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Intermediate Macroeconomics

Posted: August 25th, 2021

HARVARD UNIVERSITY DEPARTMENT OF ECONOMICS
Econ 1010b / Econ E-1012 Intermediate Macroeconomics

My father said, “Son, we’re lucky in this town / It’s a beautiful place to be born.

It just wraps its arms around you / Nobody crowds you and nobody goes it alone.

Your flag flyin’ over the courthouse / Means certain things are set in stone.

Who we are, what we’ll do, and what we won’t.”

—Bruce Springsteen, “Long Walk Home”

2019  Final Examination

Overview and Instructions:

There are two parts to the exam. Part I is a series of questions about a single policy experiment or exogenous shock. This part has 18 questions worth 1 point each. Part II is a series of multiple choice questions related to the individual chapters that we covered. It has 82 questions that are also worth 1 point each. Thus, there are 100 points possible on the exam and you should fill in a bubble for each of the first 100 questions on your Scantron sheet. In other aspects, the procedures for this final are exactly the same as for the two midterms:

  1. Mark all of your answers on the Scantron sheet. Do not mark your answers on this exam copy. Donot turn in this exam copy when you are done (please recycle it).
  2. The exam will be graded by computer, so use No. 2 pencil only on your Scantron sheet. Erase completely if you want to change your answer.
  3. As you did on for the midterms, write down your 8-digit Harvard ID and your name on the Scantron sheet in the appropriate places and fill in the appropriate bubbles underneath.
  4. Calculators are not permitted. Use the blue book you are provided as scratch paper. Do not turn inany blue books you use in this way (please recycle them, too).
  5. For all questions on this exam, there is only one correct answer: A.), B.), C.), D.) or E.). So fill inonly one bubble per question.
  6. There is no additional penalty (besides getting no points) for wrong answers, so go ahead and guess.

Part I. This part asks you about the effects of a change in a single exogenous variable using several different models. You should assume that the capital stock is fixed in both the short-run and the longrun (that is, we are abstracting from the effect of investment on full–employment output in the very long run). Assume also that savings S does not change when the real interest rate r changes, and that all other behavioral equations follow their “standard” forms. For example, the MPC is somewhere between 0.01 and

0.99.

The exogenous change is an increase in autonomous investment (“animal spirits”) φ. All other exogenous variables are held constant as φ increases.

Use the following letters to signify how the given endogenous variable will change if φ increases:

  1. Increase.
  2. Decrease.
  3. No change.
  4. Ambiguous change. An ambiguous change is one that cannot be signed, so that the model is consistent with either an increase in the variable, a decrease in the variable, or no change in the variable.

Exogenous change: φ increases

A.) Increase B.) Decrease C.) No Change D.) Ambiguous Change

  • Long–run, classical, closed economy model of Chapter 3:
    • Output A
    • Investment A
    • Real Interest Rate B
  • Long–run, small open economy model (SOE) of Chapter 6:
    • Investment A
    • Net Exports A
    • Real Exchange Rate B

this page, assume that prices are fixed, and that• Short–run, closed-economy IS–LM model of Chapters 11 and 12. For this part and remaining models on IS and LM curves (and IS∗ and LM∗ curves) have their“usual” slopes (that is, ignore special cases like the liquidity trap).

  • Investment A
    • Output A
  • Short–run, small open–economy (SOE) Mundell–Fleming model of Chapter 13 under floating exchange

rates.

  • InvestmentA
    • Net ExportsA
    • Nominal Exchange RateB
  • Short–run, small open–economy (SOE) Mundell–Fleming model under fixed exchange rates.
    • InvestmentA
    • Real Interest RateB
    • Nominal Exchange RateB
    • OutputA
  • Short–run, large open–economy (LOE) Mundell–Fleming model under floating exchange rates.
  1. InvestmentA
    1. Real Interest RateB
    1. Nominal Exchange RateB

Part II. Multiple choice. When answering each question, you should only use information learned up to that chapter. For example, when answering the Chapter 6 questions regarding open economies in the long run, do not use the Mundell–Fleming model.

Chapter 1: Introduction to Econ 1010b

19. Which of the following is likely to be true in a model in which prices are perfectly flexible at all times (for example, prices can jump)?

  1. Markets will clear continuously.
  2. Real variables in the model will be determined only by other real variables.
  3. An exogenous change in the money supply M will temporarily raise the level of output Y .
  4. A.) and B.)
  5. A.), B.) and C.).

Chapter 2: The Data of Macroeconomics

20. Which of the following raises US investment I in 2019?

  1. In June 2019, a retail store in Kansas purchases goods from China to stock its shelves, but the goodsgo unsold until January 2020.
  2. In May 2019, a restaurant in Kentucky purchases potatoes from a farm in Idaho in order to make french fries, which are eaten by customers later that month.
  3. In October 2019, a young couple purchases a house in Massachusetts from an older couple whopurchased the house in 1990.
  4. A.) and B.) E.) A.), B.) and C.).

