Macroeconomics Test 3 Review

Which of the following is an example of a macroeconomic externality?

A decrease in aggregate demand should lead to a lower price level which could help the economy rebound. Prices remain high, however, as menu costs make it undesirable for individual firms to lower prices.

What do neoclassical economists believe is the root cause of changes in economic output?

Aggregate supply

According to the neoclassical model what chain of events follows in the long-run after a short-run decrease in demand accompanied by an increase in unemployment?

Aggregate supply shifts to the right as wages decline, thus returning output back to potential level and lowering prices.

Retirement pension plans, also called "defined benefits" plans, traditionally are set as a fixed income per year at retirement. What are some characteristics of a pension plan?

An inflation rate of just 1% to 2% per year can decrease the buying power on an individual's fixed income. A pension does not keep up with inflation and buying power is lost over time.

Which of the following are examples of defined contribution plans?

401(k)s 403(b)s

Which of the following statements is true? Countries with controlled economies have historically had low inflation rates. Countries with controlled economies have an abundance of goods. Countries with controlled economies allow citizens to influence price. Countries with controlled economies have little government intervention.

Countries with controlled economies have historically had low inflation rates.

True or false? Assume prices and wages are sticky. If aggregate demand shifts to the left, then wages will adjust in the short run, making equilibrium wage $10.

False

True or false? Following a decrease in aggregate demand, and assuming this economy experiences sticky wages and price, there will be an excess supply of 350 units of output.

False

True or false? Human capital per person, physical capital per person, and advances in technology have no impact on GDP growth.

False

True or false? Keynesian economists, with its emphasis on aggregate supply, focuses on the underlying determinants of output and employment in markets, and thus tends to put more emphasis on economic growth and how labor markets work.

False

True or false? The relationship between the interest rate and investment spending is positive. The lower the interest rate, the lower the investment spending by firms.

False

Which of the following are examples of the expenditure multiplier concept? Select the two correct answers below.

Government decides to raise its budget by $300 billion in order to repair major bridges across the nation. This raises GDP by $670 billion. Consumers are concerned about a global financial crisis, so they decide to save more of their earnings. Total consumption declines by $230 billion dollars. This causes GDP to decline by $460 billion dollars.

All of the following statements are true, except: Select the correct answer below: High and variable inflation means that the incentives in the economy to adjust in response to changes in prices are stronger than in periods of low inflation. High and variable inflation will lead to markets adjusting toward their equilibrium prices and quantities more erratically and slowly. Many individual markets will experience a greater chance of surpluses and shortages in an economy with high and variable inflation. Inflation can blur messages about the conditions of demand and supply in a market economy.

High and variable inflation means that the incentives in the economy to adjust in response to changes in prices are stronger than in periods of low inflation.

All of the following statements are true, except: Select the correct answer below: A firm can make money from inflation by paying bills and wages as late as possible so that it can pay in inflated dollars, while collecting revenues as soon as possible. If a firm is currently holding a lot of assets in cash, it would benefit from inflation An economy with high inflation rewards businesses that have found clever ways of profiting from inflation. In the short term, low or moderate levels of inflation may not pose an overwhelming difficulty for business planning.

If a firm is currently holding a lot of assets in cash, it would benefit from inflation

All of the following statements are true, except: Select the correct answer below: If inflation varies substantially over the short or medium term, then it may make sense for businesses to stick to shorter-term strategies. In recent decades in the U.S., rising inflation rates have at times been closely followed by lower inflation rates. In recent decades in the U.S, rising inflation rates have always corresponded to increasing productivity rates. There is some evidence that if inflation can be held to moderate levels, it doesn't prevent a nation's real economy from growing at a healthy pace.

In recent decades in the U.S, rising inflation rates have always corresponded to increasing productivity rates.

All of the following statements are true, except: Select the correct answer below: Uncertainty about future inflation makes it hard to predict the value of some financial assets in the future. Moderate or high Inflation rarely poses substantial long-term planning problems for businesses. When saving for retirement, people need to consider what their money will really buy several decades in the future. It's impossible to predict the rate of future inflation.

Moderate or high Inflation rarely poses substantial long-term planning problems for businesses.

Which of the following best explains the coordination problem?

Most people are willing to take a wage cut during bad economic times so long as everyone else does as well, but markets cannot organize this activity, explaining why wages are sticky.

If an economy goes into recession due to a drop in aggregate demand, a ______ economist would advocate for government retraining programs for structurally unemployed workers.

Neoclassical

How are the net exports of a country affected by a higher domestic price level?

Net exports would decrease, since exports would decrease and imports would increase.

According to neoclassical economics, what happens to the price level when aggregate demand increases and aggregate supply is set at potential output?

Price levels increase.

Which of the following is true in the long run?

Prices are flexible and allow the economy to produce at the full employment level of output.

Which of the following is an example of a menu cost?

Ron's retail clothing business needs to pay the local printing shop to make new catalogs due to increase in the prices of their basic collection. Sylvia is aware of an increase in the cost of purchasing inventory and must pay a pricing service provider to recalculate the prices for her products.

The market below experiences sticky prices and wages. Which of the following statements explains what happens in the immediate term following a decrease in aggregate demand?

The economy will produce at the original equilibrium price, but quantity demanded will drop, creating a surplus of output.

Which of the following are associated with menu costs?

The resources it takes to gather information on market forces and determine proper prices. The costs in time and manpower for a company to research and determine the new equilibrium prices for a mobile phone in the wake of a new release from a competitor.

