor,and the saving rate.
C)consumption,investment,the capital stock,labor,and output.
D)productivity and the depreciation and saving rates.
E)the capital stock,labor,output,and the saving rate.
Q3) Consider the data in Figure 5.7 which shows the growth rates for three countries which were involved in World War II.How does the basic Solow model explain the trends in growth rates for each of these countries?
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Chapter 6: Growth and Ideas
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Sample Questions
Q1) In monopolistic competition,the price is equal to the marginal cost.
A)True
B)False
Q2) If Canada and Taiwan have the same fraction of researchers and the same knowledge efficiency parameter,but Canada's population is larger,then:
A)Taiwan has a higher per capita output growth rate.
B)Canada has a higher per capita output growth rate.
C)each country's per capita output grows at the same rate.
D)Canada has higher per capita income than Taiwan.
E)Canada's level of income is greater than Taiwan's.
Q3) Suppose Chile and Côte Ivoire have the same fraction of researchers,the same knowledge efficiency parameter,but Chile's population is larger.Chile has a higher per capita output growth rate.
A)True
B)False
Q4) The Romer model relies on increasing returns to ideas and labor.
A)True
B)False
Q5) How does the Romer model of economic growth exploit the concept of nonrivalry?
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Chapter 7: The Labor Market,wages,and Unemployment
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Q1) For most Americans,the length of unemployment is usually less than three months.
A)True
B)False
Q2) Generally,during a recession:
A)inflation rises.
B)the natural rate of unemployment rises.
C)the employment rate rises.
D)the unemployment rate rises.
E)there is no change in the unemployment rate.
Q3) __________ historically has had the lowest unemployment rate since 1960.
A)The United States
B)Japan
C)France
D)The United Kingdom
E)Germany
Q4) The supply of labor curve slopes upward because,with a higher wage,the opportunity cost of leisure rises.
A)True
B)False
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Chapter 8: Inflation
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Q1) If the real GDP growth is 4 percent per year,the money growth rate is 6 percent,and velocity is constant,using the quantity theory,the inflation rate is:
A)6 percent.
B)4 percent.
C)-2 percent.
D)2 percent.
E)-4 percent.
Q2) Often,when discussing inflation,we use the "core rate of inflation," which excludes __________ from its calculation.
A)energy prices
B)food and energy prices
C)housing prices
D)food and housing prices
E)energy and housing prices
Q3) If all goods' prices adjust simultaneously,there will be a short-term misallocation of resources.
A)True
B)False
Q4) Explain how increases in government expenditures can lead to inflation.
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Chapter 9: An Introduction to the Short Run
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Q1) Potential output is defined as __________.
A)the amount of total output if all inputs were utilized at their long-run,sustainable levels
B)what an economy produces when it is at capacity
C)the current level of output
D)the amount of output where inflation is zero
E)none of the above
Q2) Consider Figure 9.1.
A)Area a is where current output is less than potential output,and area b is where current output is greater than potential output.
B)Area a is where current output is greater than potential output,and area b is where current output is less than potential output.
C)Point c is where economic fluctuations are zero,and at point b,the economy is in a boom.
D)At point c,current output equals the short-term fluctuations.
E)Area a is where current output is greater than potential output,and at point c,the economy is in a boom.
Q3) What does the Phillips curve represent?
Q4) How is a recession "officially'' determined?
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Chapter 10: The Great Recession: a First Look
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Q1) Which of the following is not an asset on a bank's balance sheet?
A)loans
B)deposits
C)cash
D)reserves
E)investments
Q2) Between May 2004 and May 2006,the Fed raised the federal funds rate by 4 percentage points due to rising inflation worries.
A)True
B)False
Q3) Given the information in Table 10.2,if reserve requirements are 3 percent and capital requirements are 10 percent the bank meets:
A)reserve requirements,but not capital requirements.
B)neither reserve requirements nor capital requirements.
C)both reserve and capital requirements.
