ECONS Exam 2

If there are 100 million people in the total population, a labor force of 50 million, and 47 million employed workers, the unemployment rate is _____.

6%

The equilibrium unemployment rate is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____.

6.5%

A fixed nominal interest rate of _____ with _____ inflation will yield the highest real rate of return for a lender.

7%; 2%

A period of falling real GDP is the _____ of the business cycle.

A period of falling real GDP is the _____ of the business cycle.

Henry Ford's $5 per day wage led to:(i) an increase in the number of workers willing to work at the Ford plant.(ii) workers who were more dedicated to their work.(iii) unemployment.(iv) lower total labor costs.

all of the above

A price index: a. includes a base year. b. is used to measure the cost of a market basket across different years. c. is normalized so that it equals 100 in the base year. d. All of these answers are true.

all of these answers are true

If there is _____ rise in income, there will be an intermediate increase in total consumption in the economy.

an announcement of a future

Thomas Malthus believed that:

food production would not exceed population growth and that this would lead to continuous subsistence living.

Unexpected inflation _____ lenders and _____ borrowers.

hurts; benefits

Following a significant recessionary period in which there were periodic wage freezes, workers negotiate higher wages. However, the higher wages lead to a decrease in the number of new workers getting hired, so unemployment persists in the region. The scenario described here is an example of:

hysteresis.

When an economy is between the peak and the trough of a business cycle, it is:

in a recession.

People are likely to save the MOST _____, during their life cycle.

in their peak earnings years

Shoe-leather costs are the:

increased cost of transactions due to inflation.

The catch-up effect would be largest in an economy where:

the initial level of capital is low.

The crowding-out effect is _____.

the negative effect of government budget deficits on private investment spending

A constant returns to scale production function is one where increasing all inputs by a certain proportion leads to output rising by:

the same proportion.

An example of physical capital is a:

truck that a company purchases for deliveries.

When real interest rates rise, consumption will shift:

upward if the income effect outweighs the substitution effect.

Other things equal, expectations of lower income would _____ and shift the consumption function _____.

decrease autonomous consumption; down

If banks are worried about high default rates and institute new tough lending regulations, then the _____ loanable funds shifts to the _____.

demand for; left

If the government institutes a tax credit on funds invested, then the _____ loanable funds shifts to the _____.

demand for; right

Your university installs new computer systems in its labs. Each year, the value of these computers falls due to normal wear and tear. These costs are:

depreciation costs

The production function exhibits _____ returns to _____ capital.

diminishing; physical

In a business cycle, a trough is immediately followed by a(n):

expansion.

Hyperinflation is:

extremely high rates of inflation.

Cyclical unemployment is a result of _____.

recessions and economic downturns

Based on Okun's rule of thumb, if you forecast that the output gap will decline from -2% to -4%, the unemployment rate will:

rise by 1%.

Inflation is a:

rise in the overall level of prices.

According to Okun's rule of thumb, for every 1% fall in the actual output below potential output, the unemployment rate:

rises by 0.5%.

All else equal, a nation that has a high rate of _____ will have a high rate of _____ and therefore a high growth rate of _____ capital.

savings; investment; physical

What kind of data adjustment removes the effect of sales spikes due to the holiday season?

seasonally adjusted data

The three types of business investment are:

spending on equipment, structures, and intellectual property.

If the population and GDP increase by the same percentage, then real GDP per capita:

stays the same.

Suppose that a CPI basket includes avocadoes, pineapples and oranges. Avocadoes become very expensive, and consumers substitute away from avocadoes and buy hummus instead. If the CPI basket does not change to reflect the move away from avocados, the result is:

substitution bias.

If the stock market crashes:

the aggregate consumption function will shift down.

Periodic fluctuations of a country's real gross domestic product (GDP) are known as:

the business cycle.

The present value of $1 realized one year from now is:

$1 / (1 + r).

If the interest rate is 4%, what is the approximate present value of $2,000 received in four years?

$1,710

The present value of a $110 payment in one year, given an annual 10% interest rate, is:

$100

If the interest rate is 6.75%, what is the approximate future value of $10,000 in five years?

$13,862

If the interest rate is 6% and the average inflation rate is 3.1%, what is the approximate future value of $75,000 in 20 years?

$132,852

What is Uganda's real GDP if its nominal GDP is $27.5 billion (in current US$), and the GDP deflator is 163.4?

$16.8 billion

An advanced computer system for a multinational corporation costs $500,000 and is expected to depreciate by 4% at the end of next year. The real interest rate is 4%. What is the user cost of the computer system for one year?

$40,000

If the average marginal propensity to consume is 0.75, then a $1 million increase in total income will lead to a _____ in consumption.

$750,000 increase

Which expression MOST accurately describes how to calculate the unemployment rate?

(Unemployed / Labor force) × 100

Which of the following is an economic cost of unemployment?(i) Unemployed people often accept lower wages when they eventually find work.(ii) Hysteresis occurs.(iii) The unemployment rate falls.(iv) Children whose parents are unemployed have lower academic outcomes.

(i) and (ii)

The aggregate production function Y = f(L, H, K) shows that economic growth can occur if:(i) human capital increases.(ii) labor productivity falls.(iii) the capital stock in the country depreciates.(iv) the depreciation rate increases.

(i) only

How can dissaving in the current period be funded?(i) borrowing from friends(ii) bank loans(iii) previous savings(iv) current income earned

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

Hand-to-mouth consumers:(i) spend more on necessities than on luxuries.(ii) save very little or nothing at all.(iii) purchase a large amount of luxury items.(iv) live paycheck to paycheck.

