macro -- test questions

sell out of a speculative bubble when you hear this phrase

"this time it's different"

indirect effects of gov't spending, representing opportunity costs

"what is unseen"

Which of the following models assumes that nominal wages are perfectly flexible

Classical Labor Market

"Inflation is always and only a monetary phenomenon"

Crude Quantity Theory of Money

This equation, at the heart of the Quantity Theory of Money, is a tautology

Equation of Exchange

"I do NOT believe in bubbles" because markets are efficient

Eugene Fama

T/F International free trade was brought to an abrupt halt by the Japanese bombing of Pearl Harbor in Dec 1941 which brought the US into WWII

False

T/F Other things the same, an increase in the price of oil tends to result in a supply stimulus, or RIGHTWARD shift in Aggregate Supply Curve

False

T/F Real GDP is not adjusted for (does not take into account of) inflation.

False

first person known to have written about the total effects of opportunity cost

Frederic Bastiat

Which of the following periods of economic decline was associated with deflation

Great Depression of 1930s

"cheap money drives out dear money"

Gresham's Law

near-libertarian, with private markets sending signals for economic decisions

Hayak and Austrian school

For whom is the following statement a central theme: "Market systems are inherently unstable and unfair and must. be regulated through central planning by an elite intelligentsia."

J Maynard Keynes (General Theory of Employment, Interest, and Money)

Near-Socialist with gov'ts planning out most aspects of everyday life

Keynes and Keynesian school

"the economy" is a machine that can be fine-tuned using gov't spending

Keynesian policy

Which of the following tend to favor demand-feeding markets that give rise to bubbles

Keynesians

the only gov't policy that is effective is unanticipated (fools people)

Lucas' critique

example of the Broekn-Window Fallacy of Bastiat

No gov't spending is ever really wasted since it puts dollars in circulation and stimulates some sector of the economy

purports to show a trade-off between inflation and unemployment

Phillips curve

If all resources are fully employed, then Say's Law would imply which of the following?

Supply creates its own demand

T/F The crude quantity theory of money assumes that the velocity of money is constant, which is also seldom ever true in the US economy because the velocity of money frequently changes depending on economic conditions.

T/F The crude True

In Keynes' version of the Classical Model, all 3 parts of the Classical Labor Market, the Loanable Funds Model, and the Crude Quantity Theory of Money, are separate and entirely independent of one another.

True

T/F GDP captures only economic activity, so an event like a disaster may lead to a higher GDP but may make most of those in the economy worse off

True

Which of the following statements is true about Keynes' version of the Classical model: The Quantity Theory of Money and Classical Labor market are independent of each other the equilibrium interest rate is where Investment spending equals saving nominal wage is not sticky but rather perfectly flexible all of the above

all of the above

the principle of parsimony requires these of any model

assumptions

In order for the money (demand deposit) multiplier to equal the reciprocal of the reserve requirement ratio what assumptions are necessary:

banks loan out all excess reserves no significant cash leakages no runs on the bank

How can Federal Reserve system increase credit (indirectly increase money supply)

buy gov't securities on open market

functioned as currency in German POW camp article

cigarettes

there is no scope for involuntary unemployment

classical labor market

Which of the following takes into account the prices of retail goods?

consumer price index

new opportunities for profits emerge while old opportunities fall away

creative destruction

trying to solve yesterday's problem, regulators sow the seed of the next bubble

credit crunch

one of the possible causes of a speculative bubble

crop failure

Which of the following occurs directly, ceteris paribus, when the price of oil rises: decrease in demand for plastic decrease in demand for rubber decrease in supply of gas all of the above

decrease in supply of gas

In a situation where information travels so fast in a particular market that no one can take advantage of riskless arbitrage opportunities, the market is said to be?

efficient

prices already fully reflect all publicly available information

efficient markets

Which of the following is the most efficient form of money (among choices given) because it has more valuable as a commodity than the other choices? paper gold electronic bookkeeping entries sticks of wood

electronic bookkeeping entries

For which kind of variable is the value determined inside the model as a result?

endogenous variable

long-term interest rates contain a premium reflecting expected inflation

expectations theory

T/F According to Robert E. Lucas Jr. gov't policy will always work whether it is unanticipated (fools people) or not

false

T/F Other things the same, an increase in the price of oil tends to result in a supply shock, or rightward shift in AS curve

false

Which of the following assumptions did Barro claim is required to obtain the result that gov't debt has no effect on current consumption (or production)?

families act as infinitely lived dynasties because of intergenerational altruism capital markets are perfect path of gov't expenditures are fixed

extremely short-term interest rate at which banks can borrow from FED or other banks

federal funds rate or discount rate

Which of the following is the least efficient form of money (among the choices given) because it has more value as a commodity than the other choices? paper gold credit cards sticks of wood

gold

3 examples of assets where speculative bubbles can occur

gold, stock, beanie babies

"Commanding Heights" of the macroeconomy

heavy industries (coal, steel, and rail)

what typically precedes massive monetization of the debt

high interest rates in which the treasury can find few buyers for its debt

If the special assumptions we studied are all met, then what would be the ultimate effect on the money supply if the Fed bought $100 million of gov't securities on the open market and the reserve requirement ratio were 5%

increase $2 billion

say whether each variable is an injection, leakage or not considered: Investment Spending (I)

injection

say whether each variable is an injection, leakage or not considered: government spending (G)

