Macro Final Exam

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income. (Scenario: Consumption Spending) If income increases by $2,000, consumption will increase by:

$1,600.

An economy saves 20 percent of any increase in income and there are no income taxes or imports. Then, an increase in investment of $2 billion leads to a short run increase in real GDP of

$10 billion.

Equilibrium real GDP is $500 billion, government expenditures are $80 billion, the MPC = 0.9, and there are no income taxes or imports. Suppose that government expenditures increase to $100 billion. If the price level is constant, after the increase in government expenditures, equilibrium real GDP will be

$700 billion.

If the basket of goods and services used to calculate the CPI cost $200 in the reference base period and $450 in a later year, the CPI for the latter year equals

225.

If the CPI was 132.5 at the end of last year and 137.5 at the end of this year, the inflation rate over these two years was

3.8 percent.

If this year the price level is 135 and last year it was 125, the inflation rate is

8 percent.

Toyota assembles cars for the U.S. market in Kentucky. Choose the correct statement.

All of the statements are true.

Inflation is a problem when

All of these answers are correct.

When the price level in France increases while the exchange rate and the price level in the United States remain the same, the result is that

All of these answers are correct.

________ consumption is consumption that will occur ________ the level of GDP and disposable income.

Autonomous; independent of

If depreciation is less than gross investment, then net investment is

positive.

If the CPI is 120, this means that

prices are 20 percent higher than in the reference base period.

We distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. In the long run

real GDP equals potential GDP.

Crowding out negatively affects the economy by:

reducing investment spending on physical capital.

The circular flow shows that the household sector earns its income by

selling factors of production.

The aggregate demand curve

shifts rightward when taxes are decreased.

The unemployment rate will never equal zero percent because

some portion of the labor force will always be between jobs.

Monetary policy is controlled by

the Federal Reserve.

If the money prices of resources changes

the SAS curve shifts.

Of the following items, which would NOT be included in GDP?

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

In March 2013 the Fed announced that it might decrease its open market purchases of securities by the end of the year. This announcement suggests that the Fed is concerned that

the inflation rate will rise.

Potential GDP is

the maximum amount of GDP that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation.

Which of the following is NOT a determinant of household saving?

the nominal interest rate

The aggregate demand curve shows

the quantity of real GDP demanded at different price levels.

The Keynesian model of aggregate expenditure describes the economy in

the short run.

Fiscal policy involves

the use of tax and spending policies by the government.

The value of all the following goods is included in the calculation of GDP EXCEPT:

the value of Firestone tires installed on brand-new Volvo station wagons.

What term is used to describe the lowest point of a business cycle?

trough

In September 2014, the labor force participation rate fell from 62.8 percent to 62.7 percent. This change could have been caused by

unemployed workers giving up looking for a job.

The long-run aggregate supply curve is

vertical at the full-employment level of real GDP.

The labor force participation rate is percentage of the ________ who are in the labor force.

working-age population

Nominal GDP is

GDP valued at prices of that year.

Read the two statements below and indicate if they are true or false. I.Autonomous expenditures change when GDP changes. II.Aggregate planned expenditure is the sum of planned consumption expenditure, investment, government expenditure, and net exports.

I is false and II is true.

Which of the following describes the chain of events the Fed uses to fight recession?

Lower the federal funds rate target, buy government securities, increase reserves and loans, increase aggregate demand.

The Council of Economic Advisors advises the

President.

An example of a government transfer is a(n):

Social Security payment.

Which of the following occurs while moving along a short-run aggregate supply curve?

The price level changes and the money wage rate is constant.

A decrease in the real interest rate leads to

a movement downward along the demand for loanable funds curve.

The multiplier shows that as ________ changes, real GDP changes by a ________ amount.

autonomous expenditure; larger

An increase in the government ________ reduces the government's ________.

budget surplus; debt

To increase the quantity of money in the economy, the Federal Reserve is likely to

buy government securities in an open market operation.

To lower the federal funds rate, the Federal Reserve could

buy government securities.

Automatic stabilizers are government spending and taxation changes that:

cause fiscal policy to be expansionary when the economy contracts.

Suppose an economy is producing real GDP of $300 billion. The potential output is equal to $400 billion, and the MPC is equal to 0.80. Then the government should follow a policy of:

cutting taxes by $25 billion to bring the economy to potential output.