Some economists argue that during an inflationary period, the erosion of real wages could help reduce the rate of inflation.

True

True or False? Neoclassical economists tend to focus more on long term economic growth.

True

True or false? An increase in the taxes that a consumer has to pay has a negative effect on disposable income and therefore, reduces consumption.

True

True or false? Canada and Mexico are major trading partners. If the growth rate of Canada increases relative to Mexico's growth rate, the result will be an increase in Mexico's aggregate demand.

True

True or false? Flexible prices allow output to remain the same in the long run even when there are short run shifts in aggregate demand or supply.

True

True or false? In a recession, a neoclassical economist would likely argue for changes to labor policy institutions and nothing more.

True

True or false? Neoclassical economics argues that fiscal policy does not shift the aggregate demand curve at all.

True

True or false? Neoclassical economists do not see aggregate demand as a useful tool for reducing unemployment. With a vertical aggregate supply curve determining economic output, changes in aggregate demand have no long-run effects on unemployment.

True

True or false? Policy makers who try to contract the economy below its natural rate of unemployment can trigger an increase in inflation.

True

True or false? The Keynesian view advocates that policies should be used to help restore the economy to full employment during recessions.

True

True or false? The expenditure multiplier is greater than 1 because a change in spending causes a more than proportionate change in GDP.

True

What does the neoclassical Phillips curve tell us will be the long run outcome for a nation that continues to use Keynesian policies to try to keep unemployment below the natural rate?

Wages and price rising in an inflationary spiral.

All of the following statements are true, except: Select the correct answer below: Ordinary people can sometimes benefit from the unintended redistributions of inflation. When interest rates are fixed, rises in the rate of inflation tend to penalize suppliers of financial capital. When interest rates are fixed, demanders of financial capital typically end up worse off than suppliers of financial capital. The unintended redistributions of buying power that inflation causes can have a broad impact on society.

When interest rates are fixed, demanders of financial capital typically end up worse off than suppliers of financial capital.

According to Keynes, if aggregate demand is not high enough to provide firms with an incentive to hire enough workers to reach full employment ______________.

a recessionary gap would occur

A short-run Phillips curve seems to suggests ________________________________.

a smooth inverse transition between unemployment and inflation

The short-term Keynesian model is built on _______________ fluctuations determining the business cycle, along with price and wage ________________ to explain recessions and why cyclical unemployment rises and falls.

aggregate demand; rigidity

Which of the following best describes hyperinflation?

an outburst of high inflation

The unemployment rate on the long-run Phillips curve will __________.

be the natural rate of unemployment

Hyperinflation often occurs when economies shift from a(n) ________________ economy to a ___________________ economy.

controlled; market-oriented

Which of the following factors influences how much a firm chooses to spend on investment?

expectations of future profits

Matt's wife is in the Army and has received orders to a military installation 2000 miles away. Matt resigns from his current job and he and his wife move across the country. Matt then actively searches for similar positions near the military installation where his wife is working. What type of unemployment is Matt experiencing?

frictional unemployment

In neoclassical economics, price level ___________________ when aggregate demand _________________ and aggregate supply is set at potential output.

increases, increases

If prices are considered the messengers in a market economy because they convey information about supply and demand conditions, what can blur price messages about the economy?

inflation

The macroeconomic equilibrium along the vertical aggregate supply curve can occur at a variety of different price levels, and the natural rate of unemployment can be consistent with all different rates of ____________.

inflation

Keynes believed that the government should __________ during recessions.

intervene and increase spending

The economy will produce at the original equilibrium price, but quantity demanded will drop, creating a surplus of output.

investment will increase

Neoclassical economists focus on the economy in the ____________ .

long run

In a recession, a _______economist would likely argue for changes to labor policy institutions and nothing more.

neoclassical

The figure below shows an economy experiencing an inflationary gap. What can a government do to close the inflationary gap?

raise taxes decrease government spending

If an economy is currently producing at point Er, then the economy is experiencing a(n) ________ gap, which the government can fix by ______________.

recessionary; shifting aggregate demand rightward

An inflationary gap occurs when aggregate demand_________________, and the unemployment level _________________.

shifts to the right; falls below the natural rate of unemployment

The core assumption(s) of the neoclassical theory rests on __________.

the behavior of individuals to make rational decisions in their own self-interest the reliability of individuals to always maximize their utility, wealth, and profit

Consider an individual who borrowed $10,000 to purchase a used car at a fixed interest rate of 7%. If inflation increases from 2% to 5%, how will this impact the real interest rate the individual will be paying?

the car loan must be repaid at a real interest rate of 2%

Suppose that nominal GDP is rising. This means that __________.

the economy is experiencing an economic boom if the price level has not changed significantly

In defined contribution plans, who contributes to the employee's retirement account?

the employee the employer

Consider a family who borrows $250,000 to purchase a new home at a fixed interest rate of 8.5%. If inflation increases from 4% to 5.5%, how will this impact the real interest rate the family will be paying?

the home loan must be repaid at a real interest rate of 3%; (8.5%-5.5%=3%)

In order to maintain purchasing power for those wage earners, the federal minimum wage rate should keep up with _________________.

the rate of inflation

Which of the following best describes the real interest rate?

the rate of interest after allowing for inflation

In a recession, the neoclassical economic model advocates __________.

waiting out the recession and allowing the market to correct itself

Which of the following factors influence consumption expenditure?

wealth