ECN 202: Principles of Economics: Macroeconomics

Midterm 2, Spring 2024

Name__________________________________________________________
Multiple Choice (3.33 points each):
Choose the option that best answers the question or completes the sentence. Mark your response
on the answer sheet.

1. The labor force is defined as:

A) The unemployed population.
B) The employed plus the unemployed.
C) The adult population available for work.
D) The employed population.

2. Unemployment benefits are one example of a(n) _______________ that reduces the size
of fluctuations during the business cycle.
A) automatic stabilizer
B) paradox of thrift
C) hidden attribute
D) moral hazard

3. The profit-maximizing mark-up declines as the number of firms increases. This is

because:
A) The greater the number of firms, the more market power they each have.
B) Too many firms means diseconomies of scale.
C) The lower the individual mark-up, the more firms can share in the profits.
D) The larger the number of firms, the more competitive the system is likely to be.

4. The main weakness of the original Phillips curve is that it ignored:

A) Time.
B) Policymaker preferences.
C) Inflationary expectations.
D) Household preferences.

5. The process by which some jobs are created and some are destroyed as the economy
adopts new technology is known as:
A) long-run growth
B) unemployment benefits
C) the business cycle
D) creative destruction

Version 2 Page 1
6. If the government spends less than it receives in tax revenue it has a budget __________
and the government debt will _________.
A) surplus; increase
B) deficit; decrease
C) surplus; decrease
D) deficit; increase

7. The budget deficit refers to _____ while government debt refers to _____.
A) Firms' borrowing; government borrowing.
B) Households' borrowing; government borrowing.
C) Consumer credit; the national debt.
D) The government's current borrowing requirement; the accumulation of past
government borrowing.

8. Which of the following statements is correct regarding fiscal policy?

A) In a recession the aim of a government fiscal expansion is to over-ride the effects
of automatic stabilizers.
B) Unemployment benefits and taxes automatically increase government spending and
cut taxation in a downturn, while they trim spending and raise taxes in a boom.
These are, therefore, automatic stabilizers.
C) As a family worried about mounting debts should cut spending and save more, so
should an economy adopt austerity measures (increase taxes and reduce spending)
when its debt level is high to restore its public finances to balance.
D) Expansionary fiscal policy (e.g. increasing the government deficit or reducing the
surplus) always has a stabilizing effect for the economy.

9. Which of the following might help to minimize the costs of adapting to new
technology?
A) A poorly developed financial sector.
B) Government re-training schemes for those who lose their jobs.
C) A shortage of skilled labor.
D) Strict regulation of new start-ups.

Version 2 Page 2
Use the following to answer question 10:

10. In the figure shown, a fall in output is caused by a reduction in investment. Which of the
following would help restore output to its original level?
A) An increase in target wealth.
B) An increase in actual wealth.
C) A reduction in autonomous consumption.
D) A tightening of credit conditions.

11. The Consumer Price Index (CPI):

A) Measures the general level of prices that consumers pay for goods and services.
B) Records the price of all goods and services in the economy.
C) Records the price of all goods produced in the domestic economy, including
exports.
D) Measures the rate of inflation.

Version 2 Page 3
Use the following to answer question 12:

12. The figure depicts the long-run adjustment process in the labor market after
technological progress. Based on this information, which of the following statements is
correct?
A) At D firms increase investment, and hence employment, due to the large gap
between the real wage paid and the workers’ wage-setting curve.
B) Lower unemployment at E implies a higher wage required to induce workers to
exert high effort, resulting in the higher real wage at B.
C) The new technology does not cause any increase in unemployment, either in the
short run or in the long run.
D) The adjustment from equilibrium A to the new equilibrium at B is immediate.

Version 2 Page 4
Use the following to answer question 13:

13. The figure shows a plot of unemployment rate vs gross unemployment benefit
replacement rate for the period 2000 to 2012. Based on this information, which of the
following statements is correct?
A) The graph confirms the prediction of the labour market model that higher
unemployment benefit would raise the wage curve, leading to higher
unemployment.
B) Countries that offer generous unemployment insurance schemes can still achieve
low rates of unemployment.
C) Eastern Asian countries achieved low unemployment rates despite having high
unemployment benefit.
D) In considering Nordic countries, it can be concluded that high unemployment
benefit leads to a high unemployment rate.

