ECON 

2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

MC Practice Solutions
Macroeconomics, ECON 2123
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Ch 1-3 (introduction)

1. An individual is said to be a discouraged worker if he or she

A) is working, but prefers not to work.
B) is working part time, but would prefer a full time job.
C) is working in jobs she/he is not suited for.
D) wants to work, and is actively searching for a job.
E) wants to work, but has given up searching for a job.
Answer: E

2. Which of the following tends to occur when the unemployment rate increases?
A) a reduction in the labor force participation rate
B) a reduction in the number of discouraged workers
C) an increase in the number of employed workers
D) all of the above
E) none of the above
Answer: A

3. Which of the following calculations will yield the correct measure of real GDP?
A) divide nominal GDP by the consumer price index
B) divide the GDP deflator by the consumer price index
C) multiply nominal GDP by the consumer price index
D) multiply nominal GDP by the GDP deflator
E) none of the above
Answer: E

4. Suppose we switch the base year from 2000 to 2008. This change in the base year will cause
A) nominal GDP in every year to increase.
B) nominal GDP in every year to decrease.
C) both nominal and real GDP in every year to decrease.
D) real GDP in every year to decrease.
E) none of the above
Answer: E

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

5. The Okun's law shows the relationship between

A) inflation and unemployment rate.
B) output growth and unemployment.
C) inflation and output growth.
D) output growth and money supply.
Answer: B

6. The Phillips curve describes the relationship between

A) output growth and unemployment.
B) inflation and output growth.
C) output growth and money supply.
D) inflation and unemployment.
Answer: D

7. Based on the notation presented in Chapter 2, which of the following expressions represents
nominal GDP?
A) Yt
B) PtYt
C) Yt/Pt
D) $Yt/Pt
Answer: B

8. Deflation generally occurs when which of the following occurs?

A) the consumer price index is greater than the GDP deflator
B) the consumer price index decreases
C) the rate of inflation falls, for example, from 4% to 2%
D) nominal GDP does not change
Answer: B

9. During the late 1990s, Japan experienced reductions in the GDP deflator. Given this information, we
know with certainty that
A) real GDP fell during these periods.
B) real GDP did not change during these periods.
C) the overall price level in Japan decreased during these periods.
D) both real GDP and the overall price level decreased during these periods.
Answer: C

10. Hedonic pricing is

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

A) the way that luxury goods are priced in a market economy.

B) the tendency for the inflation rate to rise by greater and greater amounts.
C) the tendency for nominal GDP to rise when the price level rises.
D) the process of translating nominal GDP into real GDP.
E) the process of pricing individual characteristics of a good or service.
Answer: E

11. Which of the following is an exogenous variable in our model of the goods market in Chapter 3?
A) consumption (C)
B) saving (S)
C) disposable income (YD)
D) government spending (G)
E) none of the above
Answer: D

12. The marginal propensity to consume represents

A) the level of consumption that occurs if disposable income is zero.
B) the ratio of total consumption to disposable income.
C) total income minus total taxes.
D) the change in output caused by a one-unit change in autonomous demand.
E) the change in consumption caused by a one-unit change in disposable income.
Answer: E

13. Suppose the consumption equation is represented by the following: C = 250 + .75YD. Given this
information, the marginal propensity to save is
A) .25.
B) .7.
C) 1.
D) 4.
E) none of the above
Answer: A

14. Which of the following would tend to make the multiplier larger?
A) an increase in the marginal propensity to consume
B) an increase in the marginal propensity to save
C) a reduction in taxes
D) a reduction in government spending
E) none of the above

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

Answer: A

15. Which of the following events will cause an increase in equilibrium output?
A) an increase in the marginal propensity to save
B) an increase in taxes
C) a reduction in the marginal propensity to consume
D) all of the above
E) none of the above
Answer: E

16. Which of the following equals demand in an open economy?

A) C + I + G + X
B) C + I + G + X - IM
C) C + I + G + IM - X
D) C + I + G
Answer: B

17. Suppose an economy is in equilibrium. Given this information, we know with certainty that
A) G = T.
B) X = IM.
C) S = I.
D) Y = Z.
Answer: D

