BEC - MacroEcon

In a macroeconomic free-market flow model, which one of the following would not be considered an "injection?"

. A. Government spending. B. Investment spending. C. Government subsidies. D. Imports. D, correct In a macroeconomic free-market flow model, injections are the sources of amounts added to domestic production that do not result from domestic consumption expenditures, including government spending, government subsidiaries, investment spending, and amounts received from exports, but not amounts paid for imports.

Consequences of Inflation

1. Lower current wealth and lower future real income -- Because of inflation, monetary items (those fixed in dollar amount) lose purchasing power. Consumers on fixed incomes, or those with incomes that do not keep pace with inflation, will reduce consumption. Similarly, creditors repaid with a fixed number of dollars will be able to purchase less with those dollars. The effect of less consumption is a reduction in aggregate demand leading to lower output and higher unemployment. 2. Higher interest rates -- In order to offset declines in purchasing power derived from loans, creditors increase interest rates. Higher interest rates increase the cost of borrowing, which reduces both consumer spending and business investment in capital goods. Further, lenders may tighten loan requirements, and thereby, squeeze marginal borrowers out of the market, which also would reduce spending. 3. Uncertainty of economic measures -- The changing real value of the dollar makes it an uncertain measure for making economic decisions. Price increases create uncertainty about future costs, prices, profitability, and cash flows. Consequently, individuals and businesses are likely to postpone investments, which in turn reduces current demand and future productive capacity. B. Because inflation has significant adverse consequences for the economy, control of inflation is a primary economic objective of government fiscal and monetary policy.

During 2008, Roy's disposable income was $100,000 and he spent $90,000 on consumable goods. During 2009, Roy's disposable income increased to $200,000 and he spent $150,000 on consumable goods. For 2009, when compared to 2008, what is Roy's marginal propensity to consume? A. .60. B. .75. C. .80. D. $150,000.

A, Marginal propensity to consume measures the change in consumption spending as the percent of change in disposable income. Between 2008 and 2009, Roy's spending increased from $90,000 to $150,000, an increase of $60,000. During the same period, his disposable income increased from $100,000 to $200,000, an increase of $100,000. Therefore, Roy's marginal propensity to consume for 2009 was $60,000/$100,000 = .60.

During 2008, Roy's disposable income was $100,000 and he spent $90,000 on consumable goods. During 2009, Roy's disposable income increased to $200,000 and he spent $150,000 on consumable goods. During 2009, what is Roy's average propensity to consume? A. .75. B. .80. C. .90. D. $150,000.

A, Correct! Average propensity to consume measures the percentage of disposable income spent on consumable goods. During 2009, Roy spent $150,000 of his $200,000 disposable income, or $150,000/$200,000 = .75. This was his average propensity to consume.

Which of the following effects is most likely to accompany an unexpected reduction in aggregate supply, assuming a conventional supply curve? A. An increase in the price level. B. A decrease in the price level. C. A decrease in the rate of unemployment. D. An increase in the gross domestic product (GDP).

A, A reduction in aggregate supply will shift the supply curve to the left, resulting in a lower quantity of output at a higher price.

Which of the following strategies would the Federal Reserve most likely pursue under an expansionary policy? A. Purchase federal securities and lower the discount rate. B. Reduce the reserve requirement while raising the discount rate. C. Raise the reserve requirement and lower the discount rate. D. Raise the reserve requirement and raise the discount rate.

A, correct Through its exercise of monetary policy, the Federal Reserve (the Fed) can take actions intended to expand or contract the economy. An expansionary policy would serve to increase spending, demand, employment, and other economic measures. By purchasing federal securities (through its Open Market Committee), the Fed would put more cash into the economy by providing cash to the selling investors (e.g., banks, etc.). Increasing cash (the money supply) typically serves to stimulate the economy. In addition, lowering the discount rate (the interest rate the Fed charges for short-term loans to banks) would reduce the cost of borrowing by banks, thus increasing their ability to make loans for consumption and investment purposes.

Adjustment from gross national product (GNP) to net national product (NNP) would require which one of the following?

A. Deducting depreciation from the GNP. B. Deducting investment from the GNP. C. Adding depreciation to GNP. D. Adding investment to GNP. A, Correct! Net National Product, like Gross National Product, measures the total output of all goods and services produced worldwide using the economic resources of U.S. entities, but does not include an amount (output value) for depreciation. Thus, depreciation would be deducted from GNP to derive NNP.

