Macroeconomics Part 2

A lender and a borrower signed a contract for a $1,000 loan for one year. The lender asked the borrower to pay 3% interest. Inflation occurred and prices rose by 2% over the next year. At the end of the year, the borrower repaid $1,030 (principal + interest). What is the amount worth in real terms (i.e., after inflation)? $1,060.90. $1,050.60. $1,029.41. $1,009.80.

$1,009.80. (Correct!) The real value of the $1,030 is $1,009.80. It is calculated by reducing the principal and interest for the rate of inflation, or $1,030/1.02 = $1,009.80.

The full-employment gross domestic product is $1.3 trillion, and the actual gross domestic product is $1.2 trillion. The marginal propensity to consume is 0.8. When inflation is ignored, what increase in government expenditures is necessary to produce full employment? $100 billion $80 billion $20 billion $10 billion

$20 billion

Assume that the Gross Domestic Product (GDP) Deflator index is: Year GDP Deflator Year 1 175 Year 2 180 Year 3 184 If nominal GDP for Year 3 is $11,500 billion, which of the following amounts is closest to real GDP for Year 3? $11,058 billion. $11,275 billion. $9,660 billion. $6,250 billion.

$6,250 billion. Real GDP is determined by adjusting nominal (current dollar) GDP for the effects of inflation, such that current-year GDP is expressed in terms of base period dollars (price level). The Year 3 GDP deflator of 184 shows that the price level has increased by 84% since the base period. The calculation is: 100 - 184 = 84 = .84 100 100 Thus, Year 3 prices are 184% of the base period prices. To get real GDP, nominal GDP is divided by 1.84. Thus, $11,500/1.84 = $6,250 billion. In terms of base period dollars, Year 3 GDP would be $6,250 billion.

An individual receives an income of $3,000 per month, and spends $2,500. An increase in income of $500 per month occurs, and the individual spends $2,800. The individual's marginal propensity to save is 0.2 0.4 0.6 0.8

0.4 This answer is correct. The marginal propensity to save is the change in savings divided by the change in income. $700 - $500 = 0.4 $3,500 - $3,000

An individual receives an income of $3,000 per month and spends $2,500. The individual receives an increase in income of $500 per month and spends $2,800 of the total income. The individual's marginal propensity to save is 0.2. 0.4. 0.6. 0.8.

0.4. The individual's marginal propensity to save is 0.4. This rate is calculated as the change in savings divided by the change in income, or $700 - $500 = $200/$3,500 - $3,000 = $500, or $200/$500 = 0.40.

If the U.S. economy is experiencing a 9% total unemployment rate and the natural rate of unemployment is 5.5%, which of the following is the cyclical rate of unemployment? 0.0%. 3.5%. 5.5%. 14.5%.

3.5%.

Which of the following changes would create pressure for the Japanese yen to appreciate relative to the U.S. dollar? An increase in incomes in Japan. A change in U.S. tastes in favor of Japanese goods. A decrease in U.S. incomes. A change in Japanese tastes in favor of U.S. goods.

A change in U.S. tastes in favor of Japanese goods.

If consumer confidence falls, the impact upon the economy is A downturn. An upturn. No change. Consumer confidence does not have an impact upon the economy.

A downturn.

Which one of the following statements concerning the business cycle is correct? A trough occurs at the start of a recessionary period. A peak occurs at the end of a recessionary period. A trough occurs at the end of an expansionary period. A peak occurs at the end of an expansionary period.

A peak occurs at the end of an expansionary period.

Which of the following individuals would be most hurt by an unanticipated increase in inflation? A retiree living on a fixed income. A borrower whose debt has a fixed interest rate. A union worker whose contract includes a provision for regular cost-of-living adjustments. A saver whose savings was placed in a variable rate savings account.

A retiree living on a fixed income.

An improvement in technology that in turn leads to improved worker productivity would most likely result in (This question is CMA adapted) A shift to the right in the supply curve and a lowering of the price of the output. A shift to the left in the supply curve and a lowering of the price of the output. An increase in the price of the output if demand is unchanged. Wage increases.

