1.

Your test’s form is:

a) A
b) B
c) C
d) D
e) E

2. Company XYZ announces today that its current dividend is $10 and that it will grow at the annual rate of 3%.
Investors currently require a 7% return for holding stocks of companies with XYZ’s characteristics. According to
the Gordon Model, what should be the price of XYZ’s stock?
A. $10
B. $100
C. $242.50
D. $250
E. $257.50

3. Suppose that the marginal propensity to consume is 0.5. Now suppose that government spending increases
by 5 dollars. Assume there are no taxes. What happens to the level of GDP?

A. Decreases by 10 dollars.
B. Increases by 10 dollars.
C. Increases by 5 dollars.
D. Decreases by 5 dollars.
E. There is no change.

4. Suppose the marginal propensity to consume is 0.75 and the marginal tax rate is 0.3. If the government wants
GDP to increase by $10 million, by how much must they change autonomous taxes?

A. +10.33 million
B. +6.33 million
C. +3.00 million
D. ‐3.00 million
E. ‐6.33 million

5. According to the Taylor Rule (MR schedule), if inflation falls and the target inflation rate increases what
happens to the nominal interest rate?

A. The nominal interest rate increases

B. The nominal interest rate falls
C. The nominal interest rate remains unchanged
D. Indeterminate
E. The nominal interest rate initially falls and then increases back to its starting value
25. Suppose the economy is in a recession. Which of the following policies will not help reduce the magnitude
of the output gap?

A. An increase in the money supply

B. A decrease in taxes
C. A decrease in government spending
D. A decrease in the target interest rate
E. None of the above

26. Which of the following choices has a different effect than the others on the IS curve?
A. a decrease in stock prices
B. a decrease in consumer confidence
C. a decrease in tax rates
D. a decrease in wealth
E. they all have the same effect

27. Which of the following choices has a different effect than the others on the position of the MR curve?
A. An increase in the actual inflation rate
B. A decrease in the target inflation rate
C. An discretionary (exogenous) increase in the target interest rate
D. An increase in the output gap
E. None of the above. They all have the same effect on the MR curve.

28. Which of the following does not shift the AD curve?

A. a negative shock in the stock markets
B. an increase in government spending
C. a decrease in consumer confidence
D. an increase in the target inflation rate
E. an increase in the actual inflation rate

29. If real GDP is below potential GDP, which of the following can eliminate the output gap?
A. a decrease in government spending
B. an increase in tax rates
C. an increase in the level of technology
D. a decrease in the target inflation rate
E. none of the above. They all exacerbate the output gap

30. Which of the following is not true in the short run?

A. an increase in government spending shifts AD right
B. a crash in the stock markets shifts AD left
C. higher inflation does not shift AD
D. a discretionary increase in nominal interest rate shifts AD right
E. a decrease in real interest rate shifts AD right
41. Suppose that you have purchased a two‐year coupon bond with a 5% yield at face value; investors have been expecting
that over the next two years i1=i2=0.05. At the end of the first year, interest rates decrease unexpectedly, i.e. i2 decreases.
Which of the following will be true?
I. The holding period return for the first year will be more than 5%
II. The bond price after 1 year will decrease together with the interest rate
III. At the end of the second year, the bond’s price will be less than face value
IV. The holding period return for the second year only will be less than 5%

A. I and II
B. I and IV
C. II and III
D. III and IV
E. II and IV

42. Jelly and peanut butter are complements. Suppose that a global drought dramatically reduces the supply of peanuts.
Ceteris paribus then:

A. the price of peanuts will rise and the price of jelly will rise
B. the price of peanuts will fall and the price of jelly will rise
C. the price of peanuts will fall and the price of jelly will fall
D. the price of peanuts will rise and the price of jelly will fall
E. none of the above

43. The economic environment of the Stone Age is best characterized by the Malthusian growth model. The invention of
the wheel must have:

A. initially increased consumption per capita and decreased population growth

B. initially increased consumption per capita and increased population growth
C. initially decreased consumption per capita and increased population growth
D. initially decreased consumption per capita and increased population growth
E. initially decreased the birth rate and increased the death rate