Between 2013 and 2014 the government estimates that disposable income in the United States decreased. Consequently, as a result of this change, consumption expenditure

decreased.

Monetary policy that lowers the interest rate is called ________ because it ________.

expansionary; increases aggregate demand

To measure GDP using the expenditure approach you must collect data on

exports.

The positive relationship between short-run aggregate supply and the price level indicates that, in the short run

firms produce more output as the price level rises.

Which of the following is a final good?

flour purchased at the store to bake cookies

An increase in exports of goods or services with no change in imports of goods or services

increases GDP.

An expansion occurs when the level of real GDP is

increasing.

The SAS curve and the LAS curve

intersect at potential GDP.

If prices are fixed, an increase in aggregate expenditures results in an increase in equilibrium GDP that

is greater than the change in aggregate expenditure.

The slope of the saving function is equal to the

marginal propensity to save.

The short-run aggregate supply curve shifts leftward when the

money wage rate increases.

Full-time students and prisoners are

not in the labor force.

When the economy is in full employment,

only cyclical unemployment is zero.

The unemployment rate is the ________ who are unemployed.

percentage of people in the labor force

A consumption function shows a

positive (direct) relationship between consumption expenditure and disposable income.

Suppose that the consumption function is: C = $500 + 0.8 × YD where YD is disposable income. (Scenario: Consumption Spending) The marginal propensity to save is:

0.2.

Between 2015 and 2016 the government reported that disposable income decreased by $400 billion and consumption expenditure decreased by $280 billion. Based on these data, the MPS equals

0.30.

When the Fed cuts the Federal funds rate, real GDP growth ________ and the inflation rate ________.

increases; increases

Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that foreign incomes rise. U.S. aggregate demand ________ and eventually the money wage rate ________.

increases; rises

If the Fed raises the interest rate, the first effect in an AS/AD figure is a ________ shift of the ________ curve.

leftward; AD

The slope of the consumption function is

less than the slope of the 45-degree line but not equal to zero.

Suppose Mail Boxes Etc. buys a new copier for its store for $1000. A year later, when the firm wants to upgrade to a new copier, it finds that the old copier is only worth $750. Over the year the copier was used, ________ has occurred.

depreciation

The MPC and MPS measure changes in consumption expenditure and saving that result from changes in

disposable income.

The multiplier effect

magnifies small changes in spending into larger changes in real GDP.

The key aim of monetary policy is to

maintain price stability.

As of July 2012, the 12 month CPI inflation rate was 1.4 percent and the 12 month core CPI inflation rate was 2.1 percent. The difference between these two measurements of inflation indicates

prices for food and fuel grew less rapidly than prices for other goods.

The currently used method for calculating the CPI

probably overstates inflation.

The marginal propensity to consume measures

the fraction of a change in disposable income that is spent on consumption expenditure.

If the price level is constant and the slope of the AE curve is 0.75, a decrease in government expenditures of $100 leads to a decrease in real GDP of

$400.

Suppose that a financial crisis decreases investment spending by $100 billion and the marginal propensity to consume is 0.80. Assuming no taxes and no trade, by how much will real GDP change?

$500 billion decrease

Equilibrium real GDP is $400 billion, the MPC = 0.9, and there are no income taxes or imports. Investment increases $40 billion. If the price level is constant, after the increase in investment, equilibrium real GDP will be

$800 billion.

If the slope of the aggregate expenditures curve = 0.9, the multiplier is equal to:

10.

Suppose the working-age population is 220 million, the labor force is 150 million, and the unemployment rate is 10 percent. The number of unemployed people is

15 million.

Which of the following is TRUE? I.As the real interest rate increases, people increase the quantity they save. II.The supply of loanable funds curve is downward sloping. III.As disposable income increases, the supply of loanable funds curve becomes steeper.

I only

Which of the following people would be counted as is employed in the Current Population Survey?

Rich, who is working 20 hours a week but wants a full-time job

Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect:

a short-run increase in real GDP and price level, and a long-run decrease in real GDP and an increase in price level.

If the average retirement age decreases:

implicit liabilities will increase.

Autonomous consumption is that portion of consumption expenditure that is not influenced by

income

In a simple economy in which prices are constant and there are no income taxes or imports, the marginal propensity to save is 0.2. If exports increase $50, what impact will that have on aggregate expenditure?

increase by $250

If real disposable income increases by $1,500, consumption expenditures will

increase by less than $1,500.

