ECO 304L - EXAM 2 PRACTICE QUESTIONS

Which statement would likely be made by a Keynesian economist?

"The economy tends toward instability and cyclical unemployment."

In 1900, the average annual income of U.S. citizens, in inflation-adjusted 2018 U.S. dollars, was roughly _____.

$5,000

Annual real per capita GDP in the U.S. was roughly $55,000 in 2018. If per capita GDP grew by 2% the following year, by 2019 the annual real per capita GDP would be _____.

$56,100

In 2018, U.S. GDP was roughly $20.5T. Given that the U.S. population was roughly 327M people, per capita GDP in the U.S. in 2018 was roughly _____.

$62,691

If disposable income falls by $60B and consumption falls by $30B, then the slope of the consumption function is:

0.5

If disposable income increases by $100M and consumption increases by $80M, then the marginal propensity to consume is:

0.8

From 2017 to 2018, a country's nominal GDP grew by 5.5%. Given that prices increased by 2% and real per capita GDP grew by 2.7%, we know that the population grew by _____.

0.8%

In 2015, real per capita GDP in Australia was $55,183.74. By 2016, Australia's per capita GDP had increased to $55,875.10. What was Australia's economic growth rate from 2015 to 2016?

1.25%

The Great Recession lasted from _____ to _____.

December 2007; June 2009

All of the following are examples of positive institutions.

Private property rights. The flow of funds across borders. Efficient taxes. Stable money and prices.

Which of the following policies would be advocated by modern growth theory?

Promote political stability.

Which of the following caused aggregate demand to decrease during the Great Recession?

Reduced wealth from falling stock prices.

We know that resources are important for economic growth. Which of the following statements about resources is true?

Resources can be natural, like mineral deposits or forests, or man-made, like machinery and factories.

A new method of farming is developed that increases output by one-third. This will impact

SRAS and LRAS.

A p[ositive supply shock is best represented by an outward movement of the

SRAS curve.

Which of the following economic statements would a classical economist tend to support?

Savings are crucial to economic growth because they lead to an investment in productive capital.

Macroeconomic equilibrium occurs when:

aggregate expenditure = GDP

Household wealth is defined as the value of a household's:

assets minus the value of its liabilities.

For the aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) to intersect at the same place, the economy would have to be operating

at the full-employment level.

In the Solow growth model, _____ measures the labor input in terms of the physical number of workers and the knowledge and skills embodied in those workers.

human capital

An increase in the workforce can be expected to

increase LRAS.

Increases in productivity will

increase LRAS.

Suppose a country's population is growing due to immigration. In the long run, output will _____ due to _____.

increase; an increase in LRAS

In a population, not all workers have a high school diploma. Suppose the size of the labor force increases, but a smaller percentage of the labor force has a high school diploma. It is reasonable to expect that having a larger labor force will _____ the human capital input and having a smaller percentage of the labor force with a high school diploma will _____ the human capital input.

increase; decrease

Suppose there is a surge in stock market values. In the short run, we would expect the price level to _____ and the unemployment rate to _____.

increase; decrease

Mexico and the U.S. are trading partners. If wealth increases in Mexico, then, in the short-run, equilibrium output in the U.S will _____ and the price level will _____.

increase; increase

Suppose a major tornado hits the Midwest and destroys significant amounts of physical capital. All else the same, in the short run, we can expect the marginal product of capital to ____ and investment will _____.

increase; increase

According to World Bank data, wealthy nations tend to have much lower rates of _____ and much higher rates of _____ when compared to poor nations.

infant mortality; adult literacy

Goods that have been produced but not yet sold are referred to as:

inventories

The aggregate demand curve illustrates the

inverse relationship between the price level and the quantity demanded of real GDP.

An economy is in the steady state if

investment equals depreciation.

If firms are less optimistic that future profits will rise and remain strong for the next few years, then:

investment spending will fall.

If there is an increase in the price of oil, then in the short run, equilibrium would shift _____, and in the long run, equilibrium _____.

inwards and upwards would not change

The aggregate expenditure model focuses on the relationship between _____ and _____ in the short run, assuming _____ is constant.

total spending; real GDP; the price level

When the price level rises and U.S. goods become relatively more expensive than foreign goods, there will be a(n)

upward movement along the aggregate demand curve.