18. Suppose the consumption equation is represented by the following: C = 250 + .75YD, then private
savings is
A) -250+0.25YD.
B) -250+0.75YD.
C) -1000+0.25YD.
D) -1000+0.75YD.
Answer: A

19. If C = 2000 + .9YD, what decrease in taxes must occur for equilibrium output to increase by 1000?
A) 111
B) 100
C) 1000
D) 500
Answer: A

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

20. Inventory investment refers to

A) the difference between production and sales in a given year.
B) fixed investment.
C) nonresidential investment.
D) the purchase by firms of new machines.
Answer: A

21. Based on our understanding of the model presented in Chapter 3, we know that an increase in c1
(where C = c0 + c1YD) will cause
A) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a
smaller effect on output.
B) the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger
effect on output.
C) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a smaller
effect on output.
D) the ZZ line to become flatter and a given change in autonomous consumption (c0) to have a larger
effect on output.
Answer: B

22. An increase in the marginal propensity to save from .1 to .2 will cause

A) an increase in the multiplier and a given change in autonomous consumption (c0) to have a smaller
effect on output.
B) an increase in the multiplier and a given change in autonomous consumption (c0) to have a larger
effect on output.
C) a reduction in the multiplier and a given change in autonomous consumption (c0) to have a smaller
effect on output.
D) a reduction in the multiplier and a given change in autonomous consumption (c0) to have a larger
effect on output.
Answer: C

23. An increase in the desire to save by households will cause

A) a reduction in output.
B) a reduction in investment.
C) an increase in output.
D) no change in investment and no change in output.
Answer: A

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

24. Based on our understanding of the model presented in Chapter 3, we know with certainty that an
equal and simultaneous reduction in G and T will cause
A) an increase in output.
B) no change in output.
C) a reduction in output.
D) an increase in investment.
Answer: C

25. Suppose business confidence decreases causing a reduction in investment. Based on our
understanding of the model presented in Chapter 3, we know with certainty that a reduction in
investment will cause
A) an increase in the multiplier.
B) a reduction in the multiplier.
C) a reduction in the marginal propensity to save.
D) none of the above.
Answer: D

Ch 4-5 (short run closed economy)

1. Which of the following is a component of money?

A) bonds
B) saving
C) income
D) stocks
E) none of the above
Answer: E

2. Which of the following will cause an increase in the amount of money that one wishes to hold?
A) an increase in the interest rate
B) a reduction in the interest rate
C) a reduction in income
D) none of the above
Answer: B

3. The money demand curve will shift to the right when which of the following occurs?
A) an increase in income
B) a reduction in the interest rate

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

C) an increase in the money supply

D) all of the above
E) none of the above
Answer: A

4. Which of the following is a liability for the central bank?

A) currency
B) bonds
C) savings accounts
D) loans
E) checkable deposits
Answer: A

5. Suppose a one-year discount bond offers to pay $1000 in one year and currently sells for $950.
Given this information, we know that the interest rate on the bond is
A) 5.3%.
B) 9.5%.
C) 10%.
D) 90%.
E) 110%.
Answer: A

6. We would expect which of the following to occur when the central bank pursues expansionary
monetary policy?
A) an increase in bond prices and an increase in the interest rate (i)
B) a reduction in bond prices and an increase in i
C) an increase in bond prices and a reduction in i
D) a reduction in bond prices and a reduction in i
E) none of the above
Answer: C

7. The IS curve represents

A) the single level of output where the goods market is in equilibrium.
B) the single level of output where financial markets are in equilibrium.
C) the combinations of output and the interest rate where the money market is in equilibrium.
D) the combinations of output and the interest rate where the goods market is in equilibrium.
E) none of the above
Answer: D

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

8. The IS curve will shift to the right when which of the following occurs?
A) an increase in the money supply
B) an increase in government spending
C) a reduction in the interest rate
D) all of the above
E) none of the above
Answer: B

9. For each interest rate, the LM curve illustrates the level of output where
A) the goods market is in equilibrium.
B) inventory investment equals zero.
C) money supply equals money demand.
D) all of the above
E) none of the above
Answer: C

10. The LM curve shifts down when which of the following occurs?
A) an increase in taxes
B) an increase in output
C) an open market sale of bonds by the central bank
D) an increase in consumer confidence
E) none of the above
Answer: E

11. Which of the following statements is consistent with a given LM curve?

A) a reduction in the interest rate causes investment spending to increase
B) a reduction in the interest rate causes money demand to decrease
C) a reduction in the interest rate causes an increase in the money supply
D) an increase in output causes an increase in demand for goods
E) an increase in output causes an increase in money demand
Answer: E

12. Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the
following is true for this economy?
A) Production equals demand.
B) The quantity supplied of bonds equals the quantity demanded of bonds.
C) The money supply equals money demand.

