Final

Question 1

Long run the AS curve is horizontal or vertical?

Answer 1

Vertical

Question 2

In the short run the AS is horizontal or vertical?

Answer 2

Horizontal or flat

Question 3

Nominal wages are sticky in the ___ run.

Answer 3

Long

Question 4

Amount of goods and services workers expect to be able to buy.

Answer 4

Target real wage

Question 5

Changes in inflation are positively related to:

Answer 5

Changes in expected inflation and supply shocks

Question 6

Among the disadvantages of fixed exchange rate regimes in the context of the MundellFleming model include that
(a) monetary policy becomes useless
(b) the Central Bank may run out of international reserves in the case of persistent capital
outflows
(c) the economy becomes more vulnerable to real shocks (say, a drop in net exports) than
under flexible exchange rates
(d) all of the above

Answer 6

D) all of the above

Question 7

If an economy is at its steady state with no population growth and no technological
progress and the marginal product of capital is lower than the depreciation rate (MPK < δ),
then
(a) the economy is at its Golden Rule
(b) the steady-state level of consumption per worker (css) could be higher in a steady state
with a lower saving rate
(c) the steady-state level of consumption per worker (css) could be higher in a steady state
with a higher saving rate
(d) the government must reduce the depreciation rate to achieve the Golden Rule

Answer 7

(b) the steady-state level of consumption per worker (css) could be higher in a steady state
with a lower saving rate

Question 8

When the expected rate of inflation (πe
) falls, the short-run Phillips curve
(a) remains unaffected
(b) shifts down
(c) shifts up
(d) becomes vertical

Answer 8

(b) shifts down

Question 9

In the Solow model with population growth but no technological progress, the steady-state
growth rate of output per worker (Y/L) is:
(a) 0 (b) g (c) n (d) n + g

Answer 9

(a) 0

Question 10

Suppose a small open economy under fixed exchange rates has an initial IS-LM
equilibrium point on its BP line. In the absence of intervention, expansionary monetary
policy would produce a domestic currency ____________, for which the local Central
Bank/Government has to avoid by conducting __________, which eventually causes output to
_______________.
(a) appreciation; contractionary fiscal policy; decrease
(b) appreciation; contractionary monetary policy; remain constant
(c) depreciation; expansionary fiscal policy; increase
(d) depreciation; contractionary monetary policy; remain constant

Answer 10

(d) depreciation; contractionary monetary policy; remain constant

Question 11

Monetary policy is more effective than fiscal policy at affecting output (Y) under

(a) flexible exchange rates due to the amplifying effect that occurs through the money supply
(b) flexible exchange rates due to the amplifying effect that occurs through net exports
(c) fixed exchange rates due to the amplifying effect that occurs through the money supply
(d) fixed exchange rates due to the amplifying effect that occurs through net exports

Answer 11

(b) flexible exchange rates due to the amplifying effect that occurs through net exports

Question 12

In the Solow model with population growth and technological progress, if investment (sy)
exceeds depreciation (δk), then we can be CERTAIN that capital per worker (k) and output
per worker (y) will, respectively,
(a) increase and increase
(b) increase and decrease
(c) decrease and increase
(d) cannot be determined with the information provided

Answer 12

(d) cannot be determined with the information provided

Question 13

In the Mundell-Fleming model of small open economies, it is true that
(a) fiscal and monetary policy can affect the domestic interest rate (r) in equilibrium under
perfect capital mobility
(b) changes in net exports shift the LM curve
(c) changes in monetary policy affect the ultimate position of the LM curve regardless of the
assumption on the exchange rate regime
(d) capital flows affect the position of the LM curve but not of the IS curve under fixed
exchange rates

Answer 13

(d) capital flows affect the position of the LM curve but not of the IS curve under fixed
exchange rates

Question 14

In a small open economy with fixed exchange rates, if the world real interest rate (rf) is above the domestic interest rate (r), then there will be

(a) capital inflows and the money supply (MS) will increase
(b) capital outflows and the money supply (MS) will decrease
(c) capital inflows and net exports (NX) will decrease
(d) capital outflows and net exports (NX) will increase

Answer 14

(b) capital outflows and the money supply (MS) will decrease

Question 15

In the IS-LM model in closed economy, if the Fed’s goal is to hold the interest rate (r)
constant, an expansionary fiscal policy change must be accompanied by [HINT: Use graphs]
(a) expansionary monetary policy and the Fed allows output to rise
(b) expansionary monetary policy and the Fed allows output to fall
(c) contractionary monetary policy and the Fed allows output to rise
(d) contractionary monetary policy and the Fed allows output to fall

Answer 15

(a) expansionary monetary policy and the Fed allows output to rise

Question 16

According to the sticky-wage model, the equilibrium level of employment (L)

(a) has nothing to do with the quantity of labor demanded by firms
(b) depends on how much labor firms wish to hire at the predetermined nominal wage
(c) is determined in advance during the wage bargaining process
(d) depends only on the nominal wage (W)

Answer 16

(b) depends on how much labor firms wish to hire at the predetermined nominal wage

Question 17

In the Solow model with population growth and technological progress, the steady state is
reached when
(a) capital (K) and output (Y) no longer change
(b) the economy invests only to replace depreciated capital
(c) consumption per worker is maximized
(d) none of the above

Answer 17

(d) none of the above

Question 18

Starting from a steady state in the Solow model, if the saving rate (s) increases, then it
MUST BE TRUE that
(a) output per worker (y) will increase
(b) consumption per worker (c) will increase in the long run
(c) the economy gets closer to its Golden Rule
(d) all of the above

Answer 18

(a) output per worker (y) will increase

Question 19

. In the Solow growth model covered in class, for any given capital stock (k), how much
output (y) there is in the economy and how much of it is allocated between consumption (c)
and investment (i) is given by, respectively
(a) the production function and the depreciation rate
(b) the investment function and the saving rate
(c) the production function and the saving rate
(d) the investment function and the depreciation rate

Answer 19

(c) the production function and the saving rate