exam 2 practice questions
Which of the following would shift the Consumption Function in the Aggregate Expenditure model (but would in the Aggregate Demand model)?
-An increase in the value of your retirement savings due to a soaring stock market -A change in your tax rate -A worsening expectation about future economic conditions -A lowering of your current level of debt
What would theoretically lose (be worse off) from trade? • Vietnamese phone producers • Vietnamese phone buyers • Vietnamese computer producers • Vietnamese computer buyers • Thai phone producers • Thai phone buyers • Thai computer producers • Thai computer buyers
-Vietnamese phone buyers -Vietnamese computer producers -Thai phone producers -Thai computer buyers
What would theoretically benefit from trade? • Vietnamese phone producers • Vietnamese phone buyers • Vietnamese computer producers • Vietnamese computer buyers • Thai phone producers • Thai phone buyers • Thai computer producers • Thai computer buyers
-Vietnamese phone producers -Vietnamese computer buyers -Thai computer producers -Thai phone buyers
Classical economics claim that ______ are the primary determinant of savings, while Keynesians believe that ______ is the primary determinant.
-interest rates -income
Consider the potential level of real GDP for an economy (Ŷ). Graphically, it _______
-is vertical -does not depend on the general price level
Tariffs and quotas are tools that countries can use to restrict/reduce trade. What are they?
-tariffs are taxes on imported goods/services -quotas are limits on the number imported
The national debt of a country represents _______.
-the cumulative effect of all past budget deficits and surpluses -the total amount the federal government owes to all bond holders
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What is the marginal propensity to save (MPS) in Econlandia?
0.33
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What is the marginal propensity to consume (MPC) in Econlandia?
0.67
Suppose that in Econlandia, the government increases spending by $40 Billion. As a result, GDP of the country increases by $200 Billion. AE multiplier is 5 tax multiplier is -4 What is the implied MPC of the country?
0.8
Suppose that in the far away land of Braavos, the government increases its spending by $15 million, and this results in an increase in real GDP of $120 million. What is the MPC of the country?
0.875
In the Aggregate Expenditure model, MPC + MPS equals
1
What would be an appropriate trade rate that would benefit both Vietnam and Thailand?
1 computer for 1.5 phones
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 At this level of equilibrium real GDP (Y*), how much is disposable income?
$102,000
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What is equilibrium real GDP (Y*)
$108,000
What is the total outstanding U.S. government debt, roughly?
$20 trillion
How much did the U.S. federal government receive in tax payments for fiscal year ending 2017?
$3.3 trillion
How much did the U.S. federal government spend for fiscal year ending 2017?
$4 trillion
If marginal propensity to consume is 0.6, and income increases from $30,000 to $40,000, how much will consumption increase by?
$6,000
Consider the hypothetical country of Econlandia. Suppose that the projected full-employment level of real GDP is $60,000. Also suppose that the current equilibrium level of real GDP is $54,000. Finally suppose that the MPC = 0.8. AE multiplier is 5 tax multiplier is -4 The GDP gap is _____ and the recessionary gap is _______
$6,000 $1,200
Consider a hypothetical country Econostan that uses the dollar as its currency. For the fiscal year, the Econostani government spent $125 million, and collected $140 million. At the beginning of the year, Econostan had total debt outstanding of $850 million. Econostani's total GDP for the year was $1,670 million. At the end of the year, what is Econostani's new total government debt?
$835 million
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 At this level of equilibrium real GDP (Y*), what is the level of disposable income (Y - T)?
$900,000
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What is equilibrium real GDP (Y*)?
$940,000
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What is the tax multiplier?
-2
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What is the tax multiplier?
-9
Which would cause an increase in Aggregate Demand? 1) The government decreases tax rates 2) There is a fall in nominal interest rates 3) There is rising consumer confidence 4) The government reduces its spending on U.S. goods and services 5) There is a fall in foreign wealth 6) There is a fall in household debt levels 7) There is a fall in consumer wealth
1) The government decreases tax rates 2) There is a fall in nominal interest rates 3) There is rising consumer confidence 6) There is a fall in household debt levels
Consider a hypothetical country Econostan that uses the dollar as its currency. For the fiscal year, the Econostani government spent $125 million, and collected $140 million. At the beginning of the year, Econostan had total debt outstanding of $850 million. Econostani's total GDP for the year was $1,670 million. At the end of the year, what is Econostani's debt to GDP ratio?
