MACRO DEBATES
Macro Economics Mastery Quiz
Challenge your understanding of macroeconomics with our comprehensive quiz designed for students and professionals alike. Test your knowledge with 66 carefully crafted questions that cover key concepts including monetary policy, investment, and inflation.
- Multiple choice and checkbox formats
- Detailed feedback on your responses
- Great for revision and reinforcing your learning
Long-run growth ______the demand for goods and services.
Does not change
Decreases
Increases
May either increase or decrease
According to the Fisher equation, the real interest rate equals the nominal interest rate minus the:
Ex ante rate of interest
Expected rate of interest
Expected rate of inflation
Natural rate of interest
According to the Philips curve, the inflation rate depends on all of the following expect:
The deviation of output from its natural rate
Previously expected inflation
An exogenous supply sock
The real interest rate
Which of the following would be represented by a negative value of the random supply shock, Ut?
A decrease in government spending
Oil price decreases resulting from a breakdown in the cartel
An irrational wave of pessimism among investors
A decrease in the central bank's inflation target
According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:
Nominal rate of interest
Natural rate of interest
Target rate of inflation
Current rate of inflation
The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:
Inflation expectations
Money supply and money demand
Inflation and output
Nominal and real exchange rate
According to the Taylor rule, when real GDP is below its natural level, the nominal funds rate should be_____, and when inflation exceeds 2 percent, the nominal federal funds rate should be______.
Lowered, raised
Lowered, lowered
Raised, lowered
Raised, raised
At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank's target rate of inflation ?
Neither the current nor the expected rates of inflation
The current inflation rate, but not the expected inflation rate
The expected inflation rate, but not the current inflation rate
Both the current and expected rates of inflation
The dynamic aggregate supply curve will shift if any of the following changes expect the:
Supply shock
Past inflation rate
Natural level of output
Current inflation rate
According to the monetary policy rule (assuming Θπ>0) when inflation increases, the central bank increases the nominal interest rate by ______ the increase in the rate of inflation, which _____ the real interest rate.
More than, increases
An amount equal to, does not change
Less than, increases
Less than, decreases
When the central bank lowers its target inflation rate, it ______the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _____.
Raises, left
Raises, right
Lowers, right
Lowers, left
In the dynamic model of aggregate demand and aggregate supply, changes in the natural level of output change:
Both the DAD curve and the DAS curve.
Neither the DAD nor the DAS curve .
The DAS curve, but not the DAD curve
The DAD curve, but not the DAS curve
Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to:
Remain below the natural level for more than one period
Remain above the natural level for more than one period
Remain below the natural level for only one period
Remain above the natural level for only one period
Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output_____until returning to the natural level in the long run.
Move below and then above the natural level of output
Remain continuously above the natural level of output
Remain continuously below the natural level of output
Move above and then below the natural level of output
Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:
The natural level of output increases in response to the lower rates of inflation
Expectations of inflation decrease as a result of lower inflation in previous periods
The deviation of output from the natural level of output increases as a result of lower rates of inflation
Lower rates of inflation generate negative supply shocks
Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:
Decline continuously until reaching a lower level in the long run
Decline immediately to a lower level in the long run
Fall below and then rise continuously to long-run level below the initial level
Increase initially and then decline until reaching a lower level in the long run
In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of Θπ, the responsiveness of nominal interest rates to inflation, and a small value of ΘΥ, the responsiveness of nominal interest rates to output, then the DAD curve will be relatively ______, and supply shocks will have relatively ______ impacts on inflation than output.
Steep, larger
Steep, smaller
Flat, smaller
Flat larger
Equation: Monetary Policy Rule it=πt + ϝ + θπ (πt - π*t) + θY (Yt- Y*t). Given the monetary policy rule of the dynamic model of aggregate demand and aggregate supply, which value of Θπ, the responsiveness of nominal interest rates to inflation, would lead to inflation spiralling out of control following a demand shock?
1.00
-0.15
0.50
1.15
The investment spending component of GDP includes all of the following except:
Residential investment
Inventory investment
Net foreign investment
Business fixed investment
In equilibrium, other things being equal, all of the following changes will increase the real rental price of capital except:
Better technology
A lower quantity of labour employed
A lower stock of capital
A higher labour-capital ratio
Other things being equal, the neoclassical model of investment predicts that net investment will increase when the:
Marginal product of capital falls
Price of new capital goods rises
Real interest rate falls
Depreciation rate rises
According to the neoclassical model of investment, when the real interest rate increases, business fixed investment ______ because the ______ of capital increases.
Decreases, marginal product
Increases, marginal product
Increases, cost
Decreases, cost
According to the efficient markets hypothesis, changes in stock prices are:
Possible to predict from available information.
Rational reflections of underlying economic fundamentals.
Driven by irrational waves of pessimism.
Driven by irrational waves of optimism.
