Macroeconomics Practice Final Exam Answers PDF

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Answers and explanations for the ECO212 practice exam....

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Macroeconomics Practice Final Exam Answers True or False: 1. Economic business cycles are mainly driven by shocks in government expenditures. a. False, economic business cycles are explained by: i. Real business cycle theory emphasizes changes in productivity and technology ii. Keynesian theory focuses on business and consumer expectations of the future. iii. Financial and monetary theory looks at changes in prices and interest rates. b. None of these theories suggest that shocks in government expenditure drive economic fluctuations. 2. The recent evolution of the U.S. federal debt over GDP ratio is a consequence of the implementation of procyclical fiscal policies. a. False, the recent increase in debt to GDP ratio is a consequence of countercyclical fiscal policy and not procyclical policy. The economy is in a recession since the outbreak of the Covid-19 pandemic and in response the government has increased expenditures on health care and social security significantly. Thus, a business cycle downturn is followed by an increase in expenditure which is countercyclical fiscal policy. 3. The recent evolution of FED’s Total Assets may be a consequence of the implementation of a contractionary monetary policy. a. False, the rise in the total assets of Fed will be due to the purchase of securities from the open market. This is part of expansionary monetary policy which was implemented to expand the economy. It is not a contractionary policy. Hence the statement given is false. 4. The recent evolution of money supply may trigger a rise in future inflation. a. True, if the money supply grows at a faster rate than the economy's ability to produce goods and services, then inflation will result. 5. An increase in government expenditure shifts the labor demand curve to the right. a. True, increase in government expenditure leads to rightward shift in the AD curve which increase the real GDP, which will increase the demand for labor.

Multiple Choice: 1.

If a $10 increase in government expenditure produces a change of $17 in gross domestic product, the value of the government expenditure multiplier is ________. A. A: 1.7

2.

The quantity theory of money assumes a constant ratio of ________. A. B: Money supply to Nominal GDP

3.

The funds being lent in the federal funds market are: A. B. reserves at the FED i. The reserves at the federal reserve bank are the source of the funds that are being lent in the federal funds market.

4.

Assuming that inflation expectations remain constant, changes in the federal funds rate: A. B. change the long-run real expected interest rates in the same direction. i. Assuming that inflation remains Constant, changes in federal fund rate change the long run real expected interest rates in same direction because the federal Rate indirectly influences even longer-term interest rates. Investors want a higher rate for a longer-term Treasury note. The yields on Treasury notes drive long-term conventional mortgage interest rates.

5.

Consider an economy where the growth rate of real GDP is 6% and the annual rate of inflation is 2%. If the quantity theory of money holds, the growth rate of money supply in the economy will be: A. D. 8% i. Growth rate of money supply = Inflation rate + Growth rate of real GDP = 2% + 6% = 8%

6.

Assuming all else equal, the demand curve for reserves in an economy shifts to the left. Which of the following could be a likely reason for this shift? A. B. Rapid contraction of the economy i. When the FED decreases the reserve ratio, it lowers the amount of cash that banks are required to hold in reserves, allowing them to make more loans to consumers and businesses. This increases the nation’s money supply and expands the economy.

7.

If the Fed sells government bonds in the open market, it will cause: A. A. a shift of the supply curve for reserves to the left i. The supply curve for reserves shifts to the left. Because when fed will sell bond in the open market, then reserves will decrease leading to decrease in money supply.

8.

If there are no changes in inflation expectations, a sale of government bonds by the Fed in the open market may cause ________. A. A. both the federal funds rate and long-run expected real interest rate to rise i. Open market sale of government Bond by the Federal Reserve is a method of increasing the federal funds rate and reducing the money supply. When the real interest rate increases the demand for investment is reduced and aggregate demand is shifted back.

