ECO216 Exam 3 Study Guide
Which of the following is an example of foreign direct investment?
- A US company opens a factory in India. - A Chinese company opens a factorty in Nigeria that is jointly owned with a Nigerian company.
Which of the following key factors can help explain the Great Recession of 2007-2009?
- An increase in mortgage defaults, negatively impacting banks. - A reduction in consumer wealth, curtailing spending. - A reduction in new home construction, leading to a decrease in labor demand. - A fall in housing prices.
What could explain why a decrease in taxes could lead to a less-than-proportionate increase in output?
- Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. - As a result of diminishing returns to current consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once.
How do expansionary policies differ from contractionary policies?
- Expansionary policies seek to increase economic growth and increase employment, while contractionary policies seek to reduce the risk of excessive price inflation. - Expansionary policies seek to shift the labor demand curve to the right, while contractionary policies seek to shift it to the left. - Expansionary policies seek to reduce the severity of recessions, while contractionary policies seek to slow down the economy when it grows too fast.
According to the Taylor rule, the Federal Reserve should raise the federal funds rate when the ____________.
- Fed's inflation rate target falls. - inflation rate rises. - Fed's long-run target for the federal funds rate rises. - output gap rises.
Which of the following would likely contribute to business cycle fluctuations?
- Improvements to AI software that increase assembly line productivity significantly - The fear of an impending war - The Fed deciding to contract M2 via open market operations
What are the important mechanisms that reverse the effects of a recession in a modern economy?
- Labor demand increases due to market forces. - Labor demand increases due to expansionary government policies.
What market forces might cause the labor demand curve to shift back to the right?
- The banking system recuperates and businesses are again able to use credit to finance their activities. - Technological advances encourage firms to expand their activities. - Excess inventory has been sold off.
An example of a multiplier is when ___.
- a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending. - an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment.
The purpose of countercyclical policy is to ____________.
- reduce the intensity of economic fluctuations. - smooth the growth rates of employment, GDP, and prices.
Suppose that two workers, Joe and Moe, work at a fast-food restaurant. Joe can grill 50 hamburgers per hour or fry 25 pounds of french fries per hour. Moe can grill 80 hamburgers per hour or fry 20 pounds of french fries per hour. Using comparative advantage, determine whether Joe or Moe should grill hamburgers. The opportunity cost to Joe of grilling hamburgers is __1__ pounds of french fries. The opportunity cost to Moe of grilling hamburgers is __2__ pounds of french fries. In this case, __3__ has the comparative advantage in grilling hamburgers.
1) .5 2) .25 3) Moe
If the anticipated inflation rate is 1.25 percent and the nominal interest rate is 4.25 percent, the real interest rate is __1__. If expectations about inflation rise and the nominal interest rate remains unchanged, the expected real interest rate will __2__.
1) 3.00 2) decrease
Assume that Country A and Country B are both capable of producing sneakers and basketballs. 1) If Country A is more productive at making both goods than Country B, which of the following statements is true? 2) Which of the following could be the source of the productivity advantage in Country A compared to Country B?
1) Country A has an absolute advantage in the production of both sneakers and basketballs. 2) more education and access to more physical capital
What are the similarities and the differences between monetary and fiscal policies? Features 1) The manner (or ways) in which they work. 2) The aspect of the labor market they impact. 3) The result their implementation seeks to achieve. 4) The entities (or authorities) that oversee them.
1) D 2) S 3) S 4) D
The Conference Board publishes data on Business Cycle Indicators (BCI). The Composite Index of Leading Economic Indicators is one of the three components of the BCI. Changes in leading economic indicators usually precede changes in GDP. Some of the variables tracked by the index are listed below. i. The average weekly hours worked by manufacturing workers ii. The average number of initial applications for unemployment insurance iii. The amount of new orders for capital goods unrelated to defense iv. The amount of new building permits for residential buildings v. The S&P 500 stock index vi. Consumer sentiment 1) The average weekly hours worked by manufacturing workers is likely to be ___ with real GDP. 2) The average number of initial applications for unemployment insurance is likely to be ___ with real GDP. 3) The amount of new orders for capital goods unrelated to defense is likely to be ___ with real GDP. 4) The amount of new building permits for residential buildings is likely to be ___ with real GDP. 5) The S&P 500 stock index is likely to be ___ with real GDP. 6) Consumer sentiment is likely to be ___ with real GDP.
1) Positively correlated 2) negatively correlated 3) positively correlated 4) positively correlated 5) positively correlated 6) positively correlated
A recession is defined as at least two quarters of negative __1__. In the United States, for most of the last century, we have experienced __2__ recessions than expansions.
1. GDP growth 2. shorter
__1__ wages are __2__ wages divided by a measure of overall prices(price index). If nominal wages are downwardly rigid, real wages __3__ be. If inflation raises the priceindex, real wages will __4__ and nominal wages will remain constant.
1. Real 2. nominal 3. will also 4. decrease
If an economic shock decreases labor demand, equilibrium employment __1__ and real GDP __2__.
1. falls 2. falls
Changing corporate tax rates is an example of countercyclical __1__ policy. If the government lowers corporate tax rates, its goal would be a __2__ shift of the __3__ curve.