injection

"I believe in bubbles"

institutionalists

Which of the following believe that the form and structure of institutions, like banks, firms, schools, and organizations, really matter in determining economic behavior

institutionalists

All borrowing is assumed to be done by firm from banks for buying capital goods

investment spending in circular flow

According to the Expectations Hypothesis of interest rates, a downward-sloping US Treasury yield curve implies that

investors expect coming recession

say whether each variable is an injection, leakage or not considered: Saving (S)

leakage

say whether each variable is an injection, leakage or not considered: Taxes

leakage

Banks are perfectly competitive, making no profits in lending

loanable funds model

In equilibrium, lenders paid the same interest rate as borrowers, according to Keynes' version of

loanable funds model

according to the ______ there is a negative relationship between investment spending and the rate of interest

loanable funds model

function or characteristic of money that removes need for double coincidence of wants

medium of exchange

In forty-something Sherry takes a job in Miami that pays slightly more than her current similar job in Little Rock just because the pay is higher, then she is experiencing

money illusion

If the chair of the Federal REserve Board of Governors gives a speech in which he notes that the NYSE is setting new highs and is dangerously overpriced, then he is engaging in...

moral suasion

the Fed Chairman engages in this when he threatens to tighten credit

moral suasion

Which of the following is the total market value, in today's dollars, of all final goods and services produced within the US during a quarter

nominal gross domestic product

How can the Federal Reserve system decrease credit (indirectly decrease money supply)? buy gov't securities on the open market decrease reserve requirement ratio decrease discount rate at which member banks borrow none of the above

none of the above

If the special assumptions we studied are all met, then what would be the ultimate effect on the money supply if the Federal Reserve sells $100 million of government securities on the open market and the reserve requirement ratio were five percent? increase $100 million increase $1 billion increase $500 million none of the above

none of the above

In the Circular Flow Model, which of the following is used to describe the amount of funds that domestic consumers use in order to buy goods from producers in other countries consumption spending investment spending government spending none of the above

none of the above

Which of the following can cause stagflation: an increase in consumer taxes decrease in money supply increase in gov't spending none of the above

none of the above

What defines the velocity of money

number of times the average dollar is spent in a period

the principles of parsimony implies that

other things the same, a simple model is better than a complicated model

If silver and appear If silver and paper both function as money in a particular economy, then according to Gresham's Law

paper will circulate and people will hoard silver

in what market structure does the loanable funds model assume banks operate

perfect competition

In the Circular Flow model, when injections exceed leakages, ceteris paribus,

prices rise, and if, the economy is not already at full employment, output rises too

this is the economy contracting for 2+ quarters

recession

According to former FED chair Paul Volcker, the only way to effectively combat institutionalized inflationary expectations is to

severely contract money supply

3 characteristics of the climax, or peak, of a speculative bubble

speculation moves to secondary assets more people with little connection want to "get rich quick" swindles and frauds

simultaneous appearance of both higher prices and higher unemployment

stagflation

Which property of money makes writing contracts feasible by allowing them to retain their values over time?

standard of deferred payment

which of the following would be likeliest to exhibit the most efficient markets? gold and other precious metals diamonds stocks Arkadelphia real estate

stocks

AS shifts to the left, leading to staglfation

supply shock

gov't reduces business taxes and business regulation

supply-side economics to shift AS to the right

What did Paul Krugman prescribe as the best policy to replace the NASDAQ bubble of 1995 - 2002

traditional Keynesian stimulus policy and Fed short-term interest rate cuts to stimulate AD

T/F Bubbles occur years after initial spark, or cause and may be the result of several causes interacting over several years.

true

T/F Comparative statics consists of comparing equilibria of static models

true

T/F International free trade was brought to an abrupt halt by the assassination of the Austrian Archduke in August, 1914, which began WWI

true

T/F Lucas observed that trying to estimate the parameters of Keynesian models is useless when the economic data that are being used were generated using National Income Accounting, since those data assume a Keynesian world already

true

T/F Most recessions are not officially identified until they are already well under way.

true

T/F Other things the same, a decrease in the price of oil tends to result in a supply stimulus, or rightward shift in the AS curve

true

T/F Other things the same, an increase in the price of oil tends to result in a supply shock, or leftward shift in AS curve

true

T/F Silver, as an asset of inferior quality, might experience contagion effects from a speculative bubble in gold.

true

T/F The Great Depression of the 1930s is one of the very few contractions in US history where prices actually fell.

true

T/F The composition of a price index "market basket" depends on which kinds of goods and services those in the market basket tend to purchase

true

T/F The typical end product of a nation that will not raise enough taxes or has insufficient tax base to service its gov't debt, like 1920s Germany or present-day Venezuela, is monetization of the debt and resulting hyperinflation

true

T/F according to Robert E. lucas, Jr, gov't policy will only work when it is unanticipated (fools people)

true

T/F according to the Horton version of the Minsky model of speculative bubbles, gov't usually comes to the rescue tool ate and sows the seeds of the next bubble

true

function of characteristic of money that makes price quotes possible

unit of account

which property of money makes quoting prices feasible by accounting for them in common currency units

unit of account

who would agree with this statement as a central theme: "markets work, gov't's don't. Free markets do it best. Why fool with anything else?"

von Mises' and Hayek's Austrian School of Economics

3 things that can spark a speculative bubble

war, crop failure, technological innovation