程序代写案例-ECON 3102
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Practice Final Multiple Choice
The following is a selection of multiple choice questions from the book that won’t be appearing on the
exam. The frequency of topics in this document doesn’t reflect the frequency of topics on the actual
exam.
On the final, roughly 2/3 of the multiple choice questions will be drawn from these chapters, while 1/3
will be drawn from the first half of class.



Chapter 9 - The Savings Decisions

1. Consumption smoothing refers to
A. the tendency of all consumers to choose the same amount of current consumption.
B. the tendency of consumers to seek a consumption path over time that is smoother than
income.
C. the tendency of consumers to seek an income path over time that is smoother than
consumption.
D. consumer’s concerns about going heavily into debt.

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2. The desire to smooth consumption is reflected in
A. the consumer’s budget constraint.
B. the curvature in a consumer’s indifference curves.
C. choice between present and future.
D. the production possibilities frontier.

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3. Lifetime wealth is
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A. the quantity of assets the consumer has in the current period.
B. current income plus future income.
C. current income minus discounted future taxes.
D. the present value of disposable income.

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4. The endowment point is the consumption bundle in which
A. first-period consumption is equal to zero.
B. second-period consumption is equal to zero.
C. the consumer finds the most utility.
D. consumption is equal to disposable income in each period.

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5. The endowment point is the consumption bundle in which
A. households maximize utility.
B. households are indifferent to interest rate changes.
C. permanent income is maximized.
D. savings are zero.

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6. A consumer is a borrower if
A. optimum current consumption is less than current disposable income.
B. optimum current consumption is greater than current disposable income.
C. future disposable income is greater than current disposable income.
D. the consumer’s indifference curves are relatively steep.

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7. For a household in a (c,c’) graph, the optimal consumption bundle is
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A. to the left of the endowment point.
B. to the right of the endowment point.
C. on the endowment point.
D. dependent on other factors.

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8. In the consumer’s problem, with higher future taxes, (holding all else constant):
A. current consumption declines.
B. current consumption stays the same.
C. current consumption increases.
D. current consumption depends on other factors.

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9. An increase in the real interest rate
A. increases savings for both borrowers and lenders.
B. increases savings for borrowers, but has an uncertain effect on the savings of lenders.
C. increases savings for lenders, but has an uncertain effect on the savings of borrowers.
D. has an uncertain effect on the savings of both borrowers and lenders.

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10. Ricardian equivalence implies
A. that when the government borrows more, the market real interest rate goes up.
B. that if the government saves less, then the nation saves less.
C. that when taxes are cut people consume more.
D. that consumers will save their tax cuts to pay their future taxes.

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Chapter 10 - Credit Market Imperfections

1. The phenomenon that some consumers pay a higher interest rate when they borrow than the
interest rate they receive when they lend is best described as an example of
A) irrational behavior.
B) a credit market imperfection.
C) a vast banking conspiracy.
D) the burden of public debt.

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2. If a consumer borrows at an interest rate greater than the interest rate at which he or she can
lend, then
A) banks cannot make a profit.
B) the budget constraint has a kink at the endowment point.
C) the consumer must be a lender.
D) this makes no difference for consumer behavior.

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3. In the two-period model, the budget constraint is kinked for all of these reasons, except
A) the real interest rate is greater than zero.
B) there are costs to banks from lending and borrowing.
C) there is asymmetric information in the credit market.
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D) there is limited commitment in the credit market.

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4. Which of the following is not a reason for studying credit market frictions?
A) explaining features of financial crises
B) explaining key elements of financial market behavior
C) understanding why Ricardian equivalence may not work
D) explaining why collateral does not matter

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5. An interest rate spread is
A) the difference between long-term and short-term interest rates.
B) the difference between nominal and real interest rates.
C) the difference between lending and borrowing interest rates.
D) the difference between public and commercial interest rates.

