EC10B: PSET 1-11 Final Prep

Which of the following statements best describes the relationship between microeconomics and​ macroeconomics?

A. Microeconomics and macroeconomics are two completely separate disciplines that​ don't relate to each other.

B. Core microeconomic principles like optimization and equilibrium​ don't apply to the study of macroeconomics.

C. The mutual optimization of agents in an economy results in equilibrium for the economy as a whole.

D. Macroeconomic models always pay explicit attention to the optimization of individuals and firms.

C

Why is it difficult to have clear empirical evidence about causal relationships in​ macroeconomics?

A. In most​ cases, it is infeasible to run randomized control trials or find natural experiments on the scale necessary to answer important macroeconomic questions.

B. Causation runs in many directions in a complex global economy.

C. Economies change over​ time, so what works in one decade may no longer work in the next.

D. All of the above.

E. None of the above.

D

The accounting identity that is used to estimate the gross domestic product of a country is given by

A. Production equivalent Expenditure equivalent Income

B. Production equivalent Expenditure equivalent Consumption

C. Income equivalent Production minus Consumption

D. Consumption equivalent Income minus Saving

A

Suppose that a sofa is manufactured in Germany using​ $300 of leather that is imported from Portugal. The sofa is then sold to a German retailer for​ $1,000 and purchased by a consumer in Germany for​ $1,500.

How much does this contribute to​ Germany's GDP?

A. $500

B. $900

C. $1,200

D. $1,500

E. $2,200

C

Which of the following would be included in a​ country's GDP?

A. Shares of a​ company's stock purchased by an investor.

B. Transfer payments from the government to families with low income.

C. Unpaid care provided to an elderly relative.

D. Salaries paid to guards working in federal prisons.

D

Which of the following statements is about GDP is​ FALSE?

A. As​ per-capita GDP has risen in the​ U.S., self-reported happiness has risen too.

B. Economists use GDP as a​ useful, summary measure of societal​ well-being even though it has a number of limitations.

C. Countries with higher​ per-capita GDP also​ have, on​ average, better health and higher​ self-reported happiness.

D. Ec10 survey data reveals a correlation between family income and​ self-reported

life​ satisfaction, but income alone predicts only​ 4% of the variation in​ self-reported well-being.

A

Inflation is the​ ____________.

A. ratio of money supply to nominal GDP

B. average increase in prices across the economy

C. growth rate of real GDP

D. growth rate of nominal GDP

B

Which of the following are costs of​ inflation?

A. People experience the hassle of having to hold less cash​ (because inflation erodes its​ value).

B. Inflation can produce arbitrary redistributions of purchasing​ power, especially when it is unanticipated.

C. Even if people are not financially harmed or even gain from​ inflation, they tend to deeply dislike inflation.

D. If employment contracts are set in​ advance, unexpectedly high inflation can reduce real wages.

E. All of the above.

E

Which of the following are benefits of​ (moderate) inflation?

A. The government can raise revenue by printing money.

B. Inflation facilitates the adjustment of real wages.

C. Inflation gives central banks more scope to use monetary policy to fight recessions.

D. All of the above.

D

The real wage is the​ ____________.

A. amount of money an individual keeps after paying all taxes.

B. inflation-adjusted wage.

C. wage that would prevail in the absence of government​ intervention, such as a minimum wage.

D. price level divided by the nominal wage.

B

Nominal wages in the country of New Cambridge have risen by​ 5% in the last year. Which of the following statements is definitely​ true?

A. Labor demand in New Cambridge has shifted to the left in the last year.

B. Workers in New Cambridge receive larger paychecks than they did a year ago.

C. Workers in New Cambridge have greater purchasing power than they did a year ago.

D. Prices in New Cambridge rose by​ 5% in the last year too.

B

According to the quantity theory of​ money, ____________.

A. the ratio of the money supply to nominal GDP fluctuates widely over long periods of time.

B. in the short​ run, the growth in the money supply is directly related to the inflation rate.

C. in the long​ run, the growth in the money supply is directly related to the inflation rate.

D. the inflation rate will stay constant over the long run.

C

Which of the following economies will have the highest inflation​ rate?

A.Growth rate of money supply​ = 9%; growth rate of real GDP​ = 8%

B.Growth rate of money supply​ = 2%; growth rate of real GDP​ = 8%

C.Growth rate of money supply​ = 5%; growth rate of real GDP​ = 1%

D.Growth rate of money supply​ = 3%; growth rate of real GDP​ = 0%

C

Identify the category in which the Department of Labor would classify the following people.

Bella retired from the military last month and has been actively looking for work since.

Sven is a​ full-time Harvard student who does not work or look for work.

Daisy is working part-time at company Y but is looking for more work for extra income.

Dorothy lost her job last year but has not tried to find a new job due to concerns about her health.

Unemployed

Not in labor force

Employed

Not in labor force

The graph on the right shows a labor market that is initially in equilibrium. The market then experiences a shock to labor demand. Suppose the market is initially in equilibrium at​ A, where the labor supply curve intersects the Labor Demand 0 curve. A shock to the market causes the labor demand curve to shift leftward to Labor Demand 1.

