ECO 210 Final Exam

Which of the following does not illustrate the idea of creative destruction?

a firm has to destroy some of the expired products in its inventory.

In a command system,

a government-appointed planning board makes production and allocation decisions.

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

A college graduate using the summer following graduation to search for a job would best be classified as:

a part of frictional unemployment

Which of the following would not shift the demand curve for beef?

a reduction in the price of cattle feed

Which of the following institutional structures is most likely to promote growth?

a well-enforced system of patents and copyrights

Which of the following is not a supply factor in economic growth?

aggregate expenditures of households, businesses, and government

Two major virtues of the market system are that it

allocates resources efficiently and allows economic freedom.

In terms of aggregate supply, the difference between the long run and short run is that in the long run,

nominal wages and other input prices are fully responsive to price-level changes

Discretionary fiscal policy refers to

intentional changes in taxes and government expenditures made by Congress to stabilize the economy.

The value of money varies

inversely with the price level

A nation's GDP

is the dollar value of all final output produced within the borders of the nation.

Other than its main role of controlling the supply of money, the functions of the Federal Reserve include

issuing Federal Reserve Notes, providing for check collection, and supervising the operation of banks.

The four factors of production are:

land, labor, capital, and entrepreneurial ability

What causes the Production possibilities curve to be bowed out?

law of increasing opportunity costs increasing causes the graph to expand

If investment decreases by $20 billion and the economy's MPC is 2, the aggregate demand curve will shift:

leftward by $40 billion at each price level

Growth is advantageous to a nation because it:

lessens the burden of scarcity

In a repo transaction, the Fed _______ money; in a reverse repo transaction, the Fed _______ money.

loans, borrows

Realized economic growth is best represented by a

move from X on AB to Y on CD

An increase in quantity supplied is depicted by a:

move from point y to point x.

Determine whether the statement is positive or normative The federal government should increase income taxes on the wealthy to reduce the budget deficit

normative

Determine whether the statement is positive or normative The unemployment rate is too high

normative

What are the two factors that will create economic growth

Increase in technology and increase in capital

Consumer expenditures. $4000 Depreciation 300 Federal Government purchases of goods and services 250 State and local government's purchases 350 Investment 700 Net Interest 150 Exports 300 Imports 320 Transfer payments 75 Dividends 0 Social Insurance taxes 222 What is the value of net domestic product?

$4,980

Consumer expenditures. $4000 Depreciation 300 Federal Government purchases of goods and services 250 State and local government's purchases 350 Investment 700 Net Interest 150 Exports 300 Imports 320 Transfer payments 75 Dividends 0 Social Insurance taxes 222 What is the value of GDP?

$5,280

Assume that a hypothetical economy with an MPC of 0.75 is experiencing severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $30 billion? How large a tax cut would be needed to achieve the same increase in aggregate demand? b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt (i.e., maintaining the budget balance at its current value).

1/1-.75= 1/.25= 4 a. 30/4= 7.5 million, (.75/.25=3) 30/3= 10 million b.30x4= 120-30= 90 million, 30 million

Unemployed 10 Total Population 145 Employed 90 Discouraged Workers 5 The Unemployment rate is

10/100= 10 percent

Suppose an economy's real GDP is $100,000 in year 1 and $110,000 in year 2. What is the growth rate of its GDP. Assume that population was 200 in year 1 and 205 in year 2. What is the growth rate in GDP per capita?

110,000-100,000/100,000= real GDP growth rate= 10% 110,000/205= 536.59-500= 36.59/500x100= real GDP growth rate per capita= 7.32%

Assets Liabilities and Net Worth Reserves $27,000 Checkable Deposits $110,000 Loans 50,000 Stock Shares 200,000 Securities 33,000 Property 200,000 Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. This bank can safely expand its loans by a maximum of

110,000x.2= 22,000, Excess Reserves= 27,000-22,000= 5,000

The length of a complete business cycle varies between

2-3 years and 15 years

If a nation's real GDP is growing by 3.5 percent per year, its real GDP will double in:

70/3.5= 20 years

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is:

9-5= 4x2= 8 percent

If the demand curve for product B shifts to the right as the price of product A declines, then:

A and B are complementary goods

Which set of events would most likely decrease aggregate demand?

An increase in personal income tax rates

Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation the production capacity in economy:

C is growing more rapidly than economy B.

Which of the following statements is most accurate about the prospects for poorer countries catching up with richer countries?

