ECO 210 EXAM 2

True or False. Lenders are helped by unanticipated inflation.

False

True or False? As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations.

False

How does the purchasing power of money relate to the price level?

It is inversely related to the price level

True or false: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply."

True, but the magnitude of the effect on unemployment depends on the economic situation.

During the recession of 2007-2009, the U.S. federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

Yes

inflation

reduces the purchasing power of the dollar.

The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level.

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A 12 percent increase in nominal wages (with no change in productivity).

Aggregate supply will decrease .

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output.

Aggregate supply will decrease .

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A sizable increase in labor productivity (with no change in nominal wages).

Aggregate supply will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? The complete disintegration of OPEC, causing oil prices to fall by one-half.

Aggregate supply will increase .

Cost-push inflation occurs in the presence of __________.

rising per-unit production costs

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent.

Recognition Lag

Even though the United States has an unemployment compensation program that provides income for those out of work, should we still worry about unemployment?

Yes, because the unemployment compensation program merely gives the unemployed enough funds for basic needs. Correct

Match the following descriptions with the correct aggregate supply curve. Long run

output is fixed; a vertical line

In sequential order, the four phases of the business cycle are

peak, recession, trough, and expansion.

Rapid inflation can undermine money's ability to perform its functions. During periods of runaway inflation

people often revert to barter because money fails as a medium of exchange.

A political business cycle is the idea that

politicians are more interested in reelection than in stabilizing the economy.

Government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both

What type of tax system would have the most built-in stability?

Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill.

Administrative Lag

Economists agree that __________ inflation reduces real output.

cost-push

The type of inflation that is more likely to be associated with a negative GDP gap is

cost-push inflation

If there is an increase in the unemployment rate, the size of the labor force

could increase or decrease.

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. A recession causes a local factory to lay off 30 workers.

cyclical unemployment

The losers from inflation are those with

fixed incomes in nominal terms.

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Tim just graduated from college and is looking for a job.

frictional unemployment

The problem of time lags in enacting and applying fiscal policy is

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? The general expectation of coming rapid inflation.

Aggregate demand will increase

Who gains from inflation?

Borrowers

What is the largest component of M1?

Checkable deposits

Which of the following would help a government reduce an inflationary output gap?

Decreasing government spending; raising taxes

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? A decrease in aggregate demand.

The price level does not change, but real output declines

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? Equal increases in aggregate demand and aggregate supply.

The price level does not change, but real output increases.

What "backs" the money supply in the United States?

There is no concrete backing to the money supply in the United States.

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because

a downsloping, single-product demand curve assumes constant prices such that changes in income cause a substitution of a now relatively cheaper product for those whose prices have not changed.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes

The crowding-out effect is

a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending

Match the following descriptions with the correct aggregate supply curve. Short run

an upsloping curve; output prices are flexible, but input prices are fixed

Which of the following will shift the aggregate supply curve to the right?

business taxes fall; a new networking technology increases productivity all over the economy

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A stock market crash reduces people's wealth.

demand decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Consumers become more pessimistic about the economy.

demand decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Government spending increases.

demand increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The United States enters into an arms race with China, resulting in a significant increase in military spending.

demand increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The spread of democracy around the world increases consumer confidence in the United States.

demand increases

The type of inflation that is more likely to be associated with a positive GDP gap is

demand-pull inflation

The three basic functions of money are

medium of exchange, unit of account, and store of value

The nominal interest rate

minus the inflation rate is the real interest rate

Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession because

net tax revenue falls and transfer payments rise during a recession, so balancing the budget would require lowering transfer payments and raising taxes.

Seasonal variations and long-run trends complicate the measurement of the business cycle because

normal seasonal variations do not signal boom or recession.

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India.

structural unemployment

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Thousands of bus and truck drivers permanently lose their jobs to self-driving vehicles.

structural unemployment

The Bureau of Labor Statistics (BLS) calculates the inflation rate from one year to the next by

subtracting the CPI of the previous year from the CPI of the most recent year, and then dividing by the CPI of the previous year.

Which of the following will shift the aggregate demand curve to the left?

the government raises corporate profit taxes; interest rates rise

If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then

the government would have to use tax revenues or go deeper into debt.

The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect.

The unemployment rate that is consistent with full employment is __________.

the natural rate of unemployment

The unemployment rate is defined as

the number of unemployed persons divided by the labor force. Correct

The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables because

these goods last, so that purchases can be postponed.

A positive unemployment rate—more than zero percent—is fully compatible with full employment because at full employment,

unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs Correct

The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level.

The length of a complete business cycle

varies greatly in duration and intensity.

An increase in your nominal income and a decrease in your real income might occur simultaneously if

your nominal income increases less than the cost of living increases.

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A major increase in spending for health care by the federal government.

Aggregate demand will increase .

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A reduction in interest rates.

Aggregate demand will increase .

In the United States, who is responsible for maintaining money's purchasing power?

Board of Governors of the Federal Reserve System

Which of the components of M1 is legal tender?

Currency

What are the components of the M1 money supply?

Currency in circulation and checkable deposits

Which of the following statements is true?

Deflation means that the price level is falling, whereas with inflation overall prices are rising.

True or False? The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.

False

True or False? The total public debt is more relevant to an economy than the public debt as a percentage of GDP.

False

What near-monies are included in the M2 money supply?

Noncheckable savings deposits, money market deposit accounts, small time deposits, and money market mutual fund balances

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

Operational Lag

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

Operational Lag

Why is the face value of a coin greater than its intrinsic value?

People would sell it for its intrinsic value

What determines the value (domestic purchasing power) of money?

People's willingness to accept it in exchange for goods and services

Who measures the labor force, and how is it defined?

The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand that exceeds an increase in aggregate supply.

The price level increases somewhat, with a relatively large change in output.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? A decrease in aggregate supply, with no change in aggregate demand.

The price level rises and real output decreases.

Assume that (a) the price level is flexible upward but not downward and (b) the economy is currently operating at its full-employment output. Other things equal, how will each of the following affect the equilibrium price level and equilibrium level of real output in the short run? An increase in aggregate demand.

The price level rises rapidly and there is little change in real output.

True or False? An internally held public debt is like a debt of the left hand owed to the right hand

True

The Council of Economic Advisers (CEA) advises the president on

economic matters and provides recommendations for discretionary fiscal policy action

Hyperinflation might lead to a severe decline in total output if

everyone starts speculating and searching for ways to avoid inflation

Demand-pull inflation occurs when

prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A hurricane destroys manufacturing plants.

supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A revolution in Iran results in a significant reduction in the world's supply of oil.

supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Employers are required to provide paid sick leave to part-time as well as full-time employees.

supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A new computer chip is developed that is faster and cheaper than previous chips.

supply increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Manufacturing firms expect steel prices to decrease significantly.

supply increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Technological changes enable workers to be more productive.

supply increases

Built-in (automatic) stabilizers work by changing __________ so that changes in GDP are reduced.

taxes and government payouts

Each member of the Board of Governors of the Federal Reserve System is selected by

the U.S. president and confirmed by the Senate

Match the following descriptions with the correct aggregate supply curve. Immediate short run

the price level is fixed, a horizontal line

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A widespread fear by consumers of an impending economic depression.

Aggregate demand will decrease .

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? An increase in exports that exceeds an increase in imports (not due to tariffs).

Aggregate demand will increase

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A 10 percent across-the-board reduction in personal income tax rates.

Aggregate demand will increase .