C. Will remain the same and the cpi will rise.

D. and the CPI will rise by different amounts.

9. According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then A. real income increases by approximately 5 percent. B. the price level increases by approximately 5 percent. C. the nominal interest rate increases by approximately 5 percent. D. nominal income increases by approximately 5 percent. 25. An increase in the expected rate of inflation will A. lower the demand for real balances because the real interest rate will rise. B. lower demand for real balances because the nominal interest rate will rise. C. increase the demand for real balances because the real interest rate will fall. D. increase the demand for real balances because the nominal interest rate will rise.

1. According to the IS-LM model, an increase in government purchases causes a(n) A. increase in income and a decrease in the interest rate. B. decrease in income and a decrease in the interest rate. C. increase in income and an increase in the interest rate. D. decrease in income and an increase in the interest rate.

3. According to the IS-LM model, if the central bank increases the money supply, then the interest rate A. falls and income falls. B. falls and income rises. C. rises and income falls. D. rises and income rises.

10. According to the quantity equation, which of the following might happen if the money supply increases? A. Velocity is constant, prices are constant, and total output increases. B. Velocity increases, prices are constant, and total output is constant. C. Velocity is constant, prices fall, and total output is constant. D. Velocity rises, prices fall, and total output is constant.

12. Because of the relationship between prices and the real money supply, the aggregate demand curve is A. vertical. B. upward sloping. C. horizontal. D. downward sloping.

1. Consider the following aggregate supply equation:

Y = Y + a*(P - P^e) Based on this equation, the slope of the AS curve is A. a. B. Y. C. -a. D. 1/a.

18 Choose the pair of words that best complete this sentence: If government purchases increase, national saving will ________ and the equilibrium real exchange rate will _______. A. fall; fall B. fall; rise C. rise; rise D. rise; fall

19. Choose the pair of words that best completes this sentence: In a large open economy monetary policy is ____ potent and fiscal policy is ____ potent than in a closed economy. A. less; more B. less; less C. more; more D. more; less

19. Consider the following data on inflation and unemployment

Year	Inflation	Unemployment
1	10%	5%
2	8%	6%
3	4%	9%

The part of the business cycle characterizing this economy from year 1 to year 3 is a A. recession. B. boom. C. stagflation. D. repression.

11. Consider an economy where the money supply is growing at 7 percent per year and velocity is constant. Which of the following statements about real GDP growth and the inflation rate could be true? A. Real GDP is growing at 2 percent and inflation is 5 percent. B. Real GDP is growing at 7 percent and inflation is 7 percent. C. Real GDP is growing at 2 percent and inflation is 9 percent. D. Real GDP is growing at 9 percent and inflation is 2 percent. Considerthefollowingtable

Consumption of foreign goods and services	100
Consumption of domestic goods and services	900
Investment of foreign goods and services	20
Investment of domestic goods and services	180
Government purchases of foreign goods and services	0
Government purchases of domestic goods and services	500
Exports	100

Based on the data, what are total imports? A. 0 B. 120 C. 1,000 D. 1,580 3 Consider the following table

Consumption of foreign goods and services	100
Consumption of domestic goods and services	900
Investment of foreign goods and services	20
Investment of domestic goods and services	180

12. Consider an economy where the only goods traded are coconuts and pineapples. Last year, 100 coconuts were sold at $1 apiece, and 200 pineapples were sold at $2.50 apiece. If the money supply was $100, what was velocity? A. 30 B. 15 C. 6 D. 5

19. Considerthefollowingtable:

	ConsumptionGoods	NonconsumptionGoods
Year	ProductionPrice	ProductionPrice
1995	20/$0.50	10/$1.00
2000	10/$1.00	10/$0.50

If 1995 is the base year, the CPI in 2000 is

1. 0.

2. 1/2.

3. 1.

4. 2.

23. Choose the pair of words that best completes this sentence: Investment depends on the ________ interest rate because higher inflation will ________ the value of the dollars with which the firm will repay the loan. A. real, increase B. nominal, increase C. real, decrease D. nominal, decrease

13. Consider the following table: APPLES/ ORANGES

Year	Production/Price	Production/Price
1995	20/ $0.50	10/$1.00
2000	10/ $1.00	10/$0.50

If 1995 is the base year, what is the GDP deflator for 2000?

