305 Tests/Quizzes
Suppose the consumption equation is represented by the following: C = 250 + .75YD. Given this information, the marginal propensity to save is
.25
In the expectations-augmented Phillips curve, π = πe−3(u−u). If π = 0.03 when πe= 0.06 and u = 0.06, then u=
0.05
Use the information provided below to answer the following questions. Suppose a country using the United States' system of calculating official unemployment statistics has 100 millionpeople, of whom 50 million are working age. Of these 50 million, 20 million have jobs. Of the remainder: 10 million are actively searching for jobs; 10 million would like jobs but are not searching; and 10 million do not want jobs at all. Refer to the information above. The official unemployment rate is
0.33
If C = 2000 + .9YD, what increase in government spending must occur for equilibrium output to increase by 1000?
100
If C = 2000 + .9YD, what decrease in taxes must occur for equilibrium output to increase by 1000?
111
Suppose that money demand is given by Md=$Y(0.21−1.2i) where $Y is $100. If the Federal Reserve sets an interest rate target of 7%, the money supply it must create is $12.6. If the Federal Reserve wants to increase the interest rate i from 7 to 11%, the new level of the money supply it must set is $7.8. As a result of the increase in the interest rate from 7 to 11%, the Federal Reserve's balance sheet contracts in terms of the assets and liabilities it holds.
12.6, 7.8, contracts
Use the information provided below to answer the following questions. The non−institutional civilian population is 250 million, of which 100 million are employed and 10 million are unemployed. Based on the information above, the labor force participation rate is
44%
Suppose the consumption equation is represented by the following: C = 250 + .8YD. The multiplier for the above economy equals
5
If the nominal interest rate 8% and expected inflation 3%, the expected real interest rate in year t isapproximately:
5%
Suppose a one−year discount bond offers to pay $1000 in one year and currently sells for $950. Given thisinformation, we know that the interest rate on the bond is
5.3%
Based on our understanding of the IS-LM model that takes into account dynamics, we know that an increase in government spending will cause
A gradual increase in Y
Which of the following is one possible explanation for the change in the natural rate of unemployment in the United States during the 1970s?
A. contractionary fiscal policy B. contractionary monetary policy C. an increase in the proportion of labor contracts that were indexed D. all of the above E. none of the above ANSWER: E
Which of the following statements is false?
A. A bank's assets are its uses of funds. B. The bank's assets provide the bank with income. C. Bank capital is recorded as an asset on the bank balance sheet. Your answer is correct. D. A bank issues liabilities to acquire funds ANSWER: C
Which of the following will occur when the central bank pursues expansionary monetary policy?
A. a rightward shift in the money demand curve and a leftward shift in the money supply curve. B. a leftward shift in the money demand curve and a leftward shift in the money supply curve C. a rightward shift in the money demand curve and a rightward shift in the money supply curve. D. a leftward shift in the money demand curve and a rightward shift in the money supply curve. E. none of the above. ANSWER: E
The money demand curve will shift to the left when which of the following occurs?
A. an increase in the interest rate B. an open market sale of bonds by the central bank C. a reduction in the interest rate D. an increase in income E. none of the above ANSWER: E
Which of the following individuals would be considered unemployed?
A. an individual who works only part−time. B. an individual who is not working and is not looking for work. C. an individual who works full−time in a family business, but is not paid. D. all of the above. E. none of the above. ANSWER: E
Suppose the actual unemployment rate decreases. This will cause:
A. an upward shift in the WS curve B. a downward shift in the WS curve C. a downward shift in the PS curve D. an upward shift in the PS curve E. none of the above ANSWER: E
Which of the following is a component of money?
A. coins held by the nonbank public. B. checkable deposits. C. bills held by banks. D. all of the above ANSWER: D
Suppose the economy is currently operating on both the LM curve and the IS curve. Which of the following is true for this economy?
A. financial markets are in equilibrium. B. the quantity supplied of bonds equals the quantity demanded of bonds. C. production equals demand. D. the money supply equals money demand. E. all of the above. ANSWER: E
When a liquidity trap situation exists, we know that:
A. fiscal policy will have no effect on the demand for goods B. an open market operation will have no effect on the supply of money C. expansionary monetary policy will be deflationary D. an open market operation will have no effect on the monetary base E. none of the above ANSWER: E
Which of the following variables is most directly determined in the labor market?