21. Gross Domestic Product (GDP) for the United States is equal to

  1. The total income earned by factors of production (for example, labor and capital) located in theUnited States.
  2. The total expenditure on the US economy’s output of final goods and services.
  3. The total expenditures of US consumers, US firms, and the US government.
  4. A.) and B.).
  5. A.), B.), and C.)

22. Which of the following is targeted by the Federal Reserve to be 2% per year?

  1. Inflation as measured by the price index for personal consumption expenditures (PCE).
  2. Inflation as measured by the consumer price index (CPI).
  3. The unemployment rate (UR).
  4. A.) and C.).
  5. B.) and C.).

23. A comparison of the Fed’s Summary of Economic Projections (SEPs) from 2014 and 2019 shows that members of the Federal Open Market Committee (FOMC) believe that the  has declined since 2014.

  1. Long-run nominal Federal Funds rate.
  2. Long-run real Federal Funds rate (sometimes called “r-star”).
  3. Long-run inflation target π∗.
  4. A.) and B.).
  5. A.) and C.)

Chapter 3: National Income: Where It Comes From and Where It Goes

NOTE: For all Chapter 3 questions, you should assume that national savings S does not change when the real interest rate r changes. Also, as we assumed in class, the marginal propensity to consume MPC is between 0.01 and 0.99.

24. If Y = F(K,L) is constant returns to scale (CRS), and z is a positive number, then F(zK,zL) equals

  1. Y .
  2. zY .
  3. 2zY . D.) z2Y .

E.) None of the above.

25. If the production function Y = F(K,L) is constant returns to scale (CRS) and Cobb-Douglas, and MPK and MPL denote the marginal products of capital and labor, respectively, then

A.) Y = (MPK · K) + (MPL · L). MPL should grow over time at the same rate as average labor B.) The marginal product of labor productivity Y/L.

  • Real economic profit equals zero.
  • A.) and B.).
  • A.), B.), and C.).

26. Assume that capital K and labor L are combined in a standard constant returns to scale CobbDouglas production function to make output Y . The technological parameter A equals 1. Total factor payments to suppliers of capital make up one-half of output Y . The amount of capital K supplied to the economy is 100 units, and the amount of labor supplied is 25 units. How many units of output Y does this economy produce each period?

  • √125
  • None of the above or we aren’t given enough information to answer the question.

27. (Continuing the previous question.) What is the marginal product of capital MPK?

  1. 1/4.
  2. 1/2.
  3. 1.
  4. 4.
  5. None of the above or we aren’t given enough information to answer the question.

28. (Continuing the previous question.) Now assume that a wave of immigration raises the amount of labor L in the economy from 25 to 100. Consider a graph of the market for capital services, in which the amount of capital supplied K is on the horizontal axis and the real rental rate  is on the vertical axis. How does the immigration wave affect this supply-and-demand diagram?

  1. The supply curve in the diagram shifts out.
  2. The supply curve in the diagram shifts in.
  3. The demand curve in the diagram shifts up.
  4. The demand curve in the diagram shifts down.
  5. No curve shifts.

29. (Continuing the previous question.) After the wave of immigration occurs, what is the new marginal product of labor MPL?

  1. 1/4.
  2. 1/2.
  3. 2.
  4. 4.
  5. None of the above or we aren’t given enough information to answer the question.

30. Which of the following would be expected to raise the real interest rate r?

  1. An increase in autonomous consumption a.
  2. An increase in autonomous investment (“animal spirits”) φ.
  3. A balanced-budget increase (that is, an equal increase) in government purchases G and taxes T.
  4. A.) and B.).
  5. A.) and B.), and C.).

31. Which of the following would be expected to raise investment I?

  1. An increase in autonomous investment (“animal spirits”) φ.
  2. An increase in government purchases G.
  3. An increase in taxes T.
  4. A.) and B.).
  5. A.) and C.).

32. Assume (in contrast to our usual assumption) that higher real interest rates r reduce consumption C, so that holding other factors constant, national savings rises when the real interest rate rises. In this economy, what happens when autonomous consumption a rises?

  1. National saving S rises.
  2. Investment I rises.
  3. The real interest rate r rises.
  4. A.) and C.).
  5. A.), B.), and C.).

Chapter 4: The Monetary System

33. Assume that the Fed purchases bonds in an open market operation. Which of the following will rise as a result?

  1. The monetary base B.
  2. The money supply M.
  3. The reserve-deposit ratio rr.
  4. A.) and B.).
  5. A.) and B.), and C.).

