Macroeconomics Final Questions

(Problem 11) Why would you expect real GDP per capita in California and Pennsylvania to exhibit convergence but not in California and Baja California, a state of Mexico that borders the United States? Consider what changes would allow California and Baja California to converge, then determine which of the following best describes the correct answer.

It is more likely that the factors that affect growth will be equal in California and Pennsylvania but not equal between California and Baja California.

The demand for money is higher in Japan than in the United States because:

Japanese interest rates are lower than those in the United States.

A dramatic increase in the Federal government's deficit spending would possibly lead to which one of the following?

Less funds being available for the private sector's spending.

If you transfer $1,000 from your savings account to your checking account:

M1 increases by $1,000, but M2 doesn't change.

The LARGEST monetary aggregate is:

M2, because it contains currency in circulation, all bank deposits, other deposits, and deposit-like assets.

If we find that our economy is in a recession, which of the following could the Fiscal policy makers do to correct the situation?

Reduce taxes

Refer to Figure: AD-AS Model II. If nominal wages fall, in the short run the _____ curve will shift to the _____.

SRAS; right

Which factor will NOT cause an increase in demand for good X?

a decrease in the price of good X

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. What is the government budget balance?

a deficit of $1.5 trillion

Use Figure: Technological Progress and Productivity Growth. If there is a significant increase in human capital per worker (all other factors remaining unchanged), it is BEST indicated by a move from:

B to C - shift up in the production function

Assume that we are looking at the local market for pizza. Assume that the equilibrium price is $20 and the equilibrium quantity is 1000. Which of the following options best describes what would happen to this market if a study was published that proved that pizza caused serious illness?

Demand would decrease causing a surplus situation. Prices would then decline and this causes quantity supplied to decrease and quantity demanded to increase until the new equilibrium is reached at a lower price and lower quantities.

Which one of the following factors do we consider to be central (the seed) for economic growth to occur?

labor productivity

Which item is a paper claim that entitles the buyer to future income from the seller? I. a financial asset II. a physical asset III. a liability

I only

Which item is a tangible object that can be used to generate future income? I. a financial asset II. a physical asset III. a liability

II only

Which item is a requirement to pay in the future? I. a financial asset II. a physical asset III. a liability

III only

The roots of inflation can be traced back to

Increases in money

Suppose that Jim just got a $20,000 loan from his credit union to buy a new car. The loan is a _____ for Jim and a _____ for the credit union.

liability; financial asset

Which two goods are most likely substitutes in consumption?

loaves of bread and hamburger buns

(Problem 7c) Indicate whether the following change will raise or lower the natural rate of unemployment. (Answer "raise" or "lower".) Greater access to the Internet leads both potential employers and potential employees to use the Internet to list and find jobs.

lower

(Problem 7d) Indicate whether the following change will raise or lower the natural rate of unemployment. (Answer "raise" or "lower".) Union membership declines.

lower

Refer to Figure: Policy Alternatives. Assume that the economy depicted in panel (a) is in short-run equilibrium with AD1 and SRAS1. If the economy is left to correct itself:

lower wages will result in a gradual shift from SRAS1 to SRAS2.

An advantage that financial intermediaries provide to the financial sector is

makes it easier for the small financial investor to participate in the financial sector

In the short run, the interest rate is determined in the _____ market.

money

If a country has a trade surplus, we can conclude that it also has a:

net capital outflow (more trading their own goods, more exports)

A financial asset is:

a claim that entitles the owner to future income from the seller.

Use Table: National Income Accounts. The value of national savings is:

$1.6 trillion.

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

$100.

The Federal Open Market Committee sets the target interest rate for the next:

6 weeks

If real GDP doubles in 12 years, its average annual growth rate is approximately:

6%

Use Table: Investment Projects. If the market interest rate declines from 15% to 13%, then the amount of investment demanded will increase by:

$200

Refer to Table: Monetary Aggregates. The value of M2 is:

$3,355 billion - all except gift cards

The income expenditure model predicts that if the marginal propensity to consume is 0.75 and the federal government increases spending by $100 billion, real GDP will increase by:

$400 billion - multiplier

Refer to Table: Components of the Money Supply. The money supply measured by M1 is:

$450 billion - currency + travelers checks + checkable deposits

(Problem 7a) The government of Eastlandia uses measures of monetary aggregates similar to those used by the United States, and the central bank of Eastlandia imposes a required reserve ratio of 10%. Given the following information, answer the question below. Bank deposits at the central bank = $200 million Currency held by public = $150 million Currency in bank vaults = $100 million Checkable bank deposits = $500 million Traveler's checks = $10 million What is M1?

$660 million

As of the January 5, 2014 auction date, what is the investment rate for the most recently issued 26-week T-bills?

