Deck 1: The Policy and Practice of Macroeconomics

Question 1

A(n) ________ variable is calculated from within the model. A(n) ________ variable can never be taken as given.

A) endogenous; endogenous
B) exogenous; endogenous
C) endogenous; exogenous
D) exogenous; exogenous
E) none of the above

Answer 1

endogenous; endogenous

Question 2

Macroeconomics is the study of ________ while microeconomics studies ________.

A) large business enterprises; small business ventures
B) the overall household economic activity; market behavior
C) an individual firm; the overall economic performance of a nation
D) the overall economic performance of the world; the economy of a single country
E) none of the above

Answer 2

none of the above

Question 3

Which statement is true of an exogenous variable in an economic model?

A) It has no direct relation to the endogenous variables.
B) Its value within the model cannot be changed.
C) It is often a policy variable.
D) It is explained inside the model.
E) All of the above.

Answer 3

It is often a policy variable.

Question 4

If a macroeconomist studying the causes of unemployment suspects that changes in technology might play a role, then this macroeconomist is at which step in the process of developing an economic model?

A) Identify the exogenous variables.
B) Identify the endogenous variables.
C) Compare the model with the data.
D) Conduct prediction and policy analysis.
E) Develop a model.

Question 5

Macroeconomic models particularly focus on the following three economic data series.

A) endogenous variables, exogenous variables, and taxes
B) inflation, unemployment, and business cycles
C) nominal GDP, the employment rate, and budget deficits
D) bankruptcies, the unemployment rate, and depressions
E) none of the above

Question 6

If a macroeconomist studying the causes of unemployment finds that, historically, changes in technology seem to have caused between five and 15 percent of changes in unemployment, then this macroeconomist is at which step in the process of developing an economic model?

A) Identify the exogenous variables.
B) Identify the endogenous variables.
C) Develop a model.
D) Compare the model with the data.
E) Conduct prediction and policy analysis.

Question 7

Real GDP measures ________.

A) the total hours the average U.S. citizen works a year
B) the percentage of income produced by workers and firms
C) how slowly interest rates grow.
D) the total market value of actual goods and services produced in an economy over a year
E) how rapidly the overall level of prices is rising.

Question 8

Macroeconomics is the study of ________ while microeconomics studies ________.

A) large biological systems; political implications of nanotechnology
B) the overall economic activity and prices; an individual firm, household, or market
C) an individual firm; the overall economic performance of a nation
D) the overall economic performance of the world; the economy of a single country
E) firm behavior; market behavior

Question 9

A simple macroeconomic model might explain how an increase in the demand for new housing would lead to a decrease in the rate of unemployment. In such a model, which of these variables is likely to be exogenous?

A) the quantity sold of home furnishings
B) the degree of unionization of the construction industry
C) the wage rate for unskilled workers
D) the level of tax revenues
E) the demand for concrete

Question 10

To compare the conclusions of a model with what actually happens, historical data are entered into the model as ________.

A) endogenous variables
B) exogenous variables
C) equations
D) predictions
E) policies

Question 11

Macroeconomics is the study of ________ while microeconomics studies ________.

A) an individual firm; the overall economic performance of a nation
B) the overall economic performance of the world; the economy of a single country
C) the overall economic activity and prices; an individual firm, household, or market
D) firm choices; market behavior
E) consumer choices; government behavior

Question 12

An exogenous variable is typically ________.

A) calculated by the model
B) only used to conduct policy analysis
C) explained inside the model
D) disregarded in economic models
E) none of the above

Question 13

Which of the following sequences best describes the five necessary steps to develop an economic model in the correct order?

A) (1): Identify the endogenous variables; (2): identify the exogenous variables; (3): develop a model; (4): compare the model with the data; (5): conduct prediction and policy analysis.
B) (1): Develop a model; (2): identify the exogenous variables; (3): identify the endogenous variables; (4): compare the model with the data; (5): conduct prediction and policy analysis.
C) (1): Conduct prediction and policy analysis; (2): develop a model; (3): identify the endogenous variables; (4): identify the exogenous variables; (5): compare the model with the data.
D) (1): Conduct prediction and policy analysis; (2): compare the model with the data; (3):identify the endogenous variables; (4): identify the exogenous variables; (5): develop a model.
E) none of the above

Question 14

In a model of the saving rate, which of these relationships is most crucial?