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6. A default premium is the interest rate premium
A) under normal market circumstances.
B) when there are no market fluctuations.
C) covering the default risk.
D) for government debt.

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7. Asymmetric information means
A) some market participants have more information than others.
B) some Previous Editions are more important than others.
C) some market participants interpret Previous Editions differently.
D) the impact of Previous Editions on economic outcomes depends on the context.

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8. In the model with asymmetric information in the credit market, a decrease in the fraction of
bad borrowers in the population
A) reduces the interest rate spread.
B) increases the default premium.
C) hurts good borrowers.
D) causes banks to earn negative profits.

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9. Collateral is
A) a source of asymmetric information.
B) assets that are difficult to seize.
C) an asset that can be seized if the borrower defaults.
D) never used in practice.

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10. If the value of collateral falls for a consumer,
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A) current consumption must fall.
B) current consumption must rise.
C) future consumption must fall.
D) current consumption falls only if the collateral constraint binds.

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11. An increase in the value of collateral for the consumer
A) has no effect if the consumer’s collateral constraint binds.
B) increases current consumption one-for-one if the collateral constraint binds.
C) reduces consumption one-for-one if the collateral constraint binds.
D) increases income if the collateral constraint does not bind.

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12. When there are credit market frictions, Ricardian equivalence may not hold because
A) consumers cannot understand the implications of the government budget constraint.
B) a tax cut in the present with a future increase in taxes works effectively like a loan.
C) an increase in government saving is matched one-for-one by a decrease in private saving.
D) social security is fully-funded.

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13. When there are credit-market imperfections, an increase in government debt may be
advantageous because it
A) discourages credit-constrained consumers from borrowing too much.
B) allows credit-constrained consumers to consume more.
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C) eliminates the problems that cause credit-market imperfections.
D) encourages more private saving.

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14. In the two-period model with asymmetric information, the presence of bad borrowers who
always default
A) makes good borrowers better off.
B) matters only for the loan interest rate faced by bad borrowers.
C) affects the equilibrium profits of banks.
D) affects good borrowers adversely.

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15. In the two-period model, the nature of the asymmetric information is that
A) only the bank knows who the bad borrowers are.
B) only borrowers know whether they are bad or not.
C) only borrowers know the value of their collateral.
D) only banks can value the collateral.

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16. Collateral is used in all of the following credit arrangements, except
A) repurchase agreements.
B) automobile loans.
C) credit card lending.
D) mortgage lending.
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17. For a consumer bound by the collateral constraint, a reduction in the price of the collateral
leads to
A) nothing.
B) an increase in current consumption and a decrease in future consumption.
C) a decrease in current consumption and no change in future consumption.
D) a decrease in current and future consumption.

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18. If there is limited commitment and the government is no better at collecting on its debts than is
the private sector, then
A) Ricardian equivalence holds.
B) the private sector can benefit from a government loan program.
C) Ricardian equivalence does not hold.
D) the Fisher relation does not hold.

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19. Pay-as-you-go social security
A) can never improve economic welfare for everyone.
B) can improve welfare for everyone if the population growth rate is large enough.
C) is always inefficient.
D) is not used by any countries in the world.

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20. In a fully-funded social security program
A) the young pay for the benefits of the old.
B) the young are forced to save for their own retirement.
C) the young have to buy bonds for the old.
D) the young are forced to save for the retirement of the old.

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21. Fully funded social security
A) is always superior to pay-as-you-go social security.
B) is essentially forced savings.
C) allows consumers flexibility in planning their savings.
D) works by taxing the young to pay benefits to the old.

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22. Why do consumers benefit from pay-as-you-go social security?
A) It keeps inflation in check as money is redistributed.
B) It is a better way than taxes to finance the government.
C) It forces people to save more than they would otherwise.
D) With sufficiently high population growth, many young contribute to the benefits of relatively
few old.