According to the efficient markets hypothesis, stock price changes reflect ______, but according to Keynes, stock price changes often reflect ______.
Reductions in investment tax credits; the use of historical cost rather than replacement cost in computing depreciation costs
Changes in the real cost of capital; financing constraints
The inventory accelerator; changes in Tobin's q
Changes in the underlying economic fundamentals; irrational waves of optimism or pessimism
Loans made to subprime borrowers in the early 2000s had the immediate impact of ______ housing demand and ______ housing prices.
Increasing, increasing
Decreasing, decreasing
Increasing, decreasing
Decreasing, increasing
A toy manufacturer accumulates inventories because of the uncertainty of the demand for their product at Christmas and the desire not to lose any potential sales. This is an example of the ______ motive for holding inventories.
Stock-out avoidance
Production smoothing
Inventories as a factor of production
Work in progress
Holding other factors constant, a fall in the interest rate will ______ inventory investment.
Decrease
Sometimes increase and sometimes decrease
Increase
Have no impact on
According to the neoclassical model of investment, the immediate impact of a rise in the real interest rate will be to:
Increase the cost of capital and lower the rate of investment, but to leave the rental price of capital unchanged.
Increase the cost of capital and the rental price of capital, but to lower the rate of investment.
Increase the rental price of capital and the rate of investment, but to leave the cost of capital unchanged.
Increase the cost of capital, the rental price of capital, and the rate of investment.
Government debt equals the:
Sum of past deficits and surpluses
M1 money supply
Difference between current government purchases and taxes
Difference between saving and investment
Holding other factors constant, the ratio of government debt to GDP can decrease as a result of any of the following changes except:
Decreases in tax revenues.
Decreases in government spending.
Increases in GDP.
Decreases in transfer payments.
If government debt is not changing, then:
GDP must equal the natural rate of output.
Capital per worker is constant.
The government's budget must be balanced.
The economy is at long-run equilibrium.
A deficit adjusted for inflation should include only government spending used to make _____ interest payments.
Nominal
Real
Domestic
Foreign
Assume that a government has a balanced budget when the economy is at full employment. If the economy then enters a recession, with no change in tax or spending laws, then the budget of the government is most likely to:
Remain balanced
Be in deficit
Be in either deficit or surplus, depending on the severity of the recession
Be in surplus
Inflation-indexed government bonds have all of the following benefits except:
Encouraging financial innovation.
Eliminating inflation risk.
Reducing the government's incentive to produce surprise inflation.
Eliminating inflation.
According to the traditional viewpoint of government debt, a tax cut without a cut in government spending:
Raises consumption in the short run but lowers it in the long run.
Lowers consumption in the short run but raises it in the long run.
Lowers consumption in both the short run and the long run.
Raises consumption in both the short run and the long run.
According to the traditional view of government debt, if taxes are cut without cutting government spending, then the international effect initially will be a capital ______ and a trade ______.
Inflow; deficit
Outflow; deficit
Outflow; surplus
Inflow; surplus
Government tax policy can affect aggregate supply as well as aggregate demand, because changes in taxes change the:
Length of the inside lag of fiscal policy.
Tradeoff between inflation and unemployment.
Supply of money in the economy.
Incentives to work and invest.
Ricardian equivalence refers to the same impact of financing government:
Whether by printing money or raising taxes.
In the long run as in the short run.
In an open economy as in a closed economy.
Whether by debt or taxes.
A debt-financed tax cut will ______ current consumption in the traditional view and ______ current consumption in the view of Ricardian equivalence.
Increase; increase
Increase; decrease
Increase; not change
Decrease; decrease
Given a reduction in income tax withheld, but no change in income tax owed, households that act according to Ricardian equivalence would ______ the extra takehome pay, while those facing binding borrowing constraints would ______ the extratake home pay.
Spend; save
Save; spend
Save; save
Spend;spend
A strict balanced-budget rule would:
Permit the use of fiscal policy for stabilization.
Redistribute tax burdens across generations.
Restrain political incompetence and opportunism.
Allow the use of tax smoothing to reduce tax distortions.
Funds flow directly between savers and investors in financial _____ and flow indirectly between savers and investors through financial _____.
Markets; intermediaries
Intermediaries; markets
Stocks; bonds
Bonds; stocks
Purchasers of bonds issued by companies are _____ of the company, while purchasers of shares of stock issued by a company are _____ of the company.
Creditors; debtors
Debtors; creditors
Partial owners; debtors
Creditors; partial owners
Risk that affects many businesses at the same time is called _____ risk, while risk associated with individual businesses is called _____ risk.
Idiosyncratic; systematic
Systematic; idiosyncratic
Symmetric; asymmetric
Asymmetric; symmetric
A situation in which one party to an economic transaction has more knowledge about the transaction than the other is called:
Asymmetric information.
Learning by doing.
Systematic risk
Risk aversion
Which of the following is an example of moral hazard?
