Exam 3 study set

If a country's population is 5 million and its output is 196 billion, its per capita output is about:

$39,000

Use the table below to calculate the labor force participation rate. Select the correct answer from the options below. Eligible Population: 270 million Labor Force: 145 million Employed Workers: 133 million Unemployed Workers: ?

53.7%

Use the table below to calculate the unemployment rate. Select the correct answer from the options below. Eligible Population: 270 million Labor Force: 145 million Employed Workers: 133 million Unemployed Workers: ?

8.3%

Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 10 percent. A Keynesian economist would most likely blame this increase in unemployment on:

A decline in the level of aggregate demand.

A fall in a foreign country's income will most likely cause:

A reduction in U.S. exports, so the U.S. aggregate demand curve shifts left.

Refer to the graph above. In 1930, the United States passed the Smoot-Hawley Tariff Act, which raised tariffs on imported goods at an average of 60 percent. Other countries retaliated with similar tariffs and world output declined. The effect of the decline in foreign output on the U.S. AD curve can be shown by a movement from:

A to D

Refer to the graph above. From 1929 to 1933 the money supply fell in the United States by 40%. The effect of this on the AD curve is best shown by a movement from:

A to D.

The three categories of workers included in hidden unemployment are:

Discouraged workers (marginally attached), involuntary part-time workers, and underemployed workers.

Aggregate demand management policies are designed most directly to:

Control the aggregate level of spending in the economy.

The study of economic growth focuses on the factors that cause an:

Economy's production possibility curve to shift out.

Refer to the graph above. A policy that cuts government spending would be most appropriate when the economy is at point:

B

Over much of the last 40 years U.S. governments have often ignored the advice of Keynesian economists and engaged in pro-cyclical fiscal policy - decreasing taxes and/or increasing spending during economic expansions. Which of the following would best explain this behavior:

B.There is tremendous political pressure to give Americans back their money when economic times are good.andc.Politicians care about their legacy and want to be seen as the leaders who cut taxes and/or engaged in prestigious infrastructure/spending projects.

The U.S. economy goes into a recession and the president turns to his Council of Economic Advisors for policy advice. If his economic advisors are laissez-faire economists their advice might include which of the following:

Balance the budget and reduce regulations on business.

The laissez-faire policy prescription to eliminate unemployment was to:

Eliminate labor unions and government policies that hold real wages too high.

If the economy was contracting Keynesian economists would most likely recommend that the government

Engage in expansionary fiscal policy and run a budget deficit if necessary

An expansionary fiscal policy would be countercyclical if it was enacted after:

Equilibrium income fell below potential income.

If output increases by 2 percent and population growth is 3 percent, per capita output:

Falls by 1%

An immigration bill that gave undocumented workers in the United States legal status and made it easier for workers to emigrate to the U.S. would likely:

Increase the long-run aggregate supply curve in the U.S., shifting it to the right in the AS/AD model.

According to Keynesian economics, which of the following would likely be the most effective fiscal policies if the economy was moving into a recession

Increase unemployment benefits and increase spending on "shovel ready" projects.

New growth theory focuses on which of the following as the engine of economic growth:

Technology

Green (sustainable) growth theory posits:

That economic growth can continue if we focus on innovative green technologies to drive the growth.

If the U.S. economy was experiencing a recession a Keynesian economist would likely advise which of the following policy prescriptions?

The government should reduce income taxes on households earning less than $200,000 per year.

Monetary policy involves:

Managing the money supply.

Austerity policies during recessions are typically favored by:

Neo-classical economists.

The benefits of economic growth in the U.S. include the production of more goods and services and therefore higher total income. The costs of economic growth can include:

The negative externalities from the production of goods and services.

What two numbers do you need to compute the unemployment rate:

The number of employed persons and the number of unemployed persons.

Keynes argued that when an economy is a depression or deep recession:

The short-run is a more important policy concern than the long-run.

Some economists talk about a non-accelerating inflation rate of unemployment (NAIRU). Another term for this concept is:

The target rate of unemployment

When the economy started to contract and was moving towards a deep depression, classical economists advised President Herbert Hoover

To cut spending in order to balance the budget.

The employment-population ratio gives the number of people:

Working as a percentage of the number of people available to work.

Potential income is that level of income that:

an economy is capable of producing without generating higher inflation.

