ECO 202 Final

Commodity money is:

a good used as a medium of exchange that has other uses.

Gross domestic product is defined as:

consumer spending + government purchases + investment spending + exports - imports.

An aggregate output level lower than potential output means there will be:

high unemployment.

If workers' nominal wages have risen by 50% over 10 years and prices have increased by 40% in that same period, then we can safely conclude that the amount of goods and services workers can buy has:

increased.

If there is an inflationary gap, nominal wages _____, and the _____ curve shifts _____ until the economy reaches long-run equilibrium

rise; short-run aggregate supply; left

If real GDP falls while nominal GDP rises, then prices on average have:

risen

All else equal, a nation that has a high rate of _____ will have a high rate of _____ and therefore a high growth rate of _____ capital.

savings; investment; physical

. In the long run, the aggregate price level has:

no effect on the quantity of aggregate output

An example of the frictionally unemployed is a(n):

real estate agent who leaves a job in Texas and searches for a similar higher-paying job in California.

Reducing taxes in response to a recession is an example of _____ policy.

. fiscal

The modern macroeconomic tools used by the government are _____ policy and _____ policy.

. fiscal; monetary

The short-run aggregate supply curve slopes upward because a _____ aggregate price level leads to _____.

. higher; higher output, since most production costs are fixed in the short run

Unexpected inflation _____ lenders and _____ borrowers.

. hurts; benefits

Because of diminishing returns to capital, doubling the amount of physical capital available for one worker to use will _____ output by _____ a factor of two

. increase; less than

In the short run, a positive demand shock _____ aggregate output and _____ the aggregate price level.

. increases; increases

When the government invests in building roads, ports, and a reliable power grid, it is investing in a nation's:

. infrastructure.

A firm does NOT want to borrow money for a project when the:

. interest rate is higher than the rate of return on the project.

Suppose that the stock market crashes, which causes a large decrease in the value of many households' financial assets. The most likely outcome is a _____ the aggregate demand curve.

. leftward shift of

When the Fed decreases the reserve requirement, banks lend _____ of their deposits, which leads to a(n) _____ in the money supply.

. more; increase

The nominal interest rate equals the real interest rate:

. plus the rate of inflation.

Investment spending is spending on:

. productive physical capital.

According to the aggregate demand curve, when the aggregate price level _____, the quantity of aggregate output _____.

. rises; demanded falls

Long-run growth is the sustained upward trend in:

aggregate output per person over several decades.

The aggregate supply curve shows the relationship between the _____ and the quantity of aggregate output supplied.

aggregate price level

If during several quarters, the economy is simultaneously increasing its levels of output and employment, then the economy is in a(n):

expansion

Domestically produced goods and services sold to people in other countries are known as:

exports.

Setting government spending and taxes in an effort to change overall spending in an economy is use of:

fiscal policy.

Anna recently moved to Boston with her husband Joe, who has a new job as an economics professor at Harvard. Anna is an experienced surgeon who is interviewing with several hospitals in Boston. Anna is:

frictionally unemployed.

In a closed economy, all investment spending must come from:

national savings.

Purchases of _____ are included in GDP.

new capital goods

In the long run, the aggregate price level has:

no effect on the quantity of aggregate output

The labor force is the total

number of people who are employed or unemployed.

Investment spending is spending on:

productive physical capital

During a recession:

unemployment increases and the growth rate of real GDP decreases.

Consider an economy that produces only DVDs and DVD players. Last year, 10 DVDs were sold at $20 each and 5 DVD players were sold at $100 each, while this year 15 DVDs were sold at $10 each and 10 DVD players were sold at $50 each. Real GDP this year using last year as the base year is:

$1,300.

Suppose a consumer buys a Perfect Pizza frozen cheese pizza at the grocery store for $10. Perfect Pizza purchased the dough and tomato sauce from a food-processing company for $2 and bought the cheese for $1. It sold the pizza to the store for $5. How much has GDP increased?

$10

If the consumer price index is 120 in year 1 and 150 in year 2, then the rate of inflation from year 1 to year 2 is:

. 25%.

