Econs Practice Test

You have saved $747. Where should you go if you want to open a checking account?

a commercial bank

When using the Fed model to diagnose the economy, if the output gap has shifted without much movement in the real interest rate, then the economy has been hit by _____ shock.

a spending

If you see a newspaper headline that says "Oil prices rise sharply," this is an example of _____ shock

a supply

When using the Fed model to diagnose the economy, if inflation rises even though the economy is weak or if it falls even though the economy is strong, then the economy has been hit by _____ shock.

a supply

Which of these does NOT constitute a government purchase of goods and services?

a surgeon's bill reimbursed under the Medicare program

If the problem in the economy is very high cyclical unemployment, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

lower; induce

Inflation arises due to:

inflation expectations, demand-pull inflation, and cost-push inflation.

If the economy is in short-run macroeconomic equilibrium above potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.

inflationary; contractionary

Discretionary fiscal policy may fail to stabilize the economy and even destabilize it because of:

lags in decisions regarding the implementation of policy changes.

The Federal Reserve's lender-of-last-resort function means that it:

lends to financial institutions when they are having trouble getting loans.

The marginal tax rate is the:

tax rate you pay if you earn another dollar.

Maria's Pizza offers one slice for $2, two slices for $3.50, three slices for $4.50, and four slices for $5.00. Gil orders two slices. From this information, we know that the marginal benefit to Gil of a second slice is at least _____, and the marginal benefit to Gil of a third slice is less than _____.

$1.50; $1.00

If the interest rate is 4%, what is the approximate future value of $15,000 in 10 years?

$22,204

Unemployment rates are usually highest for:

African American teenagers.

Which of the following scenarios depicts a rational buyer?

Damien chooses to buy a sandwich for $5 when the marginal benefit of the sandwich to him is $7.

Mark earns $3,800 in the current period. His consumption in this same period is $4,100. Which of the following is true?

His dissaving is $300

What affect will the release of the new Mercedes E-Class sedan have on last year's models that are still on the dealers' lots? Use supply and demand concepts to do your analysis.

The arrival of the new E-Class would lead to a decrease in demand for last year's model and their prices would fall.

How does the law of diminishing marginal utility relate to changing income?

The marginal benefit of an extra dollar of income falls as income rises.

Which of the following is NOT a factor that can shift supply?

The market price of a product.

Which of the following is not a demand shifter?

The price of the product.

Which statement is TRUE, according to standard economic theory?

The true cost of a choice is what you must give up when choosing between alternatives.

Efficiency wages are:

above-equilibrium wages designed to encourage better performance.

Transfer payments:

are a redistribution of funds from one individual to another individual.

Sunk costs are costs that

are incurred in the past and cannot be reversed.

If an economy has an output gap of 0%, this means the economy is:

at its highest sustainable rate of production.

Surpluses always occur

at prices above the equilibrium price.

When inflation rises unexpectedly, borrowers will _____, and lenders will _____.

benefit; be hurt

The cost-benefit principle states that a decision should be pursued only if the

benefits are greater than the costs.

In periods of unexpected inflation:

borrowers benefit, since they repay their loans in dollars whose real value has declined.

The poverty line is adjusted each year to reflect:

changes in the cost of living.

Rapid growth in poorer countries leads to

convergence in real GDP per person between poorer countries and richer countries.

A trade-off involves weighing:

costs and benefits.

Depreciation refers to the:

decline in capital due to wear and tear, obsolescence, accidental damage, and aging.

Deflation is a:

decreasing aggregate price level.

Which of the following is consistent with the view that "fairness" means equality of outcomes?

equal incomes

The risk premium is the:

extra interest charged by lenders to account for risk.

You go to Starbucks and see that the price of your favorite tall vanilla latte has gone up by 25 cents. All sizes of the vanilla lattes are now more expensive. As a result of this price increase, you would expect to see a

fall in the quantity demanded of vanilla lattes.

Purchases of foreign-produced goods and services are:

imports.

A market consists of ten similar suppliers that are making the same supply decisions. To find the market supply of these ten suppliers, you:

multiply the individual supply of one of the suppliers by ten.

