CBE Macroeconomics 2 — Questions and Answers
Question 1: Which component of GDP is typically the most volatile over the business cycle?
- Government spending
- Consumer spending
- Business investment (Correct answer)
- Net exports
Correct answer: Business investment
Business investment (especially inventories and capital expenditures) fluctuates far more than consumption or government spending across business cycles.
Question 2: The natural rate of unemployment includes which of the following?
- Cyclical and frictional unemployment
- Frictional and structural unemployment (Correct answer)
- Cyclical and structural unemployment
- Seasonal and cyclical unemployment
Correct answer: Frictional and structural unemployment
The natural rate consists of frictional unemployment (job search) and structural unemployment (skill mismatches), excluding cyclical unemployment caused by recessions.
Question 3: If the MPC (marginal propensity to consume) is 0.75, what is the simple spending multiplier?
- 2.5
- 3.0
- 4.0 (Correct answer)
- 5.0
Correct answer: 4.0
The simple multiplier = 1/(1-MPC) = 1/(1-0.75) = 1/0.25 = 4.0.
Question 4: Which measure of money supply includes savings deposits, money market accounts, and small CDs in addition to M1?
- M0
- M2 (Correct answer)
- M3
- MZM
Correct answer: M2
M2 includes all of M1 (currency, demand deposits) plus savings deposits, money market mutual funds, and small-denomination time deposits.
Question 5: The IS curve slopes downward because:
- Higher interest rates increase savings and reduce investment (Correct answer)
- Higher income raises money demand
- The price level falls when output rises
- Crowding out reduces government effectiveness
Correct answer: Higher interest rates increase savings and reduce investment
As interest rates rise, investment falls and saving becomes more attractive, reducing equilibrium output—giving the IS curve its negative slope.
Question 6: Stagflation is characterized by which combination of economic conditions?
- High growth and high inflation
- High unemployment and high inflation (Correct answer)
- Low unemployment and deflation
- Rapid growth and low interest rates
Correct answer: High unemployment and high inflation
Stagflation refers to the simultaneous occurrence of high unemployment (stagnation) and high inflation, famously experienced in the U.S. during the 1970s.
Question 7: When the central bank purchases government securities in the open market, this is known as:
- Contractionary fiscal policy
- Expansionary monetary policy (Correct answer)
- Sterilized intervention
- Crowding out
Correct answer: Expansionary monetary policy
Open market purchases inject reserves into the banking system, increasing money supply—a classic expansionary monetary policy tool.
CBE Macroeconomics 2
Which component of GDP is typically the most volatile over the business cycle?