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

D) Financial markets are in equilibrium.

E) all of the above
Answer: E

13. During 2008 in the United States, consumer confidence fell significantly. Which of the following
will occur as a result of this reduction in consumer confidence?
A) the LM curve will shift up.
B) the LM curve will shift down.
C) the IS curve will shift rightward.
D) the IS curve will shift leftward.
E) the IS curve will shift rightward, and the LM curve will shift up.
Answer: D

14. Suppose policy makers decide to reduce taxes. This fiscal policy action will cause which of the
following to occur?
A) the LM curve shifts and the economy moves along the IS curve.
B) the IS curve shifts and the economy moves along the LM curve.
C) both the IS and LM curves shift.
D) neither the IS nor the LM curve shifts.
E) output will change causing a change in money demand and a shift of the LM curve.
Answer: B

15. In late 2007 and early 2008, the U.S. Federal Reserve pursued expansionary monetary policy.
Which of the following will occur as a result of this monetary policy action?
A) the LM curve shifts down.
B) the LM curve shifts up.
C) the IS curve shifts rightward as the interest rate falls.
D) the IS curve shifts leftward as the interest rate increases.
E) none of the above
Answer: A

16. Suppose investment spending is very sensitive to the interest rate. Given this information, we
know that
A) the IS curve should be relatively flat.
B) the IS curve should be relatively steep.
C) the LM curve should be relatively flat.
D) the LM curve should be relatively steep.
E) neither the IS nor the LM curve will be affected.

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

Answer: A

17. An increase in the money supply will cause an increase in which of the following variables?
A) output
B) investment
C) consumption
D) all of the above
E) none of the above
Answer: D

18. For this question, assume that investment spending depends only on the interest rate and no longer
depends on output. Given this information, a reduction in the money supply
A) will cause investment to decrease.
B) will cause investment to increase.
C) may cause investment to increase or to decrease.
D) will have no effect on output.
E) will cause a reduction in output and have no effect on the interest rate.
Answer: A

19. Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that
this combination of policies must cause
A) an increase in the interest rate (i).
B) a reduction in i.
C) an increase in output (Y).
D) a reduction in Y.
Answer: C

20. A fiscal contraction will tend to cause which of the following to occur?
A) a reduction in the interest rate and a reduction in investment
B) a reduction in the interest rate and an upward shift in the LM curve
C) a reduction in the interest rate and an ambiguous effect on investment
D) no change in output if the Fed simultaneously pursues contractionary monetary policy
Answer: C

21. An increase in the reserve deposit ratio will most likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

D) a downward shift in the LM curve

Answer: C

22. An increase in the aggregate price level, P, will most likely have which of the following effects?
A) a rightward shift in the IS curve
B) a leftward shift in the IS curve
C) an upward shift in the LM curve
D) a downward shift in the LM curve
Answer: C

23. If government spending and taxes decrease by the same amount,

A) the IS curve does not shift.
B) the IS curve shift leftward.
C) the IS curve shifts rightward.
D) the LM curve shifts downward.
Answer: B

24. The IS curve will NOT shift when which of the following occurs?
A) a reduction in government spending.
B) a reduction in the interest rate.
C) a reduction in consumer confidence.
D) all of the above
E) none of the above
Answer: B

25. Assume that investment does NOT depend on the interest rate. A reduction in the money supply
will cause which of the following for this economy?
A) no change in the interest rate
B) no change in output
C) a reduction in investment
D) an increase in investment
Answer: B

Ch 18-20 (short run open economy)

1. If the price level in Japan is 1.0, the price level in the U.S. is 2.0, and it costs 100 Yen to buy one
dollar, then the real exchange rate between the U.S. and Japan is