Underemployed people are counted as employed, even though they are _____.

not fully using their skills

The rate of unemployment is found by dividing the:

number of people not working but seeking work by the sum of the number of people not working but seeking work and the number of people employed.

Suppose that the price of rare earth metals is increasing (this is one of the main components of most smartphones). As a consequence, people expect the price of smartphones to rise next year. Therefore, people will MOST likely:

observe higher prices for smartphones this year.

In macroeconomics, the difference between saving and investment is that:

saving is the money left over after paying for spending, and investment is the purchase of new capital.

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

scarcity.

Investment refers to:

spending on physical capital.

If expected future profits in an industry fall,

supply will shift left.

Which item would NOT be included in GDP?

the dollar value of a repair job done by your cousin on her own car

The output gap allows us to capture:

the economy's deviations from potential GDP.

The law of demand refers to

the inverse relationship between price and quantity demanded.

The law of supply refers to

the positive relationship between price and quantity supplied.

A worker classified as frictionally unemployed is one who is:

unemployed while looking for a job that suits his or her skills.

An example of a lagging indicator is:

unemployment.

It is a beautiful afternoon, and you are considering taking a leisurely stroll through the park. Your alternatives to walking are streaming a movie that you value at $5, taking a nap that you value at $7, or reading a new book that you value at $12. What is the opportunity cost to you of taking the stroll through the park?

$12

A university student faces the difficult decision of how to spend one hour tonight. She could babysit her professor's child at an hourly wage of $10; she could work at the college library at a wage of $12; or she could finish her economics homework assignment. If she chooses to complete her homework assignment, she has incurred an opportunity cost equal to:

$12.

In a simple, closed economy (no government or foreign sector), if income increases by $100, and $30 is saved, _____ will go to consumption.

$70

You open an investment account that earns a nominal interest rate of 4.2% a year. The current consumer price index is 108. In one year, the consumer price index is expected to go to 112. What is your expected real rate of return?

0.5%

Janelle loves sashimi. Her first piece of sashimi normally gives her a marginal benefit of $5. Each additional piece yields a marginal benefit that declines by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sashimi, how many pieces should she eat?

10

If the price level at the end of year 1 is 110, and the price level at the end of year 2 is 120, the inflation rate in year 2 is _____.

8.3%

Which of the following correctly describes the business cycle?

It is the fluctuations of GDP around the potential output.

Which of the following will rise when the economy is expanding?

Real GDP growth

Last month, Brayton lost his job at the local auto parts factory when the factory relocated. Brayton and his former coworkers have been looking for similar jobs, but they have found no openings. In Brayton's town, the _____ labor has _____.

demand for; fallen

If an aircraft is found to have software problems that could lead to a malfunction, the effect on the aircraft market will be that the

demand will decrease, and the price of the aircraft will fall.

Cyclical unemployment is unemployment:

due to a temporary downturn in the economy.

As a result of technological innovation, automated water pumps are being installed on the farms of Kenyan tomato farmers. As a result of the increased use of automated water pumps, the equilibrium price of tomatoes will:

fall, due to a rise in supply.

Unemployment due to the time workers spend in job search is _____ unemployment.

frictional

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost.

go; greater

Typically, business cycles:

have short and sharp recessions, followed by long and gradual expansions

The construction of new housing is considered part of:

investment spending.

The equilibrium unemployment rate cannot be equal to zero because:

it is the sum of the frictional and structural unemployment rates.

An example of human capital is a person's:

job skills

The intersection of the IS curve and the MP curve determine:

macroeconomic equilibrium.

The threat of future inflation:

makes people reluctant to lend money for long periods.

The opportunity cost of an extra dollar of consumption today is the:

marginal benefit of consumption today.

The level of household income at which half of the households in the population earn more and half of the households in the population earn less is the:

median household income

The inflation rate is the:

percentage change in the price level from one year to the next.

The minimum annual income, of which a family that earns a lower amount is considered in poverty, is the:

poverty line.

Among the factors that are important for modern economic growth are:

property rights.

Real per capita GDP is:

real GDP divided by the population.

In an economy whose aggregate real output is growing faster than the total population:

real GDP per capita is rising.

