Econ Exam 2

Alex wants to measure the nominal 1998 GDP of $873 billion in 2008 dollars. From the data he gathered, he knows the deflator for 1998 is 30 and for 2008, it is 70, and that real interest in those years was 4.23% and 3.21% respectively. If he avoids making a misleading calculation, what will the value be?

$2,037 billion

In year 1 the CPI is 137, and in year 2 the CPI is 152. If Dennis's salary was $75,000 in year 1, what is the minimum salary he must earn in year 2 to "more than keep up with inflation"?

$83,212

Which of the following statements is false?

*An increase in wage rates causes producers to move up the SRAS curve.* An increase in the price level causes producers to move up the SRAS curve. The SRAS curve is upward sloping. The long-run aggregate supply curve is vertical.

Suppose the market basket consists of 10X, 20Y, and 30Z. Current-year prices are $1.20 for each unit of X, $0.76 for each unit of Y, and $1.30 for each unit of Z. Base-year prices are $1.00 for each unit of X, Y, and Z. What is the approximate CPI in the current year?

110.33

When Anders took out his first two-year membership with Maxima Gym in 2004, the fee was $457.00. He renewed his membership three times; in 2006 for $480.00, in 2008, for $500.00, and again in 2010, for $512.00. What is the overall rate of inflation for Anders' gym membership?

12.04%

A market basket is made up of three goods, 20X, 13Y, and 17Z. The prices in the base year are $1.40, $2.00, and $2.55, respectively. The prices in the current year are $1.30, $2.30, and $3.70. What is the approximate consumer price index in the current year?

122

Suppose that out of the original 100 of government spending, 33 will be recycled back into purchases of domestically produced goods and services in the second round and 10.89 is spent in the third round. Following this multiplier effect, what will the value of the total aggregate expenditures be after the fourth round in the cycle is completed?

147.48

Women composed __________ of the paid workforce in 1900 and 50% of the paid workforce in 2010.

18%

Look at the following data: The structural unemployment rate is 4 percent, the natural unemployment rate is 5 percent, and the cyclical unemployment rate is 3 percent. The frictional unemployment rate is ____________ percent and the actual unemployment rate is __________ percent.

1; 8

If the number of employed persons in a country equals 24 million, the number of unemployed persons equals 8 million, and the number of persons over age 16 in the population equals 40 million, the unemployment rate equals:

25%.

Suppose that out of the original 100 increase in government spending, 33 will be recycled back into purchases of domestically produced goods and services in the second round and 10.89 is spent in the third round. Following this multiplier effect, what value would be recycled in the fourth round of this cycle?

3.59

If the price index moves from 107 during year 1 to 111 during year 2, the rate of inflation is approximately:

3.7%

Suppose that out of the original 100 increase in government spending, 60 will be recycled back into purchases of domestically produced goods and services. Following this multiplier effect, what value will be recycled in the next round in the cycle?

36

Look at the following data: The frictional unemployment rate is 1.5 percent, the natural unemployment rate is 4.5 percent, and the cyclical unemployment rate is -1 percent. The structural unemployment rate is _________ percent and the actual unemployment rate (in this economy) is ___________ percent.

3; 3.5

Which of the following is a distinguishing characteristic of a Keynesian cross diagram?

45-degree line

Freelife, New Hampshire has a labor force of 78,567 persons and employment of 74,382. The unemployment rate for the city is:

5.3%.

Look at the following data: The frictional unemployment rate is 2 percent, the structural unemployment rate is 3.5 percent, and the actual unemployment rate is 9.5 percent. The natural unemployment rate is ____________ percent and the cyclical unemployment rate is __________ percent.

5.5; 4

When the economy is in a recession, the government will want to increase output. If the multiplier equals 2.5 and the government increases spending by 200, how much will output increase by?

500

The economy is in a recession and the government wants to increase output. If the multiplier equals 3 and the government increases spending by 250, how much will output increase by?

750

If the unemployment rate is 8 percent, then this means:

8 percent of the labor force is unemployed.