34. Which of the following explain why the Fed increased its balance sheet in the years after 2008?

  1. The Fed wanted to act as the lender of last resort during the acute phase of the recent financialcrisis.
  2. The Fed wanted to increase its holdings of Treasury securities in order to assist the recovery fromthe Great Recession of 2007–09.
  3. The Fed wanted to keep inflation from rising above its 2% target.
  4. A.) and B.)
  5. A.), B.), and C.)

Chapter 5: Money and Inflation

NOTE: For all Chapter 5 questions, you should assume that money demand depends in part on the opportunity cost of holding money, unless the question specifically implies otherwise. All economies analyzed in this section are closed.

35. Money demand in a particular economy depends only on real output Y , not on the opportunity cost of holding money. Specifically, desired real money balances in this economy are always equal to 25% of real output. The level of nominal money balances in this economy equals $1,000 (it’s a pretty small economy).

What is the level of velocity V ?

  1. 1/250.
  2. 1/4.
  3. 4.
  4. 250.
  5. None of the above, or we aren’t given enough information to answer the question.

36. (Continuing the previous question.) What is the level of nominal GDP?

  1. $250.
  2. $500.
  3. $1,000.
  4. $4,000.
  5. None of the above, or we aren’t given enough information to answer the question.
  Country A Country B
µ .10 .12
g .02 .04
r .02 .05
Y 150 units 150 units

The table above gives some long-run statistics on money growth (µ), the growth rate of output (g), and real interest rates (r) for two countries. The levels of real output (Y ) at a point in time are also given. In both countries, the functional form of the money demand function is the “sophisticated” version, which in this example depends only on the usual two variables and no exogenous shifters. The functional form of this equation is the same for both countries. Also assume that in both countries, nominal interest rates i have been constant (at potentially different levels) for a long time.

37. Which country will have the higher level of inflation π?

  1. Country A.
  2. Country B.
  3. Country A and Country B will have the same rates of inflation π.
  4. We don’t have enough information to answer the question.

38. (Continuing the previous question.) Which country will have the higher level of velocity V ?

  1. Country A.
  2. Country B.
  3. Country A and Country B will have the same level of velocity V .
  4. We don’t have enough information to answer the question.

39. Assume that animal spirits for investment φ have increased. Which of the following will also increase as a result?

  1. The nominal interest rate i.
  2. The price level P.
  3. Velocity V .
  4. A.) and B.).
  5. A.), B.), and C.).

40. Which of the following events will cause the price level P to jump down?

  1. An increase in taxes T.
  2. A decline in government purchases G.
  3. An increase in autonomous consumption a.
  4. A.) and B.).
  5. A.), B.) and C.).

Chapter 6: The Open Economy

NOTE: As for the Chapter 3 questions, you should assume that national savings S does not change when the real interest rate r changes. Also, as we assumed in class, the marginal propensity to consume MPC is between 0.01 and 0.99.

41. Consider the loanable-funds diagram for a small open economy (SOE). In this diagram, the intersection of the savings schedule S with the investment-demand schedule I(r)

  1. Determines the SOE’s equilibrium real interest rate r.
  2. Determines the point at which the economy’s level of savings-minus-investment (S − I) equals its net exports (NX).
  • Determines the point at which the net supply of home-country currency that is to be converted into foreign currency and invested abroad equals the net foreign demand for home currency to buy home-country goods and services.
  • A.) and B.).
  • Neither A.), B.), nor C.).

42. Capeside is a small open economy (SOE) that uses a currency called the “C-dollar.” It is running a trade deficit. In this equilibrium, which of the following is true?

  1. The level of national savings S in Capeside is smaller than investment I in Capeside.
  2. Capital outflows out of Capeside are larger than capital inflows into Capeside.
  • The net supply of C-dollars to be converted into foreign currency and invested abroad is smaller than the net foreign demand for C-dollars to buy Capeside’s goods and services. D.) A.) and B.).

E.) A.) and C.).

43. In the SOE model, which of the following will result from an increase in government purchases G?

  1. A decrease in the real exchange rate ǫ.
  2. An increase in investment I.
  3. A decrease in net exports NX.
  4. A.) and B.).
  5. A.), B.) and C.).

44. In the SOE model, which of the following will cause the real exchange rate ǫ to rise?

  1. An increase in government purchases G.
  2. An increase in animal spirits for investment φ.
  3. An increase in the world real interest rate r∗.
  4. A.) and B.).
  5. Neither A.), B.), nor C.).

45. Consider a graph of the market for foreign currency exchange for a small open economy (SOE) called Stars Hollow, whose currency is the “SH-dollar.” Which of the following raises the net supply of

SH-dollars to be exchanged into foreign currency and invested abroad?