The broadest measure of economic activity is:

real GDP.

The _ interest rate ___.

real; can be zero, positive, or negative

In the long run, an increase in saving will generally:

reduce the rate of economic growth.

Inflation is a(n):

rising aggregate price level.

In 1798, the English economist Thomas Malthus predicted that:

rising population growth would cause productivity per capita to fall.

An example of a leading indicator is:

the stock market.

If income increases:

there will be a rightward movement along the consumption function.

The capital stock in an economy is the:

total quantity of capital at a point in time.

If the labor force totals 100 million workers, and 90 million are working, then the unemployment rate is _____.

10%

A fixed nominal interest rate of _____ with _____ inflation will yield the highest real rate of return for a lender.

7%; 2%

Which of the following scenarios does NOT depict a rational seller?

Main Street Bakery calculates the marginal cost of a multilayer red velvet cake sd $9 and sells it for $8.

Diminishing marginal product leads to

rising marginal costs for a seller.

What is the relationship between lower interest rates and aggregate expenditure?

Lower interest rates boost aggregate expenditure.

Which of the following is an investment?

Marios builds a new house.

In June 2019, India imposed a tariff on almonds from the United States. How does this affect the IS curve in the U.S.?

Net exports decrease, leading to a left shift of the IS curve.

Suppose that an economy is in a recession. You would expect to see the unemployment rate:

rise above the equilibrium unemployment rate.

If government expenditure rises by $40 billion and the multiplier in the economy is 2.5, then real GDP_____, and the IS curve shifts to the_____.

rises by $100 billion; right

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

140

If the risk-free rate is 1.5% and the risk premium is 2%, the MP curve is at:

3.5%.

Junko is a single mother who earns $17,000 per year. She receives $3,000 per year in in-kind transfers and a $1,000 earned income tax credit. If her earned income rises to $22,000, she will lose the tax credit and $500 of her in-kind transfer benefits. What is Junko's effective marginal tax?

30.0%

A bakery hires a baker who can make 15 cakes per day. The bakery then decides to hire a second baker who will use the kitchen at the same time as the first baker. The bakery finds that the second baker can produce only an additional nine cakes per day. What concept does this scenario illustrate?

Diminishing marginal product

The MOST important use of GDP is as a measure of:

the size of the economy.

Which of the following scenarios illustrates the law of demand?

Kathleen eats more steak when the price is low, and less when the price is high.

There are empty candy shelves at Walmart on the day before Halloween. Which of the following explains this event?

There is a shortage in the candy market.

Which of the following indicators will probably rise when the economy is in a recession?

Unemployment

Cedar point amusement park reduces its entry fees. As a result of this price fall,

the quantity demanded will be higher.

_____ is estimated by asking: "What is the _____ I am willing to pay to get this benefit (or avoid that cost)?"

Willingness to pay; most

Which of the following tax systems is progressive? Corinne pays a 10% tax on the first $10,000 she earns plus _____ tax on any additional income.

a 25%

A downward shift of the consumption function can be caused by:

a decrease in wealth.

If there is news of a future rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

a large increase; no change

Excess demand leads to a:

shortage and rising prices.

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

transfer payments.

Medicaid, Medicare, and Social Security are examples of:

transfer payments.

An understanding of the state of the economy, projections on economic growth, the floor framework, and the way the Federal Reserve works allows you to:

understand which way interest rates might change.

In Venezuela, the bolivar, the domestic currency, lost value because the government printed excess amounts of money to fund its budget deficit. This situation can happen if the:

central bank is not independent of the political process.

Which of these is NOT a tool of fiscal policy?

changes in the money supply

When the economy is in a recession, tax receipts _____, and unemployment insurance payments _____.

decrease; increase

Payroll taxes are 6.2%, and Medicare taxes are 2.9%. If your employer owes you $1,000, how much will you get after these deductions?

$909

If expected inflation is 2%, and actual inflation is 2.8%, then unexpected inflation is:

0.8%.

If potential GDP is $19.04 trillion and actual GDP is $20.07 trillion, the output gap is:

5.41%

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.

