Collection of Multiple-Choice Questions Units 1 to 4

*Note: an exogenous variable does not depend on other variables like GDP (Y) or
the interest rate (i). An endogenous variable does depend on other variables like
GDP (Y) or the interest rate (i).

GDP def = nominal / real GDP

Unit I: Main Macroeconomic Indicators

1. In Macroland they only produce necklaces and seeds. The necklaces
are made with seeds. It takes 1 kg of seeds to build a necklace. In 2017,
300 necklaces and 1000 kilograms of seeds were produced. The seeds
that are not used to produce necklaces are used as a final consumer
good. The seed industry does not use intermediate goods. The
necklaces were sold for 10 euros and the seeds for 5 euros. With this
information we know that:
A) the added value of the collar industry is 1500 euros
B) GDP is equal to 6500 euros
C) the added value of the seed industry is 5000 euros
D) All options are correct.

2. Suppose that a country that uses the United States system to

calculate official unemployment statistics has 100 million people, of
whom 50 million are of working age. Of these 50 million, 20 million have
jobs. Of the rest: 10 million are actively looking for work; 10 million
would like jobs but are not looking; and 10 million don't want a job at
all. The type of labor force participation is
A) 0.6 active/ working age
B) 0.8
C) 0.4
D) 0.3

3. Suppose that nominal GDP was $ 1200 billion in 1990 and $ 2000
billion in 1995. The GDP deflator was 1.00 in 1990 and 1.50 in 1995.
From this we can infer that, between 1990 and 1995
A) prices increased by 66%.
B) real GDP remained constant. NO
C) real GDP increased by approximately 11%. YES
D) nominal GDP increased by 33%. NO

4. Suppose that the average Annual Consumer Price Index (CPI) in a

given country shows the following values, 2011 = 100, 2012 = 110, and
2013 = 115.5. In this case, we can say that:
A) Average annual inflation in 2013 is lower than in 2012. YES
B) The price level is decreasing during the period 2011-2013. Maybe
C) Inflation is accelerating during the period 2011-2013. Don t know 2011
D) Average annual inflation in 2013 is higher than in 2012. NO

5. See the table. The growth rate of real GDP in year 2 is:
TABLE
Year 1 (Base year) Year 2
Q P Q P
Apples 100 0.05$ 130 0.06$
 Oranges 300 0.03$ 270 0.04$

A) -4.2%
B) 4.3% real GDP = quantity * base year P
C) -2.3%
D) 2.4%

6. Consider a farmer who sells raw milk for € 500 to a dairy, that the
dairy sells made cheese for € 1,500 to a grocery wholesaler. In turn, the
grocery wholesaler sells the cheese for € 1,900 to a supermarket, and
the supermarket sells it to the final consumer for € 2,190. These
transactions contribute to GDP by
A) € 500 + € 1,000 + € 1,900 + € 2,190 = € 5,590.
B) € 2190 - € 1900 = € 290.
C) € 2,190 - € 500 = € 1690.
D) € 500 + € 1,000 + € 400 + € 290 = € 2,190. Sum of added value

7. The component least likely to be included in a measurement of gross

domestic product (GDP) is:
a) the value added of a store that sells antiques. NO
b) the annual salary of a local police officer. NO
c) the environmental damage caused by production. YES
d) the production of a new car. NO

8. The Phillips curve of an economy is given by the following equation:

t-t-1 = 1.2 - 0.2ut

where t is the inflation rate (in percentage) and u t is the unemployment rate (in
percentage). According to the equation for the Phillips curve the NAIRU (Non
Accelerating Inflation Rate of Unemployment) of this economy is:

To find the NAIRU, we set πt−πt−1=0

A) 4%
B) 5%
C) 6%
D) 7%

9. The equation of the Okun’s Law for the country of Jinpin is

ut-ut-1 = 5 – 1.4grgdpt

Where ut is the unemployment rate (in percentage) and grgdp t is the growth rate
of GDP (in percentage). According to this equation if the economic authorities of
Jinpin seeks to reduce the unemployment rate by 1 percent point, then GDP
should change by:

-1 = 5 -1.4 grgdpt

Then we solve this equation

A) 4.3%
B) 3.6%
C) -3.4%
D) 3.4%

10. Suppose you are provided with the following data for your country
for a particular month: 200 million people are working, 20 million are
not working but are looking for work, and 40 million are not working
and have given up looking for work (not in labor force ). The official
unemployment rate for that month is

1. Labor Force Definition

The labor force includes:

 Employed: Individuals who are currently working.