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

A) 2.
B) 10.
C) 50.
D) 100.
E) 200.
Answer: E

2. Suppose the U.S. one-year interest rate is 3% per year, while a foreign country has a one-year
interest rate of 5% per year. Ignoring risk and transaction costs, a U.S. investor should invest in foreign
bonds as long as the expected yearly rate of depreciation of the foreign currency is
A) less than 5%.
B) greater than 5%.
C) greater than 2%.
D) less than 2%.
E) less than 1%.
Answer: D

3. Assume that the nominal exchange rate increases by 2%. If prices (both domestic and foreign) do
not change, we know that
A) domestic goods are now relatively cheaper.
B) domestic goods are now relatively more expensive.
C) foreign goods are now relatively cheaper.
D) both B and C
E) none of the above
Answer: D

4. In a flexible exchange rate regime, an exogenous increase in the expected future exchange rate will
cause
A) the UIP curve to shift to the left/up.
B) the UIP curve to shift to the right/down.
C) a movement along the UIP curve.
D) neither a shift nor movement along the UIP curve.
Answer: B

5. For this question, assume the interest parity conditions holds. Also assume that the domestic interest
rate is 10% and that the foreign interest rate is 7%. Given this information, we would expect that
A) individuals will only hold foreign bonds.
B) individuals will only hold domestic bonds.

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

C) the domestic currency is expected to appreciate by 3%.

D) the domestic currency is expected to depreciate by 3%.
Answer: D

6. Assume the interest parity condition holds and that individuals expect domestic currency to
appreciate by 5% during the coming year. Given this information, we know that
A) the interest rate differential between the two countries is less than 5%.
B) i < i*.
C) i = i*.
D) individuals will only hold foreign bonds.
E) none of the above
Answer: B

7. The expression, IM, represents the value of imports in terms of

A) foreign currency.
B) domestic currency.
C) foreign goods.
D) domestic goods.
E) exports.
Answer: C

8. The quantity of imports will increase when there is

A) a reduction 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: B

9. 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: A

10. Which of the following will always cause an increase in net exports?

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

A) a reduction in domestic output

B) an increase in the real exchange rate
C) an increase in government spending
D) an increase in investment
E) all of the above
Answer: A

11. An increase in government spending will have a greater impact on net exports when
A) the marginal propensity to save is smaller.
B) the economy is closed.
C) the sensitivity of investment to income is smaller.
D) all of the above
E) none of the above
Answer: A

12. Which of the following will occur in a small country with a high marginal propensity to import?
A) changes in government spending will cause large changes in output.
B) changes in government spending will cause large changes in the trade balance.
C) a depreciation will cause only small changes in the trade balance.
D) there is no combination of policies that can eliminate the trade deficit.
E) all of the above
Answer: B

13. Which of the following would make the multiplier smaller?

A) a reduction in marginal propensity to save
B) a small initial trade deficit
C) a reduction in the marginal propensity to import
D) a real appreciation
E) none of the above
Answer: E

14. An open economy with a low saving rate (private and public) must have
A) low investment only.
B) high investment only.
C) a trade surplus only.
D) low investment or a trade deficit.
E) low investment or a trade surplus.
Answer: D

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

15. An increase in which of the following variables will cause a reduction in the demand for domestic
goods?
A) foreign income
B) the real exchange rate
C) consumer confidence
D) domestic income
E) all of the above
Answer: B

16. An increase in domestic demand will have which of the following effects in an open economy?
A) a smaller effect on output than in a closed economy and a positive effect on the trade balance
B) a smaller effect on output than in a closed economy and a negative effect on the trade balance
C) a larger effect on output than in a closed economy and a positive effect on the trade balance
D) a larger effect on output than in a closed economy and a negative effect on the trade balance
Answer: B

17. Suppose policy makers want to increase Y and keep NX constant. Which of the following policies
would most likely achieve this?
A) an increase in government spending
B) a real depreciation
C) an increase in government spending and a reduction in the real exchange rate
D) a reduction in the real exchange rate
E) encourage the country's trading partners to implement policies that will cause an increase in foreign
income (Y*)
Answer: C

