Econ Final Exam

As a market interest rates rise:

a. a banks opportunity cost of holding reserves rises

In the figure, assume that initial real growth rate of the economy is 3% when a negative aggregate demand shock shifts the AD curve from AD1 to AD2, As a result of the Fed's policy response, the AD curve shifts to AD5 in the short run. Which of the following is TRUE about the Feds policy response?

b. The fed responded too much to the shock

Why are voters generally considered myopic?

b. They focus on economic conditions in the year of the election, not over the entire term of the presidency

In the basic model with AD and LRAS curves only, if spending growth is 10% and the Solow growth rate falls from 5% to 3% then inflation will:

b. increase from 5% to 7%

Deflation is

c. a decrease in the average level of prices

In the best case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to:

d. 10%

in the distinguished gentleman. Eddie Murphy plays a con man with a name similar to that of a long running congressional representative. When the politician dies, Murphy runs for office using the politicians name: Jeff Johnson. He's careful not to go on camera but uses taglines in commercials such "Johnson: the name you trust." He eventually achieves a slim victory . How does Murphy's character use voter ignorance to win the election ? (Hint: the answer is only slightly different than the way most politicians use voter ignorance to win elections.)

d. He's expecting most voters to neither investigate him too much nor know that their congressman died

If a baker observes an increases in demand for bread, should the baker increase output or raise prices

d. It depends on whether the change in demand is driven by inflation or by a stronger preference for bread

Which of the following is considered unemployed?

d. John, on temporary layoff from his work, awaits recall

If the economy is hit by a negative real shock that reduces real GDP growth below its long run potential rate, what is the appropriate monetary policy to move real GDP growth back to the long run rate without raising inflation?

d. No monetary policy can achieve this goal

Which of the following would Not shift the long run aggregate supply curve?

d. an increase in the money supply

When the Fed supplies "too much" monetary stimulus in the face of a negative aggregate demand shock:

d. inflation, real growth, and nominal wage growth all increase

Disinflation is more painful when the central bank:

d. is not credible

When actual inflation is equal to expected inflation :

d. neither borrowers nor lenders are harmed

Giving the possibilities for crowding out, expansionary fiscal policy financed through government borrowing is most likely to by effective when the:

d. private sector is reluctant to spread or invest

Which of the following is not consistent with points along the long run aggregate supply curve?

d. real output growth is negatively related to inflation

Tyler owes $100,000 but he owns Mexican Amati paintings that he could sell immediately for $80,000 or within a few months for $120,000. If these are all the assets and liabilities that Tyler has, Tyler is:

d. solvent but illiquid

A worker repairing VHS cassette tape players was laid off because most of his customers have started using DVD players and streaming services. This worker is now:

d. structurally unemployed

Assume that the economy is initially at point Y in the graph. If the fed took the appropriate action with monetary policy but overestimated how serious the recession is, then:

d. the fed would overshoot and the economy would move to point W

Suppose that congress decided to exempt seniors from paying income tax on labor income. What would happen to the labor force participation rate for seniors?

a. It would increase

The Federal Reserve can influence the economy by shifting:

a. The AD curve

a negative real shock leads to:

a. and increase in the inflation rate but a decrease in the real GDP growth rate.

If prices are perfectly flexible, the economy will always be growing:

a. at its potential rate

An increase in the reserve ratio means that banks want to

a. become more liquid

Which of the following can explain the shift of the long run aggregate supply curve from A to B in the figure?

a. development of new technology

Someone who recently moved to Florida because of its warmer climate will need to spend time looking for a new job. This is an example of:

a. frictional unemployment

Suppose the economy in initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by

a. increasing taxes so that the AD curve shifts back to AD1

Laws that make it more difficult (and more expensive) to fire workers:

a. lead to higher rates of long term unemployment

As a result of an increase in the growth rate of the money supply :

a. real GDP growth increases only in the short run, and the inflation rate increases in both the short run and the long run

When workers lose their jobs and become officially unemployed, the number of people in the labor force:

a. remains constant

Representative John Murphy has secured around $200 million of federal government money for a small airport near Pennsylvania, that averages about 30 passengers a day. The costs of the their government support:

a. represent an external cost paid mostly by taxpayers who will never use the airport

After a pair of wars in the late seventeenth and early eighteenth centuries, French-British relations decayed to the point that England began putting high tariffs on French wines. A large part of the support for this law came from British brewers and distillers who feared the return of French competition after the wars. These tariffs help explain why, to this day, the English prefer beer over wine. Of the arguments against free trade, which seems most likely to apply here, given the information provided?

a. saving domestic jobs

The text states that "inflation is a type of tax" This tax refers to _______ when inflation occurs.

a. the lower purchasing power of money

Money illusion is

b. Mistaking changes in nominal prices for changes in real prices

Why is wasteful spending by the government difficult to control?

b. Providing decision makers with necessary information and creating incentives to control costs are both difficult to achieve