 Unemployed: Individuals who are not working but are actively looking for work.

A. 7.7%.
B. 9.1%.
C. 10%.
D. 23%.

11. Suppose a country using the United States' system of calculating

official unemployment statistics has 100 million people, of whom 50
million are working age. Of these 50 million, 20 million have jobs. Of the
remainder: 10 million are actively searching for jobs; 10 million would
like jobs but are not searching; and 10 million do not want jobs at all.
The labor force is

The labor force consists of:

1. People who are employed (those with jobs).

2. People who are unemployed but actively seeking work.
3. Not in the Labor Force: Individuals who are not employed and are not actively looking for work.

A. 20 million.
B. 40 million.
C. 60 million.
D. none is correct

12. An individual is considered unemployed if he or she:

A. works only part-time.
B. works full-time in a family business.
C. is not working and is not looking for work . YES us way
D. none is correct

13. In a given year, suppose a company spends $100 million on

intermediate goods and $200 million on wages, with no other expenses.
Also assume that its total sales are $800 million. The value added by
this company equals
A. $200 million.
B. $300 million.
C. $500 million.
D. $700 million.
14. During the mid-1980s, we observed a significant reduction in
international oil prices. In the United States, we would expect that this
reduction in oil prices would cause
A. a larger reduction in the CPI compared to the GDP deflator.
as the direct impact of falling oil prices is felt by consumers first and foremost
and therefore CPI
B. an equal reduction in the CPI and GDP deflator.
C. a larger reduction in the GDP deflator compared to the CPI.
D. no change in the CPI and a reduction in the GDP deflator. NO

15. 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.
A reduction in the GDP deflator indicates that the overall price level in Japan
decreased.
D. both real GDP and the overall price level decreased during these periods.

16. 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. none of the options is necessarily correct YES

17. Suppose nominal GDP increased in a given year. Based on this

information, we know with certainty that
A. real output has increased. YES
B. the price level (GDP deflator) has increased. YES
C. real output and the price level (GDP deflator) have both increased.
D. either real output or the price level (GDP deflator) have increased.
increase in nominal GDP = either an increase in real output / an increase in the
price level, or both.
Unit 2: The Goods Market
18. According to the goods market model in a closed economy with
exogenous investment, which of the following events will cause a
reduction in equilibrium production?
A) an increase in taxes. YES
B) an increase in the marginal propensity to save. YES
C) a reduction in the marginal propensity to consume. YES
D) All of the above

19. Buybuyland is a country with a marginal propensity to consume

equal to 0.80. Since unemployment in the country is high, the
government is trying to increase production. They have calculated that
if they increase production by 500 units, this increase will be good
enough to reduce the unemployment rate by 2 points. Using our basic
macroeconomic model of the goods market in a closed economy with
exogenous investment, which of the following policies will most
efficiently help the government to achieve this increase in production
and this reduction in unemployment?
A) Increase government spending by 100 units. YES
B) reduce taxes by 100 units
C) increasing public spending by 400 units or reducing taxes by 400 units would
have the same desired result
D) increase public spending by 400 units

20. If disposable income in a country increases by $ 100 and aggregate

consumption increases by $ 85 in the same period, ceteris paribus (all
else equal), we can conclude that
MPC = change C/ Change disposable I

A) a change in disposable income is induced by a change in consumption.

B) the marginal propensity to consume is 0.15. NO
C) $ 15 is autonomous consumption.
D) the marginal propensity to consume is 0.85.

21. Assume that the consumption function is given by C = 300 + 3/4 (Y -

T). Investment (I) does not depend on Output. It is a closed economy.
With this data we know that if there is a drop in taxes of 100 UNITS,
then the level of GDP
a) increases by less than 400 units. 375
b) drops by 400 units. NO
c) increases by more than 400 units.
d) increases by 100 units NO

22. The economy of Jinpin, a closed economy, is described by the

following equations:
Z=C+I+G
C = 250 + 0.3YD
I = 100 + 0.2Y- 1000i
G = 200, T = 100, i = 0.1
The equilibrium level of production of this country is
A) 1000
B) 1250
C) 1500
D) None of the options is correct

23. In an open economy, which of the following represents the domestic

demand for goods?
A) C + I + G
B) C + I + G + X
C) C + I + G - IM
D) C + I + G + X - IM

24. In an open economy, which of the following will always cause an

increase in net exports?
A) a reduction in domestic output YES
B) an increase in government spending NO
C) an increase in investment NO
D) all of them

