2nd Exam MacroEcon 2301
Total population 745,000 Working age pop. 550,000 Number employed 361,000 Number of unemployed 19,000 The labor force is....?
380,000
In a small country, the adult population equals 10,000. There are 3,000 people unemployed and 4,000 people are employed. The labor force participation rate equals
70%
8-15 Price Index formula
(nominal GDP/ real GDP) x 100
Light Bulbs $1 Quantity 500 Volleyballs $5 Quantity 1000 What would the price index be?
122.22
Quiz 5 question 5 Refer to table 11.5 The equilibrium real GDP (Y) in a closed economy (i.e. no trade) is: C= 110+0.75(Y-T) I=200 G= 300 T= 300
1500
The value of the multiplier in the economy illustrated in the figure above is...
2.0
Which of the following is NOT an event that causes BOTH the short- run aggregate supply (SRAS) curve and the long- run aggregate supply (LRAS) curve to shift?
A temporary change in the price of a key input
Quiz 5 question 1 Refer to table 11.1 The equation for the aggregate consumption function is
C= 80+0.75Y
The theory that government borrowing may function like an increase in taxes, that is, reducing current consumption and business expenditures, was formulated by...
David Ricardo
8-5 GDP Formula NDP Formula NI Formula
GDP= C+G+I+X-Imports NDP= GDP-Depreciation NI= NDP-indirect business taxes
Life-Cycle Theory of Consumption and Permanent Income Hypothesis
Life-Cycle Theory= decisions about current consumption and saving based on current income and anticipated future income Permanent Income= determines current consumption based on anticipated average lifetime income
Which of the following actions could be undertaken if the government wants to close a recessionary gap?
Reduce taxes and increase government spending.
Suppose the U.S. dollar gains strength against the euro (and against other major currencies). This strengthening of the dollar will cause which of the following to occur?
The aggregate demand curve will shift to the left and the short- run aggregate supply will shift to the right.
7-13 Currently, the price index used to calculate the inflation rate is equal to 90. The general expectation throughout the economy is that next year its value will be 99. The current nominal interest rate is 12 percent. What is the real interest rate?
The expected rate of inflation is equal to 100 × [(99 - 90)/90] = 10 percent. Hence the real interest rate equals the difference between the 12 percent nominal interest rate and the 10 percent anticipated inflation rate, or 2 percent
11-7 As in Problem 11-6, suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. In this case, however, suppose that policymakers wish to prevent equilibrium real GDP from changing in response to the oil price increase. Should they increase or decrease the quantity of money in circulation? Why?
To prevent a short-run decrease in real GDP from taking place after the temporary rise in oil prices shifts the SRAS curve leftward, policymakers should increase the quantity of money in circulation. This will shift the AD curve rightward and prevent equilibrium real GDP from declining in the short run.
11-6 Suppose that there is a temporary, but significant, increase in oil prices in an economy with an upward-sloping SRAS curve. If policymakers wish to prevent the equilibrium price level from changing in response to the oil price increase, should they increase or decrease the quantity of money in circulation? Why?
To prevent a short-run increase in the price level from taking place after the temporary rise in oil prices shifts the SRAS curve leftward, policymakers should decrease the quantity of money in circulation. This will shift the AD curve leftward and prevent the equilibrium price level from rising in the short run.
If equilibrium level of real Gross Domestic Product (GDP) is less than the full- employment real Gross Domestic Product (GDP) consistent with the position of the economy's long- run aggregate supply (LRAS) curve, then the difference between full- employment real Gross Domestic Product (GDP) and current equilibrium real Gross Domestic Product (GDP) is...
a recessionary gap
10-12 Explain whether each of the following events would cause a movement along or a shift in the position of the LRAS curve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.
a. An increase in the capital stock causes real planned production to rise at any given price level, so the LRAS curve shifts rightward. b. An increase in the quantity of money causes the aggregate demand to shift rightward, which generates a movement upward along the LRAS curve. c. This reduction in the capital stock, which also will lead to higher energy prices, causes real planned production to decline at any given price level, so the LRAS curve shifts leftward. d. When the price level rises with inflation, there is a movement of the AD curve upward along the LRAS curve.
10-16 Foreachquestion,supposethattheeconomybeginsatthelong-runequilibriumpointAin the diagram below. Identify which of the other points on the diagram—points B, C, D, or E—could represent a new long-run equilibrium after the described events take place and move the economy away from point A a. Significant productivity improvements occur, and the quantity of money in circulation increases. b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government imposes a large tax increase on the nation's households. c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government reduces its spending on goods and services.
a. B: Productivity improvements cause the LRAS curve to shift rightward, from LRAS1 to LRAS2, and the increase in the quantity of money in circulation causes the AD curve to shift rightward, from AD1 to AD2. b. C: The reduction in the usable portion of the capital stock reduces the economy's long-run productive capabilities, so the LRAS curve shifts leftward, from LRAS1 to LRAS3. The increase in taxes imposed on households induces them to reduce their expenditures, so the AD curve shifts leftward, from AD1 to AD3. c. E: The technological improvement shifts the LRAS curve rightward, from LRAS1 to LRAS2, and the reduction in government spending shifts the AD curve leftward, from AD1 to AD3.
