Module 2: Exam Short Answers
As exports increase, the income from those exports becomes available for domestic investment, increasing the supply of funds?
____FALSE______ True/False. (2pts)
6. According to the article on the wage-productivity puzzle, economist do not know what the natural rate of unemployment in the US currently is?
____True____________True/False (2pts)
1. Suppose workers agreed to an indexed contract that increased their nominal wage by 4 percent plus 25 percent of any increase in the Consumer Price Index (CPI). If the CPI increased by 8 percent, what would be the change in the real wage?
a. -2 percent
Assume an economy that is contracting and unemployment is rising. Which of the following would be a logical explanation for a sudden fall in the unemployment rate even while the economy continues to contract? a) a reduction in the number of discouraged workers b) an increase in the number of discouraged workers c) an increase in the level of employment d) a decrease in the level of employment
b) an increase in the number of discouraged workers
In late 2008/2009 in response to the global financial crisis, an emergency meeting of the European Central Bank is called and they decide to _____________(buy/sell) securities from/to banks, causing interest rates to ____________(fall/increase/be unaffected) and the money supply curve_________ (moves left/moves right/is unchanged) while the money demand curve _____ (moves left/moves right/is unchanged). As a result of the central bank's action outlined above, bond prices _________(increase/decrease are unaffected), aggregate expenditure ___increases______________ (increases/decreases/stay the same) aggregate __demand__________ (supply/demand) shifts ___rightward______ (leftward/rightward) in the short run in response.
buy, fall, right unchanged increase,
what has been the single largest contributor to growth in china in recent years
capital
when wealth increases doe the money demand or supply shift
demand shifts to the right
imagine a natural disaster damages or destroyed 10% of the factories in a country what impact will have that have on future aggregeaget demand
increase
output in the short run_______ while inflation rate
increases/ decreases
Government spending is like investment for all of the following examples except when: a) it goes to help pay for education b) it helps provide infrastructure for the economy c) it is used for public health measures d) it is used for a personal income tax rebate e) All of the above are cases where spending acts like investment
it is used for a personal income tax rebate
A fall in the market interest rate makes any investment project: a) less profitable if the funds were borrowed and more profitable if it came from retained earnings. b) more profitable if the funds were borrowed and less profitable if it came from retained earnings. c) less profitable regardless of whether the funds were borrowed or came from retained earnings. d) more profitable regardless of whether the funds were borrowed or came from retained earnings. e) more or less profitable depending on the industry
more profitable regardless of whether the funds were borrowed or came from retained earnings.
Does the textbook believe that Ricardian equivalence is a problem for government policies to manage the business cycle?
no
are corp bonds part of M2
not as liquid or not as means of payment or they could list what is in M2 and that is part of the list
in response to a massive gall in nominal wages the aggregate ______________ curve shift s ______________
supply/ right or down
1. If banks decide to hold some of their excess reserves instead of lending them all out, then: A) the money multiplier will be less than 1 divided by the required reserve ratio. B) a loan of $1 will lead to a change in the money supply by a multiple amount equal to 1 divided by the required reserve ratio. C) the money multiplier becomes 1 divided by the excess reserves. D) depositors will have to borrow more in order to increase the money supply. E) Both C and D. F) None of the above.
the money multiplier will be less than 1 divided by the required reserve ratio.
If the marginal propensity to save decreases from 0.6 to 0.5 a) the slope of the consumption function increases from 0.4 to 0.5 b) the vertical axis intercept changes from 0.6 to 0.5 c) the slope of the consumption function decreases from 0.6 to 0.5 d) the horizontal axis intercept changes from 0.4 to 0.5 e) the end of civilization as we know it and mass anarchy
the slope of the consumption function increases from 0.4 to 0.5
if you buy a home foremerly rented, GDP this year is
unchanged
10. Is stabilization policy stabilizing (in other words, has it worked according to the textbook)?
yes
What is the output gap? A couple ways this could be worded.
-Any time GDP is above or below potential output or full employment (same idea) OR -They might also mention GDP is off/not at Long Run Aggregate Supply instead of potential output. Fine OR -They may mention an inflationary or recessionary gap.
What is a balance sheet effect?
-The reduction in a firm's net worth due to falling asset prices or -sudden sale of assets by one firm, reduces prices, creating problems for other firms (Contagion) or words to that effect See page 437 for a description of it that students may be trying to capture
ccording to the article, "We are in a low growth world," why haven't we seen more labor productivity growth? two key points: 1.5 points each
-technology not paying off -if they just mention fewer people working fewer hours
3. What factor(s) cause a movement along the money demand curve? What factor(s) will lead to a shift in the money demand curve (left or right)?
A change in the interest rate causes movement along the money demand curve. Any change in money demand caused by something other than an interest rate (change to real income or the price level for example) will cause the curve to shift. Answers may say "anything else" or may mention factors like "real income" and "price level".
