econ exam 3 practice exam

The size of the multiplier increases as the size of the marginal propensity to consume increases. (True or False)

true

The long-run level of output is known as _____ output. -recognized -structural -potential -balanced budget

potential

In the AD-AS framework, price and quantity are represented by _____, respectively. -the GDP deflator and the real GDP -the real GDP and the real interest rate -nominal interest rates and the real GDP -the real interest rate and consumption

the GDP deflator and the real GDP

The government's debt is: -always zero by the end of the year. -the equivalent of the country's imports. -the current year's deficit. -the accumulation of all the deficits.

the accumulation of all the deficits.

Potential output is the level of real GDP that: -occurs when the economy has only cyclical unemployment. -the economy would produce if all prices, including nominal wages, were fully flexible. -occurs when the actual rate of unemployment is zero. -the economy would produce if all prices, including nominal wages, were sticky.

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

Suppose a high-income person, a middle-income person, and a low-income person purchase identical houses that are financed by similar mortgages. Who gets the largest tax benefit? -the high-income person -the middle-income person -the low-income person -They all pay the same tax rate.

the high-income person

A change in _____ does NOT shift the money demand curve. -the interest rate -the price level -banking technology -real GDP

the interest rate

The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____. -the interest rate; real GDP -the interest rate; unemployment -real GDP; the interest rate -real GDP; the money supply

the interest rate; real GDP

On which of the following is there a tax incentive in the United States?(i) health insurance purchased through employers(ii) your mortgage(iii) rental value on owner-occupied housing(iv) contributions toward your retirement account -(i), (iii), and (iv) -(iii) and (iv) -(iv) only -(i), (ii), (iii), and (iv)

(i), (ii), (iii), and (iv)

Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore _____%. -90 -110 -10 10

-10

The long run in macroeconomic analysis is a period: -in which nominal wages and other prices are flexible. -in which wages are sticky. -of less than one year. -of one to two years.

-n which nominal wages and other prices are flexible.

In your current job, you earn $55,000. You take the standard deduction of $12,200. You have an offer of a new job working for a different employer. Your salary would go up by $5,000. Given your current taxable income, what is your marginal tax rate? -22% -12% -10% -24%

22%

Suppose the economy is operating at an output of $4,000 billion. Assume furthermore that potential output is $5,000 billion and the marginal propensity to consume is 0.75. _____ would close this recessionary gap. -A $25 billion increase in government spending -A $25 billion increase in taxes -A $250 billion increase in government spending -A $1,000 billion increase in government spending

A $250 billion increase in government spending

f the central bank reduces the quantity of money that is circulating in the economy, the _____ curve will shift to the _____. -LRAS; right -LRAS; left -AD1; left -AD1; right

AD1; left

If the supply of money shifts from S1 to S2, the Federal Reserve must have _____ Treasury bills in the open market. -sold -bought -issued new -borrowed

bought

Which of the following is a reason NOT to worry about government debt? -A debt crisis is likely if debt becomes too large relative to GDP. -Future generations can help repay the debt. -Governments never default on sovereign debt. -Debt owed to foreign nations can be written off.

Future generations can help repay the debt.

If an economy has a negative output gap of 2%, this means: -unemployment is 2% above the natural rate of unemployment. -GDP is 2% above potential GDP. -inflation is 2% above the long-run rate of inflation. -GDP is 2% below potential GDP.

GDP is 2% below potential GDP.

How is monetary policy different from fiscal policy? -Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes. -Monetary policy focuses on correcting inflation, whereas fiscal policy focuses on unemployment. -Monetary policy is determined by the president, whereas fiscal policy is determined by the chair of the Federal Reserve. -There is no difference between the two policies.

Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when productivity increases in the economy? -Both prices and GDP increase. -Both prices and GDP decrease. -Prices increase, and GDP decreases. -Prices decrease, and GDP increases.

Prices decrease, and GDP increases.

Which statement is correct (SRAS1 shifts to the right)? -An increase in the price level is responsible for pushing the curve to the right. -A decrease in the price level is responsible for pushing the short-run aggregate supply curve to the right. -Short-run aggregate supply has increased. -Short-run aggregate supply has decreased.

Short-run aggregate supply has increased.