If nominal wages are completely flexible and can adjust freely and​ quickly, what would be the change in employment caused by the shock to labor​ demand?

A. Since the nominal wage is flexible and can adjust​ freely, the shock to the labor market would have no impact on employment.

B. The labor market would move from A to​ C, resulting in a decrease in employment from Upper L 0 to Upper L 2.

C. The labor market would move from A to B which would result in a decrease in employment from Upper L 0 to Upper L 1.

C

If nominal​ wages, instead, are downwardly rigid and remain at w 0​, what would be the change in employment caused by the shock to labor​ demand?

A. Since the nominal wage is flexible and can adjust​ freely, the shock to the labor market would have no impact on employment.

B. The labor market would move from A to​ C, resulting in a decrease in employment from Upper L 0 to Upper L 2.

C. The labor market would move from A to B which would result in a decrease in employment from Upper L 0 to Upper L 1.

B

Using the empirical relationship known as​ Okun's Law and the specific numerical parameters that Jason showed in​ lecture, if the unemployment rate rose by​ 3% you would expect the growth rate of real GDP to be (_________)

From the supply perspective on the​ economy, how would we explain this change in​ output?

A.Unemployed workers have less​ income, so a higher unemployment rate leads to less consumption.

B.Higher unemployment accompanies periods of high output because people choose to return to the labor force when times are good.

C.With higher​ unemployment, there are fewer workers and more idle​ capital, so the economy produces less output.

D.Higher unemployment increases the costs of producing output because it reduces the supply of labor.

3

C

In addition to the national Consumer Price Index​ (CPI), the Bureau of Labor Statistics produces several regional CPI indices. These are constructed in the same way as the national​ CPI, just at a smaller​ scale: in a given​ city, researchers gather prices for a bundle of goods every month and then construct an index to track price changes of that bundle within the city. The following table shows the CPI indices​ (base period​ 1982-1984 =​ 100) for San​ Francisco-Oakland-San Jose and Los​ Angeles-Riverside-Orange County, from 2007 to​ 2014:

In​ 2014, the San​ Francisco-Oakland-San Jose CPI was​ 251.985, while the Los​ Angeles-Riverside-Orange County CPI was 242.434.

Using the information given​ above, which of the following statements is​ true?

A.Prices have increased more in San​ Francisco-Oakland-San Jose than in Los​ Angeles-Riverside-Orange County since the base period.

B.Prices are higher in San​ Francisco-Oakland-San Jose than in Los​ Angeles-Riverside-Orange County.

C.Prices have increased more in Los​ Angeles-Riverside-Orange County than in San​ Francisco-Oakland-San Jose since the base period.

D.Prices are lower in San​ Francisco-Oakland-San Jose than in Los​ Angeles-Riverside-Orange County.

A

Suppose a San Francisco resident and a Los Angeles resident each make the same nominal wage every year from 2007 to​ 2014: ​$60 comma 000.00 a year.

Using the table​ above, the real wage of the San Francisco resident fell by (???) percent between 2007 and 2014. The real wage of the Los Angeles resident fell by (???) percent between 2007 and 2014.​ (Enter your answer as a positive number expressed in percentage points and round to the nearest two decimal places. Do not enter the​ "%" sign.)

​Hint: First convert the 2014 nominal wage to 2007​ dollars, and then calculate the percent change between the two wages expresed in 2007 dollars.

14.26

10.35

Catch-up growth​ (or convergence) is the​ ____________.

A.

process where GDP per capita grows at a positive and relatively steady rate for long periods of time.

B.

type of growth that occurs when growth is compounded on the rate of growth in the prior period of measurement.

C.

process by which relatively less wealthy nations rapidly increase their incomes by taking advantage of existing technologies and by increasing their​ saving, efficiency units of​ labor, and efficiency of production.

D.

pattern of growth that occurs when workers in relatively less wealthy nations work extra hours so that their GDP per capita catches up with wealthier nations.

C

Sustained growth is the​ ____________.

A.

process where GDP per capita grows at a positive and relatively steady rate for long periods of time.

B.

process by which relatively less wealthy nations rapidly increase their incomes by taking advantage of existing technologies and by increasing their​ saving, efficiency units of​ labor, and efficiency of production.

C.

type of growth that occurs when growth is compounded on the rate of growth in the prior period of measurement.

D.

pattern of growth that occurs when workers in relatively less wealthy nations work extra hours so that their GDP per capita catches up with wealthier nations.

A

When we decompose labor productivity growth using the tools of growth​ accounting, we see that U.S. productivity growth is primarily due to growth in​ _______ and​ _______.

A.

capital​ intensity; average human capital

B.

total factor​ productivity; capital intensity

C.

total factor​ productivity; population

D.

total factor​ productivity; average human capital

B

The slowdown in U.S. productivity growth since the early 1970s is primarily attributable to a slowdown​ in:

A.

population growth

B.

the growth of educational attainment

C.

total factor productivity growth

D.

capital accumulation

C

According to the convergence​ model:

A.