1. fiscal 2. rightward 3. labor demand
A Japanese company opening a factory in Singapore is an example of __1__ that would directly benefit the citizens of __2__. The company's actions would __3__ cross-country interdependence.
1. foreign direct investment 2. Singapore 3. increase
Crowding out occurs when __1__ borrowing displaces __2__ borrowing. Since expansionary fiscal policy should only take place during times of __3__, it seems worth the risk for many policy makers.
1. government 2. private 3. recession
How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor falls? When the demand for labor falls, the fall in employment is __1__ when real wages are flexible and __2__ when wages are downwardly rigid.
1. limited 2. amplified
Suppose the Fed wants to implement an anti-recession monetary policy. For each of the tools listed below, indicate the direction the Fed's action should take. The Fed should conduct an open market __1__ of Treasury bonds. The Fed should __2__ the reserve requirement. The Fed should __3__ the interest rate paid on reserves deposited at the Fed. The Fed should __4__ lending from its discount window.
1. purchase 2. lower 3. decrease 4. expand
As a new expansion in the business cycle starts, we can expect the aggregate labor demand curve to shift to the __1__. This will be met with __2__ in real GDP and a movement __3__ the aggregate production function.
1. right 2. an increase 3. up
Net capital outflows are defined as __1__ minus foreign investment. When the real interest rate starts to decline, net capital outflows increase and net exports __2__ as domestic products become __3__ expensive to purchase.
1. savings 2. increase 3. less
Early theories of business cycles assumed that economic fluctuations had a pendulum-like structure with systematic swings in economic growth. A) Which property of economic fluctuations do these early theories contradict? B) Using your answer above, how does a pendulum-like structure contradict this property in economic fluctuations?
A. Limited predictability. B. Pendulums swing in an easily-measured rhythm that would make predicting fluctuations simple.
How does comparative advantage in trade differ from absolute advantage?
Absolute advantage looks at the number of goods or services that a producer can make, whereas comparative advantage looks at the opportunity cost of the goods or services that a producer can make.
Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation.
An increase in reserves triggers a multiple expansion of bank loans and deposits, which generates an increase in the stock of money. If the money supply grows faster than real GDP, inflation will occur.
What is foreign direct investment?
Investments by foreign individuals and companies that generate an ownership stake in domestic businesses.
David Ricardo, the British political economist, used the example of two commodities—wine and cloth—produced by England and Portugal to explain trade. The following table shows the number of labor hours it would take England and Portugal to produce one unit each of wine and cloth: Portugal England Wine 80 120 Cloth 90 100 Portugal can produce both wine and cloth using fewer labor hours than England. A group of Mercantilists, who believe that nations build their wealth by exporting more than they import, suggest that Portugal has nothing to gain from trading with England. Would you agree?
No, gains from trade are determined on the basis of comparative advantage, not absolute advantage.
When workers are laid off, what happens to physical capital?
Physical capital becomes less productive, leading firms to reduce capacity utilization.
Fill in the table below with the opportunity costs for each country. Original Table: Portugal England Wine 80 120 Cloth 90 100 New Table: Portugal England Wine 1.88 1.25 Cloth 1.67 1.50
Portugal England Wine .88 1.20 Cloth 1.13 0.83 Portugal has the comparative advantage in the production of wine, and England has the comparative advantage in the production of cloth. England should import wine and Portugal should import cloth.
Suppose that each country spends 150 hours producing each good. Show how much of each good would be produced. Original Table, how long per 1 unit: Portugal England Wine 80 120 Cloth 90 100
Portugal England Wine 1.88 1.25 Cloth 1.67 1.50 Divide 150 by original value
How does foreign direct investment benefit the recipient country?
Technology transfer ultimately improves productivity in the recipient country.
What are the automatic and discretionary components of fiscal policy?
The automatic components do not require deliberate action on the part of the government, while the discretionary components do.
The concept of multipliers was one of the key elements of John Maynard Keynes's theory of fluctuations. A multiplier is ____________.
an economic mechanism that causes an initial shock to be amplified by follow-on effects.
An economic expansion that occurs close to full employment ____________.
can cause inflation with very little employment and output growth.
The Taylor rule states that ___________.
central banks should set their policy rates (in the United States, the federal funds rate) according to a formula that incorporates the long-term target for the policy rate, the output gap, and the deviation of inflation from its target.
According to the concept of persistence in the rate of growth, if the economy grows this quarter, it will ____________.
likely grow next quarter
Contractionary monetary policy shifts the labor demand curve to the left by ____________.
pushing long-term interest rates up, thereby causing reduced private expenditures and inducing firms to want to hire fewer workers.
In addition to being a benefit of international trade, technology transfer ____________.
results in a higher level of cross-country interdependence
If wages are flexible, the decrease in employment and real GDP will be ___ the decrease if wages are rigid.
smaller than
Trade allows buyers and sellers to exploit gains from specialization because it allows sellers to ____________.
specialize in the production of the good or service for which they have a comparative advantage and buy goods and services for which they do not have a comparative advantage.
In addition to specialization, which of the following is a benefit of international trade?
technology transfer
Does the effectiveness of monetary policy depend on inflation expectations? Explain.
Yes, the central bank's ability to influence the long-term expected real interest rate is partly determined by the public's long-term expectations of the inflation rate.
