Question 1

Suppose the government increases taxes while holding all else constant. According to the formal model of consumption and saving, what is the most likely immediate effect on national saving?

Accepted Answer

National saving will increase because private saving falls less than the increase in public saving.

Question 2

Which of the following best describes the Permanent Income Hypothesis?

Accepted Answer

Individuals smooth consumption over time based on their expected lifetime income.

Question 3

If the real interest rate increases, what is the predicted effect on desired investment according to the neoclassical investment model?

Accepted Answer

Desired investment decreases because the cost of borrowing rises.

Question 4

A country experiences an increase in total factor productivity (TFP). According to the aggregate production function, what is the likely effect on output, holding capital and labor constant?

Accepted Answer

Output will increase because TFP raises the efficiency of both capital and labor.

Question 5

Which of the following would shift the aggregate labor demand curve to the right?

Accepted Answer

An increase in productivity.

Question 6

Suppose the natural rate of unemployment in an economy is 5%. If the actual unemployment rate is 8%, what can be inferred about the output gap?

Accepted Answer

The output gap is negative, indicating the economy is below potential output.

Question 7

Which of the following is NOT a factor that shifts the aggregate labor supply curve?

Accepted Answer

Productivity.

Question 8

If the expected real interest rate increases, what is the likely effect on current consumption according to the consumption-smoothing model?

Accepted Answer

Current consumption decreases because saving becomes more attractive.

Question 9

Which of the following best explains why the yield curve might invert?

Accepted Answer

Long-term interest rates fall below short-term rates due to expectations of lower future interest rates.

Question 10

According to the classical labor market model, what happens if the real wage is above the equilibrium level?

Accepted Answer

There will be excess supply of labor, causing unemployment.

Question 11

Suppose the government increases its budget deficit. According to the loanable funds model, what is the likely effect on the real interest rate?

Accepted Answer

The real interest rate will increase because government borrowing raises demand for funds.

Question 12

If the marginal product of capital (MPK) is greater than the user cost of capital, what should a profit-maximizing firm do?

Accepted Answer

Increase its capital stock.

Question 13

Which of the following is a component of the user cost of capital?

Accepted Answer

Real interest rate.

Question 14

If the central bank conducts open market purchases, what is the expected effect on the money supply and interest rates?

Accepted Answer

Money supply increases and interest rates fall.

Question 15

Which of the following best describes cyclical unemployment?

Accepted Answer

Unemployment caused by the business cycle.

Question 16

Suppose the expected future marginal product of capital (MPK) increases. What is the likely effect on desired investment?

Accepted Answer

Desired investment increases because future returns are higher.

Question 17

Which of the following is a reason why the participation rate might increase?

Accepted Answer

An increase in working-age population.

Question 18

If the efficiency of payments technologies improves, what is the likely effect on the demand for money?

Accepted Answer

Demand for money decreases because people can hold less cash.

Question 19

Which of the following is a direct effect of an increase in the population growth rate on long-run living standards, holding all else constant?

Accepted Answer

It decreases the capital-labor ratio, potentially lowering living standards.

Question 20

Suppose the government introduces a new tax on interest income. According to the formal model of consumption and saving, what is the likely effect on private saving?

Accepted Answer

Private saving decreases because after-tax returns are lower.

Macroeconomics: Goods Market, Growth, and Labor Market Study Guide

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