Suppose Botswana doubles its income in 6 years while South Africa doubles its income in 9 years. According to the Rule of 72, the growth rate in Botswana is:

4 percentage points higher than the growth rate in South Africa.

The Rule of 72 implies that a country with a growth rate of 8 percent will double its income in about:

9 Years

If the distribution of the gains from growth matter, growth in median income is:

A more informative measure of growth than growth in per capita income when the gains from growth are concentrated on a small segment of the population.

An innovator, who creates new products and new ways to get business done, is referred to as:

An entrepreneur

Which of the following is an example of an expansionary fiscal policy:

An increase in government spending.

The paradox of thrift occurs when:

An increase in saving reduces output.

The legal system is an example of:

An institution

You are part of the president's team of economic advisors when the US economy contracts, and a recession begins. The federal budget is balanced when the recession starts. You are a Keynesian economist. What advice do you give the president? He wants a detailed policy plan and wants to know the budgetary effects.

As a Keynesian, I would advise the president to engage in expansionary fiscal policy -increase government spending in order to stimulate economic activity. This spending would include direct government spending on public capital (infrastructure), e.g., expanding high speed internet access, creating an efficient national electric grid, repairing bridges, tunnels and roadways, upgrading public water & sewer systems, building efficient public transportation systems (high speed rail, urban rail systems, walkable residential communities, bicycle lane systems, ...). The focus should be on "shovel ready" projects in order for the spending to quickly effect the economy. Cutting taxes to stimulate spending could be another option. However, it's important to carefully determine which taxes would have the most immediate stimulus effect on the economy. The evidence demonstrates that cutting income taxes for businesses does not have a strong stimulus effect, as businesses take most of their increased income as profit rather than spending on expanding their businesses. If the president is determined to cut taxes as part of his stimulus plan, I would advise cutting taxes on groups that would be the most likely to quickly spend the increased income, low-income households for example. The budget is currently balanced so there's no extra money (budget surplus) to use. I would advise the president to engage in deficit spending - borrowing money to finance the increased spending. The debt can be paid back when the economy has recovered.

You are part of the president's team of economic advisors when the US economy contracts, and a recession begins. The federal budget is balanced when the recession starts. You are a neo-classical economist. What advice do you give the president? He wants a detailed policy plan and wants to know the budgetary effects.

As a neo-classical economist I would advise the president to be extremely cautious regarding any increases in government spending. I would advise the president to allow the self-adjusting mechanism of the market to stabilize the economy. If the president was insistent on doing something to react to the recession, I would likely focus on cutting taxes on businesses to stimulate the economy. I would also advise cutting regulations on businesses to lower their costs. The budget is currently balanced so there's no extra money (budget surplus) to use. I would advise the president to continue to balance the budget. I would argue that the increased tax spending (tax cuts) on business would be balanced by the increased tax receipts from the increased business activity caused by the tax cuts.

Unlike most countries, the Philippines treats discouraged workers as part of its labor force. As a result:

Both the labor force participation rate and the unemployment rate in the Philippines are higher than they would be if discouraged workers were not included.

Every month the U.S. government releases a set of statistics about conditions in the labor market. Included in these statistics is the unemployment rate. Which agency of the government prepares these statistics:

Bureau of Labor Statistics in the Labor Department.

Refer to the graph above. No changes in fiscal policy are advisable when the economy is at point:

C

The target rate of unemployment:

Changes

Refer to the graph above. If the economy is at point D, which of the following policies is most likely to move the economy to potential output:

Cut in taxes.

Workers who lose their jobs because of recessions are categorized as:

Cyclically Unemployed

Refer to the graph above. An expansionary fiscal policy would be most appropriate when the economy is at point:

D

Which of the graphs above correctly labels the axes of the AS/AD model?

D. (Y: price level, X: real output)

In recent years labor force participation rates in the U.S. have:

Differed based on race and ethnicity with Latino men consistently having higher rates than other groups.

Keynesian economists would likely argue in favor of engaging in expansionary monetary policy:

During an economic recession.

With respect to the unemployment problem, Keynesian economists generally take the position that:

Each person should have a job commensurate with their training and experience.

Keynesian economists are most likely to recommend which of the following government actions during a recession

Expansionary fiscal policy and expansionary monetary policy

What does the term "full employment" mean?