What is the floor framework that the Federal Reserve uses to influence the federal funds rate? -Operations by the Open Market Trading Desk at the Fed -The use of open market operations by the Fed -The Fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go -The Fed's approach of setting the discount rate above the federal funds rate

The Fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go

Potential output would NOT be increased by: -an increase in physical capital. -a decrease in the aggregate price level. -an increase in human capital. -technological innovation.

a decrease in the aggregate price level.

The economy in panel (b) is initially in short-run equilibrium at real GDP level Y1 and price level P2. At real GDP level Y1 there is: -an inflationary gap. -a recessionary gap. -no gap. -long-run equilibrium.

a recessionary gap.

An excise tax is a tax on: -luxury goods and services. -imports. -purchases that is typically a percentage of the purchase price of goods and services. -a specific product.

a specific product

Macroeconomic equilibrium occurs where: -aggregate demand intersects with aggregate supply. -the price level in the economy is at the lowest possible level. -aggregate demand is larger than aggregate supply. -the quantity of output that buyers plan to buy is less than the quantity of output produced in the economy.

aggregate demand intersects with aggregate supply.

Curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____. -long-run aggregate supply; short-run aggregate supply; aggregate demand -aggregate demand; short-run aggregate supply; long-run aggregate supply -short-run aggregate supply; long-run aggregate supply; aggregate demand -aggregate demand; long-run aggregate supply; short-run aggregate supply

aggregate demand; long-run aggregate supply; short-run aggregate supply

A movement from AD1 to AD2 may have been the result of: -an increase in government spending. -a decrease in government spending. -increases in personal income taxes. -a decrease in consumer wealth. trade sanctions.

an increase in government spending.

If the economy is at potential output and consumption spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is: -a decrease in government transfers. -an increase in government spending. -a decrease in government spending. -an increase in the money supply to decrease interest rates.

an increase in government spending.

Which of the following services are provided by local government? -Medicare -military defense -bus services -Pell grants

bus services

Monetary policy affects GDP and the price level by: -changing aggregate supply. -changing aggregate demand. -changing the aggregate amount of labor supplied. -changing exports.

changing aggregate demand.

The short-run aggregate supply curve will shift to the left if: -the aggregate price level falls. -commodity prices rise. -tax revenues fall. -productivity increases.

commodity prices rise.

If the Turkish Central Bank forecasts a negative output gap, you can reasonably expect _____ on the horizon. -deflation -excess demand -high demand for labor -rising consumer confidence

deflation

If the rate of interest is below equilibrium, there will be an excess _____ money and the interest rate will _____. -demand for; rise -supply of; fall -demand for; fall -supply of; rise

demand for; rise

Which of the following stages of the business cycle is most preferable when you graduate from college and begin looking for a job? -Expansion -Trough -Contraction -Recession

expansion

Suppose that an economy is in a recession. You would expect to see real GDP: -rise above potential GDP. -be equal to potential GDP. -fall below potential GDP. -and nominal GDP unchanged.

fall below potential GDP.

The Federal Reserve will lose money as a lender of last resort if: -the output gap becomes positive. -the economy improves. -consumers complain about the use of taxpayer money. -financial institutions fail to pay back their loans.

financial institutions fail to pay back their loans.

Government spending adds directly to GDP through _____ and indirectly through _____. -government purchases; military spending -transfer payments; government purchases -government purchases; transfer payments -higher interest rates; crowding out

government purchases; transfer payments

If the marginal propensity to consume is 0.75, the multiplier for taxes and transfer payments is: -less than 4. -equal to 4. -greater than 4. -equal to 0.75.

greater than 4

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be: -higher than the neutral interest rate. -lower than the neutral interest rate. -equal to the inflation rate. -equal to the neutral interest rate.

higher than the neutral interest rate.

If the economy is in equilibrium at Y1 in panel (a) and the government decreases taxes, the result will likely be a(n): -increase in unemployment. -decrease in interest rates. -decrease in aggregate demand. -increase in aggregate demand.

increase in aggregate demand.

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____. -increase; decrease -increase; increase -decrease; increase -decrease; decrease

increase; decrease

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

increases; increases

An example of a lagging indicator is: -consumer confidence. -unemployment insurance claims. -business confidence. -the stock market.

unemployment insurance claims

The wealth effect is the: -inverse relationship between prices and consumption spending due to changes in real wealth. -positive relationship between prices and consumption spending due to changes in real wealth. -inverse relationship between real interest rates and consumption. -positive relationship between real interest rates and consumption.

inverse relationship between prices and consumption spending due to changes in real wealth.

