Exam 2

A worker would be hurt least by inflation when the

worker is protected by a cost-of-living adjustment clause in an employment contrac

multiplier

1/MPS

If the Consumer Price Index was 125 in one year and 120 in the following year, then the rate of inflation is approximately

-4%

Which of the following would be one of the factors that shift the aggregate demand curve? A change in

Profit expectations on investment projects

Assume there are no investment projects that will produce an expected rate of return of 8 percent or more. There are, however, $2 billion worth of investment projects with an expected rate of return at 7 percent, an additional $2 billion for every drop of the interest rate by 1 percent. If the real interest rate is 3 percent in this economy, the cumulative amount of investment at the 3 percent or higher rate of return i

10 billion

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But, if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of

10%

MPS = MPC ***

1:1 ratio

If the negative GDP gap were equal to 4% of the potential GDP, Okun's law suggests that the actual unemployment rate would exceed the natural rate of unemployment by

2%

The economy has an annual inflation rate of 3.5%. It will take approximately how many years for the price level to double

20 years

The total adult population of an economy is 175 million, the number of employed is 122 million, and the number of unemployed is 17 million. The percent of adults who are not in the labor force is

206%

Suppose that new computer software for accounting and analysis at a business has a useful life of only one year and costs $200,000 before it needs to be upgraded to a new version. The revenue generated by this software is expected to be $250,000. The expected rate of return from this new computer software is

25%

If the natural rate of unemployment is 4.5 percent and the actual unemployment rate is 6.5 percent, then Okun's law indicates that the GDP gap is

4%

A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in institutions, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate?

6 Percent

If the inflation premium is 3% and the real interest on a loan is 4%, then the nominal interest rate is

7%

If disposable income increases from $912 to $927 billion and MPC = 0.6, then consumption will increase by

9

Which of the following fiscal policy changes would be the most expansionary?

A $40 billion increase in government spending

If the cyclically-adjusted budget shows a deficit of about $100 billion and the actual budget shows a deficit of about $150 billion, it can be concluded that there is

A cyclical defici

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and perunit production cost are flexible when

AD increases but not when AD decreases

If the unemployment rate for the United States economy rises from 7 to 11 percent during a year, we can conclude that

Actual GDP is less than Potential

In which industry or sector of the economy is output least likely to be affected by the business cycle

Agricultural Comodities

Which combination of factors would most likely increase aggregate demand?

An increase in consumer wealth and a decrease in interest rates

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output in times of recession

Which of the following events would most likely reduce aggregate demand

An increase in real interest rates

Rate of inflation

CPI 2 - CPI 1/CPI 1 x 100

An increase in household wealth that creates a wealth effect shifts the

Consumption schedule upward and the saving schedule downward

. If there is a constitutional requirement to maintain a balanced budget, then during a recession when tax revenues are shrinking, the government will have to implement

Contractionary fiscal policy

Some economists prefer to use the term business fluctuations rather than business cycles to describe the historical growth record in the United States because

Cycles imply regularity while fluctuations do not

. If disposable income decreases from $1800 to $1500 and MPC = 0.75, then saving will

Decrease $75

If the U.S. dollar appreciates in value relative to foreign currencies, then this will:

Decrease aggregate demand and increase aggregate supply

Actions by the Federal government that decrease the progressivity of the tax system

Decrease the effect of automatic stabilizers

The crowding-out effect works through interest rates to

Decrease the effectiveness of expansionary fiscal policy

The United States is experiencing a recession and Congress decides to adopt an expansionary fiscal policy to stimulate the economy. In this case, the crowding-out effect suggests that investment spending would

Decrease, thus decreasing aggregate demand and partially offsetting the fiscal policy

Due to automatic stabilizers, when income rises, government transfer spending

Decreases and tax revenues increase

As the consumption and saving schedules relate to real GDP, an increase in taxes will shif

Downward for both

The phases of the business cycle from points A to D are, respectively (High point, downhill, low point, uphill)

Peak, recession, trough, expansion

. If the price level increases by 15 percent while nominal income increases by 8 percent, then in percentage terms real income would

Fall by about 7 percent

Aggregate demand decreases and real output falls but the price level remains the same. Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?

Fear of Price War

contractionary fiscal policy

Fiscal policy used to decrease aggregate demand or supply. Deliberate measures to decrease government expenditures, increase taxes, or both. Appropriate during periods of inflation.

The cyclically-adjusted deficit as a percentage of GDP is 2 percent in Year 1. This deficit becomes 1 percent of GDP in Year 2. It can be concluded from Year 1 to Year 2 that

Fiscal policy was more contractionary

Frictional unemployment Structural unemployment Cyclical unemployment Disguised unemployment

Frictional = Quit new job for better one Structural = current skills dont match requirements of new jobs Cyclical = follows the business cycle Disguised = Working but productivity is 0

GDP Gap

GDP Potential - Actual

. If the price of crude oil decreases, then this event would most likely

Increase aggregate supply in the U.S.

Which of the following is an important real consequence of the public debt of the United States

Its consequent higher interest rates lead to fewer incentives to bear risk and innovate

If the slope of a linear consumption schedule increases in a private, closed economy, then it can be concluded that the

MPC has increased

In an economy, for every $1600 decrease in income, spending falls by $1200. It can be concluded that the

Marginal Propensity to Save is .25

Nominal Interest rate ***

Nominal = Real interest rate + inflation rate

In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2?

Rose by 600

If disposable income is $900 billion when the average propensity to consume is 0.9, it can be concluded that

Saving is 90 bil

If the consumption schedule shifts downward, and the shift was not caused by a tax change, then the saving schedule

Shift Upward

One timing problem with fiscal policy to counter a recession is a "recognition lag" that occurs between the

Start of the recession and the time it takes to recognize that the recession has started

A worker who loses a job at a call center because business firms switch the call center to another country is an example of: A. Frictional unemployment B. Structural unemployment C. Cyclical unemployment D. Disguised unemployment

Structural

Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is

Structural

What is the likely effect of a rise in real interest rates on consumption and saving in the best of circumstances?

The consumption schedule shifts downward slightly and the saving schedule shifts upward slightly

Incurring an internal debt to finance a war like World War II does not pass the true cost of the war on to future generations because

The opportunity cost of wartime expenditures was borne by the generation that lived during the war

Which statement is correct? A. All sectors of the economy are affected to similar degrees by business fluctuations B. Real output and employment generally show little variance over the business cycle C. The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle D. Recessions have not been severe because economists and statisticians have been able to predict their occurrence and intensity with high accuracy

The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle

Calc Unemployment Rate

Unemployed people/labor force

Wage contracts, efficiency wages, and the minimum wage are explanations for why

Wages tend to be inflexible downward

Crowding out effecty ***

fpub

A person's real income will increase by 3% if her nominal income

increases by 7% while the price index rises by 4%

Expected Rate of Return

multiply potential outcomes, add together

Level of productivity and per-unit cost*** 45 46

productivity = total output/total input

Stabilizer **

tax system