A. interest rates B. stock prices C. nominal wages Your answer is correct. D. all of the above E. none of the above ANSWER: C
An open market sale of bonds by the central bank will cause which of the following when a liquidity trap situationexists?
A. output will decrease B. the money supply, M, will not change C. the interest rate will not change Your answer is not correct. D. the interest rate will increase E. none of the above ANSWER: E
Which of the following events will cause a reduction in equilibrium output?
All of the above
The interest rate will increase as a result of which of the following events?
An increase in income
Consider the simplified bank balance sheet shown below. Assets = 120 Liabilities = 100 Capital = 20 If the bank's assets decline in value, its leverage ratio will rise The bank will remain solvent provided its assets decline by no more than 19 Suppose the bank's assets fall by 10. In this case, the bank might consider which of the following options? A one-for-one reduction in assets and liabilities. Increasing its capital from investors.
Answer in problem
Suppose that the Phillips curve is given by: πt= πet + (m + z) − α ut Given this equation for the Phillips curve, what would be the equation for the natural rate of unemployment? The equation for the natural rate of unemployment can be written as un = m+z/a According to the equation for the natural rate of unemployment, an increase in α will lead to a decrease in the natural rate of unemployment. Using the equations above, calculate the natural rate of unemployment given the following information. Assume m = 0.02 and z = 0.05. If α = 1, the natural rate of unemployment is 77%. (Round your response to one decimal place.) If α = 2, the natural rate of unemployment is 3.5%.
Answer in problem
Consider the following simplified production function: Y =N , where Y is output and N is employment. According to the production function, labor's productivity (output per worker) is _______ Given the value of labor's productivity in the simplified production function, Y =N , it follows that the cost of one more unit of output (that is, the marginal cost) is equal to the cost of employing one more worker, at wage W . If the goods market is perfectly competitive, then Upper P equals Upper W P=W .
Constant and equal to 1
Suppose there is an increase in consumer confidence. Which of the following represents the complete list of variables that must increase in response to this increase in consumer confidence?
Consumption and output
Which of the following long-term bonds has the highest interest rate?
Corporate BBB bonds
Suppose that the economy is characterized by the following behavioral equations: C = 130 + 0.90YD I = 140 G = 150 T = 100
Equilibrium output (Y) = 3,300. Total demand (Z) = 3,300. Total demand is equal to production.
Which of the following would NOT be considered part of fixed investment spending (I)?
Exxon increases its inventories of unsold gasoline.
Which of the following is an exogenous variable in our model of the goods market in Chapter 3?
Government spending (g)
When x decreases
IS curve shifts to the right.
The purchase by the Canadian government of a fighter jet produced in the United States is included in U.S.
Net exports
Based on price setting behavior, we know that a reduction in the unemployment rate will cause:
No change in the real wage
An economy produces three goods: cars, computers, and oranges. Quantities and prices per unit for years 2012 and 2013 are as follows:
Picture 1
Consider a bank that has assets of 100, capital of 20, and short-term credit of 80. Among the bank's assets are securitized assets whose value depends on the price of houses. These assets have a value of 50. Suppose that as a result of a housing price decline, the value of the bank's securitized assets falls by an uncertain amount, so that these assets are now worth somewhere between 25 and 45. Call the securitized assets "troubled assets." The value of the other assets remains at 50. As a result of the uncertainty about the value of the bank's assets, lenders are reluctant to provide any short-term credit to the bank.
Picture 10
Uncoventional monetary policy: financial policy and quantitative easing Suppose that the IS and LM relations are IS: Y=C(Y−T)+I(Y, r+χ)+G LM: r=r Interpret the interest rate as the federal funds rate adjusted for expected inflation, the real policy interest rate of the Federal Reserve. Assume that the rate at which firms can borrow is much higher than the federal funds rate, equivalently that the premium χ, in the IS equation is high.
