Sample Questions

1) For this question, assume that the expected rate of inflation is a function of past year's
inflation. Also assume that the unemployment rate has greater than the natural rate of
unemployment for a number of years. Given this information, we know that
A) the rate of inflation will approximately be equal to zero.
B) the rate of inflation should neither increase nor decrease.
C) the rate of inflation should steadily increase over time.
D) the rate of inflation should steadily decrease.
E) the inflation rate will be approximately equal to the natural rate of unemployment.
Answer:
2) Suppose policy makers underestimate the natural rate of unemployment. In a situation like
this, policy makers might implement a policy that
A) attempts to maintain output below the natural level of output.
B) results in deflation.
C) both A and B
D) results in steadily rising inflation.
Answer:
3) Which of the following will most likely cause a change in the natural rate of unemployment?
A) changes in monetary policy
B) changes in fiscal policy
C) changes in expected inflation
D) all of the above
E) none of the above
Answer:
4) In the Phillips curve equation, which of the following will cause a reduction in the current
inflation rate?
A) a reduction in the expected inflation rate
B) an increase in the unemployment rate
C) a favorable supply shock
D) all of the above
E) none of the above
Answer:
5) Exports will decrease when there is
A) an increase in the real exchange rate.
B) an increase in domestic output.
C) an increase in foreign output.
D) all of the above
E) none of the above
Answer:
6) Which of the following is true when a country's trade position is balanced (i.e., NX = 0)?
A) Demand for domestic goods is equal to the domestic demand for goods.
B) Demand for domestic goods is greater than the domestic demand for goods.
C) Demand for domestic goods is less than the domestic demand for goods.
D) Neither a budget surplus nor deficit exists (i.e., G - T = 0).
Answer:
7) An increase in the pound price of the dollar represents:
A) an appreciation of the dollar
B) a depreciation of the dollar
C) an appreciation of the pound
D) a devaluation of the dollar
Answer:
8) The receipt of an interest payment on a loan made by a U.S. commercial bank to a foreign
resident is entered in the U.S. balance of payments as a:
A) credit in the financial account
B) credit in the current account
C) credit in official reserves
D) debit in unilateral transfers
Answer:
9) Which of the following is not a driver of globalization?
A) Technological advancements.
B) Political integration.
C) Reduction in international trade.
D) Liberalization of trade and investment policies.
Answer:
10) The difference between net capital flows and the current account deficit is called the
A) capital account surplus.
B) capital account deficit.
C) international error.
D) missing number.
E) statistical discrepancy.
Answer:
11) Assume the interest parity condition holds and that initially i = i*. A reduction in the foreign
interest rate (i*) will cause
A) an increase in the demand for the domestic currency.
B) an increase in E.
C) an expected depreciation of the domestic currency.
D) all of the above
Answer:
12) Suppose there are two countries that are identical in every way with the following exception.
Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible
exchange rate regime. Suppose taxes are increased in both countries rises by the same amount.
Given this information, we know that
A) the change in output in A will be greater than in B.
B) the change in output in B will be greater than in A.
C) the change in output will be the same in both countries.
D) the relative output effects are ambiguous.
Answer:
13) Suppose a country with a fixed exchange rate decides to reduce the price of its currency. This
change in policy is called
A) an appreciation.
B) a depreciation.
C) a peg.
D) a devaluation.
E) a revaluation.
Answer:
14) In 2005, China increased the price of its currency while continuing to pursue a fixed
exchange rate. This change in policy is called
A) an appreciation.
B) a depreciation.
C) a peg.
D) a devaluation.
E) a revaluation.
Answer:
15) For this question, assume that the economy is operating in a fixed exchange rate regime and
that perfect capital mobility exists. Given this information, which of the following will occur?
A) The domestic and foreign interest rates must be equal.
B) The central bank cannot use monetary policy to affect domestic output.
C) An expansionary fiscal policy will require that the central bank increase the money supply.
D) all of the above
E) none of the above
Answer:
16) Suppose a country switches from a fixed to a flexible exchange rate. Which of the following
will occur as a result of this change?
A) Monetary policy will become a less effective tool for changing output.
B) A given change in government spending will now have a greater effect on output.
C) Both fiscal and monetary policy will become more effective in changing GDP.
D) Both fiscal and monetary policy will become completely ineffective in changing GDP.
E) none of the above
Answer:
17) Assume policy makers in a fixed exchange rate regime decide to peg the exchange rate at a
higher level. This is called
A) a devaluation.
B) a revaluation.
C) a depreciation.
D) an appreciation.
Answer:
18) Under a fixed exchange rate regime, expansionary fiscal policy will tend to cause which of
the following?
A) an increase in imports
B) an increase in net exports
C) a reduction in investment
D) all of the above
Answer:
19) Suppose there are two countries that are identical in every way with the following exception.
Country A is pursuing a fixed exchange rate regime and country B is pursuing a flexible
exchange rate regime. Suppose taxes are increased in both countries rises by the same amount.
Given this information, we know that
A) the change in output in A will be greater than in B.
B) the change in output in B will be greater than in A.
C) the change in output will be the same in both countries.
D) the relative output effects are ambiguous.
Answer:

20) Which of the following is not a component of Aggregate Demand (AD)?

a) Consumption spending.

b) Investment spending.

c) Government spending.

d) Savings.

Answer:

21) What is the shape of the long-run Aggregate Supply (AS) curve?

a) Horizontal.

b) Vertical.

c) Upward sloping.

d) Downward sloping.

Answer:

22) What is the relationship between the price level and the Aggregate Supply (AS) curve
in the long run?
a) Positive relationship.

b) Negative relationship.
c) No relationship.

d) Inverse relationship.

Answer:

23) Which of the following factors can cause a rightward shift in the long-run
Aggregate Supply (AS) curve?
a) Increase in wages.

b) Increase in resource prices.

c) Technological advancements.

d) Decrease in productivity.

Answer: