Economics Final
28) If the Fed increases the supply of bank reserves, ________. A) the federal funds rate falls B) the inflation rate falls C) consumption falls D) investment falls
A
32) The Fed usually prefers the inflation rate to hover around ________. A) 2% B) 5% C) 6% D) 10%
A
4) Assuming all else equal, if the marginal product of labor rises, ________. A) the labor demand curve shifts to the right B) the labor demand curve shifts to the left C) there is a rightward movement along the labor demand curve D) there is a leftward movement along the labor demand curve.
A
5) The marginal product of a country's workers increases during summer due to the pleasant weather. Which of the following is likely to happen in this case, assuming all else equal? A) The country's labor demand curve will shift to the right in summer. B) The country's labor demand curve will shift to the left in summer. C) There will be an upward movement along the labor demand curve. D) There will be a downward movement along the labor demand curve.
A
6) The demand for a particular brand of shoes decreased due to a change in consumers' tastes and preferences. This will lead to a(n) ________, assuming all else equal. A) leftward shift of the firm's labor demand curve B) rightward shift of the firm's labor demand curve C) downward movement along a firm's labor demand curve D) upward movement along a firm's labor demand curve
A
9) Refer to the scenario above. Suppose the economy is currently operating on the production function F2 and E2 is the level of employment in the country. If the demand curve for labor shifts to the left, ________. A) employment will decrease from E2 to E1 B) employment will increase from E2 to E3 C) employment will remain unchanged at E1 D) output will increase from Y2 to Y3
A
18) ________ monetary policy causes the real interest rate to ________. A) Expansionary; rise B) Contractionary; rise C) Expansionary; remain unchanged D) Contractionary; remain unchanged
B
countercyclical policies
attempt to reduce the intensity of economic fluctuations and smooth the growth rates of employment,GDP, and prices
0 lower bound
interest rate approaches zero or is zero; puts monetary policy on the shelf, so cant be used to bail you out- dangerous
Business cycle
short run changes in the growth of GDP
1) A short-run change in ________ is referred to as a business cycle. A) the growth rate of output B) the aggregate price level C) the currency exchange rate D) the expenditure incurred by the government
A
12) ________ emphasize(s) that changing productivity and technology are the main reasons behind fluctuations in the economy. A) The real business cycle theory B) Keynesian theory C) Ricardian theory D) Monetary theories
A
2) Which of the following falls during a boom? A) Unemployment B) Gross Domestic Product C) Consumption D) Investment
A
22) Which of the following is likely to lead to a partial recovery after a recession? A) A decrease in tax rates B) A decrease in government spending C) A decrease in money supply D) An increase in the interest rate
A
25) Which of the following economic variables is affected when the government adopts countercyclical fiscal policy? A) Government spending B) Interest rates C) Bank reserves D) M2 measure of money supply
A
26) Identify the correct statement. A) Countercyclical fiscal policy stimulates the economy during a recession by shifting the labor demand curve to the right. B) Countercyclical fiscal policy stimulates the economy during a recession by shifting the labor demand curve to the left. C) Countercyclical monetary policy slows down the growth rate of an economy during an expansion by shifting the labor demand curve to the right. D) Countercyclical monetary policy stimulates the economy during a recession by shifting the labor demand curve to the left.
A
3) Which of the following is true? A) Expansions have different lengths. B) Expansions are always shorter than recessions. C) Recessions are always accompanied by high inflation. D) Economists can correctly predict the end of a recession.
