Extra Problems #3. ECON Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma. Notice:

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1 ECON Macroeconomic Theory Spring 2010 Instructor: Guangyi Ma Extra Problems #3 Notice: (1) There are 25 multiple-choice problems covering Chapter 6, 9, 10, 11. These problems are not homework and will not be graded. The aim of these problems is to provide you with additional exercises and to help you prepare the Exam #2 on next Monday. (2) The answer keys are attached in the last page. Page 1

2 Problem 1~25: Multiple choice problems Please choose your answer and circle the corresponding capital letter (A, B, C, D) 1. If the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.01 and the fraction of the unemployed who find a job each month is 0.09 (the rate of job findings), then the natural rate of unemployment is: A) 1 percent. B) 9 percent. C) 10 percent. D) about 11 percent. 2. According to efficiency-wage theories, firms benefit by paying higher-than-equilibrium wages because worker increases. A) productivity B) turnover C) unionization D) shirking 3. All of the following are possible explanations for the trends in the U.S. unemployment rate in the last half of the twentieth century and early twenty-first century except: A) the changing composition of the U.S. work force. B) sectoral shifts. C) a generally increasing real value of the minimum wage. D) the links between unemployment and productivity. 4. Over the business cycle, investment spending consumption spending. A) is inversely correlated with B) is more volatile than C) has about the same volatility as D) is less volatile than 5. Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long-run. A) real B) nominal C) real and nominal D) neither real nor nominal Page 2

3 6. The aggregate demand curve tells us possible: A) combinations of M and Y for a given value of P. B) combinations of M and P for a given value of Y. C) combinations of P and Y for a given value of M. D) results if the Federal Reserve reduces the money supply. 7. When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: A) slopes upward and to the right. B) slopes downward and to the right. C) is horizontal. D) is vertical. 8. The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is the natural rate of output in the short run. A) above B) below C) equal to D) either above or below 9. If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run, prices will and output will. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase 10. Stabilization policy: A) aims at keeping output and employment at their natural rates. B) always succeeds in keeping output and employment at their natural rates. C) is generally ineffective. D) does more harm than good. 11. According to classical theory, national income depends on, while Keynes proposed that determined the level of national income. A) aggregate demand; aggregate supply B) aggregate supply; aggregate demand C) monetary policy; fiscal policy D) fiscal policy; monetary policy Page 3

4 12. In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government-purchases multiplier. C) unplanned inventory investment. D) real money balances. 13. According to the Keynesian-cross analysis, when there is a shift upward in the government-purchases schedule by an amount G and the planned expenditure schedule by an equal amount, then equilibrium income rises by: A) one unit. B) G. C) G divided by the quantity one minus the marginal propensity to consume. D) G multiplied by the quantity one plus the marginal propensity to consume. 14. 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 expenditure and so does the IS analysis. 15. The IS curve shifts when any of the following economic variables change except: A) the interest rate. B) government spending. C) tax rates. D) the marginal propensity to consume. 16. 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. 17. If the interest rate is above the equilibrium value, the: A) demand for real balances exceeds the supply. B) supply of real balances exceeds the demand. C) market for real balances clears. D) demand for real balances increases. Page 4

5 18. An LM curve shows combinations of: A) taxes and government spending. B) nominal money balances and price levels. C) interest rates and income, which bring equilibrium in the market for real money balances. D) interest rates and income, which bring equilibrium in the market for goods and services. Use the following to answer question 19: Exhibit: IS-LM Fiscal Policy 19. (Exhibit: IS-LM Fiscal Policy) Based on the graph, starting from equilibrium at interest rate r 1 and income Y 1, an increase in government spending would generate the new equilibrium combination of interest rate and income: A) r 2, Y 2 B) r 3, Y 2 C) r 2, Y 3 D) r 3, Y In the IS-LM model, changes in taxes initially affect planned expenditures through: A) consumption. B) investment. C) government spending. D) the interest rate. Page 5

6 21. If the demand for real money balances does not depend on the interest rate, then the LM curve: A) slopes up to the right. B) slopes down to the right. C) is horizontal. D) is vertical. Use the following to answer question 22: Exhibit: Policy Interaction 22. (Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r 3, income Y 2, IS 1, and LM 1, if there is an increase in government spending that shifts the IS curve to IS 2, then in order to keep output constant the Federal Reserve should the money supply shifting to. A) increase; LM 2 B) decrease; LM 2 C) increase; LM 3 D) decrease; LM In the IS-LM model, a decrease in output would be the result of a(n): A) decrease in taxes. B) increase in the money supply. C) increase in money demand. D) increase in government purchases. Page 6

7 Use the following to answer question 24: Exhibit: IS-LM to Aggregate Demand 24. (Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM 3 shifts to LM 2 because the money supply decreases from M 3 to M 2, then, holding other factors constant: A) the aggregate demand curve will shift to the right. B) the aggregate demand curve will shift to the left. C) this represents a movement up the aggregate demand curve. D) this represents a movement down the aggregate demand curve. 25. A shift in the aggregate demand curve, starting from long-run equilibrium, which increases output in the short run, will in the long run, as compared to a short-run equilibrium. A) increase both output and the price level B) decrease output but increase prices C) increase output but decrease the price level D) decrease both output and the price level Page 7

8 Answer Key 1. C 2. A 3. C 4. B 5. A 6. C 7. D 8. B 9. C 10. A 11. B 12. C 13. C 14. C 15. A 16. D 17. B 18. C 19. C 20. A 21. D 22. D 23. C 24. B 25. B Page 8

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