Countries with lower​ per-capita income may catch up to countries with higher​ per-capita income, but only if they have free trade and democratic governments.

B.

Countries with lower​ per-capita income will eventually catch up to countries with higher​ per-capita income because they have less​ capital, and thus higher marginal returns to​ capital, and because they can adopt ideas from frontier economies.

C.

Countries with lower​ per-capita income will never catch up to countries with higher​ per-capita income because countries with higher​ per-capita income have better technology.

D.

Countries with lower​ per-capita income will only catch up to countries with higher​ per-capita income if they receive large amounts of foreign aid.

B

Which of the following observations is NOT consistent with the covergence model by​ itself?

A.

U.S. states that were poorer in 1880 have grown at a faster rate since 1880.

B.

In​ 1950, the U.S. had five times the real GDP per capita of​ Portugal; in 2019 it had only twice the real GDP per capita of Portugal.

C.

Since​ 2000, low and middle income countries have grown faster on average than high income countries.

D.

Countries like Liberia and Sierra Leone have experienced​ persistent, negative growth in GDP per capita over the course of several decades.

D

Which of the following is NOT one of the fundamental drivers of growth Jason covered in​ lecture?

A.

Capital accumulation

B.

Institutions

C.

Geography

D.

Culture

A

Fundamental drivers of growth seek to​ explain:

A.

Why some countries have experienced​ catch-up growth but others have not.

B.

Why regions have diverged since 1000.

C.

Why regions that were relatively rich in 1500 have since experienced a reversal of fortune.

D.

All of the above.

D

Which of the following statements is TRUE about institutional explanations for economic​ growth?

A.

Economics generally consider institutional explanations for economic growth to be less important than geographic or cultural explanations.

B.

Technology is particularly sensitive to institutions because they affect the ability of firms to engage in risky​ innovation, enter new​ markets, and challenge incumbent firms.

C.

Extractive institutions are generally better for growth than inclusive institutions.

D.

All of the above.

B

Which of the following statements is TRUE about cultural explanations for economic​ growth?

A.

Cultures can develop for one reason and then be​ good, bad or neutral for growth depending on the circumstances.

B.

Jason emphasized the importance of cultures that explicitly honored hard work and timeliness.

C.

It is impossible for economists to study the role of culture in growth because it is not randomly assigned.

D.

Cultures are either always better for growth or always worse for growth.

A

Which of the following statements is NOT true about global​ inequality?

A.

GDP per capita is positively correlated across countries with life expectancy and​ self-reported life satisfaction.

B.

The reduction in global income inequality since 2000 has been driven in large part by improving standards of living in China and India.

C.

The reduction in global income inequality since 2000 has been driven in large part by a reduction in inequality within countries.

D.

All of these statements are true.

C

Which of the following statements is TRUE about the relative size of the United States economy and the Chinese​ economy?

A.

Using​ PPP, overall GDP in China is larger than overall GDP in the United States.

B.

Using market exchange​ rates, GDP per capita in China is larger than GDP per capita in the United States.

C.

Using market exchange​ rates, overall GDP in China is larger than overall GDP in the United States.

D.

Using​ PPP, GDP per capita in China is larger than GDP per capita in the United States.

E.

All of the above.

A

In​ 2019, GDP per capita in the Netherlands in 2019 was​ 47,000 Euros. If you went to a​ bank, you could exchange 0.9 Euros for​ $1, but 0.8 Euros could buy as much stuff in the Netherlands as​ $1 could in the United States.

Using the more accurate method for comparing standard of living across different countries with different​ currencies, GDP per capita in the Netherlands in 2019 in dollars was

$(–––––––)

​(Round

your response to the nearest dollar. Do not include a dollar

sign.​)

The United States has a higher GDP per worker than the​ Netherlands, but suppose its labor productivity was lower. If​ true, what would this tell you with certainty about the United States and the​ Netherlands?

A.

The Netherlands has more capital per worker than the United States.

B.

The United States has higher total factor productivity than the Netherlands.

C.

Workers in the United States work more​ hours, on​ average, than workers in the Netherlands.

D.

The United States has a larger population than the Netherlands.

58750

C

Doubling the size of the capital stock​ (K) in the aggregate production function will​ _____________.

A.

More than double the amount of output that can be produced.

B.

Double the amount of output that can be produced.

C.

Increase the amount of output that can be​ produced, but by less than double.

D.

Cause no change to the amount of output that can be produced.

C

Doubling the size of the capital stock​ (K) and the number of effective units of labor​ (H) in the aggregate production function will​ ___________.

A.

More than double the amount of output that can be produced.

B.

Double the amount of output that can be produced.

C.

Increase the amount of output that can be​ produced, but by less than double.

D.

Cause no change to the amount of output that can be produced.

B

Doubling the amount of total factory productivity​ (A) in the aggregate production function will​ _____________.

A.

More than double the amount of output that can be produced.

