Principles of Macroeconomics
Sample Exam Unit 3

1.    Most economists today would agree that the downward-sloping Phillips curve

         a. is the same for all nations.
         b. applies only in the long run.
         c. applies only in the short run.
         d. does not exist.
         e. is useful only during periods of stagflation.

2.    An increase in national income (RGDP) shortly before a presidential election could signal the start of
         a. an economywide supply shock.
         b. a political business cycle.
         c. a real business cycle.
         d. long-run economic growth.
         e. a permanent reduction in the inflation rate.

3.    In the long run, the Phillips curve is vertical because
         a. expected inflation is always equal to actual inflation.
         b. the economy gravitates toward a natural rate of unemployment regardless of the inflation rate.
         c. long-term economic growth is associated with low inflation.
         d. people are unable to adjust their nominal wage expectations to real wage changes.
         e. the aggregate supply curve becomes horizontal in the long run.

4.    The various schools of macroeconomic thought disagree primarily about
         a. the shape of the aggregate demand curve.
         b. the economic impact of international politics.
         c. the proper role of monetary and fiscal policy.
         d. the effectiveness of a democratic political system.
         e. the allocation of private ownership rights.

5.    Keynesian economics
         a. emphasizes the supply side of the market.
         b. was first introduced by Milton Friedman.
         c. assumes that all market automatically clear if government does not interfere with the market.
         d. believes that wage rates and prices are perfectly flexible.
         e. stresses government intervention as a stimulant for economic growth.

6.    Monetarist would argue that in the long run an increase in the money supply will
         a. reduce inflation and increase the natural rate of unemployment.
         b. reduce interest rates.
         c. increase economic growth.
         d. increase inflation with no change in the potential level of GDP.
         e. increase inflation and decrease the natural level of unemployment.

7.    Keynesian economics became popular in response to
         a. stagflation of the 1970's.
         b. the economic growth of the 1950's.
         c. the monetary crisis of 1913.
         d. the 1982 recession under the Reagan administration.
         e. the Great Depression of the 1930's.

8.    The new classical school holds that
         a. macroeconomic equilibrium occurs only after active government intervention.
         b. unemployment is only temporary as the economy tends naturally toward equilibrium.
         c. rigid prices and wages keep the economy from ever achieving equilibrium.
         d. macroeconomic equilibrium cannot occur as long as the aggregate supply curve is vertical.
         e. rational expections result in involuntary unemployment and prolonged periods of macroeconomic disequilibrium.

9.    What is the main difference between new Keynesian economics and monetarist economics?
         a. Monetarists believe that prices fluctuate, whereas new Keynesians support a fixed-price model.
         b. Monetarists reject the idea that government intervention can stabilize the economy, whereas new Keynesians support
              this notion.
         c. Monetarists believe that the aggregate supply curve is always vertical, whereas new Keynesians believe that the
            aggregate supply curve is always horizontal.
         d. Monetarists believe that an increase in the money supply changes RGDP instantaneously, whereas new Keynesians
            assume that economic policy operates with a long and variable lag.
         e. Monetarists believe that deficit spending helps stimulate economic growth, whereas new Keynesians advocate a
            balanced budget.

10.    Wage rigidity that is reflected in the rigidity of prices is explained by
         a. supply-side economics.
         b. new classical economic theory.
         c. monetarist economic theory.
         d. Keynesian economic theory.
         e. the real business cycle.

11.    Both monetarist and new classical economists agree on
         a. the enhancement of economic growth through discretionary monetary policy.
         b. minimal government involvement in the market system.
         c. the increased use of tax legislation to stimulate the supply side of the market.
         d. the flexibility of wages and prices in the short run.
         e. the enactment of legislation to prevent the publication of government policy plans.

12.    Which of the following do NOT favor an active role for government in promoting low inflation and economic growth?
         a. Only Keynesians.
         b. Only monetarists.
         c. Only new classical economists.
         d. Monetarist and new classical economists.
         e. Monetarists and Keynesians.

13.    Which of the following accurately portrays the different assumptions on which new Keynesian and new classical theory
        are based?
         a. New Keynesian economics assumes that the economy can reach equilibrium below the natural rate of unemployment,
            whereas new classical economics assumes that macroeconomic equilibrium is always at the natural rate of
            unemployment.
         b. New Keynesian economics believes that government intervention is unnecessary, whereas classical economics
            supports an active government role.
         c. New Keynesian economics assumes that the long-run Phillips curve is vertical, whereas new classical economics views
            the long-run Phillips curve as horizontal.
         d. New Keynesian economics assumes that all prices are flexible, whereas new classical economics applies a fixed-price
            model.
         e.  New Keynesian economics emphasizes short-run reductions in inflation rates, whereas new classical economic
            focuses on short-run reductions in the unemployment rate.

14.    The hypothesis of political business cycles asserts that
         a. political manipulation of the business cycle is an effective way to increase permanent economic growth.
         b. political popularity is not a function of the business cycle.
         c. politicians can produce a favorable short-run tradeoff between inflation and unemployment to improve their chances of
            re-election.
         d. an economic recession takes place before every national election.

15.    "The economy automatically tends toward the natural rate of unemployment.  Whatever the government does, smart
        people will figure it out and take actions that will end up offsetting the effects of any government policy."  The author of
        this statement represents which school of thought?
         a. The new classicals.
         b. The traditional Keynesians.
         c. The monetarist.
         d. The new Keynesian.
         e. all of the above.

16.    Suppose First Union increases its employees wages by four percent for the upcoming year because annual inflation for
        the past two years has been four percent.  The expectations formed by First Union are
         a. adaptive expectations.
         b. rational expectations.
         c. optimistic expectations.
         d. deductive expectations.

17. Which of the following would NOT be considered a real variable in determining the real business cycle?
         a. The weather.
         b. A change in technology.
         c. A labor strike.
         d. An increase in the money supply.

18. Milton Friedman was the leading figure in developing
         a. political business cycles.
         b. traditional Keynesian economics.
         c. monetarist economics.
         d. new classical economics.

19. If Congress and the President decide to reduce marginal tax rates and increase government spending near an election, they
        may cause
         a. a political business cycle.
         b. autonomous consumption.
         c. a real business cycle.
         d. time consistent fiscal policy.
         e. rational expectations.

20. "Demand is the source of all economic instability."  This comment is most likely stated
         a.by a traditional Keynesian economist.
         b. by a monetarist economist.
         c. by a traditional classical economist.
         d. by a new classical economist.

21. When forecasting the future economic condition of the United States, Fred uses all past and current information.
        Economists would classify his expectations as
         a. systematic expectations.
         b. wage expectations.
         c. adaptive expectations.
         d. foresight expectations.
         e. rational expectations.

22. A policy is called "time inconsistent" if
         a. the policy plan changes as economic conditions change.
         b. the policymakers have credibility.
         c. the policy plan does not change as economic conditions change.
         d. the policy plan reflects only Keynesian assumptions about the economy.
         e. the policy plan assumes long-run trade-offs between the inflation rate and the unemployment rate.

23. The long run Phillips curve indicates that the consequences of trying to reduce unemployment below its natural rate would
        be
         a. higher and higher inflation.
         b. an inflation rate equal to zero.
         c. lower interest rates.
         d. an ever rising rate of unemployment.

24. The reservation wage is
         a. the nominal wage rate plus the expected rate of inflation.
         b. the minimum wage a worker is willing to accept before employment.
         c. the nominal wage rate minus the inflation rate.
         d. the legal minimum wage an employer must pay.

Answers:

C, B, B, C, E, D, E, B, B, D, B, D, A, C, A, A, D, C, A, A, E, A, A, B

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