Consider the AS-AD model with an upward sloping AS curve. An increase in the money supply leads
initially to a decrease in output and prices a decrease in output and an increase in prices. an increase in output and unchanged prices an increase in output and a decrease in prices. an increase in output and an increase in prices.
The model of a small open economy with flexible exchange rates in the short run is inconsistent with
the following fact from business-cycle data? Unemployment and output are negatively correlated. Consumption and output are positively correlated. Consumption is more volatile than investment. Investment is more volatile than output. Output is more volatile than investment.
Consider a small open economy with rigid prices in the short-run and a fixed exchange rate. How
can the central bank maintain a fixed exchange rate after a fall in the world interest rate? Increase the nominal interest rate. Increase the money supply Increase government spending to increase output. Decrease the monetary base. Sell bonds in an open market operation.
The IS curve is negatively sloped because Lower interest rates lead to more investment and, thus, higher planned expenditure. Lower interest rates lead to less investment and, thus, less output. Higher interest rates lead to more investment and, thus, less actual expenditure. Lower interest rates imply more money demand and, thus, a higher equilibrium income. Higher interest rates imply more money demand and, thus, a higher equilibrium output.
Consider a small open economy in the long run. Suppose the world interest rate rises. As a result, investment decreases and net exports increase. investment decreases and net exports are unchanged. investment decreases and net exports fall. investment and output rise. investment is unchanged and output rises.
Consider a country producing a final good with capital and labor, Y = F(K;L) = K^0:5L^0:5. The
capital depreciation rate is 0.03, the population growth rate is 0.02, and the current savings rate is 0.1.
In the Golden rule steady state, investment per worker equals 4. 5. 0.5 2 10.
In the closed economy IS-LM model, an increase in taxes implies that national savings and investment increase. national savings and investment decrease. national savings increase and investment decreases. national savings decrease and investment increases. national savings and investment are unchanged.
Consider a small open economy with fixed exchange rates in the short run. Suppose total world
savings increase. As a result, investment and consumption increase and net exports decrease. investment and output increase and net exports are unchanged. investment, output and net exports decrease. investment and output decrease and net exports increase. investment and net exports increase output is unchanged.
In the closed economy IS-LM model, a purchase of government bonds by the central bank implies
that national savings are unchanged and investment increases. national savings and investment increase. national savings increase and investment decreases. national savings decrease and investment increases national savings and investment decrease.
Suppose the United States enters a recession and output falls by 3 percent. According to past experiences
what do you expect? Employment to remains constant Aggregate consumption and investment to fall by more than 3 percent. Aggregate investment to fall by more that 3 percent, and consumption to fall by almost 3
percent. Aggregate investment to fall by less that 3 percent, and consumption to fall by more than 3
percent Aggregate investment and consumption to fall by around 3 percent.
Consider the Keynesian-cross and IS-LM model. An increase in government spending leads to a
:::::::::: increase in output in the Keynesian-cross than in the IS-LM model because the crowding-out
effect is :::::::::::: in the IS-LM model. smaller, smaller larger, smaller. larger, larger. same, same. smaller, larger.
Suppose, different from the standard model, money demand depends only on the real interest rate
and not on output. In the context of the IS-LM model, fiscal policy becomes :::::::: effective in changing
output because :::::::: more, the central bank is forced to use an interest rate target. more, consumption responds stronger to a given change in disposable income. less, the LM curve becomes vertical. less, the interest rate response is stronger. more, there is no crowding-out effect.
Consider the long-run classical closed economy with consumption depending only on disposable
income. Assume that as a result of pessimism about the future, investment demand falls. As a result
the real interest rate :::::::: and the equilibrium level of investment is ::::::::::. falls, unchanged. unchanged, unchanged. falls, higher falls, lower unchanged, higher.
Suppose private consumption is given by C = C+0:6(Y -T). In the Keynesian-cross, a simultaneous
increase in government spending and taxes by 3 Euros implies that output increases by 7.5 Euros. output increases by 4.5 Euro. output increases by 3 Euros. output increases by 1.8 Euros. output does not change.
During a year, Commoria, a closed economy, has a level of real private consumption of 5, real investment
of 3, and real government spending of 2. Moreover, the price level is 2 and the velocity of money
is equal to 2. Hence, the quantity of money is 15 5 20 10 25.