Aggregate supply describes the

willingness and ability of suppliers to product GDP.

In the Solow growth model, human capital will increase if

workers become better educated and more skilled.

During the Great Depression, the aggregate price level and real GDP both decreased, as shown on the graph. Unemployment increased to record levels. Which of the following best explains why this happened?

A stock market crash, large numbers of bank failures, an increase in tax rates, and a tight money supply caused a recession.

An increase in the value of the dollar will

decrease aggregate demand.

If short-run equilibrium output is below full-employment output, then, in the long run, input prices will

decrease and output will increase.

When moving up along the production function, the marginal product of capital will eventually

decrease.

If wildfires burned 25% of California's physical capital, then long-run output will _____ and the price level will _____.

decrease; increase

Suppose a country's population is aging and the size of the workforce is declining. In the long run, output will _____ and the price level will _____.

decrease; increase

If a firm experiences diminishing marginal productivity, the marginal product of physical capital will _____ when the amount of physical capital is _____.

decrease; increased

The graph accurately summarizes what happened during the Great Depression. During that time, aggregate demand _____, causing the price level to _____ and real GDP to _____.

decreased; decrease; decrease

As a result of decreasing aggregate demand, we can see the price level _____ and real GDP _____.

decreased; decreased

As the COVID recession wore on, people's incomes declines, real wealth decreased, expectations of future income fell, business confidence dropped, and foreign income declines. These factors all shifted the _____ curve to the _____.

AD; left

Between 2006 and 2010, real per capita GDP in India grew at an average rate of 7.11% per year. Which of the following factors could contributed most to this rapid escalation in the growth rate?

Advances in technology.

Real per capita income in _____ today is still less than that of the U.S. in 1850.

Africa

Which of the following policy statements would a classical economist tend to support?

Aggregate supply is the most important side of the economy.

What would cause an outward shift of the LRAS curve?

An improvement in technology.

From 2009 to 2010, nominal GDP in the U.S. grew by 3.8%. Given that prices increased by 1% and the population grew by 1%, we know that real per capita GDP grew by _____.

1.8%

During the Great Recession, the unemployment rate climbed as high as _____% and remained around _____% five years after the recession began.

10; 8

Sasha's starting salary at her new job is $50,000. Her company gives a performance raise of 4% each year. If Sasha continues in the same position and always receives the performance raise, in how many years will she double her salary?

17.5 Years

From 2016 to 2017, nominal GDP in Mexico grew by 9.3%. Given that prices increase by 6.0% and the population grew by 1.3%, we know that real per capita GDP grew by _____.

2.0%

In 2017, real per capita GDP in the U.S. was roughly $53,357. In 2018, real per capita GDP in the U.S. was roughly $54,542. Therefore, between 2017 and 2018, the rate of economic growth in the U.S. was _____.

2.2%

From 2009 to 2010, real per capita GDP in the U.S. grew by 1.8%. Given that prices increased by 1% and the population grew by 1%, we know that nominal GDP grew by _____.

3.8%

A coffee shop can make 100 cups of coffee with one espresso machine and 180 cups of coffee with two espresso machines. The marginal product of the second espresso machine is

80 cups of coffee.

During the COVID recession, real GDP fell _____% in the second quarter of 2020 on a non-annualized basis, and _____% on an annualized basis.

9; 31.4

What can cause a shift in the LRAS?

A change in labor productivity.

Maritza owns a restaurant. She wants to increase the number of patrons she serves each month, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the physical capital resource at her restaurant?

Buying more tables and chairs.

Aggregate expenditure includes spending on:

C + I + G + NX

_____ economists emphasize that prices are fully flexible and the economy will eventually return to long-run equilibrium.

Classical

_____ economists were laissez-faire in their policy recommendations, having faith that the economy would self-correct without government intervention.

Classical

What is the relationship between enforcing a nation's laws and economic growth?

Enforcing laws is good for growth. It creates stability and incentivizes investment.