B.

Double the amount of output that can be produced.

C.

Increase the amount of output that can be​ produced, but by less than double.

D.

Cause no change to the amount of output that can be produced.

B

Which of the following could plausibly be an example of increased​ technology, or Total Factory​ Productivity, in the aggregate production​ function?

A.

The elimination of explicit racial segregation in​ education, employment, and other areas.

B.

A new idea about how to motivate and retain employees.

C.

The development of increasingly sophisticated artificial intelligence.

D.

All of the above.

D

How do economists measure​ technology, or Total Factor​ Productivity, in the aggregate production​ function?

A.

They use complex models that estimate technology based on dozens of different variables collected in government surveys.

B.

They survey a panel of industry experts each year and construct a measurement based on the responses.

C.

They estimate changes in technology based on the number of new patents filed each year.

D.

They​ don't. Technology is calculated as the residual after accounting for the observable amounts of labor and capital.

D

In the development accounting exercise Jason did in​ lecture, India was closest to the U.S. level of​ __________.

A.

capital per worker​ (K/L)

B.

average human capital​ (h)

C.

technology​ (A)

D.

GDP per worker​ (Y/L)

B

From the perspective of development​ accounting, what is the most important difference between​ high-income countries and​ low-income countries?

A.

​Low-income countries have lower total factor productivity than​ high-income countries.

B.

Workers in​ low-income countries have less education than workers in​ high-income countries.

C.

​Low-income countries have less capital per worker than​ high-income countries.

D.

​Low-income countries have less physical capital than​ high-income countries.

A

Which of the following critiques of the Trump​ administration's tariff policy did Professor Summers make in his guest​ lecture?

A.

The enormous uncertainty around the Trump tariffs risks undermining investor confidence in American assets.

B.

Current tariff policy will lead to higher prices and more unemployment.

C.

Current tariff policy will lead to hostility and retaliation from other countries.

D.

Tariffs on steel hurt domestic industries that use steel more than they help the domestic​ steel-producing industry.

E.

All of the above.

E

Which of the following statements best summarizes Professor​ Summers's perspective on​ AI?

A.

AI will cause an economic revolution that will replace a large portion of the human workforce.

B.

The hype around AI is overstated given the limitations of current models.

C.

AI is different from previous revolutionary technologies in its potential to be used for​ self-improvement, and there is a reasonable chance we will see a discontinuity in the rate of economic growth as a result.

D.

AI is similar to previous revolutionary technologies like​ electricity, computers,​ etc., and will have a similar impact on economic growth.

C

Suppose the country of Gakpo is riskier for investors than the country of Jota. Uncovered interest parity​ (UIP) tells us​ that:

A.

Interest rates in Gakpo will be lower than interest rates in​ Jota, adjusting for expected exchange rate movements but not for risk.

B.

Interest rates in Gakpo will be the same as interest rates in​ Jota, adjusting for expected exchange rate movements but not for risk.

C.

Interest rates in Gakpo will be higher than interest rates in​ Jota, adjusting for expected exchange rate movements but not for risk.

D.

Not enough information to tell.

C

Spain's official currency is the​ euro, making its exchange rate effectively fixed to the rest of the euro area.​ However, interest rates on its government bonds were much higher than interest rates on German government bonds in 2010. How was this​ possible?

A.

Investors feared that Spain would default on its debt.

B.

Investors feared that Spain would leave the euro​ area, causing its exchange rate to appreciate.

C.

Investors feared that Spain would leave the euro​ area, causing its exchange rate to depreciate.

D.

A and B only.

E.

A and C only.

E

If a country faces pressure for its exchange rate to​ devalue, it can​ __________.

A.

issue bank reserves to domestic financial institutions

B.

sell domestic currency to accumulate internationtal reserves

C.

buy domestic currency using international reserves

D.

None of the above

C

Which of the following is a TRUE statement about international​ reserves?

A.

International reserves are typically used to move an economy along the UIP curve.

B.

When using international reserves to prevent a currency from​ devaluing, the risk is that the country runs out of reserves and is unable to defend its fixed exchange rate.

C.

Buying domestic currency with international reserves causes the domestic currency to depreciate.

D.

International reserves are most commonly used to keep an exchange rate from​ appreciating, boosting net exports.

B

How do capital controls keep an economy off of its UIP​ curve?

A.

They limit capital inflows or capital​ outflows, preventing arbitrage opportunities from being fully eliminated.

B.

They allow central banks to buy domestic currency using international​ reserves, keeping the exchange rate from depreciating.

C.

They make domestic assets seem riskier to dissuade foreign investors from purchasing them.

D.

They cannot be used to keep an economy off of its UIP curve.

A

Which of the following is a risk of using capital​ controls?

A.

They can distort the allocation of​ capital, directing it to areas where the rules are weaker.

B.

They can make a country less attractive to foreign investors over the longer term.

C.

They can lead to black markets and corruption to circumvent the controls.

D.

All of the above.