Picture 11
The IS-LM view of the world with more complex financial markets Consider an economy described by the figure on the right. The units on the vertical axis of the figure are percents. If the nominal policy interest rate is 7% and the expected rate of inflation is 3%, the value for the vertical intercept of the LM curve is 4%. Suppose the nominal policy interest rate is 7%. If expected inflation increases from 3% to 4%, in order to keep the LM curve from shifting, the central bank must increase the nominal policy rate of interest to 8%.
Picture 12/13
The real wage implied by the price-setting behavior of firms having some market power is given by This wage does not depend on the rate of unemployment. In the figure on the right, show the determination of the equilibrium real wage and the natural rate of unemployment. 1.) Using the line drawing tool, graph the price-setting relation. Label your curve 'PS'. 2.) Using the point drawing tool, indicate the equilibrium point. Label your point 'A'.
Picture 14
The figure on the right shows the average monthly flows (in millions) between employment, unemployment, and non-participation for a hypothetical economy. According to the figure, the proportion of unemployed workers finding jobs in an average month is 21.821.8%. (Round your response to one decimal place.) U.S. data covering the 1996-2014 period show that the proportion of unemployed workers finding jobs has
Picture 15
Consider a closed economy with the following data: Production Y=$15trillion Consumption C=$11trillion Taxes T=$3 trillion Investment I=$0 trillion
Picture 2
The figure on the right displays a simplified consumption function. Which of the following expressions describes thisfunction? If consumption falls by $60 when disposable income falls by $100, the value of the parameter c1 must be 0.60.6. (Enter your response in decimal form.) Suppose households become less optimistic about the future. All else constant, this attitude change will cause the consumption function to
Picture 3
More often than not, policymakers find it useful to employ monetary and fiscal policies in combination. Suppose the economy shown in the accompanying figure is experiencing a recession at point A and policymakers want to implement a same-direction policy mix to raise output. 1.) Using the 3-point curved line drawing tool, reflect the appropriate fiscal policy. Label your curve 'IS′'. 2.) Using the line drawing tool, reflect the appropriate monetary policy. Label your curve 'LM′'. 3.) Using the point drawing tool, identify the new equilibrium point. Label your point 'A′'.
Picture 8
In response to the financial crisis, policymakers enacted an assortment of corrective measures. Which of the following were among these? (Check all that apply.) C. Stimulation of demand via fiscal policy. Your answer is correct. D. Efforts to strengthen the financial system via financial policies. Your answer is correct. E. Attempts to reduce borrowing costs for consumers and firms. Your answer is correct. In terms of the IS-LM figure on the right, the onset of the crisis sent the economy reeling from point A to point Upper B. The combination of fiscal and financial policies moved the economy from point B to point Upper C. The implementation of monetary policy moved the economy from point C to point Upper D.
Picture 9
Consider the following IS-LM Model All of the following statements accurately describe the outcome of a contractionary fiscal policy that involves a decrease in government spending except __________. With the government's contractionary fiscal policy, the value of the real money supply becomes Now suppose the real money supply is fixed at 2550 and government spending still decreases to G = 269. Calculate the new equilibrium values of the following:
Pictures 6/7
The appropriate concept to use when seeking to measure production and its change over time. Economists focus on this statistic when they wish to assess the performance of the economy from year to year. The sum of the quantities of final goods produced times their current prices. This variable is generally considered to be a reasonably good indicator of the average standard of living.
Real GDP Real gdp growth Nominal GDP Real GDP per person
Based on our understanding of the model presented in the text, a reduction in investment will cause
Reduction in output
The text proposes the following model of expected inflation πet = (1 − θ) π + θ πt−1 What do we know about your process of the formation of expected inflation when θ = 0? What do we know about your process of the formation of expected inflation when θ = 1? If you look mainly at what the long−run trends have been for inflation when trying to predict what inflation will be this year, then you believe that θ is near 0
Regardless of what inflation was last year, you would expect it to be at the long-run average inflation rate this year. Last year's inflation rate will be the only input for you to revise your estimates for this year's expected rate regardless of what the long-run average inflation rate is.