14. The spending multiplier is likely to be larger during _________ when there are idle
resources and may be smaller during ___________.
A) expansions; recessions
B) booms; busts
C) recessions; expansions
D) expansions; financial crises

Version 2 Page 5
15. Which of the following statements is correct regarding inflation and deflation?
A) Borrowers benefit from deflation as the value of their debt decreases in real terms.
B) (Unexpected) Inflation transfers wealth from lenders to borrowers.
C) Falling prices benefit consumers and are therefore always good for the economy.
D) Any inflation makes it difficult for consumers and firms to attain the message
about scarcity of resources (sent by relative prices) and is therefore always bad for
the economy.

16. Monetary policy can affect aggregate demand and inflation through all of the following
channels EXCEPT:
A) Residential investment
B) The exchange rate
C) Taxes and government spending
D) Expectations/confidence

17. The two goals of monetary policy as enacted by the Federal Reserve are:
A) Economic growth and a rising stock market
B) Low interest rates and low unemployment rate
C) Stable prices and full employment
D) Zero inflation and zero unemployment

18. In the expression for aggregate consumption C = C0 + C1Y, C1 is known as:

A) The marginal propensity to consume.
B) The multiplier.
C) The average propensity to consume.
D) Autonomous consumption.

Version 2 Page 6
Use the following to answer question 19:

19. Of the six countries in the graph, the country with the smallest (absolute value) Okun's
coefficient is:
A) Brazil
B) Spain
C) United States
D) Japan

20. If the nominal interest rate is 1% and inflation is 3%, then the real interest rate is:
A) -2%
B) 2%
C) 4%
D) 0%

Version 2 Page 7
Use the following to answer question 21:

21. The figure shows that in a recession (at point C), there is a ________ bargaining gap
that will lead to ________ inflation.
A) negative; lower
B) positive; lower
C) positive; higher
D) negative; higher

Version 2 Page 8
 22. The correct formula to calculate GDP based on its spending components is:
A) Consumption + Investment + Government Spending + Exports + Imports
B) Consumption + Investment + Government Spending
C) Consumption + Government Spending + Exports - Imports
D) Consumption + Investment + Government Spending + Exports - Imports

Use the following to answer question 23:

23. According to the Beveridge Curves below for the United States and Germany, for any
given level of the unemployment rate, Germany has ___________ job vacancies
compared to the United States.
A) the same
B) no
C) fewer
D) more

24. Okun's Law describes the relationship between GDP growth and the change in
unemployment such that when GDP growth is high:
A) The unemployment rate is rising.
B) The unemployment rate is unrelated to GDP growth.
C) The unemployment rate stays the same.
D) The unemployment rate is falling.

Version 2 Page 9
25. When the economy enters an expansion and inflation is too high, the goal of monetary
policy is to ___________ investment spending by _________ the real interest rate.
A) increase; raising
B) decrease; lowering
C) increase; lowering
D) decrease; raising

26. As the interest rate _________, more projects become profitable and __________
increases.
A) rises; consumer spending
B) falls; consumer spending
C) falls; investment spending
D) rises; investment spending

27. Why is investment spending likely to be more volatile than consumption spending?
A) Interest rates fluctuate.
B) Because firms cannot foresee the future.
C) Because investment depends entirely on 'animal spirits'.
D) Because a large part of consumption spending is on items that cannot be postponed.
('non-discretionary') - food, heating, lighting, shelter, for example.

Version 2 Page 10
Use the following to answer question 28:

28. The figure is a scatter plot of the inflation rate and the unemployment rate for the US for
each year between 1960 and 2014. Based on this information, which of the following
statements is correct?
A) The Phillips curve has shifted up and down as inflationary expectations have
changed.
B) The Phillips curve shifted higher over the period.
C) The central bank can reliably use the Phillips Curve to trade off inflation and
unemployment.
D) The Phillips curve is stable over the years.

Version 2 Page 11
29. While the process of creative destruction does destroy jobs and even whole industries, in
the long run most economies ______________.
A) create more jobs than they destroy
B) destroy more jobs than they create
C) eventually end up with no jobs left for workers.
D) create the same number of jobs as they destroy

30. Inflation is best described as:

A) A rise in some prices.
B) A persistent rise in the general level of prices.
C) Too much money chasing too few goods.
D) Fall in the value of the currency (pound, dollar, euro etc).

Version 2 Page 12