Consider a small open economy with flexible exchange rates in the short run. Suppose that real
money demand depends negatively on the real interest rate and, differently from the standard model,
positively on disposable income: M/P = L(Y - T; r). Hence, an increase in taxes leads to an increase in net exports and output. unchanged net exports and an increase in output. a decrease in net exports and output an increase in net exports and a decrease in output a decrease in net exports and an increase in output.
Consider the IS-LM model. Suppose there are two identical economies. The only difference is that
economy A has a higher sensitivity of money demand with respect to the interest rate. As a result, an
increase in government spending leads to a smaller reduction in national savings in economy B. a smaller reduction in national savings in economy A. an equal reduction in national savings in both economies an equal increase in the interest rate in both economies an equal increase in consumption in both economies.
The government increases spending by 300 units. If the investment function is I(r) = 500 -10 r (r is
in percentage terms and Ç=change), in the long-run classical economy, we should expect: Ç*I = 0, Çr = 0%. ÇI = 300, Çr = -30%. ÇI = -300, Çr = 30%. ÇI = -300, Çr = -30%. ÇI = 0, Çr = 30%.
Suppose the fear of a financial crisis increases the demand for currency in a closed economy. In the
short run equilibrium of the money market this leads to lower interest rates and a right shift of the LM curve. higher interest rates and a left shift of the LM curve. unchanged interest rates and a left shift of the LM curve higher interest rates and a right shift of the LM curve lower interest rates and a left shift of the LM curve.
Consider an economy that produces output according to Yt = (EtLt)^0:5K^0:5
t , where K is the capital stock, L is the quantity of labor, and E is the efficiency of labor. Suppose the growth rate of labor is
n = 0:01, the growth rate of technology is g = 0:01, and the rate of capital depreciation is d = 0:03.
Moreover, the exogenous savings rate of the economy is 0.2. Suppose the current capital stock per
efficient worker is equal to 4 and Et = 2. Then, the current real wage equals :::::::, and, next period,
the real wage will grow with rate :::::::. 2, 0.01 2, more than 0.01. 4, 0.01. 4, 0. 4, less than 0.01.
Consider a closed economy. The investment function is given by I = 100, the consumption function
is given by C = 1000+0:5(Y -T), government spending and taxes are equal to 100, and the demand
for real money balances is given by M/P = 0:5Y - 3r. In this economy, the AS curve is vertical. AS curve is horizontal. AD curve is vertical. AD curve is horizontal. AS and AD curve are vertical.
Consider the long run in a small open economy model with flexible exchange rates. Suppose the
central bank decreases the discount rate. As a result, domestic prices increase. The nominal exchange rate (amount of foreign per domestic currency)
is unchanged. domestic prices decrease. The nominal exchange rate (amount of foreign per domestic currency)
is unchanged. domestic prices increase, and the nominal exchange rate (amount of foreign per domestic
currency) decreases the real interest rate decreases and net exports rise. the real interest rate decreases and net exports fall.
5.
A cup of coffee costs 2 Dollars in the US and 1.5 Euros in the Euro zone. When the nominal exchange
rate is 1.1 Dollars per Euros, then: the Euro is undervalued relative to the Dollar (in terms of PPP). the Euro should depreciate against the Dollar to satisfy PPP. the Euro is overvalued relative to the Dollar (in terms of PPP). the Euro is fairly valued against the Dollar (in terms of PPP). the Dollar should appreciate against the Euro to satisfy PPP.
Assume the economy is currently in its long-run equilibrium and the government of a closed economy
raises taxes by 500 units. According to the AS-AD model with an upward sloping AS curve, this leads
initially to a ::::::::: in prices and output. To reach the new long-run equilibrium, prices :::::::: and
investment :::::::::. decrease, keep decreasing, increases increase, keep increasing, decreases. decrease, increase, decrease. decrease, keep decreasing, decreases. decrease, increase, increases.
In the classical economy, let output be produced by Y = K^0:5L^0:5. Let K = 4, L = 16, and the price
level P = 2. Therefore, the real rental price of capital is given by: 8 4 2,5 1 0,5.