D)capital requirements,but not reserve requirements
E)not enough information
Q4) How does "securitization" reduce overall risk?
Q5) Briefly discuss the macroeconomic outcomes of the financial crisis.
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Chapter 11: The Is Curve
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Q1) Every six weeks,or so,the Federal Reserve meets to set the __________.
A)discount rate
B)mortgage rate
C)federal funds rate
D)10-year bond rate
E)tax rate
Q2) According to Ricardian equivalence,an increase in government expenditure without a proportional tax increase implies that households expect future tax increases and will reduce spending today.
A)True
B)False
Q3) If the real interest rate is less than the marginal product of capital,firms are better off:
A)producing at a loss.
B)saving their earnings in an economywide financial market.
C)accumulating more inventory.
D)borrowing in financial markets and buying more capital.
E)none of the above
Q4) What is the relationship between the real interest rate and the output gap in the IS curve? Explain.
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Chapter 12: Monetary Policy and the Phillips Curve
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Q1) In March and April 1980,inflation in the United States peaked at 14.6 percent.What did then-Fed Chairman Volcker elect to do? What was the impact of his policy?
Q2) Oil prices are closely watched because:
A)they hurt automobile owners.
B)they affect inflation directly.
C)of their impact on stock markets.
D)of their immediate impact on subsidies and taxes.
E)they affect inflation both directly and indirectly.
Q3) If the central bank is targeting the money supply,the money supply is __________ and __________ the nominal interest rate.
A)equal to money velocity;is vertical with respect to B)whatever level is dictated by the president;is horizontal with respect to C)whatever level is dictated by the central bank;is horizontal with respect to D)whatever level is dictated by the central bank;is vertical with respect to E)whatever level is dictated by the central bank;slopes downward with respect to
Q4) What are the mechanics of lowering interest rates?
Q5) The main tool used by the Federal Reserve is the federal funds rate. A)True B)False
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Chapter 13: Stabilization Policy and the Asad Framework
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Q1) Which of the following best describes why the aggregate demand curve slopes downward?
A)If the central bank observes a high rate of inflation,the monetary policy rule dictates an increase in the real interest rate.The high interest rate reduces output by reducing investment demand in the economy.
B)If the central bank observes a low rate of inflation,the monetary policy rule dictates an increase in the real interest rate.The high interest rate reduces output by reducing investment demand in the economy.
C)If the central bank observes a high rate of inflation,the monetary policy rule dictates a decrease in the real interest rate.The low interest rate increases output by reducing investment demand in the economy.
D)If the central bank observes a low rate of inflation,the monetary policy rule dictates a decrease in the real interest rate.The low interest rate reduces output by reducing investment demand in the economy.
E)None of the above is correct.
Q2) Combining the IS and monetary policy curves gives us the aggregate supply curve.
A)True
B)False
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Chapter 14: The Great Recession and the Short-Run Model
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Q1) When a risk premium is added to the short-run model it:
A)shifts the MP curve up.
B)shifts the IS down.
C)shifts the AD curve down.
D)is represented by a movement along the MP curve.
E)c and a
Q2) During the Great Depression,
A)deflation raised the real interest rate.
B)unemployment lowered the nominal interest rate.
C)deflation lowered the real interest rate.
D)unemployment increased the output gap.
E)high interest rates increased inflation.
Q3) In the aftermath of the recent financial crisis,the Fed's assets on its balance sheet grew to include which of the following?
A)term auction credit
B)mortgage backed securities
C)bank reserves.
D)a and b
E)Treasury accounts
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Chapter 15: Consumption
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Q1) If moving an extra unit of future consumption to today's consumption improves your lifetime utility you are not:
A)saving enough.
B)spending all your future income.
C)maximizing your lifetime utility.
D)earning income today.
E)discounting the future.