A shift to the right in the supply curve and a lowering of the price of the output.

Economists and economic policy makers are interested in the multiplier effect because the multiplier explains why (This question is CMA adapted) A small change in investment can have a much larger impact on gross domestic product. Consumption is always a multiple of savings. The money supply increases when deposits in the banking system increase. The velocity of money is less than one.

A small change in investment can have a much larger impact on gross domestic product.

Which of the following definitions best describes a business cycle? Activity where the decline in the economy's real gross domestic product (GDP) persists for at least a half-year. Activity marked by a relatively high level of real GDP, full employment, and inflation. Activity that alternates periods of growth and decline in an economy's GDP. Activity where real GDP declines, inflation moderates, and unemployment increases.

Activity that alternates periods of growth and decline in an economy's GDP.

Which of the following is most likely to result in an increase in aggregate demand in the U.S. economy? An increase in taxes. An increase in interest rates. An increase in government spending. An increase in imports.

An increase in government spending.

Which of the following may provide a leading indicator of a future increase in gross domestic product? A reduction in the money supply. A decrease in the issuance of building permits. An increase in the timeliness of delivery by vendors. An increase in the average hours worked per week of production workers.

An increase in the average hours worked per week of production workers.

Which of the following effects is most likely to accompany an unexpected reduction in aggregate supply, assuming a conventional supply curve? An increase in the price level. A decrease in the price level. A decrease in the rate of unemployment. An increase in the gross domestic product (GDP).

An increase in the price level.

Some economic indicators lead the economy into a recovery or recession, and some lag it. An example of a lagging indicator is (This question is CIA adapted) Chronic unemployment. Orders for consumer and producer goods. Housing starts. Consumer expectations.

Chronic unemployment.

Which of the following indicators does the federal government use to measure inflation? Dow Jones Index. Consumer Price Index. Consumer Confidence Index. Corporate profits.

Consumer Price Index.

For a given level of tax collections, prices, and interest rates, a decrease in governmental purchases will result in a(n) (This question is CIA adapted) Increase in aggregate demand. Increase in aggregate supply. Decrease in aggregate demand. Decrease in aggregate supply.

Decrease in aggregate demand.

An increasing federal deficit implies which of the following conditions? Increased tax revenues and decreased entitlement payments. Decreased tax revenues and increased entitlement payments. The United States is importing more than it is exporting. The economy is in an inflationary phase.

Decreased tax revenues and increased entitlement payments.

How does inflation distort reported income? Wages are NOT reflective of current labor rates. Sales are NOT reflective of current product prices. Depreciation is NOT reflective of current fixed-asset replacement costs. Interest expense is NOT reflective of current borrowing rates.

Depreciation is NOT reflective of current fixed-asset replacement costs.

Variations between business cycles are most likely attributable to which of the following factors? The law of diminishing returns. Comparative advantage. Duration and intensity. Opportunity costs.

Duration and intensity.

Which of the following issues is least likely to be relevant to the study of macroeconomics? Business cycles. Aggregate supply. Elasticity of demand. Inflation and deflation.

Elasticity of demand.

Which of the following segments of the economy will be least affected by the business cycle? Commercial construction industry. Machinery and equipment industry. Residential construction industry. Health care industry.

Health care industry.

In a macroeconomic free-market flow model, which one of the following would not be considered an "injection"? Government spending. Investment spending. Government subsidies. Imports.

Imports.

Assume increased capital investment results in higher levels of output of goods, but demand remains unchanged. What will be the likely effect on aggregate equilibrium quantity and price if a conventional supply curve is assumed? *Quantity* *Price* Increase Increase Increase Decrease Decrease Increase Decrease Decrease

Increase Decrease

Assume that the United States Congress passes a tax law that provides for a "rebate" to taxpayers. One of the goals of the rebate is Increase consumer disposable income and expand the economy. Increase consumer disposable income and contract the economy. Decrease consumer disposable income and expand the economy Decrease consumer disposable income and contract the economy.

Increase consumer disposable income and expand the economy.

