MacroEconomics Exam #2

Business cycles are

alternating periods of expanding and contracting economic​ activity, which are usually illustrated using movements in real GDP.

The period between the low point of economic activity and the following high point is called

an expansion

Which of the following changes does not cause an increase in the quantity of goods and services that can be produced by one​ worker, or in one hour of​ work?

an increase in the number of workers

Which of the following are financial securities that represent promises to repay a fixed amount of​ funds?

bonds

Which of the following is not a service that the financial system provides for savers and​ borrowers?

guaranteeing savers high rates of return

. The low point of economic activity is called

a trough

Typically, when will the National Bureau of Economic Research​ (NBER) announce that the economy is in a​ recession?

a year or more after the recession has begun

To avoid the cost of the purchasing power of paper money decreasing with​ inflation, workers and firms will try to hold as much paper money as possible.

False

If the inflation rate is 6 percent and the nominal interest rate is 4​ percent, then the real interest rate is

-2 percent, which is the nominal interest rate minus the inflation rate.

Firms that act as financial intermediaries LOADING... match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provide to savers and​ lenders? ​(Mark all that​ apply.)

Allows savers to spread their money among many financial investments. Collects and communicates information about borrowers to savers Provides an easy method of exchanging a financial security for money.

The National Bureau of Economic Research​ (NBER), a private​ group, is responsible for declaring when recessions begin and end LOADING... . The Bureau of Economic Analysis​ (BEA), part of the federal​ government, might not want to take on this responsibility. Which one of the following is the most appropriate reason for the​ BEA's refusal?

Because it is part of the​ government, the BEA could be pulled into politics with the dating of recessions.

The price index which is used to measure changes in the cost of living is the

Consumer Price Index​ (CPI).

"I don't believe the government price statistics. The CPI LOADING... for 2014 was 210210​, but I know that the inflation rate LOADING... ​couldn't have been as high as 110110 percent in​ 2014."

Disagree. The inflation rate is the percentage increase in the price level from the previous​ year, not the base year.

If income rises more slowly than the rate of​ inflation, purchasing power will rise.

False

Which one of the following is not a measure of the price​ level?

Government Price​ Index: an average of the prices paid by the government for goods and services used only by different government agencies.

Which of the following equals the amount of public​ saving?

Government tax revenue minus the sum of government purchases and transfer payments to households.

The following appeared in a newspaper​ article: ​"Inflation in the Lehigh Valley during the first quarter of​ [the year] was less than half the national​ rate...So, unlike much of the​ nation, the fear here is​ deflation-when prices sink so low that the CPI drops below​ zero." Do you agree with the​ reporter's definition of deflation LOADING... ​?

No. Deflation is defined as a negative inflation rate.

Albanda is an agrarian economy located in South Asia. Shen Chou and her friend Wang Tao are discussing the efficacy of the Consumer Price Index.​ Shen, who works with a nonprofit​ organization, says that the Consumer Price Index does not reflect the realities of consumption patterns of the average consumer.​ Wang, a policy​ planner, says that it must be accurate because it was updated only a year ago. Which of the​ following, if​ true, would strengthen​ Shen's argument?

Pensioners whose benefit payments are directly linked to the changes in CPI reported a decreased purchasing power compared to the previous year.

Which of the following is not a​ "loanable fund"?

Real estate.

Consider the following choices. Which one of the following choices is​ correct?

Recessions were more severe and lasted longer in the first half of the twentieth century and became shorter and milder in the second half.

Many economists agree that this difference is due to all of the following reasons​ except:

Since the​ 1950s, people have become more rational and control their spending behavior countercyclically.

In the fall of​ 2015, Apple introduced a new model of its iPhone. The new model had a faster processor and a better camera than the previous model but sold for the same price. How was the CPI affected by the introduction of the new model of the​ iPhone? If​ Apple's new iPhones offer more features for the same price as the previous​ model, how was the consumer price index affected by the introduction of the new​ iPhone?

The CPI does not change.

The central bank of the country Iberia recently announced a reduction in the interest rate by 150 basis points. Following this​ announcement, Matthew​ Boulder, who is interested in buying a​ house, expects the real interest rates also to fall.​ However, he notices that the real interest rate in the economy has actually increased. Which of the following is most likely to explain this​ outcome?

The Iberian economy is going through a period of deflation.

Following a long period of slow​ growth, the government of country X decided to open its economy and reduce trade barriers in order to boost economic growth. This provided the expected impetus to the economy as competition increased and the efficiency of domestic firms improved. A decade after opening the​ economy, the​ country's GDP is now growing at an average of​ 7-8 percent annually. A group of economists claim that the standard of living of the people has improved substantially during this period. They also expect this impressive growth to continue over the next five years. Which of the​ following, if​ true, will indicate that the country may not be able to maintain this average growth over the next few​ years?