The basket of goods in the Consumer Price Index consists of about _________ products; that is, several hundred specific products in over __________ broad-item categories.

80,000; 200

In the short run, an increase in investment, ceteris paribus, shifts the

AD curve to the right, causing equilibrium price level to rise and equilibrium Real GDP to increase.

If aggregate supply is vertical, then which of the following statements must be true?

Aggregate demand does not affect the quantity of output.

Nancy's union has negotiated a three-year wage contract that provides for a 1.4% increase indexed to inflation. The rates of inflation are forecast to be 1.62%, 1.93% and 2.21% respectively. How will Nancy's wage increase be expressed in the new contract?

COLA plus 1.4%

____________________ will not cause a shift of the AS curve in a Keynesian framework.

Changes in output prices

The GDP deflator is a price index that includes the following components of GDP:

Consumption, Investment, Government plus Exports minus Imports

Refer to Exhibit 8-1. Assume the economy is originally in equilibrium at point A. If unusually bad weather leads to decreased production of wheat, corn, and other crops, at which point is the economy most likely to end up?

D

Currently the economy is on a short-run equilibrium at "E". A recently published research found a growing consumer optimism about the future of the economy. This optimism is expected to cause the short-run equilibrium to shift to________________ (Answer by clicking in E1, E2, or E3 on the graph below)

E1

Which of the following statements is incorrect?

Employment insurance compensation increases the opportunity cost of being unemployed.

An economics professor is discussing a measure of inflation over time based on a basket of goods comprised of all the components of GDP. Which measure is it?

GDP Deflator

Review the 2 graphs below (a and b). Which of the two represents the neoclassical Phillips curve (click anywhere on the graph)?

Inflation vs unemployment graph

Suppose that everyone who has looked for a job for more than six months gave up in despair and stopped looking. What would happen to the unemployment rate?

It would fall.

According to macroeconomic theory, evidence that high unemployment may be accompanied by low inflation, and low unemployment may be accompanied by high inflation is supported by the:

Keynesian Phillips curve tradeoff.

In an AD/AS model, the point where the economy has excess capacity is called the:

Keynesian zone of the AS curve

The shape of the ______________ involves a tradeoff between unemployment and inflation.

Phillips curve

Which of the following is the name used to describe the price index that consists of intermediate goods and finished goods?

Producer Price Index

Starting from short-run equilibrium, the following occurs: personal income taxes are cut, business taxes are cut, and labor productivity rises. What is the effect on the price level, Real GDP, and the unemployment rate in the short run?

Real GDP rises, the unemployment rate falls, and the effect on the price level cannot be determined.

In the short run, a decrease in wage rates, ceteris paribus, shifts the

SRAS curve to the right, causing equilibrium price level to fall and equilibrium Real GDP to increase.

If foreign input prices increase and the United States purchases those inputs, then the U.S.

SRAS curve will shift leftward and U.S. prices will rise.

A __________ is a person who was employed in the civilian labor force and was either fired or laid off.

Selected Answer: none of the above Answers: new entrant reentrant job leaver job fixer none of the above

Which of the following factors can shift the AD curve?

Selected Answer:a, b, and c Answers: net exports government purchases the money supply

If the price level is constant, but consumption increases, then the wealth effect will

Tax cut to families (E1) Tax cut to families AND a major war that disrupted the supply of oil (a major resources for the production and transportation of goods and services) (E8) Natural disaster in the agricultural sector (E7) Widespread consumer pessimism about the future (E5)_ A major loss of wealth due to stock market crash AND advancement in technology that improved productivity (E4) Weakening currency AND declining labor cost (wage) (E6) Serious economic slowdown in Canada, Mexico, China, and other countries AND increasing cost of production in the U.S. (E2) Advancement in technology (E3)

The representative basket of goods and services currently costs $31,500. The cost of this same basket is $21,000 using base year prices.

The CPI for the current period is 150

From a neoclassical view, which of the following is a true statement?

The economy cannot sustain production above its potential GDP in the long run.

Which of the following statements is false?

