MEcon Master of Economics Master of Economics: Introduction to Macroeconomics 2

Question 1

In the IS-LM model, a leftward shift of the IS curve is most likely caused by:

Accepted Answer

A decrease in consumer confidence reducing autonomous consumption

Answer

A fall in autonomous consumption reduces aggregate expenditure, shifting IS left.

Question 2

Which condition defines the steady state in the Solow growth model?

Accepted Answer

Investment per worker equals depreciation per worker

Answer

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:

Accepted Answer

Government spending replacing private investment via higher interest rates

Answer

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:

Accepted Answer

4.0

Answer

The multiplier is 1/(1−MPC) = 1/(1−0.75) = 1/0.25 = 4.

Question 5

Hysteresis in unemployment theory suggests that:

Accepted Answer

Prolonged cyclical unemployment can permanently raise the structural rate

Answer

Hysteresis occurs when long-term unemployment erodes skills, raising the equilibrium unemployment rate persistently.

MEcon Master of Economics Practice Test