Which of the following changes in unemployment is most likely to be associated with a period of economic contraction? Decrease in the cyclical unemployment rate. Increase in the natural unemployment rate. Increase in the cyclical unemployment rate. Increase in the structural unemployment rate.

Increase in the cyclical unemployment rate.

Which of the following changes would most effectively halt a period of inflation? Decreasing interest rates by a large amount Decreasing savings by a small amount Increase interest rates by a large amount Increase savings by a small amount

Increase interest rates by a large amount

In any competitive market, an equal increase in both demand and supply can be expected to always (This question is CMA adapted) Increase both price and market-clearing quantity. Decrease both price and market-clearing quantity. Increase market-clearing quantity. Increase price.

Increase market-clearing quantity.

The most effective fiscal policy program to help reduce demand-pull inflation would be to (This question is CMA adapted) Decrease the rate of growth of the money supply. Increase both taxes and government spending. Decrease taxes and increase government spending. Increase taxes and decrease government spending.

Increase taxes and decrease government spending.

An increase in the value of the Chinese currency (the RMB) relative to the U.S. dollar would most likely cause which of the following? Increased aggregate demand in the U.S. Increased aggregate supply in the U.S. Increase aggregate demand in China. Decrease aggregate supply in China.

Increased aggregate demand in the U.S.

Which of the following actions is the acknowledged preventive measure for a period of deflation? Increasing interest rates. Increasing the money supply. Decreasing interest rates. Decreasing the money supply.

Increasing the money supply.

A decrease in which economic indicator would most appropriately encourage a business owner to move forward on a planned expansion? Stock prices. Building permits. Commercial loans. Initial claims for unemployment.

Initial claims for unemployment.

In addition to increasing the demand for lendable funds, government borrowing to finance large deficits has which of the following effects? It decreases the rate of inflation. It puts upward pressure on interest rates. It increases the supply of lendable funds. It exerts downward pressure on interest rates.

It puts upward pressure on interest rates.

Which of the following theoretical aggregate supply curves has a "kink" at the level of output at which there is full employment? Classical supply curve. Conventional supply curve. Standard supply curve. Keynesian supply curve.

Keynesian supply curve.

A country reduces its rate of monetary growth. Which of the following is the expected result for the country's economy? Higher net exports Higher investment Lower GDP growth Lower interest rates

Lower GDP growth

If a government were to use only fiscal policy to stimulate the economy from a recession, it would Raise consumer taxes and increase government spending. Lower business taxes and government spending. Increase the money supply and increase government spending. Lower consumer taxes and increase government spending.

Lower consumer taxes and increase government spending.

Which of the following indicates that the economy is in a recessionary phase? The rate of unemployment decreases. The purchasing power of money declines. Potential national income exceeds actual national income. There is a shortage of essential raw materials and costs are rising.

Potential national income exceeds actual national income.

During the recessionary phase of a business cycle (This question is CMA adapted) The purchasing power of money is likely to decline rapidly. The natural rate of unemployment will increase dramatically. Potential national income will exceed actual national income. Actual national income will exceed potential national income.

Potential national income will exceed actual national income.

If the Federal Reserve Board wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve Board take? (This question is CMA adapted) Raise the reserve requirement and the discount rate. Purchase additional U.S. government securities and lower the discount rate. Reduce the reserve requirement and raise the discount rate. Raise the discount rate and sell U.S. government securities.

Purchase additional U.S. government securities and lower the discount rate.

Which of the following strategies would the Federal Reserve most likely pursue under an expansionary policy? Purchase federal securities and lower the discount rate. Reduce the reserve requirement while raising the discount rate. Raise the reserve requirement and lower the discount rate. Raise the reserve requirement and raise the discount rate.

Purchase federal securities and lower the discount rate.

The consensus of economic forecasts indicates that consumer prices are likely to increase because of increases in aggregate demand. Which of the following outcomes is most likely to occur as prices increase? Quantity of output increases if there is capacity to produce. Unemployment increases. Profits fall if all costs are fixed. Profits rise even if cost increase.

Quantity of output increases if there is capacity to produce.