50%
Which would cause a decrease in the potential GDP? 1)There is an increase in the productivity of labor 2) There is an increase in the labor force participation rate 3) There is an increase in the supply of labor 4) There is an advance in the technology of production 5) There is an increase in the nation's amount of human capital 6) Unrest in the Middle East causes a disruption in the supply of oil to the U.S.
6) Unrest in the Middle East causes a disruption in the supply of oil to the U.S.
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What is the marginal propensity to consume (MPC) in Hypothetica?
9/10 (0.9)
Did the U.S. run a budget deficit or surplus in 2017? How much, roughly? government spending: $4 trillion tax payments: $3.3 trillion
A budget deficit of $700 billion
Consider a hypothetical economy of Winterfell. Suppose that Winterfell begins in long-run Macroeconomic Equilibrium. Now suppose that Winterfell's two biggest trading partners, Casterly Rock and Dorne both suffer significant economic slowdowns. The AD shifts left. What effect would that have on Winterfell's overall economy (overall prices - P, real GDP - Y, and unemployment - U)?
A fall in P, a fall in Y, and an increase in U
In economic news, the housing market is mentioned quite often. 'New housing is up 5% over last year', or 'New housing is down 8% from last year.' Economically, why is this such a big deal?
Because there are so many parts, materials and labor involved, a change in construction rates can have significant spillover (multiplier) effects into other parts of the economy
At this equilibrium level of real GDP (and income), consumption C = ____ and savings S = ______.
C = $93,000 S = $9,000
Which country is the largest foreign holder of United States debt? (Who does the U.S. government owe the most to?)
China and Japan are very close, they both hold much more than any other country
What are the differences in assumptions between Classical and Keynesian economists about how market participants behave and how quickly markets (and prices) can adjust to changes?
Classical economists believe that market participants and markets adjust quickly while Keynesian economists believe that some market participants and markets can be slow to adjust
Suppose that France has an absolute advantage over Germany in the production of cheese. This means that, given their current resources and available technology:
France can produce more cheese than Germany
What are the two main tools used in Aggregate Demand fiscal policy?
Government spending and (household) tax rates
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What would happen to y* if G increased by 3,000 and T also increased by 3,000 (and holding everything else the same)?
Y* would increase by 3,000
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What would happen to equilibrium real GDP (Y*) if imports fell $10,000 (down to $50,000)?
Y* would rise by $100,000
Consider the two countries above. What if GDP for Spendlotsvia was around $500 billion, while GDP for Frugalia was around $75 billion. Does that change your answer from above?
Yes, Spendlotsvia is better off because their debt is only ½ of their GDP
The giant manufacturing company Whamazon is considering your city to locate its new factory. You are the mayor of the city. Suppose that you estimate the MPC of your city to be 0.6. Suppose further that Whamazon estimates the immediate new Investment impact upon your city will be $350 million. Whamazon is asking for a tax subsidy of $750 million to locate there. Should you take the offer?
Yes, your city comes out ahead $125 million ($875 new economic development - $750 cost)
Consider the situation of many less developed countries (such as Thailand or India) where labor costs are very low, and that of many developed countries (such as the U.S. or Germany) where labor costs can be much higher. Given that, we can say that the less developed countries will have:
a comparative advantage in the production of some goods/services
Suppose that the president of a country wishes to lower personal income and business taxes. Suppose further that the country was already running budget deficits consistently (aka - the U.S). If nothing else changes, what will happen to the government's finances?
Since even less money is coming in before, and if the government spends the same as before, then the government will begin to run even larger deficits; the total debt of the country will increase
What describes the national security argument for protectionism?
