MACROECONOMICS AND THE GLOBAL ECONOMIC ENVIRONMENT
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MACROECONOMICS AND THE GLOBAL ECONOMIC ENVIRONMENT
PRACTICE FINAL
SECTION 1: MULTIPLE CHOICE QUESTIONS (60 points)
Circle the correct answer. Each question is worth 2 points for a total of 60 points.
1. The largest component of aggregate demand is _____ .
A. consumption
B. investment
C. saving
D. government spending
2. The most volatile component of aggregate demand is _____ .
A. consumption
B. investment
C. saving
D. government spending
3. What is the use of private saving in the U.S. economy?
A. To finance firms’ investments
B. To finance government purchases
C. To finance the U.S. current account
D. All of the above
4. The Federal Reserve preferred price measure is _____ .
A. the Consumer Price Index (CPI)
B. the Core Consumer Price Index (Core CPI)
C. the Personal Consumption Expenditure (PCE) price index
D. the Producer Price Index (PPI)
5. In 2000, Britney Spears's “Oops!... I did it again” album’s first-day sales reached $1.0 million. In 2015, Adele’s “25” album's first-day sales reached $1.5 million. If the CPI is 100 in 2000 and in 138 in 2015, _____ is the largest first-day grossing album, with _____ million in sales in 2015 dollars.
A. “Oops!... I did it again”; 1.0
B. “Oops!... I did it again”; 1.4
C. “25”; $1.1
D. “25”: $1.5
6. The Federal Reserve targets the Federal Funds Rate, a nominal interest rate, as its main tool to influence the economy. As you know, however, consumption and investment’s behavior respond to the real interest rate. Using the Fisher equation, the Federal Reserve has a grip on the real interest rate when _____ .
A. the inflation rate is low, stable, and predictable
B. the nominal interest rate is below the real interest rate
C. the nominal interest rate is above the real interest rate
D. none of the above
7. A negative permanent total factor productivity (TFP) shock _____ .
A. decreases labor demand, employment, and the real wage
B. decreases investment
C. decreases output
D. all of the above
8. What is the main driver of economic growth?
A. Total Factor Productivity
B. The stock of capital
C. The labor force
D. The saving rate
9. All of the following increase total factor productivity, except _____ .
A. more physical capital
B. better human capital
C. new management technique
D. favorable changes in government regulations
10. Potential output is _____ .
A. the amount of sustainable output when capital and labor are fully employed
B. the amount of output produced when the unemployment rate is zero
C. the maximum amount of output an economy can produce
D. the amount of output that generates an inflation rate of 2 percent
11. The aging of the population and baby boomers’ early retirement will represent a reduction in U.S. labor supply. A reduction in labor supply leads to _____ .
A. higher employment and higher wages
B. higher employment and lower wages
C. lower employment and higher wages
D. lower employment and lower wages
12. The gender pay gap persists in the United States. In fact, the current female-to-male earnings (median earnings) ratio is about _____ .
A. 40 percent
B. 60 percent
C. 80 percent
D. 120 percent
TABLE 1: THE U.S. EMPLOYMENT SITUATION IN 2016
(Numbers in thousands)
February March
Employment status
Civilian non-institutional population Civilian labor force
Employed
Unemployed
Not in the labor force
252,577
158,890
151,074
7,815
93,688
252,768
159,286
151,320
7,966
93,482
13. Using Table 1, the unemployment rate was _____ in February and _____ in March.
A. 3.1; 3.2
B. 3.7; 3.6
C. 4.9; 5.0
D. 5.2; 5.3
14. Between February and March 2016, the unemployment rate _____ because of _____ .
A. increases; an increase in the labor force participation
B. increases; a decrease in the number of employed individuals
C. increases; an increase in the population
D. decreases; a decrease in the number of individuals not in the labor force
15. When considering how much to save today, individuals should look at _____ .
A. the real interest rate
B. their current income
C. their expected future income
D. all of the above
16. Igloo currently has 10 self-serve ice cream machines. How many ice-cream machines should Igloo invest in today if its expected future marginal product of capital is 0.36⁄+1 , the real interest rate is 2 percent, and the depreciation rate of capital is 10 percent?
A. 0 ice-cream machines
B. 1 ice-cream machine
C. 3 ice-cream machines
D. 9 ice-cream machines
17. In a recent Wall Street Journal article, Warren Buffett mentioned that he can’t find anything to buy. This seems to be the feeling of most investors as recent surveys suggest that business investment will be weak over the next few quarters. What is the impact of a sustained decrease in business investment?