Lauren owns a bakery. She wants to increase her daily production of baked goods, and she wants to use a technological advance to do so. _____ would represent a technological advance at her bakery.

Installing a convection oven that can bake bread in half the time

Sustained economic growth is primarily caused by

advances in technology.

Lauren owns a bakery. She wants to increase her daily production of baked goods, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the human capital resource at her bakery?

Increasing employee training.

_____ consumption is consumption that depends upon the level of GDP and _____ consumption is consumption that does not depend upon the level of GDP.

Induced; autonomous

If planned aggregate expenditure is greater than total production, then:

GDP will increase.

Krista owns a hair salon. She wants to increase the number of clients she serves each month, and she wants to use a technological advance to do so. _____ would represent a technological advance at her hair salon.

Installing a new hair dryer that can dry hair in half the time, with less damage to the hair

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will rise and GDP and employment will decline.

How can we explain the slope of the SRAS curve?

It is positive because of sticky input prices and flexible output prices.

How does a decrease in government spending affect the aggregate expenditure line?

It shifts the aggregate expenditure line downward.

How will technological advancement impact the steady state level of capital in the Solow growth model?

It will increase the steady state level of capital.

_____ economics emphasizes the inherent instability in the macroeconomy and the resulting need for government intervention to move back to full employment.

Keynesian

_____ economics focuses on spending, or aggregate demand, as the fundamental factor in the economy.

Keynesian

Which of the following is true of LRAS?

LRAS is independent of the price level.

What events might allow an economy to reach a long-run equilibrium?

Labor costs could decrease allowing SRAS to shift.

Which of the following would have caused aggregate demand to decrease on the graph, such as occurred during the Great Depression?

Lower expected future income.

Why would an increase in capital resources lead to an increase in worker productivity?

More capital means that workers have better tools and equipment and can produce more.

Lauren owns a bakery. She wants to increase her daily production of baked goods, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the physical capital resource at her bakery?

Moving into a larger space.

From 2017 to 2018, nominal GDP in the U.S. increased by 5.2%. Does this mean that the U.S. economy actually grew by 5.2% during that time period?

No, because nominal GDP ignores changes in prices and population growth.

Is having abundant resources an absolute guarantee of economic growth and prosperity?

No, other factors like institutions and technological advances are relevant too.

The stock market crash in _____ is generally viewed as the beginning of the Great Depression.

October 1929

In 1950, residents in Liberia were wealthier than those in Taiwan. Today, per capita GDP in Taiwan is more than 20 times that of Liberia. Which of the following best explains why Taiwan is now so much wealthier than Liberia?

Taiwan's political climate has been stable, while there has been constant violent unrest in Liberia.

Which of the following would affect both SRAS and LRAS?

Technological changes.

Which of the following would cause an increase in LRAS?

The amount of physical capital increases.

Which of the following would cause the long-run equilibrium point to shift down and out?

The country's overall productivity increased.

How will the economy move toward long-run equilibrium on its own?

The price level will adjust.

Which of the following would shift aggregate demand to the left?

There is a decline in consumer confidence.

Which of the following would cause the AD curve to shift inward?

There is a reduction in consumer confidence about future growth in the economy.

During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because

U.S. housing prices fell.

Steve owns a bike shop. He wants to increase the number of bikes he sells each week, and he wants to use a technological advance to do so. _____ would represent a technological advance at his bike shop.

Utilizing an online ordering system that allows him to sell bikes across the country

Which of the following would cause the SRAS curve to shift inward?

Wages and input prices rise as the economy responds to inflation expectations.

A decrease in the general price level will lead to

a downward movement along the SRAS curve as firms decrease output.

Keynesian economists believe that savings are _____ and stress the importance of aggregate _____.

a drain on demand; demand

An example of physical capital is

a factory.

Country X has a higher growth rate of real investment than Country Y. You might expect Country X to also have

a higher growth rate of real GDP.

During the Great Depression, the U.S. aggregate demand curve shifted to the left, in part, because

a large number of U.S. banks failed.

When compared to other recessions, the Great Depression had

a larger decline in real GDP.

The aggregate demand curve slopes downward because

a lower price level increases real wealth.

According to the interest rate effect, an increase in the price level leads to _____ in the interest rate, and therefore to _____ in the quantity of aggregate demand.

a rise; a fall

When there is an unplanned decrease in inventories,

actual inventory investment is less than planned inventory investment.

Change in real per capita GDP is the best measure of economic growth because it

adjusts changes in nominal GDP for changes in the price level and population growth.

Real per capita GDP is higher in the U.S. than in Bangladesh. Based on that, we could predict the U.S. to have a higher rate of _____ and a lower rate of _____.

adult literacy; infant mortality

According to the Solow growth theory, developing nations will catch up to the developed nations

because for developing nations, the marginal productivity of capital is higher when they use lower levels of capital.

During the Great Recession, LRAS decreased. This was caused by a(n)

breakdown in the loanable funds market.

If inflation turns out to be higher than expected, this will

cause movement along the SRAS curve.

The slope of the consumption function is equal to the change in:

consumption divided by the change in disposable income.

The consumption function describes the relationship between:

consumption spending and disposable income.

Household spending on goods and services is known as:

consumption spending.

When the price level rises, _____ declines from the wealth effect, _____ declines from the interest rate effect, and _____ decline(s) from the international trade effect.

consumption; investment; net exports

Classical economists believe savings are _____ and stress the important of aggregate _____.

crucial for growth; supply

Suppose Florida was operating at its steady state when a major hurricane hits and destroys significant amounts of physical capital. All else being the same, Florida's real GDP will _____ in the short run, and real GDP will _____ in the long run.

decline; return to the steady state level

Investment spending _____ during a recession and _____ during an expansion.

declines; increases

Diminishing marginal product occurs when the marginal product of an input _____ as the quantity of the input _____.

decreases; increases

The key assumption of the Solow model is

diminishing returns.

Nominal GDP is a poor measure of economic growth because it

does not consider changes in prices or population growth.

Many economists attribute the troubles of the Great Recession in housing markets to

excessive monetary expansion in the previous decade.

If planned aggregate expenditure is less than total production, then:

firms will experience an unplanned increase in inventories.

During the Great Depression, Keynes recommended

fiscal policy in the form of spending on social programs and infrastructure.

Keynesian economists believe that prices are sticky and slow to adjust, from which they conclude that

government intervention is essential to move the economy back to full employment.

Which of the following describes the correct direction of causality?

growth-friendly institutions -> growth friendly incentives -> economic growth

Today, not all regions of the world enjoy the same level of annual real per capita GDP. The regions that have higher levels of real per capita GDP probably also have

growth-promoting institutions like property rights.

According to modern (new) growth theory, the primary reason why countries around the world have not converged at the same level of income is that they

have different institutions.

All countries have some resources and technology available to them. The ones that grow fastest are the ones that

have the institutions in place that allow those resources to be fully developed.

In comparison with other recessions, the Great Depression had

higher rates of unemployment.

According to the Solow growth model, investment in developing countries should yield relatively _____ returns, and should lead to _____ capital in developing nations.

higher; more

"Consumption spending" refers to _____ spending on goods and services.

household

When U.S. housing prices declined prior to and during the Great Recession, it caused aggregate demand to decrease because

household wealth decreased, causing a decline in consumer spending.

When stock prices declined during the Great Recession, it caused aggregate demand to decrease because

household wealth decreased, leading to a decline in consumer spending.

A good economic model

is simple, flexible, and useful for making accurate predictions.

Real per capita GDP matters because

it correlates with better human welfare conditions.

During the Great Depression, the U.S. aggregate demand curve shifted to the _____, in part, because the U.S. government _____ the money supply.

left; decreased

The decrease in aggregate demand during the Great Depression was caused, in part, by

misguided macroeconomic policy.

If the price level falls but workers are reluctant to accept a pay cut, this is an example of

money illusion.

According to the Solow model, an economy should build

more capital as long as the extra benefit is at least as great as the extra cost.

If prompted to describe fundamental beliefs about the economy, a Keynesian economist would state that

more focus should be placed on the short run than on the long run.

New technology makes capital _____ and real per capita GDP will _____.

more productive; increase

The Great Recession was similar to other major recessions in that

real GDP initially declined and then recovered sometime later.

If this country experiences a war that decreases capital, then

there will be a downward movement along the production function.

If the price level rises by 5%, then, all else being equal, the long-run quantity of LRAS will

not change.

If there is an increase in government spending, then in the short run, equilibrium would shift _____, and in the long run, equilibrium would shift _____.

outward and upward upward

Competitive markets contribute significantly to economic growth because

people who want to participate don't face barriers to entry.

The two factors that must be subtracted from the percentage change in nominal GDP to yield the percentage change in real per capita GDP are the

percentage change in prices and the rate of population growth.

The basic premise of early growth theory was that the rich countries were those with more

physical capital.

The relationship between the growth rate of real GDP and the growth rate of real investment is

positive.

If the current short-run equilibrium level of output is greater than full-employment output, we can expect that in the long run the

price level will rise and SRAS will decrease.

Keynesian economists believe that prolonged recessions are possible because

prices are sticky and do not adjust quickly during economic downturn.

On the 45 Degree line diagram, the 45 Degree line shows points such that:

real aggregate expenditure equals real GDP.

The percentage change in nominal GDP minus the percentage change in prices and the rate of population growth equals the percentage change in

real per capita GDP.

A decrease in _____ could cause the SRAS to shift outward.

restrictions on immigrant labor

The interest rate effect results from people

saving less when the price level rises.

The adoption of efficient institutions will

shift a nation's production function upward.

According to the Solow growth theory, the developing nations

should eventually be as wealthy as the already-developed nations.

The rule of 70 shows us that

small and consistent economic growth rates can improve living standards.

"Investment spending" does not include:

spending on consumer durable goods.

At macroeconomic equilibrium, total _____ equals total _____.

spending; production

Classical economists believe the economy is inherently _____ and _____ government intervention because prices are _____.

stable; does not need; flexible

When inflation pushes up prices in the economy, input prices are _____ and revenues _____ in the short run.

sticky; increase

Keynesian economists believe prices are _____ and focus on the _____ run.

sticky; short

Residents of wealthy countries tend to have longer life expectancies because

stronger economic growth allows for more spending on health care.

A decrease in _____ could cause the AD curve to shift outward.

taxes in consumers

Average world income began to increase rapidly during _____, when many economies moved away from agriculture and toward manufacturing.

the Industrial Revolution

The marginal propensity to consume is defined as:

the change in consumption divided by the change in disposable income.

Classical economists believe that

the economy is inherently stable and self-correcting.

Based on the belief that prices are fully flexible, classical economists conclude that

the economy is self-correcting and does not need government intervention.

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by:

the level of aggregate expenditure.

The Solow model implies than an economy will reach a steady state because

the marginal product of capital decreases.

Menu costs help explain

the positive slope of the SRAS curve.

Suppose housing values fall during a recession. In the short run,

the price level will fall as the AD curve shifts left.

A technological advancement will cause

the production function to shift upward.

Modern (new) growth theory and the Solow growth model are both based on the importance of

the production function.

The Great Recession was similar to other major recessions in that

the rate of unemployment increased and then decreased at a later time.

During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because

the stock market declined in value by one-third.

An increase in AD is beneficial in the short run because _____ but not in the long run because _____.

the unemployment rate falls; the price level rises.

If capital is increasing, then

there is an upward movement along the production function.

If net investment is positive, then

there is an upward movement along the production function.

Considering the growth experience for all countries in the world,

there is little evidence of catching up by the poor countries or of the slowing down of growth in the wealthy countries.

During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because

there was a decrease in expected income.

During the Great Recession, the U.S. LRAS curve shifted to the left, in part, because

there was an institutional breakdown in financial markets.

One similarity between the Great Depression and the Great Recession is that in both cases

there was noticeable stress in financial markets.

One similarity between the Great Recession and the Great Depression is that in both economic downturns

there were significant problems in financial markets.

If net investment is negative, then

there will be a downward movement along the production function.