18. Suppose the rest of the world experiences an expansion that causes an increase in foreign income
(Y*). From the domestic economy's perspective, this increase in foreign income will cause which of
the following as the domestic economy adjusts to the rise in Y*?
A) an increase in domestic income
B) an increase in imports
C) an increase in net exports
D) all of the above
E) both A and C
Answer: D

19. Which of the following will occur as a result of a tax cut?

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

A) private saving decreases

B) investment decreases
C) the trade balance improves
D) the trade balance worsens
E) the budget deficit decreases
Answer: D

20. Assume that the interest parity holds and that the dollar is expected to depreciate against the pound.
Given this information, we know that
A) U.S. and U.K. interest rates are equal.
B) the U.S. interest rate exceeds the U.K. interest rate.
C) the U.K. interest rate exceeds the U.S. interest rate.
D) individuals will prefer to hold U.S. bonds because the U.S. interest rate exceeds the U.K. interest
rate.
E) none of the above
Answer: B

21. In an open economy under flexible exchange rates and represented by the IS-LM-UIP model, a
reduction in government spending will cause a reduction in which of the following?
A) net exports
B) the exchange rate, E
C) exports
D) all of the above
E) none of the above
Answer: B

22. A change in which of the following variables will have NO direct effect on the level of domestic
demand?
A) domestic income
B) the real exchange rate
C) government spending
D) the interest rate (r)
E) none of the above
Answer: B

23. As the economy moves up and to the left along the IS curve, which of the following will occur
when exchange rates are flexible?
A) investment spending decreases

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

B) consumption decreases
C) the domestic currency appreciates
D) all of the above
E) none of the above
Answer: D

24. 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: E

25. For this question, assume that there is a simultaneous tax increase and monetary expansion. In a
flexible exchange rate regime, we know with certainty that
A) the exchange rate and output would both increase.
B) the exchange rate would increase and output would decrease.
C) the exchange rate would decrease.
D) the exchange rate would decrease and output would increase.
E) none of the above
Answer: C

26. Under a fixed exchange rate regime, suppose there is a reduction in housing wealth that causes a
reduction in consumption. This wealth-induced reduction in consumption will cause
A) a reduction in investment.
B) an increase in net exports.
C) a reduction in imports.
D) all of the above
E) none of the above
Answer: D

27. 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

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

D) all of the above

E) none of the above
Answer: A

Ch 6-7 (medium run AS-AD)

1. The natural rate of unemployment is the rate of unemployment

A) that occurs when the money market is in equilibrium.
B) that occurs when the markup of prices over costs is zero.
C) where the markup of prices over costs is equal to its historical value.
D) that occurs when both the goods and financial markets are in equilibrium.
E) none of the above
Answer: E

2. For this question, assume that the economy is initially operating at the natural level of output. A
reduction in consumer confidence will cause
A) an increase in the real wage in the medium run.
B) a reduction in the real wage in the medium run.
C) no change in the real wage in the medium run.
D) ambiguous effects on the real wage in the medium run.
E) none of the above.
Answer: C

3. Suppose workers and firms expect the overall price level to increase by 5%. Given this information,
we would expect that
A) the nominal wage will increase by less than 5%.
B) the nominal wage will increase by exactly 5%.
C) the nominal wage will increase by more than 5%.
D) the real wage will increase by 5%.
E) the real wage will increase by less than 5%.
Answer: B

4. Suppose the actual unemployment rate increases. This will cause

A) an upward shift in the WS curve.
B) a downward shift in the WS curve.
C) an upward shift in the PS curve.
D) a downward shift of the PS curves.

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

E) none of the above

Answer: E

5. Suppose that increased international trade makes product markets more competitive in the U.S.
Given this information, we would expect to observe which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: C

6. Based on our understanding of the labor market model presented in Chapter 6, we know that an
increase in the markup will cause
A) an increase in the equilibrium real wage.
B) a reduction in the equilibrium real wage.
C) a reduction in the natural rate of unemployment.
D) both B and C
E) both A and C
Answer: B

7. A reduction in the minimum wage will tend to cause which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: B

8. Based on the aggregate supply relation, an increase in current output will cause
A) a shift of the aggregate supply curve.
B) an increase in the current price level.
C) a change in the expected price level this year.
D) an increase in the expected price level and an upward shift of the AS curve.
E) an increase in the markup over labor costs.
Answer: B

9. Based on your understanding of the AS/AD model, which of the following is an INCORRECT

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

statement about the short-run adjustment process for the macroeconomy?