Full employment is the lowest unemployment rate possible without increasing inflation. Full employment does not equal zero unemployment, it refers to a relatively low unemployment rate. It is typically experienced when an economy as operating at its potential output. Most economists believe it to be between 4-5%. There is no cyclical unemployment at full employment. It is the target rate of unemployment for economists working on unemployment reduction policies for the government. It is also called the Non-Accelerating Inflation Rate of Unemployment (NAIRU).

President Obama was advised by Keynesian economists during his 8 years in office. His response to the "great recession" of 2008-2009 was Keynesian. Which of the following policies did Obama implement:

Funded "shovel ready" infrastructure projects and cut payroll taxes.

Discouraged workers are people who:

Get discouraged when they can't find a job, and stop looking for one, even though they still want a job.

Which of the following would economists that support new growth theory most likely recommend to government in order to grow the US economy in the long-run:

Government should increase funding for primary education.

Fiscal policies are policies that directly affect:

Government spending and taxes.

If per capita output falls by 2 percent and population grows by 3 percent, output:

Grows by 1%

Historically unemployment rates in the U.S.:

Have differed based on race and ethnicity with Black workers consistently having higher rates than other groups.

Which of the following was not a solution to the Great Depression favored by Classical economists:

Hire unemployed workers for public works programs.

Keynes used the term "the paradox of thrift" to explain a situation where

Households saving during an economic contraction has the paradoxical effect of hurting those same households in the short-run

Explain why your policy examples will lead to increased long-run growth

I. Increasing access of quality third level education to low-income households would increase the human capital of the United States, higher levels off human capital will likely contribute positively to long-run growth. II. Better transportation systems will increase the efficiency of the economy contributing positively to long-run growth. III. The products and services produced by private technology companies, pharmaceutical companies, food companies, etc., are, more often than not, dependent on scientific discoveries that come from pure science research. This research largely takes place in universities and government scientific agencies. It's a public good that everyone can use and contributes positively to long-run growth. IV. Better public health creates a healthier population and contributes positively to long-run growth. V. Research demonstrates that quality pre-K education has important positive effects on later stages of education. It will contribute to increasing human capital and therefore contribute positively to long-run growth.

Give 3 examples of government policies that would likely contribute to long-run growth.

I. Increasing investment in quality third level education that would expand access to low-income households. II. Increasing investment in environmentally friendly transportation systems like high-speed rail, electric bus systems, walkable communities, ... III. Increasing investment in pure science research. IV. Increasing investment in public health. V. Increasing investment in quality pre-K education that would expand access to low-income households.

The Classical (old) growth model predicted that countries that continued to add additional physical capital would eventually experience diminishing returns from the capital. New growth theory suggests that countries might experience increasing returns if they follow the new growth model, why?

Ideas are non-rivlarous and can have positive externalities.

If the US economy went into a recession, which of the following policy prescriptions would Keynesian economists most likely recommend

Increase spending on "shovel-ready" infrastructure projects and decrease payroll taxes.

Which of the following would likely increase economic growth:

Increasing government subsidies to education.

Markets help to promote growth by:

Increasing specialization and the division of labor.

Yasheng Huang finishes his Ted Talk "Does Democracy Stifle Economic Growth?" asking whether the Dragon or the Elephant is better positioned for future economic growth? Which of the following most accurately reflects his answer to this question?

India, because of its political institutions.

In which of the following schools of economic thought would you place Yasheng Huang after watching his Ted Talk "Does Democracy Stifle Economic Growth?"

Institutionalists

If potential output exceeds actual output, the economy:

Is experiencing a recessionary gap.

What was Keynes response to the classical economists during the Great Depression when they argued that the economy had a self-adjusting mechanism? Use the graphical model we covered in class as part of your answer.

Keynes responded that in a depression or severe recession the economy can get stuck at an equilibrium far below potential output, and the self-adjusting mechanism of the market will take far too long to move the economy back to full employment GDP. The long-drawn-out recession (or depression) would cause severe economic pain for most workers - "in the long-run we're all dead". He argued that government intervention through demand-side spending is necessary to move the economy back to potential output in a reasonable period of time.

New growth theory, unlike the old classical model of growth, suggests that an economy need not experience diminishing returns and will likely experience increasing returns. Which of the following explain the optimism of new growth theory?

Knowledge and ideas are non-rivalrous.