One possible explanation for rising unemployment rates in Europe and the US during the 1970s and
1980s is the high volatility of oil prices during that period leading to sectoral shifts in labor demand. is a falling union membership rate leading to lower equilibrium wages. is an aging of the population leading to lower employment separation rates. is an aging of the population leading to lower employment separation rates. is a fall in efficiency wages due to better living conditions. a decline in the real minimum wage because of the high inflation.
Assume the government decreases taxes and government spending by 10. Therefore, output decreases in the long run and prices increase in the short run. output increases in the short run and prices decrease in the long run. output increases in the short run and prices increase in the long run. output decreases in the short run and prices decrease in the long run.
Suppose parliament wishes to lower the unemployment rate. To achieve this, they pass a law that
increases firing costs for firms. The law will increase unemployment because structural unemployment will increase. decrease unemployment because the job separation rate will fall. have an ambiguous effect on the unemployment rate because the job finding and job separa-
tion rate will decrease. decrease unemployment because structural unemployment will fall.
Consider a small economy in the long run. The economy has perfect capital mobility and no barriers to
trade. As a result, purchasing power parity holds. Denote by the nominal exchange rate the amount
of foreign currency for one unit of domestic currency. Money demand in the economy is given by
M/P = kY , where k is a constant. Suppose over the last year the currency did neither devalue nor
appreciate but the government wishes to devalue the currency from now onwards by 2% each year.
Hence, it should, increase tariffs one time by 2%. increase government spending one time by 2%. increase government spending permanently by 2%. increase the annual money supply growth rate permanently by 2%.
Consider a small open economy in the short run with a fixed exchange rate. An increase in tariffs
leads to a rise in output and unchanged net exports. unchanged output and net exports. unchanged output and a rise in net exports. a rise in output and net exports.
The IS curve displays levels of output and the interest rate such that the goods market and the money market are in equilibrium. aggregate production equals aggregate spending. money supply equals money demand. the interest rate market is in equilibrium.
Consider a small open economy in the long run. Suppose government spending increases. As a
result, investment is unchanged and net exports fall. investment decreases and net exports are unchanged. investment increases and net exports rise. investment and net exports fall.
Consider a closed economy in the long-run. Suppose technology satisfies Y = K0.5L0.5, where Y is
total output, K = 8 is the stock of capital, and L = 2 is the quantity of labor. We know that ÇL/L = 0.
The growth rate of money is ÇM/M = 0.09. Suppose the real interest rate is given by the real rental
price of capital. If the velocity of money is constant, what will be the nominal interest rate in the long
run? i= 25%. i = 34%. i = 9%. i = 36%.
Suppose output is produced by Y = AL0.5, where L is labor, and A is productivity. Suppose the level
of technology is 8 and the amount of available labor is 16. A minimum wage of 2 leads in equilibrium
to 10 unemployed workers. 6 unemployed workers. 12 unemployed workers. 4 unemployed workers.
Consider a small open economy in the long run. Suppose the government increases government
spending and the demand for investment decreases. As a result net exports fall by the amount that the government spending increases. net exports fall but we do not know by how much. net exports rise but we do not know by how much. we do not have enough information.
Suppose Comoria has a savings rate s = 0.6, a capital depreciation rate δ = 0.1, the population grows
at rate n = 0.02, and the technological progress is g = 0.01. Output is produced by Y = K0.5(EL)0.5,
where K is capital, L is labor, and E is labor efficiency. Hence, in steady state, the real rental price of
capital grows at 3 percent. grows at 2 percent. grows at 1 percent. does not grow.
China is growing more rapidly in terms of output per worker than Spain. The growth was particularly
fast at the beginning of the 2000s but slowed down since then. This is consistent with China having a capital stock per worker below its steady state at the beginning of the 2000s,
and Spain having a capital stock per worker close to its steady state. Spain having a capital stock per worker below its steady state at the beginning of the 2000s,
and China having a capital stock per worker close to its steady state. China and Spain being in their steady state and China having a higher exogenous technolog-
ical progress than Spain. China and Spain being in their steady state and Spain having a higher exogenous technolog-
ical progress than China.