  1. An increase in the level of tariffs that Stars Hollow places on imports.
  2. An increase in the world demand for the goods that Stars Hollow produces.
  3. A decline in government purchases G in Stars Hollow.
  4. A.) and B.).
  5. A.), B.), and C.).

46. Assume that the United States is a large open economy (LOE), and that investors around the world suddenly view the United States as a bad place to invest their savings. Which of the following is likely to decline as a result?

  1. The US net capital outflow.
  2. The US real exchange rate ǫ.
  3. The US level of output Y .
  4. A.) and B.).
  5. A.), B.), and C.).

47. In which economy will an increase in government purchases G have the largest negative effect on the level of investment I?

  1. A closed economy.
  2. A small open economy (SOE).
  3. A large open economy (LOE).
  4. The negative effect of higher G on I will be the same in a closed economy, a small open economy, and a large open economy.
  5. The effect of higher G on I is always zero in a closed economy, small open economy, or a large open economy.

Chapter 7: Unemployment and the Labor Market

48. Consider a labor market that is in steady state. The following data are observed for each time period of this steady state: population = 1,000 (there is no population growth); labor force participation rate LFPR = 80%; number of unemployed persons U = 160; number of persons who flow from employment E to unemployment U in each period (E → U flow) = 64. Each period, there are flows between U and E in both directions, but no one flows in or out of the labor force—the same people are out of the labor force (N) in each period. What is the unemployment rate UR in this economy?

  1. 6.4 percent.
  2. 16 percent.
  3. 20 percent.
  4. 25 percent.
  5. None of the above or we aren’t given enough information to answer the question.

49. (Continuing the previous question.) What is the job-finding rate for unemployed workers in this steady state? That is, with what probability does an unemployed worker flow from U to E within a single period?

  1. 6.4 percent.
  2. 10 percent.
  3. C.) 20 percent.
  4. 40 percent.
  5. None of the above or we aren’t given enough information to answer the question.

50. The Beveridge Curve is often used as a “quick and dirty” way to analyze developments in the labor market. Viewed in this way, the  shift in the Beveridge Curve that occurred around 2010 suggests that  had declined at that time.

  1. outward; labor demand.
  2. inward; labor demand.
  3. outward; matching efficiency.
  4. inward; matching efficiency.

Chapters 8 and 9: Economic Growth

NOTE: For all Solow Model questions, you should assume the “full” Solow Model, which includes both population growth and growth in labor-augmenting technical progress (unless told otherwise).

51. In the Solow Model, which of the following share the same growth rate in steady state? (Keep in mind that “zero” is also a growth rate.)

  1. The capital-labor ratio K/L, the capital-output ratio K/Y, and the marginal product of capital MPK.
  2. Output per worker Y/L, the marginal product of capital MPK, and the marginal product of labor MPL.
  3. Consumption per worker C/L, the marginal product of labor MPL, and labor-augmenting technology

E.

  • Aggregate output Y , aggregate capital K, and population.
  • None of the above.

52. The economy of Goldenland is in steady state and is at the Golden Rule. It has population growth n of 3 percent, a depreciation rate δ of 5 percent, and a rate of growth of output per worker Y/L of 2 percent.

The capital-output ratio K/Y is 5 (five). What is Goldenland’s saving rate s?

  1. 5 percent (.05).
  2. 10 percent (.10).C.) 25 percent (.25).
  3. 50 percent (.50).
  4. None of the above or we aren’t given enough information to answer the question.

53. (Continuing the previous question.) What is the steady-state level of capital per effective unit of labor k in Goldenland?

  1. .10.
  2. √5.
  3. 5.
  4. 25.
  5. None of the above or we aren’t given enough information to answer the question.

54. Solovia is an economy that is in steady state and that has no population growth or labor-augmenting technological progress. Analysts in Solovia have calculated that its marginal product of capital MPK is lower than the slope of its breakeven-investment function. The analysts recommend that Solovia change its saving rate s so that the MPK will eventually equal this slope. What will happen to consumption per worker and investment per worker immediately after this change in the savings rate is made?

  1. Consumption per worker and investment per worker will both rise.
  2. Consumption per worker will rise and investment per worker will fall.
  3. Consumption per worker will fall and investment per worker will rise.

D.) Consumption per worker and investment per worker will both fall.

55. (Continuing the previous question.) Once Solovia’s new steady state is reached, which of the following variables will have a steady-state value that is higher than its steady-state value before the savings rate s

was changed?

  1. The level of consumption per worker.
  2. The growth rate of consumption per worker.
  3. The level of investment per worker.
  4. A.) and B.).
  5. A.) and C.).

