Macroeconomics In The Global Economy

1.

There are several methodologies to measure GDP. If you compare two of them: the product and expenditures methodologies, they should provide you with the same estimate of GDP...

A.

Only for economies with a balanced current account
B.

For all economies
C.

Only when we measure GDP in PPP (purchasing power parity)
D.

Only when inventories are constant

Correct Answer
B. For all economies

Explanation
The statement suggests that regardless of the methodology used (product or expenditures), the estimate of GDP should be the same for all economies. This implies that the two methodologies are consistent and provide reliable estimates of GDP for all economies, regardless of their current account balance, measurement in PPP, or the constancy of inventories.

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2.

An expected decrease in future income will tend to lead to

A.

Higher consumption and higher saving
B.

Lower consumption and lower saving
C.

Lower consumption and higher saving
D.

Lower consumption but no effect on saving

Correct Answer
C. Lower consumption and higher saving

Explanation
When there is an expected decrease in future income, individuals tend to lower their consumption in order to save more money for the uncertain times ahead. This is because they anticipate a decrease in their ability to afford goods and services in the future. As a result, they prioritize saving more of their current income to create a financial cushion and ensure their future financial security. Therefore, the correct answer is lower consumption and higher saving.

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3.

Assume that investment opportunities at any given interest rate are the same in Japan and in the US. The nominal interest rate in Japan is 0.8%, in the US it is 0%. Inflation in the US is 3% and in Japan inflation is -1.5% (there is deflation in Japan). Based on this information, where would you expect more investment?

A.

In Japan because nominal interest rate is higher
B.

In the US because nominal interest rate is lower
C.

In the US because the real interest rate is lower
D.

In the US because the real interest rate is higher

Correct Answer
C. In the US because the real interest rate is lower

Explanation
Based on the given information, the nominal interest rate in Japan is higher than in the US. However, when considering inflation, the real interest rate in the US is lower. Inflation erodes the purchasing power of money, so a negative inflation rate in Japan means that the real interest rate is higher there. On the other hand, the positive inflation rate in the US reduces the real interest rate. Therefore, investors would expect more investment in the US due to the lower real interest rate.

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4.

Suppose that a German citizen crosses the border each day to work in France. Her income from this job would be counted in...

A.

French GNI and German GNI
B.

French GNI and German GDP
C.

French GDP and German GNI
D.

French GDP and German GDP

Correct Answer
C. French GDP and German GNI

Explanation
The correct answer is French GDP and German GNI. This is because the income earned by the German citizen while working in France would be included in the calculation of French GDP, as it is a measure of the economic output within the borders of France. On the other hand, the income earned by the German citizen would contribute to German GNI, as it represents the total income earned by German residents, regardless of where it was earned.

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5.

Money supply in an economy is

A.

Equal to the number of notes and currency in circulation
B.

Twice as large as GDP
C.

Fixed by the government
D.

The result of central bank policy and response of the private sector

Correct Answer
D. The result of central bank policy and response of the private sector

Explanation
The correct answer is that money supply in an economy is the result of central bank policy and response of the private sector. This means that the central bank, through its monetary policy, influences the money supply by controlling factors such as interest rates and reserve requirements. The private sector, on the other hand, responds to these policies by deciding how much money to borrow or lend, which affects the overall money supply in the economy. Therefore, money supply is not fixed by the government or simply equal to the number of notes and currency in circulation, nor is it twice as large as GDP.

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6.

Over the past twenty years the US net foreign asset position has deteriorated and from a net creditor to the rest of the world the US has become a net debtor. This implies that over these past twenty years, on average, the US has:

A.

Been running a capital and financial account deficit
B.

Been running a capital and financial account surplus
C.

Kept the interest rate too low
D.

Been running inadequate monetary policy that led to the depreciation of the dollar

Correct Answer
B. Been running a capital and financial account surplus

Explanation
The US net foreign asset position deteriorating means that the US has been accumulating more liabilities to the rest of the world than it has been accumulating assets. This implies that the US has been running a capital and financial account surplus, as it has been receiving more capital inflows from foreign investors than it has been investing abroad.

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7.

When we look at a large sample of countries over the last 5 decades we do not observe convergence in GDP per capita because

A.

Of differences in inflation rates
B.

Poor countries do not have enough resources to invest and grow
C.

The interest rate is always higher in poor countries
D.

Not all poor countries provide the necessary environment for investment to happen

Correct Answer
D. Not all poor countries provide the necessary environment for investment to happen

Explanation
The answer states that not all poor countries provide the necessary environment for investment to happen. This suggests that the lack of convergence in GDP per capita among countries over the last 5 decades is due to the fact that some poor countries do not have the conditions or infrastructure in place to attract investment and promote economic growth. Therefore, these countries are unable to catch up with wealthier nations and achieve convergence in GDP per capita.

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8.

When the currency-to-deposit ratio increases, then if everything else is held constant we will see:

A.

An increase in money supply
B.

A decrease in money supply
C.

No change in money supply
D.

A sharp acceleration in consumption

Correct Answer
B. A decrease in money supply

Explanation
When the currency-to-deposit ratio increases, it means that people are holding a larger proportion of their money in cash rather than depositing it in banks. This leads to a decrease in the amount of money available for banks to lend out, resulting in a decrease in the money supply.

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9.

The supply of loanable funds, or "national saving," is equal to

A.

income - consumption - government spending
B.

Income - consumption - government spending - taxes
C.

Income - consumption
D.

Income - consumption - taxes

Correct Answer
A. income - consumption - government spending

Explanation
The correct answer is income - consumption - government spending. This is because the supply of loanable funds, or "national saving," is determined by the amount of income that is not consumed or spent by the government. By subtracting consumption and government spending from income, we are left with the amount of funds available for saving and investment.

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10.

A high ratio of consumption to GDP...

A.

Is a necessary condition for long-term growth, demand needs to grow
B.

Can be a barrier to growth unless the country can attract capital from other countries
C.

Is a characteristic of large economies because they are self sufficient
D.

Is a consequence of high wages

Correct Answer
B. Can be a barrier to growth unless the country can attract capital from other countries

Explanation
A high ratio of consumption to GDP can be a barrier to growth unless the country can attract capital from other countries. This is because when the consumption levels are high relative to the GDP, it indicates that the country is spending a large portion of its income on consumption rather than investing in productive activities or saving. This can lead to a lack of funds for investment in industries and infrastructure, which can hinder economic growth. However, if the country is able to attract capital from other countries through foreign direct investment or loans, it can compensate for the lack of domestic savings and investment, thus potentially overcoming the barrier to growth.

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