Topics in Macroeconomics 2 Econ 2004

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Cornelius Campbell
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1 Topics in Macroeconomics 2 Econ 2004 Practice Questions for Master Class 3 on Tuesday and Wednesday, March 2 and 3, 2010 and Master Class 4 on Tuesday and Wednesday, March 9 and 10, 2010 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The defining feature of business cycles is that they A) represent the underlying trend of real GDP in the economy. B) are inherently bad. C) measure prospects for future growth in the economy. D) are fluctuations about trend in real GDP. 2) A business cycle peak is a A) relatively large negative deviation from trend in real GDP. B) small negative deviation from trend in real GDP. C) relatively large positive deviation from trend in real GDP. D) small positive deviation from trend in real GDP. 3) A business cycle trough is a A) relatively large positive deviation from trend in real GDP. B) small negative deviation from trend in real GDP. C) relatively large negative deviation from trend in real GDP. D) small positive deviation from trend in real GDP. 4) A turning point is A) a change in policy. B) a zero deviation from trend. C) a boom or a recession. D) a peak or a trough. 5) Business cycle persistence refers to the property that A) real GDP is rarely exactly at trend. B) booms and recessions last a long time. C) business cycles are persistently hard to predict. D) when real GDP is above trend, it tends to stay above trend, and when it is below trend, it tends to stay below trend. 6) The frequency of the business cycle refers to A) how much it leads or lags. B) how large the deviations from trend are. C) how long a cycle lasts. D) how variable it is. 1

2 7) Robert Lucas has popularized the notion that with respect to A) quantitative behavior of co-movements among series, business cycles are all alike. B) severity, business cycles are all alike. C) qualitative behavior of co-movements among series, business cycles are all alike. D) causation, business cycles are all alike. 8) A recession is a series of A) troughs. B) below trend values. C) negative growth rates. D) declining deviations from trend. 9) Predicting business cycles is difficult because A) their frequency is irregular. B) statistics lie. C) they are very persistent. D) the weather changes unpredictably. 10) When a macroeconomic aggregate is procyclical A) its deviations from trend generally change before the deviations from trend in GDP do. B) its deviations from trend generally change more that the deviations from trend in GDP. C) it grows faster than GDP. D) its deviations from trend are more often of the same sign as the deviations from trend in GDP. 11) If deviations from trend in a macroeconomic variable are negatively correlated with deviations from trend in real GDP, that variable is said to be A) useless in predicting future movements in real GDP. B) acyclical. C) countercyclical. D) procyclical. 12) Difficulties in determining the cyclical pattern in real wage rates from aggregate data are primarily caused by biases due to A) substitution behavior. B) changing policy responses to business cycles. C) variations in the composition of the labor force over the business cycle. D) substantial differences across different business cycles. 13) Employment tends to be A) procyclical and more variable than real GDP. B) countercyclical and more variable than real GDP. C) procyclical and less variable than real GDP. D) countercyclical and less variable than real GDP. 14) Employment tends to A) lag the cycle. B) be coincident with the cycle. C) sometimes lead, sometimes lag the cycle. D) lead the cycle. 2

3 15) Making use of an economic model is a process of A) resolving inconsistencies in the actions of economic agents. B) running experiments to determine how changes in the exogenous variables will change the endogenous variables. C) solving hundreds of simultaneous equations. D) running experiments to determine how changes in the endogenous variables will change the exogenous variables. 16) In a general equilibrium model A) there are no fluctuations. B) all prices are endogenous. C) all markets but one clear. D) all prices are exogenous. 17) In an economic model, an exogenous variable is A) a variable that has no effect on the workings of the model. B) a stand-in for more complicated variables. C) determined outside the model. D) determined by the model itself. 18) In an economic model, an endogenous variable is A) a stand-in for more complicated variables. B) determined by the model itself. C) a variable that has no effect on the workings of the model. D) determined outside the model. 19) In a one-period model, government is likely to run A) either a surplus or a deficit. B) a surplus but not a deficit. C) neither a surplus nor a deficit. D) a deficit but not a surplus. 20) Fiscal policy refers to a government's choices over its A) expenditures, taxes, issuance of money, and borrowing. B) expenditures, taxes, transfers, and borrowing. C) issuance of money, taxes, environmental regulations, and foreign affairs. D) expenditures, foreign affairs, issuance of money, and borrowing. 21) An economy that has no interaction with the rest of the world is called A) a parochial economy. B) a closed economy. C) an isolated economy. D) a rogue nation. 22) Which of the following relationships does not hold in the one-period model? A) Y=C+G B) G=T C) Y=zF(K,N) D) =Y-wN-C 23) The rate at which one good can be converted technologically into another is called A) the marginal rate of transformation. B) the marginal product of labor. C) the marginal rate of substitution. D) the rate of conversion. 24) A competitive equilibrium has all of the following properties except A) MPN = w. B) MRSl,C = MRTl,C. C) MPN = slope of PPF. D) MRTl,C = MPN. 3