56. According to our discussion in class, a major strength of the paper involving the use of the plow (or “plough”) is that it shows

  1. That modern-era economic outcomes can have a profound effect on the informal rules by which aneconomy operates.
  2. A causal link than runs from historical cultural influences and practices to modern economic out-comes.
  3. Both of the above.
  4. None of the above.

57. Use the growth-accounting formulas discussed in class to answer the following question: A country experiences 5 percent annual growth in aggregate output Y and 3 percent annual growth in average labor productivity Y/L. The capital-labor ratio K/L is growing at 1 percent per year. (You can assume that there are no changes in human capital or unmeasured labor quality that need to be accounted for.) If capital’s share of income is 25 percent, how fast is total factor productivity growing in this economy?

  1. 2.75 percent per year.
  2. 4 percent per year.
  3. 4.75 percent per year.
  4. 5 percent per year.
  5. None of the above or we aren’t given enough information to answer the question.

Chapter 10: Introduction to Economic Fluctuations

58. Assume the Fed increases the money supply M. In the Chapter 10 model, what happens immediately afterward (that is, in the short run), to output Y and the price level P? (You can assume that output Y

was equal to potential output Y before M rose.)

  1. Output Y rises and the price level P rises.
  2. Output Y rises and the price level P stays the same.
  3. Output Y stays constant and the price level P rises.
  4. Output Y stays the same and the price level P stays the same.

59. (Continuing the previous question.) Over the long run, as the economy returns to potential output

Y , which of the following variables declines slowly over time?

  1. Output Y .
  • Real balances
  • The price level P.
  • A.) and B.).
  • A.), B.), and C.).

60. In the Chapter 10 model, which of the following events causes an immediate and simultaneous increase in both the price level P and output Y ?

  1. An exogenous increase in nominal money balances M.
  2. An exogenous decrease in money demand.
  3. An adverse supply shock.
  4. A.) and B.).
  5. Neither A.), B.), nor C.).

Chapters 11 & 12: Aggregate Demand I & II

NOTE: Unless the question specifically involves inflation or deflation, you should assume that π = πe = 0, which is the assumption that we maintained most of the time in class. You should also assume that the IS and LM curves have their “usual” shapes (and thus are not at the polar cases we sometimes discussed in class). Finally, you should assume that the

economy starts out at Y before any changes in exogenous variables occur.

61. A change in animal spirits for investment φ shifts

  1. The IS curve.
  2. The LM curve.
  3. The IS curve and the AD curve.
  4. The LM curve and the AD curve.
  5. The IS curve, the LM curve, and the AD curve.

62. A change in the price level P shifts

  1. The IS curve.
  2. The LM curve.
  3. The IS curve and the AD curve.
  4. The LM curve and the AD curve.
  5. The IS curve, the LM curve, and the AD curve.

63. Assume that autonomous consumption a has declined and that all prices are fixed in the short run

as this change occurs. Before this change, the economy was at the natural level of output Y . In the short run, under the standard assumptions for the IS and LM curves, the decline in a would be expected to  the real interest rate r and  output Y .

  1. raise; raise
  2. raise; lower
  3. lower; raise
  4. lower; lower

64. (Continuing the previous question.) What is the initial, short-run effect of a decline in a on consumption C and investment I?

  1. Consumption rises and investment rises.
  2. Consumption rises and investment falls.C.) Consumption falls and investment rises.

D.) Consumption falls and investment falls.

65. (Continuing the previous question.) Now consider the economy’s long-run adjustment to the decline in a. As the economy makes this adjustment, the real interest rate r will  and output Y will

 .

  1. rise; rise.
  2. rise; decline.C.) decline; rise.

D.) decline; decline.

66. Which of the following tend to increase the effects of an increase in autonomous consumption a on short-run Y ?

  1. A large interest elasticity of money demand.
  2. A small interest elasticity of money demand.
  3. A large interest elasticity of investment.
  4. A.) and C.).
  5. B.) and C.).

67. According to our discussion in class, expected inflation πe played an important role in the economy at various points during the Great Depression. Specifically, in 1929 a(n)  in expected inflation caused the real interest rate r to . In 1933, a separate movement in expected inflation caused the real interest rate r to

  1. Increase, decline, decline again.
  2. Increase, decline, increase.C.) Increase, increase, decline.
  3. Increase, increase, increase again.
  4. Decline, increase, decline.

Chapter 12a: Forward Guidance and Quantitative Easing

68. Which of the following makes it more likely that a policy of forward guidance will be successful?

  1. Movements in the long-term interest rate are closely related to expected short-term interest rates.
  2. Movements in the long-term interest rate are not closely related to expected short-term interest rates.
  3. The central bank undertaking the forward guidance has a lot of credibility with the public.
  4. A.) and C.).
  5. B.) and C.).