The exchange rate is the price of one (country's) currency in terms of another (country's) currency. A currency has appreciated in value if more of a foreign currency is needed to buy it. A change in the money supply can change aggregate demand. A change in business taxes can change investment, which can change aggregate demand. *none of the above*

Referring to the diagram above, which of the following is a true statement?

The increase in output (Q1 to Q2) may come about because of lower levels of taxation.

The representative basket of goods and services currently costs $21,000. The cost of this same basket is $22,050 using base year prices.

The inflation rate is -4.76%

Which of the following best describes how the wealth effect works?

The price level rises, purchasing power falls, a person's monetary wealth falls, and the person buys fewer goods and services.

Aggregate demand curves slope downwards for each of the following reasons EXCEPT

The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods.

Inflation implies that

WRONG- None of the Above

According to the Keynesian framework, which of the following may help a country reduce inflation, but will not help that country to get out of a recession?

WRONG- a decrease in the tax rate on consumer income

An analyst needs to adjust the nominal GDP for the years 2000 and 2010 into real terms to conclude his comparison analysis. The nominal GDP in 2000 was $500 billion and $1,000 billion for 2010; the real interest rate was 6.79% in 2000 and 3.71% in 2010; the 2000 deflator was 24 and 51 in 2010. What is the real change?

a decline of approximately 5.88%

If the price level remains constant but the wage rate increases, then there will be __________ in production and the SRAS curve will shift __________.

a decrease; leftward

According to the Keynesian framework, ________________________ may cause a recession, but not inflation.

a major trading partner's economic slowdown

The graph above refers to a significant increase in oil prices. Which of the following is likely to result?

a rise in inflation

If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and output falls below potential GDP, which of the following is likely to occur?

a rise in unemployment

In the neoclassical version of the AD/AS model, which of the following should you use to represent the AS curve?

a vertical line drawn at the level of potential GDP

The _________________ argument points out that if an employer reacts to poor business conditions by reducing pay for all workers, then the best workers, with the best employment alternatives at other firms, are the most likely to leave and the least-attractive workers, with fewer employment alternatives, are more likely to stay.

adverse selection of wage cuts

In the neoclassical view, changes in ____________________ can only have a short-run impact on output and on unemployment.

aggregate demand

At a macroeconomic level, the theory of rational expectations points out that if the ______________________ is vertical over time, then people should rationally expect this pattern.

aggregate supply curve

Consumption, investment, government spending, exports, and imports are:

all components of aggregate demand.

Referring to the diagram above, complete the following sentence: Any increase in aggregate demand in the short-run will lead to:

an increase in output (Q1 to Q2), but it will also lead to prices increasing.

Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in:

an increase in price level.

According to the Keynesian framework, ________________ in __________________ may cause inflation, but not a recession.

an increase; domestic investment

If a person did at least one hour of work as a paid employee during the survey week, how is she classified?

as an employed person

Referring to a Keynesian Phillips curve, a reduction in inflation is likely to cause:

at least a slight increase in unemployment.

Which of the following will cause the multiplier to be smaller and cause changes in investor confidence to have a smaller effect in an economy?

bigger leakages

In order to shift the vertical supply curve to the left, which of the following would have to occur?

breakdown of key market institutions

Cyclical unemployment arises when:

business activity in the macroeconomy declines.

A decrease in the price level

causes a downward movement along the existing AD curve.

A rise in wage rates

causes the SRAS curve to shift leftward.

Personal income taxes rise. This lowers __________, which lowers __________ and the __________ curve shifts __________.

consumption; aggregate demand (AD); AD; leftward

According to the _____________________ argument, a market-oriented economy has no obvious way to implement a plan of systematic wage reductions.

coordination

Which of the following represents a Keynesian point of view of macroeconomics?

creating increases in aggregate demand to reduce unemployment

As income taxes rise, disposable income __________, causing __________ the AD curve.

decreases; a leftward shift of

Another term used to describe negative inflation is:

deflation

Melanie decided to save 20% of her annual earnings for 10 years so she would have a down payment for a house. After 5 years, what change in the economy would cause an increase in the purchasing power of the funds she has managed to save?

deflation

Suppose the real exchange rate of 10 Mexican pesos to the dollar moves to 9 pesos to the dollar. The dollar has __________________, making American goods __________ expensive for Mexicans.

depreciated; less

Changes in the price level of the different components of aggregate demand are reflected in the AD/ASAD/AS macroeconomic model by a ________________________.

downward sloping AD curve

If markets throughout the global economy all have flexible and continually adjusting prices, then:

each economy will always head for its natural rate of unemployment.

