ECON 202 Principles of Macroeconomics Q & A w/ Rationales, Exams of Macroeconomics

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ECON 20 2

Principles of

Macroeconomics

Q & A w/ Rationales

1. Suppose the government of Country A decides to increase its spending on public infrastructure by borrowing from the domestic market. How will this affect the aggregate demand, interest rate, and exchange rate in Country A in the short run? a) Aggregate demand will increase, interest rate will increase, exchange rate will appreciate. b) Aggregate demand will increase, interest rate will decrease, exchange rate will depreciate. c) Aggregate demand will decrease, interest rate will increase, exchange rate will appreciate. d) Aggregate demand will decrease, interest rate will decrease, exchange rate will depreciate. Answer: A. Rationale: An increase in government spending will shift the aggregate demand curve to the right, leading to a higher output and price level. To finance the spending, the government will borrow from the domestic market, increasing the demand for money and raising the interest rate. A higher interest rate will attract foreign capital inflows, increasing the demand for the domestic currency and causing it to appreciate.
2. Consider the following data for Country B: | Year | Nominal GDP (billions of dollars) | Real GDP (billions of 2010 dollars) | GDP Deflator | |------|------------------------------------|---------------------------- ---------|--------------|

rate is 20%. d) Labor force participation rate is 50%, unemployment rate is 16.67%. Answer: B. Rationale: The labor force participation rate is the ratio of the labor force to the working-age population, which is (40 + 10) / 60 x 100 = 66.67%. The unemployment rate is the ratio of the unemployed to the labor force, which is 10 / (40 + 10) x 100 = 16.67%. B: Which of the following best describes the concept of Gross Domestic Product (GDP)? a. The total value of all goods and services produced within a country's borders in a specific period b. The total value of all goods and services produced by a country's citizens, regardless of location c. The total income earned by a country's residents, including income from abroad d. The total value of all final goods and services produced within a country's borders in a specific period Answer: a. The total value of all goods and services produced within a country's borders in a specific period Rationale: Gross Domestic Product (GDP) measures the total economic output of a country, including goods and

services produced within its borders. What is the primary goal of monetary policy? a. To minimize unemployment b. To stabilize prices and control inflation c. To promote economic growth d. To reduce income inequality Answer: b. To stabilize prices and control inflation Rationale: The primary goal of monetary policy is to maintain price stability and control inflation, which helps to create a conducive environment for sustainable economic growth. When unemployment is at its natural rate, what can be inferred about the economy? a. The economy is operating at full employment b. The economy is experiencing cyclical unemployment c. The economy is in a recession d. The economy is in an expansionary phase Answer: a. The economy is operating at full employment Rationale: When unemployment is at its natural rate, it indicates that the economy is operating at full employment, with only frictional and structural unemployment present. What is the relationship between the interest rate and investment in an economy?

surplus indicate for a country? a. The country is exporting more goods and services than it is importing b. The country is importing more goods and services than it is exporting c. The country has a negative balance of trade d. The country's currency is overvalued Answer: a. The country is exporting more goods and services than it is importing Rationale: A trade surplus occurs when a country's exports exceed its imports, indicating a positive balance of trade. What is the Phillips curve used to illustrate in macroeconomics? a. The relationship between inflation and unemployment b. The impact of government budget deficits on economic growth c. The relationship between interest rates and investment d. The influence of exchange rates on international trade Answer: a. The relationship between inflation and unemployment Rationale: The Phillips curve demonstrates the inverse relationship between inflation and unemployment in an economy.

How does a contractionary fiscal policy aim to influence the economy? a. By increasing government spending and cutting taxes b. By decreasing government spending and raising taxes c. By decreasing the money supply and raising interest rates d. By increasing the money supply and lowering interest rates Answer: b. By decreasing government spending and raising taxes Rationale: A contractionary fiscal policy is designed to reduce aggregate demand by cutting government spending and increasing taxes, thereby helping to control inflation. What is the primary function of the Federal Reserve in the United States? a. To conduct monetary policy and regulate the financial system b. To oversee fiscal policy and manage government spending c. To set exchange rates and control international trade d. To manage the national debt and budget deficits Answer: a. To conduct monetary policy and regulate the financial system Rationale: The Federal Reserve's primary responsibilities include conducting monetary policy, supervising and

Rationale: According to classical economic theory, an increase in the minimum wage can lead to higher unemployment as businesses may reduce their workforce to manage higher labor costs. Which of the following is an example of an automatic stabilizer in an economy? a. Unemployment insurance b. Discretionary fiscal policy c. Quantitative easing d. Exchange rate intervention Answer: a. Unemployment insurance Rationale: Unemployment insurance is an automatic stabilizer that provides income support to individuals during economic downturns, helping to stabilize their consumption levels. How does an increase in government borrowing affect the loanable funds market? a. It increases the supply of loanable funds, leading to lower interest rates b. It decreases the supply of loanable funds, leading to higher interest rates c. It increases the demand for loanable funds, leading to higher interest rates d. It decreases the demand for loanable funds, leading to lower interest rates