4 25) A Pareto optimum requires all of the following except A) MRSl,C = MRTl,C. B) MPN = w. C) MRTl,C = MPN. D) MPN = -slope of PPF. 26) The first fundamental theorem of welfare economics states that A) under certain conditions, a competitive equilibrium is Pareto optimal. B) a Pareto optimum is always a competitive equilibrium. C) under certain conditions, a Pareto optimum is a competitive equilibrium. D) a competitive equilibrium is always Pareto optimal. 27) The second fundamental theorem of welfare economics states that A) a Pareto optimum is always a competitive equilibrium. B) under certain conditions, a competitive equilibrium is Pareto optimal. C) a competitive equilibrium is always Pareto optimal. D) under certain conditions, a Pareto optimum is a competitive equilibrium. 28) A competitive equilibrium may fail to be Pareto optimal due to all of the following except A) inequality. B) non-price-taking firms. C) externalities. D) distorting taxes. 29) An increase in government spending A) decreases consumption, increases output. B) decreases consumption and output. C) increases consumption, decreases output. D) increases consumption and output. 30) Which of the following is wrong with respect to an increase in total factor productivity? A) Output is up. B) Households are better off. C) The real wage is down. D) Consumption is up. 31) In response to an increase in total factor productivity A) both the substitution effect and the income effect suggest that hours worked should increase. B) the substitution effect suggests that hours worked should decrease, while the income effect suggests that hours worked should increase. C) the substitution effect suggests that hours worked should increase, while the income effect suggests that hours worked should decrease. D) both the substitution effect and the income effect suggest that hours worked should decrease. 32) Changes in total factor productivity are plausible causes of business cycles because productivity-induced business cycles correctly predict A) real wages and consumption must be procyclical. B) consumption and government spending must be procyclical. C) total hours worked and consumption must be procyclical. D) real wages and total hours must be procyclical. 33) When the tax rate increases, the tax revenue A) always decreases. B) may increase or decrease. C) always increases. D) does not change. 4

5 34) Proportional income taxation is distorting because A) the competitive equilibrium is not Pareto optimal. B) people do all they can to avoid paying taxes. C) firms do all they can to avoid paying taxes. D) the government budget constraint does not hold. 35) How does an increase in the proportional labor income tax modify the budget constraint? A) a parallel move down B) a parallel move up C) a tilting down D) a tilting up SHORT Problems 36) Consider a static macroeconomic model discussed in class which has the following features. The representative consumer: chooses consumption C and leisure l; takes as given taxes T, dividends, the wage rate w, and her endowment of time h. The representative firm: chooses the demand for labour Nd to maximise profits; uses a standard production function zf(k,nd) where z denotes TFP and K is the given stock of capital; takes as given the wage rate w. The government: consumes G and collects lump-sum taxes T; runs a balanced budget. The wage rate adjusts to clear all the markets in the economy. (a) Graphically represent the equilibrium in terms of indifference curves and the PPF as well as in terms of the demand and supply of labour. Explain. (b) Suppose there is a reduction in the price of oil that increases Total Factor Productivity, z. Determine the effects on aggregate output, consumption, employment, and the real wage, with reference to income and substitution effects. How does this compare to business cycle comovements as observed in the data? (c) How does this compare to facts about long-run growth as observed in the data? 37) Suppose that the government decides to reduce taxes. In the model used in Question 36, i.e. Chapter 5, determine the effects this has on aggregate output, consumption, employment, and the real wage, and explain your results. 38) Suppose that there is a natural disaster that destroys part of the nation's capital stock. Determine the effects on aggregate output, consumption, employment, and the real wage, with reference to income and substitution effects, and explain your results. 39) Suppose that the representative consumer's preferences change, in that his or her marginal rate of substitution of leisure for consumption increases for any quantities of consumption and leisure. (a) Explain what this change in preferences means in more intuitive language. (b) What effects does this have on the equilibrium resl wage, hours worked, output, and consumption? 5

Practice for Master Class 3 Chapter 5

Practice for Master Class 3 Chapter 5 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In an economic model, an exogenous variable is A) determined