AS.180.101
Elements of
Macroeconomics
Final Exam Review
2026
1. Case: A country’s GDP rises, but unemployment also increases.
Question: Which explanation fits best?
o A. Structural unemployment due to technological change
o B. Classical full-employment equilibrium
o C. Keynesian multiplier effect
o D. Demand-pull inflation
Answer: A
Rationale: GDP growth with rising unemployment suggests structural shifts,
not cyclical demand.
2. Case: Inflation rises to 8% while output stagnates.
1
, Question: What condition is this?
o A. Deflation
o B. Stagflation
o C. Hyperinflation
o D. Demand-pull growth
Answer: B
Rationale: Stagflation combines high inflation with stagnant output.
3. Case: The central bank raises interest rates to combat inflation.
Question: Which curve shifts in the IS-LM model?
o A. IS curve left
o B. LM curve left
o C. AD curve right
o D. AS curve right
Answer: B
Rationale: Higher interest rates reduce money supply, shifting LM left.
4. Case: A government increases spending without raising taxes.
Question: What is the short-run effect?
o A. AD shifts right, increasing output
o B. AS shifts left
o C. AD shifts left
o D. GDP falls
Answer: A
Rationale: Fiscal expansion increases aggregate demand.
5. Case: A country runs a persistent current account deficit.
Question: Which policy addresses this?
o A. Currency depreciation
o B. Increase in imports
o C. Expansionary fiscal policy
o D. Higher interest rates
Answer: A
Rationale: Depreciation makes exports cheaper, reducing deficit.
6. Case: A nation’s unemployment rate is 3% below the natural rate.
Question: What is the likely outcome?
o A. Deflation
o B. Inflationary pressure
o C. Higher productivity
2
, o D. Balanced growth
Answer: B
Rationale: Below natural unemployment, inflation accelerates (Phillips curve).
7. Case: A country’s GDP deflator rises faster than CPI.
Question: What does this imply?
o A. Export prices rising faster than consumer goods
o B. Consumer inflation higher than producer inflation
o C. Broader inflation across economy
o D. Deflationary trend
Answer: C
Rationale: GDP deflator covers all goods/services, CPI only consumer basket.
8. Case: A government issues bonds to finance deficit.
Question: What is the crowding-out effect?
o A. Private investment falls due to higher interest rates
o B. Consumption rises
o C. Exports increase
o D. Inflation falls
Answer: A
Rationale: Borrowing raises interest rates, reducing private investment.
9. Case: A country experiences rapid money supply growth.
Question: Which theory explains inflation here?
o A. Quantity theory of money
o B. Keynesian liquidity trap
o C. Ricardian equivalence
o D. Rational expectations
Answer: A
Rationale: MV = PY; excess money growth leads to inflation.
10.Case: A nation’s GDP rises but GNP falls.
Question: What explains this?
• A. Foreign-owned firms dominate domestic production
• B. Domestic firms expand abroad
• C. Inflation mismeasurement
• D. Fiscal contraction
Answer: A
Rationale: GDP counts domestic production, GNP counts national ownership.
3
, 11.Case: A country faces high cyclical unemployment.
Question: Which policy is most effective?
• A. Expansionary fiscal policy
• B. Structural reforms
• C. Currency appreciation
• D. Higher interest rates
Answer: A
Rationale: Cyclical unemployment responds to demand stimulus.
12.Case: A nation’s central bank targets inflation at 2%.
Question: Which rule applies?
• A. Taylor rule
• B. Phillips curve
• C. Okun’s law
• D. Mundell-Fleming model
Answer: A
Rationale: Taylor rule guides interest rates based on inflation/output gaps.
True/False (8 Questions)
13.Fiscal policy is more effective in liquidity traps.
Answer: True
Rationale: Monetary policy loses traction when interest rates near zero.
14.GDP deflator measures only consumer goods prices.
Answer: False
Rationale: It measures all domestically produced goods/services.
15.Okun’s law links unemployment changes to GDP growth.
Answer: True
Rationale: It quantifies GDP loss from unemployment.
16.Ricardian equivalence suggests deficits always crowd out investment.
Answer: False
Rationale: It argues consumers save in anticipation of future taxes.
17.Stagflation can be explained by supply shocks.
Answer: True
Rationale: Negative supply shocks raise prices and reduce output.
18.CPI always equals GDP deflator.
Answer: False
Rationale: CPI is narrower; GDP deflator is broader.
19.Rational expectations theory assumes agents anticipate policy effects.
