ECON Final Study Guide

In a typical business cycle, the trough is immediately followed by the:

Expansion

The trade balance is the difference between the value of:

Exports and the imports

Which of the following is TRUE?

Inflation means an increase in the overall level of prices

The trough of the business cycle:

Is a temporary minimum level of real GDP

Which is most likely a macroeconomic, not microeconomic, question?

Is the national unemployment rate rising or falling?

If monetary aggregates were ranked from most liquid to least liquid, the order would be:

M1 and M2

Which program was introduced in 1990 to replace the means-tested program Aid to Families with Dependent Children?

Temporary Assistance to Needy Families

An economic recovery encompasses all of the following EXCEPT:

The end of the business cycle

Keynesian economics stressed:

The importance of total spending

If all of the households and businesses start saving more during economic hard times, then aggregate income will fall, hurting everyone in the economy. This is known as:

The paradox of thrift

One role of government policy is:

To attempt to manage short-run macroeconomic fluctuations

If an economy is open:

Trading with other countries makes up a portion of the economy

Look at the figure The Business Cycle. Point B on this graph shows a(n):

Trough

One of the issues of importance to macroeconomists is:

Understanding how living standards change over time

An example of a double coincidence of wants is:

a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired

An inflationary gap can be closed with:

a decrease in government purchases

A positive demand shock will result from:

a move by the Federal Reserve to lower the interest rate

(Figure: Inflationary and Recessionary Gaps)Look at the figure Inflationary and Recessionary Gaps. The intersection of AD with SRAS in panel (b) indicates:

a short-run equilibrium

Diminishing returns to physical capital means that when the amount of human capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to:

a smaller increase in the marginal product of labor

Economies with high growth rates tend to be those that have:

a stable government that protects property rights

The original purpose of savings and loans was to:

accept deposits from state and local governments and loan them to businesses in need of short-term loans

An inflationary gap occurs when:

actual output exceeds potential output

(Figure: Aggregate Supply)Look at the figure Aggregate Supply. If the economy is at point E:

actual outputs is more than potential output

Which of the following is (are) associated with poverty?

adequate employment, education and proficiency in English

Sometimes healthy people drop their health insurance, leaving only sicker people to buy insurance. This creates a situation known as:

adverse selection

Programs associated with the welfare state are believed to cause deadweight loss, since they:

affect incentives to work and to save

All of the following are examples of job search EXCEPT:

attending a class at a community college to learn database management

Which of the following about bank runs is FALSE?

bank runs typically happen to only small banks with few financial assets

To lower the short-term interest rate, the Federal Reserve can:

buy Treasury bills

The tools of conducting monetary policy include:

changes in the required reserve requirement

For the United States in 2012, a Gini coefficient of 0.57 suggests that:

compared to most European countries, the United States has unusually high levels of income inequality

1. For a nonrival good like pay-per-view television programs, the private market will lead to:

consumption of too little of the good

If the economy exhibited an inflationary gap, the government should follow a(n) _____ policy, which would shift the AD curve to the _____.

contractionary; left

When the economy is at full employment, _____ is zero.

cyclical unemployment

If interest rates rise, there will be a(n):

decrease in aggregate demand

If policy makers want to decrease real GDP by $100 billion and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____.

decrease; $40 billion

Improvements in information technology have:

decreased the demand for money

An inflationary gap gradually:

decreases short-run aggregate supply

(Figure: Equilibrium in the Money Market)Look at the figure Equilibrium in the Money Market. If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____.

demand for; rise

Given the figure Model of a Competitive Market, if there are no external benefits or costs, the output at Q will be:

efficient

Becky works for a large grocery store that provides a health insurance program to all workers. This is an example of

employment-based health insurance

If the Federal Reserve wants to increase the monetary base, it might:

engage in an open market purchase of Treasury bills

Assume that the marginal propensity to consume is 0.8. Government purchases of goods and services increase by $100 billion, financed by a $100 billion tax increase. Real GDP will:

expand by $100 billion

Pigouvian taxes are designed to reduce:

external costs

If the demand for money is $100 billion and the supply of money is $200 billion, then the interest rate will:

fall

If real GDP rises while nominal GDP falls, then prices on average have:

fallen

In the long run, nominal wages are:

flexible, because contracts and informal agreements are renegotiated in the long run

Frictional unemployment exists because of all of the following reasons EXCEPT:

for the minimum wage

If a bank has deposits of $100,000, cash in its vault of $10,000, and $15,000 on deposit at the Federal Reserve and if the required reserve ratio is 20%, then the bank:

has excess reserves of $5,000

Economic growth is likely to entail:

higher saving

In the United States in the first two decades following World War II:

income distribution became more nearly equal

Suppose the Federal Reserve were to buy $100 million of U.S. Treasury bills. The money supply would:

increase by more than $100 million

(Figure: Short- and Long-Run Equilibrium)Look at the figure Short- and Long-Run Equilibrium. If the economy is at equilibrium at E1, the appropriate policy to return the economy to potential output is a(n):

increase in transfer payments

If the Fed decreases the reserve requirement from 10% to 5%, the money multiplier will _____ and the money supply will most likely _____.