D

The exchange rate of Ketterdam kruge to U.S. dollars​ (expressed in​ kruge/$) changed from 10​ kruge/$ to 12​ kruge/$. We would say the dollar​ ________ relative to the​ kruge, which all else equal will​ __________ net exports by the United States.

A.

​depreciated; increase

B.

​appreciated; increase

C.

​depreciated; decrease

D.

​appreciated; decrease

This is because imports of Ketterdam goods are now​ _____________ for U.S. customers and exports of U.S. goods are now​ ___________ for Ketterdam customers.

A.

more​ expensive; cheaper

B.

more​ expensive; more expensive

C.

​cheaper; more expensive

D.

​cheaper; cheaper

D

C

Expansionary monetary policy in a country with a floating exchange rate produces​ _______________.

A.

a leftward shift in the UIP curve

B.

a rightward shift in the UIP curve

C.

a movement down and to the left along the UIP curve

D.

a movement up and to the right along the UIP curve

E.

no change in the UIP curve or the​ economy's position on the UIP curve

C

Expansionary fiscal policy in a country with a fixed exchange rate produces a​ _______________.

A.

a leftward shift in the UIP curve

B.

a rightward shift in the UIP curve

C.

a movement down and to the left along the UIP curve

D.

a movement up and to the right along the UIP curve

E.

no change in the UIP curve or the​ economy's position on the UIP curve

E

Which of the following statements is not true about the effect of expansionary monetary policy in an open economy with floating exchange​ rates, all else​ equal?

A.

Expansionary monetary policy will produce an even larger boost to demand in an open economy with floating exchange rates than in an otherwise identical closed economy.

B.

Expansionary monetary policy will lead to an increase in net exports.

C.

By reducing the nominal interest​ rate, the central bank will also cause a depreciation in the exchange rate.

D.

The expanding economy will lead to increased demand for​ imports, but this effect is smaller than the effect of the change in the exchange rate on net exports.

E.

All of these statements are true.

E

Which of the following statements is not true about the effect of expansionary fiscal policy in an open economy with floating exchange​ rates, all else​ equal?

A.

If the central bank prevents the interest rate from​ rising, the fiscal multiplier will be greater than if it does nothing.

B.

Expansionary fiscal policy will produce a smaller increase in demand in an open economy with floating exchange rates than in an otherwise identical closed economy.

C.

If the central bank takes no action in​ response, expansionary fiscal policy will lead to a currency depreciation.

D.

The Keynesian multiplier effect is smaller in an open economy due to import leakages.

E.

All of these statements are true.

C

A country with a fixed exchange rate cannot use traditional monetary​ policy, but it can​ _________ its exchange rate to stimulate demand. In order to do​ so, the central bank must​ ___________.

A.

​devalue; raise interest rates

B.

​revalue; lower interest rates

C.

​revalue; raise interest rates

D.

​devalue; lower interest rates

D

In​ practice, changes in currency valuations are not a very commonly used countercyclical tool in countries with fixed exchange rates​ because:

A.

Investors may require a higher interest rate to invest in a country if they expect the exchange rate may be devalued.

B.

If people expect frequent changes in the exchange​ rate, it will effectively not be a fixed exchange rate and will introduce uncertainty into trade and supply chains.

C.

Exchange rate devaluations increase the cost of repaying debt denominated in foreign​ currency, which makes up a large component of total debt in many emerging markets that fix their exchange rates.

D.

All of the above.

D

Governor Kugler emphasized that the inflation and disinflation following COVID could be understood​ as:

A.

Separate stories for the different​ components, including factors affecting goods​ prices, housing​ prices, and​ non-housing services.

B.

A Phillips curve model.

C.

Both perspectives are useful.

D.

The inflation has no explanation.

C

What modifications did Governor Kugler suggest to make the Phillips curve match the data​ better?

A.

Incorporate money supply growth into the model.

B.

Replace the unemployment rate​ (U) with job vacancies or openings divided by the unemployment rate ​(V/U).

C.

Add changing corporate markups or​ “greed” into the model.

D.

All of the above modifications.

B

According to Governor​ Kugler, the recent tariffs imposed by President Trump​ are:

A.

A bad policy that should be reversed.

B.

A good policy that should be continued.

C.

Something the Fed should ignore.

D.

Something she would not comment on but the Fed would take into account in setting interest rates.

D

The trade balance is defined as the​ ___________.

A.

value of a​ country's imports minus the value of its exports.

B.

value of a​ country's exports minus the value of its imports.

C.

value of a​ country's exports plus the value of its imports.

D.

ratio of imports plus exports to GDP.

B

The trade balance is known as​ ___________.

A.

the balance of payments.

B.

the terms of trade.

C.

the current account balance.

D.

net exports

D

A country has a trade deficit when

the value of (________) is less than the value of (________)

and a trade surplus when

the value of (________) is less than the value of (________)

.

exports|imports

imports|exports

All else​ equal, if Germany were to increase its national saving​ rate, its net exports would​ ______ and its current account surplus would​ _______.

A.

​increase; shrink

B.

​increase; grow

C.