1. 0

2. between 0 and 1

3. 1

4. greater than 1

5. Consider the following production table:

	Labor	Capital	Output
(i)	1,000	1,000	10,000
(ii)	2,002	2,000	20,010

Assuming that the production function displays constant returns to scale, what is the marginal product of labor when labor and capital are both equal to 1,000? A. 1 B. 5 C. 10 D. 20

19. Considerthefollowingtable

Year	InflationRate	NominalInterestRate
1	5%	10%
2	10%	5%

By how much has the real interest rate changed between year 1 and year 2? A. It has increased 5 percent. B. It has decreased 5 percent. C. It has increased 10 percent. D. It has decreased 10 percent.

6. Consider the following production table:

Labor	Capital	Output
1	2	3
2	2	6
3	2	8

By how much does the marginal product of labor decrease as labor input increases from 1 to 2 and from 2 to 3? A. 0 B. 1 C. 2 D. 3

27 Considerthefollowingtable

Domesticinflation:	5%
Foreigninflation:	6%
Change in nominal exchange rate:	3%

Based on the data, what is the change in the real exchange rate? A. 2 percent B. 3 percent C. 5 percent D. 8 percent

9 Consider the following data on the Transalpinian economy

Y = 1,000

C =  700

G =  150

I =  250 - 10r*

10 Consider the following data on the Transalpinian economy

Y = 1,000

C  =  650

G =  200

I  =  250 - 20r*

The world interest rate is 7.5 percent. How does the world interest rate have to change to make net exports zero? A. It has to rise by 5 percent. B. It has to rise by 2.5 percent. C. It has to remain constant. D. It has to fall by 2.5  percent.

27. Choose the pair of words that best completes this sentence: The nominal interest rate is the sum of the ex ante real interest rate and the _________ inflation rate, and real money balances are a function of the ___________ interest rate. A. expected; nominal B. actual; nominal C. actual; real D. expected; real

21. Compared to long-term unemployment, short-term unemployment is more likely to be A. frictional unemployment. B. structural unemployment. C. a result of minimum-wage laws. D. a result of union activity.

24. Discouraged workers who want jobs, but have stopped looking for jobs are A. frictionally unemployed. B. unemployed due to structural unemployment. C. no longer in the labor force. D. helped by minimum-wage legislation.

20. Debt-deflation leads to lower income because A. falling prices redistribute income from creditors to debtors, which leads to a decline in the APC. B. falling prices redistribute income from debtors to creditors, which leads to a decline in the APC. C. a rise in the saving rate leads to a lower amount of real debt in the economy, depressing consumption and therefore income. D. a fall in the saving rate leads to higher interest rates and lower income.

15. Economists usually advocate targeting nominal rather than real variables because: A. nominal variables have larger effects on the economy. B. it is difficult to determine the exact level of real variables. C. real variables vary more than nominal ones. D. policy instruments do not affect real variables.

18. Efficiency wage theories claim that firms may pay high real wages in order to A. avoid the threat of unionization. B. make workers more productive. C. discourage unskilled workers from applying. D. reduce the level of frictional unemployment.

19. Efficiency wages do not lead to A. structural unemployment. B. wages above their equilibrium level. C. lower firm profits. D. increased worker productivity.

12. Economic profit is the same as accounting profit minus A. the return to labor. B. the return to capital. C. depreciation. D. corporate taxes.

9. Exogenous increases in the supply of loanable funds shift the A. LM curve outward. B. LM curve inward. C. IS curve outward. D. IS curve inward.

7. Euler's theorem implies that if a production function exhibits constant returns to scale A. economic profit is zero. B. accounting profit is zero. C. the marginal product of labor equals the real wage. D. the marginal product of capital equals the real interest rate.

7. Frictional unemployment occurs because A. the minimum wage is too high. B. unions exert pressure in the labor market. C. rigidities exist in the wage-setting process. D. it takes time to match firms and workers.

