Macro Exam 1 True False

According to John Maynard Keynes, recessions were self-correcting because unemployed workers would accept lower wages in order to get hired. He argued that, as a result, company profits would increase and the company would then increase output and hire more workers

False

Fiscal policy refers to buying and selling of U.S. treasury bonds by the Federal Reserve system to influence the money supply and level of interest rates in the economy

False

For a corporation, dividends plus retained earnings equals total sales revenue

False

If a corporation goes bankrupt, the corporation's stockholders are responsible for paying off the corporation's debts

False

In a "laissez-faire" economy, most basic economic decisions are made by the government

False

John Maynard Keynes argued that natural economic forces in the economy would always reduce unwanted unemployment, and government actions only tend to make unemployment worse

False

Other things being equal, junk bonds tend to have lower coupon (interest) rates than other bonds of the same term to maturity

False

Suppose the selling price of the stock for Corporation A exceeds the selling price of stock for Corporation B. This implies the sales revenue of Corporation A exceeds the sales revenue of corporation B

False

To bring the economy out of a recession, Keynes argued that government should increase taxes and/or decrease government spending to balance the budget

False

The largest component of GDP is government spending on transfer payments such as social security, Medicare, welfare, etc.

False (GDP = household consumption + gross private investment + government spending + net exports)

Gross Domestic Product refers to the dollar value of all new and used goods sold in a country during the course of a year.

False (GDP only inclues final goods and services)

The term "ceteris paribus" means "it happened after this, therefore it happened because of this"

False (all else equal)

Any output combination that lies outside the production possibility frontier is associated with some unemployment of resources.

False (any output combination inside the production possibility frontier)

The maximum price that a person would be willing to pay for a product minus the actual selling price of the product is called producer surplus.

False (consumer surplus)

Sole proprietors have the protection of limited liability.

False (corporations)

Assume prices increase as a result of union demands for better pensions. This type of inflation is called DEMAND PULL INFLATION.

False (cost push inflation, demand pull inflation = increase in price level driven by upward shift in demand)

One of the major policy goals of macroeconomics, as demanded in the Employment Act of 1946, is a more equal distribution of income.

False (economic growth, stable prices, maximal employment, smoothing out business cycles)

The three major goals of macroeconomic policy are low inflation, low unemployment and equal distribution of income.

False (economic growth, stable prices, maximal employment, smoothing out business cycles)

The "post-hoc fallacy" refers to the mistake of assuming that what is true of a part is necessarily true for the whole.

False (fallacy of composition, post hoc - if B occured after A, then A must have caused B)

The government's attempt to influence the economy by changing taxes and government spending is called welfare policy

False (fiscal policy)

In a "laissez-faire" economy, most basic economic decisions are made by the government.

False (hands off)

A decrease in the federal funds rate sends a signal that the Federal Reserve System fears future inflation.

False (increase)

The four factors of production are land, labor, banks, and entrepreneurs

False (land, labor, capital, entrepreneurship)

We assume that the primary goal of individuals is to maximize lifetime income.

False (maximize utility)

Suppose interest rates in the economy are 5% today. Suppose I buy a bond today which pays a coupon rate of 5%. Suppose tomorrow, interest rates in the economy unexpectedly and suddenly rise to 8%. I decide to sell my bond in the open market. Other things being equal, the selling price of my bond will be higher tomorrow than my original purchase price.

False (no one will buy a bond that only yields 5% if 8% is possible)

Real GDP has increased every year since 1960

False (nominal GDP increased)

The following is a positive economic statement. "We should have a balanced budget amendment."

False (normative)

If you own stock in a corporation, you are guaranteed a certain amount paid to you by the corporation in the form of a quarterly dividend.

False (only bonds have guarantee)

On a production possibility curve, economic growth is represented by a movement along and up the curve.

False (outward shift of curve)

Assume that last year the American dollar traded for 13.5 pesos. Assume that today the US dollar trades for 16.0 pesos. Other things being equal, we would expect that US exports to Mexico would increase

False (peso depreciated, hurts American producers)

Consumer surplus is equal to the actual selling price of a product minus the minimum amount that the seller would have accepted

False (producer surplus)

You just purchased a bond issued by the ABC Corporation, and thus you now own a portion of the corporation.

False (stock)

Most economists believe that, in general, the Consumer Price Index understates the true inflation rate.

False (tends to overstate)

According classical economists, recessions were self-correcting so there was no need for government interference in the economy.

True

An example of a normative statement is: "We should raise the minimum wage"

True

An increase in the value of the dollar will cause US net exports to decrease.

True

Assume that China keeps the value of the yuan artificially low versus the US dollar. This benefits US consumers and hurts US producers.

True

Economists tend to believe that deflation is harmful for an economy.

True

Gross Domestic Product refers to all the dollar value of all goods sold in a country during the course of a year

True

Other things being equal, bonds of longer the term to maturity tend to pay higher interest than bonds of shorter term maturity

True

Stock prices rise when investors suddenly expect the Federal Reserve to lower interest rates.

True

Suppose an economy is on its PPF and can produce only consumption goods and capital goods. It can produce more capital goods only by reducing production of consumption goods.

True

Suppose the American dollar appreciates versus the Euro. This will tend to benefit US consumers and hurt US exporters

True

Suppose the Federal Reserve System takes steps to lower the level of interest rates in the economy to encourage more borrowing and spending by consumers and businesses. This is an example of monetary policy.

True

The PPF is outward bowed to illustrate increasing opportunity costs.

True

When high unanticipated inflation occurs, bond owners lose.

True