69. Forward guidance can be described as

  1. An attempt to lower long-term interest rates when the current Federal Funds rate is zero.
  2. A promise by the Fed to keep the short-term interest rate at zero longer than a Taylor Rule might suggest.
  3. An attempt to lower the term premium between short-term and long-term interest rates.
  4. A.) and B.).
  5. A.), B.), and C.).

70. Assume that inflation π has been constant at the Fed’s target π∗ for some time. Additionally, the unemployment rate UR has equalled the FOMC’s estimate of the natural rate UR∗ for a long time as well. Then, one day, the inflation rate π rises by 1 percentage point. There is no change in the unemployment rate. If the Fed is following a Taylor Rule of the type discussed in class, the Fed will  .

  1. Raise the nominal Fed Funds rate by 1 percentage point.
  2. Raise the nominal Fed Funds rate by more than 1 percentage point.
  3. Raise the nominal Fed Funds rate by less than 1 percentage point.
  4. Reduce the nominal Fed Funds rate by 1 percentage point.
  5. Reduce the nominal Fed Funds rate by less than 1 percentage point.

Chapter 13: Aggregate Demand in the Open Economy

NOTE: For all Chapter 13 questions, you should assume that the domestic economy is a small open economy with perfect capital mobility. Importantly, this means that that countries are not like China, which restricts capital flows. Additionally, national savings S does not change when the real interest rate r changes (the general assumption made for Chapters 3 and 6).

71. Consider two countries—one has flexible exchange rates, and the other has fixed exchange rates. Both experience an increase in government purchases G. Which country is most likely to experience a change in output Y in response to this increase in G?

  1. The country with fixed exchange rates.
  2. The country with flexible exchange rates.
  3. Both countries are likely to experience a change in output Y.
  4. Neither country is likely to experience a change in output Y.

72. Consider two countries—one has flexible exchange rates, and the other has fixed exchange rates. Both experience an exogenous increase in world demand for the goods and services that they produce. Which country is most likely to experience a change in net exports NX in response to this increase in their export demand?

  1. The country with fixed exchange rates.
  2. The country with flexible exchange rates.
  3. Both countries are likely to experience a change in NX.
  4. Neither country is likely to experience a change in NX.

73. Which of the following shifts the IS∗ curve to the right?

  1. An increase in government purchases G.
  2. An increase in autonomous consumption a.
  3. An increase in animal spirits for investment φ.
  4. A.), and B.).
  5. A.), B.), and C.).

74. Which of the following shifts the IS∗ curve to the left?

  1. An increase in the world real interest rate r∗.
  2. An increase in country risk θ.
  3. An increase in tariffs placed on imported goods.
  4. A.), and B.).
  5. A.), B.), and C.).

75. For a country with flexible exchange rates, which of the following shifts the LM∗ curve to the right? Note: You should consider only the immediate effects of the events below. That is, you can ignore

any knock-on effects to the LM∗ curve that might arise after the events listed, which could result from changes in the price level P or money demand γ, or from the central bank’s attempt to limit exchange-rate movements.

  1. An increase in the world real interest rate r∗.
  2. An increase in country risk θ.
  3. An increase in the nominal money supply M.
  4. A.), and B.).
  5. A.), B.), and C.).

76. The textbook theory of uncovered interest parity predicts that if Country A has a higher nominal interest rate i than Country B, then

  1. The currency of Country A will depreciate (that is, weaken) over time relative to Country B’s.
  • The currency of Country A will appreciate (that is, strengthen) over time relative to Country B’s.
  • Country A should be a more profitable place for international investors to place their savings.
  • A.) and C.).
  • B.) and C.).

77. An “internal devaluation” is best described as a decline in the  brought about by a decline in the  . Countries with  exchange rates are more likely to require internal devaluations.

  1. Nominal exchange rate e; real exchange rate ǫ; flexible.
  2. Nominal exchange rate e; real exchange rate ǫ; fixed.
  3. Nominal exchange rate e; price level P; fixed.
  4. Real exchange rate ǫ; price level P; flexible.
  5. Real exchange rate ǫ; price level P; fixed.

78. The graph above shows a long-run response to an increase in country risk for a small open economy.

What exchange-rate regime does this economy have?

  1. Fixed exchange rates.
  2. Flexible exchange rates.
  3. The graph is appropriate for an economy with either fixed or flexible exchange rates.
  4. We are not given enough information to answer the question.

79. Which economy is likely to experience the largest short-run increase in output Y due to an increase in nominal money balances M?

  1. A small open economy (SOE) with flexible exchange rates.
  2. A large open economy (LOE) with flexible exchange rates.
  3. A closed economy.
  4. All three economies described above will experience the same increase in Y from an increase in M.

