Problem Set Description

Macroeconomic Theory - ECON2202.
05
Spring 2023
Problem Set 6
Problem Set Description
There are 20 questions and the PS maximum score is 10/10. Each correct answer is
worth 0.5 points, each incorrect answer is worth 0 points.
Problem Set Rules
Please, read the Problem Set questions in this document and answer by filling in the
PS6_AnswersSheet set using Microsoft Word or any similar compiler. Save your filled-in
PS6_AnswersSheet in PDF and upload the PDF file on Canvas by the stated due date.
Do not forget to write down your first and last names in the appropriate spaces in the
Answer Sheet.
Multiple Choice Questions

write the letter referring to the answer into the correct Answer Box in the Answer Sheet
True/False Questions
In the Answer Box in the Answer Sheet, write T if you think the statement is true, write F
if you think it is false.
Notice: I will only accept your answers if you submit them as stated above. Hand
written answers, scanned answers or any other format will not be accepted, and will
receive grade 0.
You are encouraged to cooperate with each other, but each student must submit their
own answers.
I do not accept late submissions.

The following questions relate to Chapter 9 of the textbook
Question 1: Multiple Choice (0.5 pt)
Output fluctuations are defined as

a. the amount of output when inflation is about 2 percent.
b. what an economy produces when it is at capacity.
c. the percentage difference between current output and potential output.
d. the amount of total output if all inputs were utilized at their long-run
sustainable levels.
e. the amount of output when unemployment is zero.
The Phillips curve in the text shows the ________ relationship between ________.
a. positive; the change in inflation and short-term economic fluctuations
b. negative; the change in inflation and short-term economic fluctuations
c. positive; inflation and unemployment
d. negative; inflation and unemployment
e. negative; the change in inflation and unemployment
In 1979, the inflation rate reached about 14 percent, due in part to ________. The
Board of Governors of the Federal Reserve under ________ decided to ________
interest rates, sending the economy into a ________.
a. a fall in oil prices; Paul Volcker; raise; recession
b. an increase in consumer spending; Paul Volcker; lower; recession
c. an increase in oil prices; Paul Volcker; raise; recession
d. an increase in oil prices; Paul Volcker; lower; boom
e. a fall in oil prices; Alan Greenspan; raise; recession
If an economy has a horizontal Phillips curve and experiences an expansion, inflation

a. falls. d. does not change.
b. rises sharply. e. falls sharply.
c. rises, but not very much.
Figure 9.3: Percent Change in U.S. Employment, 1980–2019
Based on the data presented in Figure 9.3, which of the following periods is/are likely a
recession/recessions?
a. 1984, 1988, and 2006 d. 2005

b. 1988 and 2014 e. Not enough information is given.
c. 1983, 1990, and 2001
The global savings glut can be defined as

a. the increase in foreign savings moving into the United States in search of
investment opportunities.
b. the rapid increase in personal saving rates in the United States leading to
increased lending to foreign countries.
c. the response of U.S. savings to low interest rates in the early 2000s.
d. the decline in saving rates globally.
e. the precautionary savings increase in response to the establishment of the
euro.
Securitization is defined as
a. bolstering defense spending.
b. making it more difficult to enter the United States illegally.
c. creating incentives for firms to protect proprietary information.
d. disallowing the use of collateral for loans.
e. lumping large numbers of financial instruments together and selling pieces
to different types of investors.
In September 2008, the LIBOR rate ________ this was largely due to the fact that
________. This ________ interbank loans
a. spiked; banks did not know what assets other banks had; increased the
risk premium on
b. fell; the Fed reduced the Fed funds rate; pushed up interest rates on
c. fell to zero; the federal funds market “dried up”; reduced the number of
d. equaled the discount rate; the Fed raised interest rates on reserves;
accelerated
e. equalized globally; exchange rates are fixed; reduced the exchange rate
premium
Question 9: True/False (0.5 pt)
Subprime loans are loans made to households that do not necessarily meet “standard”
lending restrictions.
According to the IS curve, when interest rates rise, ________ and ________.
a. governments borrow less; firms produce less
b. firms and households borrow more; firms produce less
c. firms and households borrow less; firms produce less
d. firms and households borrow more; firms produce more
e. firms and households borrow more; governments produce more
In the IS curve, consumption, government expenditure, exports, and imports are a

function of
a. expectations. d. the interest rate.
b. current output. e. output fluctuations.
c. potential output.
In the simple IS curve analysis, which of the following component of aggregate demand
is a function of both the real interest rate and the potential output?
a. exports d. investment
b. consumption e. imports
c. government expenditures
In the long run, the

a. federal funds rate equals the 10-year bond rate.
b. marginal product of capital is greater than the real interest rate.
c. marginal product of capital equals the nominal interest rate.
d. marginal product of capital equals the real interest rate.
e. marginal product of capital is less than the real interest rate.
In the IS curve Y!t = a - b ( R t - r ), the term a is called

a. the tax rate.
b. the elasticity of output with respect to the interest rate.
c. a consumption expenditure shock.
d. the deviation of the real interest rate to the marginal product of capital.
e. an aggregate demand shock.
Suppose a c = 0 .6 0 , a i = 0 .2 0 , a g = 0 .2 0 , a e x = 0 .1 0 , and a im = 0 .2 0 . For any given

