Chapter 2 - Macro

Question 1

The convergence hypothesis states:

a) Countries with lower levels of GDP per capita will grow faster on average than those with higher levels until they catch up to the leaders.

b) Countries converge to the same steady-state GDP per capita through the elimination of inefficient production.

c) Modern economic growth eliminates countries comparative advantages as they become more like each other.

d) None of the above.

Question 2

The convergence hypothesis is confirmed by data from advanced economies but cannot be confirmed by data that mixes rich with poor countries. This is because:

a) ...the business cycles of advanced economies converged during the first third of the twentieth century.

b) ...prices in developing countries are sticky in the long-run whereas prices in advanced economies are flexible in the long-run.

c) ...the simple Solow model does not consider complementary inputs such as infrastructure and human capital.

d) ...there are significant barriers preventing international factor mobility.

Question 3

Which of the following is not an implication of externalities to human capital?

a) Basic education should be made compulsory.

b) Human capital should be paid better in poor countries.

c) Educational subsidies are economically justifiable.

d) Human capital would not necessarily be subject to decreasing returns in the aggregate.

Question 4

What is the social trade-off involved in patent protection?

a) A longer patent period means that less knowledge will be available for use.

b) The higher the cost of a patent application, the fewer patent applications will be made.

c) Increasing the cost of new knowledge through patent licensing will decrease the demand to use new knowledge.

d) Less than full-exploitation of new knowledge by potential users is the cost of increasing the incentive for inventors to produce new knowledge.

Question 5

The explanation offered in this chapter for why poor nations appear caught in a poverty trap is that...

a) ...patents restrict access to new technologies to those nations that can afford the fees.

b) ...low human capital endowments lead to low rates of diffusion of technological innovations.

c) ...multinational corporations do not reinvest their profits from poor nations in the poor nations.

d) ...all of the above.

Question 6

In an economy where capital were not subject to decreasing marginal returns, which of the following statements would NOT be true?

a) An increase in the rate of saving (s) could lead to an increase in the rate of growth of output.

b) Policies that would only lead to a one-time increase in the level of output could lead to a permanent increase in the rate of output growth.

c) The economy would not converge to a unique steady state capital to effective labour ratio.

d) The golden rule rate of saving would be zero.

Question 7

The presumption that costly new knowledge would be undersupplied by private markets is based on two essential characteristics of new knowledge: it is (A) ______ and (B) _______.

a) A: non-rivalrous
B: non-excludable

b) A: non-rivalrous
B: excludable

c) A: rivalrous
B: non-excludable

d) A: rivalrous
B: excludable

Question 8

Long-term waves of economic activity are associated with…

a) …cycles of economic expansion and contraction.

b) …variations in fertility across generations.

c) …major innovations followed by imitation and further improvements.

d) …alternating historical periods of economies and diseconomies of scale.

Answer1. a) Countries with lower levels of GDP per capita will grow faster on average than those with higher levels until they catch up to the leaders.2. c) ...the simple Solow model does not consider complementary inputs such as infrastructure and human capital.3. b) Human capital should be paid better in poor countries.4. d) Less than full-exploitation of new knowledge by potential users is the cost of increasing the incentive for inventors to produce new knowledge.5. b) ...low human capital endowments lead to low rates of diffusion of technological innovations.6. d) The golden rule rate of saving would be zero.7. a) A: non-rivalrous               B: non-excludable    8. c) …major innovations followed by imitation and further improvements.

Chapter 1-Macro Economics...

Question 1

Macroeconomics distinguishes between the real economy and the…

a) …monetary economy.

b) …virtual economy.

c) …normative economy.

d) …underground economy.

Question 2

During business cycles the opposite of a trough is …

a) …an inflation

b) …a hyperinflation.

c) …a trend.

d) …a peak.

Question 3

According to the analysis of the British economist John Maynard Keynes,…

a) …markets coordinate supply and demand so that a policy of laissez-faire would prevent recessions.

b) …economic fluctuations were the cumulative result of mistakes made by businesses and households in an uncertain world.

c) …government demand could be used to smooth fluctuations in aggregate output and income.

d) …supply creates its own demand through the circular flow of economic activity.

Question 4

In order to influence spending on goods and services in the short-run, monetary policy is directed at directly influencing…

a) …unemployment rates.

b) …inflation rates.

c) …interest rates.

d) …economic growth rates.

Question 5

"Inflation is generally procyclical" means…

a) …"higher rates of inflation tend to precede periods of high economic growth."

b) …"the rate of inflation tends to rise in periods of high economic growth and fall in periods of low economic growth".

c) …"prices on average rise in an economic expansion but fall after a business cycle peak."

d) "…more inflation results in less capacity utilization."

Question 1

Macroeconomics distinguishes between the real economy and the…

answer:

a) …monetary economy.

Feedback:

Spending depends upon both the volumes of goods and services as well as their prices denominated in money.

Question 2

During business cycles the opposite of a trough is …

answer:

d) …a peak.

Feedback:

Together these are the cyclical turning points.

Question 3

According to the analysis of the British economist John Maynard Keynes,…

 answer:

c) …government demand could be used to smooth fluctuations in aggregate output and income.

Feedback:

Keynes saw the key to offsetting falls in private demand in expansionary fiscal policy (tax cuts or spending increases).

Question 4

In order to influence spending on goods and services in the short-run, monetary policy is directed at directly influencing…

 answer:

c) …interest rates.

Feedback:

Interest rates affect a household's decision how much to save and how much to consume. Hence they affect spending on goods and services. "Short-run" turns out to be an important qualifier.

Question 5

"Inflation is generally procyclical" means…

 answer:

b) …"the rate of inflation tends to rise in periods of high economic growth and fall in periods of low economic growth".

Feedback:

Note that according to the Burns-Mitchell diagram for price inflation, it actually lags the peak of the business cycle by a quarter. Note choice "c" confuses the price level with the rate of change of the price level (i.e. inflation). Deflation in the modern world does not generally occur after the peak of the business cycle, rather a slowing down of the rate of inflation can be expected