A
10) Refer to the scenario above. If the economy is currently on F2 and produces Y3 level of output, a leftward shift of the labor demand curve with no change in productivity will cause output to ________. A) decline from Y3 to Y1 B) decline from Y3 to Y2 C) increase from Y3 to Y5 D) increase from Y3 to Y4
B
11) According to Okun's Law, if real GDP grows by 4% over a year, unemployment is likely to ________. A) increase by 0.5% B) decrease by 0.5% C) increase by 1% D) decrease by 1% Change in UR = -0.5 (g - 3%)
B
13) ________ emphasize(s) that changing expectations about the future is the main reason behind fluctuations in the economy. A) The real business cycle theory B) Keynesian theory C) Ricardian theory D) Monetary theories
B
16) An initial leftward shift in labor demand often creates a cascading chain of events, amplifying the impact of the initial shock. This is known as the ________ effect. A) rebound B) multiplier C) Veblen D) cluster
B
19) An increase in the real interest rate leads to a(n) ________. A) increase real output B) decrease in demand for labor C) increase in demand for capital D) increase in demand for money
B
20) Mortgage defaults are likely to rise when ________. A) investment increases B) consumption falls C) wage rates rise D) unemployment falls
B
21) ________ when its inventory increases. A) A firm's labor demand curve is likely to shift to the right B) A firm's labor demand curve is likely to shift to the left C) A firm's total product curve is likely to shift upward D) A firm's cost curve is likely to shift downward
B
27) A ________ in the long-run real interest rate ________ household's demand for durable goods. A) fall; lowers B) fall; increases C) rise; increases D) rise; does not affect
B
29) If the Fed buys bonds from a private bank, ________. A) the private bank's total assets will increase B) the private bank's composition of assets will change C) the Fed's total liabilities will remain unaffected D) the Fed's total assets will remain unaffected
B
30) Quantitative easing is likely to lead to a(n) ________. A) increase in the federal funds rate B) decrease in the federal funds rate C) increase in unemployment rate D) decrease in the price level
B
31) If the Fed can communicate that it will maintain a(n) ________, the long run nominal interest rate will remain ________. A) contractionary monetary policy; low B) expansionary monetary policy; low C) contractionary fiscal policy; high D) expansionary fiscal policy; low
B
34) The Taylor rule says that the ________, the lower the federal funds rate. A) higher the inflation rate B) lower the output gap C) higher the volume of bank reserves D) higher the supply of money
B
35) If the federal funds rate is set by the Taylor rule and the inflation rate increases by 3 percentage points, everything else remaining unchanged, for a given inflation target, the federal funds rate should ________. A) increase by 3 percentage point B) increase by 4.5 percentage points C) decrease by 3 percentage points D) decrease by 1.5 percentage points
B
37) Expansionary fiscal policy uses ________ government spending and ________ taxes to increase aggregate economic activity. A) higher; higher B) higher; lower C) lower; higher D) lower; lower
B
38) Which of the following should be increased during a recession? A) Real interest rates B) Government spending C) Income taxes D) Nominal interest rate
B
7) Assuming all else equal, if the labor demand curve shifts to the left and the labor supply curve remains unchanged, ________. A) equilibrium wage rises B) equilibrium wage falls C) unemployment rises D) consumption falls
B
Keynesian Law
Animal spirit- changing sentiments (expectations); multiplier effect- basically a snowball effect; everything is connected; the decision he made is the animal spirit because he responded to something in the economy, real or imaginary, and caused change in sentiments
15) ________ emphasized that animal spirits affect GDP. A) Milton Friedman B) Adam Smith C) John Maynard Keynes D) David Ricardo
C
17) A sudden fall in housing prices in Potentia has lowered the confidence of households. Assuming all else equal, this is likely to lead to a(n) ________. A) increase in the overall price level B) increase in the demand for construction workers C) decline in current consumption D) fall in the unemployment rate
C
36) Suppose the inflation rate target is "0" and the long run federal funds target is also "0." Calculate the federal funds rate if the current inflation rate is 5% and real output is 4.5% below trend output. A) 2.25% B) 0.5% C) 5.25% D) 0.25% FFR = 0% + 1.5%(5%-0%) + 0.5(-4.5%) = 7.5% +(-2.25%) = 5.25%
C
8) The ________ in employment during a recession is smaller if wages are ________. A) decline; rigid B) increase; rigid C) decline; flexible D) increase; flexible
C
co-movement
Consumption and investment move together; when consumption decreases, production decreases, causing people to invest less, and with production down businesses fire more...