Potential GDP is a measure of an economy's ability to produce goods and services. Which of the following is assumed in estimating potential GDP?

A. Price levels are stable; there is no inflation or deflation. B. Imports and exports are at equal amounts. C. All labor is being fully and efficiently used. D. Real GNP is equal to potential GNP. C,Correct! Potential GDP is a measure of the maximum amount of goods and services an economy can produce at a given time, assuming available technology and full utilization of available economic resources, including labor.

Components of Aggregate Demand

Aggregate demand is the total spending by individual consumers (consumption spending), businesses on investment goods, and by governmental entities, and foreign entities on net exports. Each is considered in the following subsections.

An increase in the minimum wage rate would likely result in which one of the following? A. The aggregate supply curve would shift outward. B. The aggregate supply curve would shift inward. C. The aggregate supply curve would remain unchanged. D. The quantity supplied at various prices will increase.

B, Correct! An increase in the minimum wage rate would be an increase in the cost of economic resources (labor), which would shift the aggregate supply curve inward--a reduction in supply.

If the U.S. economy is experiencing a 9% total unemployment rate and the natural rate of unemployment is 5.5%, which of the following is the cyclical rate of unemployment? A. 0.0%. B. 3.5%. C. 5.5%. D. 14.5%.

B, Correct! The cyclical rate of unemployment is the difference between the total rate of unemployment and the natural rate of unemployment (which includes all categories of unemployment except cyclical unemployment). Thus, cyclical unemployment is calculated as the total unemployment rate 9.0% minus the natural rate of unemployment 5.5% = 3.5% cyclical rate of unemployment.

Which of the following is correct regarding the Consumer Price Index (CPI) for measuring the estimated decrease in a company's buying power? A. The CPI is measured only once every 10 years. B. The products a company buys should differ from what a consumer buys. C. The CPI measures what consumers will pay for items. D. The CPI is skewed by foreign currency transactions.

B, Correct! The Consumer Price Index (CPI) measures the change in price over time of a representative "basket" of goods and services purchased by consumers, not by companies. Goods and services purchased by companies would be expected to be different than the goods and services purchased by consumers. The Wholesale Price Index (WPI) should be more representative of goods and services purchased by businesses.

Which of the following actions is the acknowledged preventive measure for a period of deflation? A. Increasing interest rates. B. Increasing the money supply. C. Decreasing interest rates. D. Decreasing the money supply.

B, Correct! When an economy is in deflation, increasing the money supply (for example, by lowering the reserve requirement or, in most circumstances, lowering the discount/interest rate) will stimulate demand and increase the general price level.

In macroeconomics, which one of the following would not be considered investment spending? A. A family has a new home constructed. B. A business acquires new production equipment. C. An individual acquires shares of common stock. D. A business acquires inventory to expand its product line.

C, Acquisition of shares of common stock is not included in the definition of investment spending for macroeconomic analysis purposes. Such investments are considered saving.

Assuming a conventional supply curve, which one of the following factors will not cause a shift in the aggregate supply curve for a good? A. An increase in the availability of input resources. B. Technological developments that increase production efficiency. C. An increase in the selling price of the good. D. A decrease in the cost of input resources.

C, An increase in the selling price of a good would not shift a conventional supply curve. A change in price (alone) is reflected by movement along a given supply curve, not by a shift in the supply curve.

Which of the following changes in unemployment is most likely to be associated with a period of economic contraction? A. Decrease in the cyclical unemployment rate. B. Increase in the natural unemployment rate. C. Increase in the cyclical unemployment rate. D. Increase in the structural unemployment rate.

C, Correct! Cyclical unemployment results from a contraction in economic activity (i.e., a decrease in aggregate demand). During a period of economic contraction, the cyclical unemployment rate would be expected to increase.

The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment? A. $100 billion B. $80 billion C. $20 billion D. $10 billion

C, In order to reach full employment, gross domestic product needs to increase by $.1 trillion (i.e., $1.3 trillion @ full employment - $1.2 trillion @ current = $.1 trillion shortfall). Because of the multiplier effect, additional government expenditures needed to increase gross domestic product by that amount is $20 billion. The formula is: Multiplier Effect = Initial Change in Spending x (1/(1 - MPC)) Where: Initial Change in Spending = X, and substituting known values: $.1T = X x [1/(1-.8)] [NOTE: .1T = 100B.]; therefore: $100B = X x [1/.2] $100B = X x 5 X = $100B/5 X = $20B A $20B increase in government expenditures would result in $100 billion increase in gross domestic product.