Answer: b. It decreases the supply of loanable funds, leading to higher interest rates Rationale: An increase in government borrowing reduces the supply of loanable funds, putting upward pressure on interest rates in the loanable funds market. What is the impact of a depreciation of the domestic currency on a country's balance of trade? a. It will lead to a trade surplus as exports become cheaper for foreign buyers b. It will lead to a trade deficit as imports become more expensive for domestic buyers c. It will have no impact on the balance of trade d. It will lead to a decrease in the country's foreign exchange reserves Answer: a. It will lead to a trade surplus as exports become cheaper for foreign buyers Rationale: A depreciation of the domestic currency makes exports cheaper for foreign buyers, leading to increased export competitiveness and a potential trade surplus. How does a supply-side policy aimed at reducing business regulations impact long-term economic growth? a. It accelerates long-term economic growth by fostering innovation and entrepreneurship b. It hinders long-term economic growth by creating

2. Inflation is measured by which of the following indices? a) Consumer Price Index (CPI) b) Gross Domestic Product (GDP) c) Unemployment Rate d) Current Account Balance Answer: a) Consumer Price Index (CPI) Rationale: The Consumer Price Index is designed to measure changes in the average price level of goods and services consumed by households. It is commonly used as a measure of inflation.
3. Which of the following would result in an increase in the money supply? a) An increase in reserve requirements b) An increase in the discount rate c) Open market purchases of government securities by the central bank d) A decrease in required reserves Answer: c) Open market purchases of government securities by the central bank Rationale: When the central bank buys government securities in the open market, it injects money into the banking system, increasing the money supply. This action is known as open market operations.

4. The Phillips curve shows the relationship between which two macroeconomic variables? a) Inflation rate and aggregate demand b) Unemployment rate and interest rates c) Inflation rate and unemployment rate d) Interest rates and economic growth Answer: c) Inflation rate and unemployment rate Rationale: The Phillips curve illustrates the trade-off between inflation and unemployment rates. It suggests that there is an inverse relationship between the two variables. When the unemployment rate is low, inflation tends to be higher, and vice versa.
5. Aggregate demand is determined by the combination of which of the following? a) Consumption, investment, government spending, and net exports b) Saving, investment, government spending, and taxes c) Consumption, government spending, taxes, and net exports d) Saving, consumption, investment, and government spending Answer: a) Consumption, investment, government spending, and net exports Rationale: Aggregate demand represents the total spending on goods and services within an economy. It is influenced

unemployment.

8. Which of the following is a component of aggregate income according to the circular flow model of the economy? a) Savings b) Imports c) Government transfers d) Financial investments Answer: c) Government transfers Rationale: The circular flow model shows the flow of income and spending in an economy. Government transfers, such as social security payments and welfare benefits, are considered a part of aggregate income as they represent money received by households.
9. A trade deficit occurs when: a) The value of imports exceeds the value of exports b) The value of exports exceeds the value of imports c) The government budget deficit exceeds the trade surplus d) There is no difference between the value of imports and exports Answer: a) The value of imports exceeds the value of exports Rationale: A trade deficit refers to the situation when a country's imports surpass its exports. It means that the

country is purchasing more goods and services from abroad than it is selling, leading to a negative trade balance.

10. Which of the following is an example of expansionary monetary policy? a) Increasing the reserve requirements for banks b) Selling government securities in the open market c) Decreasing the money supply d) Decreasing the discount rate Answer: d) Decreasing the discount rate Rationale: An expansionary monetary policy aims to stimulate economic growth by increasing the money supply and reducing borrowing costs. Lowering the discount rate encourages banks to borrow more from the central bank, increasing the availability of credit.
11. The crowding-out effect refers to: a) The decrease in private investment due to government borrowing b) The decrease in government spending due to higher interest rates c) The decrease in consumption due to inflation d) The decrease in net exports due to a stronger currency Answer: a) The decrease in private investment due to government borrowing Rationale: The crowding-out effect occurs when increased

responsiveness of consumption to changes in disposable income.

14. Which of the following is a characteristic of an expansionary phase of the business cycle? a) High unemployment and low inflation b) High unemployment and high inflation c) Low unemployment and low inflation d) Low unemployment and high inflation Answer: c) Low unemployment and low inflation Rationale: During an expansionary phase of the business cycle, economic activity is increasing, leading to a decrease in unemployment. Additionally, low inflation indicates that prices are relatively stable.
15. The real interest rate is calculated as: a) Nominal interest rate minus inflation rate b) Inflation rate minus nominal interest rate c) Nominal interest rate divided by the inflation rate d) Inflation rate divided by the nominal interest rate Answer: a) Nominal interest rate minus inflation rate Rationale: The real interest rate adjusts the nominal interest rate for the impact of inflation. By subtracting the inflation rate from the nominal interest rate, the real interest rate reflects the purchasing power of the interest earned or paid.