25. In an open economy, which of the following will occur as a result of

a tax increase in the short-run?
A) private saving increases
B) investment increases
C) the trade balance improves
This is correct. When taxes increase, consumption falls, including
consumption of imported goods. This tends to reduce imports, improving the
trade balance (exports minus imports).
D) the trade balance worsens

26. An open economy is defined by

C=100+0.8(Y-T)
I=400
X=0.3Y*
IM=0.3Y
T=1000, G=1000, Y*=1000

The equilibrium level of production is:

A) 2000
B) 2200
C) 2400
D) None is correct

27. We have the following information about a closed economy: in a

given moment of time, Z=C+I+G, I=1000, C=2000 and T=G=0. We know
that
A. Equilibrium output is 3000
B. The equilibrium output is larger than 3000
C. The equilibrium output is lower than 3000
D. we cannot say anything about equilibrium output without the marginal
propensity to save
28. In the Republic of Jinpin G=2000, T=1000 and c1=0.8. The
government wants to equilibrate the budget by reducing G by 500 and
by increasing T by 500. Assuming the economy is closed and investment
is exogenous, the effect of such policy on equilibrium output will be…
Just find the multiplier

A. -4000
B. -5000
C. -4500
D. It cannot be calculated with the data available

29. In a closed economy with exogenous investment, suppose the

marginal propensity to consume equals .8 (i.e., c 1 = 0.8). Given this
information, which of the following events will cause the largest
increase in output?
Just find the multiplier
A. T decreases by 200
B. G increases by 200
C. I increases by 150
D. both increase of T by 200 or increase of G by 200 lead to the same result

30. Saveland is a country with a high marginal propensity to save and

Buybuyland is a country with a much lower marginal propensity to save.
A collapse in world stock markets is raising fears about the future of
the world economy which in turn is generating a big fall in investment
and consumption in all countries. Regarding the economies of Saveland
and Buybuyland we can expect that (suppose the economy is closed and
investment is exogenous):
A. the fall in equilibrium output will be higher in Buybuyland YES
B. the increase in equilibrium output will be higher in Saveland
C. the fall in equilibrium output will be similar in both countries
D. the fall in equilibrium output will be lower in Buybuyland

31. Changes in GDP in the short run are caused primarily by

A. demand factors.
B. supply factors.
C. technology.
D. all of them

32. Suppose the United States economy is represented by the following

equations:
Z=C+I+G
C = 500 + .5YD
T = 1000
I = 600
G = 2000
If current production is 4000, then we know that output will tend to
A. Increase as demand is lower than current output NO
B. Decrease as demand is lower than current output Yes
C. Decrease as demand is higher than current output No
D. Increase as demand is higher than current output No

33. Consider the following economy:

C = 1000 + 0.8YD,
I = 500,
G =300, T = 200,
X=0.3Y*, IM=0.3Y.
What is the value of net exports (NX) in this economy if Y*=5000?

NX = X - IM
A. -200
B. -400
C. -360
D. None of the options is correct.
Unit 3: The Money Market
34. In Macroland, a closed economy, economic agents increase their
demand for money due to a stock market crisis. If the central bank
decides to keep the money supply constant, we would expect that
A) the interest rate decreases and investment and production increase NO
B) the interest rate increases, investment decreases and production increases
Maybe
C) the interest rate decreases, investment increases and production decreases
NO
D) the interest rate increases and investment and production decrease Maybe

35. Which of the following will generate an increase in the demand for
money?
A) a fall in nominal income ??
B) an increase in interest rates NO
C) an increase in prices NO
Entraine une demande croissante de la demande d argent car augmentation des P ==
couts
D) None of the above

36. The demand for money of an economy is M d=$Y(0.5-4i), the

reserve ratio of this economy is =0.1. If the Central Banks wants to fix
the interest rate at 5% the the suppy of Central Bank's money (Hs)
should be
A. 2400
B. 240
C. 1400
D. It cannot be computed with the data available

37. The money supply will tend to fall when which of the following
occurs?
A. a central bank sale of bonds YES
B. a decrease in the ratio of reserves to deposits NO
C. all of them NO
D. none of them

38. After an increase if the marginal propensity to save, the demand for
money ________ .
A. increases NO
B. decreases
C. remain unchanged Maybe
D. it may increase or decreae NO
Unit 4: The IS-LM Model
39. For this question, suppose for simplicity 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 make investment to increase.
B) will have no effect on production.
C) will cause a reduction in production and will have no effect on the interest
rate.
D) will make investment to decrease. YES

40. Suppose there is a simultaneous fiscal expansion and a monetary

expansion. We know for sure that:
A) production will increase and the interest rate will decrease.
B) production will decrease.
C) both production and the interest rate will increase.
D) the interest rate will increase.