17. Faced with an adverse supply shock, if the central bank wants to stabilize output, it should A. decrease the money supply. B. increase the money supply. C. decrease government spending. D. increase government spending.

7. For a fixed money supply, a higher level of real balances implies A. a higher price level. B. a lower price level. C. higher velocity of money. D. lower velocity of money.

Government purchases of foreign goods and services	0
Government purchases of domestic goods and services	500
Exports	100

Based on the data, what are net exports? A. -20 B. 0 C. 120 D. 1,580

21. Government revenue raised through the printing of money is called A. hyperinflation. B. seignorage. C. income taxes. D. sales taxes.

22. General Motors increases the price of a model car produced exclusively for export to Europe. Which U.S. price index is affected?

A. The CPI

B. The GDP deflator

C. Both the CPI and the GDP deflator

D. Neither the CPI nor the GDP deflator

3. GDP is

B. a flow.

4. GDP measures

D. all of the above.

19. Hysteresis is the effect of history on A. expected inflation. B. the sacrifice ratio. C. cyclical inflation. D. the natural rate of unemployment.

32. Hyperinflation usually starts when A. people start spending too much money. B. firms demand higher and higher prices for their goods. C. governments are forced to print money to finance their spending. D. fiscal deficits are small.

10. In the basic endogenous growth model, the production function exhibits A. decreasing returns. B. constant returns. C. increasing returns. D. none of the above.

11. In the basic endogenous growth model, usually called the Y=AK model, as long as the savings rate times the constant A is greater the rate of depreciation, income will grow A. at an increasing rate. B. at a decreasing rate. C. until it reaches its steady state. D. forever.

12. In the Solow model, savings leads to _______ growth, but in the Y=AK model, savings can lead to _______ growth. A. negative; eternal B. temporary; persistent C. exogenous; endogenous D. consumption; technological

14. In the two sector model presented in Section 8-4, where the sectors consist of manufacturing firms and research universities, A. only firms use capital as inputs. B. only universities use knowledge as inputs. C. both universities and firms use capital and knowledge as inputs. D. universities use capital and knowledge as inputs.

15. In the two sector model, the proportion of labor devoted to research universities determines the A. steady-state stock of physical capital. B. marginal product of capital. C. steady-state savings rate. D. steady-state growth rate of income.

16. In most endogenous growth theories, externalities from firms' research play a crucial role. Economists

agree that research A. always has beneficial externalities. B. can exhibit externalities of ambiguous value. C. usually has negative long-run effects. D. none of the above.

8. If a firm with a constant returns to scale production function pays all factors their marginal products, then A. economic and accounting profits are both zero. B. economic profit is zero and accounting profit is positive. C. economic profit is positive and accounting profit is zero. D. economic and accounting profit are both positive

28. If an individual is to hold lower money balances on average, she must make more frequent trips to the bank to withdraw money. This inconvenience of reducing money holding is called A. a menu cost. B. a shoeleather cost. C. an inflation tax. D. seignorage.

5. In the Solow model with technological progress, an increase in the rate of technological change will A. shift the investment curve upward. B. shift the investment curve downward. C. leave the investment curve unchanged. D. lead to a lower level of consumption at the steady state.

6. In a Solow model with population growth and technological progress, the steady state level of consumption is maximized when the steady state marginal product of capital equals the rate of depreciation plus A. the rate of population growth plus the rate of technological change. B. the rate of population growth. C. the rate of technological change. D. none of the above.

1. In the Solow growth model with population growth (n) and technological progress (g), the steady-state growth rate of output per efficiency unit is A. 0. B. n. C. g. D. n + g.

2. In the Solow growth model with population growth (n) and technological progress (g), the steady-state growth rate of output per worker is A. 0. B. n. C. g. D. n + g.

3. In the Solow growth model with population growth (n) and technological Progress (g), the steady-state growth rate of total output is A. 0. B. n. C. g. D. n + g.

