Macroeconomics 210 Exam 2

Inflation does what

reduces the purchasing power of the dollar.

In sequential order, the four phases of the business cycle are

peak, recession, trough, and expansion.

The difference between a 2.5 percent and a 3.0 percent annual growth rate over several decades could be the difference between

output doubling in 28 years (2.5 percent growth) and 23 years (3.0 percent growth). Correct

A political business cycle is the idea that

politicians are more interested in reelection than in stabilizing the economy. Correct

Demand-pull inflation occurs when

prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.

Economists agree that __________ inflation reduces real output.

cost-push

The type of inflation that is more likely to be associated with a negative GDP gap is

cost-push inflation.

If there is an increase in the unemployment rate, the size of the labor force

could increase or decrease.

The shape of the short-run aggregate supply curve is

upsloping, because wages adjust more slowly than the price level.

The length of a complete business cycle

varies greatly in duration and intensity.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again. Correct

During the recession of 2007-2009, the U.S. federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?

yes

An increase in your nominal income and a decrease in your real income might occur simultaneously if

your nominal income increases less than the cost of living increases.

An increase in aggregate demand.

The price level rises rapidly and there is little change in real output.

The benefits of economic growth, particularly as measured by real GDP per capita, include

higher living standards for the vast majority of people

The nominal interest rate

minus the inflation rate is the real interest rate.

Which of the following will shift the aggregate supply curve to the right? -The government passes a law doubling all manufacturing wages. -A new networking technology increases productivity all over the economy. -Business taxes fall -The price of oil rises substantially.

-a new network technology increases productivity all over the economy -business taxes fall

Which of the following are part of a long-run aggregate -the price level is fixed -an unsloping curve -a horizontal line -output prices are flexible, but input prices are fixed -a vertical line -output is fixed

-a vertical line -output is fixed

Which of the following would help a government reduce an inflationary output gap? check all that apply -Increasing government spending -Lowering taxes -Raising taxes -Decreasing government spending

-raising taxes -decreasing government spending

Which of the following will shift the aggregate demand curve to the left? -the government raises corporate profit taxes -there is an economic boom overseas that raises the incomes of foreign households -the government reduces personal income taxes -interest rates rise

-the government raises corporate profit taxes -interest rates rise

If real GDP grows at 7 percent per year, then real GDP will double in approximately __________ years.

10

Suppose that a country has 9 million people working full-time. It also has 1 million people who are actively seeking work but are currently unemployed, along with 2 million discouraged workers who have given up looking for work and are currently unemployed. What is this country's unemployment rate?

10%

Zion's nominal income will go up by 10 percent next year. Inflation is expected to be -2 percent next year. By approximately how much will Zion's real income change next year?

12 percent

Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent, and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank?

7%

A decrease in aggregate demand.

A decrease in aggregate demand.

Who gains from inflation?

Borrowers

Which of the following statements is true?

Deflation means that the price level is falling, whereas with inflation overall prices are rising.

True or False. Computers and increased global competition have inhibited economic growth in recent decades.

False

True or False. Lenders are helped by unanticipated inflation.

False

If GDP is $25 trillion, how many years will it take for GDP to increase to $100 trillion if annual growth is 5 percent? Instructions: Enter your answer as a whole number.

GDP x (1 + 0.05)^time = 4 trillion t= ln 4 / ln 1.05 = 28 years

What are the four supply factors of economic growth?

Increases in the quantity and quality of natural resources, increases in the quantity and quality of human resources, increases in the supply of capital goods, and improvements in technology.

What type of tax system would have the most built-in stability?

Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes.

Who measures the labor force, and how is it defined?

The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.

What is the efficiency factor?

The level of economic efficiency and full employment needed to reach full production potential.

what is the demand factor

The level of purchases needed to maintain full employment.

Equal increases in aggregate demand and aggregate supply.

The price level does not change, but real output increases

An increase in aggregate demand that exceeds an increase in aggregate supply.

The price level increases somewhat, with a relatively large change in output. Correct

The crowding-out effect is

a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending

The unemployment rate is defined as

the number of unemployed persons divided by the labor force.

The multiplier

causes an initial change in spending to generate an even larger change in the aggregate demand curve.

The Consumer Price Index (CPI) is determined each month by

comparing the value of a market basket of goods that consumers typically purchase to the value of the basket in a base year.

The losers from inflation are those with

fixed incomes in nominal terms

Which of the following are part of a short-run aggregate -the price level is fixed -an unsloping curve -a horizontal line -output prices are flexible, but input prices are fixed -a vertical line -output is fixed

-output prices are flexible, but input prices are fixed -an unsloping line

Which of the following are part of an immediate short-run aggregate supply curve -the price level is fixed -an unsloping curve -a horizontal line -output prices are flexible, but input prices are fixed -a vertical line -output is fixed

-the price level is fixed -a horizontal line

A country's current unemployment rate is 11 percent. Economists estimate that its natural rate of unemployment is 6 percent. About how large is this economy's negative GDP gap?

