Macroeconomics Questions and Answers

Answer: A

GDP stands for Gross Domestic Product.

Gross Domestic Product is the total market value of all final goods and services produced within a country's borders in a given period, usually a year or a quarter. It is the most widely used measure of the size of an economy and of its growth.

The other expansions are invented. A government development plan, a general development project and gross data processing have nothing to do with the standard abbreviation used in national accounts.

Answer: C

The classical system is characterised by a self-adjusting mechanism of the economy (b), and by optimisation through the market without state control (d). So the code is 'b and d', option (C). Statement (a) is wrong, since in the classical system monetary factors determine the price level, not output and employment, which are fixed by real factors. Statement (c), state action to direct development, runs against the classical view of laissez faire. Options (A), (B) and (D) include (a) or (c).

Answer: C

The key is (C): Keynes' consumption function (1936), the relative income hypothesis of Duesenberry (1949), Friedman's permanent income hypothesis (1957) and the life cycle hypothesis (b), which is placed last in the key, since its full form, with Ando, was given by Modigliani in 1963 (an early paper by Modigliani and Brumberg is of 1954, so this item is arguable). Option (A) puts Friedman and the life cycle hypothesis before Keynes, (B) puts the life cycle before Keynes and (D) starts with the relative income hypothesis, and each of them is wrong.

Answer: C

The psychological law of consumption is Keynes's (a-2), the time preference theory of interest is that of Irving Fisher (b-1), the public choice view is linked with Gordon Tullock (c-4) and the open economy IS-LM model is the Mundell-Fleming model (d-3). The code is 2, 1, 4, 3, option (C). Options (A), (B) and (D) give the psychological law to Mundell and Fleming, Tullock or Fisher, which is wrong.

Answer: A

Monetary policy works through the bank rate (a-4), trade policy deals with imports and exports (b-3), credit policy uses margin money (c-2) and fiscal policy uses the tax rate (d-1). So the code is 4, 3, 2, 1, option (A). Option (B) gives trade policy margin money, (C) gives monetary policy imports and exports and (D) gives it margin money, so all three confuse the instruments of the policies.

Answer: B

Monetarism is the school of Milton Friedman (a-4), the employment multiplier is due to R.F. Kahn (b-1), the multiplier effect of a balanced budget is that of Haavelmo (c-2) and the rational expectations hypothesis is that of John Muth (d-3). The code is 4, 1, 2, 3, option (B). Options (A), (C) and (D) give monetarism to Haavelmo, Kahn or Muth, and so mismatch the first pair.

Answer: D

The keyed sequence of the four phases is recovery, expansion, recession and depression, option D. In this ordering, an upturn begins with recovery, goes on to an expansion (boom), turns down in a recession and bottoms out in a depression.

Options A, B and C run in other orders, for example putting recession before expansion or beginning with depression, and so they do not follow the sequence of the cycle as keyed. The standard modern order is expansion, peak, contraction and trough.

Answer: C

The keyed answer is C1Yd. In the consumption function C = C0 + C1 Yd, the intercept C0 and the marginal propensity to consume C1 are parameters (given constants of the model), and so they are not endogenous. The term C1Yd varies as the disposable income varies, and so it is the part determined within the model.

Strictly, the endogenous variables are C and Yd; of the options offered only the term that moves with income is endogenous, so options A and B, which are constants, are wrong, and 'none of the above' is not the key.

Answer: B

The relative income hypothesis (Duesenberry) holds that consumption is irreversible: people do not reduce their consumption standards easily when income falls, so consumption follows a ratchet effect, rising along the long-run path and falling less in a recession.

The absolute income hypothesis (Keynes) has consumption depend only on current income and reversible, while the permanent income and life cycle hypotheses relate consumption to expected lifetime income, and do not have the ratchet property.

Answer: B

Constrained cycles, in which the economy bounces between a ceiling and a floor, are generated by Hicks's model of the trade cycle: the ceiling is set by full employment and the floor by the autonomous investment and disinvestment limits.

Samuelson's multiplier-accelerator model gives damped or explosive cycles, depending on the parameters, and Kaldor's model gives a limit cycle from non-linear saving and investment functions, so options A and C are wrong, and 'all of the above' is also wrong.