0.112%.

If the marginal propensity to save is 0.1, then the government spending multiplier has a value of

10

If the marginal propensity to consume is 0.9, then the government spending multiplier is:

10 - 1/(1-MPC)

Use Table: Investment Spending, Private Spending, and Capital Inflows. What is the budget balance as a percentage of GDP in Northlandia?

10%

Use Figure: Technological Progress and Productivity Growth. If there is an increase in physical capital per worker (all other factors remaining unchanged), it is BEST indicated by a move from:

A to B - movement along the production function

Refer to Figure: AD-AS. Suppose that initially the economy is at long-run equilibrium. If the government cuts taxes, _____ will shift to the _____.

AD1; right to AD2

Refer to Figure: Economic Adjustments. Assume that the economy is at point b. The effect of a decrease in the money supply is represented by a shift of the _____ curve to _____.

AD2; AD1

Which example illustrates cyclical unemployment?

An autoworker is laid off because a recession has caused a decline in sales.

Which of the following would cause the interest rate to increase in our loanable funds market model?

An increase in perceived business opportunities - increase demand, increase interest rate

Assume that we are looking at the world market for oil. Assume that the initial equilibrium price is $50 a barrel and the monthly quantities bought and sold is 10 trillion barrels. How would this market be affected by a world wide economic downturn?

Demand would decrease, causing a surplus of oil, price would decrease and this would lead to less barrels bought and sold.

Which of the following statements is true about the Board of Governors of The Fed?

Each governor is appointed for a 14 year term and cannot be reappointed.

The advantage of using financial intermediaries over financial markets is which of the following?

Financial intermediaries reduce the exposure to risk

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. How much is private saving?

GDP - tax revenue - consumption = $3.5 trillion

The marginal propensity to consume is typically:

None of these 3 possible answers listed here are correct answers - between 0 and 1

A $100 million increase in government spending increases equilibrium GDP by:

None of these 3 possible answers listed here are correct answers - greater than $100 million because of the multiplier

Which of the following is likely to occur when the economy goes into a recession?

None of these 3 possible answers listed here are correct answers - spend, cut taxes, decrease interest rates, increase money supply

(Figure: Shifts in Demand and Supply II) Use Figure: Shifts in Demand and Supply II. The graph shows how supply and demand might shift in response to specific events. Suppose a fall frost destroys one-third of the nation's grapefruit crop. Which panel BEST describes how this will affect the market for vitamin B12 tablets, which are a substitute in consumption for grapefruit?

Panel A - increase in demand

(Figure: Shifts in Demand and Supply) Use Figure: Shifts in Demand and Supply. The figure shows how supply and demand might shift in response to specific events. Suppose scientists discover that eating a tomato a day prevents aging. Which panel BEST describes how this will affect the market for tomatoes?

Panel C - increase in demand

Assume that we are looking at the local market for pizza. Assume that the equilibrium price is $20 and the equilibrium quantity is 1000. Which of the following options best describes what would happen to this market if two new pizza restaurants open up for business in this market?

Supply would increase causing a surplus situation. Prices would then decline and this causes quantity supplied to decrease and quantity demanded to increase, this continues until there is a new equilibrium at a lower price and higher quantity.

Suppose we are looking at the market for gold. Assume that the equilibrium price is $1,200 per ounce and the quantities bought and sold is 100 billion ounces. If there was a discovery of very large gold deposits in parts of the world, how would this discovery affect this market?

Supply would increase, leading to a surplus, causing price to decrease and we would have greater quantities of gold.

Which one of the following parts of the Federal Reserve is considered to be privately owned by the banks in the area?

The 12 district banks

(Problem 5b) Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank. If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit?

The bank will hold $50 as reserves and lend $450.

For some reason, the expectations for future inflation increases dramatically, what effect would this have on the loanable funds market?

The demand for loanable funds would increase thus increasing the interest rate level.

Which one of the following answers correctly shows the correct comparison between the federal funds rate, the discount rate and the interest rate on reserves?

The discount rate is the highest, then the federal funds rate is next and finally the interest rate on reserves is the lowest

(Problem 7) Which of the following U.S. policies and institutions may negatively influence U.S. long-run economic growth?

The government's persistently large borrowing may make financing additional improvements in infrastructure and education (a phenomenon known as "crowding out"), consequently slowing economic growth - if large borrowing causes more of the government's spending to be devoted to paying interest on the debt, or if it pushes up interest rates, it may make it more difficult for both the public and private sector to invest in physical and human capital.

Which of the following events is likely one of the causes for the financial crisis and eventual recession in 2008?

The killing of the Glass Steagall legislation in 1999.

