1 Exercises I. Definition 1. GDP deflator 2. Real exchange rate; 3. Risk aversion;4. Investment; 5. Transfer payments; 6. Indexation 7. Efficiency wages; 8. Catch-up effect; 9. Rule of 70; 10. Marginal propensity to consume (MPC); 11. Nominal variables; 12. net capital outflow; 13. Purchasing-power parity; 14. Monetary neutrality; 15. Frictional unemployment; 16. The natural rate of unemployment; 17. Crowding out; 18. classical dichotomy ; 19. Structural unemployment; 20. Reserve requirement; 21. Fisher Effect; 22 fiscal policy; 23. automatic stabilizers; 24.multiplier effect; 25. the theory of liquidity preference; 26. recession; 27. Adverse selection 28. depreciate 29. Fiat money；30 Present value II. Multiple choices: 1. At a given real exchange rate, which of the following, by itself, would increase the supply of dollars in the market for foreign-currency exchange? a. foreign citizens buy more U.S. bonds b. U.S. citizens buy more foreign bonds c. foreign citizens buy more U.S. goods d. U.S. citizens buy more foreign goods ANS: B 2A typical worker in Italy can produce 24 units of product in an eight-hour day, while a typical worker in Poland can produce 25 units of product in a 10-hour day. We can conclude that a. worker productivity in Poland is higher than in Italy. b. the standard of living will likely be higher in Italy than in Poland. c. productivity is 3 units per hour for the Polish worker and 21/2 units per hour for the Italian worker. d. there will be no difference between the standard of living in Italy and Poland. ANS: B 3Which of the following statements about GDP is correct? a. GDP measures two things at once: the total income of everyone in the economy and the unemployment rate. b. Money continuously flows from households to government and then back to households, and GDP measures this flow of money. c. GDP is to a nations economy as household income is to a household. d. All of the above are correct. ANS: C 2 4If the multiplier is 2.5, the MPC is a. 0.2. b. 0.6. c. 0.75. d. 1.00. ANS: B 5 When the Fed lowers the growth rate of the money supply, it must take into account a. only the short-run effect on production. b. only the short-run effects on inflation and production. c. only the long-run effect on inflation. d. the long-run effect on inflation as well as the short-run effect on production. ANS: D 6Which of the following transactions adds to U.S. GDP for 2006? a. In 2006, Ashley sells a car that she bought in 2002 to William for $5,000. b. An American management consultant works in Mexico during the summer of 2006 and earns the equivalent of $30,000 during that time. c. When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 per month. d. None of the above transactions adds to GDP for 2006. ANS: C 7The five debates over macroeconomic policy exist mostly because a. economists disagree over basic issues such as the importance of saving for economic growth. b. there are tradeoffs and people disagree about the best way to deal with them. c. politicians offer misleading information. d. people fail to clearly see the benefits or the costs of most changes. ANS: B 8A higher rate of return on saving has a. an income effect that discourages saving and a substitution effect that encourages saving. b. an income effect that encourages saving and a substitution effect that discourages saving. c. income and substitution effects that both decrease saving. d. income and substitution effects that both increase saving. ANS: A 9In a particular country in 1995, the average worker needed to work 25 hours to produce 40 units of output. In that same country in 2005, the average worker needed 3 to work 40 hours to produce 68 units of output. In that country, the productivity of the average worker a. decreased by 1.7 percent between 1995 and 2005. b. remained unchanged between 1995 and 2005. c. increased by 4.75 percent between 1995 and 2005. d. increased by 6.25 percent between 1995 and 2005. ANS: D 10Household spending on education is included in a. consumption, although it might be argued that it would fit better in investment. b. investment, although it might be argued that it would fit better in consumption. c. government spending, based on the fact that most higher-education students attend publicly-supported colleges and universities. d. None of the above is correct; in general, household spending on services is not included in any component of GDP. ANS: A Table 1 Prices and Quantities Year Price of Sandwiches Quantity of Sandwiches Price of Magazines Quantity of Magazines 2006 $4.00 100 $2.00 180 2007 $5.00 120 $2.50 200 2008 $6.00 150 $3.50 200 11.Refer to Table 1. Using 2006 as the base year, for 2007, a. real GDP is $880 and the GDP deflator is 80. b. real GDP is $880 and the GDP deflator is