increase; increase

If the consumer price index changes from 120 to 125 between December 2009 and December 2010, the:

inflation rate for 2010 is 4.2%

Which pair of policies is likely to reduce the natural rate of unemployment?

job training and employment subsidies

Historically, development of a new technology often:

leads to increases in productivity only once firms learn how to use it

A simultaneous rise in productivity and nominal wages would shift the short-run aggregate supply curve to the:

left if the rise in nominal wages is larger than the rise in productivity

Structural unemployment consists of people who are unemployed because of:

more job hunters than jobs

The convergence hypothesis states that international differences in real GDP per capita tend to _____ over time.

narrow

There are six households in a rural community. Each household earns $40,000 per year. Suppose that a new resident builds a mansion in the community and that the income in the new household is $4 million per year. After the new resident arrives, the median household income has _____ and the mean household income has _____.

not changed; increased

1. Stephanie stops at a gas station to fill up the tank of her car. The unleaded gasoline in her tank is best described as a(n):

private good

Programs that are not means-tested:

provide benefits for people regardless of income level

(Figure: A Money Market)Look at the figure A Money Market. The equilibrium interest rate is:

r2

A popular explanation for the most important cause of the increase in income inequality in recent years is:

rapid technological change

The Coase theorem states that in the presence of externalities, a market economy will:

reach an efficient solution if transaction costs are sufficiently low and property rights are well-defined

Unanticipated inflation:

reduces the value of money

If the price level and nominal GDP both doubled, then real GDP would:

remain unchanged

Economists say that long-run economic growth is almost entirely due to:

rising productivity

A decrease in health care insurance premiums paid by employers would likely:

shift the short-run aggregate supply curve to the right

A negative demand shock, holding everything else constant:

shifts AD to the left and results in lower aggregate price levels and lower real GDP in the short run

If the population and GDP increase by the same percentage, then real GDP per capita:

stays the same

Consider an economy that already has a sizable budget deficit. If the economy is facing a major downturn, the government should:

stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining

1. The table Externalities from Parks shows the marginal social benefit and the marginal social cost of preserving various amounts of land in a city for a public park. If the government wants to achieve the optimum amount of land for the park, it could use a Pigouvian _____ of _____.

subsidy; $150

The welfare state can:

take up a large share of government spending in wealthy countries

Which of the following acts to protect depositors from a bank run by insuring all deposits up to $250,000?

the FDIC

Health care in the United States is DIFFERENT FROM that of other wealthy countries in all of the following ways EXCEPT that:

the United States is the only country that provides government health care

Which curve is easiest to shift?

the aggregate demand curve

Which of the following situations is likely to lead to an increase in discouraged workers?

the availability of job falls

The total of the values added at every stage of production for a good yields:

the final value of the good

If the Federal Reserve increases the discount rate:

the money supply is likely to decrease

Because the revenue from personal income taxes increases as disposable income increases:

the multiplier effect decreases

Aggregate demand will increase if:

the public becomes more optimistic

1. Which of the following is a negative externality?

the risks to nonsmokers from second-hand smoke

Banks don't lend out all of the funds deposited because:

they have to satisfy any depositor who wants to withdraw funds

1. An advantage of tradable emissions permits is that:

they provide incentives for firms to develop technologies that are less polluting

1. Suppose government officials have set an emissions tax to reduce pollution. Further suppose that with the emissions tax, the marginal social cost of pollution exceeds the marginal social benefit of pollution. The emissions tax is:

too low

Government payments to households for which no good or service is provided in return are called:

transfer payments

The theory of Ricardian equivalence argues that expansionary fiscal policy:

will have no effect on the economy because consumers, anticipating higher taxes to pay for government spending, will decrease spending today to save for the higher taxes

All of the following are reasons average workers in the United States today produce more than their counterparts a century ago EXCEPT that the modern worker:

works longer hours

Which of the following is NOT included in the calculation of GDP?

your granny's monthly Social Security payment

(Table: Components of the Money Supply)Look at the table Money Supply. The money supply measured by M2 is:

$1,725 billion

(Table: South Korea's Real GDP per Capita)Look at the table South Korea's Real GDP per Capita. As a percentage of real GDP per capita in 1960, approximately how much did South Korea produce in 2000?

1,011%

(Table: Price Levels)Look at the table Price Levels. What is the rate of inflation from 2013 to 2014?