The neoclassical view holds that long-term expansion of potential GDP due to _______________________ will determine ____________________.

economic growth; the size of the economy

The definition of market equilibrium states that at the _______________, the quantity of labor demanded by employers will equal the quantity supplied.

equilibrium wage

If a Keynesian expenditure-output model shows that aggregate demand for both goods and labor has shifted to the left to D1, while wages remained at w0 and prices remained at P0, what will be the result?

excess supply

Which of the following data would be analyzed to determine whether any shift in the MPI has occurred over the course of the past 5 year period?

exchange rates

A rise in foreign real national income tends to raise U.S. __________, shifting the U.S. AD curve to the __________.

exports; right

From a neoclassical view, which of the following is less important?

fighting unemployment

Which of the following is a distinguishing characteristic of the neoclassical view?

flexibility of wages and prices over time

Unemployment that arises as a result of the time it takes for unemployed people to locate a job utilizing their transferable skills is called __________ unemployment.

frictional

The development of a nationwide computerized job bank listing of all job openings would be most likely to reduce:

frictional unemployment.

A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is said to be:

frictionally unemployed.

The effects of inflation are seen in:

goods, services, wages and income levels

If the price level of what firms produce is rising across an economy, but the costs of production are constant, then:

higher profits will induce expanded production.

When prices of outputs in an economy become sufficiently high causing production to exceed potential GDP, the resulting:

hyper-intense production will be unsustainable in the long run.

In the early 1990's extremely high inflation rates of 2500% were common in Russia. During that time, we can say that as a result of those inflation rates, Russia was experiencing ___________________.

hyperinflation

The chart below gives the data necessary to make a Keynesian cross diagram. Assume that the tax rate is 0.4 of national income, the MPC out of after-tax income is 0.9, investment is 58, government spending is 60, exports are 40, and imports are 0.1 of after-tax income.

if 600, 374

Assume that Ms. Sawyer's current salary is $75,000, up from $70,000 last year, while the CPI is 160 this year, up from 150 last year. This means that Ms. Sawyer's real income has

increased

According to the Keynesian framework, ____________________________ will not help reduce inflation, but may help a country get out of a recession.

increased spending by the government on health care

Which of the following is most strongly supported by the Keynesian perspective of macroeconomics?

inflation is a price that might have to be paid to achieve lower unemployment

__________ implies that pressure for price increases reaches across _______________markets, not just one.

inflation; most

If a neoclassical model shows increasing wages in the economy over the long run, what else will likely occur?

inflationary increase in price level

As the aggregate price level in an economy rises, ____________________.

interest rates increase

Which of the following is not an example of one of the major categories in the overall CPI?

investment items (such as stocks, bonds, real estate, and life insurance)

A person is unemployed if he

is a member of the civilian labor force, out of work, and actively seeking work.

The producer Price Index (PPI)

is calculated based on prices paid for inputs by producers

Karen chooses to go to university fulltime rather than to work. Karen:

is not part of the labor force.

If a Phillips curve shows that unemployment is low and inflation is high in the economy, then that economy:

is producing at a point where output is more than potential GDP.

The equilibrium quantity of labor and the equilibrium wage increase when:

labor demand shifts to the right, if wages are flexible.

The equilibrium quantity of labor decreases and the equilibrium wage increases when:

labor supply shifts to the left, if wages are flexible.

The equilibrium quantity of labor increases and the equilibrium wage decreases when:

labor supply shifts to the right, if wages are flexible.