David receives a tax refund of $800. He spends $600 and saves $200. David's marginal propensity to consume is:

0.75.

The Council of Economic Advisers

helps the President and the public stay informed about the state of the economy.

If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is:

0.6

If a $75 billion increase in autonomous expenditure increases equilibrium expenditure by $150 billion, then the multiplier must be

2

Sarah and Diane are both billing clerks for the local trucking company earning $17,000 per year. Sarah is attending college, plans to graduate in one year and earn $55,000 as an economist. Diane is not in college or undergoing any specialized training and will have the same job next year. According to economic theory, which of the two individuals would tend to have a higher current savings rate?

Diane

Which of the following are policy instruments available to the Fed as it tries to achieve its macroeconomic goals? I.government expenditures on goods and services and taxes II.the government budget deficit or surplus III.changes in the federal funds rate

III only

The ________ the expected profit, the greater is the ________.

higher; investment demand

Which of the following statements is TRUE?

Real GDP fluctuates around potential GDP.

The expected profit from an investment will change with

a change in technology.

All of the following shift the short-run aggregate supply curve EXCEPT

a change in the price level.

In the long-run equilibrium, an increase in the quantity of capital leads to

a decrease in the equilibrium price level and an increase in equilibrium real GDP.

Suppose the only revenue taken in by the government is in the form of income tax, and the tax rate is 10 percent. If aggregate income is $800 billion, and government outlays are $100 billion, then the government budget has

a deficit of $20 billion.

Classify each of the following items as a final good or an intermediate good, and identify which is a component of consumer spending, investment, or government spending on goods and services. Item 1. A new airplane bought by United Airlines.Item 2. A DVD bought by a household. Item 1 is _________ and item 2 is __________.

a final good that is an investment spending; a final good that is a consumer spending.

You observe that unplanned inventories are increasing. You predict that there will be

a recession.

If Nike, an American corporation, produces sneakers in Thailand this would

add to Thailand's GDP but not to U.S. GDP.

In the calculation of GDP by the expenditure approach, exports from the United States must be

added.

Suppose the real interest rate rises and the quantity of loanable funds decreases. These changes could have been the result of

an increase in household wealth.

A change in which of the following changes the slope of the aggregate expenditure curve?

an increase in the marginal propensity to consume

An increase in the value of the multiplier can be caused by

an increase in the marginal propensity to consume.

An increase in the quantity of capital increases ________ and increase in the full-employment quantity of labor increases ________.

both the SAS and the LAS; both the SAS and the LAS

If the inflation rate is negative, the price level in an economy is

falling.

Suppose the market for loanable funds is in equilibrium. If disposable income increases, the equilibrium real interest rate ________ and the quantity of loanable funds ________.

falls; increases

The U.S. dollar is an example of:

fiat money.

The factor market can best be described as where

firms buy the services of labor, land and capital.

Unemployment that occurs because it takes workers and employees time to find each other is called:

frictional unemployment

Suppose the natural unemployment rate equals 6 percent and the current unemployment rate is 8 percent. We can conclude that

full employment is not occurring.

If tax revenues equal $1.5 billion and government outlays equal $1.6 billion, then the

government budget has a deficit of $0.1 billion.

By definition, a government budget deficit is the situation that occurs when the

government outlays exceed what is received in taxes.

If the government runs a deficit, the total amount of government debt is

increasing.

When an individual is frictionally unemployed, the unemployment arises in part from

individuals searching for appropriate employment.

If the price level for the last three months has been 112, 125, and 126, we would say

inflation was more rapid between the first and second month than between the second and third month.

An increase in the real interest rate results in a

movement along the supply of loanable funds curve.

An increase in the price of imported oil leads to a:

negative supply shock.

Frictional unemployment is the result of

normal labor market turnover.

According to the BEA, in the second quarter of 2011 nominal GDP was $15 trillion and in the second quarter of 2012 nominal GDP was $15.6 trillion. Based solely on this information, from the second quarter of 2011 to the second quarter of 2012

real GDP may have increased, decreased, or stayed the same.

Gross domestic product is the

the market value of all final goods and services produced in an economy in a year

The AS/AD model studies the relationship between

the price level and real GDP.