ECON 2006 - Macroeconomics - Final Study Questions

1) In the Phillips curve equation, which of the following will cause an increase in the current inflation 1)
rate?
A) a reduction in the unemployment rate
B) an increase in the expected inflation rate
C) an increase in the markup, m
D) all of these
E) none of these

2) Which of the following assumptions best characterized the assumption about how individuals 2)
formed expectations of inflation by the early 1970s?
A) Expected inflation for the current year was smaller than the previous year's inflation rate.
B) Expected inflation for the current year was less than the previous year's inflation rate.
C) Expected inflation for the current year equal to the average inflation rate over the past five
years.
D) Expected inflation for the current year equal to the average inflation rate over the past ten
years.
E) Expected inflation for the current year was approximately equal to the previous year's
inflation rate.

3) For this question, assume that individuals form expectations of inflation according to the following 3)
equation et = t-1 . From 1970 on, the value of for this equation
A) remained constant at zero.
B) decreased over time and approached zero.
C) increased over time and approached 1.
D) remained constant at negative one.
E) none of these

4) Assume that expected inflation is based on the following: et = t-1 . If = 0, we know that 4)
A) high rates of unemployment will cause steadily declining rates of inflation.
B) the Phillips curve illustrates the relationship between the level of inflation rate and the level
of the unemployment rate.
C) a reduction in the unemployment rate will have no effect on inflation.
D) low rates of unemployment will cause steadily increasing rates of inflation.

5) Suppose policy makers underestimate the natural rate of unemployment. In a situation like this, 5)
policy makers might implement a policy that
A) attempts to maintain output below the natural level of output.
B) results in deflation.
C) attempts to maintain output below the natural level of output and results in deflation
D) results in steadily rising inflation.

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 6) Which of the following will not cause an increase in the natural rate of unemployment? 6)
A) an increase in z
B) an increase in the expected inflation rate
C) a reduction in m
D) an increase in m
E) none of these

7) Which of the following will tend to occur as a result of a reduction in the proportion of a country's 7)
workers who have indexed wages?
A) the unemployment rate will be relatively high.
B) the inflation rate will be relatively low.
C) the unemployment rate will be relatively low.
D) a given change in the unemployment rate will cause a relatively smaller change in the
inflation rate.
E) none of these

8) Suppose policy makers overestimate the natural rate of unemployment. In situations like these, 8)
policy makers will likely implement policies that result in
A) an unemployment rate that is "too low."
B) overly expansionary monetary and fiscal policy.
C) a lower inflation rate than necessary.
D) less unemployment than necessary.
E) a steadily increasing inflation rate.

9) Which of the following does not represent a "labor market rigidity" to which critics refer when 9)
discussing unemployment in Europe?
A) generous unemployment insurance
B) a high degree of employment protection
C) restrictive monetary and fiscal policies
D) relatively high minimum wages
E) none of these

10) Okun's law shows that when the unemployment rate is above the natural rate, 10)
A) output is above potential. B) inflation is higher than expected.
C) inflation is lower than expected. D) output is below potential.

11) The Phillips curve shows that when the unemployment rate is higher than the natural rate, 11)
A) policy rate is higher than expected. B) inflation is lower than expected.
C) policy rate is lower than expected. D) inflation is higher than expected.

12) In the IS-LM-PC model, which of the following is assumed to be exogenous? 12)
A) C B) I C) G D) Y

13) If the output is too low, to achieve the medium run equilibrium, the central bank will 13)
A) increases inflation rate. B) increases policy rate.
C) increase money supply. D) reduces policy rate.

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14) The zero lower bound refers to the situation that 14)
A) real interest rate is 0%.
B) inflation rate is 0%.
C) risk premium is 0%.
D) the lowest the central bank can decrease the nominal policy rate is 0%.

15) When a government reduces its deficits by increasing taxes, in the medium run, 15)
A) interest rate is higher. B) IS curve shifts inward to the left.
C) output returns to potential. D) output increases.

16) The price setting relation is 16)

A) vertical. B) downward sloping.
C) horizontal. D) upward sloping.

17) An increase in the price of oil will cause which of the following in the medium run? 17)
A) no change in the level of output
B) an increase in the unemployment rate
C) a reduction in the interest rate
D) no change in the price level
E) none of these

18) For this question, assume that the economy is initially operating at the natural level of output. An 18)
increase in unemployment benefits will cause
A) ambiguous effects on the real wage in the medium run.
B) a reduction in the real wage in the medium run.
C) no change in the real wage in the medium run.
D) an increase in the real wage in the medium run.

19) The ratio of a country's exports to its GDP must 19)

A) equal the ratio of imports to GDP.
B) be less than one.
C) be greater than one.
D) be larger than the ratio of imports to GDP.
E) none of these

20) Which of the following best defines the real exchange rate? 20)
A) the price of foreign currency in terms of domestic currency
B) the price of foreign bonds in terms of domestic bonds
C) the price of domestic goods in terms of foreign goods
D) the price of domestic currency in terms of foreign currency
E) none of these

21) When the dollar appreciates relative to the pound, the pound price of the dollar 21)
A) does not change.
B) changes in the next period.
C) increases.
D) increases or decreases, depending on the amount of the depreciation.
E) decreases.