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23. In the United States, Social Security is:
A. implemented through individual savings accounts.
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B. fully-funded.
C. pay-as-you-go.
D. currently bankrupt.

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24. What does it mean when people say that the United States Social Security system will be
bankrupt in 2034?
A. 2034 will be the first year in which benefits paid exceed revenues collected.
B. The present value of benefits paid out over the history of the program will exceed the
present value of revenues collected, triggering an automatic decrease in benefits.
C. The offices at the Social Security Administration will have their electricity shut off and their
computers repo’ed.
D. The Social Security Adminstration has a stockpile of money and assets, which will run out
in 2034. At this point, the program will stop paying benefits entirely.

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25. To “privatize” social security means:
A. To transition from a pay-as-you-go system to a fully-funded system.
B. To transition from a fully-funded system to a pay-as-you-go system.
C. To hire a private corporation to manage the social security program.
D. To entirely remove social security benefits and taxes.

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Chapter 11 - Real Intertemporal Model with Investment

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1. The assumption that current-period labor supply is positively related to the current-period real
wage is justified as long as the
A. income effect dominates the substitution effect in the short run.
B. income effect dominates the substitution effect in the long run.
C. substitution effect dominates the income effect in the short run.
D. substitution effect dominates the income effect in the long run.

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2. When drawn against the current wage, the current labor supply shifts to the right if
A. current taxes increase.
B. future taxes decrease.
C. firms make more profits.
D. total factor productivity increases.

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3. An increase in lifetime wealth
A. increase current labor supply and increase current consumption demand.
B. increase current labor supply and decrease current consumption demand.
C. decrease current labor supply and increase current consumption demand.
D. decrease current labor supply and decrease current consumption demand.

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4. When drawn against the current real wage, the labor demand curve is
A. upward sloping because the marginal product of labor rises with the quantity of labor
employed.
B. upward sloping because the marginal product of labor declines with the quantity of labor
employed.
C. downward sloping because the marginal product of labor rises with the quantity of labor
employed.
D. downward sloping because the marginal product of labor declines with the quantity of
labor employed.
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5. The marginal propensity to consume out of income
A. is larger than one.
B. is equal to one.
C. is smaller than one.
D. varies around one.

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6. When drawn against the real interest rate, the output supply curve is upward sloping because
labor supply is
A. increasing in the real interest rate and labor demand is independent of the real interest
rate.
B. decreasing in the real interest rate and labor demand is independent of the real interest
rate.
C. independent of the real interest rate and labor demand is increasing in the real interest
rate.
D. independent of the real interest rate and labor demand is decreasing in the real interest
rate.

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7. Output supply is increasing in the interest rate because
A. labor demand is increasing in the interest rate.
B. labor demand is decreasing in the interest rate.
C. labor supply is increasing in the interest rate.
D. labor supply is decreasing in the interest rate.

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Topic 5 - Money and Trade
Chapter 12,18 - Money and Monetary Policy

1. Price tags attached to goods for purchase at a store would be an example of money’s role as
a
A. medium of exchange.
B. store of value.
C. unit of account.
D. none of the above

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2. Going from M0 to M1 and to M2, what is the principle?
A. from household money demand to firm money demand
B. from illiquid to liquid
C. from most usable to least usable for transaction purposes
D. from most usable to least usable as a store of value

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3. The opportunity cost of holding money is
A. zero.
B. the inflation rate.
C. the real interest rate.
D. the nominal interest rate.

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4. We want money mostly because
A. it makes us happy.
B. we can buy goods with it.
C. we lengthen the life of our mattress.
D. we trust it.

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5. The current demand for money increases when
A. current real income decreases.
B. future real income decreases.
C. the nominal rate of interest decreases.
D. none of the above.

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6. The money supply is
A. endogenous.
B. determined by policy.
C. irrelevant.
D. indeterminate.

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7. The money supply is vertical because
A. prices are indeterminate.
B. prices have no real impact.
C. the money supply is set by policy.
D. prices are counter-cyclical.

