# INTRODUCTION TO MACROECONOMICS Professor Marcelo Olarreaga June 9, 2010

### From Baripedia

1

In Ecoland, net factor income abroad is positive, indirect taxes are equal to 200, production subsidies are equal to 100, and capital depreciation is equal to 100. What can we say with with certainty ?

 Net National Product at factor prices is larger than Net National Product at market prices. National Income is smalIer than Net National Product at market prices. Domestic product is larger than National Product. We cannot say with certainty whether National Product at factor prices is smalIer or larger than National Product at market prices.

2

Real GDP per capita is an imperfect measure of the standard of living because :

 it does not take into account the negative externalities that economie activity has on the envi­ronment. it does not take into account the size of the population that needs to share global production. it does not take into account the purchasing power lost due to a generalized priee increase. it overestimates the importance of the informai economy.

3

Consider an economy in which there are three sectors and for which you only have the following information :

We can then state the following :

 GDP calculated as the sum of factor income is equal to 25. Value added of sector B is 10. GDP calculated as the sum of final output is equal to 80. The sum of value added is equal to 115.

4

What is the difference between the GDP deflator and the Consumer Price Index (CPI) ?

 The GDP deflator overestimates inflation and the CPI underestimates inflation due to the sub­ situation bias. The GDP deflator underestimates inflation and the CPI overestimates it due to consumer hete­rogeneity. The GDP deflator excludes the price of exported goods and the CPI includes them. The GDP deflator excludes the price of imported goods and the CPI includes them.

5

The GDP in 2005 evaluated at 2001 prices was equal to 460, and the consumer price index in 2005 with base 100 in 2001 was equal to 105. We can say with certainty that :

 Nominal GDP increased between 2001 and 2005. The inflation rate between 2001 and 2005 was 50%. Purchasing power increased by 5% between 2001 and 2005. None of the above is correct.

6

The residents of Frutland spend all their income on oranges, apples and bananas. In 2004, they purchased 50 oranges at a priee of 2CHF each, 50 apples at a priee of 1 CHF each and 500 bananas at a priee of O.lCHF each. In 2005, they purchased 75 oranges at a priee of 3CHF each, 80 apples at a priee of 1CHF each, and 500 bananas at a priee of 0.2CHF each. If the base year was 2004, and we calculate the inflation rate using the consumer priee index, what is the rate of inflation in 2005 ?

 60% 45% 50% 20%

7

Consider the folIowing production function : Y = A· F(L, K, H, N) with A being technological know­ ledge, L labor, K physical capital, H human capital and Nnatural resource endowments. Let's assume that the production function exhibits constant returns to scale, and declining marginal factor productivity. Which of the folIowing is correct ?

 If we double natural resource endowments, production will also double. If we double the number of workers and physical capital, production will also double. If we double the number of workers, labor productivity will increase. If we double the amount of human capital, labor productivity will increase.

8

Consider the equilibrium in the folIowing labor market :

The government sets the minimum wage at 25. Which of the folIowing is correct ?

 We have structural unemployment, but an increase in labor productivity can help eliminate the We have frictional unemployment, but no structural unemployment. If the minimum wage goes below 20, frictional and structural unemployment will disappear. If the capital-laber ratio increases, employment will fall.

9

In 2000, the number of unemployed individuals was 100, and the number of employed individuals was 900. In 2008, the number of unemployed individu ais was 200 and the number of employed individuals was 1900. Which of the folIowing is correct ?

 Between 2000 and 2008 while the labor force increased, the unemployment rate fell. The labor force and the unemployment rate increased between 2000 and 2008. We do not know what happened with the unemployment rate because we have no information regarding the evolution of the labor force between 2000 and 2008. If the number of unemployed individuals doubled, the unemployment rate increased.

10

Which of the following leads without ambiguity to a fall in the interest rate in the market for loanable funds?

 An increase in the government deficit. A change in taxes that discourages savings. An investment subsidy accompanied by policies that encourage savings. None of the above.

11

Morgan, a very important investor, has decided to buy a 1000 CHF bond that pays 100 CHF a year from now. The risk-free interest rate is 10%. What is the present value of this investment ?

 1 CHF. 0. 100 CHF. 10 CHF.

12

Regarding individual attitudes towards risk, which of the folIowing is false ?

 Systemic risk can be eliminated by diversifying the portfolio. If an individual's utility function is convex on income, he will not want to purchase risk insuranee. Risk-averse individuals will tend to prefer assets with a low yield, because they are often less If an individual's marginal utility falIs with income, then he will want to insure against risk.

