Question 1

According to Real Business Cycle (RBC) theory, how does the market eventually close inflationary and recessionary gaps over time?

Accepted Answer

By decreasing nominal wages to close inflationary gaps and increasing nominal wages to close recessionary gaps.

Question 2

Which of the following is NOT considered a countercyclical variable in macroeconomics?

Accepted Answer

Consumption

Question 3

Suppose the government increases spending by $100 million. If the marginal propensity to consume (MPC) is 0.8, what is the total change in aggregate demand according to the simple spending multiplier formula?

Accepted Answer

The total change is $$500 million, since $$ \frac{1}{1-0.8} 	imes 100 = 5 	imes 100 = 500 $ million.

Question 4

If the government wants to close a recessionary gap by stimulating aggregate demand, which of the following policies would be most effective?

Accepted Answer

Increasing government spending and/or cutting taxes.

Question 5

A wage-price spiral arises when an increase in short-run aggregate supply (SAS) prices prompts workers to bargain for higher wages, which in turn increases aggregate supply prices further. This process is most likely to occur when:

Accepted Answer

Aggregate demand is increasing and nominal wages are flexible.

Question 6

Suppose the French economy produced a GDP of 1 trillion Euros in 2015, and that the government had total tax revenues of 200 billion Euros and total outlays of 250 billion Euros. If the interest rate on the public debt was 5 percent and the rate of inflation was 2 percent, then:

Accepted Answer

There was a primary deficit in 2015.

Question 7

If the government budget deficit is $25 trillion and real GDP equals potential GDP, what type of deficit does the economy have according to macroeconomic theory?

Accepted Answer

A structural deficit.

Question 8

Which of the following best describes fiscal policy?

Accepted Answer

The regulation of taxation and government spending to influence the economy.

Question 9

The concept of 'money velocity' refers to:

Accepted Answer

The rate at which money changes hands in the economy.

Question 10

If the central bank wants to respond to an inflationary gap, which of the following actions is most appropriate?

Accepted Answer

Increase the nominal interest rate.

Question 11

Which of the following actions by the Federal Reserve may be considered a loosening of monetary policy?

Accepted Answer

Lowering reserve requirements on banks.

Question 12

Suppose the Fed buys bonds from Person 1 for $$8,000. Person 1 deposits all of the 8$$,000 at Bank A. Bank A lends $$7,000 to Person 2 and keeps 1$$,000 as reserves. Person 2 keeps $$5,000 in cash and deposits 2$$,000 at Bank B. Bank B keeps $$500 in reserves and lends 1$$,500 to Person 3. Person 3 keeps $$500 in cash and deposits 1$$,000 in Bank C. Bank C keeps $$200 in reserves and lends 800. $$What is the monetary base?

Accepted Answer

$$8,000$$

Question 13

Based on the previous scenario, what is the money supply?

Accepted Answer

$$17,500$$

Question 14

Based on the previous scenario, what is the money multiplier?

Accepted Answer

$$2.5$$

Question 15

According to RBC theory, why do recessions happen?

Accepted Answer

Because the economy is in full employment and only real shocks matter.

Question 16

If the government wants to reduce inflation, which of the following policies would be most effective?

Accepted Answer

Decrease government spending and/or increase taxes.

Question 17

If the marginal propensity to consume (MPC) is $$0.75$$, what is the value of the simple spending multiplier?

Accepted Answer

$$4$$

Question 18

Which of the following would most likely cause a recessionary gap to close in the long run according to RBC theory?

Accepted Answer

A decrease in nominal wages.

Question 19

If the government runs a budget deficit when real GDP equals potential GDP, what type of deficit is this?

Accepted Answer

A structural deficit.

Question 20

Which of the following is a plausible consequence of a wage-price spiral in the economy?

Accepted Answer

Rising inflation and higher nominal wages.

Macroeconomics Exam Review: Business Cycles, Fiscal & Monetary Policy, Money Supply

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