ECO330 Test 2 and 3 Answer Key

Supposed a one-year discount bond offers to pay $100 in one year and currently sells for $99. Given this information, we know that the interest rate on the bond is.

1.01%

Suppose the Phillips curve is represented by the following equation: πt - πt-1 = 20 - 2ut. Given this information, we know that the natural rate of unemployment in this economy is

10%

If C = 2000 + .9YD, what increase in government spending must occur for equilibrium output to increase by 1000?

100

When the Current Population Survey (CPS) was introduced in 1940, it was based on approximately 8,000 households. The CPS survey is now based on a survey of how many households?

60,000

Suppose the aggregate production function is represented by the following: Y = AN. Given this information, labor productivity is given by

A

A tariff is

A tax on imported goods

Which of the following represents the demand for domestic goods?

C + I + G + X - I/E

To prevent bank runs and the consequent bank failures, the United States established the ________ in 1934 to provide deposit insurance.

FDIC

In the IS-LM-PC model, which of the following is assumed to be exogenous?

G

Which of the following about IS relation is not correct?

It is the relation between interest rate and savings

Which country had the highest rate of technological progress form 1985 to 2013?

Japan

Which of the following individuals first discovered the relationship between unemployment and inflation?

Phillips

Which of the following countries had the highest level of output per capita in 1950?

United States

In 2005, China increased the price of its currency while continuing to pursue a fixed exchange rate. This change in policy is called

a devaluation

Assume that the interest parity condition holds and that both the expected exchange rate and foreign interest rate are constant. Given this information, a reduction in the domestic interest rate will cause

a reduction in the current exchange rate

Assume the Marshall-Lerner condition holds. Which of the following will cause an increase in net exports?

a reduction in the real exchange rate

The natural level of employment (N) will increase when which of the following occurs?

a reduction in unemployment benefits

An increase in consumer confidence will tend to cause which of the following to occur?

a rightward shift in the IS curve

As the economy moves up and to the right along the IS curve, which of the following will occur when exchange rates are flexible?

all of the above

Based on price setting behavior, which of the following will cause a reduction in the price level?

all of the above

Which of the following is an endogenous variable in our model of the goods market in Chapter 3?

all of the above

Contractionary monetary policy in a flexible exchange rate regime will cause

an increase in E

Based on our understanding of the determinants of the interest rate and bond prices, we know that a reduction in income will cause

an increase in bond prices and a reduction in i.

For this question, assume that the Phillips curve equation is represented by .......... Which of the following will cause a reduction in the natural rate of unemployment?

an increase in e

The interest rate will increase as a result of which of the following events?

an increase in income

Suppose there is a Fed purchase of bonds and simultaneous tax cut. We know with certainty that this combination of policies must cause

an increase in output (Y)

Because of our understanding of the paradox of saving, we know that a reduction in the desire to save will cause

an increase in the equilibrium GDP

Based on our understanding of the paradox of saving, we know that a reduction in the desire to save will cause

an increase in the equlibrium GDP

In the short run, an increase in the price of oil will cause

an increase in the interest rate

Exports will decrease when there is

an increase in the real exchange rate

Which of the following will cause an increase in output per effective worker?

an increase in the saving rate

For this question, assume that policy makers are pursuing a fixed exchange rate regime and that output is initially greater than the natural level of output. The economy will tend to move toward the natural level of output when which of the following occur?

an increase in their price level

In recent years, the increasing relative wage of skilled labor has been mostly due to

an increased in the demand for skilled labor that exceeds the increase in supply

Which of the following is not included as a component of the M1 definition of money?

bonds

For this question, assume that a country experiences a permanent increase in its saving rate. Which of the following will occur as a result of this increase in the saving rate?

both B and C

In a fixed exchange rate regime, which of the following policies could be implemented to reduce a trade deficit and leave aggregate demand constant?

decrease government spending and devalue the currency

Rich premiums in corporate bonds tend to _________ during business cycle expansions and ____________ during recessions, everything else held constant.

decrease; increase

In an open economy, we know that individuals must choose between which of the following?

domestic and foreign bonds

If the nominal interest rate is less than the real interest rate, we know that

expected deflation must be occuring

Channeling funds from individuals with surplus funds to those desiring funds when the saver does not purchase the borrower's security is known as

financial intermediation

In the OECD countries, there is a negative relationship between output per capita in 1950 and

growth since 1950

In recent years, real wages of the least educated workers

have decreased, while the real wages of college-educated workers have increased

The evidence shows that, over the last 25 years, spending on research and development in the rich countries has

increased as a percentage of GDP

Which of the following explains why the original Phillips curve relation disappeared or, as some economists have remarked, "broke down" in the 1970s?

individuals changed the way they formed expectations of inflation

Which of the following conditions will most likely coincide with the existence of a liquidity trap?

individuals prefer to hold only money and not bonds

The capital-labor ratio will tend to decrease over time when

investment per worker is less than saving per worker.