An increase in the marginal propensity to consume leads to a more horizontal IS curve. more vertical IS curve. more horizontal LM curve. more vertical LM curve.
Suppose technology in two countries, Graham and Balet, satisfies Y = K^a*L1−a, where Y is total
output, and K is the stock of capital. Suppose the capital depreciation rate, the savings rate, and the
population is the same in the two economies. Graham has a higher initial capital stock than Balet but
both are below steady state. As a result, the interest rate is currently higher in Graham but decreases at a faster rate over time. the interest rate is currently higher in Graham and decreases at a slower rate over time. the interest rate is currently lower in Graham and decreases at a faster rate over time. the interest rate is currently lower in Graham but decreases at a slower rate over time.
Assume an increase in confidence about future productivity increases today’s investment demand.
How does this affect investment and real interest rates in the long run (closed) classical economy the interests rates rise, investment stays constant. the interest rate rise, and investment rises. the interest rate falls, investment rises. the interests rate and investment are unchanged.
A rise in the propensity to hold currency instead of demand deposits will in equilibrium increase money demand. decrease money demand. increase the monetary base. decrease the monetary base.
Assume the government of a closed economy raises taxes by 500 units. Let the consumption function
be C = 100 + 0, 2(Y − T) − 2r. What happens to investment in the long-run? It increases by less than 500. It increases by 500. It increases by more than 500. It is unchanged.
Consider a small open economy with fixed exchange rates in the short run. Suppose world investment
demand falls. As a result, domestic investment and output increase, and net exports are unchanged. domestic investment, output, and net exports decrease domestic investment and output decrease, and net exports increase. domestic investment and net exports increase, output is unchanged.
Commoria and Grondar produce a final good with capital and labour, Y = F(K,L) = K0.5L0.5.
Suppose that the two countries are identical, except that the savings rate is higher in Commoria than
in Grondar. Both economies have an identical capital stock per worker which is well below the steady
state levels. Hence, on the convergence path to steady state, the capital stock always growth faster in Commoria than in Grondar. consumption is always higher in Commoria than in Grondar. consumption is always higher in Grondar than in Commoria. we do not have enough information to answer the question.
Consider a closed economy with flexible prices in the long run. The government increases the growth
rate of money supply from 6% to 7%. Suppose that the growth rate of GDP is 6% and the growth rate
in the velocity of money is 2%. What are the consequences of such policies in the long run? The inflation rate will be 0%. The inflation rate will be 1%. The inflation rate will be 3%. The inflation rate will be -3%.
Consider a closed economy in the short run. The government changes a policy and the result is a
higher output than before, and a lower interest rate than before. What might the government have
done? It increased taxes. It decreased government spending. It increased government spending and the money supply. It decreased the money supply.
The short run aggregate demand curve shows all equilibria when the goods and service market is in equilibrium for different levels
of the price level. shows all equilibria when the money market is in equilibrium for different levels of the inter-
est rate. shows all equilibria when the goods and service market and the money market are in equi-
librium for different levels of the price level. shows all equilibria when the goods and service market is in equilibrium for different levels
of the interest rate.
Consider two economies which produce output according to Y = L^1.2. Economy A has today L = 10
workers and economy B has L = 20 workers. Moreover, economy A has a population growth rate of
5 percent, and there is no population growth in economy B. As a result, wages are higher today in A, and will grow less over time in economy A. wages are lower today in A, and will grow less over time in economy A. wages are lower today in A, and they will grow the same in both economies. wages are lower today in A, and they will grow faster in economy A.
Suppose two closed economies, Gala and Homa, are identical except that the marginal propensity to
consume is larger in Gala. Hence, an equal increase in the money supply will lead in the short run
to a larger output rise in Homa. a larger output rise in Gala. the same output rise in both economies. We do not have sufficient information.
Suppose a small open economy with flexible exchange rates, where real interest rates depend on the
world interest rate and a risk premium: r = r*+θ. Consumption is given by C = C(Y −T), investment
by I = I(r* + θ), net exports by NX = NX(ǫ), and government spending equals taxes G = T. The
money market equilibrium is given by M/P = L(r* + θ, Y ). When in the short-run the risk premium
rises, i.e., θ rises, the income − − − − − − − − − − −. If the government wants to counteract the
− − − − − − − − − − − of its currency, it should − − − − − − − − − − −. stays constant; depreciation; reduce the money supply. rises; depreciation; reduce the money supply. stays constant; appreciation; increase government spending. rises; depreciation; decrease government spending.