A) the effect of the saving rate on government spending
B) the effect of government spending on the saving rate
C) the effect of the saving rate on taxes
D) the effect of taxes on the saving rate
E) the effect of the saving rate on the real wage

Question 15

An exogenous variable is typically ________.

A) not considered in an economic model
B) only used to conduct policy analysis
C) taken as given
D) explained inside the model
E) explained by interest rates

Question 16

If a macroeconomist studying the causes of unemployment asserts that a particular change in technology will cause the rate of unemployment to decrease by ten percent, then this macroeconomist is at which step in the process of developing an economic model?

A) Identify the endogenous variables.
B) Develop a model.
C) Compare the model with the data.
D) Identify the exogenous variables.
E) Conduct prediction and policy analysis.

Question 17

An endogenous variable is typically ________.

A) taken as given
B) strictly explained outside the model
C) strictly explained inside the model
D) strictly explained by data
E) strictly explained by graphical analysis

Question 18

An endogenous variable is typically ________.

A) strictly explained inside the model
B) taken as given
C) strictly explained outside the model
D) constant inside the model
E) explained by unemployment

Question 19

In a macroeconomic model designed to explain why some countries grow faster than others, which of these variables is likely to be endogenous?

A) investment
B) economic policies
C) geographic size
D) population
E) none of the above

Question 20

Macroeconomic models particularly focus on the following three economic data series.

A) real GDP, the unemployment rate, and inflation
B) endogenous variables, exogenous variables, and GDP per person
C) inflation, recessions, and business cycles
D) real GDP, the employment rate, and interest rates
E) real GDP, the unemployment rate, and depressions

Question 21

Figure 1.1
Figure 1.1 displays exogenous variables entering a model from which emerge endogenous variables. Yet, in the five-step process to develop an economic model, the macroeconomist specifies the endogenous variables first, then the exogenous variables. Which is the correct sequence? Explain.

Question 22

Since World War II the U.S. ________.

A) has seen a substantial decrease in the inflation rate
B) has seen frequent periods of deflation
C) has seen a significant increase in trend unemployment
D) has seen real GDP grow as fast, on average, as in the pre-war period
E) none of the above

Question 23

Real GDP measures ________.

A) the total amount of income of every person and firm in the economy
B) the percentage of income produced by workers and firms
C) how rapidly the overall level of prices is rising.
D) how many hours the average U.S. citizen works a year
E) how many automobiles are produced in a month

Question 24

What explains the rise in income in the U.S. between 1900 and 2010?

A) business cycles
B) inflation
C) recessions
D) depressions
E) none of the above

Question 25

From 1900 to 2010 real GDP per person has had two important attributes.

A) It has grown substantially over time and there are small differences from country to country
B) It has grown unevenly over time in the U.S. but it has grown substantially.
C) It has grown evenly over time in the U.S. and there are huge differences from country to country
D) It has fluctuated around a trend in the U.S. but it has not grown much for all the Southeast Asian countries
E) It has doubled in the U.S. but there have been many recession periods

Question 26

Compared to other economies, the unemployment rate in the United States ________.

A) is relatively high
B) is relatively low
C) is remarkably stable
D) is neither particularly high nor low
E) varies too much for a reasonable comparison

Question 27

In the Great Depression of the 1930s, the unemployment rate in the U.S. climbed to what percentage?

A) 5
B) 10
C) 15
D) 20
E) 25

Question 28

From 1900 to 2010 real GDP per person in the U.S. has ________.

A) doubled
B) grown by a factor of four
C) grown by a factor of eight
D) grown by a factor of twenty
E) declined

Question 29

The unemployment rate measures, at a point in time, the ________.

