Econ exam 3
Aggregate Demand
the amount of goods and services in the economy that will be purchased at all possible price levels
regressive tax system
the average tax rate falls as GDP rises
progressive tax system
the average tax rate rises with GDP
structural unemployment
unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one
cyclical unemployment
unemployment that rises during economic downturns and falls when the economy improves
an increased MPS and a decreased MPC leads to...
wealth
Okun's Law
1 percent more cyclical unemployment results in 2 percent less output (GDP gap)
A lender need not be penalized by inflation if the A) lender correctly anticipates inflation and increases the nominal interest rate accordingly. B) inflation is unanticipated by both borrower and lender. C) long-term rate of inflation is less than the short-term rate of inflation. D) short-term rate of inflation is less than the long-term rate of inflation.
A
Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated inflation occurs in the economy, then A) lenders are hurt, but borrowers benefit. B) borrowers are hurt, but lenders benefit. C) both lenders and borrowers are hurt. D) both lenders and borrowers benefit.
A
Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percentage of potential GDP is A) 8 percent. B) 10 percent. C) 2 percent. D) 4 percent.
A
If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to A) consume is three-fifths. B) consume is one-half. C) consume is two-fifths. D) save is three-fifths.
A
If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is A) 12 percent. B) 24 percent. C) 6 percent. D) 18 percent.
A
Part-time workers who want full-time work are counted as A) fully employed, and therefore the official unemployment rate may understate the level of unemployment. B) unemployed, and therefore the official unemployment rate may overstate the level of unemployment. C) fully employed, and therefore the official unemployment rate may overstate the level of unemployment. D) unemployed, and therefore the official unemployment rate may understate the level of unemployment.
A
Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result, A) the official unemployment rate will remain unchanged. B) the official unemployment rate will rise. C) the size of the labor force will increase. D) the official unemployment rate will fall.
A
Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon, where she anticipates that a new job will be available. We can say that Susie is faced with A) structural unemployment. B) frictional unemployment. C) seasonal unemployment. D) cyclical unemployment.
A
Under which of the following circumstances would we observe the greatest increase in real income? A) Nominal income falls by 2 percent, and the price level falls by 10 percent. B) Nominal income rises by 15 percent, and the price level rises by 12 percent. C) Nominal income falls by 4 percent, and the price level rises by 6 percent. D) Nominal income rises by 8 percent, and the price level rises by 4 percent.
A
multiplier effect
An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.
expansionary fiscal policy
An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output
1) Real-Balances Effect 2)Household Expectations Interest- Rate Effect 3) Personal Income Tax Rates 4) Profit Expectations 5) National Incomes Abroad 6) Government Spending 7) Foreign Purchases Effect 8) Exchange Rates 9) Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. A change in net export spending would most likely be caused by changes in A) 7 and 8. B) 6 and 9. C) 2 and 3. D) 5 and 6.
B
Countercyclical discretionary fiscal policy calls for A) deficits during both recessions and periods of demand-pull inflation. B) deficits during recessions and surpluses during periods of demand-pull inflation. C) surpluses during both recessions and periods of demand-pull inflation. D) surpluses during recessions and deficits during periods of demand-pull inflation
B
Full-Time Employed = 80 Part-Time Employed = 25 Unemployed = 15 Discouraged Workers = 5 Members of Underground Economy = 6 Consumer Price Index = 110 Refer to the given information about a hypothetical economy. If members of the underground economy are currently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by about A) 2 percentage points. B) 5 percentage points. C) 0 percentage points. D) 6 percentage points.
B
If the MPC is 0.8 and disposable income is $200, then A) personal consumption expenditures must be $160. B) consumption and saving cannot be determined from the information given. C) saving will be $20. D) saving will be $40.
B
In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates? A) trough B) expansion C) peak D) recession
B
Menu costs A) are sunk costs and therefore should be disregarded. B) are the costs to firms of changing prices and communicating them to customers. C) decrease during recession. D) increase during recession.
B
Official unemployment statistics A) overstate unemployment because workers who are involuntarily working part time are counted as being employed. B) understate unemployment because discouraged workers are not counted as unemployed. C) include cyclical and structural unemployment but not frictional unemployment. D) understate unemployment because individuals receiving unemployment compensation are counted as employed.
B
Other things equal, a decrease in the real interest rate will A) reduce investment and shift the AD curve to the right. B) expand investment and shift the AD curve to the right. C) reduce investment and shift the AD curve to the left. D) expand investment and shift the AD curve to the left.