41. In a closed economy in the short term, if the investment does not
react to changes in the interest rate, then
A) Fiscal policy is ineffective.
B) Monetary policy is ineffective. YES
C) Monetary policy is effective.
D) None of the above.

42. In the IS-LM model, which of the following shocks are consistent
with an increase in the consumption level and, at the same time, a
constant GDP level in equilibrium?
a) an increase in taxes, accompanied by the purchase of bonds in the open
market by the Central Bank.
b) an increase in taxes, accompanied by the sale of bonds in the open market by
the Central Bank.
c) a cut in taxes, accompanied by a purchase of bonds in the open market by the
Central Bank.
d) a cut in taxes, accompanied by the sale of bonds in the open market by the
Central Bank.

43. The LM curve shifts downward, in which one of the following

situations?
A) an increase in the money supply
B) a decrease in the reserve ratio YES
C) a purchase of bonds by the central bank
D) all of the above

44. If spending is NOT responsive to changes in the interest rate, then

the
A) IS and LM curves are vertical.
B) IS curve is vertical.
C) IS curve is vertical and the LM curve is horizontal.
D) LM curve is vertical.

45. Which of the following occurs as the economy moves leftward along
a given IS curve?
A) an increase in the interest rate causes a reduction in the money supply. NO
B) an increase in the interest rate causes money demand to increase. NO
C) an increase in taxes causes a reduction in demand for goods.
D) an increase in the interest rate causes investment spending to decrease. YES

46. Ratovian is a closed economy. The government wants to reduce the

budget deficit and, therefore, decides to increase taxes. At the same
time, the Governor of the Central Bank decides to increase the Money
Supply. Then, in the short run, at equilibrium, it must be that
a) the interest rate increases.
b) the interest rate drops.
c) output decreases.
d) output increases.

47. The IS-LM model predicts that a contractionary monetary policy

would not decrease output if:
A. the IS curve is completely interest inelastic YES
B. the demand for money is infinitely interest elastic NO
C. the economy is already in recession
D. the LM curve is steeper than the IS curve.

48. If investment does not depend on the interest rate, then the ________
curve is ________.
A) IS; vertical
B) IS; horizontal
C) LM; vertical
D) LM; horizontal

49. Suppose we know that in the Spanish economy C = 500 + 0.8YD and
T= 1000 and G=2000. The economy is in equilibrium with Y=11500,
then we know that total saving in this economy is
A. -1000
B. 1600
S = Y- C - T
C. 600
D. It cannot be computed with the data available

50. Which of the following about IS relation is not correct?

A. It is the the relation between interest rate and savings.
B. It is the equilibrium condition for the goods market.
C. It stands for "Investment equals saving."
D. It shows what firms want to invest must be equal to what people and the
government want to save.

51. An economy is defined by the following equations:

C=500+0.3(Y-T)
I=300+0.2Y
T=1000, G=2000, X=0, IM=0.
The government increases G by 100, what effect will this increase of G have on
equilibrium output?
A. increase by 100
B. increase by 500
C. increase by 200
D. none is correct
52. An economy is defined by the following equations:
C=500+0.3(Y-T)
I=300+0.2Y
T=1000, G=2000
X=0.3Y*, IM=0.3Y.
Suppose G increases by 200, what effect will this increase have on total
consumption?
A. increase by 200
B. increase by 400
C. increase by 250
D. none is correct

53. An economy is defined by the following equations:

C=500+0.3(Y-T)
I=300+0.2Y
T=1000, G=2000, X=0, IM=0.
The equation of the aggregate demand for domestic goods (Z) is:
A. Z=3500+0.5Y
B. Z=2500+0.3Y
C. Z=2500+0.5Y
D. none is correct

54. If investment spending depends only on output, and not on the

interest rate, then a decrease in the budget deficit (assume a flat LM)
A. will cause investment spending to decrease.
B. will cause investment spending to increase.
C. may cause investment spending to increase, but only if investment is not
very sensitive to interest rate changes.
D. will cause investment spending to rise or fall, depending on the reason for
the drop in the budget deficit.

