MEcon Master of Economics Master of Economics: Introduction to Macroeconomics 4 — Questions and Answers
Question 1: Which of the following best captures the distinction between the short-run and long-run Phillips curves?
- Both curves are downward-sloping but with different slopes
- The short-run curve is downward-sloping; the long-run curve is vertical at the natural rate (Correct answer)
- The long-run curve slopes upward due to supply-side constraints
- The short-run curve is vertical while the long-run curve is horizontal
Correct answer: The short-run curve is downward-sloping; the long-run curve is vertical at the natural rate
In the long run, inflation expectations adjust fully, eliminating the inflation-unemployment trade-off and making the curve vertical.
Question 2: A central bank that follows a strict inflation-targeting regime primarily uses which instrument to achieve its goal?
- Reserve requirements on commercial banks
- A short-term policy interest rate (Correct answer)
- Direct credit allocation to priority sectors
- The exchange rate peg
Correct answer: A short-term policy interest rate
Inflation-targeting central banks adjust a short-term policy rate (e.g., the federal funds rate) to steer inflation toward the announced target.
Question 3: In the context of national income accounting, which identity must always hold?
- Y = C + I + G + NX
- Y = C + S + I
- Y = wages + profits + rents
- All of the above are always true by accounting identity (Correct answer)
Correct answer: All of the above are always true by accounting identity
GDP can be measured by expenditure (Y=C+I+G+NX), income distribution, or saving-investment identity — all are accounting identities that always hold.
Question 4: What does the term 'liquidity trap' describe in macroeconomics?
- A situation where banks hoard reserves rather than lend despite low rates
- A condition in which monetary policy cannot lower interest rates further to stimulate demand (Correct answer)
- The tendency of consumers to convert bonds to cash during booms
- The breakdown of the quantity theory when velocity falls
Correct answer: A condition in which monetary policy cannot lower interest rates further to stimulate demand
In a liquidity trap, the nominal interest rate hits zero and additional money creation is held as cash, rendering conventional monetary policy ineffective.
Question 5: Real Business Cycle (RBC) theory attributes economic fluctuations primarily to:
- Changes in money supply driven by central bank errors
- Demand-side shocks amplified by price stickiness
- Technology shocks and other real supply-side disturbances (Correct answer)
- Animal spirits and irrational consumer expectations
Correct answer: Technology shocks and other real supply-side disturbances
RBC models explain business cycles as optimal responses to real technology or preference shocks, without relying on nominal rigidities.
Question 6: Which measure of inflation reflects changes in the prices of goods and services typically consumed by urban wage earners and clerical workers?
- GDP deflator
- Producer Price Index (PPI)
- Consumer Price Index (CPI-W) (Correct answer)
- Personal Consumption Expenditures (PCE) deflator
Correct answer: Consumer Price Index (CPI-W)
The CPI-W (CPI for Urban Wage Earners and Clerical Workers) is the BLS index specifically designed for that demographic.
Question 7: According to the permanent income hypothesis, a consumer's current spending is primarily determined by:
- Current disposable income alone
- The average income the consumer expects to earn over their lifetime (Correct answer)
- The level of liquid assets held at the start of the period
- Government transfer payments received in the current period
Correct answer: The average income the consumer expects to earn over their lifetime
Milton Friedman's permanent income hypothesis holds that consumption tracks expected lifetime (permanent) income, not transitory income fluctuations.
MEcon Master of Economics Master of Economics: Introduction to Macroeconomics 4
Which of the following best captures the distinction between the short-run and long-run Phillips curves?