A) percentage of workers who do not have a job
B) percentage of workers who do not have a job but are looking for work
C) percentage of workers who stop working
D) percentage of workers who are looking for work
E) none of the above

Question 30

What explains the rise in income in the U.S. between 1900 and 2010?

A) business cycles
B) economic growth
C) recessions
D) depressions
E) the purchasing power of the dollar

Question 31

Develop a simple model of inflation by identifying at least two exogenous variables and describing, briefly, how the value of these exogenous variables will impact the rate of increase in the overall level of prices in the economy.

Question 32

From 1929 to 2010, the unemployment rate in the U.S. ________.

A) has continued to grow but has always remained well above zero
B) has fluctuated around zero
C) has gone up and down but has always remained well above zero
D) has decreased in most recessions
E) has grown by a factor of four

Question 33

Since World War II the U.S. ________.

A) has seen a substantial decrease in the inflation rate
B) has seen frequent periods of deflation
C) has not seen a significant increase in trend unemployment
D) has seen real GDP grow slower, on average, than in the pre-war period
E) none of the above

Question 34

The term "business cycle" refers to ________.

A) the opening and eventual closing down of businesses
B) the rising and later declining of the purchasing power of the dollar
C) the acquiring of raw materials and ultimate selling of a finished product
D) the tendency for rich economies to be inevitably out-paced by other economies
E) the slowing and eventual accelerating of economic growth

Question 35

Since World War II the U.S. ________.

A) has seen a substantial increase in the inflation rate
B) has seen less frequent periods of deflation
C) has seen real GDP grow as fast, on average, as in the pre-war period
D) all of the above
E) none of the above

Question 36

Assume that a high proportion of recent college graduates decides to stay in school seeking advanced degrees, rather than confront the challenge of landing a good job in the midst of generally high unemployment. What is the direct impact of this behavior on the unemployment rate? In the longer term, what indirect impacts might there be on the unemployment rate?

Question 37

Economists apply the term "Great Inflation" to which decade?

A) 1930s
B) 1940s
C) 1950s
D) 1960s
E) 1970s

Question 38

Apart from the Great Depression of the 1930s, which decade saw the largest rise in unemployment in the U.S.?

A) 1950s
B) 1970s
C) 1980s
D) 1990s
E) 2000s

Question 39

A business manager who observes that prices in general keep rising might infer, correctly, that now is a good time to ________.

A) invest to expand the business
B) raise the price of her product
C) expect an increase in business profits
D) expect a higher return on personal savings
E) all of the above

Question 40

Up until World War II inflation in the U.S. ________.

A) remained around zero on average
B) rose and remained quite high for an extended period of time
C) has gone up and down but has always remained well above zero
D) increased by a factor of four every year
E) decreased by 30% every year

Question 41

Which of these economies has the highest saving rate?

A) Greece
B) China
C) United States
D) Brazil
E) Japan

Question 42

Policies to keep inflation in check ________.

A) are, typically, fiscal policies
B) are a potential cause of high unemployment
C) are unlikely to be needed, so long as government spending remains high
D) include increasing the quantities of money and saving
E) are desirable in the short run, but may produce bad long-run outcomes

Question 43

By 2010, the U.S. economy had emerged from the recession that had begun in 2007. Despite an economic growth rate well above zero, unemployment showed little sign of declining much below ten percent. Focusing on the definition of the unemployment rate, explain how it is possible to have positive economic growth without declining unemployment.

Question 44

The percentage of income that Americans save each year ________.

A) is much higher than the percentage the Chinese citizens save
B) is higher than the saving rate of most industrialized countries
C) is lower than the saving rate of most industrialized countries
D) increased by a factor of five every year since the 1970s
E) none of the above

Question 45

Which of these is among the principal determinants of economic growth?

A) inflation
B) the financial system
C) the central bank
D) the government budget deficit
E) stabilization policy

Question 46

Common sense suggests (and macroeconomists agree!) that sustained economic growth over extended time periods is more important than the economy's short-term fluctuations. Why, then, do macroeconomists (and policymakers, and the general public) care so much about the business cycle?

Question 47

Which of these is not among the principal determinants of economic growth?

A) institutions
B) education
C) research and development
D) balanced trade
E) saving and investment

Question 48

Policies to encourage higher personal saving rates include ________.

A) lowering income taxes
B) lowering sales taxes
C) increasing the quantity of money
D) raising asset prices
E) reducing interest rates

Question 49

An increase in government spending might be an example of a ________ policy for the purpose of ________.

A) monetary; lowering unemployment
B) monetary; reducing inflation
C) monetary; increasing saving
D) fiscal; reducing inflation
E) fiscal; lowering unemployment

Question 50

The U.S. personal saving rate ________.

A) is much higher than the percentage the Chinese citizens save
B) is higher than the saving rate of most countries
C) cannot fall below zero.
D) increased by a factor of five every year since the 1970s
E) none of the above

Question 51

Policies to encourage higher personal saving rates include ________.

A) raising income taxes
B) raising sales taxes
C) lowering taxes on pension plans
D) A and B but not C
E) B and C but not A

Question 52

Looking at the U.S. personal saving rate over the last sixty years, we can say that ________.

A) it has always been low
B) Americans used to spend a lot more than they have in recent years
C) Americans used to save a lot more than they have in recent years
D) it has always been fairly high
E) Americans spend more when concerned about their future earnings

Question 53

An increase in interest rates might be an example of a ________ policy for the purpose of ________.

A) monetary; reducing inflation
B) monetary; lowering unemployment
C) monetary; increasing the quantity of money
D) fiscal; reducing inflation
E) fiscal; lowering unemployment

Question 54

A good example of a policy to increase an economy's saving rate is ________.

A) to reduce poverty
B) to increase the economic growth rate
C) to increase government spending
D) to reduce interest rates
E) to increase sales taxes

Question 55

Policies to encourage higher personal saving rates include ________.

A) raising income taxes
B) lowering sales taxes
C) raising taxes on pension plans
D) all of the above
E) none of the above

Question 56

Fiscal policy involves ________.

A) taxes and government spending
B) setting interest rates
C) controlling the amount of money in the economy
D) all of the above
E) none of the above

Question 57

Raising taxes and cutting spending are examples of ________.

A) fiscal policy tightening
B) fiscal policy expansion
C) monetary policy tightening
D) monetary policy expansion
E) none of the above

Question 58

When households have very low savings ________.

A) investment decreases
B) they are less able to cope with severe economic downturns
C) bankruptcies increase
D) all of the above
E) none of the above

Question 59

Raising household savings could be beneficial because ________.

A) it translates into higher investment
B) severe economic downturns can be "better-weathered"
C) it provides a cushion to avoid bankruptcies
D) all of the above
E) none of the above

Question 60

When households increase their personal savings ________.

A) investment decreases
B) they are better able to cope with severe economic downturns
C) interest rates are likely to rise, as well
D) all of the above
E) none of the above

Question 61

The U.S. central bank ________.

A) usually raises taxes to stabilize a slowing economy
B) encourages higher savings rates by raising the national sales tax
C) is known as the Federal Reserve
D) all of the above
E) none of the above

Question 62

Nonactivists propose doing nothing in the face of economic hardship because ________.

A) markets can take quite a bit of time to self-correct
B) excessive unemployment tends to disappear on its own accord
C) while households feel the hardship, firms typically benefit
D) all of the above
E) none of the above

Question 63

Nonactivists propose doing nothing in the face of economic hardship because ________.

A) activist policies can kick in at the wrong time and be counterproductive
B) "markets self-correct pretty rapidly anyway"
C) in the face of high unemployment, activist policies would likely lead to surges in inflation
D) all of the above
E) none of the above

Question 64

Policies to reduce the likelihood of financial crises might include ________.

A) enlarging government budget deficits
B) reducing imbalances in global trade and capital flows
C) keeping the inflation rate near or below zero
D) more aggressive use of stabilization policy
E) all of the above

Question 65

Activist policymakers, compared to nonactivists, are more likely to emphasize ________ considerations and to prefer ________.