The figure on the right shows the determination of the interest rate in the financial market. Of the two curves drawn in the figure, the one drawn for a given level of nominal income is the money demand curve. The supply of money curve is drawn as a vertical line to indicate that the quantity of money in circulation is independent of the interest rate. Suppose there is a decrease in the economy's money supply. 1.) Using the line drawing tool, show the effect of this event in the accompanying figure. Label your new curve appropriately. 2.) Using the point drawing tool, identify the new equilibrium point. Label your point 'A''
See Picture 4
Changes in GDP in the medium run are determined primarily by:
Supply factors
________ was/were introduced in October 2008 to clean up banks.
TARP
Which of the following is not an action taken by governments to help stabilize the financial sector? The American Recovery and Reinvestment Act
The government created additional tax cuts. A. was created to help stimulate aggregate demand Your answer is not correct. B. was a fiscal stimulus tool used by the government C. was intended to raise output and reduce the recession D. All of the Above ASNWER: D
During a given year, the following activities occur in two stages: i. A pearl harvesting company pays its workers $70,000 to harvest 6,000 saltwater pearls. The pearls are then sold to a jewelry manufacturer for $110,000. ii. The jewelry manufacturer pays the jewelry artists it employs $1,100,000 to make 3,000 sets of one-of-a-kind, high-quality pearl earrings, which the manufacturer sells directly to customers for $1,800,000.
Using the production-of-final-goods approach, GDP in this economy is $1800000. (Round your response to the nearest dollar.) What is the value added at each stage of production? First stage = $110000. (Round your response to the nearest dollar.) Second stage = $1690000. (Round your response to the nearest dollar.) Using the value-added approach, GDP is $1800000. (Round your response to the nearest dollar.) What are the total wages and profits earned? Total wages = $1170000. (Round your response to the nearest dollar.) Profits earned = $630000. (Round your response to the nearest dollar.) Using the income approach, GDP is $1800000. (Round your response to the nearest dollar)
Suppose that a person's yearly income is $90,000. Also suppose that this person's money demand function is given by Md=$Y(0.35−i) When the interest rate is 10%, this person's money demand is $22500. (Round your response to the nearest dollar.) When the interest rate is 15%, this person's money demand is $18000. (Round your response to the nearest dollar.) Which of the following statements correctly describes the relationship between the interest rate and moneydemand?
When the interest rate increases, money demand decreases because interest-paying bonds become more attractive than the money balance.
A reduction in unemployment benefits will tend to cause which of the following?
a downward shift in the WS curve
A reduction in consumer confidence will likely have which of the following effects?
a leftward shift in the IS curve
We would expect which of the following to occur when the central bank pursues contractionary monetary policy?
a reduction in bond prices and an increase in i
Based on wage setting behavior, we know that an increase in the unemployment rate will cause
a reduction in the real wage.
An increase in the real interest rate, with no other changes that affect aggregate expenditure, is best represented by ________ in panel (a) and ________ in panel (b).
a shift from AE2 to AE1; a movement from point B to point A Picture 5
The Fed conducts open market operations with the primary goal of
affecting the federal funds rate.
Pure inflation occurs when:
all prices and nominal wages rise by the same percentage.
The IS curve will shift to the right when which of the following occurs?
an increase in government spending.
Which of the following statements is consistent with a given (i.e., fixed) LM curve?
an increase in output causes an increase in money demand.
Based on our understanding of the labor market model presented in the text, we know that a reduction in the markup will cause
an increase in the equilibrium real wage.
For this question, assume that the Phillips curve equation is represented by the following: πt−πt-1= (m + z)−αut. Which of the following will NOT cause a decrease in the natural rate of unemployment?
an increase in the expected rate of inflation
For this question, assume that the Phillips curve equation is represented by the following: πt−πt-1= (m + z) − αut. Which of the following will cause a reduction in the natural rate of unemployment?
an increase in α
In economics, money refers to
assets used and accepted as payment.
The process by which simultaneous withdrawals by a particular bank's depositors results in the bank closing is known as a
bank run
Suppose there is a fiscal contraction. Which of the following is a complete list of the variables that mustdecrease?
consumption and output.
In the efficiency wage model, a decrease in productivity would
decrease output but have no effect on the real wage.