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8. Government printing of money to finance government spending is called
A. irresponsible.
B. an open-market purchase.
C. sterilization.
D. seigniorage.

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9. In a model with money neutrality, a 10% increase in the money supply leads to an increase of
prices by
A. more than 10%.
B. 10%.
C. less than 10%, but more than zero.
D. zero.

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10. In a model with money neutrality, how much should the money supply be increased to obtain
a 1% increase in real output?
A. -1%
B. between 0 and 1%
C. 1%
D. It cannot be done.

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11. At the zero lower bound
A. monetary policy has the usual effects.
B. conventional monetary policy is all that works.
C. government spending has no effects.
D. open market purchases of government bonds by the central bank have no effects.

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12. An open-market operation refers to
A. changing the money supply by changing taxes.
B. changing the money supply by changing government spending.
C. an exchange of money for interest-bearing debt by the monetary authority.
D. an exchange of domestic money for foreign money by the monetary authority.

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13. In practice, money growth targeting was
A. a good idea.
B. a policy introduced in the U.S. in the 1970s, which continues to the present.
C. better than interest rate targeting.
D. a failure.

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14. The zero lower bound on the nominal interest rate arises because
A. if the nominal interest rate were less than zero, an arbitrage opportunity would exist.
B. bank profits must be zero.
C. the government would not allow it.
D. the economy would crash.

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15. The current monetary system in the United States is
A. a mix of fiat money and exchange using transactions deposits at banks.
B. a commodity money system.
C. a gold standard.
D. a commodity-backed fiat money system.

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16. A double coincidence of wants problem can be overcome by
A. fiat money.
B. higher search costs.
C. greater specialization in consumption and production.
D. Jevons’s trap.

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17. The gold standard is an example of
A. commodity money.
B. commodity-backed paper currency.
C. barter currency.
D. fiat money.

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18. Salt, for example, as it is used in part of Ethiopia, is an example of
A. commodity money.
B. commodity-backed paper currency.
C. barter currency.
D. fiat money.

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19. The major disadvantage of commodity money is that
A. anybody can issue it and walk away.
B. its value fluctuates with the scarcity of the commodity.
C. it is subject to dollarization.
D. the central bank cannot be prevented from issuing too much of it.

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20. If money is superneutral,
A. a one-time change in the money supply has no real impact.
B. a one-time change in the money supply has a real impact.
C. a change in the money growth rate has no real impact.
D. a change in the money growth rate has a real impact.

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21. The money growth rate and the inflation rate
A. are negatively correlated.
B. are positively correlated, but the relationship is noisy.
C. are positively correlated, and the relationship is tight.
D. are uncorrelated.

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22. 43) Two unconventional monetary policies are
A) open market operations and quantitative easing.
B) quantitative easing and the zero lower bound.
C) the liquidity trap and negative nominal interest rates.
D) quantitative easing and negative nominal interest rates.

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Chapter 13 - Models of the Business Cycle

1. There are several competing models of the business cycle because
A) none currently captures all facets of the business cycle.
B) they are all rooted in different philosophical traditions.
C) different shocks need different models.
D) they depend on the type of policy that is adopted.

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2. The behavior of the Solow residual suggests that when current total factor productivity
increases
A) it becomes more difficult to predict future total factor productivity.
B) future total factor productivity is also likely to increase.
C) such increases are temporary, so we can draw no conclusions about the likely behavior of
future total factor productivity.
D) future total factor productivity is likely to decrease.

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3. In real business cycle theory, the persistence of shocks to total factor productivity is justified
by
A) the fact that some capital depreciates every period.
B) the behavior of Solow residuals.
C) the fact that Taylor rules have been used in post-war United States.
D) the fact that capital takes some time to build.

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4. In the real business cycle model, a persistent increase in total factor productivity
A) has no effect on the real interest rate.
B) unambiguously increases the real interest rate.
C) unambiguously decreases the real interest rate.
D) has a theoretically ambiguous effect on the real interest rate.