Some goods should be insulated from foreign competition to ensure an adequate supply of these goods in the event of an international conflict
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What would happen to equilibrium output (Y*) if Investment increased by 1,000 (to 8,000) and holding everything else the same? At this equilibrium level of real GDP (and income), consumption C = $93,000 savings S = $9,000
Y* would increase by $3,000
The wealth effect, the interest-rate effect and the export effect all explain why
aggregate demand is downward sloping
If the terms of trade between the U.S. and Mexico is one half a laptop per ton of avocados create a set of prices for avocados and laptops
avocados = $1000/ton laptop = $500
Protectionism:
is the use of trade barriers to protect domestic firms from foreign competition
Deficits and surpluses tend to run in cycles. In general, when an economy is growing/expanding government revenue tends to _______, while government spending tends to _____. Combined, these tend to make deficits _______.
rise fall smaller
The overall goal of Aggregate Supply Fiscal Policy is to:
set the LRAS on a new, higher trajectory
The overall goal of Aggregate Demand Fiscal Policy is to:
smooth out the normal business fluctuations
Which would cause an increase in the potential level of real GDP? 1) There is an increase in the productivity of labor 2) There is a decrease in the labor force participation rate 3) There is an increase in government spending on U.S. goods/services 4) There is an increase in the nation's stock of physical capital 5) Unrest in the Middle East causes a disruption in the supply of oil to the U.S. 6) There is an advance in technology of production
1) There is an increase in the productivity of 4) There is an increase in the nation's stock of physical capital 6) There is an advance in technology of production
The formula for the AE multiplier is
1/(1 - MPC)
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What is the marginal propensity to save (MPS) in Hypothetica
1/10 (0.1)
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What is the Aggregate Expenditure (AE) multiplier?
10
How much is this expressed as debt-to-GDP for the U.S.?
100%
Over a 55-year average, about how much does the U.S. federal government collect in taxes each year, as a % of GDP?
17%
Consider the U.S. economy. Suppose that there is a tremendous fall in the stock market and home values. Suppose we take action to remedy the situation. What would be the appropriate AD fiscal policies? 1) Raise taxes on households 2) Lower taxes on households 3) Increase government spending 4) Decrease government spending 5) Increase the money supply 6) Decrease the money supply
2) Lower taxes on households 3) Increase government spending
Suppose you were the top economic adviser to the President of Econlandia. Which of the following would you recommend to her in order to close the GDP gap? 1. Increase G by 6,000 2. Increase G by 1,200 3. Increase G by 6,000 and increase T by 6,000 4. Decrease T by 1,500 5. Decrease T by 4,000 6. Increase G by 2,400 and decrease T by 1,500
2. Increase G by 1,200 3. Increase G by 6,000 and increase T by 6,000 4. Decrease T by 1,500
Over a 55-year average, about how much does the U.S. federal government spend, as a % of GDP?
20%
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What is the AE multiplier?
3
Which of the following are true in equilibrium? 1) C = S 2) C + S = X + M 3) C + S = Y - T 4) Aggregate Expenditures (AE) = output/income (Y) 5) X = M 6) G + I + X = S + T + M 7) I + X = G + T
3) C + S = Y - T 4) Aggregate Expenditures (AE) = output/income (Y) 6) G + I + X = S + T + M
Which would cause a decrease in Aggregate Demand? 1) The government decreases tax rates 2) There is a fall in nominal interest rates 3) There is rising consumer confidence 4) There is falling investor/business confidence 5) The government reduces its spending on U.S. goods and services 6) There is a fall in foreign wealth 7) The Federal Reserve increases the money supply
4) There is falling investor/business confidence 5) The government reduces its spending on U.S. goods and services 6) There is a fall in foreign wealth
Consider the U.S. economy. Suppose that there is a tremendous fall in the stock market and home values. What curve would this affect and which way?
AD, shift left
Consider the hypothetical country of Econlandia. Suppose that the projected full-employment level of real GDP is $60,000. Also suppose that the current equilibrium level of real GDP is $54,000. Finally suppose that the MPC = 0.8. The AE multiplier is _____ and the tax multiplier is ______
AE multiplier is 5 tax multiplier is -4
Suppose that in Econlandia, the government increases spending by $40 Billion. As a result, GDP of the country increases by $200 Billion. What is the implied AE multiplier? What is the tax multiplier?
AE multiplier is 5 tax multiplier is -4
Suppose that the U.S. imposes a tariff on imported car tires from China. Who would lose from this policy?
American tire buyers and Chinese tire industry
Suppose that the U.S. imposes a tariff on imported car tires from China. Who would benefit from this policy?
American tire industry and the American government
What are the components of Aggregate Demand?