B
Other things equal, an improvement in productivity will A) shift the aggregate supply curve to the left. B) shift the aggregate supply curve to the right. C) increase the price level. D) shift the aggregate demand curve to the left.
B
The accompanying list describes the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment. 1. Mollie just graduated from college and is now looking for work. She has had three job interviews in the past month but still has not gotten a job offer. 2. George used to work in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in a few months when national economic conditions improve. 3. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the Federal government cut defense spending. She has been looking for similar work for a year, but no company seems interested in her aircraft design skills. 4. Ricardo lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year but was unsuccessful and quit looking for work. Which individual is cyclically unemployed?
B
The investment demand curve will shift to the left as a result of A) a decrease in labor costs. B) an increase in the excess production capacity available in industry. C) increased business optimism with respect to future economic conditions. D) a decrease in business taxes.
B
Unemployed = 7 Total Population = 145 Employed = 95 Discouraged Workers = 3 The table contains information about the hypothetical economy of Scoob. All figures are in millions. If the natural rate of unemployment in Scoob is 5 percent, then A) structural unemployment is about 3 percent. B) cyclical unemployment is about 2 percent. C) hidden unemployment is about 5 percent. D) frictional unemployment is about 2 percent.
B
Which of the following represents the most expansionary fiscal policy? A) a $10 billion tax increase B) a $10 billion increase in government spending C) a $10 billion decrease in government spending D) a $10 billion tax cut
B
transfer payments
Benefits given by the government directly to individuals.
A decline in the real interest rate will A) shift the investment schedule downward. B) shift the investment demand curve to the left. C) increase the amount of investment spending. D) shift the investment demand curve to the right.
C
Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is A) unemployed. B) in the labor force. C) not in the labor force. D) employed.
C
Demand-pull inflation A) can be present even during an economic depression. B) is also called "hyperinflation." C) occurs when total spending in the economy is excessive. D) is measured differently than cost-push inflation.
C
If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is A) $20 billion. B) $360 billion. C) $320 billion. D) $660 billion.
C
If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift A) leftward by $20 billion at each price level. B) rightward by $20 billion at each price level. C) leftward by $40 billion at each price level. D) rightward by $40 billion at each price level.
C
Kara voluntarily quit her job as an insurance agent to return to school full time to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kara presently is A) structurally unemployed. B) not a member of the labor force. C) frictionally unemployed. D) cyclically unemployed.
C
Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S. A) aggregate supply curve would shift to the right. B) aggregate supply curve would shift to the left. C) aggregate demand curve would shift to the right. D) aggregate demand curve would shift to the left.
C
The APC is calculated as A) change in income/change in consumption. B) change in consumption/change in income. C) consumption/income. D) income/consumption.
C
The crowding-out effect of expansionary fiscal policy suggests that A) tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B) it is very difficult to have excessive aggregate spending in the U.S. economy. C) increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. D) consumer and investment spending always vary inversely.
C
The interest-rate effect suggests that A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending. C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
C
Which of the following fiscal policy changes would be the most expansionary? A) a $10 billion tax cut and $30 billion increase in government spending B) a $20 billion tax cut and $20 billion increase in government spending C) a $40 billion increase in government spending D) a $40 billion tax cut
C
What causes LRAS to shift?
Changes in productivity
Disposable Income - Consumption $200 $205 225 225 250 245 275 265 300 285 Refer to the given data. The marginal propensity to consume is A) 0.75. B) 0.25. C) 0.20. D) 0.80.
D
If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes A) the real-balances effect. B) the shift-of-spending effect. C) the output effect. D) the foreign purchases effect.
D
Other things equal, appreciation of the dollar A) increases aggregate demand in the United States and may decrease aggregate supply by reducing the prices of imported resources. B) decreases aggregate demand in the United States and may reduce aggregate supply by increasing the prices of imported resources. C) increases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.
D
Recently, a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been receiving increases in the nominal incomes of its members through collective bargaining. Is the critic correct? A) Yes, because real income may fall if prices increase less proportionately than the increases in nominal income. B) No, because real income may fall if prices increase less proportionately than the increases in nominal income. C) Yes, because when you have a large nominal income, your standard of living automatically increases. D) No, because real income may fall if prices increase more proportionately than the increase in nominal income.