17. If two economies are identical except for their rates of population growth, then the economy with the higher rate of population growth will have A. higher steady-state output per worker. B. higher steady-state capital per worker. C. higher steady-state consumption per worker. D. lower steady-state output per worker.

18. If two economies are identical except for their rates of population growth, then if both economies are in steady state, the economy with the higher rate of population growth will have a A. lower rate of growth of total output. B. higher rate of growth of total output. C. lower rate of growth of output per person. D. higher rate of growth of output per person.

19. If the population growth rate decreases in an economy described by the Solow growth model, the line representing population growth and depreciation will A. shift upward. B. shift downward. C. stay the same. D. cross the investment curve at the same point. 20. In the Solow growth model with population growth, the Golden Rule steady state is achieved when the marginal product of capital equals A. the savings rate. B. the population growth rate. C. the population growth rate plus the rate of depreciation. D. the proportion of output that goes to wages.

2. If a production function has two inputs and exhibits constant returns to scale, then doubling both inputs will cause the output to A. reduce by half. B. stay the same. C. double. D. quadruple.

28. In a closed economy, with total output and taxes fixed, if government spending rises A. consumption falls. B. national saving rises. C. the real interest rate falls. D. investment falls. 29. In a closed economy with total income fixed, a reduction in taxes will cause consumption A. to rise and investment to fall. B. and investment both to rise. C. to fall and investment to rise. D. and investment both to fall.

4. In the sticky-wage model, output deviates from the natural rate through A. unexpected changes in the nominal wage. B. expected changes in the price level. C. unexpected changes in the price level. D. expected changes in the real wage.

5. In the sticky-wage model, employment is assumed to be determined by the A. equilibrium between supply and demand for labor. B. supply of labor. C. demand for labor. D. level of the nominal wage.

8. In the imperfect-information model, it is assumed that firms A. can observe both the price of their output and the overall price level. B. can observe the price of their output but cannot observe the overall price level. C. cannot observe the price of their output but can observe the overall price level. D. cannot observe either the price of their own output or the overall price level.

9. In the sticky-price model, if the fraction of firms in the economy that set prices in advance rises, then it would be expected that the aggregate supply curve A. shifts upward. B. shifts downward. C. becomes steeper. D. becomes flatter.

13. If expected inflation rises, the Phillips curve A. shifts upward. B. shifts downward. C. becomes steeper. D. becomes flatter.

16. In the country of Stabilia, the monetary authorities particularly dislike inflation. The current inflation of 5 percent is considered rampant. If the sacrifice ratio in Stabilia is five, the percentage of a year's GDP that has to be forgone to bring inflation down to 1 percent is A. 0.8 percent. B. 1.25 percent. C. 20 percent. D. 25 percent.

32. In a closed economy with output fixed, an increase in government spending matched by an equal increase in taxes will A. increase consumption. B. increase the interest rate. C. increase investment. D. leave all other variables unchanged.

33. In a closed economy with fixed output, an increase in government spending without any change in taxes will lead to a(n) A. increase in the real interest rate and a decrease in private saving. B. decrease in the real interest rate and an increase in private saving. C. decrease in the real interest rate and no change in private saving. D. increase in the real interest rate and no change in private saving.

34. In the simple macroeconomic model of Chapter 3, a decrease in taxes will shift the A. investment demand curve to the left. B. investment demand curve to the right. C. savings curve to the left. D. savings curve to the right.

8. If the Fed reduces the supply of money, the A. AS curve shifts outward. B. AS curve shifts inward. C. AD curve shifts outward. D. AD curve shifts inward.

10. In the short run, if prices are fixed, the aggregate supply curve is A. vertical. B. upward sloping. C. horizontal. D. downward sloping.

36. In the full model of the economy presented in chapter 3, the variable that adjusts to equilibrate the supply and demand for goods and services is A. government spending. B. consumption. C. taxes. D. the real interest rate.

16 If the nominal exchange rate is $1 equals 150 Japanese yen, and a Big Mac costs $2 in the U.S. and 300 yen in Japan, then the real exchange rate of U.S. Big Macs for Japanese Big Macs is A. 1. B. 2. C. 150. D. 300. 10. If investment becomes less sensitive to the interest rate, then the A. LM curve becomes steeper. B. LM curve becomes flatter. C. IS curve becomes steeper. D. IS curve becomes flatter.