A) output in excess of the natural level leads to higher prices.
B) a reduction in employment leads to lower prices.
C) an increase in demand increases output.
D) an increase in output above the natural level leads to higher nominal wages.
E) none of the above
Answer: E

10. Assume the economy is initially operating at the natural level of output. Which of the following
events will NOT change the composition of output (i.e., the percentage of GDP composed of
consumption, investment, ... etc.) in the medium run?
A) a reduction in government spending
B) a cut in taxes
C) a reduction in the desire to save
D) an increase in consumer confidence
E) an increase in the money supply
Answer: E

11. Answer this question using the AS/AD model presented in the textbook. Which of the following
would cause a reduction in the natural level of output in the medium run?
A) a decrease in government spending
B) a decrease in the money supply
C) an increase in taxes
D) both A and C
E) none of the above
Answer: E

12. Which of the following events will NOT cause an increase in the aggregate price level?
A) an increase in unemployment benefits
B) an increase in the markup
C) an increase in Pe
D) a reduction in output
E) none of the above
Answer: D

13. For this question, assume that the economy is initially operating at the natural level of output. A
one-time 5% reduction in the nominal money supply will cause
A) a 5% reduction in the price level in the medium run.

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

B) a 5% increase in the interest rate (i) in the medium run.

C) a 5% reduction in the real money supply in the medium run.
D) all of the above
E) both A and C
Answer: A

14. When the economy is operating at a point where output is less than the natural level of output,
which of the following occurs?
A) the unemployment rate is greater than the natural unemployment rate.
B) the price level is less than the expected price level.
C) the price level will be lower next period than it is this period.
D) all of the above
E) none of the above
Answer: D

15. A reduction in the aggregate price level will cause

A) an increase in the interest rate and a leftward shift in the IS curve.
B) a downward shift in the LM curve and a reduction in the interest rate.
C) a reduction in investment and a reduction in output .
D) an ambiguous effect on investment.
Answer: B

16. An increase in the minimum wage will tend to cause which of the following?
A) an upward shift in the WS curve
B) a downward shift in the WS curve
C) an upward shift in the PS curve
D) a downward shift in the PS curve
E) none of the above
Answer: A

17. With the real wage on the vertical axis and the unemployment rate on the horizontal axis, we know
that
A) the WS curve is upward sloping.
B) the WS curve is downward sloping.
C) the PS curve is upward sloping.
D) the PS curve is downward sloping.
Answer: B

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

18. The natural level of output is the level of output that occurs when
A) the goods market and financial markets are in equilibrium.
B) the economy is operating at the unemployment rate consistent with both the wage-setting and
price-setting equations.
C) the markup (m) is zero.
D) the unemployment rate is zero.
E) there are no discouraged workers in the economy.
Answer: B

19. In the short run, an increase in the price of oil will cause
A) an increase in output
B) a reduction in the price level
C) an increase in the interest rate.
D) all of the above
E) none of the above
Answer: C

20. Efficiency wage theory suggests that

A) workers will be paid less than their reservation wage.
B) productivity might drop if the wage rate is too low.
C) the government can only set tax rates so high before people will prefer not to work.
D) unskilled workers will have a lower turnover rate than skilled workers.
E) firms will be more resistant to wage increases as the labor market tightens.
Answer: B

21. An increase in the price of oil will tend to cause which of the following?
A) an increase in the natural rate of unemployment
B) an increase in the price level
C) an increase in the interest rate
D) all of the above
Answer: D

22. For this question, assume that the economy is initially operating at the natural level of output. An
increase in the price of oil will cause which of the following in the medium run?
A) a reduction in the interest rate
B) a reduction in output and an increase in the aggregate price level
C) a reduction in output and a reduction in the interest rate
D) a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

price level
E) a reduction in the aggregate price level and no change in output
Answer: B

23. Suppose a central bank implements a monetary expansion. Which of the following would we
expect to occur in the short run?
A) an increase in the nominal wage
B) the AD curve to shift to the left
C) the price setting curve to shift up
D) the wage setting curve to shift downward
E) the wage setting curve to shift upward
Answer: A