14) ________ emphasize(s) that changes in prices and interest rates are the main reasons behind fluctuations in the economy. A) The real business cycle theory B) Keynesian theory C) Ricardian theory D) Monetary theories
D
23) Counter cyclical policies ________. A) lead to hyperinflation B) lower output below its potential level C) increase the intensity of economic fluctuations D) smooth the rate of growth of the economy over time
D
24) Which of the following economic variables is affected when the central bank adopts countercyclical monetary policy? A) Government spending B) Personal income tax rates C) Corporate tax rates D) Interest rates
D
33) Which of the following is likely to happen if the Fed conducts a contractionary monetary policy? A) Banks will make more loans. B) Labor demand will increase. C) The stock of money will increase. D) The rate of inflation will decrease.
D
Fisher equation
Real interest = Nominal interest - inflation
Fiscal Policy
almost impossible because you cant take away government spending (SS, National debt spending, etc.); expansionary- lower taxes, raise spending
change in labor demand
causes business cycles
Paul Volcker
chairmen of the Fed; intentionally caused recession to fight inflation- Volcker recession
okuns law
change in unemployment rate= -1/2 (growth in real GDP-3%); 3% is the growth in natural (potential) GDP
Expansionary monetary policy
increases the quantity of bank reserves and lowers interest rates, shifting the labor demand curve to the right and increasing the growth rate of GDP
quantity theory of money
inflation= growth in money + growth in Real GDP
causes of downward wage rigidity
minimum wage laws, labor unions & their bargaining power, layoffs (businesses lay off before they lower wages), efficiency wages- companies pay higher rate than usual
recession
negative growth in GDP; must be two consecutive negative growth periods or quarters
Countercyclical fiscal policy
passed by the legislative branch and signed into law by the executive branch, reduces economic fluctuations by manipulating gov expenditures and taxes. They may be automatic or discretionary. Automatic stabilizers are components of the gov budget, like taxes owed, that automatically adjust to smooth out economic fluctuations
shifters of the labor demand curve
price of output (positive) demand for output (positive) productivity of labor (positive) cost of related inputs (negative)
Contractionary monetary policy
slows down the growth in bank reserves and increases interest rates, shifting the labor demand curve to the left and reducing the growth rate of GDP. CMP is used when inflation is rising above the feds long run target of 2 percent or when the economy is growing excessively quickly
Real Business Cycle Model
technology advancements; when technology progress speeds up, businesses invest more in research and development (new products); economic expansion is caused by technological progressions); the rate at which technology is formed causes expansions or contractions
shortrun fluctuations
the economy will fluctuate along its trend; potential & long run GDP- the ups and downs of GDP along its trend; the economy doesnt always produce at its potential; also known as Business Cycle
OMO
the feds transactions with private banks to increase or reduce bank reserves held on deposit at the fed. OMO influence the FFR- an increase in the supply of bank reserves lowers the FFR, holding all else equal
Expansionary fiscal policy
uses higher gov expenditure and lower taxes to increase GDP, shifting the labor demand curve to the right. Crowding out occurs when rising gov expenditure partially (or even fully) displaces expenditure by households and firms.
Contractionary fiscal policy
uses lower gov expenditure and higher taxes to reduce GDP, shifting the labor demand curve to the left
Taylor Rule
FFR = Targeted FFR + 1.5 (actual inflation-target inflation) + .05 (output gap)
Output gap
GDP - trend (potential) GDP/ trend GDP
NBER
National Bureau of economic Resources; announces recessions
countercyclical monetary policy
conducted by the central bank (the Fed)- attempts to reduce economic fluctuations by manipulating bank reserves and interest rates
shifters of the labor supply curve
population (positive)