Suppose the economy is initially in short−run equilibrium and the Fed decreases the nominal money supply. If the price level remains constant, real GDP will ________ relative to potential GDP and the real interest rate will________.
decrease, increase
Suppose nominal GDP increased in a given year. Based on this information, we know with certainty that:
either real output or the price level (GDP deflator) have increased
Suppose that a person's wealth is $60,000 and that her yearly income is $70,000. Also suppose that her money demand function is given by: MD= $70,000(0.35−i) The corresponding bond demand function is given by: Bd=$60,000−$70,000×(0.35−i) From these demand functions, one can conclude that if this person's income increases but her wealth remains unchanged ____________.
her demand for money increases but her demand for bonds decreases.
When inflation has been persistent, as was the case in the United States during the 1970s, low unemployment rates will likely be associated with
increases in the inflation rate.
Which of the following explains why the original Phillips curve relation disappeared or, as some economists haveremarked, "broke down" in the 1970s?
individuals changed the way they formed expectations of inflation.
The Phillips curve describes the relationship betwee
inflation and unemployment .
Holding large amounts of bank capital helps prevent bank failures because
it can be used to absorb the losses resulting from bad loans.
When the Fed attempts to increase real GDP and employment by ________ its target for the federal funds rate, it is conducting ________ monetary policy.
lowering, expansionary
When an analysis is conducted of the factors underlying supply (e.g., the capital stock) as the determinant of output in an economy, the time frame under consideration is the medium run. When an assessment is made of an economy's prospects over a period of, say, a few years, the time frame under consideration is the short run.
medium, short
Assume that expected inflation is based on the following: πet= θπt−1. An increase in θ will cause:
no change in the natural rate of unemployment
Suppose there is a simultaneous fiscal expansion and monetary expansion. We know with certainty that:
output will increase and the interest rate will decrease.
Equilibrium in the goods market requires that
production equals demand
The goal of fiscal policy is to ________, and typically focuses on ________.
reduce the severity of economic fluctuations; employment and production
The Phillips curve suggests that monetary policymakers could use monetary policy to
reduce the unemployment rate at the expense of higher inflation.
An increase in the desire to save by households will cause:
reduction in output
Based on our understanding of the model presented in Chapter 3, we know with certainty that an equal and simultaneous reduction in G and T will cause:
reduction in output
Some policymakers claim that raising the minimum wage will result in economic growth. If increasing the minimum wage would actually generate economic growth, we would expect to eventually see nominal wages________ and unemployment ________.
rise, fall
An increase in the expected rate of inflation would
shift the short-run Phillips curve upward.
In the fall of 2012, more than three years after the end of the recession, the unemployment rate remained just below 8% and nearly half of the unemployed had been out of work for at least six months. Unemployment had been so high for so long, that many economists had begun speaking of the "new normal", in which unemployment rates might be stuck at higher levels for many years. If this "new normal" does materialize, these higher unemployment rates would most likely be the result of ________ unemployment.
structural
If government spending and taxes increase by the same amount,
the IS curve shifts rightward
A reduction in the marginal propensity to save from .4 to .3 will cause:
the ZZ line to become steeper and a given change in autonomous consumption (c0) to have a larger effect on output
Which of the following best defines the real interest rate (r)?
the amount of goods we must give up next year in order to consume more goods today.
Which of the following best defines the LM curve?
the combinations of i and Y that maintain equilibrium in financial markets
The economy is considered to be at full employment when
the cyclical unemployment rate is zero.
During the late 1990s, Japan experienced reductions in the GDP deflator. Given this information, we know with certainty that:
the overall price level in Japan decreased during these periods
Since approximately 1970, the most stable Phillips−type relationship for the United States has been between which of the following?
the unemployment rate and the change in the rate of inflation.
The mortgage is said to be underwater when
the value of the mortgage exceeds the value of the house.
Gross domestic product is calculated as the sum of the
total market value of final goods and services produced in the economy during a period of time.
For this question, assume that investment spending depends only on output and no longer depends on the interest rate. Given this information, an increase in the money supply
will cause a reduction in the interest rate.