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5. In the real business cycle model, a persistent increase in total factor productivity
A) increases the real wage and increases the price level.
B) increases the real wage and decreases the price level.
C) decreases the real wage and increases the price level.
D) decreases the real wage and decreases the price level.

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6. The real business cycle model best explains the procyclicality of the nominal money supply by
A) an unpredictable Federal Reserve.
B) exogenous money.
C) endogenous money.
D) uncorrelated money.

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7. According to real business cycle theorists, an increase in total factor productivity could lead to
an increase in the nominal money supply due to
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A) the cyclical behavior of tax collections and attempts by the Federal Reserve to stabilize
real output.
B) the Federal Reserve’s attempts to stabilize real output and the price level.
C) the Federal Reserve’s attempts to stabilize the price level and banking sector expansion of
deposit money.
D) banking sector expansion of deposit money and the cyclical behavior of tax collections.

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8. The observed correlation between the price level and real GDP may be low because
A) consumption is procyclical.
B) the central bank acts to target the price level.
C) money demand does not depend on income.
D) money demand increases when the nominal interest rate rises.

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9. According to real business cycle theory
A) monetary policy is driving business cycles.
B) Federal Reserve actions need to be watched closely.
C) technology shocks have a major role in business cycles.
D) cash-in-advance is necessarily to explain business cycles.

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10. An important critique of real business cycle theory is the belief that cyclical movements in total
factor productivity
A) rarely occur.
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B) may, in part, be an artifact of measurement error.
C) lead to imperceptible changes in labor demand.
D) are too small to account for the size of fluctuations in real GDP.

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11. The phenomenon of underutilization of labor during a recession is called
A) labor stockpiling.
B) investing in human capital.
C) labor force stabilization.
D) labor hoarding.

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12. In the real business cycle model, average labor productivity is procyclical because, when total
factor productivity goes down,
A) the labor input declines more than in proportion to the decline in output.
B) the labor input increases more than in proportion to the decline in output.
C) the labor input declines more than in proportion to the increase in output.
D) the labor input declines less than in proportion to the decline in output.

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13. An argument for that the real business cycle model is a good model is
A) it implies that employment is countercyclical.
B) the Solow residual measures total factor productivity accurately.
C) it matches most key business cycle facts.
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D) the model provides a role for monetary policy.

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14. A Keynesian model that is consistent with fully flexible wages and prices is based upon the
notion of
A) cooperation failures.
B) coordination failures.
C) collaboration failures.
D) decreasing returns to scale.

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15. A model with coordination failures has
A) agents that do not act rationally.
B) multiple equilibria.
C) a government that is too large.
D) a tax rate that is too high.

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16. Strategic complementarities may help explain business cycles because such
complementarities may lead to
A) decreasing returns to scale.
B) constant returns to scale.
C) increasing returns to scale.
D) a downward-sloping labor supply curve.

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17. If there is a coordination failure,
A) pessimism fails to arise.
B) optimism can be self-fulfilling.
C) firms coordinate their plans with firms.
D) private sector economic agents coordinate on good outcomes always.

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18. Real business cycle theory and coordination failure theory
A) are the same theory.
B) have similar predictions for the correlations we should observe in the data.
C) do not explain the key business cycle facts.
D) both imply that consumption is countercyclical.

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19. The coordination failure model is based on the possibility of increasing returns to scale
A) both at the aggregate level and at the level of the individual firm.
B) at the aggregate level, but not at the level of the individual firm.
C) at the level of the individual firm, but not at the aggregate level.
D) in future periods, but not in the current period.

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20. In the Keynesian coordination failure model example,
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A) there is one equilibrium.
B) there are three equilibria.
C) equilibrium fails to exist.
D) there are two equilibria.

