Econ Test 2

If MPC = 0.6, what is the spending multiplier?

2.5

What is the spending multiplier if the marginal propensity to consume is 0.60?

2.5

If a country increases the amount of goods it imports but its exports remain unchanged:

AD shifts left.

If business expectations become less favorable, what will likely happen to the AD curve?

AD shifts left.

What does the "paradox of thrift" say?

An economy that saves too much can end up with lower total savings.

How does the spending multiplier compare between a $1,000 increase in government spending and a $1,000 decrease in taxes collected?

An increase in government spending has a greater spending multiplier than an equivalent tax decrease.

Which of the following would NOT shift the AD curve?

An increase in market power occurs in the airline industry.

If you spend $100 and the MPC is 0.9, how much spending will this $100 generate in the economy?

$1,000

In the following aggregate expenditures graph, to raise income from $4,400 to $4,800, government spending (G) must increase by _____; this corresponds with an MPC of _____.

$100; 0.75

Boeing buys $3 million worth of steel, $2.5 million worth of computer hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing sells this particular model at $10 million. The value added by Boeing is equal to:

$3.5 million.

If the wage rate is $9 per hour and the price level is 2, then the real wage is:

$4.50.

What are the components of aggregate expenditures?

C + I + G + (X - M)

Suppose that a bank wishes to make a 5% rate of return on a one-year loan but expects inflation over the course of the loan to be roughly 3%. Which statement is TRUE?

If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of return than expected.

Which of the following would most likely cause aggregate demand to decrease?

Income taxes rise to reduce the deficit.

According to the balanced budget multiplier, an increase in government spending of $10,000 that is financed by an increase of $10,000 in taxes will have what effect on the economy when MPC is 0.80?

Income will increase by $10,000.

If AD shifts right as the economy booms, and then SRAS shifts left, what happens to inflation?

It increases.

In a depressed economy with a MPC of 0.75, what effect will a $100 increase in government spending have on equilibrium GDP?

It will raise it by $400.

The General Theory of Employment, Interest, and Money, written by _____ and published in _____, transformed the way economists thought about macroeconomics.

John Maynard Keynes; 1936

If the economy is above long-run equilibrium output, what will happen in the long run if SRAS adjusts?

Prices rise and output decreases.

If mergers between firms increase throughout the economy, what would happen to the SRAS curve?

SRAS shifts left.

In an AD/AS model, if the economy is below its long-run output, what will happen in the long run if the markets are left alone?

SRAS will shift right.

What is the main claim of the aggregate expenditures model?

Spending will generate income, which allows for more spending.

Which of the following factors would most likely shift the SRAS curve to the right?

an increase in the use of truck panels and tails to improve fuel efficiency

A temporary rise in the price of agricultural crops due to a drought is likely to cause a(n):

decrease in the short-run aggregate supply.

Deflation is a:

decreasing aggregate price level.

In the U.S. economy, the circular-flow diagram does NOT illustrate:

growing income inequality.

Economists use the term long-term growth to indicate:

growth of the economy over several decades.

Per capita economic growth is:

growth per person.

Which of the following are considered withdrawals from an economy?

imports; taxes; savings

Shoe-leather costs are the:

increased cost of transactions due to inflation

Choose the best answer. The topics studied in macroeconomics include:

inflation, unemployment, and economic growth.

Increases in the average level of prices are called:

inflation.

If real GDP at full employment is $5 billion while current GDP is $6 billion, a(n) _____ exists, and will require a _____ in spending to bring the economy back to full employment.

inflationary gap; decrease

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

infrastructure.

Which factor contributes to economic development?

investment in infrastructure

Which of the following curves is vertical?

long-run aggregate supply

Generally, which group of people has the highest marginal propensity to consume?

low-income people

The convergence hypothesis says that international differences in GDP per capita tend to _____ over time.

narrow

If all of the households and businesses start saving more during economic hard times, then aggregate income will fall, hurting everyone in the economy. This is known as the:

paradox of thrift.

Investment spending is spending on:

productive physical capital.

Use of monetary policy entails changes in:

the quantity of money

The "wealth effect" refers to the fact that when aggregate price levels rise:

the real value of savings accounts, bonds, and cash declines.