Answer: True
4
Elements of
Macroeconomics
Final Exam Review
2026
1. Case: A country’s GDP rises, but unemployment also increases.
Question: Which explanation fits best?
o A. Structural unemployment due to technological change
o B. Classical full-employment equilibrium
o C. Keynesian multiplier effect
o D. Demand-pull inflation
Answer: A
Rationale: GDP growth with rising unemployment suggests structural shifts,
not cyclical demand.
2. Case: Inflation rises to 8% while output stagnates.
1
, Question: What condition is this?
o A. Deflation
o B. Stagflation
o C. Hyperinflation
o D. Demand-pull growth
Answer: B
Rationale: Stagflation combines high inflation with stagnant output.
3. Case: The central bank raises interest rates to combat inflation.
Question: Which curve shifts in the IS-LM model?
o A. IS curve left
o B. LM curve left
o C. AD curve right
o D. AS curve right
Answer: B
Rationale: Higher interest rates reduce money supply, shifting LM left.
4. Case: A government increases spending without raising taxes.
Question: What is the short-run effect?
o A. AD shifts right, increasing output
o B. AS shifts left
o C. AD shifts left
o D. GDP falls
Answer: A
Rationale: Fiscal expansion increases aggregate demand.
5. Case: A country runs a persistent current account deficit.
Question: Which policy addresses this?
o A. Currency depreciation
o B. Increase in imports
o C. Expansionary fiscal policy
o D. Higher interest rates
Answer: A
Rationale: Depreciation makes exports cheaper, reducing deficit.
6. Case: A nation’s unemployment rate is 3% below the natural rate.
Question: What is the likely outcome?
o A. Deflation
o B. Inflationary pressure
o C. Higher productivity
2
, o D. Balanced growth
Answer: B
Rationale: Below natural unemployment, inflation accelerates (Phillips curve).
7. Case: A country’s GDP deflator rises faster than CPI.
Question: What does this imply?
o A. Export prices rising faster than consumer goods
o B. Consumer inflation higher than producer inflation
o C. Broader inflation across economy
o D. Deflationary trend
Answer: C
Rationale: GDP deflator covers all goods/services, CPI only consumer basket.
8. Case: A government issues bonds to finance deficit.
Question: What is the crowding-out effect?
o A. Private investment falls due to higher interest rates
o B. Consumption rises
o C. Exports increase
o D. Inflation falls
Answer: A
Rationale: Borrowing raises interest rates, reducing private investment.
9. Case: A country experiences rapid money supply growth.
Question: Which theory explains inflation here?
o A. Quantity theory of money
o B. Keynesian liquidity trap
o C. Ricardian equivalence
o D. Rational expectations
Answer: A
Rationale: MV = PY; excess money growth leads to inflation.
10.Case: A nation’s GDP rises but GNP falls.
Question: What explains this?
• A. Foreign-owned firms dominate domestic production
• B. Domestic firms expand abroad
• C. Inflation mismeasurement
• D. Fiscal contraction
Answer: A
Rationale: GDP counts domestic production, GNP counts national ownership.
3
, 11.Case: A country faces high cyclical unemployment.
Question: Which policy is most effective?
• A. Expansionary fiscal policy
• B. Structural reforms
• C. Currency appreciation
• D. Higher interest rates
Answer: A
Rationale: Cyclical unemployment responds to demand stimulus.
12.Case: A nation’s central bank targets inflation at 2%.
Question: Which rule applies?
• A. Taylor rule
• B. Phillips curve
• C. Okun’s law
• D. Mundell-Fleming model
Answer: A
Rationale: Taylor rule guides interest rates based on inflation/output gaps.
True/False (8 Questions)
13.Fiscal policy is more effective in liquidity traps.
Answer: True
Rationale: Monetary policy loses traction when interest rates near zero.
14.GDP deflator measures only consumer goods prices.
Answer: False
Rationale: It measures all domestically produced goods/services.
15.Okun’s law links unemployment changes to GDP growth.
Answer: True
Rationale: It quantifies GDP loss from unemployment.
16.Ricardian equivalence suggests deficits always crowd out investment.
Answer: False
Rationale: It argues consumers save in anticipation of future taxes.
17.Stagflation can be explained by supply shocks.
Answer: True
Rationale: Negative supply shocks raise prices and reduce output.
18.CPI always equals GDP deflator.
Answer: False
Rationale: CPI is narrower; GDP deflator is broader.
19.Rational expectations theory assumes agents anticipate policy effects.
Answer: True
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