MEcon Master of Economics Master of Economics: Introduction to Macroeconomics 2 — Questions and Answers
Question 1: In the IS-LM model, a leftward shift of the IS curve is most likely caused by:
- An increase in government spending
- A decrease in consumer confidence reducing autonomous consumption (Correct answer)
- A rise in the money supply
- A reduction in the nominal interest rate
Correct answer: A decrease in consumer confidence reducing autonomous consumption
A fall in autonomous consumption reduces aggregate expenditure, shifting IS left.
Question 2: Which condition defines the steady state in the Solow growth model?
- Output per worker equals consumption per worker
- Investment per worker equals depreciation per worker (Correct answer)
- The savings rate equals the population growth rate
- Total factor productivity equals zero
Correct answer: Investment per worker equals depreciation per worker
At steady state, new investment exactly offsets depreciation, so capital per worker is constant.
Question 3: The concept of 'crowding out' in fiscal policy refers to:
- Government spending replacing private investment via higher interest rates (Correct answer)
- Inflation reducing the real value of tax revenues
- Imports rising when domestic income increases
- Automatic stabilizers offsetting discretionary policy
Correct answer: Government spending replacing private investment via higher interest rates
Expansionary fiscal policy raises interest rates, reducing private investment and partially offsetting the stimulus.
Question 4: If the marginal propensity to consume (MPC) is 0.75, the simple Keynesian expenditure multiplier is:
- 2.5
- 3.0
- 4.0 (Correct answer)
- 7.5
Correct answer: 4.0
The multiplier is 1/(1−MPC) = 1/(1−0.75) = 1/0.25 = 4.
Question 5: Hysteresis in unemployment theory suggests that:
- Unemployment naturally returns to the natural rate after any shock
- Prolonged cyclical unemployment can permanently raise the structural rate (Correct answer)
- Frictional unemployment is always higher than cyclical unemployment
- The Phillips curve is vertical in both the short and long run
Correct answer: Prolonged cyclical unemployment can permanently raise the structural rate
Hysteresis occurs when long-term unemployment erodes skills, raising the equilibrium unemployment rate persistently.
Question 6: Which of the following best distinguishes M1 from M2 money supply measures?
- M1 includes savings deposits; M2 does not
- M2 includes small time deposits and money market accounts; M1 does not (Correct answer)
- M1 includes Treasury bills; M2 excludes all government securities
- M2 is narrower than M1 because it excludes currency
Correct answer: M2 includes small time deposits and money market accounts; M1 does not
M2 equals M1 plus savings deposits, small-denomination time deposits, and retail money market mutual fund shares.
Question 7: In a small open economy with a floating exchange rate, an expansionary monetary policy primarily works by:
- Raising domestic interest rates to attract foreign capital
- Depreciating the exchange rate to boost net exports (Correct answer)
- Increasing the money multiplier through reserve requirements
- Shifting the LM curve to the left
Correct answer: Depreciating the exchange rate to boost net exports
Lower domestic interest rates cause capital outflow and currency depreciation, which stimulates exports and output.
MEcon Master of Economics Master of Economics: Introduction to Macroeconomics 2
In the IS-LM model, a leftward shift of the IS curve is most likely caused by: