Econ 203 - Final

Consider the following two situations. Irene accepts a job where she will be driving in dangerous traffic, so she seeks auto insurance. After Victor buys health insurance, he visits the gym less frequently. Which of these person's actions illustrates moral hazard?

Victor's but not Irene's

An increase in the expected price level shifts

the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.

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

the slope of the aggregate-demand curve.

It is claimed that a secondary advantage of mutual funds is that

they give ordinary people access to the skills of professional money managers.

In order to maintain stable prices, a central bank must

tightly control the money supply.

If the supply of a product increases, then we would expect equilibrium price

to decrease and equilibrium quantity to increase

In 2008, the United States was in recession. Which of the following things would you not expect to have happened?

Increased real GDP

Who gets scarce resources in a market economy?

Whoever is willing and able to pay the price

When we move along a given supply curve,

all nonprice determinants of supply are held constant.

Monetary policy affects the economy with a long lag, in part because

changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.

The price level is a

nominal variable.

According to liquidity preference theory, the money-supply curve is

vertical.

Take the following information as given for a small economy: - When income is $10,000, consumption spending is $6,500. - When income is $11,000, consumption spending is $7,250. The marginal propensity to consume for this economy is

0.750.

The largest reduction in a portfolio's risk is achieved when the number of stocks in the portfolio is increased from

1 to 10

Which of the following actions best illustrates moral hazard?

A person purchases homeowners insurance and then checks his smoke detector batteries less frequently.

The CPI differs from the GDP deflator in that

increases in the prices of foreign produced goods that are sold to US consumers show up in the CPI but not in the GDP deflator.

When the interest rate increases, the opportunity cost of holding money

increases, so the quantity of money demanded decreases.

Other things the same, if reserve requirements are increased, the reserve ratio

increases, the money multiplier decreases, and the money supply decreases.

A farmer has the ability to grow either corn or cotton or some combination of the two. Given no other information, it follows that the farmer's opportunity cost of a bushel of corn multiplied by his opportunity cost of a bushel of cotton

is equal to 1.

If Year 1 is the base year and Year 2 is the following year, then the inflation rate in Year 2 equals

[(CPI in Year 2 - CPI in Year 1)/CPI in Year 1] x 100

Jackie, a Canadian citizen, works only in the US. The value of the output she produces is

included in the US GDP, but not included in US GNP.

Gross domestic product measures

income and expenditures.

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

increase the money supply.

The income that households and noncorporate businesses receive is called

personal income.

An example of an automatic stabilizer is

unemployment benefits.

Which of the following is an example of barter?

A barber gives a plumber a haircut in exchange for the plumber fixing the barber's leaky faucet.

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?

Both sticky price theory and sticky wage theory

The inflation rate you are likely to hear on the nightly news is calculated from the

CPI.

Which of the following functions as both a store of value and a medium of exchange?

Cash but not stocks

Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the United States?

Make it fall which by itself would decrease US aggregate demand.

The classical dichotomy and monetary neutrality are represented graphically by

a vertical long-run aggregate-supply curve

For an economy as a whole,

income must equal expenditure.

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

lower than desired prices, which leads to an increase in the aggregate quantity of goods and services supplied.

Suppose an economy experiences an increase in its saving rate. The higher saving rate leads to higher growth rate of productivity

more in the short run than in the long run.

An example of a perfectly competitive market would be the

soybean market

Which of the following statements regarding the Federal Open Market Committee is correct?

All regional Fed presidents attend the meetings, but only five get to vote.

Suppose the government finds a major defect in one of a company's products and demands that the product be taken off the market. We would expect that the

demand for existing of the stock and price will both fall.

The traditional view of the production process is that capital is subject to

diminishing returns, so that other things the same, real GDP in poor countries should grow at a faster rate than in rich countries.

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "

Which of the following is an example of crowding out?

An increase in government spending increases interest rates, causing investment to fall.

Fran buys 1,000 shares of stock issued by Miller Brewing. In turn, Miller uses the funds to buy new machinery for one of its breweries.

Fran is saving; Miller is investing.

Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows that

GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.

US GDP and US GNP are related as follows:

GNP = GDP - Income earned by foreigners in the US + Income earned by US citizens abroad.

Which of the following demonstrates the law of demand?

Jayden buys more donuts at $0.25 per donut than at $0.50 per donut, other things equal.

Which of the following is an explanation for the existence of frictional unemployment?

Job search

John and Jane decide to go on a vacation. As a result, they withdraw $2,500 from their savings account to purchase $2,500 worth of traveler's checks. As a result of these changes,

M1 increases by $2,500 and M2 stays the same.

In a closed economy, if Y and T remained the same, but G rose and C fell but by less than the rise in G, what would happen to public and national saving?

Public and national saving would fall.

Which of the following is most commonly used to monitor short-run changes in economic activity?

Real GDP

Which of the following is not included in M1?

Savings deposits

Consider the expressions T - G and Y - T - C. Which of the following statements is correct?

The first of these is public saving; the second one is private saving.

Which of the following is not correct?

The gains from specialization and trade are based not on comparative advantage but on absolute advantage.

According to the classical dichotomy, which of the following increases when the money supply increases?

The nominal wage

Which of the following is not a determinant of the long-run level of real GDP?

The price level

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

aggregate demand to the right.

Matilda just graduated from college. In order to devote all her efforts to college, she didn't hold a job. She is going to tour around the country on her motorcycle for a month before she starts looking for work. Other things the same, the unemployment rate

and the labor-force participation rate are both unaffected.

If the interest rate is above the Fed's target, the Fed should

buy bonds to increase the money supply.

Shifts in aggregate demand affect the price level in

both the short and long run.

Efficiency wages

increase productivity but increase unemployment.

If the MPC is 3/5 then the multiplier is

2.5, so a $100 increase in government spending increases aggregate demand by $250.

Which of the following changes would not shift the supply curve for a good or service?

A change in the price of the good or service.

The following facts apply to a small economy. - Consumption spending is $6,720 when income is $8,000. - Consumption spending is $7,040 when income is $8,500. In response to which of the following events could aggregate demand increase by $1,500?

A stock-market boom stimulates consumer spending by $550, and there is a small operative crowding-out effect.

Which of the following would cause stagflation?

Aggregate supply shifts left.

Which of the following shifts the long-run aggregate supply curve to the left?

An increase in the price of imported natural resources and an increase in trade restrictions.

If consumers often purchase muffins to eat while they drink their lattes at local coffee shops, what would happen to the equilibrium price and quantity of lattes if the price of muffins rise?

Both the equilibrium price and quantity would decrease.

Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP?

Both the price level and real GDP rise.

Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?

The supply of loanable funds shifted left.

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.

The consumer price index tried to gauge how much incomes must rise to maintain

a constant standard of living.

Investment is

a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.

Consider two people who are currently out of work. Tim is not looking for work because there have been many job cuts where he lives, and he doesn't think it likely that he will find work. Bev is not currently looking for work, but she would like a job, and she has looked for work in the past. The Bureau of Labor Statistics considers

both Tim and Bev to be marginally attached workers.

Other things the same, as the price level decreases it induces greater spending on

both net exports and investment.

Suppose there was a large increase in net exports. If the Fed wanted to stabilize output, it could

decrease the money supply, which will increase interest rates.

During the 2008 financial crisis velocity decreased. This means that the rate at which money changed hands

decreased. Other things the same, a decrease in velocity decreases the price level.

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate

decreases by 2 percentage points.

An increase in household saving causes consumption to

fall and aggregate demand to decrease.

In the CPI, goods and services are weighted according to

how much consumers buy of each good or service.

Suppose an increase in the price of rubber coincides with an advance in the technology of tire production. As a result of these two events, the demand for tires

is unaffected, and the supply of tires could increase, decrease, or stay the same.

The effect of an increase in the price level on the aggregate-demand curve is represented by a

movement to the left along a given aggregate-demand curve.

What must be given up to obtain an item is called

opportunity cost

When there is an excess supply of money,

people will try to get rid of money causing interest rates to fall. Investment increases.

Collective bargaining refers to

the process by which unions and firms agree on the terms of employment.

A recession has traditionally been defined as a period during which

real GDP declines for two consecutive quarters.

If over a short time there is an increase in the number of people retired and a decrease in the number of people working, then productivity

rises but real GDP per person falls.

Core CPI is

the CPI excluding food and energy.

The economy's two most important financial markets are

the bond market and the stock market.

Kurt decided to increase the number of stocks in his portfolio. In doing so, Kurt reduced

the firm-specific risk, but not the market risk of his portfolio.

The discount rate is

the interest rate the Fed charges banks.

Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in government expenditures changes aggregate demand more,

the larger the MPC and the weaker the influence of income on money demand.

Money is

the most liquid asset but an imperfect store of value.