Sample Multiple Choice Questions

Chapters 7, 8, 9, 10, 11, 13, 14

(randomly chosen)

1. Examination of recent data for many countries shows that countries with high
saving rates generally have high levels of output per person because:
A) high saving rates mean permanently higher growth rates of output.
B) high saving rates lead to high levels of capital per worker.
C) countries with high levels of output per worker can afford to save a lot.
D) countries with large amounts of natural resources have both high output levels
and high saving rates.

2. In the Solow growth model, the assumption of constant returns to scale means
that:
A) all economies have the same amount of capital per worker.
B) the steady-state level of output is constant regardless of the number of workers.
C) the saving rate equals the constant rate of depreciation.
D) the number of workers in an economy does not affect the relationship between
output per worker and capital per worker.

3. In the Solow growth model of Chapter 7, the demand for goods equals
investment:
A) minus depreciation.
B) plus saving.
C) plus consumption.
D) plus depreciation.
4. The Solow growth model describes:
A) how output is determined at a point in time.
B) how output is determined with fixed amounts of capital and labor.
C) how saving, population growth, and technological change affect output over
time.
D) the static allocation, production, and distribution of the economy's output.

5. In an economy with no population growth and no technological change, steady-

state consumption is at its greatest possible level when the marginal product of:
A) labor equals the marginal product of capital.
B) labor equals the depreciation rate.
C) capital equals the depreciation rate.
D) capital equals zero.

6. When f(k) is drawn on a graph with increases in k noted along the horizontal
axis, the slope of the line denotes:
A) output per worker.
B) output per unit of capital.
C) the marginal product of labor.
D) the marginal product of capital.

7. If the production function exhibits decreasing returns to scale in the steady

state, an increase in the rate of population would lead to:
A) growth in total output and growth in output per worker.
B) growth in total output but no growth in output per worker.
C) growth in total output but a decrease in output per worker.
D) no growth in total output or in output per worker.

8. When capital increases by K units, output increases by:

A) L units.
B) MPL x L units.
C) K units.
D) MPK x K units.
9. In the Solow growth model, capital exhibits ______ returns. In a basic
endogenous growth model, capital exhibits ______ returns.
A) constant; diminishing
B) constant; constant
C) diminishing; constant
D) diminishing; diminishing

10.In a steady state with population growth and technological progress:

A)the capital share of income increases.
B)the labor share of income increases.
C)in some cases the capital share of income increases and sometimes the labor
share increases.
D) the capital and labor shares of income are constant.

11. In the two-sector endogenous growth model, the fraction of labor in universities
(u) affects the steady-state:
A) level of income.
B) growth rate of income.
C) level of income and growth rate of income.
D) level of income, growth rate of income, and growth rate of the stock of
knowledge.

12.In the United States' recent economic history:

A)increasing capital formation has been a high priority of economic policy.
B)economic policy has not been concerned with increasing capital formation.
C)economic policy has been more concerned with increasing labor skills than with
increasing capital formation.
D) economic policymakers have felt that too much attention has been paid to
increasing capital formation.

13. According to the Solow model, persistently rising living standards can only be
explained by:
A) population growth.
B) capital accumulation.
C) saving rates.
D) technological progress.
14. A 5-percent reduction in the money supply will, according to most economists,
reduce prices 5 percent:
A) in both the short and long runs.
B) in neither the short nor long run.
C) in the short run but lead to unemployment in the long run.
D) in the long run but lead to unemployment in the short run.

15. In the long run, the level of output is determined by the:

A) interaction of supply and demand.
B) money supply and the levels of government spending and taxation.
C) amounts of capital and labor and the available technology.
D) preferences of the public.

16. The relationship between the quantity of goods and services supplied and the
price level is called:
A) aggregate demand.
B) aggregate supply.
C) aggregate investment.
D) aggregate production.

17. Possible explanations for sticky magazine prices include the hypotheses that
the costs of charging the wrong price may ______, and perhaps customers
______ frequent price changes inconvenient.
A) be great; do not find
B) be great; find
C) not be great; find
D) not be great; do not find

18. The long-run aggregate supply curve is vertical at the level of output:
A) determined by aggregate demand.
B) at which unemployment is at its natural rate.
C) at which the inflation rate is zero.
D) at a predetermined price level.
19. A short-run aggregate supply curve shows fixed ______, and a long-run
aggregate supply curve shows fixed ______.
A) output; output
B) prices; prices
C) prices; output
D) output; prices

20. Starting from long-run equilibrium, if a drought pushes up food prices throughout
the economy, the Fed could move the economy more rapidly back to full
employment output by:
A) increasing the money supply, but at the cost of permanently higher prices.
B) decreasing the money supply, but at the cost of permanently lower prices.
C) increasing the money supply, which would restore the original price level.
D) decreasing the money supply, which would restore the original price level.