Some believe that technological progress leads to higher unemployment in the medium run. This claim that technological progress results in an increase in unemployment in the medium is supported by

neither theory nor evidence

Because the U.S. traditionally gives more foreign aid than it receives, the U.S. traditionally has a negative value for

net transfers received

Based on price setting behavior, we know that a reduction in the unemployment rate will cause

no change in the real wage

For this question, assume that the economy is initially operating at the natural level of output. A reduction in consumer confidence will cause

no change in the real wage in the medium run

Which of the following variables is most directly determined in the labor market?

nominal wages

Okun's law shows that when the unemployment rate is above the natural rate,

output is above potential

When using a logarithmic scale to plot output per capita over time, an upward-sloping curve that becomes increasingly steep indicates

output per capita is growing by an increasing percentage each year

When a government reduces its deficits by increasing taxes, in the medium run,

output returns to potential

In the absence of technological progress, we know that the level of output per worker in the steady state will

remain constant

In the absence of technological progress, we know the level of output per worker in the steady state will

remain constant

Which of the following describes a situation where research is considered relatively fertile?

research that translates into many new products

Which of the following does not represent a labor market rigidity to which critics refer when discussing unemployment in Europe?

restrictive monetary and fiscal policies

The spread between the interest rates on bonds with default risk and default-free bonds is called the

risk premium

The difference between net capital flows and the current account deficit is called the

statistical disprency

Churning refers to

structural change associated with technological progress.

High growth in the rich countries form 1985 to 2014 was most likely due to

technological progress

During 2008 in the US, consumer confidence fell significantly. Which of the following will occur as a result of this reduction in consumer confidence?

the IS curve will shift leftward

For this question, assume that exchange rates flexible and that the exchange rate expected to occur in one year is not constant. Suppose that individuals now expect that the domestic central bank will pursue expansionary monetary policy in one year. This expected future monetary expansion will cause which of the following to occur?

the current nominal exchange rate will decrease

Which of the following is always true after an economy reaches a balances growth equilibrium?

the growth rate of capital is equal to the growth rate of the effective work force

A reduction in the saving rate will not affect which of the following variables in the long run?

the growth rate of ouput per worker

Of the following, which often used measure of changing living standards is

the growth rate of real GDP per capita

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher saving rate than country B. Given this information, we know with certainty that

the growth rate will be the same in the two countries

Suppose there are two countries that are identical in every way with the following exception: Country A has a higher stock of human capital than Country B. Given this information, we know with certainty that

the growth rate will be the same in the two countries

The zero lower bound refers to the situation that

the lowest the central bank can decrease the nominal policy rate is 0%.

"Convergence" has been occuring among the OECD countries because

the poorer countries have had higher growth rates than the richer countries

Which of the following best defines the real exchange rate?

the price of domestic goods in terms of foreign goods

Labor productivity is represented by which of the following?

the ratio of output to employment

Which of the following represents the participation rate?

the ratio of the labor force to the civilian noninstitutional population

Suppose that over the past decade, U.S. inflation is less than that in Mexico. Further assume that during this same period, the dollar depreciates relative to the Mexican peso. Given this information

the real exchange rate must decrease

Which of the following is the definition for the real supply of money?

the stock of money measured in terms of goods, not dollars

Which of the following will occur as a result of a tax increase?

the trade balance improves

For this question, assume that the J-curve effect exists. Which of the following will occur after a real appreciation?

the trade deficit will improve temporarily before it worsens

When the unemployment rate is on horizontal axis and the real wage is on the vertical axis, an increase in productivity will cause which of the following to occur?

the wage-setting and price-setting curves will both shift upward

For this question, assume that investment spending depends only on the interest rate and no longer depends on output. Given this information, a reduction in the money supply

will cause investment to decrease