Some Practice Questions

I- Multiple Choice Questions

1) The figure shows that central banks reduced interest rates more sharply and kept them lower after the 2008 crisis than they did in the 1930s. But the figure shows    nominal interest rates. Bearing in mind that inflation was slightly negative in the    early 1930s and approximately zero from 2009, which of the following statements could be true about monetary policy after 1929 and after 2008?

a) It is real (not nominal) rates that matter, so the figure tells us nothing useful.

b) Since inflation is roughly zero, the nominal and real rates are the same in both periods.

c) When we account for inflation, there is little difference in the stance of monetary policy in the two periods.

d) When we consider real interest rates, monetary policy was even tighter in the 1930s compared with 2008 onwards.

2) Imagine that you are responsible for policymaking in an economy that is          experiencing a deep recession. You and your colleagues announce a number of   measures (like those in Roosevelt’s ‘New Deal’) that you tell everyone will boost demand and output. Why does it matter whether the public believes your              announcement?

a) It does not. If the measures are appropriate, aggregate demand will increase, regardless of what anyone thinks.

b) People will feel more confident about the future and increase their spending, which will reinforce the actions of government.

c) If they really believe that you are going to increase government spending, they may worry that taxes will have to rise in future. They will reduce their  spending in order to save more for the future tax demands, which will          undermine your strategy. It might be better if they simply ignored your        promises.

d) You are more likely to be re-elected if people believe that you tried to do something.

3) Which, if any, of the following statements about the US economy are true?

a) In the three epochs of capitalism since 1921, inequality fell during all three sub-periods of good economic performance (i.e. 1921- 1929, 1948-

1973 and 1979-2008).

b) Government debt as a percentage of GDP was higher at the end of the golden age (in 1979) than it was in 1948.

c) As a percentage of GDP, household debt fell and government debt rose in the period from 2008 when the financial crisis began until 2013.

4) In an economy with no taxation and no external trade, the size of the multiplier depends on:

a) Investment.

b) The current level of aggregate demand.

c) Autonomous consumption.

d) The marginal propensity to consume.

5) In the context of aggregate demand, which of the following constitutes investment?

a) Putting money in a savings account.

b) Buying company shares.

c) Buying a new car for personal use.

d) Upgrading your firm’s IT equipment.

6) Which of the following is likely to lead to a fall in the level of investment spending?

a) A rise in interest rates and increased optimism about future demand.

c) An easing of monetary policy by the central bank.

d) An official forecast of a downturn in the economy.

e) A rise in the expected rate of profit.

7) A household’s net worth (or equity) is best described as:

a) The total value of its assets.

b) The value of its house and other consumer durables.

c) The total value of assets minus the total value of its liabilities.

d) The value of its house minus the amount of the outstanding mortgage.

8) Which of the following statements regarding the multiplier is correct?

a) If two countries were identical except for the share of credit-constrained households, then the country with the higher share would have a smaller    multiplier.

b) The multiplier is constant over the business cycle.

c) An increase in the level of exports leads to a higher multiplier.

d) Taxation and imports are 'leakages' from the circular flow of income, which reduce the size of the multiplier.

9) The following diagram depicts the change in the aggregate goods market equilibrium when there is a €2 billion increase in investment.

The economy’s marginal propensity to consume is 0.5. Based on this information, what is the value of the multiplier?

a) 5

b) 1

c) 10

d) There is not enough information to calculate the multiplier.

10) In an economy with unutilized resources, the government stimulates aggregate demand by increasing its spending. The effect on output and employment will be  greater if:

a) The economy has a high propensity to import.

b) The spending is financed by additional taxation.

c) Its trading partners undertake a similar policy.

d) The central bank simultaneously tightens monetary policy.

11) Cuts in public expenditure do not guarantee a reduction in the government’s deficit because:

a) Firms will try to pay less tax.

b) Aggregate demand will fall, reducing government revenue.

c) Aggregate demand falls, and firms invest less.

d) There is a fall in autonomous consumption.

12) The aggregate demand of an open economy is given by the after-tax domestic consumption C, the investment I (which depends on the interest rate r), the           government spending G and net exports X – M , Given this equation,

which of the following increases the multiplier?

a) A fall in government spending.

b) A fall in the interest rate.

c) A fall in the marginal propensity to import.

d) A rise in the tax rate.