If the actual unemployment rate is 7% and the cyclical unemployment rate is 2%, then the natural rate of unemployment is:

. 5%

Which factor will shift the short-run aggregate supply curve to the RIGHT?

. a widespread decrease in commodity prices

A recessionary gap occurs if:

. actual real GDP is less than potential output.

. GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. How much is investment spending?

$2 trillion

Suppose that there is no trade and no government in a small economy. GDP is $25 trillion, and consumption spending is $18 trillion this year. What is the level of private saving?

$7 trillion

. In the Republic of Sildavia, a market basket of goods and services cost $130 in 2009, $140 in 2010, and $160 in 2011. Based on this information and considering 2009 to be the base year, the price index in 2011 was:

123.07.

The Republic of Livonia has an adult population of 100 million; 60% of Livonia's population is employed, and 10% of the people are unemployed. The labor force participation rate in Livonia is _____%.

70

Which statement is an example of investment spending in macroeconomics?

A Domino's Pizza store has purchased a new pizza oven.

In a closed economy, investment spending, I, must equal:

GDP - C - G.

The Federal Reserve's main assets are:

U.S. Treasury bills.

The interest rate effect of a change in the aggregate price level occurs when:

a higher price level decreases the purchasing power of money, resulting in an increase in the interest rate.

In an open economy, government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, GDP was $100 billion, and investment spending was $10 billion. As a result, there was:

a net capital inflow of $10 billion.

A nation whose value of imports exceeds its value of exports is said to have:

a trade deficit.

Which factor will shift the short-run aggregate supply curve to the RIGHT?

a widespread decrease in commodity prices

Human capital is:

a. the improvement in labor made possible by education and knowledge that is embodied in the workforce.

John Maynard Keynes believed that the government should:

actively try to mitigate the effects of recessions by using fiscal and monetary policies.

When the economy is producing output above the potential, it has:

an inflationary gap.

The term liquidity means that the:

asset is readily convertible to cash without much loss of value.

In periods of unexpected inflation:

borrowers benefit since they repay their loans in dollars with lower real value.

Samantha asks her employer for a 5% raise for the coming year. If the inflation rate during the next year is 5.5%, then her real wage will:

decrease by 0.5%.

If the economy is at potential output and the Fed decreases the money supply so that actual output is less than potential output, eventually nominal wages will_____ and short-run aggregate supply will _____.

decrease; increase

The annual percentage change in the aggregate price level is negative when there is:

deflation.

Value added in national income accounts refers to the:

difference between the price and the value of inputs purchased.

The aggregate production function exhibits _____ returns to physical capital

diminishing

The demand for loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity demanded of loanable funds.

downward; investors; increasing

A business will want to borrow to undertake an investment project when the rate of return on that project is _____ rate

higher than the interest

A business will want to borrow to undertake an investment project when the rate of return on that project is _____ rate.

higher than the interest

A government policy that does NOT promote economic growth is:

implementing a monetary policy that increases inflation

One difference between a closed and an open economy is that:

in the latter, foreign savings complement domestic savings in financing investment spending.

Shoe-leather costs are the:

increased cost of transactions due to inflation.

When the economy is in a recessionary gap, the government can improve economic outcomes by:

increasing the money supply, lowering the interest rate, increasing investment spending and consumption spending, and thus increasing aggregate demand.

A nation's exports minus its imports:

is net exports.

The short-run aggregate supply curve will shift to the:

left if nominal wages increase.

A decrease in the level of business opportunity will generally _____ the loanable funds demand curve.

left-shift

Contractionary fiscal policy shifts the aggregate demand curve to the _____ and is used to close a(n) _____ gap.

left; inflationary

According to the convergence hypothesis, differences in real GDP per capita among countries tends to narrow over time because countries that start with a _____ real GDP per capita tend to have _____ growth rates.

lower; higher

You are choosing whether to purchase a bond or stock. If you purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk.

lower; lower

During rapid price inflation, firms must frequently change prices. The cost of changing listed prices is known as the _____ cost.

menu

. Changing interest rates is an example of _____ policy.

monetary

To be officially unemployed, a person must:

not have a job and must have looked for work in the past four weeks.