11-11 For each question that follows, suppose that the economy begins at point A. Identify which of the other points on the diagram—point B, C, D, or E—could represent a new short-run equilibrium after the described events take place and move the economy away from point. a. Most workers in this nation's economy are union members, and unions have successfully negotiated large wage boosts. At the same time, economic conditions suddenly worsen abroad, reducing real GDP and disposable income in other nations of the world. b. A major hurricane has caused short-term halts in production at many firms and created major bottlenecks in the distribution of goods and services that had been produced prior to the storm. At the same time, the nation's central bank has significantly pushed up the rate of growth of the nation's money supply. c. A strengthening of the value of this nation's currency in terms of other countries' currencies affects both the SRAS curve and the AD curve.
a. E: The union wage boost causes the SRAS curve to shift leftward, from SRAS1 to SRAS3. The reduction in incomes abroad causes import spending in this nation to fall, which induces a leftward shift in the AD curve, from AD1 to AD3. b. B: The short-term reduction in production capabilities causes the SRAS curve to shift leftward, from SRAS1 to SRAS3, and the increase in money supply growth generates a rightward shift in the AD curve, from AD1 to AD2. c. C: The strengthening of the value of this nation's currency reduces the prices of imported inputs that domestic firms utilize to produce goods and services, which causes the SRAS curve to shift rightward, from SRAS1 to SRAS2. At the same time, currency strengthening raises the prices of exports and reduces the prices of imports, so net export spending declines, thereby inducing a leftward shift in the AD curve, from AD1 to AD3.
7-15 Suppose that in 2019 there is a sudden, unanticipated burst of inflation. Consider the situations faced by the following individuals. Who gains and who loses?
a. The homeowner gains; the savings bank loses. b. The tenants gain; the landlord loses. c. The auto buyer gains; the bank loses. d. The employer gains; the pensioner loses.
10-13 Explain whether each of the following events would cause a movement along or a shift in the AD curve, other things being equal. In each case, explain the direction of the movement along the curve or shift in its position.
a. When the price level falls with deflation, there is a movement downward along the AD curve. b. The decline in foreign real GDP levels reduces incomes of foreign residents, who cut back on their spending on domestic exports. Thus, the domestic AD curve shifts leftward. c. The fall in the foreign exchange value of the nation's currency makes domestic-produced goods and services less expensive to foreign residents, who increase their spending on domestic exports. Thus, the domestic AD curve shifts rightward. d. An increase in the price level causes a movement upward along the AD curve.
In the simple circular flow model, total income in the United States must equal...
all of the above
An increase in the amount of physical capital will cause...
an increase in both aggregate supply and real GDP and a reduction in the price level
All of the following would shift the LRAS curve to the right EXCEPT
an increase in the overall price level
8-18 finding the base year inflation or deflation
base year at equilibrium inflation if nominal GDP exceeds real GDP
The full- employment rate of output can...
be surpassed only in the short run
In the above figure, if real GDP is below $12 trillion, inventories will be...
below target levels, so firms increase production.
Quiz 5 question 6 Refer to table 11.5 If both G and T decrease by 100, equilibrium output will
decrease by 100
If the dollar appreciates and foreign goods become less expensive, the total planned expenditures on domestic goods and services will
fall due to the open economy effect
If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will...
generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more.
Which of the following factors could cause the economy to experience supply-side inflation?
government laws which say that the average work week must be reduced by one hour every year
A stronger dollar leads to cheaper input prices for U.S. firms because...
imports of raw materials and intermediate goods are cheaper
If there is persistent inflation...
long-run aggregate supply is growing at a slower rate than aggregate demand
Suppose total planned expenditures equal $14.4 trillion when the value of the price level is 95. If the price level dropped to 90, total planned real expenditures will equal...
more than $14.4 trillion
The real rate of interest can be defined as the...
nominal interest rate less the anticipated rate of inflation
8-14 Calculations for nominal and real GDP using two years
nominal= quantity x price of same year real= quantity of year listed x price of compared year
A decrease in aggregate demand will cause... (based on different theorists)
prices to fall according to classical economists, and unemployment to increase according to Keynes
A decrease in aggregate demand will cause...
prices to fall according to classical economists, and unemployment to increase according to Keynes.
You observe that unplanned inventories are increasing. You predict that there will be ________.
recession
The larger the multiplier, the ________ the AE curve and the ________ the AD curve from an increase in investment.
steeper; larger the shift in
A person who is unemployed because of a mismatch between the person's skills and current employment requirements is experiencing...
structural unemployment
Fred recently lost his job as a teller at the bank. The bank explained that they were replacing Fred and others with ATM machines. Fred falls into a category of unemployment known as...
structural unemployment
Indirect business taxes include all of the following EXCEPT
taxes on corporate profits
Because of crowding out...
the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates
By definition, a direct expenditure offset will occur whenever...
the government increases spending in an area that competes with the private sector.
The percentage of the non institutionalized working-age individuals who are employed or seeking work is known as...
the labor force participation rate
According to Keynesian theory, the most important determinant of saving and consumption is...
the level of real disposable income
An increase in ________ shifts the AE curve ________ and an increase in ________ shifts the aggregate demand curve ________
the price level; downward; autonomous expenditure; rightward
Keynes argued that because of sticky prices and wages...
the short-run aggregate supply curve could be horizontal
Refer to the above figure. If the price level is 80 (below equilibrium)...
the total planned real expenditures by individuals businesses, and the government exceed total planned production by firms
According to Keynes, the "stickiness" of wage rages could be best explained by...
unions and long-term labor contracts
Refer to the above table. When real GDP equals $10 trillion...
unplanned inventories will decrease.
When economists refer to investment expenditures they mean the...
use of today's resources to expand tomorrow's production or consumption