44. Suppose the economy is in equilibrium at zero output gap. If there is a sudden and major drop in the stock market
(which lowers people’s wealth), then which of the following happens to the IS curve according to our short‐run/long‐run
analysis?
A. The IS curve shifts right to reach its short‐run equilibrium, then shifts further right to reach its long‐run
equilibrium.
B. The IS curve shifts right to reach its short‐run equilibrium, then shifts left to reach its long‐run equilibrium.
C. The IS curve shifts left to reach its short‐run equilibrium, then shifts further left to reach its long‐run
equilibrium.
D. The IS curve shifts left to reach its short‐run equilibrium, then shifts right to reach its long‐run equilibrium.
E. The IS curve shifts left to reach its short‐run equilibrium, then does not shift again in the economy’s
transition to its long‐run equilibrium.

45. Suppose the economy is in equilibrium at zero output gap. If the Federal Reserve thinks inflation is too high and
undergoes a policy of disinflation, then which of the following happens to the monetary rule (MR) curve according to our
short‐run/long‐run analysis?
A. The MR curve shifts up to reach its short‐run equilibrium, then shifts up further to reach its long‐run equilibrium.
B. The MR curve shifts up to reach its short‐run equilibrium, then shifts down to reach its long‐run equilibrium.
C. The MR curve shifts down to reach its short‐run equilibrium, then shifts down further to reach its long‐run
equilibrium.
D. The MR curve shifts down to reach its short‐run equilibrium, then shifts up to reach its long‐run equilibrium.
E. The MR curve does not shift at all when the FED pursues a policy of disinflation.
15. Assume that the demand elasticity of a good X is ‐4/3. If the slope (ΔP/ΔQ) of the inverse demand curve is ‐5
and the equilibrium quantity is 6, what is the equilibrium price?
A) 24/15.
B) 45/2.
C) 40.
D) 24/3.
E) 24.

16. In the Malthusian model, which of the following will change the long run steady state level of consumption
per capita:

I. A change in the amount of land

II. A change in the birth rate
III. A genocide that kills half the population

A. I only
B. II only
C. I and II
D. II and III
E. I, II, and II

17. In country ASDFGH, real GDP is growing slightly faster than nominal GDP (let’s say by 1 percentage point).
Which of the following statements about prices best characterizes the situation in ASDFGH?
A. ASDFGH is experiencing mild inflation.
B. ASDFGH is experiencing mild deflation.
C. ASDFGH is experiencing hyperinflation.
D. ASDFGH is experiencing disinflation.
E. none of the above
1. Your test’s form is:
a) A
b) B
c) C
d) D
e) E

2. Company XYZ announces today that its current dividend is $10 and that it will grow at the annual rate of 3%.
Investors currently require a 7% return for holding stocks of companies with XYZ’s characteristics. According to
the Gordon Model, what should be the price of XYZ’s stock?
A. $10
B. $100
C. $242.50
D. $250
E. $257.50

3. Suppose that the marginal propensity to consume is 0.5. Now suppose that government spending increases
by 5 dollars. Assume there are no taxes. What happens to the level of GDP?

A. Decreases by 10 dollars.
B. Increases by 10 dollars.
C. Increases by 5 dollars.
D. Decreases by 5 dollars.
E. There is no change.

4. Suppose the marginal propensity to consume is 0.75 and the marginal tax rate is 0.3. If the government wants
GDP to increase by $10 million, by how much must they change autonomous taxes?

A. +10.33 million
B. +6.33 million
C. +3.00 million
D. ‐3.00 million
E. ‐6.33 million

5. According to the Taylor Rule (MR schedule), if inflation falls and the target inflation rate increases what
happens to the nominal interest rate?

A. The nominal interest rate increases

B. The nominal interest rate falls
C. The nominal interest rate remains unchanged
D. Indeterminate
E. The nominal interest rate initially falls and then increases back to its starting value