Econ 1 Exam 2

________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending.

A decrease; and increase

Refer to the fire to the right. Ceteris paribus, an increase in personal income taxes would be represented by a movement from

AD2 to AD1.

The formula for aggregate expenditure is

AE=C+I+G+NX

Refer to the diagram to the right. At point L in the diagram, which of the following is true?

Actual inventories are greater than planned inventories.

When the government runs a budget deficit, we would expect to see that

investment will fall.

In a closed economy, public saving plus private saving is equal to

investment.

Which of the following would be directly counted in GDP in 2012?

kitchen cabinets purchases from Home Depot in 2012 to be installed in a house built in 1997

Which of the following labor market statistics best indicates the amount of labor that is available to the economy from a given working-age population?

labor force participation rate

According to the Nation Bureau of Economic Research, the recession, that began in December 2007

lasted 18 months.

If GDP calculations included measurements of pollution and environmental damage, GDP values would most likely be

less than their values without these measurements.

Gross national product, GNP, of the United States is the market value of all final goods and services

produced by residents of the United States anywhere in the world.

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Aggregate demand and potential real GDP decrease continuously.

If aggregate demand just increased, which of the following may have caused the increase?

an increase in government purchases

Which of the following will shift the aggregate demand curve to the right, ceteris paribus?

an increase in net exports

Which of the following would increase the unemployment rate?

an increase in unemployment insurance payments

The country of Alaine produces 1,000 tons of corn during a year. It is valued at $500 per ton. A lobbyist for the corn industry in Alaine argues that the total value of corn production should be included in the country's GDP for the same year. The lobbyist's claim is based on the assumption that

corn is not used in the production of other goods

Most of the unemployment that occurred during the Great Depression was

cyclical unemployment.

If you have trouble finding a job because of the slowdown in the overall economy, we would say that you are

cyclically unemployed.

National income equals gross national product minus

depreciation.

In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services.

equals

The ratio of the increase in ________ to the increase in ________ is called to multiplier.

equilibrium real GDP; autonomous expenditure

Efficiency wages cause unemployment because

firms pay wages that are above the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied.

Deflation will

increase the quantity of real GDP demanded.

Suppose there has been an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.

increase; decrease to its initial value

What would be expected to happen to each of the following variables during a recession? Unemployment would be expected to ________. Durable goods production, such as automobiles, would be expected to ________. The inflation rate would be expected to ________.

increase; decrease; decrease

After an unexpected ________ in the price of oil, the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.

increase; decreases

The GDP deflator is the

ratio of nominal GDP to real GDP multiplied by 100.

Suppose the U.S. GDP growth rate is faster relative to other countries' GDP growth rates. This will

shift the aggregate demand curve to the left.

If, due to a recession, foreign workers begin to leave the United States to search for temporary work in their home countries until the recession has ended, this will

shift the short-run aggregate supply curve of the home country to the right.

Refer to the diagram to the right. If the economy is at a level of aggregate expenditure given by point K,

the economy is in equilibrium.

Refer to the diagram to the right. Suppose that the level of GDP associated with point N is potential GDP. If the U.S. economy is currently at point K,

the economy is in recession.

Which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?

the financial crisis

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then

the multiplier is 8.

Suppose that nominal GDP in 2011 was less than real GDP in 2011. Given this information, we know for certain that

the price level in 2011 was less than the price level in the base year.

Stagflation occurs when

inflation rises and GDP falls.

Consider the following data for Tyrovia, a country that produces only two products: guns and butter. Nominal GDP for Tyrovia in 2011 equals

$1,140

Refer to the diagram to the right. Which of the points in the above graph are possible long run equilibria?

A and C

Refer to the table above showing three stages of production of an automobile. The value of each automobile in gross domestic product equals

$25,000

Consider the following for a closed economy: Refer to the scenario above. Based on the information above, what is the level of private saving in the economy?

$3 trillion

What is investment in a closed economy if you have the following economic data? Y= $10 trillion C=$5 trillion TR= $2 trillion G= $2 trillion

$3 trillion

You lend $5,000 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 5%. As a result, you will receive ________ at the end of the year, but that money has a purchasing power of ________.

$5,500; $5,250

The table above reports the nominal average hourly earnings in private industry and the consumer price index for 1965 and 2010. The real average hourly earning for 1965 in 1982-1984 dollars equal

$8.28

Looking at the table above, real average hourly earnings were equal to ________ in 2010.

$9.52

Given the consumption schedule in the table above, the marginal propensity to save is

0.1.

If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is

0.80

Refer to the diagram to the right. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?

1.8%

In 2011, the value of the GDP deflator is In 2012, the value of the GDP deflator is

115, 119

Assume the market basket for the consumer price index has three products, Cokes, hamburgers, and CDs, with the following values in 2006 and 2011 for price and quantity: The consumer Price Index for 2011 equals

121

Assume the market basket for the consumer price index has two products, meat and potatoes, with the following values in 2006 and 2013 for price and quantity: The Consumer Price Index for 2013 equals

129

Consider the following data on nominal GDP and real GDP (values are in billions of dollars): The base year used in calculating real GDP is

2009

If the growth rate of GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from

23.3 years to 17.5 years.