13) A country’s GDP is being measured by expenditure. Various categories of expenditure are recorded as follows:

o Households’ spending on consumption = $100bn

o Firms’ spending on capital goods = $15bn

o Firms’ addition to inventories = $1bn

o Government spending on services = $10bn

o Government spending on capital goods = $2bn

o Government transfers (social security etc) = $10bn

o Exports = $12bn

o Imports = $10bn.

What is the correct estimate of GDP?

a) $150bn

b) $160bn

c) $139bn

d) $130bn

14) Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption?

a) A temporary reduction in income.

b) A rise in interest rates.

c) An unexpected promotion to a senior position.

d) A freeze in the value of state retirement benefits.

15) Okun's law implies that:

a) Changes in the unemployment rate and GDP growth rate are positively correlated.

b) The change in unemployment is negative in booms and positive in recessions.

c) Every change in the level of employment is exactly matched by an opposite change in the level of unemployment.

d) GDP growth rate and changes in unemployment are inversely correlated.

16) Why is investment spending likely to be more volatile than consumption spending?

a) Because investment depends entirely on ‘animal spirits’ .

b) Because firms cannot foresee the future.

c) Because a large part of consumption spending is on items that cannot be postponed. (‘non-discretionary’) – food, heating, lighting, shelter, for        example.

d) Because Interest rates fluctuate.

17) Inflation is best described as:

a) A rise in prices.

b) A persistent rise in the general level of prices.

c) Too much money chasing too few goods.

d) Fall in the value of the country’s currency.

18) A console issued in 2010 has a face value of $1,000 and pays interest of $50 per annum. The interest rate on newly issued console drops to 4 percent. What   happens to the value of the 2010 console?

a) The value of the console issued in 2010 remains unchanged.

b) The value of the console issued in 2010 falls to $800.

c) The value of the console issued in 2010 rises to $1250.

d) More information is required to establish the answer

19) The money multiplier depicts the relationship between:

a) the change in the money supply and the change in the monetary base

b) the change in deposits and the change in the money supply

c) the change in the money supply and the change in deposits

d) the change in the monetary base and the change in the money supply

e) the change in deposits and the change in the monetary base

20) Falling yields on longer-term government bonds can reflect expectations of :

a) falling inflation

b) a strengthening economy

c) a weakening economy

d) rising inflation

e) Both (a) and (c) are correct

answer:

1) In a boom, asset prices rise, borrowers have more collateral, banks become more willing to lend to them, and spending increases further.

2) A fall in the price level (deflation) causes consumers to expect further falls. This causes them to postpone spending and the reduction in demand causes prices to fall further.

3) A fire sale occurs when a household cannot repay its mortgage and sells its house.

4) When saving increases, investment increases.

5) A policy of fiscal stimulus in a recession is more effective in an open economy than in a closed economy because of the stimulus it provides to neighboring

economies.

6) An increase in taxation is a way for governments to finance a budget deficit.

7) Maintaining fiscal balance in a recession helps to stabilize the economy.

8) Unemployment benefits and taxes automatically increase government spending  and cut taxation in a downturn, while they trim spending and raise taxes in a boom.

These are therefore automatic stabilizers.

9) Some components of government spending inevitably increase when output falls.

10) Economic activity is subject to fluctuations (booms and slumps). For the US economy, considering the entire period from 1800-2010, The main cause of       economic fluctuations over the years has been the size of the agricultural sector and the effects of weather.

11) The marginal propensity to consume (MPC), measures the fraction of every additional (‘marginal’) dollar of disposable income that is consumed.

12) Gross Domestic Product (GDP) is the most referred to and reliable economic indicator in large part because it explicitly includes non-market activities, quality of life metrics, working conditions, domestic care work and environmental          conditions.

13) Deficits are a flow measure; debt is a stock measure.

14) Nominal GDP means adjusted for the price level, typically by using the Consumer Price Index (CPI).

15) Just like Greece with respect to the Euro (EUR), the United States is just a user of its currency, the United States dollar (USD).

16) Gross Domestic Product (GDP) can be determined by the expenditures of each component of GDP, namely: consumption, investment, government spending, and

exports minus imports.

17) Structural, or technological unemployment, is unemployment due to the  mismatch between the types of workers demanded and the available workers.

18) Time-related underemployment is when someone is working part-time even when they want to work full-time.