The healthiest people buy life insurance.
The person with life insurance exercises daily and eats healthy foods.
The sickest people buy health insurance.
The person with health insurance rides a motorcycle without wearing a helmet.
Governments can reduce the problem of moral hazard by:
Reducing corporate income tax rates.
Requiring licenses be obtained before starting a business.
Prosecuting fraud and malfeasance.
Keeping interest rates low.
An asset-price bubble bursts if there is:
A statement from the central bank stating that the bubble is over.
An excess demand for an asset that raises asset prices.
A sharp decrease in interest rates that pricks the asset-price bubble.
A panic cycle of asset sales and falling asset prices.
Subprime borrowers are borrowers:
Who obtain loans at interest rates below the prime rate.
With risky credit profiles.
Most likely to make their loan payments on time.
Who borrow to purchase smaller homes.
The mortgage defaults during the 2008–2009 financial crisis severely reduced the capital positions of:
A large insurance company (AIG).
Government-sponsored enterprises involved in the mortgage market.
All of the above.
Major investment banks.
A credit crunch reduces aggregate demand by:
Increasing the exchange rate.
Reducing consumption and investment spending.
Reducing the money supply.
Increasing interest rates.
During the 2008–2009 period, the conventional monetary policy response was to _____ the target federal funds rate, while the conventional fiscal policy response was to _____ taxes and to _____ government spending.
Increase; increase; increase
Increase; increase; decrease
Decrease; decrease; increase
Decrease; decrease; decrease
An illiquid bank can become insolvent when it:
Sells additional stock to obtain funds.
Refuses to make promised payments.
Sells assets at fire-sale prices to meet liquidity demands.
Can extend the due dates of its liabilities.
The government purchasing ownership stakes in a faltering financial institution in order to prop up the financial system is an example of:
Conventional monetary policy.
A giveaway of public funds.
A capital injection.
Risky lending.
Proponents of restricting the size of financial institutions believe this policy will _____, while opponents believe this policy will _____.
Eliminate the need for deposit insurance; encourage imprudent risk taking
Reduce the number of financial institutions; give institutions the incentive to take excessive risks.
Allow firms to take advantage of economies of scale; increase the volatility of the financial system.
Make the financial system more stable; lead to higher costs
Sovereign debt refers to debt issued:
By governments.
Without collateral.
With no rating by a credit-rating agency.
With a promise to repay in a foreign currency.
Economists who view the economy as naturally stable often argue that:
The economy should be slowed when it is depressed and stimulated when it is overheated.
The economy should be stimulated when it is depressed and slowed when it is overheated.
Monetary and fiscal policies should not be used to “fine-tune” the economy.
Economists should act to stimulate or slow the economy on the basis of forecasts in order to assure that the policy actions are timely.
The time between when government spending increases and when aggregate demand starts to increase is an example of an:
Outside lag of fiscal policy.
Outside lag of monetary policy.
Inside lag of monetary policy.
Inside lag of fiscal policy.
According to the Lucas critique, when economists evaluate alternative policies they must take into consideration:
The stage of the political business cycle in which the policy is to be implemented.
Whether the policy will offset the impact of automatic stabilizers.
How the policies will affect expectations and behavior.
The length of the inside lags associated with the policies.
If policymakers are free to analyze events as they occur and choose whatever policy seems appropriate at the time, then this is:
Monetary policy.
Policy by discretion.
Fiscal policy.
Policy by rule.
Conducting monetary policy so that the FF rate = 0.05, where the FF rate is the nominal federal funds interest rate, is an example of:
An active policy rule.
An automatic stabilizer.
A passive policy rule.
Discretionary policy.
An argument in favor of allowing discretionary macroeconomic policy is that:
Policymakers may make erratic shifts in policy in response to changing political situations.
The objectives of policymakers may be in conflict with the well-being of the public.
Uninformed policymakers may choose incorrect policies.
Giving policymakers flexibility will allow them to respond to changing conditions.
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 uses discretion in conducting monetary policy. Initially, households and firms expect high inflation. Following an announcement by the central bank of a low-inflation policy, households and firms will ______ the central bank's announcement and ______ their expectations of inflation.
Not believe; not change
Believe; not change
Not believe; lower
Believe; lower
Monetary policy rules that target nominal variables would target any of the following except the:
Price level.
Money supply.
Level of nominal GDP.
Unemployment rate.
Economic research finds that greater central-bank independence is ______ correlated with lower and more stable inflation as well as ______ correlated with the average growth and variability of real GDP.
Not; strongly
Not; not
Strongly; strongly
Strongly; not
Economic science has provided convincing evidence in favor of the:
Rule requiring a constantly balanced budget for the federal government.
Rule favoring use of the money supply to hit a nominal GDP target.
Rule favoring a constant rate of growth of the money supply.
Fact that there is no simple and compelling case for any particular view of macroeconomic policy.
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