24. At the current level of output, suppose the actual price level is greater than the price level that
individuals expect (i.e., Pt > Pet). We know that
A) output is currently below the natural level of output.
B) the interest rate will tend to rise as the economy adjusts to this situation.
C) the nominal wage will tend to decrease as individuals revise their expectations of the price level.
D) the AS curve will tend to shift down over time.
E) none of the above
Answer: B

25. The short-run aggregate supply curve (AS) presented in the textbook has its particular shape
because of which of the following explanations?
A) a reduction in the aggregate price level will cause a reduction in the interest rate and an increase in
output.
B) an increase in the aggregate price level causes an increase in nominal money demand and an
increase in the interest rate.
C) a drop in the nominal wage causes an increase in the amount of output that firms are willing to
produce.
D) a reduction in output causes a reduction in employment, an increase in unemployment, a reduction
in the nominal wage and a reduction in the price level.
Answer: D

Ch 10-12 (long run growth)

1. Of the following, the most often used measure of changing living standards is

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

A) the growth rate of nominal GDP.

B) the growth rate of real GDP.
C) the growth rate of nominal GDP per capita.
D) the growth rate of real GDP per capita.
E) unemployment per capita.
Answer: D

2. Suppose individuals wish to obtain the most accurate comparison of living standards between the
Canada and Saudi Arabia. To do so, one would convert Saudi Arabian output into dollars using
A) the current nominal exchange rate.
B) the current real exchange rate.
C) the prior year's real exchange rate.
D) an average of the last five years' exchange rates.
E) purchasing power parity methods.
Answer: E

3. For this question, assume that a country experiences a permanent reduction in its saving rate. Which
of the following will occur as a result of this reduction in the saving rate?
A) a permanently slower growth rate of output.
B) no permanent effect on the level of output per capita.
C) a permanently lower level of output per worker.
D) both A and B
E) both B and C
Answer: C

4. Suppose there are two countries that are identical with the following exception. The saving rate in
country A is lower than the saving rate in country B. Given this information, we know that in the long
run
A) the growth rate of output per capita will be greater in B than in A.
B) the growth rate of output per capita will be greater in A than in B.
C) the capital-labor ratios (K/N) will be the same in both countries.
D) the growth rate of output per capita will be the same in both countries.
E) none of the above
Answer: D

5. For this question, assume that the saving rate increases. We know that this increase in the saving rate
will cause which of the following?
A) a temporary increase in the level of output per capita

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

B) no permanent change in the level of output per capita

C) a temporary increase in the rate of growth of output per capita
D) a permanently higher rate of growth of output per capita
E) none of the above
Answer: C

6. Which of the following will cause a reduction in output per worker (Y/N)?
A) a reduction in the capital stock (K)
B) a reduction in the saving rate
C) a reduction in K/N
D) all of the above
Answer: D

7. An increase in the saving rate will affect which of the following variables in the long run?
A) output per worker
B) capital per worker
C) the level of investment
D) all of the above
Answer: D

8. A reduction in the saving rate will NOT affect which of the following variables in the long run?
A) output per worker
B) the growth rate of output per worker
C) the amount of capital in the economy
D) capital per worker
E) none of the above
Answer: B

9. The capital-labor ratio will tend to decrease over time when

A) investment per worker equals saving per worker.
B) investment per worker is less than saving per worker.
C) investment per worker exceeds depreciation per worker.
D) saving per worker equals depreciation per worker.
E) output per worker exceeds capital per worker.
Answer: B

10. In the absence of technological progress, which of the following remains constant in the steady
state equilibrium?

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

A) investment per worker

B) output per worker
C) saving per worker
D) all of the above
E) only A and B
Answer: D

11. For this question assume that technological progress does not occur. The rate of saving in Canada
has generally been greater than the saving rate in the U.S. Given this information, we know that in the
long run
A) Canada's growth rate will be greater than the U.S. growth rate.
B) investment per worker in Canada will be no different than U.S. investment per worker.
C) capital per worker in Canada will be no different than U.S. capital per worker.
D) all of the above
E) none of the above
Answer: E