The central bank announced its intention to take appropriate measures to ensure that inflation stays within control.

What is the difference between the consumer price index and the producer price​ index?

The consumer price index is an average of the prices of the goods and services purchased by the typical urban family of​ four, whereas the producer price index is an average of the prices received by producers of goods and services at all stages of the production process.

Firm​ X, a leading manufacturer of rubber tires in country​ A, caters to almost​ one-third of the domestic tire market. The country was hit by a recession last year that caused the national output growth to be negative. Simon​ Reeds, the CEO of firm​ X, feels that these fluctuations in the business environment are​ short-lived and expects the economy to recover very soon. In spite of the​ recession, Simon feels that the firm can actually invest in expanding its facilities as it has sufficient cash flows to continue its operation during the crisis period. The​ firm's marketing​ head, Sandra​ Jones, counters this by saying that the firm is already losing sales due to the recession and they should not increase costs further by making​ large-scale investments in the present climate. Which of the​ following, if​ true, would support the​ CEO's claim?

The government recently announced a plan to offer incentives to buyers in the car and household appliances market.

John​ Smith, a factory worker at an automobile plant in the city​ Detrigan, makes​ $25 per hour. His​ dad, Larry Smith who retired from a plant in the same city ten years​ back, was earning an average of​ $10 per hour at the time of retirement. Looking at the​ CPI, John concludes that a factory​ worker's purchasing power is lower now compared to ten years ago.​ Larry, however, does not agree that purchasing power has fallen. According to​ him, this conclusion cannot be drawn from such limited data. Which of the​ following, if​ true, would weaken​ Larry's claim that the purchasing power of an average factory worker has not​ fallen?

The total number of hours worked by an average factory worker has fallen over the years.

As the economy nears the end of an​ expansion, which of the following typically​ occurs?

The profits of firms will be falling. Interest rates are usually rising. Wages are usually rising faster than prices.

If inflation is unexpectedly​ high, borrowers will benefit and lenders will be harmed.

True

The producer price index​ (PPI) tracks the prices firms receive for goods and services at all stages of production.

True

What are the names of the following events in a business​ cycle? a. The high point of economic activity is called

a peak

The period between the high point of economic activity and the following low point is called

a recession

A government that collects more in taxes than it spends experiences

a budget surplus.

Narnia, a developed open​ economy, has been experiencing​ double-digit inflation and a decelerating output growth for the last four quarters. Jonathan Mathews and Ben​ Hall, two market​ analysts, are discussing the various measures that can be adopted by the concerned authorities to curb inflation and boost production in the economy. Jonathan thinks that the central bank should raise the nominal interest rate to control inflation.​ This, he​ feels, will also contribute to an increase in the aggregate supply of funds available for investment in the economy. Ben however disagrees. According to​ him, an increase in the nominal interest rate will lower​ investment, leading to a decline in aggregate production by firms.​ This, in​ turn, will increase the shortage in the economy and prices will rise further. ​Ben's claim that a higher interest rate will increase the shortage in the economy fails to recognize the possibility​ that:

a higher interest rate induces consumers to increase saving.

The Making the Connection gives examples of firms that prospered by expanding during recessions. As we have​ seen, some firms prosper by expanding during recessions. When firms expand during​ recessions, they

cannot be certain when recovery will occur and know they could experience prolonged losses.

An International Monetary Fund Factsheet makes the following observation regarding sound financial​ systems: ​"A country's financial​ system...provide[s] a​ framework...[for] supporting economic​ growth." ​ Do you agree with this​ observation? Briefly explain. A weak financial system LOADING... might make economic growth LOADING... ​difficult, since

capital​ investment, essential for rapid economic​ growth, is often financed by borrowed funds and an unstable financial system leads to difficulty attracting loanable funds.

The​ firm's observation is

consistent with economic theory explaining​ long-run economic growth.

Which of the following is not a reason that the economy is considered to have been more stable in the 1950dash-2007 period than in other​ periods?

continually falling oil prices

Holding all else​ constant, a federal government budget deficit will

decrease the supply of loanable funds and increase the equilibrium real interest rate.

Recessions cause the inflation rate to​ _________, and the unemployment rate to​ _________.

decrease; increase

Lower prices usually cause consumers to buy​ more, not less.​ However, in this​ case, consumers may

delay buying until prices fall​ further, so current lower prices would not have the ususal effect.

Purchases of which types of goods are business cycles most likely to​ affect?

durable goods

Industries that produce

durable goods are more affected by recessions than is the economy as a whole.

The financial system of a country is important for​ long-run economic growth because

firms need the financial system to acquire funds from households.

Businesses demand loanable funds because

firms need to borrow funds for new​ projects, such as building new factories or carrying out new research projects.