Catching up is possible, as poorer countries tend to grow faster than richer countries.

What happens to the market of ramen noodles, an inferior good, when consumer's income increases?

Demand decreases, Price decreases, quantity decreases

What happens to the market for movie theatre popcorn when the price of movie tickets increases?

Demand decreases, Price level decreases, Quantity decreases

The dollar depreciates relative to the euro

Demand increases, both price level and output increase

Real GDP refers to:

GDP data that have been adjusted for changes in the price level.

Determine whether the statement is Macro or Micro More workers are being hired by the nation's businesses

Macro

Determine whether the statement is Macro or Micro The U.S. economy grew at an annual rate of 4.2 percent last year

Macro

Determine whether the statement is Macro or Micro New discoveries in medicine are leading to strong growth in the biotech industry

Micro

List the four tools of monetary policy and explain how they should be used to eliminate a recession.

Open Market Operations Buy Securities Required Reserve Ratio Decrease Discount Rate Decrease Interest on Reserves Decrease

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

Which of the following transactions would be included in GDP?

Peter buys a newly constructed house

Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is:

Structural

What happens to the market for bicycles when labor costs increase?

Supply decreases, Price Level increases, Quantity decreases

Congress passes new laws significantly increasing the regulation of business

Supply decreases, Price level increases, output decreases

A new technology increases worker productivity

Supply increases, Price level decreases, Output increases

What happens when flat screen TVs when new producers enter the market?

Supply increases, price decreases, quantity increases

Explain the links between changes in the nation's money supply, the interest rate, investment spending, aggregate demand, real GDP, and the price level.

The links between changes would be if the money supply rose, the interest rate would decrease, investment spending and aggregate demand would rise as well as the real GDP and price level. If the money supply decreased, then it would be vice versa from when the money supply increases.

List the 3 goals of monetary policy.

The three goals are economic growth, achieve full employment, and price stability.

In January, the interest rate is 5 percent and firms borrow $55 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $30 billion to $60 billion. That drives the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?

There is a crowding-out effect of $25 billion.

Unemployed 10 Total Population 145 Employed 90 Discouraged Workers 5 The labor force is

Unemployed+Employed= 100

Which of the following is not one of the five fundamental questions?

What prices will be charged for goods and services?

Year Value of Market Basket CPI Inflation Rate 1 500 ? 2 575 ? ? 3 675 ? ?

Year 1 CPI= 500/500x100= 100 Year 2 CPI= 575/500x100= 115, Inflation Rate= 115/100=15% Year 3 CPI= 675/500X100=135, Inflation Rate= 135/115=17.4%

Find real GDP for each year in base year prices Year Nominal GDP Price Index Real GDP 1 $117 120 ? 2 149 96 ? 3 178 112 ?

Year 1: 117/120 x 100= 97.5, Year 2: 149/96 x 100= 155.2, Year 3: 178/112 x 100= 159

Year Market Value of Basket of Goods Price Index 1 112 100 2 144 ? 3 161 ?

Year 2= 144/112 x 100= 128.5 Year 3= 161/112 x 100= 143.75

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

Suppose the Federal Reserve sets the reserve requirement at 10 percent, banks hold no excess reserves, and no additional currency is held. a. What is the money multiplier? b. By how much will the total money supply change if the Federal Reserve changes the amount of reserves by -$60 million? c. Suppose the Federal Reserve wants to decrease the total money supply by $500 million. By how much should the Federal Reserve change reserves to achieve this goal?

a. 1/.01= 10 b. 10x-60= -600 million c. -500/10= -50 million

Federal Reserve notes in circulation $700 Money market mutual funds (MMMFs) held by individuals. 400 Corporate bonds 300 Iron ore deposits 50 Currency in commercial banks 110 Savings deposits, including money market deposit accounts (MMDAs) 140 Checkable deposits 1,600 Small-denominated (less than $100,000) time deposits 100 Coins in circulation 40 a. What is M1 in Ironmania? b. What is M2 in Ironmania?

a. 700+1600+40= 2,340 b. 2340+140+400+100= 2,980

Suppose the Federal Reserve wants to increase the money supply by increasing the lending potential of commercial banks. Assume the current reserve requirement for commercial banks is 16 percent. Now suppose the Fed wants the lending potential to increase by $200 billion, and it plans to use open-market operations to accomplish this goal. a. If sales or purchases of government securities are the only instrument used in the open-market operations, the Fed will need to ? government securities in the total amount of? b. The Fed may also opt to use some amount of ? to effectively ? commercial banks rather than permanently transfer ownership of the securities in order to obtain its goal.

a. buy, 200x.16= 32 billion b. repo, lend money to

The total demand for money curve will shift to the right as a result of

an increase in nominal GDP.