R t , a equals ________ and the economy ________.
a. 0; is in its long-run equilibrium
b. 0.90; has experienced a positive aggregate demand shock
c. 0.30; has experienced a positive aggregate demand shock
d. -0.10; has experienced a negative aggregate demand shock
e. 1.00; is in its long-run equilibrium
The permanent-income hypothesis suggests that people will base their consumption on
their
a. permanent incomes only.
b. temporary incomes more than their permanent incomes.
c. permanent incomes more than their temporary incomes.
d. temporary incomes only.
e. future incomes.
Consider Figure 11.7 of the life-cycle hypothesis. Area(s) ________, and area(s)
________.
a. A is a period of dissaving; C is a period of saving
b. C is a period of dissaving; B is a period of saving
c. B is a period of dissaving; A and C are periods of saving
d. A and C are a period of dissaving; B is a period of saving
e. Not enough information is given.
When the multiplier is included in the IS curve, a

a. demand shock has a larger impact on short-run fluctuations than with the
standard IS curve.
b. change in the real interest rate has a smaller impact on short-run
fluctuations than with the standard IS curve.
c. demand shock has a smaller impact on short-run fluctuations than with the
standard IS curve.
d. change in taxes has no impact on short-run output.
e. change in the marginal product of capital has a smaller effect on short-run
fluctuations in output than with the standard IS curve.
When the real interest rate rises, there is leftward movement along the IS curve.
When there is a change to potential output, the IS curve will shift.

Ungraded Questions – Just try and solve them if you wish.
Question U1: Ungraded
Suppose the parameters of the IS curve are a i = 0 , b = 0 .5 , r = 3 % , and the real interest
rate is initially R 3 percent.
(a) Is the economy in its long-term equilibrium? Explain.
(b) Suppose the real interest rate falls to 2 percent. What happens to the short-run
equilibrium, holding everything else constant?
(c) What happens to the short-run equilibrium if a g falls 3 percent, holding everything
else constant?
(d) What occurs if the marginal product of capital rises to 5 percent, holding everything
else constant? What would cause this to happen?
Explain what happens to the macroeconomy in the short run in each of the following
circumstances:
(a) There is a deep recession in Europe.
(b) Housing values rise above their trend.
(c) Mortgage lenders raise interest rates.
(d) The government decides to close 20 percent of its military bases around the country.
(e) The long-run interest rate rises.
According to Ricardian equivalence, what should be the long-run effect of the temporary
tax cuts implemented in George H. Bush’s presidency?

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Macroeconomic Theory - ECON2202.

Problem Set Description

Problem Set Rules

Multiple Choice Questions

I do not accept late submissions.

Question 1: Multiple Choice (0.5 pt)

Output fluctuations are defined as

Question 2: Multiple Choice (0.5 pt)

Question 3: Multiple Choice (0.5 pt)

Question 4: Multiple Choice (0.5 pt)

If an economy has a horizontal Phillips curve and experiences an expansion, inflation

Figure 9.3: Percent Change in U.S. Employment, 1980–2019

a. 1984, 1988, and 2006 d. 2005

The following questions relate to Chapter 10 of the textbook

Question 6: Multiple Choice (0.5 pt)

The global savings glut can be defined as

Question 8: Multiple Choice (0.5 pt)

Question 9: True/False (0.5 pt)

The following questions relate to Chapter 11 of the textbook

Question 10: Multiple Choice (0.5 pt)

In the IS curve, consumption, government expenditure, exports, and imports are a

Question 12: Multiple Choice (0.5 pt)

Question 13: Multiple Choice (0.5 pt)

In the long run, the

Question 14: Multiple Choice (0.5 pt)

In the IS curve Y!t = a - b ( R t - r ), the term a is called

Suppose a c = 0 .6 0 , a i = 0 .2 0 , a g = 0 .2 0 , a e x = 0 .1 0 , and a im = 0 .2 0 . For any given

Question 16: Multiple Choice (0.5 pt)

Question 17: Multiple Choice (0.5 pt)

When the multiplier is included in the IS curve, a

Question 19: True/False (0.5 pt)

Question 20: True/False (0.5 pt)

When there is a change to potential output, the IS curve will shift.

Question U1: Ungraded

Question U2: Ungraded

Question U3: Ungraded

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