Calculate the labor force participation rate for the United States based on the following data : Civil non-institutionalized population 244,828,000 Civil labor force 155,754,000 Employed 143,492,000 Not in labor force 89,304,000 Unemployed 12,262,000 Total population 315,495,915

LFPR = Labor Force ÷ Non-Institutionalized Population × 100 LFPR = 155,754,000 ÷ 244,828,000 × 100 LFPR = 0.6362 × 100 LFPR = 63.6%

Based on the following data calculate the labor force participation rate for the United States: Civil non-institutionalized population 252,924,000 Civil labor force ? Employed 150,400,000 Not in labor force 89,304,000 Unemployed 8,250,000 Total population 315,495,915

LFPR = Labor Force ÷ Non-Institutionalized Population × 100 Labor Force = Employed + Unemployed Labor Force = 150,400,000 + 8,250,000 = 158,650,000 LFPR = 158,650,000 ÷ 252,924,000 × 100 LFPR = 0.6273 × 100 LFPR = 62.7%

Calculate the labor force participation rate for the US based on the following data: Civilian non-institutionalized population 256,828,000 Civilian labor force ? Employed 148,492,000 Not in labor force 89,304,000 Unemployed 10,262,000 Total US population 331,495,915

Labor Force Participation Rate = Labor Force ÷ Eligible Population × 100 Labor Force = Employed + Unemployed Labor Force = 148,492,000 + 10,262,000 Labor Force = 158,754,000 Labor Force Participation Rate = Labor Force ÷ Eligible Population × 100 Labor Force Participation Rate = 158,754,000 ÷ 256,828,000 × 100 Labor Force Participation Rate = 61.8%

Since 2010

Labor force participation rates for both men and women have been decreasing.

"Classical economist" is often used interchangeably with which of the following terms:

Laissez-faire economist.

Before the Great Depression the popular view of government was:

Laissez-faire, and after the Depression, the popular view of government was activist.

The law of diminishing marginal productivity implies that increasing only one input will:

Lead to smaller and smaller increases in output.

When aggregate demand is declining and the price level needs to fall to bring about equilibrium, pressure for the price level to fall brings expectations of falling aggregate demand, lower asset prices, and financial panics triggered by the decline in the value of financial assets. If these forces are strong enough, these dynamic effects can create a:

Leftward shift in the aggregate demand curve.

The effect of specialization and the division of labor is to make us:

More productive and more dependent on others.

Keynes believed equilibrium income was:

Not fixed at the economy's potential income.

Compounding means that changes in living standards depend:

On both the initial level of income and the accumulation of changes in income since the initial year.

Structural unemployment is caused by:

People losing a job when their skills become obsolete due to technological innovations.

If a country's population is decreasing by 1% per year and its long-run GDP growth rate is 2% annually, what's happening to the country's per capita growth rate?

Per capita growth = % Δ in output - % Δ in population Per capita growth = 2% - (-1%) Per capita growth = 3%term-83 If a country's population is increasing by 2% per year and its long-run GDP growth rate is 6% annually, what's happening to the country's per capita growth rate? Per capita growth = % Δ in output - % Δ in population Per capita growth = 6% - 2% Per capita growth = 4%

Factory buildings are an example of:

Physical Capital

The old classical model of economic growth focused on:

Physical capital as the engine of growth.

During the Great Depression, output fell very sharply and the government's budget went into deficit (that is tax revenues fell beneath government outlays.) In response, the Roosevelt administration passed a tax increase designed to reduce the budget deficit. This is an example of:

Procyclical fiscal policy.

Which of the following would most likely increase aggregate demand during an economic contraction:

Redistribute income from high-income households to lower income households.

If businesses expect future demand to increase, this will cause a:

Rightward shift of the aggregate demand curve.

A new government in Pakistan redistributes income from high income Pakistani households to low-income Pakistani households. This will likely:

Shift the Pakistani AD curve to the right.

In the summer of 1953, the Korean War ended and US government expenditures decreased. In terms of the AS-AD model, this change should have:

Shifted the AD curve to the left.

Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through trade negotiations, the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and let go their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers' situation:

Structural unemployment.

What is the difference between growth in the Keynesian short-run model and growth in the long-run model?

The Keynesian short-run model addresses the problems created by the fluctuations of the business cycle. It is a model that demonstrates how to get an economy in recession back to potential output - it's designed for the short-run (growing the economy only when it's in recession). It is a model that focuses on the demand-side of the economy. The long-run growth model has nothing to do with the fluctuations of the business cycle. It is a model that explains how to grow the economy in the long-run, i.e., increase potential output. It is a model that focuses on the supply-side of the economy.