(Problem 16b) Explain the effect on a company's stock price today of the following event, other things held constant. Several companies in the same sector announce surprisingly higher sales.

The stock price will rise - This will lead to an immediate rise in the company's stock price because it is unexpected information that communicates to investors that the company's sector is doing well, and so it is likely that the company will also experience higher sales and a higher-than-expected future profit.

As of October 29, 2014, what is the target federal funds rate?

The target is a range from 0% to 0.25%.

Use Figure: The Market for Loanable Funds II. Other things being equal, if there is an increase in the interest rate above 8%, _____ quantity of loanable funds will be demanded.

a smaller

Diminishing returns to physical capital implies that, when the human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to _____ productivity.

a smaller increase

Linking savers and investors is an important aspect of:

a well-functioning financial system.

Investment spending in macroeconomics refers to:

adding to physical capital.

If the government increases its borrowing, then at every interest rate there is a(n) _____ funds.

additional demand for

Suppose that the U.S. government doubles its spending on health care. The _____ curve shifts _____, output _____, and prices _____.

aggregate demand; right; increases; increase

(Problem 8a) With its tradition of a job for life for most citizens, Japan once had a much lower unemployment rate than that of the United States; from 1960 to 1995, the unemployment rate in Japan exceeded 3% only once. However, since the crash of its stock market in 1989 and slow economic growth in the 1990s, the job-for-life system has broken down and unemployment has risen to more than 5% in 2003. One effect of these recent changes in Japan is ________ in the Japanese natural rate of unemployment.

an increase

If the Fed initiates an open market sale of securities we would see....

an increase in reserves that banks have on hand.

Between 1970 and the present, research comparing similar wealthy countries found that increases in the money supply:

and increases in the price level were roughly proportional.

An important advantage of bonds as a financial asset is that they:

are standardized and therefore are easier to sell than loans.

The main role of financial systems is to:

channel funds from savers into investments.

Good X and good Y are related goods. Holding everything else constant, if the price of good X decreases and the demand for good Y increases, good X and good Y are probably:

complements

Refer to Figure: Short-Run Equilibrium. If the economy is at equilibrium at Y1 and P1, the government should use _____ fiscal policy to shift the aggregate demand curve to the _____.

contractionary; left

In recent times we have seen newly developing economies grow at faster growth rates than established industrial economies, this phenomena is sometimes called

convergence

One factor frequently cited for slow growth in India until the 1990s is:

corruption among government officials.

There are several ways in which the government can fund its spending. Which one is likely to lead to hyperinflation?

creating money

In September 2007, reversing its course, the Federal Reserve began a series of:

cuts in the federal funds target rate to lower the interest rate, reversing its previous policy of raising interest rates, to fight the financial crisis.

The National Bureau of Economic Research announced that the U.S. economic recession that began in December of 2007 hit a trough in June of 2009. During that period, which type of unemployment increased for sure?

cyclical

If interest rates rise, there will be a(n):

decrease in aggregate demand.

A decrease in the demand for money would result from a(n):

decrease in real GDP.

One reason financial institutions become very large is to:

decrease transaction costs.

Net capital inflow equals:

imports minus exports.

(Problem 8b) As the accompanying diagram shows, the rate of growth of real GDP has picked up in Japan since 2001. The likely effect of this increase in GDP growth will be a(n) ______ in the unemployment rate. Is the likely cause of the change in the unemployment rate during this period a change in the natural rate of unemployment or a change in the cyclical unemployment rate?

decrease; a change in cyclical unemployment rate

To close an inflationary gap using monetary policy, the Federal Reserve should _____ the money supply to _____ investment and consumer spending and shift the aggregate demand curve to the _____.

decrease; decrease; left

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _____ in real GDP and _____ the price level.

decrease; increase

If there is an increase in the government budget deficit, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____.

demand for; increase; increase; increase

During the latter half of the twentieth century, the Soviet Union made more physical capital available to its workers, but this increase resulted in successively smaller increases in productivity. This example illustrates:

diminishing returns to physical capital.

The demand curve for loanable funds slopes:

downward because quantity demanded is lower when the price to borrow money is higher.

(Problem 5) The Bureau of Labor Statistics (BLS) regularly releases the "Productivity and Costs" report for the previous month. The table below is from the BLS site for the fourth quarter of 2014.

durable manufacturing

Refer to Figure: Short- and Long-Run Equilibrium. The government should _____ aggregate demand by _____ taxes to close the _____ gap.

expand; cutting; recessionary

The 2009 American Recovery and Reinvestment Act was an example of a(n):

expansionary fiscal policy.

The Fisher effect states that the:

expected real rate of interest is unaffected by the change in expected inflation.