The Federal Reserve's lender-of-last-resort function means that it: -lends to financial institutions when they are having trouble getting loans. -buys long-term bonds in an effort to lower long-term interest rates. -borrows from financial institutions even when the general public has reduced borrowing. -oversees lending regulations in commercial banks.

lends to financial institutions when they are having trouble getting loans.

In a recessionary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today. -lower; reduce -lower; induce -raise; reduce -raise; induce

lower; induce

When the Federal Reserve purchases more long-term bonds, this: -increases the discount rate. -raises long-term bond interest rates. -lowers long-term bond interest rates. -increases the federal funds rate.

lowers long-term bond interest rates.

The purpose of "Fedspeak" was to: -encourage debate between Federal Open Market Committee (FOMC) members. -ensure that the Federal Reserve's inflation target was never understood by the general public. -establish the Federal Reserve's dual mandate. -minimize market reactions from Federal Reserve statements.

minimize market reactions from Federal Reserve statements

A fall in prices leads to a: -movement up and to the left along the same aggregate demand curve. -movement down and to the right along the same aggregate demand curve. -right shift of the aggregate demand curve. -left shift of the aggregate demand curve.

movement down and to the right along the same aggregate demand curve.

Forward guidance occurs when the Federal Reserve: -provides information about the future course of monetary policy in order to influence expectations about future interest rates. -follows the same future course of monetary policy that it has been following in the past. -carries out open market operations to influence future interest rates. -provides information about current monetary policy in order to influence expectations about future interest rates.

provides information about the future course of monetary policy in order to influence expectations about future interest rates.

In late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of: -quantitative easing. -fiscal policy. -forward guidance. -interbank loans.

quantitative easing.

In the long run, the aggregate supply curve is vertical because the: -output becomes fully flexible. -prices become fixed in the long run. -prices remain sticky, and thus the economy cannot produce more than a certain fixed level of GDP. -quantity of output returns to potential GDP as market prices adjust and resource markets return to equilibrium.

quantity of output returns to potential GDP as market prices adjust and resource markets return to equilibrium.

The lower bound for the federal funds rate is set by the: -repurchase agreements and interest on excess reserves. -discount rate. -open market trading desk. -president of the country.

repurchase agreements and interest on excess reserves.

The long-run supply curve illustrates how the aggregate output supplied is _____ the aggregate price level. -positively related to -negatively related to -unrelated to a one-to-one correspondence with

unrelated to

Ceteris paribus, a decrease in imports leads to a: -movement up and to the left along the same aggregate demand curve. -movement down and to the right along the same aggregate demand curve. -right shift of the aggregate demand curve. -left shift of the aggregate demand curve.

right shift of the aggregate demand curve.

Expansionary monetary policy causes a: -right shift of the aggregate supply curve. -left shift of the aggregate demand curve. -right shift of the aggregate demand curve. -movement along the same aggregate demand curve.

right shift of the aggregate demand curve.

Based on Okun's rule of thumb, if you forecast that the output gap will decline from 0% to -3%, the unemployment rate will: -rise by 1.5%. -fall by 2%. -rise by 3%. -fall by 1.5%.

rise by 1.5%.

Mandatory spending is spending that: -supports programs that do not get determined annually but instead are set in law. -is appropriated by Congress annually. -includes all federal government spending. -includes all state and local government spending.

supports programs that do not get determined annually but instead are set in law.

The marginal tax rate is the: tax on social security. amount of your income that you pay taxes on. amount of tax rebates that you receive at the end of the year. -tax rate you pay if you earn another dollar.

tax rate you pay if you earn another dollar.

The members of the Federal Open Market Committee (FOMC) who can actually vote on policy decisions are: -the Fed governors and the Fed district bank presidents. -the chair of the Fed and the New York Fed bank president. -the Fed governors, the New York Fed president, and a rotating group of four other district bank presidents. -12 members of Congress.

the Fed governors, the New York Fed president, and a rotating group of four other district bank presidents.

What are overnight reverse repurchase agreements? -government-issued bonds that the Treasury Department sells to the Federal Reserve -the issue of discount window loans to financial institutions, with an agreement for the financial institutions to pay back the loans the next day -the demand and supply of overnight loans in the overnight loan market -the sale of government bonds to financial institutions, with an agreement to purchase the bonds back the next day, at a higher price

the sale of government bonds to financial institutions, with an agreement to purchase the bonds back the next day, at a higher price