The size of the health care sector in a less developed country is smaller than the size of the health care sector of a developed country. In​ particular, the size of the health care sector in a developing country

grows with economic prosperity as life expectancy increases.

Households supply loanable funds because of the

interest income received from the borrowers.

The computation of the average annual growth rate of real GDP

is more complex when examining data for a long period of time than when examining data for only a few years.

Potential GDP

is the level of real GDP attained when all firms are producing at capacity.

The chapter explains that it is impossible to know whether a particular nominal interest rate is​ "high" or​ "low" because

it all depends on the inflation rate.

During the last half of the twentieth​ century, the U.S. economy experienced

long​ expansions, interrupted by relatively short recessions.

After​ 1950,

most economic expansions in the United States have been​ longer, and economic recessions have been shorter than previous recessions.

Since about​ 1950, year-to-year fluctuations in U.S. real GDP have been

much smaller than before that time and there have been fewer severe recessions.

The difference between a nominal variable and a real variable is that

nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.

During the spring of​ 2015, the United Kingdom experienced a brief period of deflation. According to an article in the Wall Street Journal​, ​"The U.K.'s history of sticky and​ hard-to-control inflation suggests that a short period of falling prices will be taken as a reprieve for​ consumers, not as a signal to defer​ purchases." ​ Consumers could see deflation as a​ "signal to defer​ purchases" because if deflation is expected to​ continue,

prices would be lower in the future.

The business consulting firm McKinsey​ & Company released a report on world economic growth that contained the observation​ "productivity needs to drive​ growth." ​ It is likely that McKinsey​ & Company was referring to growth in

real GDP per capita.

Which of the following is the best measure of the standard of living of the typical person in a​ country?

real GDP per person

​Long-run economic growth in the United States is best measured using

real GDP per​ capita, which has been trending strongly upwards over the past century.

A more cautious approach might be advisable in particular industries where

sales are particularly cyclical.

Potential GDP is

sometimes​ greater, sometimes​ less, and sometimes equal to actual real GDP.

Which of the following changes will ensure that an economy experiences sustained economic​ growth?

technological change

In its annual report for​ 2009, Corning noted declines in sales for most of its products. But it also noted that these declines were​ "offset somewhat by an increase in sales of Gorilla​ glass, a protective cover glass that is optimized for portable display devices. Sales of Gorilla glass have continued to increase as the Company moves to capitalize on market opportunities for this​ product." Gorilla glass is used on the screens of iPhones and many other portable electronic devices. Its sales may have been less affected by the business cycle than sales of some of the​ firm's other​ products, such as screens for LCD televisions or ceramics used in automobile emission​ systems, because

the demand for portable electronic devices was less affected than the demand for televisions and automobiles.

From a trough to a​ peak, the economy goes through

the expansionary phase of the business cycle.

In determining whether to borrow​ funds, firms compare the rate of return they expect to make on an investment with

the interest rate they must pay to borrow the necessary funds.

For a given positive inflation​ rate,

the nominal interest rate is always higher than the real interest​ rate, and the real interest rate may be positive or negative.

The difference between the nominal interest rate and the real interest rate is

the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.

The real interest rate equals

the nominal interest rate minus the inflation rate.

The BLS collects price statistics from traditional​ full-price retail​ stores, which do not reflect the prices some consumers pay by shopping at discount stores or on the Internet. This is a description of which​ bias?

the outlet bias

Computation of the CPI assumes that households buy the same market basket of products each month. For this​ reason, which one of the following factors is not relevant in calculating the​ CPI?

the quantities of the products households purchase in the current year

The two key factors that cause labor productivity to increase over time are

the quantity of capital per hour worked and the level of technology.

Changes in the CPI overstate the true inflation rate due to four​ "biases." If apple prices rise rapidly during the month while orange prices​ fall, consumers will reduce their apple purchases and increase their orange purchases. Which of the four biases is concerned with this consumer​ behavior?

the substitution bias

Which of the following factors determines the supply of loanable​ funds?

the willingness of households and governments to save

What is the best use of the rule of 70 among those listed​ below?

to judge how rapidly real GDP per capita is growing over long time periods

The unemployment rate

typically rises during a recession and after the recession has ended.

An article in the Economist​ notes, "For 60​ years, from 1770 to​ 1830, growth in British​ wages, adjusted for​ inflation, was imperceptible because productivity growth was restricted to a few​ industries." Not until the late nineteenth​ century, when productivity​ "gains had spread across the whole​ economy," did a sustained increase in real wages begin. You can expect there to be a close relationship between productivity gains and increases in real wages because

unit costs fall when more goods are produced per​ worker, so prices can​ fall, thereby increasing the value of real wages.

During​ recessions, the inflation rate

usually decreases.

Of the eight categories in the CPI market​ basket, which three categories make up more than 75 percent of the​ basket?

​housing, transportation, and food