Q2) If you see low interest rates you(r)___________ and consumption growth
A)save less;slows down
B)expect high rates of inflation;speeds up
C)discount the future more;is constant
D)save more;increases
E)permanent income is constant;is zero
Q3) Household consumption accounts for about ___________ of U.S.GDP.
A)two-thirds
B)one-half
C)one-fourth
D)one-third
E)five-sixths
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Chapter 16: Investment
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Q1) The largest component of physical investment is:
A)nonresidential fixed investment.
B)software.
C)residential investment.
D)changes in inventory.
E)unplanned investment.
Q2) Consider Figure 16.1.If there is an increase in the capital,then curve __________ would shift to curve __________.If the MPK falls,curve __________ would shift to
A)d;c;a;b
B)b;a;c;d
C)c;d;b;a
D)a;b;d;c
E)not enough information
Q3) When John Maynard Keynes said,"An investment in knowledge always pays the best interest," he was referring to investing in government spending.
A)True
B)False
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Chapter 17: The Government and the Macroeconomy
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Q1) If __________ hold(s),then holding the present value of government spending constant,budget deficits will not crowd out investment.
A)adaptive expectations
B)generational accounting
C)crowding in
D)lower interest rates
E)None of the above is correct.
Q2) By issuing bonds to finance a war in the present,in the language of generational accounting,
A)pay no burden to enjoy peace.
B)future generations are paying for the peace they enjoy.
C)past and present generations pay for the peace.
D)only past generations pay for peace.
E)None of the above is correct.
Q3) If the federal government has a budget shortfall,it generally sells some of its real asset holdings to cover the excess outlays.
A)True
B)False
Q4) Explain how budget deficits lead to crowding out.Is there evidence of this?
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Chapter 18: International Trade
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Q1) From the national income identity,
A)the trade balance is equal to the net capital outflow.
B)the trade balance is always greater than the net capital inflow.
C)if there is a trade surplus,there is a net capital inflow.
D)the trade balance equals the federal government's budget balance.
E)None of the above is correct.
Q2) Consider Table 18.1.With free trade in the East,fish consumption _________ and potato consumption __________,compared to autarky.
A)rises;falls
B)rises;stays the same
C)stays the same;rises
D)stays the same;stays the same
E)rises;rises
Q3) According to economic theory,fast-growing countries should be running trade deficits;but the evidence is that,in fast-growing countries,the causality is from exports to growth.
A)True
B)False
Q4) Explain how trade can be used for international risk sharing.
Q5) What has been the trend of trade in the United States since 1950? Explain.
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Chapter 19: Exchange Rates and International Finance
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Q1) The real exchange rate measures:
A)the number of foreign goods required to purchase a single unit of a domestic good.
B)the amount of foreign currency you can get for one unit of domestic currency.
C)the number of foreign goods one unit of domestic currency can buy.
D)the value of foreign currency denominated in domestic prices.
E)the relationship between foreign and domestic inflation.
Q2) Use the aggregate supply/aggregate demand model in Figure 19.4 to answer the following scenario.The European central bank reduces its interest rates,while the Federal Reserve maintains its federal funds rate.The economy initially moves from point __________ to point __________.
A)a;d
B)c;d
C)b;c
D)a;b
E)a;c
Q3) The Mexican peso crisis was precipitated,in part,by political turmoil.
A)True
B)False
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Chapter 20: Parting Thoughts
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Q1) In the long run,the classical dichotomy holds;there is no trade-off between inflation and unemployment.
A)True B)False
Q2) As a country devotes more of its resources to education,we can expect output to stay constant for all time.
A)True B)False
Q3) In the long run,real GDP is determined by very low rates of unemployment.
A)True B)False
Q4) The credibility of the central bank
A)promotes long-run growth.
B)is irrelevant for controlling inflation.
C)is crucial for controlling inflation and stabilizing output.
D)promotes sensible fiscal policy.
E)implies low interest rates.
Q5) Standards of living in the long run have been improved by higher inflation. A)True B)False
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