The Federal Reserve System is made up of the:

Board of Governors and 12 Federal Reserve district banks.

If the Federal Reserve sets the federal funds rate on the basis of inflation and the output gap, then the Federal Reserve is following:

Fed rule-of-thumb.

According to the _____, the target federal funds rate should be positively related to the _____ rate and _____ related to the unemployment rate.

Fed rule-of-thumb; inflation; negatively

In the IS-MP analysis in the Fed model, expansionary fiscal policy will shift the:

IS curve to the right.

The Fed model combines the _____ curve, the _____ curve, and the ____ curve to link interest rates, the output gap, and inflation.

IS; MP; Phillips

How do interest rates affect investment in the economy?

Lower interest rates lower the cost of borrowing for firms, and so investment rises.

How is monetary policy different from fiscal policy?

Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.

Which of these is a government transfer?

Social Security payments to retired auto workers

How do overnight reverse repurchase agreements work?

The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Why does the Federal Reserve target inflation rather than unemployment?

The inflation rate is directly related to monetary policy and is thus an easier target to maintain.

What might be an unintended effect of an inflation rate ceiling?

The real interest rate can become negative if inflation is high enough.

The difference between a budget deficit and government debt is that:

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

When a supply shock causes higher inflation but also causes output to fall, then the economy experiences:

a depression.

When using the Fed model to diagnose the economy, if a shock causes the real interest rate to fall, then the economy has been hit by _____ shock.

a financial

When using the Fed model to diagnose the economy, if a shock causes the real interest rate to rise, then the economy has been hit by _____ shock.

a financial

A debt crisis occurs when:

a government cannot repay its loans.

Suppose that with a real interest rate of 3%, no output gap exists in the economy. If the real interest rate is below 3%, the economic forecast predicts:

a positive output gap.

Unexpected inflation is:

actual inflation minus expected inflation.

Once you have identified the unexpected inflation from the Phillips curve:

add the expected inflation rate to get the actual inflation rate.

Monetary policy is defined as the:

adjustment of interest rates to influence economic conditions

A spending shock is any change in:

aggregate expenditure at a given interest rate and level of income.

Taxable income is the:

amount of your income that you pay taxes on

If the economy is at potential output, and consumer spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

an increase in government spending.

If managers expect inflation to approach the Federal Reserve's target, they have _____ expectations.

anchored

The third step in analyzing a macroeconomic shock is to:

assess inflation.

The federal funds rate is the interest rate at which:

banks borrow from other banks with excess reserves.

A financial shock is any change in:

borrowing conditions that changes the real interest rate at which people can borrow.

If the Canadian dollar appreciates, this makes foreign goods cheaper for Canadians. As a result:

competitive pressure on Canadian businesses is increased, leading Canadian businesses to lower prices.

You spend $45 on a haircut, $30 on a couple of T-shirts, and $17 on lunch at a restaurant. In which component of aggregate expenditure are these expenditures included?

consumption

A negative supply shock causes:

cost-push inflation.

Banks whose current reserves are lower than the reserve requirement:

demand overnight loans.

When the output gap becomes more positive:

demand-pull inflation rises.

The Affordable Care Act is an example of:

discretionary spending.

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

The decision to build more aircraft carriers to keep employment high is an example of:

expansionary fiscal policy.

In order to boost output, the federal government engages in _____ fiscal policy, which _____ government spending and _____ taxes.

expansionary; raises; lowers

Planned investment is the:

expenditure on capital goods by businesses.

Loans of reserves from one bank to another are made in the _____ market.

federal funds

Social insurance programs are:

government programs intended to protect families against economic hardships.

Government spending adds directly to GDP through _____ and indirectly through _____.

government purchases; transfer payments

A budget surplus occurs when:

government revenue exceeds government spending.

A budget deficit occurs when:

government spending exceeds government revenue.

Consumer spending will likely rise if:

government transfers rise.

The Treasury inflation-protected security (TIPS) is a bond with a principal value that fluctuates relative to changes in the consumer price index. The interest on the bond is calculated on the adjusted principal. This instrument has an advantage over a regular bond because it:

has a return that matches the economic growth rate.