The war in Iraq substantially reduced the working population, as well as other economic resources, of that country. Which one of the following most likely occurred in the Iraqi economy as a result of the reduced working population? A. The aggregate demand curve shifted outward. B. The aggregate supply curve shifted outward. C. The aggregate supply curve shifted inward. D. The aggregate supply curve will remain unchanged.

C, Since labor is an economic resource, a decrease in labor would shift the aggregate supply curve inward (i.e., reduce aggregate supply).

A positive gross domestic product (GDP) gap exists when A. Real GDP exceeds nominal GDP. B. Nominal GDP exceeds real GDP. C. Potential GDP exceeds real GDP. D. Nominal GDP exceeds potential GDP.

C, The GDP gap is a measure of the difference between potential GDP and real GDP. Potential GDP is the maximum production of final goods and services that is possible in the economy without putting upward pressure on the general level of prices. Real GDP is the market value of all final goods and services actually produced, adjusted for changes in the price level, that is, in terms of constant prices of a base period. The gap between real GDP and potential GDP is positive when potential GDP exceeds real GDP and negative when real GDP exceeds potential GDP. Furthermore, a positive GDP gap indicates that the economy is operating at less than full capacity, which implies unemployment and under-utilized plant and equipment. Conversely, a negative GDP gap indicates that the economy is operating above normal full capacity, which will put upward pressure on prices.

Which of the following types of unemployment typically results from technological advances? A. Cyclical. B. Frictional. C. Structural. D. Short-term.

C, Structural unemployment consists of members of the workforce who are not employed because the types of jobs they had previously have been greatly reduced or eliminated, including as a result of technological advances, or because they lack the skills needed for available jobs. Technological advances cause structural unemployment.

Which of the following Federal Reserve policies would increase money supply? A. Change the multiplier effect. B. Increase the reserve requirement. C. Reduce the discount rate. D. Sell more U.S. Treasury bonds.

C, Correct! A reduction in the discount rate would increase the money supply. The discount rate is the interest rate banks pay when borrowing from a Federal Reserve Bank (the "Fed"). By reducing the discount rate, the cost of borrowing is reduced and banks increase lending, which increases the money supply.

Variations between business cycles are most likely attributable to which of the following factors? A. The law of diminishing returns. B. Comparative advantage. C. Duration and intensity. D. Opportunity costs.

C, Correct! Business cycles are the cumulative fluctuations (up and down) in aggregate real GDP of a country and generally last for two or more years. While these increases and decreases in real GDP tend to recur over time, there is no consistent pattern of length (duration) or magnitude (intensity) of the cycles.

Which of the following changes is most likely to be a lagging indicator of a change in the business cycle? A. Change in building permits. B. Change in consumer expectations. C. Change in duration of unemployment D. Change in weekly manufacturing hours.

C, Correct! Changes in employment normally are a result of changes in the business cycle. Therefore, the length of time workers are unemployed would lag behind a change in the business cycle. After a business cycle has turned down (is recessionary), the length of unemployment would increase, and vice versa.

How does inflation distort reported income? A. Wages are NOT reflective of current labor rates. B. Sales are not reflective of current product prices. C. Depreciation is NOT reflective of current fixed-asset replacement costs. D. Interest expense is NOT reflective of current borrowing rates.

C, Correct! Depreciation does not reflect current fixed-asset replacement costs. Depreciation is the systematic and rational allocation of long-term assets over the period benefited. Thus, depreciation (expense) reflects the portion of the historical cost of the asset allocated to the current period. Since the asset may have been acquired many periods ago, during a period of inflation the current allocation will reflect the old price of the asset, not the current price (replacement cost) of the asset.

The business cycle in the U.S. is measured in terms of changes in A. total government spending. B. nominal GDP. C. real GDP. D. potential GDP.

C, Correct! The cyclical behavior of the U.S. economy (i.e., the business cycle) is reflected in the cumulative fluctuations in aggregate output as measured by the real gross domestic product (GDP).

A hospital is comparing last year's emergency rescue services expenditures to those from 10 years ago. Last year's expenditures were $100,500. Ten years ago, the expenditures were $72,800. The CPI for last year is 168.5 as compared to 121.3 ten years ago. After adjusting for inflation, what percentage change occurred in expenditures for emergency rescue services? A. 38.0% increase. B. 13.8% increase. C. 0.6% decrease D. 18.1% decrease.