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21. For the coordination failure model to work, it must be the case that the aggregate labor
demand curve must be
A) upward sloping and steeper than the labor supply curve.
B) upward sloping and flatter than the labor supply curve.
C) downward sloping and steeper than the labor supply curve.
D) downward sloping and flatter than the labor supply curve.

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22. In the coordination failure model, a rightward shift in the labor supply curve
A) increases the real wage and increases employment.
B) increases the real wage and decreases employment.
C) decreases the real wage and increases employment.
D) decreases the real wage and decreases employment.

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23. In the coordination failure model
A) there is no role for government policy.
B) government policy works through the multiplier.
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C) government policy can work by coordinating actions on the bad equilibrium.
D) government policy can work by coordinating actions on the good equilibrium.

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24. Distinguishing between the real business cycle model and the coordination failure model
A) is impossible.
B) requires that we verify whether increasing-returns-to-scale production is important.
C) requires that we identify the composition of the labor force.
D) is easy.

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25. If an economy is stuck in a "bad" equilibrium in the coordination failure model
A) the government should intervene by spending more.
B) the government should intervene by spending less.
C) the government should promote optimism.
D) there is nothing that can be done.

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26. The real business cycle model
A) fits the 2008-2009 U.S. data perfectly.
B) cannot account for the behavior of the price level in the 2008-2009 recession.
C) cannot account of the behavior of consumption in the 2008-2009 recession.
D) cannot account for the behavior of investment in the 2008-2009 recession.

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27. One potential weakness of the coordination failure model as an explanation of business
cycles is that
A) evidence supporting intertemporal substitution as an important determinant of labor supply
is weak.
B) evidence supporting the existence of increasing returns at the aggregate level is weak.
C) it fails to explain several of the key business cycle regularities.
D) it requires that consumers not behave in a rational manner.

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Chapter 14 - Sticky Prices

1. A price may be sticky because
A) of monetary policy.
B) of menu costs.
C) of total factor productivity shocks.
D) of the monetary illusion.

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2. Menu costs are
A) very small costs.
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B) the cost of differentiating prices for different goods.
C) the relative cost of raw materials compared to finished goods.
D) the cost of changing prices.

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3. What do we need to assume about firms in the sticky price model?
A) They accommodate any demand at the given price.
B) They hire until the real wage equals the average labor productivity.
C) They maximize only current profits.
D) They adapt the price to current conditions.

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4. In the New-Keynesian Sticky-price model, The output gap is
A) the difference between target output and realized output.
B) the difference between initial output and final output.
C) the difference between market-clearing output and actual output.
D) the difference between forecasted output and past output.

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5. In the New Keynesian sticky price model,
A) the money supply is irrelevant.
B) the money supply is set to achieve the central bank’s interest rate target.
C) the money supply must increase if the central bank’s interest rate target increases.
D) the central bank can never conduct open market operations.
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6. In the New Keynesian sticky price model,
A) firms can change their prices if the costs are low enough.
B) prices are sticky only for some firms.
C) prices go up when the money supply increases, but not in proportion to the money supply.
D) the price level is exogenous.

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7. The central bank in the New Keynesian model pursues a policy of
A) fixed money supply.
B) inflation between 2 and 3%.
C) zero inflation.
D) targeting the market interest rate.

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8. A money supply increase in the New Keynesian model is not neutral because
A) consumers are fooled into working harder.
B) the real interest falls, the quantity of output demanded rises, and firms supply more output.
C) productivity rises, increasing output supply.
D) bank lending rises.

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9. Suppose real output falls in the aggregate economy. Which is correct?
A) A real business cycle theorist thinks that there was a negative shock to total factor
productivity, and that the government should therefore increase expenditures.
B) A New Keynesian thinks that the output gap has fallen, and central bank’s interest rate
target should rise.
C) A real business cycle theorist thinks that total factor productivity has risen, and that the
government should do nothing.
D) none of the above.