11. If the marginal propensity to consume is large, then the A. LM curve is relatively steep. B. LM curve is relatively flat. C. IS curve is relatively steep. D. IS curve is relatively flat.

18. In the early 1980's the Federal Reserve, under Paul Volcker, began a period of tight money aimed at reducing inflation. Under this policy, nominal interest rates were: A. higher in the short run and higher in the long run. B. higher in the short run and lower in the long run. C. lower in the short run and higher in the long run. D. lower in the short run and lower in the long run.

19. In the quantity theory interpretation of the LM curve, the LM curve slopes up because A. a higher inflation rate implies a higher interest rate. B. velocity depends on the interest rate. C. when income rises, a higher interest rate is necessary to equilibrate the money market. D. for a given price level, the supply of money determines the level of income. 20. If the central bank increased the supply of real money balances, then the LM curve would A. become steeper. B. become flatter. C. shift inward. D. shift outward.

21. If money demand became more sensitive to the level of income, the LM curve would A. become steeper. B. become flatter. C. shift inward. D. shift outward.

3. In the Keynesian cross model of Chapter 10, if the interest rate is constant and the MPC is 0.7, then the government purchases multiplier is A. 0.3. B. 0.7. C. 1.4. D. 3.3.

4. In the Keynesian cross model of Chapter 10, if the interest rate is constant, the MPC is 0.6, and taxes are increased by $100, by how much does income change? A. It increases by $150. B. It decreases by $150. C. It increases by $166. D. It decreases by $166.

1. In "The General Theory of Employment, Interest, and Money," John Maynard Keynes proposed that the Great Depression was caused by A. government budget deficits. B. low aggregate demand. C. saving rates that were too low. D. inept monetary policy.

17 If a country's real exchange rate falls (depreciates), then A. net exports rise. B. net exports fall. C. exports and imports rise by the same amount. D. exports and imports fall by the same amount. 19 In the model of Chapter 5, if the government prevented the import of foreign cars, then, in the resulting equilibrium, net exports would A. rise because fewer cars would be imported. B. remain constant because saving and investment would not change. C. fall because the real exchange rate would rise. D. rise because the real exchange rate would fall. 6. If the capital stock is above the steady-state level, then investment A. is smaller than depreciation. B. is larger than depreciation. C. is equal to depreciation. D. could be higher than, lower than, or equal to depreciation.

7. If an economy is initially in a steady state and it experiences an increase in its saving rate, then the steady-state capital stock will A. fall. B. stay the same. C. rise. D. rise only if depreciation also rises.

3. In the Solow model, the depreciation rate represents the A. fraction of income taken by taxes. B. difference between the nominal and real interest rates. C. inflation rate. D. fraction of the capital stock that wears out each year.

20 If the United States has an inflation rate of 10 percent, Great Britain has an inflation rate of 12 percent, and the United States dollar has a nominal appreciation against the British pound of 3 percent, then the real appreciation of the United States dollar against the British pound is A. 1 percent. B. 13 percent. C. 15 percent. D. 25 percent.

3. If the supplies of capital and labor are fixed and technology is unchanging, then real output is A. fixed. B. determined by demand. C. uncertain. D. subject to wide fluctuations.

4. If a production function has the property of diminishing marginal product, then doubling A. all of the inputs will less than double the output. B. all of the inputs will double the output. C. all of the inputs will more than double the output. D. one of the inputs will reduce its marginal product.

1. If the rate of unemployment is neither rising nor falling, then the number of people finding jobs must equal the number of people A. unemployed. B. losing or leaving jobs. C. looking for jobs. D. leaving the labor force. 2. If the rate of job finding rises, the natural rate of unemployment will A. remain constant. B. increase. C. decrease. D. rise or decline, depending on the rate of job separation.

7. In which case is total expenditure in an economy not equal to total income?

A. if total saving is larger than total investment

B. if net exports are not zero

C. if inventory investment is negative