PART 1: Multiple-choice exercises (5 questions; 3 points each):

1. Consider the original IS-curve introduced in Chapter 11. Suppose

a

g (that is, the share of potential

output spent on government purchases) increases. This leads to (select all that apply)?

(a) A movement along the IS-curve.

(b) The IS-curve shifts up.

(c) The IS-curve shifts down.

(d) The marginal product of capital goes down.

(e) There is a positive aggregate demand shock.

Answer:

2. According to the life-cycle permanent income hypothesis (select all that apply):

(a) People smooth their consumption over their life-cycle.

(b) Consumption at any point during a person's life depends on his/her income at that time.

(c) People have permanent income.

(d) Consumption over the life-cycle depends on a person's lifetime income.

(e) Consumption and permanent income are independent.

Answer:

3. If Ricardian Equivalence holds, then the following is true (select all that apply):

(a) What matters for consumption is the timing of tax changes.

(b) People that expect a tax reduction next year will reduce consumption this year.

(c) If the government announces that taxes will increase in fifive years, people will reduce their con

sumption right away.

(d) Consumption does not depend on taxation.

(e) An increase in lifetime income after taxes due to a future tax reduction will lead to higher con

sumption this year.

Answer:

14. What is true about the Solow and Romer model? Select all that apply.

(a) GDP per capita never grows in the Solow model.

(b) A one-time permanent increase in the workforce can lead to permanently higher growth in GDP

per capita in the Romer model.

(c) Capital accumulation is a source of transitory growth in GDP per capita.

(d) Population growth leads to permanent growth in GDP per capita in the Solow model.

(e) The Romer model provides a theory of long-run growth in GDP per capita.

Answer:

5. According to the short-run model, what happens to inflflation when short-run output is positive? Select

all that apply.

(a) The inflflation rate will start increasing.

(b) The change in the inflflation rate is negative.

(c) The change in the inflflation rate is positive.

(d) The inflflation rate will continue to increase for as long as short-run output is positive.

(e) The inflflation rate does not depend on short-run output.

Answer: