ECO Exam 3

28. If the self-adjustment mechanism of the economy takes place very slowly, so that actual output differs from the natural rate of output for lengthy periods of time, then active

*d. use of monetary and fiscal policy can help to stabilize output.

9. The exchange rate effect indicates that, other things the same, a decrease in the price level causes real wealth to

*d. rise, savings to rise, interest rates to fall, and the dollar to depreciate.

32. A positive supply shock will

*d. shift the short-run aggregate supply curve to the right, which will decrease the price level but increase output

18. According to liquidity preference theory, an increase in money demand for some reason other than a change in the price level causes

*d. the interest rate to rise so aggregate demand shifts left.

16. Suppose the economy is in long-run equilibrium. If there is a sharp decline in the stock market combined with a significant increase in immigration of skilled workers, then we would expect that in the short run,

*d. the price level will fall, and real GDP might rise, fall, or stay the same. In the long run, real GDP will rise and the price level will fall.

20. The aggregate supply curve is upward sloping in

*d. the short run, but not the long run.

30. A. W. Phillips found in 1958 a

*d. negative relation between unemployment and inflation in the United Kingdom (England).

29. Which of the following monetary policy actions can be used to close the inflationary gap shown in the graph above?

*a. Decrease the money supply to increase interest rates.

17. According to the theory of liquidity preference, the money supply

*d. is independent of the interest rate, while money demand is negatively related to the interest rate.

4. GDP per-capita is a common measure of a nation's standard of living. Two important factors that influence GDP per-capita are output per worker (labor productivity) and the proportion of the population that works. The United States has an aging population and the proportion of the population that works is expected to decrease. Argentina has a young population and the proportion of the population that works is expected to increase. Given this information, which of the following statements about standard of living is TRUE?

*a. US can increase its standard of living only by increasing its labor productivity.

14. Which of the following shifts long-run aggregate supply right?

*a. an increase in either the physical or human capital stock

23. If the U.S. Congress were to increase all personal income tax rates, one consequence would be a(n):

*a. decrease in the short-run equilibrium output.

10. If a country were to increase its saving rate, then in the long run it would also increase its

*a. level of income.

13. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

*a. production is more profitable and employment rises, because of the increase in output.

24. Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as

*a. quantity of output supplied = natural rate of output + a (actual price level - expected price level).

24. Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the Marginal Propensity to Consume is 0.75. Then the government should follow a policy of

*a. raising government spending by $25 billion to bring the economy to potential output.

9. Accumulating capital

*a. requires that society sacrifice consumption goods in the present.

27. If the central bank increases the money supply, in the short run, prices

*a. rise and unemployment falls.

35. Assume the money market is in equilibrium (Theory of Liquidity Preferences). The Federal Reserve Bank has decided to sell Treasury bills (bonds) in an open market operation. The result of this action will be a

*a. rise in the interest rate as the money supply curve shifts to the left.

12. Most economists use the aggregate demand and aggregate supply model primarily to analyze

*a. short-run fluctuations in the economy.

8. Most economists use the aggregate demand and aggregate supply model developed by John Maynard Keynes primarily to analyze

*a. short-run fluctuations in the economy.

29. There is a

*a. short-run tradeoff between inflation and unemployment.

34. In the graph of the Phillips curve, the Phillips curve

*a. will shift to the left

Assume the economy is at its initial equilibrium (point A on the graph). Suppose due to deepening financial crisis and rising uncertainty, consumption and investment decline. In the short run, this shock will cause to .

*b. AD; shift to the left

32. How would a decrease in unemployment compensation affect the long-run Phillips curve?

*b. It would shift the long-run Phillips curve left as people unemployed find jobs quicker.

21. Which of the following is correct?

*b. The long-run, but not the short-run, aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.

13. Which of the sentences concerning the aggregate demand and aggregate supply model is correct?

*b. The price level and quantity of output adjust to bring aggregate demand and supply into balance.

10. Imagine that businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases (physical capital). Their reaction would initially shift

*b. aggregate demand left.

26. Which of the following shifts short-run aggregate supply right?

*b. an increase in immigration from abroad

17. Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to

*b. decrease consumption, which shifts aggregate demand left.

12. The long-run aggregate supply curve shows that by itself (ignoring the Short-run Aggregate Supply) a permanent change in aggregate demand would lead to a long-run change

*b. in the price level, but not real GDP.

20. Assume the Mexican economy is initially at full-employment equilibrium. An economic expansion in the U.S. ______ the demand for U.S. imports from Mexico. This will consequently result in an increase in Mexican aggregate demand in Mexico and a(n) ________ period in Mexico.

*b. increases; expansionary

35. In the graph of the Phillips curve, the equilibrium

*b. inflation and unemployment have decreased

30. Which of the following is upward sloping?

*b. neither the long-run nor the short-run Phillips curve

25. A decrease in the expected price level would shift

*b. only the short-run aggregate supply curve right.

11. If the dollar appreciates because of speculation or government policy

*b. or if other countries experience recessions, aggregate demand shifts left in the United States.

7. Suppose there are constant returns to scale. Now suppose that over time a country doubles its workers, its natural resources, its physical capital and its human capital, but its technology is unchanged. Which of the following would double?

*b. output, but not productivity

14. Other things the same, a fall in the economy's overall level of prices tends to

*b. raise the quantity demanded of goods and services, but lower the quantity supplied.

16. Other things the same, an increase in the price level induces people to hold

*d. more money, so they lend less, and the interest rate rises.