Keynes argued that it was necessary for government to actively engage in the macroeconomy when the economy moved into the contractionary phase of the business cycle because:

The economy can become trapped at an equilibrium that is below the equilibrium at potential output.

Which of the following are pro-cyclical fiscal policies

The economy is in an expansionary phase and the government decreases taxes and increases spending.

Give an example of pro-cyclical fiscal policy.

The economy is in recession and the government decreases spending and increases taxes.

Give an example of countercyclical fiscal policy.

The economy is in recession and the government increases spending and decreases taxes.

Outline some of the challenges to implementing the standard Keynesian policy prescriptions when the economy enters a recession.

The effectiveness of Keynesian fiscal policy prescriptions depends on the government's ability to perceive and to react appropriately to a problem. Overcoming the following timing challenges can be obstacles to an effective Keynesian response to a recession: A. Recognition lag. B. Action lag. C. Effect lag. Accurately estimating potential output (the level of output that the economy is capable of producing without generating inflation) can be challenging. This creates uncertainty over how big the stimulus spending should be, and when it's appropriate for the government to begin to rein in the stimulus spending.

Will tax cuts help increase long-run growth?

The empirical evidence does not demonstrate that cutting taxes will increase long-run growth. It might have the opposite effect if cutting taxes results in lower tax revenues for government, and therefore reduced ability for the government to invest in public capital - education, healthcare, infrastructure (all important for long-run growth).

People who are involuntary part-time workers, or have a full-time job that doesn't use their skills and education, are included in:

The underemployed

In his Ted Talk "Does Democracy Stifle Economic Growth?", Yasheng Huang states that many economists are infatuated with authoritarian governments. Huang uses the "Asian Tigers" as an example of this infatuation. Huang believes the infatuation is the result of which of the following:

Their research methodology is flawed in that they are selecting on the dependent variable.

Full employment means:

There is no cyclical unemployment.

Calculate the unemployment rate (U3) for the US based on the following data: Civilian non-institutionalized population 250,828,000 Civilian labor force 160,524,000 Employed ? Not in labor force 88,883,000 Unemployed 15,345,000 Total US population 331,495,915

Unemployment Rate (U3) = Unemployed ÷ Labor Force × 100 Unemployment Rate = 15,345,000 ÷ 160,524,000 × 100 Unemployment Rate (U3) = 9.6%

Calculate the "real" (U6 measure) unemployment rate for the US based on the following data: Marginally Attached 2,600,000 Discouraged Workers 885,000 Employed 141,957,000 Involuntary Part-Time Workers 9,000,000 Unemployed 13,567,000 Labor Force 155,524,000

Unemployment Rate (U6) = Unemployed ÷ Labor Force × 100 Unemployed (U6) = Unemployed + Marginally Attached + Involuntary Part-Time Workers Unemployed = 13,567,000 + 2,600,000 + 9,000,000 Unemployed = 25,167,000 Labor force (U6) = Labor force (U3) + Marginally Attached Labor force = 155,524,000 + 2,600,000 Labor force = 158,124,000 Unemployment Rate = 25,167,000 ÷ 158,124,000 × 100 Unemployment Rate (U6) = 15.9%

Calculate the unemployment rate for the United States based on the following data Civilian non-institutionalized population 244,828,000 Civilian labor force 164,354,000 Employed 143,692,000 Not in labor force 89,304,000 Unemployed ? Total U.S. population 315,495,915

Unemployment Rate = Unemployed ÷ Labor Force × 100 Unemployed = Labor Force - Employed Unemployed = 164,354,000 - 143,692,000 Unemployed = 20,662,000 Unemployment Rate = 20,662,000 ÷ 164,354,000 × 100 Unemployment Rate = 0.1257 × 100 Unemployment Rate = 12.6%

Calculate the unemployment rate for the United States based on the following data Civilian non-institutionalized population 244,828,000 Civilian labor force 155,754,000 Employed 143,492,000 Not in labor force 89,304,000 Unemployed 12,262,000 Total U.S. population 315,495,915

Unemployment Rate = Unemployed ÷ Labor Force × 100 Unemployment Rate = 12,262,000 ÷ 155,754,000 × 100 Unemployment Rate = 0.0787 × 100 Unemployment Rate = 7.9%

The unemployment rate is the number of people:

Without a job and looking divided by the labor force.

The Classical economists argued that:

if unemployment occurs, it will cure itself because wages and prices will fall.