During a recession, consumers hold more money by cutting back on their spending , resulting is ______in inflation and ______in real growth

b. a decrease; a decrease

You are policy maker and a lobbyist comes to you, arguing that his industry is important for national security and has important spillover benefits. Why might you be suspicious of his claims?

b. his industry benefits from tariffs that decrease foreign competition

In early 2018, president trump imposed new tariffs on washing machines produced outside the United States because:

b. low to medium skilled jobs were under pressure from the international production of goods and from the automation of factories

the most important tax rate for determining an individuals incentive to work is the ______ tax rate

b. marginal

An unexpected increase in export growth is a:

b. positive AD shock

Minimum wage laws and unions tend to:

b. raise wages and raise unemployment

Disinflation occurs when the overall price level

b. rises at a decreasing rate

Fiscal policy is most effective in keeping both inflation and real growth stable when there is a:

b. shock to aggregate demand

As part of the American Recovery and Reinvestment Act, $7 million was earmarked to build a bridge over a railroad crossing so that 168 Nebraska town residents wouldn't have to wait for the trains to pass. Which of the following best explains why this proposal was passed?

b. the costs were highly diffused, while the benefits were very concentrated.

Two reasons that there was considerable waste in US government spending in Iraq and Afghanistan were that:

b. the desires of the Iraqi and Afghan people were not clearly known to decision makers in the United States and American taxpayers could not easily monitor the US spending in Iraq and afghanistan

Inflation tends to benefit

b. the government

Without trade restrictions, the price of tennis shoes is $30, and with trade restrictions the price of tennis shoes is $45 . The difference in the two prices reflects:

b. the value of extra resources for domestic production of an additional pair of tennis shoes

The "quantity theory for money" describes the relationship between:

b. the velocity of money, money supply, real output, and prices

Workers bear at least a majority , if not all, of the burden of the employees share of FICA and Medicare tax payments because the:

b. workers would have earned higher wages without the tax payments

If the Fed credits Alex's checking account with $8,000 and Alex's bank decides to keep the entire $8,000 in the form of reserves instead of lending it out, how much does the money supply increase?

c. $8,000

When consumers suddenly become more pessimistic about the economy, a negative aggregate demand shock shifts the:

c. AD curve to the left, reducing the real growth rate in the short run

In 1970, 1.3 barrels of oil were used to produce $1,000 of GDP. In 2004, it took only 0.64 barrels of oil to do the same. What implications does this have for economic fluctuations in the US today?

c. Spikes in oil prices will not have have as severe an impact on the US economy today as they did in the 1970s

If the federal reserve offsets a negative shock to aggregate shock to aggregate demand with increased money growth:

c. both inflation and real GDP growth will rise compared to if the Fed had not acted

Government spending is a more effective policy tool when:

c. consumers are pessimistic and not spending.

Which policy would the Fed's Board of Governors choose following a negative real shock if they are more concerned about inflation than unemployment?

c. decrease the money supply to shift the aggregate demand curve to the left

Much to the chagrin of some Americans, conventional light bulbs were effectively banned in 2014 leaving only compact florescent lights (CFLs) on store shelves. The ban was encouraged, in part, by the makers of the more expensive CFLs. Which concept is best captured in this story?

c. diffused costs and concentrated benefits

The labor force consist of:

c. employed workers and adults who do not have jobs but who are looking for work

The labor force consist of:

c. employed workers and adults who do not have jobs but who are looking for work.

Suppose the economy is growing faster than its long-run potential growth rate. To bring the real growth rate back to the long run potential rate, the Fed should:

c. engage in actions to raise interest rates

The FICA tax burden is:

c. home more by the employee even though the employer contributes an equal dollar amount

Inflation is painful to stop because stopping it:

c. requires decreasing the growth rate of the money supply, which typically leads to lower growth overall in the short run

Assume that the economy is initially at point Y in the graph. If the Fed took the appropriate action with monetary policy but banks were slow to lend, then :

c. the Fed action would be partially effective and the economy would move to point Z.

If the Fed buys government bonds, which will likely NOT increase?

c. the Federal Funds rate

Suppose the federal government incurred a $1 billion deficit in 2011. What was true of national debt?

c. the national debt increased by $1 billion

Which of the following would be considered unemployed?

d. Janice, who graduated from the university in May, is waiting for her new job to start in July

Which of the following would result from a positive productivity shock?

d. an increase in the economy's long-run aggregate supply curve

During the internet revolution in the late 1990s , a positive real shock shifted the long run aggregate supply curve to the right , which led to

d. an increase in the real growth rate and a decrease in the inflation rate.

To increase the money supply in the economy , the Fed would:

d. carry out open market purchases and/or decrease the interest rate paid on reserves

When the Fed buys U.S. government bonds to affect the money supply, it is:

d. conducting an open market purchase

Which of the following will not shock aggregate demand so that it shifts to the left?

d. decreased import growth

A problem that makes fiscal policy less effective is that:

d. higher taxes or increased borrowing to find government spending can reduce aggregate demand

Two problems with the average price level indicated by the CPI are changes in both the _____ and _______

d. mix of goods purchased; quality of goods purchased