Inflation is undesirable because it:

arbitrarily redistributes real income and wealth.

Critics of economic growth:

argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.

One of the strengths of monetary policy relative to fiscal policy is that monetary policy

can be implemented more quickly.

The rationing function of prices refers to the:

capacity of a competitive market to equate the quantity demanded and the quantity supplied.

Assume that the economy is in a recession and there is a budget deficit. A strict balanced-budget rule that would require theFederal government to balance its budget during a recession would be

contractionary and worsen the effects of the recession.

Suppose that there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would

decline

A shift to the right in aggregate supply might be caused by

decrease in the prices of domestic resources

An increase in the legal reserve ratio

decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier.

Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is

directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

Economic growth is best defined as an increase in

either real GDP or real GDP per capita.

Four phases of the business cycle

expansion, peak, recession, trough

The safest way for an individual to leave a burning theater is to run for the nearest exit; it is therefore the best means of escape for a large audience. This assertion illustrates the:

fallacy of composition

When the Fed sells government securities in the open market, its intent is to try to increase aggregate demand.

false

The interest rate that banks charge one another for the loan of excess reserves is the

federal funds rate

The natural rate of unemployment is the

full-employment unemployment rate

Part-time workers who want full-time work are counted as:

fully employed, and therefore the official unemployment rate may understate the level of unemployment

Which of the following activities is excluded from GDP, causing GDP to understate a nation's production?

goods and services produced in the underground economy

The collateral used for repos and reverse repos is (are)

government bonds

Which of the following is not a typical characteristic of a market system?

government ownership of most property resources

unanticipated inflation

helps borrowers and hurts lenders

On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by

horizontally adding the transactions and the asset demand for money.

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:

increase U.S. imports and decrease U.S. exports

In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should

increase tax rates and/or reduce government spending.

A decrease in the reserve requirement causes the size of the monetary multiplier to

increase, the amount of excess reserves in the banking system to increase, and the money supply to increase.

Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates:

opportunity costs

Ceteris Paribus means

other things being equal

During a period of hyperinflation:

people tend to hold goods rather than money

Determine whether the statement is positive or normative The national economy grew at a 3.2 percentage rate in the last quarter

positive

Allocative efficiency is concerned with:

producing the combination of goods most desired by society.

The two conflicting goals facing commercial banks are:

profit and liquidity

The reason for the Fed being set up as an independent agency of government is to

protect it from political pressure

Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and potatoes are a consumer substitute for bread, we would expect the price of wheat to:

rise, the supply of bread to decrease, and the demand for potatoes to increase.

In 2010, Taylor's nominal income rose by 7.6 percent and the price level rose by 1.4 percent. We can conclude that Taylor's real income

rose approximately by 6.2 percent

The Federal Open Market Committee (FOMC) of the Federal Reserve System is primarily for

setting the Fed's monetary policy and directing the purchase and sale of government securities.

cost-push inflation

shifts aggregate supply to the left

Demand Pull Inflation

shifts demand to the right

Does a Price Ceiling create a shortage or a surplus?

shortage because it falls below equilibrium

Money functions as

store of value, unit of account, medium of exchange

In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of

the liquidity trap.

Mia wants to buy a book. The economic perspective suggests that Mia will buy the book if:

the marginal benefit of the book is greater than its marginal cost

Research for industrially advanced countries indicates that

the more independent the central bank, the lower the average annual rate of inflation.

If the aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that

the price level is sticky and recession has occurred

Which of the following is not economic investment?

the purchase of 100 shares of AT&T by a retired business executive

Economics may best be defined as:

the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity

When the price of Nike soccer balls fell, Ronaldo purchased more Nike soccer balls and fewer Adidas soccer balls. Which of the following best explains Ronaldo's decision to buy more Nike soccer balls?

the substitution effect

Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction,

the supply of money is increased by $5,000.

The presence of market failures implies that

there is an active role for government, even in a market system.

If an economy is being "productively efficient", then that means the economy is

using the least costly production techniques