Principles of Macroeconomics Essay

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Economics 112 Professor Rafferty
Principles of Macroeconomics Fall 2008

Exam #2

Multiple Choice Questions (3 points each)

1. In the long run, a country will experience an increasing standard of living only if it experiences:
a. a slow rate of population growth.
b. a high rate of consumption.
c. continuous technological change.
d. a high rate of labor force growth.

2. Which of the following accurately describes the impact of the rule of law on a country’s economic growth rate?
a. Countries with a strong rule of law have faster economic growth.
b. Countries that enforce property rights through law suits have slower economic growth.
c. Countries with a weak rule of law have faster economic growth.
d. Countries where favoritism and bribery are common have faster rates of economic growth.

3. Lack of investment in strong education and health care systems:
a. increases human capital and cause a decline in labor productivity.
b. causes a decline in physical capital and a decline in labor productivity.
c. causes a deterioration in human capital and a decline in labor productivity.
d. causes a deterioration in human capital and an increase in physical capital.

4. If all countries have the same level of efficiency (total factor productivity) then:
a. rich countries will grow more quickly than poor countries because the marginal product of capital is higher in rich countries.
b. rich countries will grow more quickly than poor countries because the marginal product of capital is lower in rich countries.
c. rich countries will grow more slowly than poor countries because the marginal product of capital is higher in rich countries.
d. rich countries will grow more slowly than poor countries because the marginal product of capital is lower in rich countries.

5. Because of the slope of the aggregate demand curve we can say that
a. a decrease in the price level leads to a lower level of aggregate spending.
b. a decrease in the price level leads to a higher level of aggregate supply.
c. an increase in the price level leads to a higher level of aggregate spending.
d. a decrease in the price level leads to a higher level of aggregate spending.

6. The wealth effect is defined as
a. when the price level falls, the real value of household wealth falls.
b. when the price level falls, the real value of household wealth rises.
c. when the price level falls, the nominal value of household wealth rises.
d. when the price level falls, the nominal value of household wealth falls.

7. The Allies destroyed a significant portion of the German capital stock during bombing raids at the end of World War II. As a result, potential real GDP for Germany
a. decreased as the long-run aggregate supply curve shifted to the right.
b. increased as the long-run aggregate supply curve shifted to the left.
c. decreased as the long-run aggregate supply curve shifted to the left.
d. increased as the long-run aggregate supply curve shifted to the right.

8. The short run aggregate supply curve has a _____ slope because as prices of _____ rise, prices of _____ rise more slowly.
a. negative; final goods and services; inputs.
b. positive; final goods and services; inputs.
c. positive; inputs; final goods and services.
d. negative; inputs; final goods and services.

9. When the price of oil increases unexpectedly, the price level _____ and the unemployment rate _____ in the short run.
a. rises; falls.
b. falls; falls.
c. rises; rises.
d. falls; rises.

10. Use the dynamic AD/AS model to answer this question. When aggregate demand grows more rapidly than aggregate supply:
a. output rises above potential and the price level decreases.
b. output rises above potential and the price level increases.
c. output falls below potential and the price level decreases.
d. output falls below potential and the price level
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