Most households derive the bulk of their income from:

wages.

Price stickiness refers to:

when prices are slow to adjust to economic shocks.

When consumer confidence falls in an economy, _____ increase in an economy and this amount is _____ by the multiplier.

withdrawals; enhanced

If technology advances:

workers can produce more with fixed amounts of physical and human capital

If a country has a population of 1,000 people, an area of 100 square miles, and a GDP of $5 million, then its GDP per capita is:

$5,000

Analysts believe that generous unemployment benefits in Europe are associated with

high unemployment rates in Europe.

When the government invests resources in a nation's educational system, it is investing in:

human capital.

An increase in the price level that is extremely rapid (say 400% per year) is called:

hyperinflation.

A recent college graduate with a major in economics attends a job fair but has not yet found a job. This graduate is counted as a _____ unemployed worker.

frictionally

An example of structural unemployment is a(n):

geologist who is permanently laid off because of an increase in wages won by labor unions.

Use of fiscal policy involves changes in:

government spending.

Conditional convergence suggests that poorer countries:

have GDPs that may not catch up to those of richer countries without changes in education and infrastructure.

Purchases of _____ are included in GDP.

new capital goods

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

The view that the government should take an active role in the macroeconomy dates to:

the Great Depression.

Human capital is:

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

The circular-flow diagram illustrates:

the key concepts in the national accounts.

Workers today are more productive than workers were in the past because:

they now have more physical capital embodying better technology.

The consumer price index in 1979 was 72.6. In 1980, it was 82.4. What was the rate of inflation from 1979 to 1980?

13.5%

A survey reveals that, on a small island, 1,000 people have jobs, 200 people don't have jobs but are looking for jobs, and 200 people are neither working nor looking for work. The unemployment rate on the island is _____%.

16.7

If the U.S. dollar were replaced with a "new dollar" at an exchange rate of 1 new dollar for 5 old dollars, then a loan of $10,000 would become a debt of _____ new dollars.

2,000

Donna was laid off at the beginning of 2017. She looked for a job for three months but could not find anything suitable. She then decided to volunteer for a soup kitchen and stopped looking for a job. Donna is considered to be:

a discouraged worker.

If Jim's income is $80,000 and the price level is 4, then Jim's real income is:

$20,000.

If the marginal propensity to save is 0.2 and income rises by $5,000, how much of this $5,000 will be consumed?

$4,000

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

Which of the following marginal propensities to consume results in the flattest consumption line in an aggregate expenditures model?

0.4

A typical family in the United States in 1900 had a purchasing power equal to _____% of the real U.S. GDP per capita in 2015.

12

A survey reveals that, on a small island, 1,000 people have jobs, 250 people are unemployed and looking for jobs, and 450 people are neither working nor looking for work. The unemployment rate on the island is _____%.

20

Suppose that South Korea is growing at 7% per year and is producing real GDP per capita of about $28,000, while Norway is growing at 3.5% per year and is producing real GDP per capita of $56,000. If all else stays equal, the real GDP per capita for these two countries will converge in _____ years.

20

A survey reveals that, on a small island, 100 people have jobs, 25 people are not working but are looking for jobs, and 45 people are neither working nor looking for work. The unemployment rate on the island is:

20%.

If output is growing at 5% annually, how many years will it take for output to quadruple?

28 years

Suppose that the real interest rate is 2.1% and the nominal interest rate is 5.4%. The inflation rate is _____%.

3.3

Suppose that a panel of economists predicts that a nation's real GDP per capita will have an average annual growth rate of 2%. According to the rule of 70, how many years will it take for this nation's real GDP per capita to double?

35

Suppose that real GDP per capita of the United States is $32,000 and its growth rate is 2% per year and that real GDP per capita of China is $4,000, and its annual growth rate is 7%. How many years will it take for China's real GDP per capita to be larger than real GDP per capita in the United States?

40 to 45 years

In Techland, from 1980 to 2010, holding technology and human capital fixed, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that real GDP per worker actually increased from $40,000 to $320,000. What share of the annual growth rate of real GDP per capita was attributable to higher total factor productivity?

5%

Real GDP per capita in the United States increased almost _____ times between 1900 and 2015.

8

Fiscal policy can be used to reduce the severity of recessions.