9. Which of the following is true?

a) Expansions have different lengths. b) Expansions are always shorter than recessions. c) Recessions are always accompanied by high inflation d) Economists can correctly predict the end of a recession. A.Expansions have different lengths 10 .Which of the following happens during a recession?

a) The market clearing wage rate falls. b) The market clearing wage rate rises. c) Labor demand increases. d) Labor supply falls. A.A. The market clearing wage rate falls 11. If nominal wages are downwardly rigid, a countercyclical policy during a

recession leads to: A. A. an increase in employment i. During recession, countercyclical policy decreases tax and increases government spending will increases employment. 12. If a bank suffers a reduction in the value of its long-term assets, then: A. B. Stock-holders equity decreases i. When we talk about the long-term assets of banks they majorly constitute of treasury/government securities these securities include short term bills/bonds, intermediate term notes and long term bonds. A bank takes some of the money it has received in deposits and uses the money to buy these bonds as these bonds are considered largely risk free. Also, when we talk about the assets of a bank=Liabilities + Stockholder’s Equity. These assets are what create the long-term fixed income for banks, as their value decreases we can say we will see a consequent decrease in the

value of the stockholder's equity. Hence, the second option where the Stockholder's equity decreases is true 13. Which of the following statements may be consequences of the Covid-19

shock? A. B. The demand of labor shifts to the left i. Because of COVID people were scared to get sick and therefore chose to exit the workforce. 14. While government debt is expected to rise sharply, the Federal Reserve (Fed)

is buying large quantities of it (see the figure below). As a consequence, the next two years we should expect the yield on U.S. treasury debt to________________. A. A. Remain relatively low i. By buying government debt the FED decreases the supply of these bonds and therefore increases their prices. Which, in turn, lowers their yield. 15. An increase in government expenditure ________. A. A. Shifts the credit demand curve to the right

i. Increased government spending increases aggregate demand. Which means that credit demand would also increase. Thus the credit demand curve would shift to the right. 16. The Quantity theory of Money a) is a long-run theory b) is a short-run theory c) is both a long-run and short-run theory d) explains the impact of positive fiscal policy shocks in the economy A. A. Is a long-run theory i. Quantity theory of money is a long run theory that assumes the long run growth rate of GDP is similar to the nominal rate of GDP and predicts a simple relationship between the money supply and nominal GDP. 17. The recent evolution of public deficits

a) explain the significant increment in public debt b) explain the significant increment in household consumption c) is explained because government's revenue exceeds its expenditures d) is explained by the implementation of contractionary fiscal policies. A. A. explain the significant increment in public debt

i. A budget deficit means that a government spends more than it receives. This means that a budget deficit will lead to increased debt.

18. An increment of the reserve requirement may

a) shift the demand of federal funds to the right b) shift the demand of federal funds to the left c) shift the supply of reserves to the right d) shift the supply of reserves to the left A. A. Shift the demand of federal funds to the right i. If reserve requirement is increased, banks and other depository institutions will require more reserves to be kept as required reserves. Therefore, they will increase the quantity of reserves demanded at every interest rate. This is going to shift the demand curve to the right and as a result there will be an increase in the federal funds rate at the new equilibrium. 19. Expansionary (or accomodative) monetary policies may:

a) foster the creation of asset pricing bubbles. b) decrease long run inflation expectations c) increase real long run expected interest rates d) increase unemployment A. A. Foster the creation of asset pricing bubbles 20. The crowding out effect of public expenditures occurs when:

a) government expenditures displace private expenditures. b) private expenditures displace government expenditures. c) the FED raises the interest on reserves d) local governments reduce public expenditures A. A. Government expenditures displace private expenditures

i. The crowding out effect happens when the government displaces expenditures from households or firms.

21. The Taylor rule

a) prescribes what the federal fund rate should be as a function of inflation and the output gap b) prescribes what the federal fund rate should be as a function of inflation and stock prices c) prescribes what the federal fund rate should be as a function of inflation and exchange rates d) prescribes what the federal fund rate should be as a function of inequality and the output gap

A. A. prescribes what the federal fund rate should be as a function of inflation and the

output gap i. The Taylor rule is a formula that predicts or guides how central banks alter interest rates in response to economic changes. 1. Target FFR = Equilibrium Real interest rate + inflation rate + 0.5(inflation rate – desired inflation rate) + 0.5(Output – Potential Output) 22. Contractionary monetary policies

a) are implemented to raise unemployment b) reduce the probability of abrupt economic contractions c) to finance government expenditures d) to stimulate the activity in the real state sector. A. B. Reduce the probability of abrupt economic contractions

i. Contractionary monetary policies exist to calm the economy when it is “overheating” or producing beyond its potential. This is an effort to stop the market from abruptly crashing....