Macroeconomics Questions for Exam 3
1) The unemployment rate indicates
a. the fraction of the population that isn’t working
b. the level of resources that is unproductive
c. the number of people who are working less hours than they want or in a job below their skill level
d. the number of people searching for work
e. the difference between the number of jobs in the economy and the number of people
2) What best explains why there always some unemployment even in healthy economy?
a. even though the economy is always growing, there are just only so many jobs in an economy
b. some people don’t want to work
c. for an unemployed person to find a job, someone else has to be fired first
d. wages don’t adjust enough to reach equilibrium
e. even though unemployed people are finding jobs, other people are losing them
3) One implication of equilibrium in the supply and demand model of labor is
a. there will be more capital than labor in the economy
b. the amount of capital and labor will be the same
c. there will be no unemployment
d. wages will be lower than they should be
e. the size of a surplus will equal the size of the shortage
4) If people take longer to search for work
a. It will affect only short run unemployment, not long run unemployment
b. It will increase frictional unemployment
c. It will increase structural unemployment
d. It will decrease the natural rate of unemployment
e. It will decrease wage rates to reach equilibrium
5) Exports minus Imports is equal to:
a. Trade Balance
b. Net Exports
c. Net Capital Outflow
d. Net Foreign Investment
e. All of the above
6) When our real exchange rate is less than 1
a. We should buy foreign goods
b. Foreigners should buy their own goods
c. Foreigners should buy our goods
d. Foreigners should use our currency
e. We should use foreign currency
7) The AD curve slopes down because
a. If goods are more expensive, people can’t afford them
b. With lower prices, people are paid less, so they demand less
c. With higher prices, there are higher interest rates which reduce demand for goods
d. With less supply, income is lower and people buy fewer goods
e. As prices rise, money is worth more so people buy more
8) Which of the following does not occur with a Demand-Led recession
a. Prices fall.
b. Unemployment rises
c. Income falls
d. Demand decreases
e. Supply increases
For the next set of questions, use the following answers: (note you may use an answer more than once, and not all answers may be used)
a. Keynesian Theory
b. Misperception Theory
c. Real Business Cycle Theory
d. a. and b. above
e. all of the above
9) This theory of economic fluctuations is based upon the economy being out of balance (disequilibrium) in the short run
10) This theory is a supply led theory
11) This theory has businesses mistakenly producing more when inflation is unexpectedly high
12) This theory explains why recessions occur.
13) This theory explains a recession by beginning with a drop in aggregate demand.
14) This theory uses the idea of sticky prices.
15) This is the oldest (of the three) business cycle theory
16) Supply shocks are an important part of this theory
17) This theory says that short run economic fluctuations occur because businesses confuse macroeconomic price movements (unexpectedly high or low inflation) with microeconomic shifts in demand for their particular product
18) This theory would explain why a recession resulted from a drop in Consumption or Investment
For the next set of questions, use the following answers: (note you may use an answer more than once, and not all answers may be used)
a. P-Sticky
b. R.B. Trag’
c. Natch R.L. Rat
d. Sup’ Shock
e. G-Ice nX
f. Dis-E.Q.
19) Who’s da man?
20) This OG is a long run dude, not into booms or busts.
21) The RBC’s (Real Business Cycles) has this home-slice
22) These three have all been in the KTP’s (Keynesian Theory Posse)
23) P-Cubed’s wing-man, he’s got his back (P-Cubed = PPP)
24) When P-Sticky joined the KTP’s (Keynesian Theory Posse), this one was jumped-in next.
25) When this dude is down, the economy may enter a recession
26) Coriorgornx uses this handle (street name).
Answers:
1) d. the unemployment rate is the fraction of the labor force that is actively searching for work. It does not include people who are outside the labor force.
2) e. frictional unemployment results from a changing economy where in the time it takes someone to find a job, someone probably lost theirs (and lost it unrelated to the person finding a job).
3) c. With an equilibrium and no surplus of labor, unemployment rate should be zero.
4) b. Frictional unemployment model assumes that job search takes time. And the longer it takes to find a job, the greater the average number of people unemployed
5) e. Exports – Imports is net exports which is also our trade balance. And the trade balance has to equal net foreign investment which is called "net capital outflow."
6) c. If the RER < 1, it means you get fewer foreign goods in exchange for domestic goods. So we should continue to buy domestic and not buy foreign. What is economical for us is also economical for foreigners. They too should buy our goods.
7) c. Interest rates are the hidden part of aggregate demand, and as interest rates change, prices and demand change.
8) e. Demand decreases, and in the short run, supply will drop to match the drop in demand.
9) a. Keynesian theory uses sticky prices (or wages or other) which means that prices can’t fully adjust in the short run to a change in AD. This creates a disequilibrium (surplus or shortage) which causes the short term economic fluctuation.
10) c. Real business cycle theory suggests that short run economic fluctuations occur because of changes in resources
11) b. Misperception theory has businesses mistaking unexpectedly high inflation as an increase in price and demand for just their product and thus responding by producing more.
12) e. All three theories attempt to explain short run economic fluctuations, including recessions.
13) d. Both the Keynesian and Misperception theory explain economic fluctuations as the result of changes in aggregate demand.
14) a. Keynesian theory uses the idea of something (prices, for example) being sticky so the economy can be in a disequilibrium in the short run.
15) a. Keynesian theory is the oldest of the three. It was developed during the Great Depression. The other two theories were developed in the 1970’s & 1980’s.
16) c. Real Business Cycle theory says that economic fluctuations are a result of short run changes in productive resources. These sudden changes in resources are sometimes called “supply shocks.”
17) b. Misperception theory is based on the idea of people confusing macro price movements with micro demand changes.
18) d. Both Keynesian and Misperception theory can explain why a recession results from a drop in AD, which would include a drop in C or I (or G or NX).
19) e. Aggregate da man (demand) is C+I+G+NX or G-Ice nX
20) c. Long run unemployment is the Natural Rate (Natch R.L. Rat)
21) d. Supply shocks are part of the Real Business Cycle theory (Sup’ shocks)
22) e. a. f. Keynesian theory uses drops in AD (drop in G-Ice nX) coupled with sticky prices (P-Sticky) which creates a disequilibrium (Dis E. Q.).
23) b. If Purchasing Power Parity isn’t true, then someone can make money, possibly, by buying where prices are low and selling where they’re high which is called arbitrage (R.B. Trag).
24) f. Sticky prices (P-Sticky) leads to a disequilibrium (Dis E.Q.) in the short run when demand changes.
25) e. G-Ice nX are the elements of AD. When AD drops, it can put the economy into a recession.
26) e. G-Ice nX is coriorgornx