The discount rate set by the Federal Reserve System is the (This question is CMA adapted) Required percentage of reserves deposited at the central bank. Rate that commercial banks charge for loans to each other. Rate that commercial banks charge for loans to the general public. Rate that the central bank charges for loans to commercial banks.

Rate that the central bank charges for loans to commercial banks.

An economy is at the peak of the business cycle. Which of the following policy packages is the most effective way to dampen the economy and prevent inflation? Increase government spending, reduce taxes, increase money supply, and reduce interest rates. Reduce government spending, increase taxes, increase money supply, and increase interest rates. Reduce government spending, increase taxes, reduce money supply and increase interest rates. Reduce government spending, reduce taxes, reduce money supply, and reduce interest rates.

Reduce government spending, increase taxes, reduce money supply and increase interest rates.

According to fiscal policy principles, a tax increase will (This question is CMA adapted) Increase spending and increase aggregate demand. Increase spending and reduce aggregate demand. Reduce spending and increase aggregate demand. Reduce spending and reduce aggregate demand.

Reduce spending and reduce aggregate demand.

An upturn in economic activity is indicated by all of the following, except Increased housing starts. Reduction in the quantity of unemployment claims. Increase in personal travel. Reduction in the amount of luxury purchases.

Reduction in the amount of luxury purchases.

An increase in spending on imported goods would most likely cause which one of the following? Shift aggregate supply to the right. Shift aggregate demand to the right. Shift aggregate supply to the left. Shift aggregate demand to the left.

Shift aggregate demand to the left.

The rate of unemployment caused by changes in the composition of employment opportunities over time is referred to as the Frictional unemployment rate. Cyclical unemployment rate. Structural unemployment rate. Seasonal unemployment rate.

Structural unemployment rate.

Which of the following types of unemployment typically results from technological advances? Cyclical. Frictional. Structural. Short-term.

Structural.

An increase in the minimum wage rate would likely result in which one of the following? The aggregate supply curve would shift outward. The aggregate supply curve would shift inward. The aggregate supply curve would remain unchanged. The quantity supplied at various prices will increase.

The aggregate supply curve would shift inward.

Implementation of a government's monetary policy in most major industrial countries is managed by The central bank. The national government. Commercial banks. Bond market traders.

The central bank.

Which of the following statements is correct regarding an economy at the peak of the business cycle? The economy will be in a static equilibrium. The economy will be at the natural rate of unemployment. Incomes will be stable. The rate of inflation will decrease.

The economy will be at the natural rate of unemployment.

The producer price index measures The price of a basket of commodities at the point of the first commercial sale. Price changes for all products sold by domestic producers to foreigners. Price changes of goods purchased from other countries. The price of a fixed market basket of goods and services purchased by a typical urban consumer.

The price of a basket of commodities at the point of the first commercial sale.

The discount rate of the Federal Reserve System is The specified percentage of a commercial bank's deposit liabilities that must be deposited in the central bank. The rate that the central bank charges for loans granted to commercial banks. The rate that commercial banks charge for loans granted to the public. The ratio of excess reserves to legal reserves that are deposited in the central bank.

The rate that the central bank charges for loans granted to commercial banks.

Gross domestic product includes which of the following measures? The size of a population that must share a given output within one year. The negative externalities of the production process of a nation within one year. The total monetary value of all final goods and services produced within a nation in one year. The total monetary value of goods and services including barter transactions within a nation in one year.

The total monetary value of all final goods and services produced within a nation in one year.

The trough of a business cycle is generally characterized by Shortages of essential raw materials and rising costs. Increasing purchasing power and increasing capital investments. Rising costs and an unwillingness to risk new capital investments. Unused productive capacity and an unwillingness to risk new capital investments.

Unused productive capacity and an unwillingness to risk new capital investments.

In a macroeconomic free-market flow model, which of the following would be considered leakages? *Savings* *Taxes* Yes Yes Yes No No Yes No No

Yes Yes

The foreign sector plays a role in a macroeconomic free-market flow model because of *imports* *exports* Yes Yes Yes No No Yes No No

Yes Yes