Since the 1960s, nations like South Korea have been a part of the so-called East Asian economic miracle because:

of the combination of rapid technological progress, high savings rates, and rapid improvement in human capital.

The aggregate supply curve shows the relationship between the aggregate price level and the aggregate:

output supplied.

. In a closed economy government spending was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion this year. Investment spending was $10 billion. As a result:

private savings were $20 billion.

The four main types of financial assets do NOT include:

real estate.

If government increases income tax rates, the aggregate demand curve is likely to:

shift to the left.

Suppose that consumer expectations improve. The aggregate demand curve will undergo a:

shift to the right.

. Sam, who is 55 years old and has been a steelworker for 30 years, is unemployed because the steel plant in his town closed and moved to Mexico. Sam is _____ unemployed.

structurally

If private savings increase, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____.

supply of; increase; decrease; increase

A budget surplus exists when:

taxes are greater than government spending.

Which curve is easiest to shift with government policy?

the aggregate demand curve

Which item is included in GDP?

the purchase of a ticket to a Lady Gaga concert

Capital inflow equals:

the total inflow of foreign funds minus the total outflow of domestic funds

The most widely used indicator of the conditions in the labor market is the:

unemployment rate.

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

upward; savers; decreasing

When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____.

wealth; aggregate demand; downward

Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which factor MOST likely caused these changes?

a decrease in short-run aggregate supply

The MOST important driver for economic growth appears to be:

technological progress.

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. How much is private saving?

$3.5 trillion

In an open economy, GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. How much is investment spending?

$4 trillion

Suppose that Mr. Green Jeans sells $5,000 of wheat to Big Ben Bakery. Big Ben uses the wheat to make flour and then hamburger buns, which it sells to Hamburger Heaven for $11,000. Hamburger Heaven also buys $20,000 of beef from a rancher. Hamburger Heaven uses the beef and buns to make 10,000 hamburgers, which are sold for $5 each. How much do these transactions add to GDP?

$50,000

. Consider an economy that produces only DVDs and DVD players. If 10 DVDs are sold at $20 each and 5 DVD players are sold at $100 each, then nominal GDP is:

$700

Suppose that, in the base period, a college student buys 20 gallons of gasoline at $2 per gallon, 2 CDs for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is $7.50. The price index for the second month is:

. 106.4.

Real GDP is nominal GDP adjusted for:

. changes in prices.

. If the economy is in an inflationary gap, the Federal Reserve should conduct _____ monetary policy to _____ aggregate demand.

. contractionary; decrease

To fight inflation, the Federal Reserve should conduct _____ monetary policy to _____ interest rates, which will shift the aggregate demand curve to the _____.

. contractionary; raise; left

Suppose that the economy is in an inflationary gap. To move equilibrium aggregate output closer to the level of potential output, the BEST fiscal policy option is to:

. decrease government purchases.

If interest rates rise, there will be a(n):

. decrease in aggregate demand.

Suppose that the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the BEST fiscal policy option is to:

. decrease taxes.

If the price level rises by 10%, the purchasing power of $10,000 will:

. decrease to $9,000.

If the economy is at potential output and the Fed increases the money supply, in the short run interest rates will likely:

. decrease.

Contractionary monetary policy entails _____ the money supply, _____ interest rates, and _____ aggregate demand

. decreasing; increasing; decreasing

The money demand curve is _____ because a lower interest rate _____ the opportunity cost of holding money.

. downward sloping; decreases

Given a recessionary gap, the Federal Reserve will use monetary policy to _____ real GDP and _____ aggregate demand.

. increase; increase

As an inflationary gap self-corrects, the equilibrium price level _____ and the equilibrium real output _____.

. rises; decreases

The Federal Open Market Committee has decided that the federal funds rate should be 2% rather than the current rate of 1.5%. The appropriate open market action is to _____ Treasury bills to _____ money _____.