D
Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would A) be unchanged. B) increase in the short run but eventually decline. C) increase. D) decline.
D
Which of the following is not seen by economists as an underlying cause of business cycle fluctuations? A) shocks to the money supply by the nation's central bank B) unexpected financial bubbles that eventually burst C) supply shocks caused by major innovations D) All of these are identified as causes of business cycle changes.
D
Which of the following statements is true about causes of business cycle fluctuations? A) Economists all agree that supply shocks are the cause of most business cycle fluctuations. B) Economists all agree that monetary changes are primarily responsible for business cycle fluctuations. C) Economists all agree that productivity shocks are the cause of most business cycle changes. D) There are a wide range of theories as to the underlying causes of business cycle movements.
D
Which of the following would not shift the aggregate supply curve? A) a decline in business taxes B) an increase in labor productivity C) a decline in the price of imported oil D) an increase in the price level
D
in which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output? A) military goods B) textile products C) agricultural commodities D) capital goods
D
what component of the real GDP equation is affected by fiscal policy?
G or government spending
unemployment
Measures the number of people who are able to work, but do not have a job during a period of time.
what is the relationship of real GDP and price level in regards to aggregate demand?
inverse
real balances effect
The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
recognition lag
The time it takes for policy makers to recognize the existence of a boom or a slump.
example of structural unemployment
Unskilled worker can't get hired because the minimum wage is too high.
What is ideal in terms of unemployment rate and participation rate?
a decreased unemployment rate and an increased participation rate
business cycle
a period of macroeconomic expansion followed by a period of contraction
cost-push inflation
a sustained rise in the price level caused by a leftward shift of the aggregate supply curve
proportional tax system
a tax whose average tax rate remains constant as the taxpayer's income increases or decreases
what is fiscal policy designed to do?
achieve full employment, control inflation, encourage economic growth
What causes investment demand to shift to the left (decrease)?
acquisition, maintenance, and operating costs, business taxes, and stock of capital goods on hand.
long run supply
all prices are flexible!!
cyclically adjusted budget balance
an estimate of what the budget balance would be if real GDP were exactly equal to potential output. only includes stimulus spending
self-fulfilling prophecy
an expectation that causes you to act in ways that make that expectation come true.
interest effect
at a low price level, people will have more money than they want and will try to acquire less liquid assets, increasing the supply of savings; this decreases interest rates and causes people to borrow more; one of the reasons aggregate demand slopes downward
Why is fiscal policy liked?
because it is bipartisan and can be used for either political agenda
What part of the GDP equation is the most volatile in the equation, especially during a recession?
investment
All recessions differ in _____________, ______________, and _________________
causes, length, and severity
how do you measure the multiplier effect?
change in real GDP/initial change in spending
why are output prices somewhat sticky?
changes in menu prices may cost more than keeping it consistent, fear of price wars, and customer attraction
What will increase consumer spending (aggregate demand)?
consumer wealth, household borrowing, consumer expectations, and decline in personal taxes
How do you measure MPC?
consumption/disposable income
if there is inflation, which fiscal policy should be used?
contractionary fiscal policy
What type of inflation are supply shocks in relation to?
cost-push inflation
What does expansionary fiscal policy do?
creates a deficit
increased productivity leads to ___________ input costs
decreased
contractionary fiscal policy
decreases government expenditures, increase taxes, or both. This creates a surplus.
GDP gap
difference between what the economy can and does produce (actual GDP - potential GDP)
taxes vary _____________ with GDP and transfers vary _________________ with GDP
directly, inversely
how to determine saving
disposable income - consumption
what occurs when the disposable income is less than consumption?
dissaving
why is input cost stickier?
due to wage contracts, efficiency wages, and the minimum wage law
What kinds of goods are affected the most in a recession?
durable goods such as capital goods and consumer durables
Labor force includes all..
employed and unemployed works/excludes total population and discouraged workers
How does capital (K) accumulate?
exchange rights and use rights must be divorced
If there is a recession, which fiscal policy should be used?
expansionary fiscal policy
What are factors that affect productivity growth?
factors affecting productivity growth, technological advance, quantity of capital, education/training, and economies of scale & resource allocation
economies of scale
factors that cause a producer's average cost per unit to fall as output rises
Recession
falling GDP and rising unemployment
what type of unemployment is considered in the natural rate of unemployment?
