ECO216 Exam 3 Study Guide

Which of the following is an example of foreign direct​ investment?

- A US company opens a factory in India. - A Chinese company opens a factorty in Nigeria that is jointly owned with a Nigerian company.

Which of the following key factors can help explain the Great Recession of 2007-​2009?

- An increase in mortgage defaults, negatively impacting banks. - A reduction in consumer wealth, curtailing spending. - A reduction in new home construction, leading to a decrease in labor demand. - A fall in housing prices.

What could explain why a decrease in taxes could lead to a​ less-than-proportionate increase in​ output?

- Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. - As a result of diminishing returns to current​ consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once.

How do expansionary policies differ from contractionary​ policies?

- Expansionary policies seek to increase economic growth and increase​ employment, while contractionary policies seek to reduce the risk of excessive price inflation. - Expansionary policies seek to shift the labor demand curve to the​ right, while contractionary policies seek to shift it to the left. - Expansionary policies seek to reduce the severity of​ recessions, while contractionary policies seek to slow down the economy when it grows too fast.

According to the Taylor​ rule, the Federal Reserve should raise the federal funds rate when the​ ____________. ​

- Fed's inflation rate target falls. - inflation rate rises. - ​Fed's long-run target for the federal funds rate rises. - output gap rises.

Which of the following would likely contribute to business cycle fluctuations?

- Improvements to AI software that increase assembly line productivity significantly - The fear of an impending war - The Fed deciding to contract M2 via open market operations

What are the important mechanisms that reverse the effects of a recession in a modern​ economy? ​

- Labor demand increases due to market forces. - Labor demand increases due to expansionary government policies.

What market forces might cause the labor demand curve to shift back to the​ right? ​

- The banking system recuperates and businesses are again able to use credit to finance their activities. - Technological advances encourage firms to expand their activities. - Excess inventory has been sold off.

An example of a multiplier is when ___.

- a drop in consumer confidence reduces household​ spending, causing firms to cut production and lay off​ employees, leading to a greater reduction in household spending. - an increase in business confidence causes firms to increase production and hire​ employees, leading to an increase in household​ spending, causing firms to further increase production and employment.

The purpose of countercyclical policy is to​ ____________.

- reduce the intensity of economic fluctuations. - smooth the growth rates of​ employment, GDP, and prices.

Suppose that two​ workers, Joe and​ Moe, work at a​ fast-food restaurant. Joe can grill 50 hamburgers per hour or fry 25 pounds of french fries per hour. Moe can grill 80 hamburgers per hour or fry 20 pounds of french fries per hour. Using comparative​ advantage, determine whether Joe or Moe should grill hamburgers. The opportunity cost to Joe of grilling hamburgers is __1__ pounds of french fries. ​ The opportunity cost to Moe of grilling hamburgers is __2__ pounds of french fries. In this​ case, __3__ has the comparative advantage in grilling hamburgers.

1) .5 2) .25 3) Moe

If the anticipated inflation rate is 1.25 percent and the nominal interest rate is 4.25 ​percent, the real interest rate is __1__. If expectations about inflation rise and the nominal interest rate remains​ unchanged, the expected real interest rate will __2__.

1) 3.00 2) decrease

Assume that Country A and Country B are both capable of producing sneakers and basketballs. 1) If Country A is more productive at making both goods than Country​ B, which of the following statements is​ true? 2) Which of the following could be the source of the productivity advantage in Country A compared to Country​ B? ​

1) Country A has an absolute advantage in the production of both sneakers and basketballs. 2) more education and access to more physical capital

What are the similarities and the differences between monetary and fiscal​ policies? Features 1) The manner​ (or ways) in which they work. 2) The aspect of the labor market they impact. 3) The result their implementation seeks to achieve. 4) The entities​ (or authorities) that oversee them.

1) D 2) S 3) S 4) D

The Conference Board publishes data on Business Cycle Indicators​ (BCI). The Composite Index of Leading Economic Indicators is one of the three components of the BCI. Changes in leading economic indicators usually precede changes in GDP. Some of the variables tracked by the index are listed below. i. The average weekly hours worked by manufacturing workers ii. The average number of initial applications for unemployment insurance iii. The amount of new orders for capital goods unrelated to defense iv. The amount of new building permits for residential buildings v. The​ S&P 500 stock index vi. Consumer sentiment 1) The average weekly hours worked by manufacturing workers is likely to be ___ with real GDP. 2) The average number of initial applications for unemployment insurance is likely to be ___ with real GDP. 3) The amount of new orders for capital goods unrelated to defense is likely to be ___ with real GDP. 4) The amount of new building permits for residential buildings is likely to be ___ with real GDP. 5) The​ S&P 500 stock index is likely to be ___ with real GDP. 6) Consumer sentiment is likely to be ___ with real GDP.

1) Positively correlated 2) negatively correlated 3) positively correlated 4) positively correlated 5) positively correlated 6) positively correlated

A recession is defined as at least two quarters of negative __1__. In the United​ States, for most of the last​ century, we have experienced __2__ recessions than expansions.

1. GDP growth 2. shorter

__1__ wages are __2__ wages divided by a measure of overall prices​(price index). If nominal wages are downwardly​ rigid, real wages __3__ be. If inflation raises the price​index, real wages will __4__ and nominal wages will remain constant.

1. Real 2. nominal 3. will also 4. decrease

If an economic shock decreases labor​ demand, equilibrium employment __1__ and real GDP __2__.

1. falls 2. falls

Changing corporate tax rates is an example of countercyclical __1__ policy. If the government lowers corporate tax​ rates, its goal would be a __2__ shift of the __3__ curve.