Assume the Phillips curve reads π = πe
− 0.5(u − 0.08), where u is the unemployment rate, π is
inflation and πe are inflation expectations. Assume inflation expectations are adaptive and the current
and last periods inflation rates are 3%. Suppose the the inflation rate increases to 4%. Hence, the
unemployment rate next period will be u = 0.10. u = 0.08. u = 0.06. u = 0.04.
In a closed economy with rigid prices in the short run, assume the money demand function is M/P =L(Y ). Therefore, an increase in government spending increases output and the real interest rate. increases the interest rate and leaves output unchanged. leaves output and the real interest rate unchanged. increases output and leaves the real interest rate unchanged.
Assume that the aggregate production function of a closed economy, can be represented by Y =
K^0.75L^0.25, where K is physical capital (the number of machines) and L is the number of workers. In
the long run, when output Y = 1000, the total labor income is 1000. 250. 500. 700.
Suppose that the equilibrium unemployment rate (steady-state) is 10%. The job separation rate is 2%.
What is the job finding rate f = 0.02. f = 0.10. f = 0.16. f = 0.18.
Suppose output short-run output is higher than long-run output in the AS-AD model. Therefore, prices can be below or above expected prices. prices are equal to expected prices. prices are lower than expected prices. prices are higher than expected prices.
Suppose nominal output grows at 5% in the long-run. Moreover, the nominal interest rate equals
4%, and the real interest rate equals 2%. Every period, 3% of the capital stock depreciates, and the
marginal product of capital is 6%. Hence, we do not know anything about the golden rule savings rate. the savings rate of the economy is above the level of the golden rule. the savings rate of the economy is below the level of the golden rule. the savings rate of the economy is at the level of the golden rule.
Consider two small open economies with flexible exchange rates in the short run. Both economies
are identical except that in economy A the elasticity of net exports with respect to the exchange rate is
larger than in economy B. As a result, an equal increase in the money supply leads to a smaller depreciation and a larger rise in output in economy B. a smaller depreciation in economy A and a smaller rise in output in economy A. a smaller depreciation in economy A and an equal rise in output in both economies. an equal depreciation in both economies and an equal rise in output in both economies.
Consider a small open economy in the short run with a fixed exchange rate. An increase in govern-
ment spending leads to a decrease in the money supply and an increase in output. an increase in the money supply and a fall in output. a decrease in the money supply and output. an increase in the money supply and output.
The LM curve displays levels of output and the interest rate such that the goods and money markets are in equilibrium. aggregate production equals aggregate spending. money supply equals money demand. the interest rate is equal to money demand.
Suppose you observe in a small open economy a fall in net exports in the long run. This maybe due
to, an increase in government spending. an increase in taxes. an increase in the world interest rate. an increase in the money supply.
Suppose that the production technology satisfies Y = K^a(EL)^1−a, where Y is the aggregate output,
K is the capital stock, E is the technology level, and L is the amount of labor. We know that ÇL/L =
0.05 and ÇE/E = 0.05. The economy is in its steady state given by the Solow model. The inflation
rate is pi = 0.15. If the money supply is constant, the growth rate of velocity is: ÇV/V = 5%. ÇV/V = 25%. ÇV/V = 10%. ÇV/V = 15%.
Suppose the job finding rate per quarter is 50%, and the job separation rate is given by s = 30%.
Today, 10 people are unemployed, and the total work force is L = 100. Hence, the next quarter
unemployment rate, Ut+1/L , is 32%. 68%. 38%. none of the above.
Consider a small open economy in the long run. Suppose the government wishes to increase the quan-
tity of net international capital inflows to the economy (increase international borrowing). Hence, it
should increase the long run interest rate. increase the money supply. decrease government spending. decrease taxes.
Consider an economy with a savings rate s = 0.3, a capital depreciation rate d = 0.1, a workforce of
L = 10, no population growth, and no technological progress. Output is produced by Y = K0.5L0.5.
