Final Exam
Since 2008, we have gotten used to the idea that the size and behavior of the financial system can be a major source of economic instability. How can the existence of a developed financial system may help to limit fluctuations in the economy?
A developed financial system can help households to 'smooth' their consumption over time.
In an imaginary economy, GDP falls from $100 billion to $95 billion while output per worker rises from $5000 to $5020. In this economy there has been:
A fall in production and an increase in productivity.
Cuts in public expenditure do not guarantee a reduction in the government's deficit because:
Aggregate demand will fall, reducing government revenue
It is often said that independent central banks are more likely to run a successful monetary policy than governments because their commitment to low inflation is more 'credible' than government promises. One reason for this is that:
Central banks are less subject to political pressures (e.g. for lower unemployment) than governments.
In an economy where the MPC is 0.7, the proportional tax rate is 0.25 and the marginal propensity to import is 0.2, the multiplier will be:
1.48
According to the revised version of the Phillips curve, as shown in Figure 15.7 (Links to an external site.), if the rate of inflation last year was 3 percent and the bargaining gap this year and next year is 1 percent, then inflation this year and next will be:
4% then 5%
An overseas bank announces that it is introducing a new type of savings account paying a 3 percent fixed rate of interest for deposits of one year duration. This 3 percent is:
A nominal rate of interest
Which of the following is likely to lead to a fall in the level of investment spending?
An official forecast of a downturn in the economy
Imagine that the rate of inflation has been 10 percent per year for a number of years. The central bank then introduces a 'tight' monetary policy and the rate of inflation comes down to 5 per cent per year. This reduction is an example of:
Disinflation
The weakness of the original Phillips curve is that it ignored:
Expectations
Which of the following might help to minimize the costs of adapting to new technology?
Government re-training schemes
The 'paradox of thrift' refers to the fact that:
If we all save more, aggregate income will fall
Which of the following statements is correct regarding the model of the labor market?
In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary.
The Beveridge curve will shift downward (toward the origin) if:
Information about job vacancies improves.
Deflation refers to a situation where prices are generally falling. Why is deflation generally undesirable?
It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further.
In periods of rapid inflation, which of the following groups tend to lose out?
Lenders (creditors)
The introduction of a new labor-saving technology results in:
Lower wage share of output and higher income inequality in the short run
In the short run, successive additions to capital produce smaller and smaller increases in output. In the long run, however, GDP continues to rise. This is because:
New capital equipment incorporates the latest technological developments.
In Figure 15.4b, when employment is at level C, the real wage lies below the profit curve. Assume inflation is zero. In a competitive system, firms will begin to _____ prices and this will start a process of _____.
Reduce; deflation
A fall in the world price of commodities will:
Shift the price setting curve up and the Phillips curve down.
Which of the following statements regarding the multiplier is correct?
Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier.
The relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force) is known as:
The Beveridge curve
In the expression for aggregate consumption C=C_0+C1Y C = C 0 + C 1 Y , the term C1 is known as:
The marginal propensity to consume
Unemployment is a stock. The size of that stock will increase if:
The rate of job destruction is 2% per year and the rate of job creation is 1% per year.
A household's net worth (or equity) is best described as:
The total value of assets minus the total value of its liabilities
Which of the following is a distinctive characteristic of 'inclusive unions'?
They set their wage demands in accordance with the productivity of labor
Which of the following statements regarding fiscal policy is correct?
Unemployment benefits and a proportional tax system are both automatic stabilizers.
Which of the following best describes the short-run relationship between inflation and unemployment?
Unemployment rises; inflation falls
In the context of aggregate demand, which of the following constitutes investment:
Upgrading your firm's IT equipment.
Figure 14.5 shows a downward shift of the aggregate demand curve, reducing the level of output from A to Z. Suppose that we begin again at A and that this is a full-employment level of output. An increase in aggregate demand in these circumstances will most likely cause:
a rise in the general level of prices
The widespread introduction of new technology into an economy takes time. The length of time between first appearance and general acceptance is known as:
the diffusion gap