​decrease; shrink

D.

​decrease; grow

B

According to the balance of payments​ identity:

A.

Current Account​ + Financial Account equivalent 0

B.

Current Account equivalent NX

C.

Current Account​ + Financial Account equivalent NX

D.

NX equivalent Financial Account

A

This means that when the U.S. runs a current account​ deficit:

A.

it is a net lender of funds to the rest of the world

B.

it is a net exporter of financial assets to the rest of the world

C.

its domestic saving exceeds domestic investment

D.

it also runs a financial account deficit

B

The United States runs a trade deficit with Austria. Is Austria taking advantage of the United​ States? Which of the following statements is most​ true?

A.

The U.S. trade deficit with Austria is primarily the result of Austria having a low saving rate.

B.

A bilateral trade deficit with another country is not good for an economy as trade is a​ zero-sum game.

C.

Most countries run deficits with some trading partners and surpluses with other trading​ partners, so a bilateral trade deficit with one country is not generally meaningful.

D.

In the presence of national​ redistribution, trade reaps no benefit to an economy.

C

Which of the following is a reason that trade deficits might not cause net job​ loss?

A.

​Empirically, U.S. imports tend to be higher when job growth is higher​ (not lower), likely because U.S. consumers buy more domestic and foreign goods when the economy is booming.

B.

If an increase in the trade deficit looked like it would lead to job​ losses, the Federal Reserve would lower the interest rate to stimulate the economy and boost job growth.

C.

Both A and B

D.

Neither A nor B

C

Which of the following statements about tariffs and trade balances is not​ true?

A.

Tariffs can only affect the trade balance if they alter the balance of domestic saving and investment.

B.

High tariffs tend to reduce the volume of trade.

C.

Despite having identical trade​ policies, the countries of the European Union have very different trade balances.

D.

High domestic tariffs on imports tend to increase the trade balance​ (more of a trade surplus or less of a trade​ deficit).

D

The country of Helios has a trade deficit of​ 4% of GDP. It should be most worried about the size of its trade deficit​ if:

A.

It is driven by high domestic investment that will increase its future productive capacity.

B.

It is driven by low domestic saving due to excessive government deficit spending.

C.

It is primarily financed by​ long-term foreign direct investment.

D.

Helios should never be worried about a trade deficit of​ 4%.

B

A customer in the U.S. wants to buy a dress made by a Swiss company that costs 50 Swiss francs​ (SFr). At an​ (indirect) exchange rate of e equals 0.91 SFr per​ dollar, the customer will need to spend (______) US. dollars ​(Round your answer to the nearest cent.​)

If the dollar appreciates relative to the Swiss​ franc, the dress​ ________ for the U.S. customer.

A.

becomes cheaper

B.

becomes more expensive

C.

stays the same price

54.95

A

An increase in the nominal interest rate in the U.S. with no change to foreign nominal interest rates will produce​ ____________ the dollar relative to foreign​ currency, assuming a​ free-floating exchange rate.

A.

an appreciation of

B.

a depreciation of

C.

no change in the value of

D.

an indeterminate change in

A

Which of the following best describes the intuition for your answer​ above?

A.

With floating exchange​ rates, foreign countries are forced to make the same changes to their domestic interest rates as the U.S. to keep exchange rates unchanged.

B.

When the Fed changes the nominal interest rate in the​ U.S., it also engages in currency swaps in the foreign exchange market to move the exchange rate in line with its policy goals.

C.

Rising interest rates in the U.S. will produce a slowdown in​ inflation, which will require the exchange rate to adjust to be consistent with the quantity theory of money.

D.

Exchange rates adjust to changes in interest rates to ensure that investors are indifferent between holding domestic and foreign assets. Otherwise arbitrage opportunities would exist.

D

A decrease in foreign nominal interest rates with no change to the nominal interest rate in the U.S. will produce​ ____________ the dollar relative to foreign​ currency, assuming a​ free-floating exchange rate.

A.

an appreciation of

B.

a depreciation of

C.

no change in the value of

D.

an indeterminate change in

A

Countercyclical fiscal policy operates through​ ______________.

A.

government spending and​ tax/transfer policy

B.

printing money

C.

interest rates

D.

​long-run investments in education and technology

A

Through the lens of our labor market​ model, expansionary fiscal policy works by​ ____________.

A.

shifting the labor demand curve to the right

B.

shifting the labor demand curve to the left

C.

shifting the labor supply curve to the right

D.

shifting the labor supply curve to the left

A

The U.S. fiscal response to the​ COVID-19 pandemic was​ ________ than the fiscal response to the Great Recession in​ 2008-2010 and​ _________ than the fiscal responses of other OECD countries to the​ COVID-19 pandemic.

A.

​smaller; larger

B.

​larger; smaller

C.

​larger; larger

D.

​smaller; smaller

C

A government cuts its purchases of goods and services without changing its tax and transfer policy. What is the direct effect of this policy​ change?

A.

An increase in G

B.

A decrease in G

C.

An increase in C

D.

