CHAPTER 1: Introduction to Macroeconomics

MULTIPLE CHOICE

	1.	Macroeconomics is the study of ________ while microeconomics studies ________.
a.	the cosmos; particle physics	
b.	the overall performance of an economy; an individual market	
c.	an individual market; the overall performance of an economy	
d.	the overall performance of a single economy; the individual firm	
e.	consumer behavior; firm behavior	

ANS:	B	DIF:	Easy	REF:	1.1	TOP:	I.
MSC:	Remembering		

	2.	The three main variables we discuss in the short run are:
a.	economic fluctuations; interest rates; unemployment	
b.	economic fluctuations; inflation; money	
c.	economic fluctuations; inflation; unemployment	
d.	interest rates; money supply; taxes	
e.	economic fluctuations; interest rates; money	

ANS:	C	DIF:	Easy	REF:	1.1	TOP:	I.
MSC:	Remembering		

	3.	Macroeconomic is to microeconomic what ________ is to ________.
a.	cosmology; particle physics	d.	chemistry; organic chemistry	
b.	particle physics; cosmology	e.	biology; zoology	
c.	physics; biology	

ANS:	A	DIF:	Easy	REF:	1.1	TOP:	I.
MSC:	Applying

	4.	Which of the following does macroeconomics endeavor to answer?
i. Why is the typical person in the United States today more than ten times richer than the typical person a century ago?
ii. Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years?
iii. What determines the rate of inflation? What determines how rapidly the overall price level in an economy increases?
a.	i only	d.	i and ii	
b.	i, ii, and iii	e.	ii and iii	
c.	ii only	

ANS:	B	DIF:	Medium	REF:	1.1	TOP:	I.
MSC:	Applying

	5.	Which of the following does macroeconomics NOT endeavor to answer?
i. Why is the typical person in the United States today more than ten times richer than the typical person a century ago?
ii. Why has the unemployment rate been nearly twice as high in Europe as in the United States in recent years?
iii. Why has the price of orange juice risen sharply?
a.	ii and iii	d.	i, ii, and iii	
b.	i only	e.	iii only	
c.	ii only	

ANS:	E	DIF:	Medium	REF:	1.1	TOP:	I.
MSC:	Applying

	6.	Which of the following does macroeconomics endeavor to answer?
i. What role does the government play in recessions and booms and in determining the rate of inflation?
ii. What causes an increase in the price of Exxon stock?
iii. How does a dairy farmer react to rising milk prices?
a.	i only	d.	i, ii, and iii	
b.	ii only	e.	ii and iii	
c.	iii only	

ANS:	A	DIF:	Medium	REF:	1.2	TOP:	II.
MSC:	Applying

	7.	Which of the following does macroeconomics endeavor to answer?
i. How does a dairy farmer react to rising wheat prices?
ii. What causes an increase in the price of Apple stock?
iii. What are potential causes of financial crises?
a.	i only	d.	i, ii, and iii	
b.	ii only	e.	ii and iii	
c.	iii only	

ANS:	C	DIF:	Medium	REF:	1.1	TOP:	II.
MSC:	Applying

	8.	Which of the following does macroeconomics endeavor to answer?
i. What role does the government play in recessions and booms and in determining the rate of inflation?
ii. What caused the currency crises in Mexico in the mid-1990s and in many Asian economies at the end of the 1990s?
iii. How does a dairy farmer react to rising milk prices?
a.	iii only	d.	i, ii, and iii	
b.	ii only	e.	i and iii	
c.	i and ii	

ANS:	C	DIF:	Medium	REF:	1.1	TOP:	II.
MSC:	Applying

	9.	Which of the following lists the four steps we use to study macroeconomic behavior in the correct order?
a.	(1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that may eventually be tested	
b.	(1) document the facts; (2) use the model to make other predictions that may eventually be tested; (3) compare the predictions of the model to the original facts; (4) develop a model	
c.	(1) compare the predictions of the model to the original facts; (2) develop a model; (3) document the facts; (4) use the model to make other predictions that may eventually be tested	
d.	(1) develop a model; (2) document the facts; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that may eventually be tested	
e.	None of the above answers are correct.	