13

Which of the following is false ?

 Money alIows to transfer purchasing power from the present to the future, and can therefore Money is the most liquid asset. Commodity money has no value by itself. Fiat money has no intrinsic value.

14

If the Swiss National Bank wants to reduce interest rates, which of the following interventions would it undertake ?

 An increase in legal reserve requirements. It will sell part of its reserves of foreign currency. It will buy government bonds. It will replace part of its government bonds by gold reserves.

15

The velocity of money increases by 10%. Based on the "Quantitative Theory of Money" and knowing that real GDP has not changed, which of the following is correct ?

 A fall of 5% in the quantity of money will lead to deflation. If the quantity of money is unchanged there will be inflation. An expansionary monetary policy will reduce the risk of inflation. None of the above.

16

What is an open-market operation ?

 Buying and selling of government bonds. An increase in the interest rate. Purchases of foreign currency in international markets. A fall in the legal reserve requirements.

17

The Central Bank bought 10 billion of financial assets. The reserve ratio of commercial banks is10%. Individuals do not hold any cash. By how much are commercial banks going to increase their reserves ?

 10 billion. 90 billion. 100 billion. 110 billion.

18

In a world where exchange rates are determined by purchasing power parity, what can we say with certainty ?

 A Swiss Franc buys the same amount of beer anywhere in the world. The real exchange rate is fixed. The nominal ex change rate is fixed. An increase in government spending will lead to an appreciation of the real exchange rate.

19

In Pacaland there is a trade balance deficit. Which of the following could have been the cause ?

 An expansionary open market operation by the Central Bank. An appreciation of the domestic currency. An increase in real interest rates paid by foreign assets. A depreciation of the domestic currency.

20

Corruption scandals led to an increase in capital flight. What will you then observe?

 An increase in the supply of loanable funds. A reduction in the demand of loanable funds. An increase in the real interest rate. An appreciation of the domestic currency.

21

Following the introduction of import quotas, what can you say about the new equilibrium ?

 Real interest rates are unchanged. The quantity of loanable funds has increased. The domestic currency has depreciated. Net exports have increased.

22

In a two-country world we have the following information

Which of the following is correct ?

 Goverment spending in country A equals 110, the government deficit in country A equals 80, and the trade balance of country B is negative. Goverment spending in country A equals 120, the government deficit in country A equals 60 and the trade balance of country B is negative. Goverment spending in country A equals 120, the government deficit in country A equals 60 and the trade balance of country B is positive. Goverment spending in country A equals 110, the government deficit in country A equals 80 and the trade balance of country B is positive.

23

Following the collapse of an oil platform in the Gulf of Mexico, oil prices increased sharply. Based on the predictions of the Aggregate Demand and Aggregate Supply model, which are the consequences that you are likely to observe in the short-run ?

 Aggregate demand and real GDP will fall. Aggregate supply falls, but prices increase. Aggregate demand and prices increase. Aggregate supply and prices increase.

24

The infrastructure required for the universal exposition of Shanghai implied that the Chinese govern­ ment had to increase spending. Using the model of Aggregate Demand and Aggregate Supply, what are we also likely to observe ?

 In the short-run production costs will fall to compensate for the increase in government spending. There is no impact on real GDP in the short-run. There is no impact on nominal GD P in the long run. An increase in aggregate demand in the short-run, which will be larger than the increase in government spending as long as the "crowding out" of private investment is smaller than the effect due to the Keynesian multiplier.

25

The marginal propensity to consume is equal to 0.9. If investments increase by 10, there will be an increase in private consumption of

 100 90 10 110

26

The consumption function is given by C(Y) = 0.9Y where Y is income. The import function is given by M(Y) = O.4Y. There are no taxes. What will be the increase in savings following an increase in government spending of 10 ?

 2 10 60 70

27

During a crisis the automatic stabilizers

 are given by the expansionary monetary and fiscal policies. are the reason why in the long run we are back to the full employment equilibrium. are explained by the fall in collected income taxes and the increase in social spending by the government. cannot help.

28

During a crisis the fiscal response will be more efficient when

 the marginal propensity to import is high. the income tax rate is high. investment demand is very inelastic with respect to interest rates. None of the above is correct

29

During a crisis the monetary response will be more efficient when

 investment demand is very inelastic with respect to interest rates. we have a liquidity trap. the marginal propensity to consume is small. None of the above is correct.

30

During the first oil crisis,

 The long-run Phillips curve shifted to the left. The short- run Phillips curve shifted to the left. The long-run Phillips curve shifted to the right. The short- run Phillips curve shifted to the right.