12. Suppose the saving rate is initially greater than the golden rule saving rate. We know with certainty
that an increase in the saving rate will cause
A) an increase in the rate of growth in the long run.
B) a reduction in output per worker.
C) a reduction in consumption per worker.
D) all of the above
E) none of the above
Answer: C

13. In the following production function, Y = f(K, NA), suppose A increases by 20%. This 20%
increase in A implies that
A) the same output can be produced with 20% less labor.
B) the effective quantity of labor has increased by 20%.
C) output will increase by less than 20%.
D) all of the above
E) both A and C
Answer: D

14. Which of the following will cause an increase in the steady-state growth rate of capital?
A) an increase in the saving rate
B) an increase in the population growth rate

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

C) a temporary increase in technological progress

D) all of the above
E) none of the above
Answer: B

15. Which of the following will cause a reduction in the steady-state growth rate of output per worker?
A) a reduction in the saving rate
B) an increase in the population growth rate
C) an increase in the rate of depreciation
D) an increase in the saving rate
E) none of the above
Answer: E

16. Which of the following is always true after an economy reaches a balanced growth equilibrium?
A) the growth rate of output equals the rate of depreciation
B) population growth is zero
C) the growth rate of capital is equal to the growth rate of the effective work force
D) the growth rate of capital is equal to the savings rate
E) none of the above
Answer: C

17. Assume that an economy experiences both positive population growth and technological progress.
Once the economy has achieved balanced growth, we know that the output per effective worker ratio
(Y/NA) is
A) growing at a rate of 0.
B) growing at a rate of gA + gN.
C) growing at a rate of gN.
D) growing at a rate of gA.
E) none of the above
Answer: A

18. Which of the following will cause an increase in the steady-state growth rate of output per worker?
A) an increase in the saving rate
B) a reduction in the population growth rate
C) a reduction in the rate of depreciation
D) a reduction in the saving rate
E) none of the above
Answer: E

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

19. When switching from the "current exchange rate" method to the "purchasing power parity"
method, India's standard of living in dollars
A) decreases.
B) remains essentially the same.
C) rises, but still remains far below that of the U.S.
D) rises almost to the level of the U.S.
E) leapfrogs over that of the U.S.
Answer: C

20. For this question, assume that there are decreasing returns to capital, decreasing returns to labor,
and constant returns to scale. Now suppose that both capital and labor decrease by 5%. Given this
information, we know that output (Y) will
A) not change.
B) decrease by less than 5%.
C) decrease by 5%.
D) the reduction in Y will be more than 5% but less than 10%
E) none of the above
Answer: C

21. For this question, assume that a country experiences a permanent increase in its saving rate. Which
of the following will occur as a result of this increase in the saving rate?
A) a permanently faster growth rate of output
B) a permanently higher level of output per capita
C) a permanently higher level of capital per worker
D) all of the above
E) both B and C.
Answer: E

22. Which of the following must occur to sustain economic growth in the long run?
A) technological progress
B) capital accumulation
C) a higher saving rate
D) all of the above
Answer: A

23. Which of the following will NOT cause an increase in aggregate output (Y) in the long run?
A) an increase in N

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ECON 2123: Macroeconomics    MC Practice Questions  Instructor: Fei DING 

B) an increase in K
C) an increase in technology
D) a reduction in the saving rate
E) none of the above
Answer: D

24. Decreasing returns to capital (K) implies that a 4% increase in K will cause
A) a reduction in output per worker (Y/N).
B) a reduction in K/N.
C) Y to increase by exactly 4%.
D) Y to increase by less than 4%.
E) no change in Y/N.
Answer: D

25. When an economy is operating at the steady state, we know that

A) steady state saving equals consumption.
B) steady state saving is less than total consumption.
C) steady state saving is equal to depreciation per worker.
D) steady state saving exceeds depreciation each year by a constant amount.
E) none of the above
Answer: C

26. In the absence of technological progress, an increase in the saving rate will cause which of the
following?
A) increase temporarily the growth of output per worker
B) increase the steady state growth of output per worker
C) decrease temporarily the growth of output per worker
D) decrease the steady state growth of output per worker
E) have an ambiguous effect on the growth of output per worker
Answer: A

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