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _____ and potential output to _____.

fall; remain stable

Refer to Figure: AD-AS Model I. If the economy is at point X, how would this situation correct itself over time? Nominal wages _____, and the _____ curve shifts _____ until the economy reaches long-run equilibrium.

fall; short-run aggregate supply; right

(Problem 3a) In the following situation, indicate what type of unemployment Melanie is facing. Is it frictional, structural or cyclical? After completing a complex programming project, Melanie is laid off. Her prospects for a new job requiring similar skills are good, and she has signed up with a programmer placement service. She has passed up low-paying job offers. Melanie is experiencing ____ unemployment.

frictional

Natural unemployment equals _____ unemployment plus _____ unemployment.

frictional; structural

Analysts believe that generous unemployment benefits in Europe are associated with:

high unemployment rates in Europe

In financial markets:

households purchase financial assets.

For a marginal propensity to consume of 0.9, the multiplier effect of an increase of $100 billion in government purchases of goods and services is larger than the multiplier effect of a tax cut of $100 billion because:

in the first round of spending only $90 billion of the tax cut will be spent and $10 billion will be saved, while the entire $100 billion of government purchases will be spent

One difference between a closed and an open economy is that:

in the latter, foreign savings complement domestic savings in financing investment spending.

Refer to Figure: Policy Alternatives. In panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it will MOST likely:

increase its spending

Refer to Figure: AD-AS Model I.. If the economy is at point X, the appropriate monetary policy is to:

increase money supply and decrease interest rates

Refer to Figure above: Short-Run Equilibrium. The economy is in short-run equilibrium. To move the economy to potential GDP, what should fiscal policy makers do?

increase tax

If the interest rate on CDs rises from 5% to 10%, the opportunity cost of holding money will _____ and the quantity demanded of money will _____.

increase; decrease

An inferior good is one for which a(n) _____ in buyers' incomes causes a(n) _____

increase; decrease in demand

Refer to Figure: Monetary Policy and the AD-SRAS Model. If the economy is at point h because of an open market purchase by the Federal Reserve and no further monetary policy is implemented, in the long run nominal wages will _____, SRAS will shift _____, real GDP will _____, and the price level will _____.

increase; to SRAS'; decrease; increase

Refer to Figure: Changes in the Money Supply. Federal Reserve policy to increase the supply of money, hence to lower the interest rate from 6% to 4%, is accomplished by action that ________ Treasury bills.

increases the demand for

According to the concept of monetary neutrality, _____ in the money supply _____ real GDP _____ the price level.

increases; do not change; but do raise

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

infrastructure

The factors that could cause money demand to shift do NOT include:

interest - changes along the curve

If wages grew at 5% last year and average prices grew at 3%, then the average worker:

is better off

The Chairperson of The Fed is

originally one of the board of governors, chosen by the President to serve a 4 year term and this has to be approved by the Senate.

A business will be likely to borrow to fund projects if the:

rate of return on the project is at least as high as the interest rate on the loan.

Refer to Figure: AD-AS Model I. If the economy is at point X, there is a(n) _____ gap with _____ unemployment.

recessionary; high

If the economy is at potential output and the Fed increases the money supply, in the long run real GDP will likely:

remain the same - long run

The federal funds rate is the interest rate on _____, and it is influenced by the _____.

reserves that banks lend to each other; Federal Open Market Committee

Suppose that the economy is operating at potential output and the money supply increases. Aggregate output will _____ potential output, nominal wages will _____, and the SRAS will shift _____.

rise above; rise; leftward

The savings-investment spending identity says that:

savings and investment spending are always equal for the economy as a whole.

If Congress places a $5 tax on each ATM transaction, there will likely be a:

shift to the right of the money demand curve.

(Table: The Market for Chocolate-Covered Peanuts) Use Table: The Market for Chocolate-Covered Peanuts. If the price of chocolate-covered peanuts is $0.50, there is a:

shortage of 70 bags per month

Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a), it is in:

stagflation

According to the liquidity preference model, the equilibrium interest rate is determined by the:

supply of and demand for money.

Refer to Figure: AD-AS. Assume that the economy is in long-run equilibrium. If the Federal Reserve lowers the key interest rate:

the aggregate demand curve will shift to AD2.

National savings is the sum of private savings and:

the budget balance

Holding all other things constant, and assuming that ramen noodles are an inferior good for Vanessa, then as her income increases, her demand curve for ramen noodles:

will shift left

Changes in _____ will NOT shift the money demand curve.

the interest rate

The quantity demanded of money is negatively related to _____, and the demand for money is positively related to _____.

the interest rate; real GDP

People forgo interest and hold money:

to reduce their transaction costs.

In the liquidity preference model, the money supply is represented by a(n):

vertical line.

The value of all accumulated savings of a household is called:

wealth