Consumption Investment Government Exports Imports
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 At this level of equilibrium real GDP (Y*), Consumption = ______ and Savings = ________
Consumption = $885,000 Savings = $15,000
What is an example of contractionary AD fiscal policy?
Decreasing Government spending and raising household tax rates
Compared to most other developed nations, how much does the U.S. government (federal, state and local) spend, in proportion to its economic size (% of GDP)? As a proportion of its size, the U.S. government spends ________.
Less than most other advanced countries
Suppose that Vietnam and Thailand can produce both computers and cell phones. In one month, Vietnam can produce 20 thousand computers or 50 thousand phones, or some combination. Also in one month, Thailand and produce 30 thousand computers or 30 thousand phones or some combination. What is the opportunity cost of a computer in Vietnam? What is the opportunity cost of a computer in Thailand?
In Vietnam, one computer costs 5/2 phones; In Thailand one computer costs 1 phone
Suppose that Vietnam and Thailand can produce both computers and cell phones. In one month, Vietnam can produce 20 thousand computers or 50 thousand phones, or some combination. Also in one month, Thailand and produce 30 thousand computers or 30 thousand phones or some combination. What is the opportunity of a phone in Vietnam? What is the opportunity cost of a phone in Thailand?
In Vietnam, one phone costs 2/5 computer, I Thailand, one phone costs 1 computer
Suppose that the economy is operating at a point less than the full-employment level of output. Suppose that the MPC is estimated to be 0.6. Suppose further that the government would like to increase Aggregate Demand by $200 billion. Which of the policies below would be appropriate?
Increase government spending by $80 billion
What is an example of expansionary AD fiscal policy?
Increasing Government spending and decreasing household tax rates
In the complete Aggregate Expenditure model, which functions are injections?
Investment (I) Government Spending (G) Exports (X)
Compared to other countries, how is the current U.S. government debt to GDP ratio?
It is quite high, higher than most other advanced economies
Suppose that for a given year, a government sets programs in place (agriculture, food safety, military, roads, schools, etc.) costing $500 million. For that same year, it collects $400 million in revenue. What does it typically do?
It prints $100 million of bonds, sells them, and uses that to pay for the last $100 million of programs
As a % of U.S. GDP, how much did the U.S. federal government collect in taxes for fiscal year 2017?
It was near its 55-year average (very slightly below)
As a % of U.S. GDP, how much did the U.S. federal government spend fiscal year 2017?
It was very close to its average (just a bit above)
Who is known as the 'father of modern macroeconomics'?
John M. Keynes
You hit your sales number for the quarter and are awarded a $3,000 bonus. You spend $2,100 on a new living room TV and entertainment system and save the rest. What is your MPC and MPS?
MPC = 0.7 MPS = 0.3
Suppose that prices dropped in Econlandia. As a result, consumers feel (and are) more wealthy and as a result increase spending. This would cause ___________.
No shift, a movement down along the given AD curve
What is the largest source of U.S. Government revenue?
Personal Income Taxes
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What would happen to equilibrium real GDP (Y*) if government spending (G) decreased by $10,000 and taxes (T) also would fall by $10,000 (assuming a balanced budget). What would be the overall net effect on real GDP?
Real GDP (Y*) would decrease by $10,000
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What is the formula for the savings function (S)?
S = -$75,000 + 1/10(Y - T)
Many economists criticize protectionism because it causes losses to consumers and eliminates jobs in domestic industries that use protected products. Why, then, do some people support protectionism?
Supporters of protectionism in high-income countries believe that wages will fall as a result of competition with firms from developing countries
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 Assuming the government runs a balanced budget, what would be the value for T?
T = $40,000
In the complete Aggregate Expenditure model, which functions are considered withdrawals?
Taxes (T) Savings (S) Imports (M)
Suppose that Vietnam and Thailand can produce both computers and cell phones. In one month, Vietnam can produce 20 thousand computers or 50 thousand phones, or some combination. Also in one month, Thailand and produce 30 thousand computers or 30 thousand phones or some combination. What is true about absolute advantage (AA)?
Thailand has the AA in computers and Vietnam has the AA in phones
Consider a hypothetical economy of Winterfell. Suppose that Winterfell begins in long-run Macroeconomic Equilibrium. Now suppose that Winterfell's two biggest trading partners, Casterly Rock and Dorne both suffer significant economic slowdowns. Consider the economy of Winterfell. How would we model the effects of Casterly Rock and Dorne on Winterfell?