A) short-run; rule-determined
B) long-run; discretionary policy
C) short-run; discretionary policy
D) long-run; rule determined
E) business; flexible plans

Question 66

The Federal Reserve ________.

A) engages in stabilization policy by setting interest rates
B) engages in fiscal policy by setting interest rates
C) addresses financial crises by raising taxes
D) all of the above
E) none of the above

Question 67

The old adage "rules are made to be broken" would typically be associated with economists who might advocate ________.

A) stabilization policy
B) monetary policy
C) rule-determined policy
D) discretionary policy
E) fiscal policy

Question 68

Since 1930 the period of highest government budget deficits for the U.S. took place in ________.

A) the 1930s
B) the 1940s
C) the 1950s
D) the 1980s
E) the 1990s

Question 69

Nonactivists propose doing nothing in the face of economic hardship because ________.

A) activist policies can kick in at the wrong time and be counterproductive
B) markets can take quite a bit of time to self-correct
C) while households feel the hardship, firms typically benefit
D) all of the above
E) none of the above

Question 70

Cutting income taxes without decreasing spending ________.

A) might give households and firms more incentives to work hard
B) could encourage households to save more and purchase government bonds
C) could lead to additional savings the government can use to finance deficits without printing money
D) all of the above
E) none of the above

Question 71

The long-standing debate over rules versus discretion in macroeconomics centers on the following statement ________.

A) "discretionary policy can lead to bad long-run outcomes but rules lack flexibility in the short-run"
B) "the speed with which the self-correcting mechanism in the economy acts is in question"
C) "the speed with which unemployment tends to disappear is debatable"
D) all of the above
E) none of the above

Question 72

An advantage of macroeconomic policy based on pre-specified rules might be that ________.

A) it is easier to stick to long-run considerations and avoid bad long-run outcomes
B) it is more flexible than discretionary policy
C) it is easier to adapt to short-run changes and avoid a bad short-run outcome
D) all of the above
E) none of the above

Question 73

In the 2000s, the U.S. economy had both a ________ and a ________.

A) large trade deficit; large capital inflow
B) large trade surplus; large capital inflow
C) large trade deficit; high saving rate
D) large capital inflow; high saving rate
E) large capital inflow; small government budget deficit

Question 74

Opponents of rule-determined policies might point out that ________.

A) markets self-correct quickly so rules become obsolete
B) unforeseen changes in the structure of the economy may make a rule obsolete
C) policies that kick in at the wrong time may lead to undesirable results
D) all of the above
E) none of the above

Question 75

An advantage of discretionary policy might be that ________.

A) it has been shown to be more efficient than rules
B) it is more flexible than rules
C) it requires a binding plan in advance to deal with economic problems
D) all of the above
E) none of the above

Question 76

Financial crises are typically ________.

A) characterized by sharp declines in asset prices
B) associated with increases in business failures
C) accompanied by sharp economic downturns
D) all of the above
E) none of the above

Question 77

Historically, the U.S. government seems to have ________.

A) run budget surpluses as often as budget deficits
B) generally spent less than what it collected in taxes each year
C) had difficulty running budget surpluses
D) not needed to borrow to finance wars
E) none of the above

Question 78

Activists believe ________.

A) the self-correcting mechanism in the economy is very slow
B) in the adoption of policies to eliminate excessive unemployment
C) doing nothing will leave too many people out of work for too long
D) all of the above
E) none of the above

Question 79

The Federal Reserve ________.

A) is the U.S. central bank
B) controls the amount of money in the economy
C) sets interest rates
D) all of the above
E) none of the above

Question 80

Consider an economic policy regime in which rules are well-known but frequently ignored. Which of these statements is true?

A) This regime might work in the long-run, but is unlikely to produce good outcomes in the short run.
B) Policymakers in this regime might find that rules are being broken with increasing frequency.
C) This regime is more likely to be supported by nonactivist, than by activist policymakers.
D) This regime is more likely to result in high unemployment than in high inflation.
E) This regime is unlikely to produce large government budget deficits.