A decrease in C

E.

No change to aggregate demand

B

Assuming no special response from the central​ bank, what will this do to interest​ rates?

A.

Decreases them

B.

Keeps them unchanged

C.

Increases them

D.

Not enough information to say for sure

A

How might this policy affect private business investment​ (following the assumption in class about the relative magnitude of the output and interest rate effects on​ investment)?

A.

Decreases it

B.

Keeps it unchanged

C.

Increases it

D.

Not enough information to say for sure

C

The government of a closed economy​ (i.e., no exports or​ imports) increased government purchases by​ $2 billion. This had a​ knock-on effect of increasing consumption by​ $1.5 billion and decreasing investment by​ $0.5 billion.

The government expenditure multiplier in this case was (_____)

The multiplier might have been even larger if​ ____________.

A.

the expenditures became income for primarily​ high-income households

B.

the government purchases were made slowly over the span of several years

C.

the central bank prevented interest rates from rising

D.

All of the above

Why​ can't a government use fiscal policy to achieve unlimited increases in​ output?

A.

Fiscal policy increases​ demand, and as the economy reaches its​ short-run potential​ (i.e., maximum​ employment), further increases in demand will primarily produce rising inflation rather than increased output.

B.

The central bank will likely engage in contractionary monetary policy to keep inflation from​ rising, offsetting the effect of expansionary fiscal policy on demand.

C.

Increased government spending without corrresponding increases in taxes will require​ borrowing, and the government may face costs related to rising debt.

D.

All of the above.

1.5

C

D

Which of the​ following, if​ true, would lead someone to be more skeptical of active countercyclical stimulus​ policy?

A.

The economy generally experiences​ v-shaped recessions.

B.

Countercyclical policies generally cause inflation.

C.

Policies have long and variable lags.

D.

All of the above.

D

Which of the following is generally an advantage of fiscal expansion over monetary​ expansion?

A.

Fiscal expansions tend to be nimble and reversible.

B.

Fiscal policy is done technocratically.

C.

Fiscal expansions increase private investment.

D.

Fiscal policy can target additional goals than just​ output, employment, and inflation.

D

What are the automatic and discretionary components of fiscal​ policy?

A.

The automatic components are limited to government​ expenditures, while the discretionary components entail changes to both taxes and expenditures.

B.

The automatic components are those fiscal actions that require accommodation from monetary​ policy, while the discretionary components do not.

C.

The automatic components do not require deliberate action on the part of the​ government, while the discretionary components do.

D.

The automatic components stimulate the​ economy, while the discretionary components serve purposes unrelated to the health of the economy.

C

A government engaging in discretionary fiscal policy during a recession​ might:

A.

Purchase large amounts of Teasury securities.

B.

Increase the generosity of social insurance benefits.

C.

Temporarily halt existing infrastructure projects to save money.

D.

Close tax loopholes that benefit the top​ 1%.

B

The government deficit is equal​ to:

A.

G​ - T

B.

government spending​ - taxes​ (taxes only, not counting​ transfers)

C.

government purchases​ - taxes ​(taxes only, not counting​ transfers)

D.

A and B only

E.

All of the above

D

When a government runs a​ deficit, ________.

A.

its nominal debt necessarily falls

B.

its nominal debt necessarily rises

C.

inflation necessarily rises

D.

its debt as a share of GDP necessarily rises

B

How was​ "debt sustainability" defined in the context of debt sustainability analysis in​ class?

A.

The government only runs a budget deficit when the economy is in a recession.

B.

Total debt as a share of GDP will not be​ ever-increasing.

C.

The total amount of debt the country has is not rising over time.

D.

Total debt as a share of GDP will eventually fall to zero.

B

Which of the following​ economic/political trends could make it more difficult to achieve debt​ sustainability?

A.

The productivity slowdown of recent decades​ reverses, leading to sustained real GDP growth of between 2 and 3 percent.

B.

Large fiscal stimulus packages become more and more common during times of high unemployment.

C.

Real interest rates stay very low for the foreseeable future.

D.

The government gradually raises taxes.

B

Which of the following factors makes a country more likely to default on its​ debt?

A.

It consistently runs high budget deficits.

B.

It borrows in a foreign currency like dollars.

C.

It is perceived by potential creditors as being more likely to default.

D.

It is experiencing a recession.

E.

All of the above.

E

The U.S. borrows in its own currency and controls its own monetary policy. What does this mean with regard to its likelihood of defaulting on its​ debt?

A.

These factors​ don't matter for the likelihood of a debt default.

B.

The U.S. never needs to default on its​ debt, so it can spend as much as it wants without negative consequences for the economy.

C.

Although these factors help reduce the likelihood of a U.S.​ default, it is still possible that it would not be able to pay its bills.

D.

​Technically, the U.S. never needs to​ default, but too much debt could lead to a de facto default through high and rising inflation.