10 percent

A decrease in aggregate supply, with no change in aggregate demand.

The price level rises and real output decreases

True or false: "Unemployment can be caused by a decrease of aggregate demand or a decrease of aggregate supply."

True, but the magnitude of the effect on unemployment depends on the economic situation.

Even though the United States has an unemployment compensation program that provides income for those out of work, should we still worry about unemployment?

Yes, because the unemployment compensation program merely gives the unemployed enough funds for basic needs.

The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because

a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed.

Economic growth means

a higher average standard of living, provided that the population does not grow even faster.

The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:

a mediocre and contradictory combination of tax and expenditure changes. Correct

Assume the following data for a country: Category Number of People (Millions) Total population. 500 Population under 16 years of age or institutionalized 120 Not in the labor force 150 Unemployed. 23 Part-time workers looking for full-time jobs 10 Instructions: Enter your answers as a whole number. a. What is the size of the labor force? b. What is the official unemployment rate?

a. (total population - population under 16 years of age or institutionalized - not in labor force) = 500-120-150=230 b. (unemployment/ labor force) = (23/230) x 100 = 10%

How long would it take for the price level to double if inflation persisted at the following percentages? Instructions: Enter your answers as a whole number. a. 7 percent per year b. 14 percent per year c. 2.5 percent per year

a. 10 years b. 5 years c. 28 years rule of 70: percent per yea/ 70

Suppose that the natural rate of unemployment in a particular year is 4 percent and the actual unemployment rate is 9 percent. Instructions: Enter your answers as a whole number. a. Use Okun's law to determine the size of the GDP gap in percentage-point terms. b. If potential GDP is $500 billion in that year, how much output is forgone because of cyclical unemployment?

a. 9%-4% = 5% x 2% = 10% b. 0.10 x 500 = 50 billion

Identify each of the following situations as something that either promotes growth or inhibits growth. a. Increasing corruption allows government officials to steal people's homes: (Click to select) Promotes growth Inhibits growth b. A nation introduces patent laws for the first time: (Click to select) Inhibits growth Promotes growth c. A court order shuts down all banks permanently: (Click to select) Promotes growth Inhibits growth d. A poor country extends free public schooling from 8 years to 12 years: (Click to select) Inhibits growth Promotes growth e. A nation adopts a free-trade policy: (Click to select) Promotes growth Inhibits growth f. A formerly communist country adopts free markets: (Click to select) Promotes growth Inhibits growth

a. Inhibits growth b. Promotes growth c. Inhibits growth d. Promotes growth e. Promotes growth f. Promotes growth

What effects would each of the following have on aggregate demand or aggregate supply, other things equal? a. A widespread fear by consumers of an impending economic depression. __________ will ___________ b. A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output. ___________ will ____________ c. A reduction in interest rates. __________will ________________ d. A major increase in spending for health care by the federal government. __________will______________ e. The general expectation of coming rapid inflation. __________will_______________ f. The complete disintegration of OPEC, causing oil prices to fall by one-half. __________will__________ g. A 10 percent across-the-board reduction in personal income tax rates. _________ will __________ h. A sizable increase in labor productivity (with no change in nominal wages). __________will ___________ i. A 12 percent increase in nominal wages (with no change in productivity). _________will_____________ j. An increase in exports that exceeds an increase in imports (not due to tariffs). __________will __________

a. aggregate demand will decrease b. aggregate supply will decrease c. aggregate demand will increase d. aggregate demand will increase e. aggregate demand will increase f. aggregate supply will increase g. aggregate demand will increase h. aggregate supply will increase i. aggregate supply will decrease j. aggregate demand will increase

The diagram below represents the aggregate demand and aggregate supply of the United States in equilibrium. Suppose a severe, widespread drought in the Midwest causes a poor grain crop. a.How would this impact the aggregate supply or aggregate demand supply graphically? b. The phenomenon depicted in the diagram is known as -demand-pull inflation. -cost-pull inflation. -deflation. -cost-push inflation. c. This phenomenon causes real domestic output to (Click to select) and the price level to (Click to select)

a. aggregate supply line shifts to the left, upward b. cost-push inflation c. decrease, increase

Suppose that a country has no public debt in year 1 but experiences a budget deficit of $40 billion in year 2, a budget surplus of $10 billion in year 3, and a budget deficit of $2 billion in year 4. a. What is the absolute size of its public debt in year 4? b. If its real GDP in year 4 is $104 billion, what is this country's public debt as a percentage of real GDP in year 4?

a. budget deficit= 40-10+2= 32 billion b. Public debt percentage= 32/104 x 100= 31%

