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Practice Questions 24th August

1. The document tests understanding of macroeconomic concepts like the Phillips curve, Okun's law, medium-run equilibrium, inflation expectations, the zero lower bound, and how different shocks affect macroeconomic variables. 2. It asks the reader to identify correct statements about these concepts, calculate macroeconomic outcomes given changes to variables like the output gap, and determine inflation and interest rates in an economy with specified consumption, investment, and interest rate parameters. 3. The final question is a bonus that asks the reader to calculate the natural rate of interest for the economy described, given a specified marginal propensity to consume.

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Gunjan Choudhary
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16 views

Practice Questions 24th August

1. The document tests understanding of macroeconomic concepts like the Phillips curve, Okun's law, medium-run equilibrium, inflation expectations, the zero lower bound, and how different shocks affect macroeconomic variables. 2. It asks the reader to identify correct statements about these concepts, calculate macroeconomic outcomes given changes to variables like the output gap, and determine inflation and interest rates in an economy with specified consumption, investment, and interest rate parameters. 3. The final question is a bonus that asks the reader to calculate the natural rate of interest for the economy described, given a specified marginal propensity to consume.

Uploaded by

Gunjan Choudhary
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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1.

The Philips Curve shows the relationship between:


a) Demand and Supply
b) Prices and Aggregate Demand.
c) Inflation and Output.
d) Inflation and Interest rates.

2. Okun’s Law states that:


a) The change in interest rates is proportional to the rate of growth
of output.
b) The change in unemployment is approximately equal to the
negative of the rate of growth of output.
c) The change in unemployment is approximately equal to the rate
of growth of output.
d) The change in output is proportional to the rate of change of
demand.

3. At a medium-run equilibrium, which of the following statements are


correct?
a) The nominal interest rate equals the inflation rate.
b) The nominal interest rate equals the natural rate of interest.
c) Inflation expectations equal the rate of growth of money supply.
d) Unemployment equals the natural rate.
e) The difference between the nominal interest rate and the rate of
growth of money supply equals the natural rate of interest.
f) Investment is 0.
g) The output gap is 0.

4. When expectations become unanchored, it implies that:


a) Today’s inflation is equal to previous period’s inflation.
b) The output gap keeps increasing.
c) The output gap keeps decreasing.
d) Inflation expectations are no longer constant.
e) The real rate of interest falls.

5. The zero lower bound implies:


a) Inflation rates cannot be below 0.
b) Real interest rates can never fall below 0.
c) The output gap can never fall below 0.
d) The nominal interest rate can never fall below 0.

6. Which of the following are true: At the natural rate of interest:


a) Unemployment equals its natural rate.
b) The output gap is 0.
c) Unemployment is 0.
d) Inflation is 0.
e) Inflation equals inflation expectations.

7. If input prices rise:


a) The natural rate of interest falls.
b) The IS curve shifts to the right.
c) The PC curve shifts to the right.
d) The PC curve shifts to the left.
e) The IS curve shifts to the left.

8. If the output gap is negative, then which of the following necessarily


happens?
a) Unemployment is falling.
b) Deflation is occurring.
c) The natural rate of interest falls.
d) Inflation expectations have become unanchored.
e) None of the above.
9. In a supply shock:
a) Output has increased but deflation occurs.
b) Output has increased and inflation rises above expectations.
c) Output has increased and inflation equals expectations.
d) Output has not changed but inflation rises above expectations

10. A cut in taxes will have the effect of:


a) Increasing the natural rate of output.
b) Increasing the natural rate of interest.
c) Reducing inflation expectations.
d) Decreasing the natural rate of interest.

11. A fall in price margins will have the effect of:


a) Decreasing the natural rate of output.
b) Decreasing the natural rate of interest
c) Raising the natural rate of unemployment.
d) Decreasing inflation expectations.

12. Assume an economy starting out from a medium run equilibrium


(MRE). Inflation expectations 𝜋 ! are initially anchored at the rate of
3%. In period t=0, inflation equals inflation expectations.
i. If the natural rate of interest is 2%, what is the nominal rate of
interest?
ii. At what rate is money supply growing?
iii. What is the value of the output gap?
Now, assuming t=0 is an MRE, at t=1, the output gap rises to 3%.
a. Assuming inflation expectations remain anchored, calculate
actual inflation from periods 1 to 5.
b. In period 6, the output gap falls to 0. What is the value of
actual inflation from periods 6 to 10, assuming anchored
expectations?
c. Assuming the nominal rate of interest remains constant at
its MRE value, calculate the real rate of interest from
periods 1 to 10.
Assuming t=0 is an MRE, at t=1, the output gap rises to 3%. Inflation
expectations become anchored, and equal previous period’s actual
inflation.
a. Calculate actual inflation from periods 1 to 5.
b. Assume that the output gap falls to 0 in period 6. How many
periods would it take for actual inflation to fall back to its
value at time t=0?
c. Assuming the nominal rate of interest remains constant at
its MRE value, calculate the real rate of interest from
periods 1 to 10.

13. Consider an economy where Y = C + I + G.


Consumption = 200 + cY.
"###
Investment = where i is the nominal rate of interest.
("%&)

G = 600.
The natural rate of output 𝑌( = 3500.
Inflation expectations 𝜋 ! are anchored at 3%.
)!
Actual inflation π = 𝜋 ! + (1 - ).
)

What is the value of inflation and the real interest rate in the following
situations:
i. c = 0.5 and i = 6%.
ii. c = 0.5 and i = 4%
iii. c = 0.4 and i = 4%
iv. c = 0.5 and i = 5%
v. c = 0.6 and i = 3%.
Bonus question: Can you calculate the natural rate of interest for this
economy, assuming c=0.5?

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