ANS:	A	DIF:	Easy	REF:	1.2	TOP:	II.
MSC:	Remembering		

	10.	________ variables are parameters to the model and generally are fixed over time, while ________ variables are the outcome of the model.
a.	Shocks; parameters	d.	Exogenous; endogenous	
b.	Endogenous; exogenous	e.	Parameters; system	
c.	Endogenous; shocks	

ANS:	D	DIF:	Easy	REF:	1.2	TOP:	II.
MSC:	Remembering		

	11.	Which of the following questions should a successful model predict?
i. How do changes in government policies change the labor market?
ii. How does money supply influence inflation?
iii. How does investment affect economic growth?
a.	ii only	d.	i and ii	
b.	i, ii, and iii	e.	i and iii	
c.	iii only	

ANS:	B	DIF:	Medium	REF:	1.2	TOP:	II.
MSC:	Applying

	12.	Which of the following questions should a successful model predict?
i. How do changes in government policies change the labor market?
ii. How does money supply influence inflation?
iii. What is the relationship between inflation and unemployment?
a.	iii only	d.	i and ii	
b.	ii only	e.	i and iii	
c.	i, ii, and iii	

ANS:	C	DIF:	Medium	REF:	1.2	TOP:	II.
MSC:	Applying

	13.	Which of the following questions should a successful model predict?
i. Why, in general, do Americans have higher incomes than Africans?
ii. How much less unemployment is there during an economic expansion?
iii. Why does the United States have a lower unemployment rate than Europe?
a.	i and ii	d.	i, ii, and iii	
b.	ii only	e.	i and iii	
c.	iii only	

ANS:	D	DIF:	Medium	REF:	1.2	TOP:	II.
MSC:	Applying

	14.	Consider the following model of the labor market:
Labor supply: 
Labor demand: .
The endogenous variables are:
a.	 and 	
b.	 and the equilibrium wage, w	
c.	 and the equilibrium wage, w	
d.	the equilibrium quantity of labor, L, and wage, w	
e.	 and the equilibrium quantity of labor, L	

ANS:	D	DIF:	Difficult	REF:	1.2	TOP:	II.
MSC:	Applying

	15.	Consider the following model of the labor market:
Labor supply: 
Labor demand: 
The values of the equilibrium quantity of labor, L, and wage, w, are:
a.		
b.		
c.		
d.		
e.		

ANS:	A	DIF:	Difficult	REF:	1.2	TOP:	II.
MSC:	Applying

	16.	Consider the following model of the labor market:
Labor supply: 
Labor demand: 
The value of the equilibrium quantity of labor, L, and wage, w, are:
a.	 = 44/5;  = 1/5	d.	 = 6;  = 6	
b.	 = 5;  = 6	e.	Not enough information is given.	
c.	 = 6;  = 5	

ANS:	C	DIF:	Difficult	REF:	1.2	TOP:	II.
MSC:	Applying

	17.	Income per person began at ________ in 1870 and ________ over a factor of 15 to ________ in 2012.
a.	$2,500; rose; $35,000	d.	$44,000; fell; $3,500	
b.	$2,800; rose; $44,000	e.	$40,000; fell; $2,500	
c.	$2,800; rose; $100,000	

ANS:	B	DIF:	Easy	REF:	1.3	TOP:	III.A.
MSC:	Remembering		

	18.	Actual GDP is ________ to potential GDP.
a.	rarely not equal	d.	rarely equal	
b.	always equal	e.	Not enough information is given.	
c.	always not equal	

ANS:	D	DIF:	Easy	REF:	1.3	TOP:	III.A./B.
MSC:	Understanding		

	19.	When we look at the ________ we are concerned with the ________.
a.	short run; causes of economic fluctuations	
b.	long run; causes of economic fluctuations	
c.	short run; determinants of economic growth	
d.	long run; causes of inflation	
e.	long run; money supply	

ANS:	A	DIF:	Easy	REF:	1.3	TOP:	III.A./B.
MSC:	Understanding		

	20.	When we look at the ________ we are concerned with ________.
a.	long run; money supply	
b.	long run; causes of economic fluctuations	
c.	long run; causes of economic growth	
d.	long run; causes of inflation	
e.	long run; unemployment	

ANS:	C	DIF:	Easy	REF:	1.3	TOP:	III.A.
MSC:	Understanding		

	21.	The short run is concerned with ________ while the long run is concerned with ________.
a.	inflation; unemployment	
b.	causes of economic fluctuations; inflation	
c.	causes of economic fluctuations; determinants of economic growth	
d.	determinants of economic growth; causes of economic fluctuations	
e.	causes of economic fluctuations; money supply	

ANS:	C	DIF:	Easy	REF:	1.3	TOP:	III.B.
MSC:	Understanding		

TRUE/FALSE

	1.	Macroeconomics is the study of an individual market.

ANS:	F	DIF:	Easy	REF:	1.1	TOP:	I.
MSC:	Remembering			
NOT:	It is the study of the overall performance of an economy.