A. A decline in output
B. A decrease in employment and in the real wage
C. A lower real interest rate
D. All of the above
18. If all prices could adjust instantaneously to shocks, the AS curve would be _____ .
A. vertical and output would always be at potential
B. vertical and inflation would be constant
C. horizontal and output would be very volatile
D. horizontal and inflation would be very volatile
19. A large earthquake struck Nepal at the end of April. What is the likely impact of this negative aggregate supply shock on output and inflation?
A. A decrease in output and inflation
B. A decrease in output, but an increase in inflation
C. An increase in output, but a decrease in inflation
D. An increase in output and inflation
20. What are the two monetary-policy objectives in the Federal Reserve Act?
A. Maximum sustainable employment and stable prices
B. Maximum output and stable interest rates
C. Maximum output and low unemployment
D. Low unemployment and stable output
21. An open market purchase of treasuries by the Federal Reserve will likely _____ .
A. decrease short- and long-run interest rates
B. increase output and inflation
C. lead to a depreciation of the dollar
D. all of the above
22. If the inflation rate is above the Federal Reserve’s inflation target and output is above potential, the Taylor Rule prescribes _____ .
A. an increase in the Federal Funds Rate
B. an appreciation of the dollar
C. a decrease in inflation
D. all of the above
23. Twin deficits are a simultaneous _____ .
A. current account and trade deficits
B. current account and government budget deficits
C. current account and private saving deficits
D. current and future account deficits
24. The current Canadian housing boom can be represented by an increase in Canadian desired investment. This increase in desired investment _____ .
A. decreases the Canadian real interest rate
B. decreases Canadian saving
C. decreases the value of the Canadian current account
D. none of the above
25. In the short run, the nominal exchange rate and the real exchange rate move in the same direction, because _____.
A. local-currency prices are sticky
B. the inflation rates move in the same direction
C. the open-economy AS curve is upward sloping
D. the open-economy AS curve is downward sloping
26. In March, the Wall Street Journal reported that Brazil’s annual inflation hit its highest level in nearly 10 years. To cool down inflation, the Brazilian monetary authority should _____ interest rates. This should lead to _____ of the Brazilian real (the currency of Brazil) against other currencies and _____ in aggregate demand.
A. increase; an appreciation; an increase
B. increase; a depreciation; an increase
C. increase; an appreciation; a decrease
D. decrease; a depreciation; a decrease
27. In the AS/AD framework, the short-run impacts of an increase in government spending are _____ .
A. lower output and higher inflation
B. lower output and lower inflation
C. higher output and higher inflation
D. higher output and lower inflation
28. The full impact of an increase in government spending on aggregate demand is often uncertain because of _____ .
A. Ricardian equivalence
B. the twin deficits
C. the crowding out effect on investment
D. all of the above
The following two multiple-choice questions are about current economic events.
29. In 2018, the U.S. economy completed one of the best years of a nearly decadelong expansion, growing at a pace of _____ in the fourth quarter despite _____ .
A. 2.6 percent; a slowdown elsewhere in the world
B. 3.4 percent; weak employment and wage gains
C. 3.4 percent; a slowdown in business investment
D. 4.3 percent; lower interest rates
30. In late January, the Fed pivoted decisively to a “prolonged” pause on interest-rate increases. What prompted the U-turn?
A. Incoming data have been weak, sending conflicting signals about the economy
B. The global economy is slowing much faster than anticipated
C. The impacts of the trade tensions remain uncertain (e.g., U.S.-China, Brexit)
D. All of the above
ESSAY 1, CONSUMPTION AND THE FEDERAL RESERVE NORMALIZATION OF INTEREST RATES
15 points
Consider Tom’s story using the two-period (this year and next year) consumption model studied in class with log utility and β=1. Tom is a MBA student with $20,000 in assets and no income this year. However, Tom has just accepted a new job at Google that will pay him an income of $180,000 next year. Assume that Tom can freely save and borrow at the current market real interest rate, r, of 0 percent.
Reminder In the two-period consumption model studied in class, we maximize an individual’s (like Tom’s) lifetime utility with respect to his budget constraint. The solution to this maximization problem is given by the following Euler equation for consumption, ′ = (1 + )′ . If () = log(), then the marginal utility of consumption is ′() = . This implies that the Euler equation can be written as 1 1
Therefore, with log utility, Tom’s rule for consumption is 1 = 2 ∙
= where PVLR represents Tom’s Present Value of Lifetime Resources. |
2022-02-23