Refer to the diagram to the right. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long run equilibrium be?

A

Refer to the figure to the right. Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from

AD1 to AD2.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?

Aggregate expenditure is equal to GDP.

A decrease in the price level in the United States will have what effect on the aggregate expenditure line?

Aggregate expenditure will shift upward.

Refer to the diagram to the right. If the U.S. economy is currently at point K, which of the following could cause it to move to point N?

Congress passes investment tax incentives.

National income =

Consumption+Savings+Taxes

Which of the following statements is true about the U.S. economy?

Each year, many new jobs are created and many existing jobs are destroyed.

In the circular flow of expenditure and income, why must total value of production in an economy equal the total value of income?

Every penny spent on a good or service must end up as someone's income.

Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports.

False

At a short run macroeconomic equilibrium, real GDP is always equal to potential GPD.

False

Countries without well-developed financial systems are able to sustain high levels of economic growth.

False

In the circular flow diagram, the value of all the income in the economy is greater than the value of goods and services produced in the economy.

False

Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population.

False

The nominal interest rate plus the inflation rate equals the real interest rate.

False

When the net exports equal zero, the economy is in macroeconomic equilibrium.

False

In a small economy in 2011, aggregate expenditure was $800 million while GDP that year was$850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was greater than anticipated in 2011.

A country in which a significant fraction of domestic production takes place in foreign owned factories and facilities is most lily where

GDP is much larger than GNP

Which of the following is considered to be a problem in using GDP as a measure of national well-being?

GDP is not adjusted to account for depletion of natural resources.

If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur?

GDP will fall.

Which of the following is a correct statement?

Inflation is measured as the percent change in the CPI.

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

Inventories will decline, and GDP and employment will rise.

An unemployment insurance program has which of the following effects?

It increases the amount of time spent searching for a job.

If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?

It is a vertical line at $4.2 trillion of GDP.

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did the technological change do to the short supply curve?

It shifted the short run aggregate supply curve to the right.

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

It shifts the aggregate expenditure line downward.

Which of the following is likely to increase measured GDP?

Marijuana becomes legal to grow and sell.

If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true?

Public saving is $100 million.

Which of the following headlines would be more closely related to what macroeconomists study than what macroeconomists study?

Real GDP grows by 2.3% in the second quarter.

Consider the following simple economy that produces only three goods:

Real GDP in 2009 equals $6680

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP.

Short-run aggregate supply will shift to the right.

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-run aggregate supply will shift to the right.

How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax?

The equilibrium quantity of loanable funds would rise.

Which of the following is not true about the composition of GDP in 2010?

The majority of consumer spending is on durable goods.

The production of LCD television sets in Australia increased by 20% this year as compared to last year. Those TV sets were no less advanced technologically than the sets sold in previous years. However, the value of the contribution LCD television sets made to Australia's nominal GDP during this year was the same as the previous year. Which of the following, if true, would best explain this outcome?

The price of LCD television sets declined in the past year.

You earned $30,000 in 1990, and your salary rose to $80,000 in 2011. If the CPI rose from 82 to 202 between 1990 and 2011, which of the following is true?

The purchasing power of you salary increased between 1990 and 2011.

The GDP of the country Sumeria has grown at an average rate of 6 percent over the last two years, while the rate of inflation has remained more or less stable. Macroeconomists in the country are arguing that this increase in GDP is a clear indication of an overall improvement in the well-being of its people. Which of the following, if true about the last two years in Sumeria, would weaken this argument?

The wealthiest Sumerians possess an increasingly large share of Sumeria's wealth.

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?

There was an unplanned investment in inventories equal to $2 million.

The U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?

This will shift the aggregate demand curve to the right.

Currently, the base year for the CPI is the average of prices in the years 1982 to 1984.

True

High-income countries such as the United States spend a greater amount on services as compared to goods.

True

Inflation is generally the result of total spending growing faster than total production.

True

The natural rate of unemployment consists of frictional unemployment plus structural unemployment.

True

In a closed economy, which of the following equations reflects investment? (Y = GDP, C = Consumption, G = Government purchases, T = Taxes, and TR = Transfers)

Y - C - G

Which of the following goods is directly counted in GDP?

a 12 inch Subway sandwich purchased by a student

When tax revenue exceeds government spending (government purchases and transfer payments) there is ________. When tax revenue equals government spending there is ________. When tax revenue is less than government spending there is ________.

a budget surplus; a balanced budget; a budget deficit

Most recessions in the United States since World War II have begun with

a decline in residential construction.

Which of the following is most liquid?

a dollar bill

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.

a housing bubble

Which of the following policies would reduce structural unemployment?

a job retaining program

Structural unemployment is the result of

a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs.

An unplanned increase in inventories results in

actual investment that is greater than planned investment.

Long run macroeconomic equilibrium occurs when

aggregate demand equals short run aggregate supply and they intersect at a pout on the long run supply curve.

A negative supply shock in the short run causes

aggregate supply shifts to the left.

Increases in real GDP would understate the well-being of a country over time if, over that time period, the

amount of pollution decreases.

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

an automatic mechanism.

The multiplier is calculated as the

change in real GDP/change in autonomous expenditure

Investment, as defined by economists, would include the purchase of a

computer by an accounting firm.

Which of the following price indices comes closest to measuring the cost of living of the typical household?

consumer price index

Which is the largest component of aggregate expenditure?

consumption expenditures

The purchase of a new automobile is included in

consumption expenditures on durable goods.

Household spending on goods and services is known as

consumption spending.

In the United States, because shipping plays such an important role in the economy, declines in cargo volumes reflect

declines in aggregate demand.

Higher personal income taxes

decrease aggregate demand.

If the marginal propensity to save is 0.25, then a $10 million decrease in disposable income will

decrease consumption by $7.5 million.

If the BLS counted persons that are on active military service in the totals for unemployment, the labor force, or the working - age population, this would

decrease the measured unemployment rate.

An increase in the price level results in a(n) ________ in household consumption spending and a(n) ________ in investment spending.

decrease; decrease

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the U.S. to Sweden and ________ U.S. aggregate demand.

decrease; decrease

The passage of the Smoot-Hawley tariff in 1930 sparked a trade war that caused net exports to ________ and real GDP to ________.

decrease; decrease

Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy.

decrease; decreases

Since 1948 the labor force participation rate for adult men has ________ and for adult women has ________.

decrease; increased

The real wage equals the nominal wage ________ the CPI, all times 100.

divided by

The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector

do not pay taxes to the government.

The natural rate of unemployment is the amount of unemployment

equal to frictional plus structural unemployment.

Suppose you borrow $1,000 at an interest rate of 12 percent. If the expected real interest rate is 5 percent, then the rate of inflation over the upcoming year that would be most beneficial to you would be a rate of inflation

greater than 7 percent

If an American firm opens a production facility in India, the total value of the production will be included in the

gross domestic product of India.

If net taxes fall by $80 billion, we would expect

household savings to rise by less than $80 billion.

Legalizing all form of illegal activities

increases GDP and reduces the size of the underground economy.

During a business cycle expansion, total production ________ and total employment ________.

increases, increases

In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS

inflation occurs.

The automatic mechanism ________ the price level in the case of ________ and ________ the price level of ________.

lowers; recession; raises; expansion

The real interest rate equals the nominal interest rate _______ the inflation rate.

minus

Statistics on real GDP during World War II may give a misleading indication of whether World War II was a period of prosperity because

most of the increased production was for military goods, no consumption goods.

Statistics on real GDP during World War II may give a misleading indication of whether or not World War II was a period of prosperity because

most of the increased production was for military goods, not consumption goods.

During the recession of 2007-2009 in the United States, ________ relative to potential GDP.

net export spending rose and consumption spending declined

Assume that inventories declined by more than analysts predicted. This implies that

planned aggregate expenditure was greater than real GDP.

Refer to the figure to the right. Ceteris paribus, an increase in the price level would be represented by a movement from

point B to point A.

When the price level from 110 to 115, the aggregate level of GDP supplied rises from $80 billion to $120 billion. This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level.

positive; short-run

A good measure of the standard of living is

real GDP per capita.

To examine how the total production of an economy has changed over time, it would be better to examine

real GDP.

An increase in aggregate demand causes an increase in ________ only in the short run, but but causes an increase in ________ in both the short run and the long run.

real GDP; the price level

As the economy nears the end of an expansion, which of the following do we typically see?

rising interest rates

A consumer price index of 160 in 1996 with a base year of 1982 - 1984 would mean that the cost of the market basket

rose 60% from the cost of the market basket in the base year.

The effect of recession on a company like Boeing Aircraft is such that

sales decline more sharply for Boeing as compared to other firms.

If planned aggregate expenditures are below potential GDP, and planned aggregate expenditures equal GDP then

the economy is in a recession.

The average price of goods and services in the economy is generally also known as

the price level.

The aggregate demand curve illustrates the relationship between ________ and the ________, holding constant all other factors that affect aggregate expenditure.

the price level; quantity of planned aggregate expenditure

Increases in real GDP since 1900 can actually underestimate growth in the standard of living for Americans since 1900 because

the quality of health care that exists today was not available in 1900.

Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result,

the short-tun aggregate supply curve will shift to the left as wages increase.

According to the test, economists consider full employment to occur when

the unemployment rate consists of only frictional and structural unemployment.

In the long run,

unemployment is at its natural rate.

If the minimum wage is set above the market wage,

unemployment will rise.

Nominal GDP is GDP in a given year

valued in the prices of that year

Which of the following explains the changes in the U.S. adult male labor force participation rate since 1948?

younger men are remaining in school longer as compared to the past