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22) From the perspective of the United States, an increase in the nominal exchange rate will cause 22)
which of the following?
A) American goods are more expensive to foreigners
B) foreign goods are more expensive to Americans
C) foreign currency is more expensive to Americans
D) the dollar becomes less expensive to foreigners
E) none of these

23) Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year 23)
interest rate of 5% per year. Ignoring risk and transaction costs, a U.S. investor should invest in
foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is
A) less than 1%.
B) less than 5%.
C) greater than 5%.
D) less than 2%.
E) greater than 2%.

24) When E decreases by 3%, we know that 24)

A) nominal depreciation.
B) a real depreciation will occur if P increases by 3%.
C) a real appreciation will occur if P also falls by 3%.
D) nominal appreciation.

25) For this question, assume that the domestic interest rate is 8% and that the foreign interest rate is 25)
6%. And finally, assume that the domestic currency is expected to depreciate by 3% during the
coming year. Given this information, we know that
A) individuals will only hold domestic bonds.
B) individuals will only hold foreign bonds.
C) individuals will be indifferent about holding domestic or foreign bonds.
D) the interest parity condition holds.

26) When the U.S. has a current account surplus, we know that it is also 26)
A) running a balanced trade account.
B) suffering from negative investment income.
C) lending to the rest of the world.
D) borrowing from the rest of the world.
E) none of these

27) Which of the following represents the domestic demand for goods? 27)
A) C + I + G + X
B) C + I + G + X - M/
C) C + I + G + X + IM
D) C + I + G - IM/
E) C + I + G

28) Which of the following represents the demand for domestic goods? 28)
A) C + I + G
B) C + I + G + X + IM
C) C + I + G + X
D) C + I + G + X - IM/
E) C + I + G - IM

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29) Which of the following is true when a country is experiencing a trade surplus (NX > 0)? 29)
A) Demand for domestic goods is less than the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is equal to the domestic demand for goods.
D) A budget surplus exists.

30) Suppose there is a reduction in foreign output (Y*). This reduction in Y* will cause which of the 30)
following in the domestic country?
A) a reduction in net exports
B) a reduction in output
C) a reduction in consumption
D) all of these
E) none of these

31) For this question, assume that the Marshall-Lerner condition does not hold. A reduction in the real 31)
exchange rate will tend to cause which of the following to occur?
A) a reduction in NX and a reduction in foreign output (Y*)
B) an increase in NX and an increase in Y
C) a reduction in NX and an increase in domestic output (Y)
D) an increase in NX and a reduction in Y
E) none of these

32) Exports will increase when there is 32)

A) a reduction in foreign output.
B) a reduction in domestic output.
C) a reduction in the real exchange rate.
D) all of these
E) none of these

33) Assume that the price levels in two countries are constant. In this situation, we know that 33)
A) the real and nominal exchange rate must move together, changing by the same percentage.
B) the real exchange rate can change, while the nominal exchange rate is constant.
C) the nominal exchange rate will fluctuate more widely than the real exchange rate.
D) the nominal exchange rate can change, while the real exchange rate is constant.
E) neither the real nor the nominal exchange rate can change.

34) In an open economy, we know that individuals must choose between which of the following? 34)
A) domestic goods and foreign currency
B) domestic and foreign bonds
C) domestic bonds and foreign currency
D) foreign goods and domestic currency
E) none of these

35) Assume that the interest parity holds and that the dollar is expected to appreciate against the 35)
pound. Given this information, we know that
A) the U.K. interest rate exceeds the U.S. interest rate.
B) the U.S. interest rate exceeds the U.K. interest rate.
C) U.S. and U.K. interest rates are equal.
D) individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K.
interest rate.
E) none of these

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36) In an open economy under flexible exchange rates, a reduction in the interest rate will cause a 36)
reduction in which of the following?
A) the exchange rate, E
B) investment
C) net exports
D) all of these
E) none of these

37) For this question, assume that there is a simultaneous tax increase and monetary expansion. In a 37)
flexible exchange rate regime, we know with certainty that
A) the exchange rate would decrease and output would increase.
B) the exchange rate would decrease.
C) the exchange rate would increase and output would decrease.
D) the exchange rate and output would both increase.
E) none of these

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Answer Key

1) D
2) E
3) C
4) B
5) D
6) B
7) D
8) C
9) C
10) D
11) B
12) C
13) D
14) D
15) C
16) C
17) B
18) C
19) E
20) C
21) C
22) A
23) D
24) A
25) B
26) C
27) E
28) D
29) B
30) D
31) E
32) C
33) A
34) B
35) A
36) A
37) B