80. Which economy is likely to experience the largest short-run increase in output Y due to an increase in animal spirits for investment φ?

  1. A small open economy (SOE) with flexible exchange rates.
  2. A large open economy (LOE) with flexible exchange rates.
  3. A closed economy.
  4. All three economies described above will experience the same increase in Y from an increase in φ.

Chapter 14: Aggregate Supply

with81α >. In class we worked with a short-run aggregate supply (SRAS) function of the form0. In the Basic Theory of Aggregate Supply, what factors determine α?                                                                                                                                   Y = Y +α(P−Pe),

  1. The sensitivity of marginal cost to the aggregate output gap.
  2. The fraction of “sticky-price” firms that cannot change their prices within the period.
  3. The difficulty that all firms have in distinguishing increases in the specific demand for their products from a general increase in aggregate demand.

D.) A.) and B.).

E.) A.), B.), and C.).

82. According to our discussion in class, why do some economists dislike theories of aggregate supply that are based on the presence of nominal rigidities?

  1. These theories imply that prices are not free to clear markets continuously, which bothers economists who like models in which the price system allocates resources efficiently.
  2. These theories imply that people cannot observe the general price level, which is published by the government at frequent intervals.

C.) Both of the above.

D.) None of the above.

83.    During the Volcker disinflation, the so-called sacrifice ratio turned out to be      than many economists had predicted, supporting the idea that inflation expectations are set at least partly in a(n)     manner.

  1. higher; adaptive.
  2. higher; rational;

C.) lower; adaptive;

D.) lower; rational.

84. According to our discussion in class, which of the following words is the most appropriate one to use when describing inflation expectations during the past decade?

  1. Adaptive.
  2. Rational.
  3. Anchored.
  4. Flat.
  5. Macro-tastic.

85. According to our discussion in class, why is the concept of “hysteresis” relevant for the formation of monetary policy today?

  1. Hysteresis implies that inflation expectations could rise dramatically if unemployment falls too far below the natural rate.
  2. Hysteresis implies that that natural rate of unemployment could decline if the actual unemployment rate remains below the natural rate for some time.
  3. Hysteresis implies that the Phillips Curve has become much flatter since the early 1980s.
  4. Hysteresis implies that the sacrifice ratio could be much lower than previous estimates have suggested.
  5. Hysteresis implies that the Federal Reserve is better equipped to manage inflation expectations than the president and Congress.

Chapter 18: Stabilization Policy

86. The table above is taken from a (now-public) forecast of the economy made in September 2008 by the staff of the Federal Reserve’s Board of Governors. In class, we used this table to make the point that

  1. Economists were aware that the financial crisis of 2008 would affect the real economy.
  2. The Phillips Curve had become flatter even by 2008.
  3. Economic forecasts are pretty good a year or two out, but long-term forecasts are usually wrong.
  4. The Fed cares more about stabilizing the inflation rate than it does about stabilizing the unemployment rate.
  5. Economic forecasting is difficult.

87. Assume that a government statistician is asked to predict the effect that a tax cut in 2019 would have on consumption in 2019. He or she predicts that a tax cut would be very effective in raising consumption, based on the positive correlation between tax cuts and consumption increases that is present in US data between 1947 and 2018. According to the logic of the Lucas Critique, why might this prediction prove inaccurate?

  1. Because high-income people account for most of taxes paid, tax cuts are unlikely to make much difference to a US consumer with the median income.
  2. The analyst is not taking account of whether the historical tax cuts were expected by previous taxpayers to be temporary or permanent.
  3. A shown by William & Mary graduate Christina Romer, historical economic data is much less accurate than modern data.
  • In the long run, output Y always returns to its long-run level, Y .
  • The historical data were generated by presidents and Congresses that were not trying to stabilize the economy. Rather, they were trying to ensure their own re-elections (the “political business cycle”).

88. Assume that an analyst advising the Federal Reserve wants to calculate an implied Federal Funds rate using a Taylor Rule. To apply a Taylor Rule of the type discussed in class, the analyst needs not only current economic data but also an estimate of

  1. The long-run real Federal Funds rate (sometimes called “r-star”).
  2. Either the long-run unemployment rate (sometimes called the “natural rate of unemployment” and

denoted UR∗) or the long-run GDP level (sometimes called “potential output” and denoted Y ).

C.) Both A.) and B.).

D.) Neither A.) nor B.)

Chapter 16: Consumption

89. Which variable is predicted by the Keynesian consumption function to rise as income grows?

  1. The average propensity to consume APC.
  2. The marginal propensity to consume MPC.
  3. The savings rate.
  4. A.) and C.).
  5. Neither A.), B.) or C.).