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be:

higher than the neutral interest rate.

Leading economic pundits predict inflation. Businesses believe these forecasts and raise prices accordingly. This scenario describes:

how credible inflation expectations create inflation.

The first step in analyzing a macroeconomic shock is to:

identify the shock and shift the curve.

Expansionary fiscal policy:

increases aggregate demand.

If overall spending declines, causing the economy to contract, the government could counter this by:

increasing government spending.

On the border between Venezuela and Colombia, vendors make art with Venezuelan bolivars (the currency of Venezuela). This scenario shows the:

loss in the value of the currency.

If there is deflation of 1% and a firm wants to leave real wages unchanged, it will need to:

lower nominal wages by 1%.

Which of these choices is correct? Holding all else equal, assuming no supply-side shock, the:

lower the unemployment rate, the higher the unexpected inflation.

Which of the following services are provided by the federal government?

military defense

The purpose of "Fedspeak" was to:

minimize market reactions from Federal Reserve statements.

A $100 million increase in government spending increases equilibrium GDP by:

more than $100 million.

The federal funds rate is the:

nominal interest rate that banks pay on overnight interbank loans.

Commercial banks:

offer services, such as checking accounts, to the general public.

The monetary policy tool whereby the Federal Reserve buys and sells government bonds is called:

open-market operations.

If unemployment is below its sustainable level, then the economy is:

operating above capacity, and inflation will likely rise.

Assuming that the reserve requirement is greater than zero, if it looks as if a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:

other member banks and borrow money at the federal funds rate.

In the IS-MP analysis in the Fed model, the intersection of the IS and MP curves determines the:

output gap.

The output gap is zero when:

potential GDP meets actual GDP.

A supply shock is any change in:

production costs that leads suppliers to change the prices they charge at any given level of output.

Quantitative easing is the:

purchase of large quantities of longer-term government bonds and other securities in an effort to drive down longer-term interest rates.

A sales tax is a tax on:

purchases that is typically a percentage of the purchase price of goods and services.

If the output gap is positive, the Federal Reserve will _____ the real interest rate to _____.

raise; cool inflationary pressures

If the actual inflation rate is greater than the target inflation rate, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

raise; down

If the output gap is positive, then relative to the neutral interest rate, the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

raise; down

If the problem in the economy is continuous higher-than-expected increases in the consumer price index, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

raise; reduce

In an inflationary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

raise; reduce

The neutral interest rate is the rate at which:

real GDP equals potential GDP.

Cost-push inflation is inflation that arises from an unexpected:

rise in production costs.

In Canada, all the provinces provide health care to all citizens and permanent residents. This is an example of:

social insurance.

If a government is using fiscal policy, this means that it is using _____ and _____ to attempt to stabilize the economy.

spending; tax policies

The 1973 OPEC oil embargo is an example of a negative _____ shock to the U.S. economy.

supply

Insufficient demand leads to a:

surplus and falling prices.

If the government's revenues are greater than its purchases of goods and services, then it has a budget:

surplus.

You are the manager of a local bank. If your bank is experiencing a bank run, where can you turn to for a loan if no other banks will lend to you?

the Federal Reserve

The New Deal was created to counter the effects from:

the Great Depression.

Who runs the Federal Reserve of the United States?

the chair of the Federal Reserve

The Phillips curve is upward-sloping because:

the more positive the output gap, the higher inflation rises above expected inflation.

Which of the following increases the effectiveness of fiscal policy?

the multiplier effect

High unemployment occurs when:

there is insufficient demand.

If the economy is below potential and interest rates are at the zero bound, how can the Federal Reserve still push long-term interest rates down?

through forward guidance and quantitative easing

If actual GDP is less than potential GDP:

unemployment will rise in the economy.

When the economy is at potential GDP, the unexpected inflation rate is _____, and the unemployment rate is equal to _____.

zero; the natural rate of unemployment

A growing number of utility companies are using drones for site inspections. What is the effect of these changes on the equilibrium price and quantity, in the market for drones?

Both the equilibrium price and the equilibrium quantity will rise.

Which of the following causes shifts in the IS curve?

Spending shocks occur.