Expectation of lower future prices is a

leftward shifter of AD.In the short run

Suppose that a rise in business confidence has led to more investment in the economy and higher levels of output. In the short-run Keynesian analysis, the rise in aggregate demand will:

lower unemployment.

The unemployment rate may overestimate the true extent of unemployment if:

many people who claim to be unemployed actually work in the underground economy. people falsely claim that they are actively seeking work in order to receive unemployment benefits. either B) or C) occurs.

In macroeconomics, what name is given to the costs of changing prices that businesses must consider?

menu costs

The sum of all the income received for contributing resources to GDP is called ___________________.

national income (Y)

The ___________________ argument tends to view inflation as a cost that offers no offsetting gains in terms of lower unemployment.

neoclassical

The representative basket of goods and services currently costs $21,000. The cost of this same basket is $22,050 using base year prices.

none of the above

In order to be classified as unemployed, a person must

not have a job, have been actively looking for work within the past four weeks, and currently be available for work.

The unemployment rate equals the

number of unemployed persons divided by the civilian labor force.

Reginald looked for work for six months but could not find a job to his liking. He now spends his time at the beach. For purposes of employment he is considered:

out of the labor force.

In the long-run neoclassical view, when wages and prices are flexible, ________________________ determine the size of real GDP.

potential GDP and aggregate supply

The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to rebound back to its _____________ and its ____________________.

potential GDP; natural rate of unemployment

The Keynesian economic framework is based on an assumption that:

prices and wages are sticky and do not adjust rapidly.

The theory of _____________________ holds that people will use all information available to them to form the most accurate possible expectations about the future.

rational expectations

In a Keynesian cross diagram, what name is given to the distance between an output level that is below potential GDP and the level of potential GDP?

recessionary gap

A(n) __________ is a person who was previously employed, hasn't worked for some time, and is currently reentering the labor force.

reentrant

Refer to Exhibit 8-2. Based on the given change, what word (rises or falls) should go in blank (5) and blank (6), respectively, to summarize the resulting impact on short run equilibrium? Given Change in Economic FactorReal GDPPrice LevelIncrease in foreign real national income(1)(2)Decrease in wage rates(3)(4)Beneficial supply shock(5)(6)Decrease in government purchases(7)(8)Increase in personal income taxes(8)(10)Decrease in labor productivity(11)(12)

rises; falls

Aggregate demand is more likely to _________________ than aggregate supply in the short run.

shift substantially

A decrease in the price of machinery

shifts the SRAS curve to the right.

The unemployment due to changes in the types of skills employers require is called __________ unemployment.

structural

Juan lost his job as a nuclear physicist working for a defense contractor. He can not find a job because no firms in the defense industry or any other industry are hiring people with his skills. Juan is ______________ unemployed.

structurally

The base year is the year

that serves as a reference point or benchmark.

If consumption increases,

the AD curve will shift rightward, which will push the price level up.

The most commonly cited measure of inflation in the United States is:

the Consumer Price Index (CPI).

Which of the following is a valid criticism of the rational expectations theory?

the assumption seems too strong

Refer to the graph shown below. At point A:

the economy has full employment.

Inflation implies that _____________________.

the overall price for a representative basket of goods and services is higher

As the price level falls,

the purchasing power of cash holdings rises.

If aggregate supply is vertical, then aggregate demand does not affect:

the quantity of output.

Potential GDP in the U.S. will be unaffected by ____________________.

the unemployment rate

A person in the civilian labor force falls into one of two categories:

unemployed or employed.

The unemployment rate measures:

unemployed workers as a percentage of the labor force.

The short-run aggregate supply curve is

upward sloping.

In the neoclassic model, economic growth over time shifts potential GDP and the ______________ gradually to the right.

vertical AS curve

Which of the following is a building block of neoclassical economics?

wages and prices will adjust in a flexible manner

The Keynesian view of economics assumes that:

wages are sticky.

In November 2010 the labor force in Siouxtown, was 14,800. There were 14,483 persons employed. The local unemployment rate:

was 2.1%.

Using a neoclassical model, what will the level of cyclical unemployment be when an economy is producing at potential GDP?

zero