. sell; decrease; supply

Potential output is the level of real GDP that:

. the economy would produce if all prices, including nominal wages, were fully flexible.

The aggregate supply curve shows the relationship of prices to:

. the quantity of output producers are willing to provide.

If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its unemployment rate is:

10%

In the Republic of Sildavia, a market basket of goods and services cost $130 in 2009, $140 in 2010, and $160 in 2011. Based on this information and considering 2009 to be the base year, the price index in 2011 was:

123.07.

If the actual unemployment rate is 7% and the natural rate is 5%, then the cyclical rate is:

2%

Suppose that the market basket for the university student price index (USPI) consists of 5 textbooks and 100 gallons of gasoline. In 2010, the base year for this index, textbooks cost $50 each and gasoline costs $1 per gallon. In 2011, textbooks cost $80 each and gasoline costs $3 per gallon. The USPI for 2011 is:

200.

Which is MOST likely a macroeconomic, not microeconomic, question?

Is the national unemployment rate rising or falling?

In 2008-09, the U.S. government tried to help the economy through one of the worst economic slumps ever. The policies used are based on _____ theory

Keynesian

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

SRAS and aggregate demand.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

SRAS and aggregate demand.

Suppose the government increases taxes by more than is necessary to close an inflationary gap. What is the MOST likely result?

The economy will move into a recession.

. Investment spending in macroeconomics refers to:

adding to physical capital.

According to the liquidity preference model:

an increase in the money supply lowers the equilibrium rate of interest.

Suppose that the economy is in long-run equilibrium at full employment levels of real GDP. In the long run, if the money supply increases, we would expect _____ in the price level and _____ in real GDP.

an increase; no change

A relatively low saving rate affects productivity growth by:

causing a shortage of funds for investment in physical capital.

Monetary policy attempts to affect the overall level of spending through:

changes in the quantity of money and the interest rate.

Menu costs of inflation are the:

costs associated with businesses changing prices.

The budget balance equals:

taxes minus government spending

The budget balance equals:

taxes minus government spending.

Technological progress allows workers to produce more:

even when the amount of physical capital and human capital do not change.

If during several quarters, the economy is simultaneously increasing its levels of output and employment, then the economy is in a(n):

expansion.

In the long run, nominal wages are:

flexible, because contracts and informal agreements are renegotiated in the long run.

Aggregate demand will shift to the RIGHT if:

government purchases increase.

Fiscal policy refers to changes in _____ to affect overall spending in the economy:

government spending and taxation

The economy is in a recession. The desired FISCAL policy is a(n):

increase in government purchases of goods and services.

Potential output:

is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible.

An example of human capital is a person's:

job skills.

Monetary neutrality implies that in the long run:

monetary policy does not affect the level of economic activity.

If interest rates are at the zero lower bound:

monetary policy is ineffective.

Stabilization policies have:

reduced the economic fluctuations caused by demand shocks but have not been effective against supply shocks.

Crowding out hampers the economy by:

reducing private investment spending on physical capital.

Financial markets make borrowing large amounts of money easier because they simplify negotiation between borrowers and lenders. This example illustrates:

reducing transaction costs

If the price level and nominal GDP both doubled, then real GDP would:

remain unchanged.

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.

rise; remain stable

Suppose that productivity increases as workers' health improves. This increase in productivity will:

shift the short-run aggregate supply curve to the right.

Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a:

shift to the left.

An increase in government spending, all other things unchanged, will cause the aggregate demand curve to: a. become positively sloped.

shift to the right.

Suppose that political instability in the Middle East interrupts the supply of oil. The _____ curve shifts _____, output _____, and prices _____.

short-run aggregate supply; left; decreases; increase

A natural disaster that destroys part of a country's infrastructure is a type of negative _____ shock and therefore shifts the _____ curve to the _____.

supply; short-run aggregate supply; left

Human capital is:

the improvement in labor made possible by education and knowledge that is embodied in the workforce.

Nominal wages are sticky because:

wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant.

Nominal wages are sticky because:

wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant.

The aggregate demand curve is negatively sloped because of the:

wealth effect of an aggregate price level change.