D

The following equation identifies the size of a persistent primary budget deficit that can be​ maintained, given the​ debt/GDP ratio a country is willing to​ tolerate, the nominal interest​ rate, and the growth rate of nominal​ GDP:

StartFraction Primary Deficit Over GDP EndFraction equals left parenthesis g minus i right parenthesis StartFraction Debt Over GDP EndFraction

Assume a country runs a primary budget deficit equal to​ 3% of GDP. If the​ long-run nominal interest rate is​ 5%, GDP must grow at (_____) in order to stabilize the debt at​ 80% of​ GDP? (Enter your answer as a​ percent, but without the percent​ sign, e.g.​ 10% would be​ 10.)

What happens if GDP grows more slowly than your answer​ above, but faster than​ 5%? (You should assume that interest rates and growth rates stay​ constant.)

A.

​Debt/GDP will stabilize at less than​ 80% of GDP.

B.

​Debt/GDP will fall over time until the debt is paid off.

C.

​Debt/GDP will stabilize at more than​ 80% of GDP.

D.

​Debt/GDP will spiral to infinity.

If debt rises well above​ 80% of​ GDP, then it is likely that​ _________.

A.

there will be no change to interest rates or growth rates

B.

interest rates will rise and growth rates will fall

C.

interest rates will fall and growth rates will rise

8.75

C

B

What does it mean for a government to run a primary​ surplus?

A.

It collects more in taxes than it spends on​ non-interest expenses.

B.

Its government debt is falling as a share of GDP.

C.

Its government debt is falling in nominal terms.

D.

It collects more in taxes than it spends.

A

Consider a country that has g > i. Assuming that interest rates and growth rates remain​ constant, which of the following is​ true?

A.

No matter the size of its primary​ deficit, this​ country's debt will stabilize as a share of GDP.

B.

This​ country's debt will stabilize as a share of​ GDP, but only if its primary deficit is not too large.

C.

This country must run a primary surplus if it wants to stabilize its debt as a share of GDP.

D.

This country will not be able to stabilize its debt.

A

Consider a country that has i greater than g. Assuming that interest rates and growth rates remain​ constant, which of the following is​ true?

A.

No matter the size of its primary​ deficit, this​ country's debt will stabilize as a share of GDP.

B.

This​ country's debt will stabilize as a share of​ GDP, but only if its primary deficit is not too large.

C.

This country must run a primary surplus if it wants to stabilize its debt as a share of GDP.

D.

This country will not be able to stabilize its debt.

C

Which of the following statements best characterizes former Governor​ Warsh’s assessment of the​ Fed’s job performance during the 2008 financial​ crisis?

A.

If the Fed had been able to save Lehman​ Brothers, the rest of the crisis would have played out very differently.

B.

The Fed was sounding early alarms about systemic risks to the banking​ sector, but was unable to persuade Congress to take action.

C.

The​ Fed’s decision to let Lehman Brothers fail caused the global financial crisis.

D.

In early​ 2008, the Fed was slow to recognize the implications of the failure of Bear Stearns​ (3/2008) and the problem of insolvency in parts of the global banking​ system, but quick to catch up once the depth of the crisis became clear in the fall of 2008.

D

Which point during the 2008 financial crisis did former Governor Warsh identify as the most important because the Fed made a strategic​ error?

A.

The first round of quantitative easing​ (QE), because it​ didn’t have any​ short-term benefits and carried​ long-term risks.

B.

The bailout of Bear​ Stearns, when the Fed should have realized that many banks were insolvent.

C.

The failure of Lehman​ Brothers, when the Fed should have found a way to provide extraordinary support to save the bank.

D.

The passage of TARP by​ Congress, because it led to an erosion of public trust in Congress and the Fed.

B

Which of the following best describes former Governor​ Warsh’s attitude towards quantitative easing​ (QE)?

A.

He views it as a dangerous blend of monetary and fiscal policy that has been overused by the Fed​ (because it leads to allocative inefficiency in capital​ markets).

B.

He views it as a vital monetary policy innovation that has been appropriately used by the Fed.

C.

He thinks that it should replace changing the federal funds rate as the​ Fed’s primary monetary policy tool.

D.

Both​ (b) and​ (c).

A

Which of the following statements best characterizes former Governor​ Warsh’s assessment of the​ Fed’s job performance between 2010 and​ 2019?

A.

The Fed should have done a better job keeping inflation from rising above its​ 2% target.

B.

The Fed did structural harm to the economy by treating the​ 2010-2019 period as if the economy was still in a crisis.

C.

The Fed did an excellent job guiding the economy back from the global financial crisis and bringing stability to financial markets.

D.

The Fed did a decent​ job, but it​ wasn’t a particularly difficult period because there were no major economic crises.

B

What were the three pillars of former Governor​ Warsh’s mental model for bank​ regulation?

A.

Stress​ tests, auditing of financial​ statements, and an expansion of the use of quantitative easing.

B.

Capital​ standards, stress​ tests, and expanded deposit insurance.

C.

A streamlined regulatory​ framework, regulatory​ discipline, and expanded deposit insurance.

D.

Capital​ standards, regulatory​ discipline, and market discipline.

D