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. a. Consumers become more pessimistic about the economy. b. Technological changes enable workers to be more productive. c. Manufacturing firms expect steel prices to decrease significantly. d. Employers are required to provide paid sick leave to part-time as well as full-time employees. e. Government spending increases. f. A hurricane destroys manufacturing plants. g. A stock market crash reduces people's wealth. h. The spread of democracy around the world increases consumer confidence in the United States. i. The United States enters into an arms race with China, resulting in a significant increase in military spending. j. A revolution in Iran results in a significant reduction in the world's supply of oil. k. A new computer chip is developed that is faster and cheaper than previous chips.

a. demand decreases b. supply increases c. supply increases d. supply decreases e. demand increases f. supply decreases g. demand decreases h. demand increases i. demand increases j. supply decreases k. supply increases

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. a. Tim just graduated from college and is looking for a job. b. A recession causes a local factory to lay off 30 workers. c. Thousands of bus and truck drivers permanently lose their jobs to self-driving vehicles. d. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India.

a. frictional unemployment b. cyclical employment c. structural unemployment d. structural unemployment

Consider the following data for a particular country: Year Population (mil) Real GDP (trillions) 1 300 18 2 375 27 a. What is the growth rate of real GDP from year 1 to year 2? b. What is the growth rate of real GDP per capita from year 1 to year 2?

a. growth rate of real GDP from year 1 to year 2 = (27 trillion-18 trillion)/ 18 trillion x 100 = 50% b. real GDP per capita for year 1 = (18 trill)/(300 million)= 60,000. real GDP per capita for year 2= (27 trill)/(375 mill)= 72,000 (72,000-60,000)/60,000 x 100 = 20%

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. a. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin. b. Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent. c. Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill. d. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

a. operational lag b. recognition lag c. administrative lag d. operational lag

The following table shows a person's nominal and real wages for three years, as well as the price level (price index) for each year. Fill in the blanks in the table, and then calculate the annual inflation rate for each year (not including the Year 1). a.Year 1: Nominal wage=8.00, Real wage=5.00, Price level=? b.Year 2: Nominal wage=9.00, Real wage=?, Price level=200, Inflation rate= ? c.Year 3: Nominal wage= ?, Real wage= 5.00, Price level=240, Inflation rate= ?

a. price level= 160.00 b. real wage=4.50, inflation rate=25.00 c.nominal wage=12.00, inflation rate=20.00 -(real wage=nominal wage/price level (in hundreths) -(nominal wage=real wage x price level (in hundreths) -(price level= nominal/real wage x 100 -(inflation rate= (current year price level- previous year price level)/ previous price level x 100)

The diagram below depicts an economy that is initially in equilibrium. Suppose that the central bank causes real interest rates in the economy to increase. a. How will this effect short-run equilibrium quantity? b. how will this effect short-tun equilibrium price level

a. quantity will decrease b. price level will decrease (aggregate demand curve will shift inward to the left)

Suppose the CPI was 140 last year and is 154 this year. Instructions: Round your answers to 1 decimal place. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. a. What is this year's inflation rate? b. In contrast, suppose that the CPI was 140 last year and is 138 this year. What is this year's inflation rate? c. What term do economists use to describe this second outcome?

a. rate of inflation = (CPI current- CPI last)/ CPI last. (154-140)/140= 10% b. (138-140)/140 = -1.4% c. Deflation

Suppose a country's real GDP is $18 trillion and the population is 300 million. Instructions: Enter your answers as a whole number. a. What is this country's real GDP per capita? b. Suppose that during the next 10 years, real GDP doubles and the population increases by 50 percent. At the end of this 10-year period, what will be its real GDP per capita?

a. real GDP per capita= real GDP/ population = $60,000 b.real GDP per capita= $80,000

Suppose your nominal income rises by 5.3 percent and the price level rises by 3.8 percent in some year. Instructions: Round your answers to 1 decimal place. a. By what percentage will your real income (approximately) increase? percent b. If your nominal income rises by 2.8 percent and your real income rises by 1.1 percent in some year, what is the (approximate) inflation rate?

a. real income % increase (approx.) = (5.3-3.8)= 1.5% b. rate of inflation= (2.8-1.1) =1.7%

Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. a. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? -How large a tax cut would be needed to achieve the same increase in aggregate demand? b. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt. -Increase government spending by $_______ billion -Increase taxes by $_______ billion

a. spending multiplier= 1/(1-mpc)= 1/(1-0.8)=5 billion tac cut multiplier= mpc/(1-mpc)= 0.8/(1-0.8)= 4, to increase AD by $25 billion, a tax cut of (25/4) = 6.25 billion b. increase government spending by $25 billion -increase taxes by $25 billion

which of the following would most likely shift the aggregate demand curve to the right: -increase in stock prices that increases consumer wealth -increased fear that a recession will cause workers to lose their jobs -an increase in personal income tax rates -a reduction in household borrowing because of tighter lending practices

an increase in stock prices that increases consumer wealth

The type of inflation that is more likely to be associated with a positive GDP gap is

demand-pull inflation.