frictional
what type of unemployment will always be present in the economy?
frictional
example of frictional unemployment
graduating from college and then pursuing a job with your degree
what benefits from a recession? what doesnt?
grocery stores would, and vacations/luxury goods would not.
volatile
highly unstable
real GDP=
hours of work x labor productivity
What can slow down productivity?
increased debt levels, overcapacity, free internet apps, slowdown in technological progress, and price of product doesn't communicate value (these all decrease demand)
In a developed country, we grow by....
increased labor productivity
demand-pull inflation
increases in the price level (inflation) resulting from an excess of demand over output at the existing price level, caused by an increase in aggregate demand
as MPC increases, the multiplier
increases. These are directly related
matching market
innovative products and both parties have to select eachother. This occurs in frictional unemployment
what are the criticisms of unemployment?
involuntary part-time workers counted as full-time, discouraged workers are not counted as employed, the survey data is unreliable because many people may be ashamed to say they don't have a job/haven't looked for one, and the underemployment is not considered.
What are causes of recession?
irregular innovation (productivity shock), changes in productivity, monetary factors, political events, and financial instability-speculation
how is the labor force participation rate measured?
labor force/working age population between the ages of 16-65
what can raise real GDP?
less hours of work and higher productivity
fiscal policy should be used in terms of __________________ effects
long term
core inflation
measures price level without food and energy goods being taken into account due to their volatility
Is it easy to determine what type of inflation is occurring?
no
real income
nominal income adjusted for price changes
how is real income determined?
nominal income/price index and nominal income - price level
what kinds of goods are affected the least in a recession?
nondurable goods such as services and food/clothing
nominal income
number of dollars received as wages unadjusted for inflation
What are some unequal burdens in unemployment?
occupation, age, race/ethnicity, gender, education, and duration
immediate-short-run supply
period where all prices are fixed and people don't know there's a shortage/surplus
What causes a recession to end?
prices will get so low that entrepreneurs will start buying again.
what are the criticisms of fiscal policy?
problems with timing via recognition lag, operational lag, and administration lag, political business cycles, future policy reversals, off-setting state and local finances, and the crowding-out effect
As interest rate decreases, what happens to investments?
profitable investments become more profitable, and previously unprofitable investments become profitable
any decrease in AD will lead to....
recession
what does not count in the unemployment category?
retired, discouraged, and don't want to work
what are the determinants of aggregate demand?
shift in factors affecting C, I, G, and Xn, and the multiplier effect
short run supply
some prices are sticky (input), and others are flexible (output)
What is the mechanism of a recession?
spark, fall in demand due to a decrease in spending, fall in production causing a surplus, rising unemployment, which furthers the fall in demand. A surplus ultimately leads to deflation.
A fall in demand causes
sticky prices and wide spread pessimism due to the self-fulfilling prophecy.
What is the current thinking on what tax cuts and government spending should be allocated to in a fiscal policy?
tax cuts should enhance work effort, investment, and innovation while government spending should be on public capital projects
What causes investment demand to shift to the right (increase)?
technological advance, planned inventory changes, and expectations
what does it mean for the GDP gap when the actual GDP>potential GDP?
the economy is growing at a substantial rate, which will eventually lead to inflation
Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1
Marginal Propensity to Save (MPS)
the increase in household savings when disposable income rises by $1
Potential GDP
the level of real GDP attained when all firms are producing at capacity, in which there is full employment and the GDP gap=0.
crowding-out effect
the loss of funds for private investment due to government borrowing. In this case, the government is more reliable to borrow to because they can tax and they can print more money.
participation rate
the percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work)
administration lag
the time it takes for congress and the president to agree on what fiscal policy to use
operational lag
the time it takes for the full impact of a government program or tax change to have its effect on the economy
Aggregate Supply
the total amount of goods and services in the economy available at all possible price levels
aggregate supply
the total amount of goods and services in the economy available at all possible price levels
natural rate of unemployment
the unemployment rate that arises from the effects of frictional unemployment
how is the unemployment rate measured?
unemployed/labor force(which is employed + unemployed) x100
frictional unemployment
unemployment that occurs when people take time to find a job
foreign purchases effect
when price level falls, other things being equal, US prices will fall relative to foreign prices, which will tend to increase spending on US exports and also decrease import spending in favor of US products that compete with imports.
Underemployment
workers are overqualified for their jobs or work fewer hours than they would prefer