6. Suppose that there are diminishing returns to capital. Suppose also that two countries are the same except one has more capital and so more real GDP per person than the other. Finally, suppose that the saving rate in both countries increases from 5 percent to 6 percent. Over the next ten years we would expect that

*b. the country that started with less capital will grow faster.

19. Assume that the economy depicted above is in a short-run equilibrium point B with AD1 and SRAS0. If the economy is left to correct itself

*b. then the expected price level should fall to shift the SRAS to the right.

7. Malthus predicted that the power of population

*b. was greater than the power of the earth to produce subsistence. His forecast was off the mark.

1. During the past century the average growth rate of U.S. real GDP per person implies that it doubled about every

*c. 35 years.

27. In the above figure, the short-run equilibrium indicates an inflationary gap exists at point E when a positive demand shock shifts the AD (i.e., short-run real GDP equals $14 trillion, which exceeds the full-employment real GDP of $12 trillion). Which of the following policies could close this inflationary gap, other things held constant?

*c. Decreasing government expenditures and increasing taxes

3. Two important factors that determine a nation's standard of living are: 1) the proportion of the population that works, and 2) its output per worker. Mexico has a relatively young population and, thus, the proportion of its population that works is expected to increase in the future. Given these circumstances, which of the following statements about its standard of living is TRUE:

*c. Mexico can increase its standard of living by either increasing its output per worker or by increasing the proportion of the population that works.

31. The Phillips curve should not reflect any relationship between inflation and unemployment in the Long Run because of monetary neutrality. This notion was pushed by the well-known economist

*c. Milton Friedman.

26. There are two types of stabilization policy, fiscal policy and monetary policy. Which of the following is a monetary policy tool?

*c. Open-market operations.

2. Which of the following is correct?

*c. The level of real GDP per person is a good gauge of economic prosperity, and the growth rate of real GDP per person is a good gauge of economic progress.

8. If there are constant returns to scale, the production function can be written as

*c. Y/L = A F( 1, K/L, H/L, N/L).

15. Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

*c. aggregate demand right.

34. Consequently, this will lead to

*c. an increase in inflation and in unemployment, shifting the PC to the right.

5. Let's assume that the population in Mexico remained constant, but the proportion of employed workers increased from 0.6 to 0.66 percent, and average labor productivity decreased from $20,000 per worker per year to $19,000 per worker per year. Given this information, we can deduce that the standard of living in Mexico has ______________ and consequently total output __________.

*c. increased; increased

11. Which part of real GDP fluctuates most over the course of the business cycle?

*c. investment expenditures

28. The natural rate of unemployment

*c. is the unemployment rate that the economy tends to move to in the long run.

25. Assume consumer confidence in the economy falls (i.e. because of "animal spirits"), and as a result, actual output falls below full-employment output (the natural rate of output). To move U.S. GDP back to full-employment output, the Federal Reserve could

*c. lower the interest rate.

6. Which of the following would not be considered physical capital?

*c. on-the-job training

33. An event like Katrina, which has reduced the amount of physical capital in New Orleans temporarily, will

*c. shift the short-run aggregate supply curve to the left, which will increase the price level but decrease output.

15. The wealth effect, interest rate effect, and exchange rate effect are all explanations for

*c. the slope of the aggregate demand curve.

2. Over the past 100 years, U.S. real GDP per person has doubled about every 35 years. If in the next 100 years it doubles every 25 years, then a century from now U.S. real GDP per person will be

*d. 16 times higher than it is now.

4. Between 2012 and 2013 what happens to Econoland's total output (GDP) and its standard of living (as measured by GDP per-capita), if we know the following information? The population of Econoland remains constant at 1,000 persons during both years. The number of employed workers increases from 400 in 2012 to 440 in 2013, but labor productivity, as measured by output per employed worker, decreases from $2,000 to $1,900 during the same time period.

*d. Both GDP per-capita and total output increase.

31. Germany has a higher natural rate of unemployment than the United States. This suggests that

*d. Germany's long-run Phillips curve is to the right of that of the United States, possibly because they have more generous unemployment compensation.

5. The President of our country is proposing that our country needs to help domestic firms by imposing trade restrictions.

*d. These are inward-oriented policies and most economists believe they would have adverse effects on growth.

33. Consequently, we will have

*d. a decrease in inflation and in unemployment

3. Productivity

*d. explains most of the differences in the standard of living across countries.

21. Most economists believe that fiscal policy can be used to get the economy out of a recession in the short run by ________ government expenditures on goods and services and/or ________ taxes.

*d. increasing; decreasing

18. When the money supply decreases

*d. interest rates rise and so aggregate demand shifts left.

1. Which of the following is a determinant of productivity?

a. human capital per worker b. physical capital per worker c. natural resources per worker *d. All of the above are correct.

22. The long-run aggregate supply curve shifts right if

a. immigration from abroad increases. b. the capital stock increases. c. technology advances. *d. All of the above are correct.

19. Which of the following shifts aggregate demand to the right?

a. an increase in the money supply b. an increase in net exports due to something other than a change in domestic prices c. an investment tax credit *d. All of the above are correct.

23. If the actual price level is higher than expected, firms might raise their production in the short run if

a. the nominal wage they pay their employees was set based on the expected price level. b. prices are costly to adjust and they have set their price at some time in the past and are not ready to change it. c. they believe that the price of their product has risen relative to the price of other products, when in fact the rise in the price of their product reflects an increase in the general price level. *d. All of the above are correct.