55. In the IS–LM model, the impact of an increase in government

purchases in the goods market has ramifications in the money market,
because the increase in income causes a(n) ______ in money ______.
A. increase; supply
B. increase; demand
C. decrease; supply
D. decrease; demand

56. If taxes are raised, but the Central Bank prevents income from
falling by raising the money supply so that production (Y) remains
constant, then:
A. both consumption and investment remain unchanged.
B. consumption rises but investment falls
C. investment rises but consumption falls
D. both consumption and investment fall

57. During the financial crisis of 2008–2009, many financial institutions

stopped making loans even to creditworthy customers, which could be
represented in the IS–LM model as a(n):
A. expansionary shift in the IS curve
B. contractionary shift in the IS curve
C. expansionary shift in the LM curve
D. contractionary shift in the Lm curve
58. What are the most likely effects of an decrease of government
spending policy jointly with an expansionary monetary policy?
A. Investment and consumption must increase
B. investment must increase, consumption must decrease
C. consumption must decrease, investment may increase or decrease
D. investment and consumption may increase or decrease or remain
constant

59. Consider the following economy:

C = 1000 + 0.5YD,
I = 500 + 0.3Y – 100i,
G =300,
T = 200,
X=0, IM=0
What is the equation for the IS curve?
A. Y = 2000 – 100i
B. Y = 200 – 125i.
C. None is correct
D. Y = 2500 – 125i.

60. The equilibrium level of output could increase if ...

A. the European Central Bank sales bonds
B. the European Central Bank buys bonds
C. the government increases taxes
D. none is correct

61. Suppose fiscal policy makers implement a policy to reduce the size
of a budget deficit. Based on the IS-LM model, we know with certainty
that the following will occur as a result of this fiscal policy action.
A. Investment spending will decrease. NO
B. Investment spending will increase.
C. There will be no change in investment spending.
D. Investment spending may increase, decrease, or not change. NO
When fiscal policy is implemented to reduce the budget deficit, typically through either cutting
government spending (G) or increasing taxes (T), the IS curve will shift to the left, indicating a
reduction in aggregate demand and output.

62. 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 YES CHANGE IN OTPUT
D. an increase in investment

63. We know with certainty that a tax increase must cause which of the
following?
A. an increase in investment
B. a reduction in investment YES
C. no change in investment
D. none is correct
64. An increase in the desire to save by households will cause (suppose
that I is exogenous)
A. a reduction in output in the short run. MAYBE
B. a reduction in investment in the short run. MAYBE
C. an increase in output in the short run. NO
D. no change in investment and no change in output in the short run. NO

65. In the republic of Jipin, public saving is -5% of GDP and private
saving is 5% of GDP, assuming that the economy in this country is
closed and considering the condition of equilibrium in the goods market
in terms of investment equals saving,
A. Total investment in Jipin is 10% of GDP
B. Total Investment in Jipin is necessarily negative
C. Total Investment in Jipin is zero
D. Total investment in Jipin is 5% of GDP

66. Suppose the consumption equation is represented by the following:

C=250+0.75YD, then private savings (S) is
Private Saving = YD - C
A. S=-250+0.25YD.
B. S=-250+0.75YD. This
C. S=-1000+0.25YD.
D. S=-1000+0.75YD Tis

S= Y-C- T
S= Y- 250 -0,75Yd

67. What are the most likely effects of an increase of taxes jointly with
an expansionary monetary policy if in net terms production ends up
unaffected after the application of both policies?
A. Investment and consumption must increase
B. investment must increase, consumption must decrease Maybe
C. consumption must decrease, investment may increase or decrease Maybe
D. consumption must decrease, investment must increase

68. Suppose that investment is exogenous, then an increase of private

savings (S) will have which one the following effects in the short run?
A. Investment, consumption and output decreases.
B. Investment must increase, consumption and output must decrease.
C. Investment and consumption remains constant, output decreases.
D. Consumption and output must decrease, investment does not change.

69. Suppose that investment depends on output, then an increase of

private savings (S) will have which one the following effects in the short
run?
E. Investment, consumption and output decreases.
F. Investment must increase, consumption and output must decrease.
G. Investment and consumption remains constant, output decreases. NO
H. Consumption and output must increase, investment does not change. NO

70. Consider the following economy:

C = 1000 + 0.5YD,
I = 500 + 0.3Y – 100i,
G =300,
T = 200,
X=0, IM=0
After an increase of G of 100 Billion consumption changes by ____.
Need to calculate the multiplier
A. 200 Billion
B. 250 Billions
C. 300 Billion
D. None of the options is correct