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

For consumption smoothers, the marginal propensity to consume out of anticipated changes in income is:

0

You purchase a certificate of deposit and expect an inflation rate of 1.5% over the next year. Your nominal rate of interest is 2.25%. Over the next year, the actual inflation rate turns out to be 1.75%. What is your actual real rate of return?

0.5%

If a $100 million increase in total income leads to a $62 million increase in consumption, the slope of the consumption function is:

0.62.

Suppose a labor market is described by the demand equation, Qd = 60 - 2w, and the supply equation, Qs = -10 + w, where Qd is the quantity demanded of labor, Qs is the quantity supplied of labor, and w is the wage (in dollars). If the government institutes a minimum wage of $25, how many workers will be employed in this market?

10,000,000

What is the GDP deflator if nominal GDP is $300 billion and real GDP is also $300 billion?

100

The median annual growth in the stock index is 7%. Which of the following annual stock index growth rates indicates a particularly strong economy?

12.9%

If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who are unemployed and have given up looking for a job, and 5 million people who are unemployed and seeking employment, then its labor force is _____ million.

140

You are given the choice of receiving $100 today or $115 one year from today. What annual interest rate will make you indifferent between these two choices?

15%

If the median value of initial unemployment claims is 400,000, which of the values of initial unemployment claims indicates a particularly strong economy?

335,000

Which of the following is an investment?

Fred pays a contractor to add two new rooms to his house.

If an economy has a positive output gap of 1.5%, this means:

GDP is 1.5% above potential GDP.

Which of the following people can be classified as "unemployed"?

Laura, who has been seeking employment for two months

How does money illusion cause nominal wage rigidity?

Since workers focus on nominal earnings and thus resent wage cuts, employers often choose to hold nominal wages constant rather than lower them.

Which statement is likely to be TRUE if actual output equals potential output?

The actual unemployment rate equals the equilibrium unemployment rate.

The government enacts regulation to institute enforceable property rights for business investment. Which input in the production function changes, and what is the effect on economic growth in the country?

The capital stock increases, and economic growth is positively affected.

Which statement about the producer price index is TRUE?

The producer price index measures the cost of a basket of goods typically purchased by producers of goods and services.

Suppose the marginal propensity to consume changes from 0.75 to 0.9. How will this affect the consumption function?

The slope will increase.

Suppose a lake is overfished until the fish stock is depleted. This is an example of:

a lack of established property rights

A group of people moves onto a forested piece of land (which has no established owner), cuts down all the trees, and acquires all the lumber on the land. Thereafter, the land is farmed until all the mineral properties of the soil are depleted. Ultimately, the land becomes a barren desert property. This is an example of:

a lack of established property rights leading to the depletion of a resource.

If Larry is a hand-to-mouth consumer and has just received a gift of $350, we can expect Larry to exhibit:

a large change in consumption.

If there is a permanent rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

a large increase; a large increase

An increasing return to scale production function is one where increasing all inputs by a certain proportion leads to output rising by:

a larger proportion.

In the absence of a minimum wage, efficiency wages, or labor unions, a decline in the demand for labor will likely result in _____ if wages are flexible.

a lower level of employment but likely no change in the unemployment rate

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

above; surplus

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

additions to GDP per worker decline.

Which statement would shift the production function upward?

an improvement in technology

During the Great Recession, the United States Congress increased the length of time that unemployment benefits could be received from 52 weeks to 99 weeks. This change caused:

an increase in the costs for the government.

Expansions are periods when _____.

both real GDP and employment grow

The moral of the story of the Solow growth model is that:

capital accumulation alone cannot lead to sustainable economic growth.

An increase in perceived business opportunities will generally _____ the demand curve for loanable funds.

cause a rightward shift of

Menu costs refer to the increased cost of:

changing listed prices.

The major difference between the producer price index and the consumer price index is that the producer price index _____, and the consumer price index _____.

is based on the cost of a market basket typically purchased by producers; is based on the cost of a market basket typically purchased by consumers

If the actual inflation rate is less than the expected inflation rate:

lenders gain and borrowers lose.

A relatively low saving rate affects productivity growth by:

limiting the funds available for investment in physical capital.

Unemployment insurance can lead to:

longer unemployment durations.

recessions and economic downturns

lower the official unemployment rate.

In the loanable funds market, the demand for loanable funds is negatively sloped because the higher the real interest rate, the:

lower the profitability of investment projects.

The rational rule of consumption is to consume more today if the:

marginal benefit of a dollar of consumption today is greater than (or equal to) the marginal benefit of spending a dollar plus interest in the future.

The menu costs of inflation are the:

marginal costs of adjusting prices.

The slope of the consumption function is the:

marginal propensity to consume.

The labor supply curve is positively sloped because:

more people are willing to work at high wages than at low wages.

Assuming a positive interest rate, the dollar amount of a future payment is _____ its present value.

more than

If a short-lived recession is expected, a consumption smoother will exhibit _____ in consumption.

no change

If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:

not change.

The CPI changes from 100 to 200. This means that:

overall prices have doubled.

Which factor will NOT increase labor productivity? a. education b. technological process c. new capital d. population growth

population growth

The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called:

potential output.

Hedging against inflation means:

purchasing financial investments with returns that are protected against inflation.

Many payments made by the U.S. government—such as Social Security payments—are tied to the consumer price index. To the extent that the index is biased upward, use of the CPI:

raises government expenditures.

An example of a frictionally unemployed worker is a(n):

real estate agent who leaves a job in Texas and searches for a similar, higher-paying job in California.

The price in the loanable funds market is the:

real interest rate.