The AD would shift left
Suppose that a country consistently runs budget deficits (aka - the U.S.) What are the only ways for the government to halt this practice and fix its finances?
The government must either raise taxes, or spend less on its citizens, or both
What is an example of automatic stabilizers?
The progressive tax code and unemployment insurance only
How has this percentage changed? Is your number above about normal, or higher or lower than normal?
U.S. debt to GDP is higher than it has been since World War II.
Suppose that Vietnam and Thailand can produce both computers and cell phones. In one month, Vietnam can produce 20 thousand computers or 50 thousand phones, or some combination. Also in one month, Thailand and produce 30 thousand computers or 30 thousand phones or some combination. -Vietnam: 1 phone costs 2/5 computer -Thailand: 1 phone costs 1 computer -Vietnam: 1 computer costs 5/2 phones -Thailand 1 computer costs 1 phone What can we say about the comparative advantage (CA) between the two countries?
Vietnam has the CA in phones, Thailand has the CA in computers
Suppose that the government of Spendlotsvia has a total outstanding debt of $250 billion. The government of Frugalia has a total outstanding debt of $100 billion. What can we say about the fiscal health of these two countries?
Without more information, we can't make any judgments about the fiscal health of either country
. What is the formula for disposable income?
Y - T
C = $75,000 + 9/10(Y - T) I = $25,000 G = $40,000 X = $50,000 M = $60,000 What would happen to equilibrium real GDP (Y*) if investment spending Consumption = $885,000 Savings = $15,000
Y* would decrease by $50,000
C = $25,000 + 2/3(Y - T) S = -$25,000 + 1/3(Y - T) I = $7,000 G = T = $6,000 X = $10,000 M = $8,000 What would happen to Y* if exports decreased by 2,000 (down to 8,000) and holding everything else the same?
Y* would decrease by 6,000
Consider a hypothetical country Econostan that uses the dollar as its currency. For the fiscal year, the Econostani government spent $125 million, and collected $140 million. At the beginning of the year, Econostan had total debt outstanding of $850 million. Econostani's total GDP for the year was $1,670 million. For the fiscal year, we would say that the Econostani government experienced a______ of_____amount.
budget surplus $15 million
Suppose that a small country, Kardashia, does not have an absolute advantage in the production of any good or service. This means that Kardashia:
can still gain from trade if it specializes in the goods/services where it has a comparative advantage
Consider a hypothetical country Econostan that uses the dollar as its currency. For the fiscal year, the Econostani government spent $125 million, and collected $140 million. At the beginning of the year, Econostan had total debt outstanding of $850 million. Econostani's total GDP for the year was $1,670 million. For the fiscal year, Econostani ________.
decreased its total outstanding debt by $15 million
Consider Econland, which uses the Eco as its currency. Suppose that the Eco depreciates in value against other currencies. In Econland, this would cause exports to: imports to: the aggregate demand to:
exports rise imports fall aggregate demand shifts right
Deficits and surpluses tend to run in cycles. In general, when an economy is contracting or in a recession, government revenue tends to _____, while government spending tends to ____. Combined, these tend to make deficits _______.
fall rise worse
Consider the U.S. economy. Suppose that there is a tremendous fall in the stock market and home values. The AD curve shifts left. What would be the short-term effect on the economy (prices - P, GDP - Y, unemployment - U)?
fall in P fall in Y rise in U
When a country has an absolute advantage in a certain good, it means that they:
have the ability to produce more of that good than another country over some time period
When a county has a comparative advantage in a certain good, it means that they:
have the ability to produce that good at a lower opportunity cost than another country
Suppose that prices rise in Econlandia. As a result, interest rates also rise, which in turn causes investment to drop. This is known as the _______.
interest rate effect
Consider the differences between Classical and Keynesian economists. According to the Classical model, the primary determinant of savings is _______, while according to the Keynesian model, the primary determinant of savings is ______.
interest rates income
Compared to most other developed nations, how 'taxed' is the US., in proportion to its economic size (% of GDP)? As a proportion of its size, Americans are taxed ______.
less than most other advanced countries