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10. Stabilization policy is policy that seeks to
A) get zero inflation.
B) eliminate fluctuations.
C) eradicate unemployment.
D) maximize output.

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11. In the New Keynesian sticky price model, if the output gap is negative,
A) the central bank should lower its interest rate target.
B) the money supply should fall.
C) the central bank should keep its interest rate target constant.
D) the money supply should increase.

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12. Active stabilization policy can be rationalized in the New Keynesian model because
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A) it makes it possible to obtain zero inflation.
B) the government knows best.
C) it counteracts the influence of unions.
D) it allows a faster return to economic efficiency.

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13. A central bank can bring output back up to efficient level in the New Keynesian model by
A) decreasing the money supply.
B) increasing the money supply.
C) decreasing government expenses.
D) increasing government expenses.

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14. In the New Keynesian Sticky-price model, to support the argument for an active role for
government in stabilizing the economy, it must be true that
A) consumers are not rational and that not all wages and prices are flexible.
B) not all wages and prices are flexible and that government must be able to react quickly
enough.
C) government must be able to react quickly enough and that shocks to the economy be
primarily due to aggregate supply shocks.
D) shocks to the economy be primarily due to aggregate supply shocks and that consumers
are not rational.

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15. A classical objection to Keynesian sticky price models is that
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A) it is easier for firms to change prices rather than change output.
B) it is cheaper for firms to change output rather than change prices.
C) sticky price models are internally inconsistent.
D) real shocks are more important than nominal shocks.

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Chapter 15 -

1. At the end of 2015, Venezuelan inflation approached
A) 200%
B) 10,000%
C) 13%
D) 2%

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2. In 1980, inflation in the United States reached about
A) 20%
B) 200%
C) 15%
D) 5%

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3. Inflation can cause harm to welfare as a result of all of the following except:
A) sticky prices causing a market disequilibrium.
B) expected inflation causing people to incorrectly calculate their personal budgets.
C) people economizing on currency holdings because of anticipated inflation.
D) unexpectedly low inflation redistributing wealth from borrowers to lenders.

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4. The Fisher relation states that
A) the nominal interest rate equals the anticipated future inflation rate minus the real interest
rate.
B) the real interest rate equals minus the anticipated future inflation rate plus the nominal
interest rate.
C) the nominal interest rate equals the real interest rate.
D) the real interest rate equals the nominal interest rate plus the anticipated future inflation
rate.

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5. The dual mandate for the Fed specifies that
A) the Fed should care about price stability and maximum employment.
B) the Fed should target the money supply.
C) the Fed needs to specify an inflation target.
D) the Fed should target the output gap.

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6. Forward guidance is
A) a guide in the forward to the central bank statement.
B) a promise about future fiscal policy.
C) a promise concerning future inflation.
D) always a promise of no future inflation.

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7. To make forward guidance work,
A) the central bank must follow through on its promises.
B) it is important that the central bank surprise the public.
C) the central bank must not follow through on its promises.
D) fiscal policy must support monetary policy.

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Chapter 16 - The Open Economy

1. International trade has increased for which of the following reasons?
A) The development of more efficient world financial markets.
B) Higher costs of transporting goods between countries.
C) More government spending on goods and services.
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D) Better monetary policy.

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2. A small open economy is an economy
A) in which both imports and exports are less than 5% of GDP.
B) whose firms and consumers are individually, but not collectively price takers.
C) whose firms and consumers are collectively, but not individually price takers.
D) whose firms and consumers are individually and collectively price takers.

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3. Which of the following is not a good reason to use a small open economy model?
A) Firms are not price-takers on world markets.
B) It is easy to work with.
C) The conclusions are much the same as in alternative models.
D) The United States is getting smaller economically relative to the rest of the world.