C, Correct! The percentage change in expenditures for emergency rescue services is a 0.6% (i.e., .006) decrease. The change in the CPI value over the 10 years was 168.5 - 121.3 = 47.2. The percentage change in the CPI was 47.2/121.3 = .38911. Therefore, adjusted for inflation, expenditures 10 years ago would have an adjusted value of $72,800 x 1.38911 = $101,127. Since expenditures in current dollars was $100,500 there was an inflation adjusted decrease of 0.6%, calculated as $100,500 - $101,127 = ($627)/$101,127 = .0062 (or 0.6%) decrease.

Which of the following is not included in what is considered the natural rate of unemployment? A. Cyclical unemployment. B. Structural unemployment. C. Frictional unemployment. D. Seasonal unemployment.

C. Cyclical unemployment, which results from a downturn in the business cycle that has reduced the current need for workers, is not considered an element of the natural rate of unemployment. The natural rate of unemployment would include structural, frictional, and seasonal unemployment.

GDP Deflator

C. Gross Domestic Product (GDP) Deflator -- The GDP Deflator relates nominal GDP to real GDP (both as previously defined). It is the most comprehensive measure of price level since GDP includes not only consumer and business spending, but also government spending and net exports. 1. The calculation is: (Nominal GDP/Real GDP) × 100 = GDP Deflator

Consequences of Deflation

Consequences of deflation—the deflationary spiral -- When prices are falling, consumers have an incentive to delay purchases and businesses have an incentive to delay investments, both in anticipation of lower prices in the future. These delays create further decreases in aggregate demand, causing further reductions in prices, increased idle production capacity, increased unemployment, and reductions in wages and in lending and interest rates. This cycle is called a deflationary spiral. If unchecked, it can have serious adverse consequence for an economy.

Discretionary Fiscal Policy

Consequently, government can directly affect aggregate demand by changing tax receipts, government expenditures, or both. Intentional changes by the government in its tax receipts and/or its spending, which are implemented in order to increase or decrease aggregate demand in the economy is called discretionary fiscal policy.

The Federal Reserve System seeks to achieve national economic objectives through its exercise of fiscal policy monetary policy Yes Yes Yes No No Yes ----correct No No

Correct! The Federal Reserve System (the Fed) seeks to achieve national economic objectives through its exercise of monetary policy, that is, through its control of the money supply. The Fed does not establish or implement fiscal policy. Fiscal policy is established primarily by the U.S. Congress, through its control of the level of government spending and the tax system (rate, etc.).

Which of the following is most likely to increase aggregate demand? A. Increased savings by consumers. B. Increased spending on imported goods. C. Increasing tax rates and tax revenues. D. Increased business investment.

D, Correct! An increase in business investment is likely to increase aggregate demand. An increase in business investment in inventory, durable equipment, and construction will increase demand for resources and labor. Furthermore, payments for those resources and labor will, in turn, increase demand from suppliers and consumers.

There can be official full employment when there is which of the following kinds of unemployment? I. Structural unemployment. II. Frictional unemployment. III. Seasonal unemployment. A. Only I. B. Only II. C. Only III. D. I, II, and III.

D, Correct! There could be official full employment when there is structural, frictional, and/or seasonal unemployment. Only cyclical unemployment is considered in the official measure of full employment.

Assume that the Gross Domestic Product (GDP) Deflator index is: Year GDP Deflator 2001 175 2002 180 2003 184 If nominal GDP for 2003 is $11,500 billion, which of the following amounts is closest to real GDP for 2003? A. $11,058 billion. B. $11,275 billion. C. $9,660 billion. D. $6,250 billion.

D, Real GDP is determined by adjusting nominal (current dollar) GDP for the effects of inflation, such that current-year GDP is expressed in terms of base period dollars (price level). The 2003 GDP deflator of 184 shows that the price level has increased by 84% since the base period. The calculation is: 100 - 184 = 84 = .84 100 100 Thus, 2003 prices are 184% of the base period prices. To get real GDP, nominal GDP is divided by 1.84. Thus, $11,500/1.84 = $6,250 billion. In terms of base period dollars, 2003 GDP would be $6,250 billion.

Jason, 14 years old, has been working delivering newspapers for the past two years. Because he just entered high school, he has had to give up his newspaper delivery job. Although he has been seeking a new job, he has not been able to find one. Jason would be considered frictionally unemployed structurally unemployed cyclically unemployed Yes No No No Yes No No No Yes No No No

D: NO, NO, NO Correct! Jason is not considered frictionally, structurally, or cyclically unemployed. Because Jason is only 14 years old, he is not considered a member of the workforce and, therefore, is not counted as unemployed. To be considered part of the workforce, an individual must be at least 16 years old.