Today’s capital stock is K1 = 2. Hence, output, capital, and consumption per worker will remain the same over time. output, capital, and consumption per worker will grow over time. output, capital, and consumption per worker will fall over time. output, capital, and consumption per worker will grow over time, if and only if, the savings
rate changes to s = 0.5.
Somalia is substantially poorer than Spain in terms of output per worker. This is consistent with Spain having a higher savings rate. Spain having a higher population growth rate. Somalia having a higher capital stock per worker. Somalia having a higher rate of technological progress.
An increase in the elasticity of money demand with respect to output leads to a more vertical LM curve. more vertical IS curve. more horizontal LM curve. more horizontal IS curve.
Consider an economy that produces output according to Y = K0.33L0.84. Capital depreciates with
rate d, the population grows with rate n and there is no technological progress. Hence, according to
the Solow model, output grows with rate n. with a rate larger than n but not necessarily equal to d + n. with a rate smaller than n. with a rate exactly equal to d + n.
Suppose you observe in the long run (closed) classical economy an increase in the real interest rate.
This may be due to an increase in government spending. an increase in taxes. an increase in the money supply. an increase in inflation.
Money is a medium of exchange and not electronic. a medium of exchange and a stock of value. a unit of account and not transferable. not transferable and a stock of value.
Consider the model of the classical long run economy. The economy produces output according to
Y = K^aL^1−a. Resulting from an immigration wave, the labor force increases by 10%. As a result, the
real rental price of capital ....... and the capital share is ........ falls, lower. rises, lower. rises, unchanged. rises, higher.
Consider a small open economy with flexible exchange rates in the short run. Suppose the govern-
ment wishes to increase net exports. Hence, it should decrease government spending. decrease the money supply. increase tariffs. fix its exchange rate.
Suppose two closed economies, Gala and Homa, are identical except that the money demand is more
sensitive to the interest rate in Gala. Hence, an equal increase in government spending will lead in
the short run to a larger output rise in Homa. a larger output rise in Gala. the same output rise in both economies. none of the above.
Consider a closed economy with flexible prices in the long run. The money supply growth rate is 7%.
Suppose that the growth rate of GDP is 6% and the growth rate of the velocity of money is 2%. The
real interest rate is 2%. Hence, the nominal interest rate is 3%. 2%. 5%. 4%.
Consider a closed economy in the short run. The government changes a policy and the result are
higher public savings than before and a lower interest rate than before. What might the government
have done? It decreased taxes. It increased government spending. It decreased government spending. It decreased the money supply.
Cost-push inflation refers to adverse demand shocks that raise the cost of production and lead to higher prices. favorable supply shocks that allow firms to raise their prices. adverse supply shocks that raise the cost of production and lead to higher prices. favorable demand shocks that allow firms to raise their prices.
Consider two economies that produce output according to Y = K0.5. Both economies have a savings
rate of s = 0.5, and the capital depreciation rate is 0.1. Economy A has today K = 10 units of capital
and economy B has K = 20 units of capital. As a result, the rental price of capital is lower today in A, and will grow less over time in economy B. the rental price of capital is lower today in A, and will grow less over time in economy A. the rental price of capital is lower today in B, and will grow at the same rate in both economies. the rental price of capital is lower today in B, and will grow less over time in economy B.
Suppose the IS curve is more horizontal in country A than in country B. As a result, the aggregate supply curve is relatively more horizontal in country B. the aggregate demand curve is relatively more horizontal in country B. the aggregate demand curve is relatively more horizontal in country A. the aggregate supply curve is relatively more horizontal in country A.
Consider a small economy in the long run. Suppose the rest of the world decreases taxes and increases
the money supply. As a result, domestic investment and net exports are unchanged. domestic investment increases and net exports decrease. domestic investment and net exports increase. domestic investment falls and net exports increase.
In the AS-AD model, an increase in government spending leads to an increase in investment and a decrease in prices. a decrease in output and investment. an increase in output and a decrease in investment. an increase in output and investment.
Consider a model of a closed economy with rigid prices in the short run. Suppose the government
wishes to increase the equilibrium money demand. Hence, it should decrease taxes. decrease government spending. decrease the money supply. none of the above.
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