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4. Which of the following is not a cause of the increase in the amount of international trade over
the last 100 years?
A) the growth of central banking
B) costs of transporting goods have fallen
C) reductions in import quotas
D) credit markets are more developed

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5. International trade has increased for all of the following reasons except
A) better monetary policy.
B) the cost of transporting goods has gone down.
C) international trade agreements.
D) more integrated world financial markets.

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6. The current account surplus is not
A) the trade balance.
B) the excess of national savings over investment.
C) private saving less government deficit.
D) output less taxes and trade deficit.

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7. For a consumer,
A) the present value of consumption equals current income.
B) current consumption equals current income minus current taxes.
C) future consumption equals future income minus future taxes.
D) the present value of consumption equals the present value of disposable income.

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8. The key effect of the current account surplus is
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A) to smooth consumption for the nation as a whole.
B) to destabilize the economy.
C) to smooth aggregate output.
D) to improve fiscal policy.

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9. When current account deficits are used to finance investment spending, such deficits may be
self-correcting because
A) they promote more responsible government policies.
B) the resulting increase in the capital stock over time shifts the output supply curve to the
right.
C) the resulting increase in the capital stock over time shifts the output demand curve to the
right.
D) the resulting increase in national indebtedness increases labor demand.

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Chapter 17 - Money in the Open Economy

1. According to purchasing power parity, the relationship among the domestic price (P), the
foreign price (P ), and the nominal exchange rate (e), can be written as
A. P = e - P .
B. P = P - e.
C. P = eP .
D. P = e/P .
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2. If purchasing power parity holds, the exchange rate (e) can be expressed as a function of the
domestic price (P) and the foreign price (P*) as
A. e = P - P*.
B. e = P* - P.
C. e = P* + P.
D. e = P/P*.

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3. In the monetary small open-economy model with a flexible exchange rate, an increase in the
domestic price level has which impact on domestic money demand?
A. It increases it.
B. It decreases it.
C. It has no impact.
D. It depends.

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4. A capital inflow occurs when a
A. domestic resident purchases a domestic asset.
B. domestic resident purchases a foreign asset.
C. foreign resident purchases a domestic asset.
D. foreign resident purchases a foreign asset.

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5. The balance of payments equals
A. the current account surplus plus the capital account surplus.
B. the current account surplus plus the capital account deficit.
C. the current account deficit plus the capital account surplus.
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D. the current account deficit plus the capital account deficit.

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6. The adoption of capital controls makes
A. everyone in the domestic economy better off.
B. some domestic residents better off and some worse off, although on average welfare
increases.
C. some domestic residents better off and some worse off, although on average welfare
decreases.
D. everyone in the domestic economy worse off.

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7. A capital inflow occurs when a
A) domestic resident purchases a domestic asset.
B) domestic resident purchases a foreign asset.
C) foreign resident purchases a domestic asset.
D) foreign resident purchases a foreign asset.

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8. The balance of payments improves
A) when there is an exchange rate appreciation.
B) when there is an exchange rate depreciation.
C) when the interest rate rises.
D) never.

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9. The balance of payments equals
A) the current account surplus plus the capital account surplus.
B) the current account surplus plus the capital account deficit.
C) the current account deficit plus the capital account surplus.
D) the current account deficit plus the capital account deficit.

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10. The acquisition of a domestic financial asset by a foreign resident is called
A) foreign direct investment.
B) foreign capital investment.
C) a portfolio inflow.
D) a portfolio outflow.

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11. To maintain a fixed exchange rate, authorities
A) make laws stipulating the exchange rate.
B) modify money supply.
C) modify government expenses.
D) modify taxes.

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12. Under a flexible exchange rate, an increase in the domestic money supply leads to
A) a devaluation of the domestic currency.
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B) a revaluation of the domestic currency.
C) a depreciation of the domestic currency.
D) an appreciation of the domestic currency.

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Answer: C

13. An agreement among countries to adopt a common currency is called a
A) central bank consolidation.
B) currency union.
C) monetary compact.
D) common banking treaty.

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Answer: B


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