ECON 528 Final Exam Review | Questions &
Answers Rated 100% Correct | Advanced
Economics Guide
Question 1: In the 2025 two-period consumption model, a rise in the real interest rate (r) causes
current consumption (C₁) to
A) always increase
B) always decrease
C) increase if the substitution effect dominates
D) remain unchanged because lifetime income is unchanged
Correct Answer: C) increase if the substitution effect dominates
Explanation: A higher r makes future consumption cheaper; the substitution effect tends to reduce
C₁, but the income effect (higher return on saving) can raise it. Net change depends on which
effect dominates, so C₁ can rise if substitution is stronger.
Question 2: Under 2025 Ricardian equivalence, a one-time lump-sum tax cut today financed by
higher taxes next period
A) raises current aggregate demand
B) lowers the real interest rate
C) leaves current consumption unchanged
,D) increases the current-account deficit
Correct Answer: C) leaves current consumption unchanged
Explanation: Households save the entire tax cut to pay next period’s higher taxes, so current
consumption does not change; aggregate demand and interest rates are unaffected.
Question 3: The Chamley-Judd result (2025 update) states that the optimal long-run tax rate on
capital income is
A) equal to the labour-income tax rate
B) zero
C) slightly positive to offset depreciation
D) negative to subsidize capital
Correct Answer: B) zero
Explanation: To avoid intertemporal distortions, the Ramsey planner sets the steady-state
capital-income tax to zero; labour income can still be taxed.
Question 4: In the 2025 New Keynesian Phillips Curve, a higher price-stickiness parameter (θ)
makes the curve
A) steeper
B) flatter
C) vertical
D) horizontal
, Correct Answer: B) flatter
Explanation: Higher θ means fewer firms reset prices each period, so inflation responds less to
marginal-cost changes—i.e., the Phillips curve becomes flatter.
Question 5: Which 2025 shock is most commonly used to identify monetary-policy effects in VARs?
A) Technology shock
B) Monetary-policy (Fed-funds-rate) shock
C) Fiscal shock
D) Oil-price shock
Correct Answer: B) Monetary-policy (Fed-funds-rate) shock
Explanation: The Christiano-Eichenbaum-Evans approach recursively orders the policy rate last
and treats the residual as the exogenous monetary innovation.
Question 6: Which 2025 calibration is standard for the quarterly discount factor β in DSGE models?
A) 0.90
B) 0.95
C) 0.99
D) 1.00
Correct Answer: C) 0.99
Answers Rated 100% Correct | Advanced
Economics Guide
Question 1: In the 2025 two-period consumption model, a rise in the real interest rate (r) causes
current consumption (C₁) to
A) always increase
B) always decrease
C) increase if the substitution effect dominates
D) remain unchanged because lifetime income is unchanged
Correct Answer: C) increase if the substitution effect dominates
Explanation: A higher r makes future consumption cheaper; the substitution effect tends to reduce
C₁, but the income effect (higher return on saving) can raise it. Net change depends on which
effect dominates, so C₁ can rise if substitution is stronger.
Question 2: Under 2025 Ricardian equivalence, a one-time lump-sum tax cut today financed by
higher taxes next period
A) raises current aggregate demand
B) lowers the real interest rate
C) leaves current consumption unchanged
,D) increases the current-account deficit
Correct Answer: C) leaves current consumption unchanged
Explanation: Households save the entire tax cut to pay next period’s higher taxes, so current
consumption does not change; aggregate demand and interest rates are unaffected.
Question 3: The Chamley-Judd result (2025 update) states that the optimal long-run tax rate on
capital income is
A) equal to the labour-income tax rate
B) zero
C) slightly positive to offset depreciation
D) negative to subsidize capital
Correct Answer: B) zero
Explanation: To avoid intertemporal distortions, the Ramsey planner sets the steady-state
capital-income tax to zero; labour income can still be taxed.
Question 4: In the 2025 New Keynesian Phillips Curve, a higher price-stickiness parameter (θ)
makes the curve
A) steeper
B) flatter
C) vertical
D) horizontal
, Correct Answer: B) flatter
Explanation: Higher θ means fewer firms reset prices each period, so inflation responds less to
marginal-cost changes—i.e., the Phillips curve becomes flatter.
Question 5: Which 2025 shock is most commonly used to identify monetary-policy effects in VARs?
A) Technology shock
B) Monetary-policy (Fed-funds-rate) shock
C) Fiscal shock
D) Oil-price shock
Correct Answer: B) Monetary-policy (Fed-funds-rate) shock
Explanation: The Christiano-Eichenbaum-Evans approach recursively orders the policy rate last
and treats the residual as the exogenous monetary innovation.
Question 6: Which 2025 calibration is standard for the quarterly discount factor β in DSGE models?
A) 0.90
B) 0.95
C) 0.99
D) 1.00
Correct Answer: C) 0.99