1. fiscal 2. rightward 3. labor demand

A Japanese company opening a factory in Singapore is an example of __1__ that would directly benefit the citizens of __2__. The​ company's actions would __3__ ​cross-country interdependence.

1. foreign direct investment 2. Singapore 3. increase

Crowding out occurs when __1__ borrowing displaces __2__ borrowing. Since expansionary fiscal policy should only take place during times of __3__, it seems worth the risk for many policy makers.

1. government 2. private 3. recession

How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor​ falls? When the demand for labor​ falls, the fall in employment is __1__ when real wages are flexible and __2__ when wages are downwardly rigid.

1. limited 2. amplified

Suppose the Fed wants to implement an ​anti-recession monetary policy. For each of the tools listed​ below, indicate the direction the​ Fed's action should take. The Fed should conduct an open market __1__ of Treasury bonds. The Fed should __2__ the reserve requirement. The Fed should __3__ the interest rate paid on reserves deposited at the Fed. The Fed should __4__ lending from its discount window.

1. purchase 2. lower 3. decrease 4. expand

As a new expansion in the business cycle​ starts, we can expect the aggregate labor demand curve to shift to the __1__. This will be met with __2__ in real GDP and a movement __3__ the aggregate production function.

1. right 2. an increase 3. up

Net capital outflows are defined as __1__ minus foreign investment. When the real interest rate starts to​ decline, net capital outflows increase and net exports __2__ as domestic products become __3__ expensive to purchase.

1. savings 2. increase 3. less

Early theories of business cycles assumed that economic fluctuations had a​ pendulum-like structure with systematic swings in economic growth. A) Which property of economic fluctuations do these early theories​ contradict? B) Using your answer​ above, how does a​ pendulum-like structure contradict this property in economic​ fluctuations?

A. Limited predictability. B. Pendulums swing in an easily-measured rhythm that would make predicting fluctuations simple.

How does comparative advantage in trade differ from absolute​ advantage?

Absolute advantage looks at the number of goods or services that a producer can​ make, whereas comparative advantage looks at the opportunity cost of the goods or services that a producer can make.

Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation.

An increase in reserves triggers a multiple expansion of bank loans and​ deposits, which generates an increase in the stock of money. If the money supply grows faster than real​ GDP, inflation will occur.

What is foreign direct​ investment?

Investments by foreign individuals and companies that generate an ownership stake in domestic businesses.

David​ Ricardo, the British political​ economist, used the example of two commodities—wine and cloth—produced by England and Portugal to explain trade. The following table shows the number of labor hours it would take England and Portugal to produce one unit each of wine and​ cloth: Portugal England Wine 80 120 Cloth 90 100 Portugal can produce both wine and cloth using fewer labor hours than England. A group of​ Mercantilists, who believe that nations build their wealth by exporting more than they​ import, suggest that Portugal has nothing to gain from trading with England. Would you​ agree?

No, gains from trade are determined on the basis of comparative​ advantage, not absolute advantage.

When workers are laid off, what happens to physical capital?

Physical capital becomes less productive, leading firms to reduce capacity utilization.

Fill in the table below with the opportunity costs for each country. Original Table: Portugal England Wine 80 120 Cloth 90 100 New Table: Portugal England Wine 1.88 1.25 Cloth 1.67 1.50

Portugal England Wine .88 1.20 Cloth 1.13 0.83 Portugal has the comparative advantage in the production of​ wine, and England has the comparative advantage in the production of cloth. England should import wine and Portugal should import cloth.

Suppose that each country spends 150 hours producing each good. Show how much of each good would be produced. Original Table, how long per 1 unit: Portugal England Wine 80 120 Cloth 90 100

Portugal England Wine 1.88 1.25 Cloth 1.67 1.50 Divide 150 by original value

How does foreign direct investment benefit the recipient​ country?

Technology transfer ultimately improves productivity in the recipient country.

What are the automatic and discretionary components of fiscal​ policy?

The automatic components do not require deliberate action on the part of the​ government, while the discretionary components do.

The concept of multipliers was one of the key elements of John Maynard​ Keynes's theory of fluctuations. A multiplier is​ ____________.

an economic mechanism that causes an initial shock to be amplified by​ follow-on effects.

An economic expansion that occurs close to full employment​ ____________.

can cause inflation with very little employment and output growth.

The Taylor rule states that​ ___________.

central banks should set their policy rates​ (in the United​ States, the federal funds​ rate) according to a formula that incorporates the​ long-term target for the policy​ rate, the output​ gap, and the deviation of inflation from its target.

According to the concept of persistence in the rate of​ growth, if the economy grows this​ quarter, it will​ ____________.

likely grow next quarter

Contractionary monetary policy shifts the labor demand curve to the left by​ ____________.

pushing​ long-term interest rates up​, thereby causing reduced private expenditures and inducing firms to want to hire fewer workers.

In addition to being a benefit of international​ trade, technology transfer​ ____________.

results in a higher level of cross-country interdependence

If wages are​ flexible, the decrease in employment and real GDP will be ___ the decrease if wages are rigid.

smaller than

Trade allows buyers and sellers to exploit gains from specialization because it allows sellers to​ ____________.

specialize in the production of the good or service for which they have a comparative advantage and buy goods and services for which they do not have a comparative advantage.

In addition to​ specialization, which of the following is a benefit of international​ trade?

technology transfer

Does the effectiveness of monetary policy depend on inflation​ expectations? Explain.

​Yes, the central​ bank's ability to influence the​ long-term expected real interest rate is partly determined by the​ public's long-term expectations of the inflation rate.