The Council of Economic Advisers (CEA) advises the president on

economic matters and provides recommendations for discretionary fiscal policy action.

Hyperinflation might lead to a severe decline in total output if

everyone starts speculating and searching for ways to avoid inflation.

true or false: As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations.

false

true or false: The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.

false

true or false: The total public debt is more relevant to an economy than the public debt as a percentage of GDP.

false

Illustrate these factors in terms of the production possibilities curve. Instructions: On the graph, click and drag the endpoints 'A' and 'B' of the production possibilities curve to new positions to illustrate the growth factor in both capital and consumer goods.

graph shifts outward to the right

Suppose an economy's real GDP is $30,000 in year 1 and $31,200 in year 2. Instructions: In part a, enter your answer as a whole number. In part b, round your answer to 2 decimal places. a. What is the growth rate of its real GDP? b. Assume that the population is 100 in year 1 and 102 in year 2. What is the growth rate of real GDP per capita?

growth in real GDP= Change in Real GDP/Population a. ((31,200-30,000)/30,000) x 100= 4% b. real GDP. per capita in year 1= 30,000/100= $300 per capita. Real GDP per capita in year 2= 31,200/102= $305.88 per capita. Growth in real GDP per capita= (305.88-300)/300 x100= 1.96%

The problem of time lags in enacting and applying fiscal policy is

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed.

A cost of economic growth is

it has not solved sociological problems such as poverty, homelessness, and discrimination.

Some politicians have suggested that the United States enact a constitutional amendment requiring that the federal government balance its budget annually. Such an amendment, if strictly enforced, would force the government to enact a contractionary fiscal policy whenever the economy experienced a severe recession because

net tax revenue falls and transfer payments rise during a recession, so balancing the budget would require lowering transfer payments and raising taxes.

Seasonal variations and long-run trends complicate the measurement of the business cycle because

normal seasonal variations do not signal boom or recession.

Today's poor countries are

not always destined to be poor if they can develop the appropriate institutions to catch up to the wealthier countries

Suppose that the economy is experiencing a recession with an estimated recessionary gap of $30 billion. Congress is considering the use of fiscal policy to ease the recession, but due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $2 billion. It wants to make up the remainder of the recessionary gap using tax cuts. If a spending increase of $2 billion is approved and the MPC is 0.9, by how much will taxes need to be reduced to close the remainder of the recessionary gap?

recessionary gap= 30bil-2 bill= 28 billion spending multiplier= 1/(1-mpc)= 1/(1-0.9)= 10 tax multiplier= mpc/(1-mpc)= 0.9/(1-0.9)=9 tax reduction= gap/tax multiplier= 28/9= 3.11 bil or change in income= (change in gov. spending/ (1-mpc)+(-mpc x change in tax/ (1-mpc))

Government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.

Cost-push inflation occurs in the presence of __________.

rising per-unit production costs

Some countries today are much poorer than other countries because

some countries began the process of modern economic growth sooner.

The Bureau of Labor Statistics (BLS) calculates the inflation rate from one year to the next by

subtracting the CPI of the previous year from the CPI of the most recent year, and then dividing by the CPI of the previous year.

Built-in (automatic) stabilizers work by changing __________ so that changes in GDP are reduced.

taxes and government payouts

The long-run aggregate supply curve is vertical because the economy's potential output is determined by

the availability and productivity of real resources, not by the price level. Correct

If the annual interest payments on the U.S. public debt sharply increased as a percentage of GDP, then -there would be a smaller debt load. -interest payments would represent a smaller portion of tax revenues. -the government would have to use tax revenues or go deeper into debt. -GDP would fall.

the government would have to use tax revenues or go deeper into debt

The downsloping aggregate demand curve can be explained by

the interest-rate effect, the real-balances effect, and the foreign purchases effect. Correct

The unemployment rate that is consistent with full employment is __________.

the natural rate of unemployment

The short-run aggregate supply curve is relatively flat to the left of the full-employment output because

there are large amounts of unused capacity and idle human resources.

In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion, driving the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true? -There is no crowding-out effect because both the government and firms are still borrowing a lot. -There is a crowding-out effect of $20 billion. -There is a crowding-out effect of $25 billion. -There is no crowding-out effect because the government's increase in borrowing exceeds firms' decrease in borrowing.

there is a crowding-out effect of $20 billion

The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables because

these goods last, so that purchases can be postponed.

true or false: An internally held public debt is like a debt of the left hand owed to the right hand.

true

A positive unemployment rate—more than zero percent—is fully compatible with full employment because at full employment,

unemployment includes frictional unemployment, which is always positive because people are transitioning to new jobs