1.1%

If the consumer price index for 2010 was 160.6 and for 2011 was 163.1, what was the inflation rate between the two years?

1.56%

If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its unemployment rate is:

10%

(Table: Unemployment and Employment Data)Look at the table Unemployment and Employment Data. If marginally attached workers are included, the labor force in this economy is:

103 million

If the cost of the market basket in the base year is $2,000 and in 2014 it is $2,100, the price index for 2014 is:

105

If the cost of a market basket is $200 in year 1 and $230 in year 2, the price index for year 2 using year 1 as the base is:

115

If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who were looking for a job but have given up, and 5 million people unemployed and seeking employment, then its labor force is:

140 million

If a checking account has an interest rate of 1% and a Treasury bill has an interest rate of 3%, the opportunity cost of holding cash in a checking account is:

2%

If real GDP doubles in 35 years, its average annual growth rate is approximately:

2%

If the actual unemployment rate is 7% and the natural rate is 5%, then the cyclical rate is:

2%

Real GDP per capita, growing at a constant rate over a 35-year period, has doubled at the end of that period. What must the annual growth rate of real GDP per capita be for this economy?

2%

If the U.S. dollar were replaced with a "new dollar" at an exchange rate of 1 new dollar for 5 old dollars, then a loan of $10,000 would become a debt of _____ new dollars.

2,000

A survey reveals that on a small island 1,000 people have jobs, 250 people are unemployed and looking for jobs, and 450 people are neither working nor looking for work. The unemployment rate on the island is:

20%

(Table: Price and Output Data)Look at the table Price and Output Data. Between years 2 and 3 the amount of change in nominal GDP due to inflation was:

34%

Which of the following transactions is included in the nation's gross domestic product?

A college student buys a pizza and has it delivered to her dorm room

One normally expects that unemployment increases while aggregate output and aggregate incomes decrease during:

A recession

Long-run economic growth is best measured by:

A sustained rise in the production of goods and services

The relation between a country's level of saving and investment:

Affects its trade balances

Monetary policy attempts to affect the overall level of spending through:

Changes in the quantity of money and the interest rate

If during 2011 the Republic of Sildavia recorded a value added of $78 billion, wages of $40 billion, profits of $8 billion, and total sales of $90 billion, the value of intermediate goods purchased during 2011 in Sildavia was:

$12 billion

Look at the figure Pollution and Efficiency. In this market, where sulfur emissions are a result of production, an efficient solution takes place at a price of _____ and a quantity of _____.

$15; 30

Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by:

$20,000

If Jim's income is $80,000 and the price level is 4, then Jim's real income is:

$20,000

Boeing buys $3 million worth of steel, $2.5 million worth of computer hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing sells this particular model at $10 million. The value added by Boeing is equal to:

$3.5 million

(Scenario: Money Supply Changes II)Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves.Look at the scenario Money Supply Changes II. By how much will the money supply contract as a result of the withdrawal?

$32,000

Assume that the real GDP of the United States is approximately $12 trillion and the population of the United States is approximately 300 million. What is per capita real GDP?

$40,000

The table Coal Mine Pollution shows the marginal social benefit and cost of various amounts of pollution from a coal mine. At the efficient quantity of pollution, the marginal social benefit of pollution is:

$400

(Table: Lemonade and Cookies)Look at the table Lemonade and Cookies. Assume that an economy produces only lemonade and cookies. If 2014 is the base year, real GDP in 2014 was: -$445

$445

(Table: Components of the Money Supply)Look at the table Money Supply. The money supply measured by M1 is:

$450 million

Suppose that U.S. debt is $7 trillion at the beginning of the fiscal year. During the fiscal year, its purchases of goods and services and its transfers are $2 trillion, and tax revenues are $1.5 trillion. At the end of the fiscal year, the debt is:

$7.5 trillion

(Scenario: Real GDP)Suppose that in year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each.Look at the scenario Real GDP. The value of nominal GDP in years 1 and 2 respectively is:

$900 and $1,077.50

Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore:

-10%

Suppose the reserve ratio is 25%; the money multiplier is:

4

Suppose that the nominal rate of interest is 7% and the inflation rate is 3%. The real rate of interest is:

4%

(Table: Real and Nominal Output)Look at the table Real and Nominal Output. The change in real output between years 3 and 4 is an increase of:

40%

(Scenario: Technological Progress and Productivity Growth in Techland)In Techland, from 1980 to 2010, holding technology and human capital fixed, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that real GDP per worker actually increased from $40,000 to $320,000.Look at the scenario Technological Progress and Productivity Growth in Techland. What share of the growth rate of real GDP per capita was attributable to higher total factor productivity?

5%

Historical evidence shows that for determining a country's living standards, over:

An extended period, long-run growth is much more important than the business cycle

In the long run the overall price level is mainly determined by:

Changes in the money supply

If a country has a trade deficit, does it indicate that the country has a serious problem?