19) Frictional unemployment is a fluctuation in the level of employment due to the business cycle.

20) The duration of unemployment is typically not a concern as those who have been unemployed for the longest amount of time are typically hired first.

III- Definitions and concepts (Expect 2-5 definitions in the final exam)

1) Difference between Orthodox and Heterodox economist’s definition for economics

2) Invisible hand

3) Macroeconomics

4) Currency regime

5) Functional Finance

6) Difference between stock and flow concepts

7) Fallacy of Composition (provide example)

8) The Growth Domestic Product (GDP)

9) Difference between nominal and real GDP

10) Different expenditure components of the GDP and their definitions

11) Three approaches of measuring the GDP (Expenditure, Production and income approaches)

12) The Growth National Product (GNP)

13) How to derive personal income from GDP

14) GDP deflator

15) Inflation rate and how to calculate it (from CPI or GDP deflator)

16) The working age population

17) The labor forces

18) Employment and unemployment rate (learn how to calculate each is very important)

19) labor underutilization

20) Duration of unemployment

21) Aggerate demand for goods and services

22) Privet domestic financial balance

23) External financial balance

24) Government financial balance

25) Sectoral balance equation and how to interpret it

26) Aggregate consumption function (graph)

27) Marginal propensity to consume

28) Marginal propensity to save

29) Marginal propensity to invest

30) Autonomous consumption

31) The great financial crises

32) the great depression

33) Stagflation

34) Difference between gross and net investments

35) Macroeconomic equilibrium (graph)

36) Expenditure multiplier

38) Neoclassical view of the money multiplier

37) Yield concepts in fixed income investments

38) Monetary aggregates

39) Yield curve and interpretation of its shape

40) Difference between neoclassical an MMT in explaining the credit creation process.

exam)

1- Between May and June of 1994, total employment in the U.S. economy fell    from 122,872,000 to 122,430,000—a decline of 442,000.  At the same time, the  number of unemployed dropped by 85,000, from 7,902,000 to 7,817,000, and the unemployment rate fell a bit from 6.042% to 6.001%.

a) How can unemployment fall when the number employed is also falling?

b) From these numbers, calculate approximately how large the labor force was in May and in June.

c) What additional information would be needed to calculate that labor force participation rate?

2- Consider the following data for the country of Fruitopia:

a) What is the nominal GDP in 1994? In 1995?

b) Assuming a base year of 1994, what is real GDP in 1994? In 1995?

c) What is the rate of change of nominal GDP from 1994 to 1995?

d) What is the rate of change of real GDP from 1994 to 1995?

e) Using your answer from above, explain how the economy of Fruitopia is doing.

3- In Brazil, the reference base period for the CPI is December 1993. In September 2000, prices had risen by 1565.63 percent since the base period. The inflation rate  in Brazil during the year ending September 2001 was 6.46 percent and during the  year ending September 2002, the inflation rate was 7.93%.

a) What is the CPI in Brazil for December 1993?

b) Calculate Brazil’s CPI in 2000.

c) Calculate Brazil’s CPI in 2001.

d) Is the price level in Brazil rising or falling?

e) Did Brazil’s inflation rate increase or decrease in 2001 and in 2002?

4) Which of the following would be included and excluded in calculating this year’s GDP? Explain your answers.

a) social security payments received by a retired factory worker

b) The services of a professional painter who paints your mother’s home

c) The payment received by Smith when he sells a 2012 Ford to Jones.

d) A monthly allowance that a college student receives from home

5) Briefly outline the distinction between Gross Domestic Product and Gross National Product.

6) By starting with the definition of gross saving from Equation (4.3) briefly outline how it differs from personal saving (PS).

7) What factors in a) the short run; and b) the long run, can affect the overall labor force participation rate?

8) How are cyclical and structural unemployment defined? Why is it sometimes difficult to differentiate between cyclical and structural unemployment?

9)  Why  might  the  average  duration  of unemployment  initially  decline  at  the beginning of a long recession but then increase?

10) Carefully define what is meant by the aggregate demand function and explain its two major components.

11) The following model represents a very simplified version of the Greek             economy of a few years ago, which has the euro (€) as its currency. The Marginal Propensity to Consume (MPCD) out of disposable income is 0.8. The share of        national income which is paid in taxes is 10 percent. 30 percent of national income is spent on imports. Total autonomous expenditure, A, consists of €60b (exports),