Fiscal Policy

In economics and political science, fiscal policy is the use of government revenue collection (mainly taxes) and expenditure (spending) to influence the economy.

Monetary Policy

Monetary policy is one of the ways that the U.S. government attempts to control the economy. If the money supply grows too fast, the rate of inflation will increase; if the growth of the money supply is slowed too much, then economic growth may also slow.

Deflation vs. disinflation

Note: Deflation is different from disinflation, which is a decline in the rate of inflation. Deflation (or deflation rate) is the annual rate of decrease in the price level.

Full Employment

Officially, full employment is when there is no cyclical unemployment. Even with frictional and structural unemployment, officially full employment can exist. Said another way, if unemployment is due solely to frictional, structural and seasonal causes (i.e., the natural rate of unemployment), the economy is in a state of full employment.

In a macroeconomic free-market flow model, which of the following would be considered leakages?

Savings Taxes Yes Yes ----correct Yes No No Yes No No Correct! In a macroeconomic free-market flow model, leakages result when income is used for purposes other than domestic consumption. Both savings and taxes (as well as payments for imports) are uses of income for purposes other than domestic consumption.

The U.S. M1 measure of money supply includes: Paper Currency Check-Writing Deposits Savings Deposits Yes Yes Yes Yes Yes No -----correct Yes No Yes Yes No No

The M1 measure of money supply includes paper currency, coins, and check-writing deposits, which are the primary financial instruments used for transactions. Check-writing deposits are amounts held by banks, savings and loan associations, and credit unions for which ownership can be transferred by writing a check. Savings deposits are not an element of the M1 definition of money.

Causes of Inflation

There are two fundamental causes of inflation, one related to demand, the other related to supply. Demand-induced (demand-pull) inflation -- Results when levels of aggregate spending for goods and services exceeds the productive capacity of the economy at full employment. Consequently, the excess demand pulls up prices. Supply-induced (cost-push or supply-push) inflation -- Results from increases in the cost of inputs to the production process—raw materials, labor, taxes, etc.—which are passed on to the final buyer in the form of higher prices. To the extent the producer absorbs the increase in cost of inputs and does not pass them on to the final buyer, inflation does not occur (or is deferred).

The following information is available for economic activity for year 1: In billions Financial transactions $60 Second-hand sales 50 Consumption by households 40 Investment by businesses 30 Government purchases of goods and services 20 Net exports 10 What amount is the gross domestic product for year 1?

What amount is the gross domestic product for year 1? A. $210 billion. B. $160 billion. C. $100 billion. D. $90 billion. C, Correct! Gross domestic product (GDP) is the total output of final goods and services produced during a period. It can be measured using either the expenditures approach or the income approach. The information provided permits GDP to be measured using the expenditures approach, which is the sum of: Consumption by individuals/households $40B Investment by businesses 30 Government purchases 20 Net exports (net purchases by foreign buyers) 10 Total Expenditures (GDP) $100B

Unemployment

a. Frictional Unemployment: Members of the labor force who are not employed because they are in transition or have imperfect information. For example, members of the labor force who are in search of a job that is in line with their talents (education, skills, experience, etc.), or who are moving to a different part of the country. b. Structural Unemployment: Members of the labor force who are not employed because their prior types of jobs have been greatly reduced or eliminated, and/or because they lack the skills needed for available jobs. For example, the advent of computers and accounting software has greatly reduced the demand for bookkeepers in the economy. c. Seasonal Unemployment: Members of the labor force who are not employed because their work opportunity regularly and predictably varies by the season of the year. For example, school teachers are regularly unemployed during summer months when school is not in session. (This category sometimes is viewed as a kind of temporary structural unemployment.) d. Cyclical Unemployment: Members of the labor force who are not employed because a downturn in the business cycle (i.e., an economic contraction) has reduced the current need for workers.

An economy is at the peak of the business cycle. Which of the following policy packages is the most effective way to dampen the economy and prevent inflation? A. Increase government spending, reduce taxes, increase money supply, and reduce interest rates. B. Reduce government spending, increase taxes, increase money supply, and increase interest rates. C. Reduce government spending, increase taxes, reduce money supply, and increase interest rates. D. Reduce government spending, reduce taxes, reduce money supply, and reduce interest rates.

c, Correct! All four of these fiscal and monetary policy actions would function to dampen demand and, therefore, the economy and would (help) prevent inflation.