No. Trade deficits occur when a country's investment spending is higher than its level of saving

(Figure: The Minimum Wage)Look at the figure The Minimum Wage. What is the quantity of labor demanded at a binding minimum wage of P3?

Q1

If the value of a country's exports is greater than the value of its imports, it is:

Running a trade surplus

1. Which of the following is a positive externality?

Sam buys a dilapidated house, renovates it, etc.

Economists mostly agree that the problem of climate change necessitates government action in the form of market-based incentives such as:

a carbon tax or a cap and trade system

A graphical representation of the relationship between the total quantity of goods and services demanded and the price level is the:

aggregate demand curve

Which of the following is an environmental policy based on tradable pollution permits?

allowing automobile drivers to buy and sell the right to a certain level of automobile emissions

Which of the following would shift the production function upward?

an improvement in technology

Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which of the following is most likely?

an increase in aggregate demand

According to the liquidity preference model:

an increase in the money supply lowers the equilibrium rate of interest

Stagflation may result from:

an increase in the price in the oil

Which of the following will NOT increase the productivity of labor?

an increase in the size of the labor force

Changes in the budget balance:

can be both the result of and the cause of changes in the economy

The marginal social benefit of pollution:

can be measured as the additional gain to society from one additional unit of pollution

A movement along the short-run AS curve occurs, holding everything else constant, when there is a:

change in the aggregate price level

From the standpoint of economic growth, banks are important to:

channel savings into investment

The adverse selection death spiral occurs when private insurance companies:

charge higher-than-average prices for health insurance

Consider an economy whose households save 20% of increases in their income. If the government lowers its transfers by $100 billion, then the real GDP will:

decrease by $400 billion

Assume the marginal propensity to consume is 0.8 and potential output is $800 billion. If actual real GDP is $700 billion, which of the following policies would bring the economy to potential output?

decrease taxes by $25 billion

It is generally accepted that a binding minimum wage does all of the following EXCEPT:

decrease the amount of labor supplied

1. Whether or not they pay for them, people cannot be excluded from receiving the benefits of:

either public goods or common resources

When government attempts to reduce climate change by establishing a minimum level of fuel efficiency on new cars, it is using a(n):

environmental standard

The dollar value of final goods and services only is counted in GDP because:

if we counted the value of all goods, we could count inputs, like the value of steel in a new automobile, more than once

(Scenario: Money Creation)Scenario: Money CreationThe reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves.Look at the scenario Money Creation. Immediately after the deposit, reserves _____ and demand deposits _____ by $1,000. -increase by $1,000; increase

increase by $1,000; increase

An economy is operating at an output level below potential real GDP. If the government wishes to use fiscal policy to bring the economy back to its potential real GDP, it will:

increase its spending

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.

increase; decrease

In the long run, an increase in the quantity of money:

increases prices but not long-run output

A definition of poverty that compares the individual's level of income with that of other individuals in the country:

is a relative measure

Long-run growth is sustainable if:

it can continue in the face of limited natural resources and the impact of growth on the environment

Compared to a generation ago, benefits from public aid programs, adjusted for inflation, are:

less

Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.

less than

The use of counterfeit money leads to:

lost revenue to pay for operations of the economy's government

The aggregate demand curve would shift to the left for all the following reasons EXCEPT:

lower labor productivity

To close a recessionary gap with fiscal policy, the government could: - lower the corporate income tax rate.

lower the corporate income tax rate

The problem with community rating is that it:

may cause adverse selection

If a central bank announces an inflation target, it:

may have to sacrifice some control over interest rates

An expansionary fiscal policy:

may include decreases in taxes

Money used to buy a ticket to a football game is functioning primarily as a:

medium of exchange

When hyperinflation forces Pedro to change the price stickers on the books in his bookstore very frequently to keep up with the aggregate price level, economists say that Pedro has a:

menu cost

According to the text, productivity is driven by all of the following EXCEPT:

natural resources

(Figure: Fiscal Policy Options)Look at the figure Fiscal Policy Options. If the aggregate demand curve is AD:

no change in discretionary fiscal policy is warranted

The GDP deflator is equal to:

nominal GDP divided by real GDP times 100

Which of the following is a solution to externalities?

the government offers free childhood immunizations

Which of the following is one of the reasons that the aggregate demand curve slopes downward?

the interest rate effect

A copper mining operation discharges waste products into a river and causes higher costs and discomfort to downstream users of the water for which they are not compensated. In this case:

too much of society's resources is being used to produce copper

Which of the following statements is FALSE?

unemployment always falls during expansions

GDP calculated via factor payments includes:

wages, interest payments, rent, and profits

Which of the following is NOT a major cause of poverty in the United States?

welfare