True

Which transaction would NOT be counted in GDP?

Your mother buys 100 shares of Nike stock.

Suppose that a country has a progressive income tax code and taxable income is calculated in nominal terms, but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation over time will pay:

a higher percentage of income in taxes over time.

Stock in a company is:

a share of ownership of the company.

A binding minimum wage in a labor market is set _____ the equilibrium wage and causes a _____ of labor.

above; surplus

Diminishing returns to physical capital means that as more and more physical capital is combined with a fixed amount of human capital and a fixed technology, eventually:

additions to aggregate output or real GDP decline.

In macroeconomics:

aggregate data such as real GDP, the price level, and unemployment are analyzed.

What does the 45-degree line in the Aggregate Expenditures model represent?

all consumption and no saving

A bond is:

an IOU that pays interest.

India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500, while the United States is growing at a rate of 3% per year, and its real GDP per capita is about $47,000. About how much will India's real GDP per capita be in 20 years?

approximately $20,000

Fiscal and monetary policies:

are used to correct for short-term economic fluctuations.

To be counted as unemployed, one must:

be out of work and be actively looking for a job during the past four weeks.

When inflation rises quickly, borrowers will _____ and lenders will _____.

benefit; be hurt

Gross domestic product is defined as:

consumer spending + government purchases of goods and services + investment spending + exports - imports.

GDP may be calculated as the sum of:

consumer spending, investment spending, government purchases of goods and services, and exports minus imports.

A laptop computer purchased by a private individual for personal use is considered to be:

consumption spending.

Private savings is equal to:

disposable income less consumption.

The total income of households after taxes and government transfers is called:

disposable income.

The real wage is the wage rate _____ the price level.

divided by

Deflation:

encourages people to hold cash rather than invest.

The money spent on domestically produced final goods and services is:

equal to GDP.

The natural rate of unemployment:

equals the actual rate of unemployment when cyclical unemployment equals zero.

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

expansion.

When an economy is expanding, unemployment tends to _____ and overall prices tend to _____.

fall; rise

In general, expansions are characterized by:

falling unemployment.

GDP is the total dollar value of all:

final goods and services produced in the economy in a given period.

Unemployment that occurs because it takes workers and employees time to find each other is _____ unemployment

frictional

Over the past year, Eli has been working very hard. His employer has taken notice and is giving Eli a 6% raise in salary. During this past year, overall prices in the economy have increased by 4%. Given this information, Eli's real wage has:

increased by 2%.

Since 1960 in the United States, the price level has

increased.

Alex expects the inflation rate to be 4%. If Alex borrows money at a nominal interest rate of 5%, his real interest rate is:

less than the nominal interest rate.

Two primary goals for macroeconomists are price stability and _____ unemployment.

low

An INCREASE in the number of discouraged workers in the economy tends to:

lower the official unemployment rate.

When hyperinflation forces Pedro to change the price stickers on the books in his bookstore very frequently to keep up with the aggregate price level, economists say that Pedro has a:

menu cost.

Employment is the total:

number of people actively working, either full time or part time.

Which example is NOT a government transfer?

payments by the Defense Department for a new weapons system

The unemployment rate is the:

percent of the labor force that is unemployed.

The inflation rate is the:

percentage change in the price level from one year to the next.

The nominal interest rate equals the real interest rate:

plus the rate of inflation.

Productivity is declining when:

population growth exceeds real GDP growth.

Thomas Malthus:

predicted that limited land supplies would prevent large increases in real incomes per capita.

Real per capita GDP is:

real GDP divided by the population.

A key input for measuring economic growth is:

real GDP per capita.

If money income remains the same while the average price level doubles:

real income will fall.

Economists have identified several consecutive quarters of falling employment, and forecasts for the next few months suggest more of the same. The economy is at the _____ stage of the business cycle.

recession

Over the course of the twentieth century, real GDP per capita in the United States rose MOSTLY as a result of:

rising productivity.

A business cycle is a:

short-run shift between economic upturns and downturns.

A person without a job who is actively seeking and available for work is considered:

unemployed.

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

unemployment rate.

Economists claim that the unemployment rate can understate the true level of unemployment because the ONLY group that is included is:

workers without jobs who have looked for work in the past four weeks.