90. Which of the following areas of empirical analysis did not support the predictions of the Keynesian consumption function?

  1. Work by Simon Kuznets on average consumption and savings in the U.S. from decade-to-decade (for example, average yearly consumption and savings in the 1890s relative to the 1880s).
  2. Cross-sectional household-level studies on consumption and savings at a point in time (for example, British households in 1948).
  3. Year-to-year studies of aggregate consumption and savings in short time series.
  4. B.) and C.).
  5. A.), B.) and C.).

91. Timmy has income in Periods 1 and 2, but consumes more than his income in Period 1. What happens to his first-period consumption if the real interest rate r rises?

  1. It rises.
  2. It falls.
  3. It stays the same.
  4. It can either rise, fall, or stay the same, depending on the relative strength of income and substitution effects.

92. According to our discussion in class, an empirical problem with the Life-Cycle Model is that many older people do not as much as the Life-Cycle Model predicts. Uncertainty over length-of-life and medical expenses as well as motives are potential explanations for that empirical fact.

  1. Save; behavioral-economics.
  2. Dissave; behavioral-economics.
  3. Save; strategic bequest.
  4. Dissave; strategic bequest.
  5. Save; rational.

93. The Life-Cycle Model predicts that in long time series, the  propensity to consume stays constant because  tend(s) to move proportionately with income.

  1. marginal; bequests.
  2. marginal; wealth.
  3. marginal; life expectancy.
  4. average; bequests.
  5. average; wealth.

Chapter 20: The Financial System: Opportunities and Dangers

94. Adverse selection concerns hidden knowledge about  , while moral hazard concerns hidden knowledge about  .

  1. Systematic risk; idiosyncratic risk.
  2. Idiosyncratic risk; systematic risk.
  3. Attributes; actions.
  4. Actions; attributes.

95. According to our discussion of Akerlof’s “lemons” model, when sellers of goods (such as used cars) know more about the quality or characteristics of the goods than potential buyers do,

  1. The sellers will want to eliminate informational advantages they have over potential buyers, in order to make it more likely that trades take place.
  2. Trades occur if and only if the buyer values the good or service more than the seller does.
  3. Both of the above.
  4. None of the above

96. Why did the economic events during the early 1980s encourage the securitization of mortgages at the expense of portfolio lending?

  1. The large increase in defaults during the early 1980s recessions meant that lenders (such as savings and loans) did not want to keep mortgages in their portfolios.
  2. The large increase in interest rates during the Volcker disinflation adversely affected the assets of lenders that had fixed-rate mortgages in their portfolios.

C.) Both of the above.

D.) None of the above.

97. How was credit risk handled in agency mortgage-backed securities (that is, the kind of MBS that

were constructed by Fannie Mae and Freddie Mac)?

  1. Credit risk was assumed to be zero, because a repeat of a Volcker-type disinflation, which decimated savings and loans, was thought impossible.
  2. A “tranching” structure allowed people with highest risk tolerances to purchase the lowest-rated tranches and be rewarded by higher yields (that is, higher interest rates).
  3. Fannie and Freddie absorbed the credit risk in return for payment of a guarantee fee (or “g-fee”). But most people believed that the credit risk would ultimately be borne by the U.S. government if a housing crisis occurred.
  4. All of the above.

         98. Negative equity is     for mortgage default.

  1. A necessary and sufficient condition.
  2. A necessary condition but not a sufficient condition.

C.) A sufficient condition but not a necessary condition.

D.) Neither a necessary nor a sufficient condition.

99. Why was information from credit default swaps (CDS) fed into Gaussian copulas by Wall Street firms that constructed collateralized debt obligations (CDOs)?

  1. The CDS data provided information on the likelihood of default for any individual mezzanine tranche of a private-label mortgage-backed security (such as a “subprime ABS”) that is included in a CDO.
  2. The CDS data were used to estimate the probable correlation of defaults among mezzanine tranches of private-label securities that were included in CDOs.
  3. The CDS data allowed the investors in CDOs to reduce the impact of asymmetric information, which is always present in financial markets.
  4. The CDSs allowed the investors in CDOs to purchase “insurance policies” against CDO defaults.

100. As discussed in class, the “bubble” theory of the crisis implies that in order to prevent or reduce future problems, policymakers should

  1. Take a “malaria” approach, which involves issuing financial-market regulations designed to reduce asymmetric-information problems that cause bubbles.
  2. Take an “earthquake” approach, which involves ensuring that the balance sheets of financial institutions are strong enough to withstand the bursting of bubbles, which are difficult to forecast, identify, or control.
  3. Both of the above.
  4. None of the above.

May 16, 2019                                                                                                                                                    20:21

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