	2.	These four steps, and in the following order, are used to study macroeconomic behavior: 
(1) document the facts; 
(2) develop a model; 
(3) compare the predictions of the model to the original facts; 
(4) use the model to make other predictions that eventually may be tested.

ANS:	T	DIF:	Easy	REF:	1.2	TOP:	II.
MSC:	Applying

	3.	These four steps, and in the following order, are used to study macroeconomic behavior: 
(1) document the facts; 
(2) use the model to make other predictions that may eventually be tested; 
(3) compare the predictions of the model to the original facts; 
(4) develop a model.

ANS:	F	DIF:	Easy	REF:	1.2	TOP:	II.
MSC:	Applying	
NOT:	They are (1) document the facts; (2) develop a model; (3) compare the predictions of the model to the original facts; (4) use the model to make other predictions that eventually may be tested.

	4.	In the long run, we are concerned about the causes of economic growth.

ANS:	T	DIF:	Easy	REF:	1.3	TOP:	III.A.
MSC:	Applying

	5.	In the long run, we are concerned about the causes of economic fluctuations.

ANS:	F	DIF:	Easy	REF:	1.3	TOP:	III.A.
MSC:	Understanding			NOT:	We are concerned with economic growth.

	6.	In the short run, we are concerned with the causes of economic fluctuations and how to fix them.

ANS:	T	DIF:	Medium	REF:	1.3	TOP:	III.B.
MSC:	Applying

	7.	In the short run, we are concerned with the causes of economic growth.

ANS:	F	DIF:	Easy	REF:	1.3	TOP:	III.B.
MSC:	Understanding			
NOT:	We are concerned with the causes of economic fluctuations.	

	8.	An economic model is an exact replica of the macroeconomy.

ANS:	F	DIF:	Medium	REF:	1.2	TOP:	II.
MSC:	Analyzing	
NOT:	It is a very simplified version of the macroeconomy that gives us insight into how the economy functions.

	9.	An endogenous variable is often called a parameter.

ANS:	F	DIF:	Medium	REF:	1.2	TOP:	II.
MSC:	Understanding			
NOT:	It is a variable that is predicted by the model; the parameter is chosen by the economist.

	10.	An exogenous variable is one that is taken as given, that is, a parameter.

ANS:	T	DIF:	Easy	REF:	1.2	TOP:	II.
MSC:	Remembering		

SHORT ANSWER

	1.	What are at least four of the main concerns of the study of macroeconomics?

ANS:	
Here are a handful of options:
a) Why does the average person today have 10 times more income than the typical person 100 years ago?
b) What determines the rate of inflation, and how do we control it?
c) How can we minimize the number of unemployed?
d) What role, if any, does the government and/or central bank have in promoting economic wellbeing?
e) Why do unemployment rates differ across countries?
f) Why are some countries richer than others, and how can we promote development in lower income countries?
g) Causes, and fixes, for economic crises

DIF:	Medium	REF:	1.1	TOP:	I.	MSC:	Understanding

	2.	What are the steps macroeconomists use to analyze the economy?

ANS:	
a) Document the problem, identify and ask the question;
b) Develop a framework for analysis, a model;
c) Test the model using empirical analysis or some other comparable analysis and compare to the observed facts;
d) Apply the model to similar situations and make other predictions.

DIF:	Easy	REF:	1.2	TOP:	II.	MSC:	Remembering

	3.	Describe the differences between the long and short run.

ANS:	
The short run is concerned with the causes of economic fluctuations, the business cycle. In the long run, we are concerned with the determinants of economic growth. Thus, the long run is the trend of output, and the short run represents the fluctuations around the trend.

DIF:	Medium	REF:	1.3	TOP:	III.A./B.	MSC:	Understanding

	4.	Consider the following model of the labor market:
Labor Supply: 
Labor Demand: 
a. Identify the model’s parameters.
b. Identify the endogenous variables.
c. Solve the model.
d. In the labor supply equation, if the “” increases to some constant , what would happen to the equilibrium wage and equilibrium labor?

ANS:	
a. Using the notation in the text, , and  is not in the text, but this is the parameter on w in the demand question, which is implicitly equal to 1.
b. They are the wage, w, and the labor in the market, L.
c. Setting supply equal to demand:

and solving yields  = 1/5 and, subbing this into either equation,  = 12/5.
d. The real wage would fall and the equilibrium labor in the market would rise.

DIF:	Difficult	REF:	1.2	TOP:	II.	MSC:	Applying