21. The theory of liquidity preference implies that, other things being equal, an
increase in the real money supply will:
A) lower the interest rate.
B) raise the interest rate.
C) have no effect on the interest rate.
D) first lower and then raise the interest rate.

22. A decrease in the price level, holding nominal money supply constant, will shift
the LM curve:
A) upward and to the right.
B) downward and to the right.
C) downward and to the left.
D) upward and to the left.

23. The assumption of constant velocity is equivalent to assuming that the demand
for real money balances depends on:
A) income alone.
B) the interest rate alone.
C) income and interest rates.
D) people economizing on real balances as the interest rate rises.
24. When drawn on a graph with income along the horizontal axis and the interest
rate along the vertical axis, the IS curve generally:
A) is vertical.
B) is horizontal.
C) slopes upward and to the right.
D) slopes downward and to the right.

25. After the Kennedy tax cut in 1964, real GDP:

A) fell and unemployment rose.
B) rose and unemployment fell.
C) and unemployment both rose.
D) and unemployment both fell.

26. An IS curve shows combinations of:

A) taxes and government spending.
B) nominal money balances and price levels.
C) interest rates and income that bring equilibrium in the market for real balances.
D) interest rates and income that bring equilibrium in the market for goods and
services.

27. The Keynesian-cross analysis assumes planned investment:

A) is fixed and so does the IS analysis.
B) depends on the interest rate and so does the IS analysis.
C) is fixed, whereas the IS analysis assumes it depends on the interest rate.
D) depends on the interest rate and so does the IS analysis.

28. The variable that links the market for goods and services and the market for real
money balances in the IS-LM model is the:
A) consumption function.
B) interest rate.
C) price level.
D) nominal money supply.
29. When firms experience unplanned inventory accumulation, they typically:
A) build new plants.
B) lay off workers and reduce production.
C) hire more workers and increase production.
D) call for more government spending.

30. The government-purchases multiplier indicates how much ______ change(s) in

response to a $1 change in government purchases.
A) the budget deficit
B) consumption
C) income
D) real balances

31. If the short-run IS-LM equilibrium occurs at a level of income above the natural
rate of output, in the long run the ______ will ______ in order to return output to
the natural rate.
A) price level; increase
B) interest rate; decrease
C) money supply; increase
D) consumption function; decrease

32. Analysis of the short and long runs indicates that the ______ assumptions are
most appropriate in ______.
A) classical; both the short and long runs.
B) Keynesian; both the short and long runs.
C) classical; the short run whereas the Keynesian assumptions are most
appropriate in the long run.
D) Keynesian; the short run whereas the classical assumptions are most
appropriate in the long run.
33. If MPC = 0.75 (and there are no income taxes but only lump-sum taxes) when T
decreases by 100, then the IS curve for any given interest rate shifts to the right
by:
A) 100.
B) 200.
C) 300.
D) 400.

34. Those economists who believe that fiscal policy is more potent than monetary
policy argue that the:
A) responsiveness of investment to the interest rate is small.
B) responsiveness of investment to the interest rate is large.
C) IS curve is nearly horizontal.
D) LM curve is nearly vertical.

35. If investment does not depend on the interest rate, then the ______ curve is
______.
A) IS; vertical
B) IS; horizontal
C) LM; vertical
D) LM; horizontal

36. The aggregate demand curve generally slopes downward and to the right
because, for any given money supply M a higher price level P causes a ______
real money supply M/P, which ______ the interest rate and ______ spending:
A) lower; raises; reduces
B) higher; lowers; increases
C) lower; lowers; increases
D) higher; raises; reduces
37. In the IS-LM model, a decrease in government purchases leads to a(n) ______
in planned expenditures, a(n) ______ in total income, a(n) ______ in money
demand, and a(n) ______ in the equilibrium interest rate.
A) decrease; decrease; decrease; decrease
B) increases; increase; increases; increase
C) decrease; decrease; increase; increase
D) increase; increase; decrease; decrease

38. The monetary transmission mechanism works through the effects of changes in
the money supply on:
A) the budget deficit.
B) investment.
C) government expenditures.
D) taxation.

39. When adaptive expectations are used to model inflation expectations in the
Phillips curve, then the natural rate of unemployment is called the ______ rate
of unemployment.
A) structural
B) cyclical
C) short-run aggregate supply
D) non-accelerating inflation

40. In the sticky-price model, if no firms have flexible prices, the short-run aggregate
supply schedule will:
A) be vertical.
B) be steeper than it would be if some firms had flexible prices.
C) slope upward to the right.
D) be horizontal.
41. Analysis of the short-run Phillips curve suggests that policymakers who want to
reduce unemployment in the short run should ______ aggregate demand at a
cost of generating ______ inflation.
A) increase; higher
B) increase; lower
C) decrease; higher
D) decrease; lower

42. The Phillips curve expresses a short-run link:

A) among nominal variables.
B) among real variables.
C) among unexpected variables.
D) between nominal and real variables.

43. The basic aggregate supply equation implies that output exceeds natural output
when the price level is:
A) low.
B) high.
C) less than the expected price level.
D) greater than the expected price level.

44. The estimate of the sacrifice ratio from the Volcker disinflation is approximately:
A) 5-6.
B) 2.5-3.
C) 1-1.5.
D) 0-0.5.

45. In industries not covered by formal wage contracts:

A) wages are always flexible.
B) wages are always fixed.
C) implicit agreements between workers and firms do not limit wage changes.
D) implicit agreements between workers and firms may limit wage changes.
46. In the sticky-wage model an unexpectedly lower price level leads to a ______ in
the labor demand curve, while in the sticky-price model reductions in output
lead to a ____ in the labor demand curve.
A) movement along; shift in
B) movement along; movement along
C) shift in; shift in
D) shift in; movement along

47. Arguments in favor of passive economic policy include all of the following
except:
A) monetary and fiscal policies work with long and variable lags, which can
produce destabilizing results.
B) economic forecasts have too large a margin of error to be useful in formulating
stabilization policy.
C) recessions do not reduce economic well-being, so using monetary and fiscal
policy for stabilization is unnecessary.
D) the Great Depression could have been avoided if the Federal Reserve had
pursued a policy of steady money growth.

48. Policies that stimulate or depress the economy without any deliberate policy
change are called:
A) leading indicators.
B) time inconsistent policies.
C) rational expectations policies.
D) automatic stabilizers.

49. A time-inconsistency problem in macroeconomic policy can occur when the

policymaker:
A) is made to follow a strict and an inflexible rule.
B) has discretion in the short run but follows a rule in the long run.
C) has discretion to act as it seems best in each situation, based on his or her own
knowledge and experience.
D) has no discretion.
50. If people's expectations of inflation are formed rationally rather than based on
adaptive expectations and if policymakers make a credible policy move to
reduce inflation, then the costs of reducing inflation will be ______ traditional
estimates of the sacrifice ratio.
A) much higher than
B) much lower than
C) exactly equal to
D) approximately two percent greater than

51. Policy is conducted by rule if policymakers:

A) announce in advance how policy will respond to various situations and commit
themselves to following through on this announcement.
B) are free to size up the situation case by case and choose whatever policy
seems appropriate at the time.
C) set policy according to election results, i.e., set policy by rule of the ballot box.
D) manipulate policy to ensure both low inflation and unemployment on election
day.

52. According to advocates of rational expectations, traditional estimates of the

sacrifice ratio are unreliable because they:
A) ignore inside lags.
B) overestimate outside lags.
C) are based on adaptive expectations.
D) are time inconsistent.

53. Assume that there is a short-run tradeoff between inflation and unemployment,
that the central bank desires both low inflation and low unemployment, and that
the central bank follows a fixed rule in conducting monetary policy. Initially,
households and firms expect high inflation. Following a credible announcement
by the central bank of a low-inflation policy, households and firms will ______
the central bank's announcement and ______ their expectations of inflation.
A) believe; lower
B) not believe; not change
C) believe; not change
D) not believe; lower
Answer Key

1. B
2. D
3. C
4. C
5. C
6. D
7. C
8. D
9. C
10. D
11. D
12. A
13. D
14. D
15. C
16. B
17. C
18. B
19. C
20. A
21. A
22. B
23. A
24. D
25. B
26. D
27. C
28. B
29. B
30. C
31. A
32. D
33. C
34. A
35. A
36. A
37. A
38. B
39. D
40. D
41. A
42. D
43. D
44. B
45. D
46. A
47. C
48. D
49. C
50. B
51. A
52. C
53. A