9. Which of the following can lead to increasing GDP and decreasing price level? (Hint: Think AS/AD) A decrease in the money supply A increase in government spending A prolonged increase in oil prices A decrease in government spending An usually severe drought affecting crops A steep fall in nominal wages
A steep fall in nominal wages
If a bank has deposits of $100,000, loans of $75,000, cash on hand of $10,000, and $15,000 on deposit at the Federal Reserve, then its reserve ratio is:
A) 5%. B) 7.5%. C) 10%. D) 12.5%. E) 25%.
Between which of the following pairings of economies would you expect to see convergence? A) France and Germany B) Mexico and Ghana NOTE: (B) is okay, but bigger differences than (A), so (A) is best answer C) Brazil and the United Kingdom D) Mexico and Ghana and Brazil and the United Kingdom E) France and Germany and Brazil and the United Kingdom F) None of the Above
A) France and Germany
Last week, Spain enacted reforms to its labor markets. Let us assume Spain made it easier to lay off workers, reduced the power of unions and cut the minimum wage. (a) What impact would this have on AS or AD? (Which one would be affected and which direction would it move?)
AS shifts to the right.
11. Lets assume oil prices triple overnight and these high prices persist for a year or more. Let's look at two countries - an Oil Exporter Petroville (think Saudi Arabia) and an Oil Importer PetroAddict (think India or Japan). *Presume that PetroAddict only imports oil and produces none. Oil is central to its economy and oil imports are a large percentage of GDP. Does this impact Aggregate Demand or Aggregate Supply_________? (2pts) What would be the impact of this on the PetroAddict's economy in the short run (increase, decrease, unchanged)? Price level____________________________ (1pt) Unemployment______________________________(1pt_______Decrease_______________________(1pt) *Presume that PetroVille exports oil worth over 50% of GDP and consumes almost no oil directly or in other goods and services. Does this impact Aggregate Demand or Aggregate Supply_________? (2pts) What would be the impact of this on the PetroVille's economy in the short run (increase, decrease, unchanged)? Price level_____________________(1pt) Unemployment______ ________________________(1pt) GDP_________ ________(1pt
Aggregate supply -price level increase - unemployment increases -GDP decreases * AD PetroVille short run: -price level increase - unemployment - decrease GDP- increase
In a sentence or two, explain what is driving the creation of more markets where superstars win out over everyone else (Hint: from article "Why workers are Losing the War Against Machines").
Any answer that involved technology was fine for us.
2. What factor(s) cause a movement along the AS curve? What factor(s) will lead to a shift in the AS curve (up or down)?
Any change in REAL GDP that causes a change in the price level leads to movement along the AS curve. (Key is that it comes from change in GDP). When anything other than a change in GDP causes a change to the price leve, the curve shifts. Not needed, but an example would be an oil price shock.
Do most economists believe budgets should always be balanced? ___NO________Yes/No Explain.
Any of these answers is fine for full credit for me. -Takes away ability to respond to a crisis or recession -Eliminates automatic stabilizers. -Ignores fact that tax receipts fall in recession -Ignores fact that government spending should rise in recession
In the power of productivity, why does it argue that India has struggled to develop economically (and become more productive)? Cite one key reason.
Any one of these is fine -Macroeconomic stability -Lack of competition -Bad government policies
Why has crowding out not been a bigger issue in the US in recent years given deficits?
Any one of these ways of saying the same thing should be fine: -We have been able to borrow from other countries -trade deficit -capital inflows. Alternatively, one could mention: -The economy could be depressed such that crowding out is not an issue.
What causes the aggregate consumption function to shift upward (hint: think about households, this is not about government policy)?
Approach 1: Increase in Autonomous consumption. -1 if they only say consumers spend more Approach 2: Increase in household wealth or (expected increase in disposable income (optimism/expectations for future).
What three factors have led to a decline in labor force participation according to the article, "Where are all the workers?" 1 pt each. Here are 4 good answers (only needed only 3) -
Baby boomers are retiring -Women's entry into labor force no longer a big driver (anything on women in the workforce is fine as an answer) -Young people in education -less welcoming to migrants
If in an open economy, the government's budget deficit increases at the same time as the trade deficit grows, this will lead to a(n) _________ in the demand and a(n) ________ in the supply of loanable funds in domestic markets. A) increase; decrease B) decrease; decrease C) increase; increase D) decrease; increase
C) increase; increase
What is inflation targeting? What is a criticism of it?
Central Bank announces a specific target rate for inflation (for example 2%). Critics suggest there are times of crisis when other factors are more important than just inflation. See page 429-430.
What factor(s) cause a movement along the AD curve? What factor(s) will lead to a shift in the AD curve (left or right)?
Changes in the price level cause a movement along the AD curve Changes in a, Ip, G, NX, changes in net taxes, and changes in the money supply all lead to a shift in the AD curve itself.
Why is discretionary fiscal policy less important in a country like Germany when it goes into a recession?
Correct answer: It has large automatic stabilizers and so doesn't need discretionary policy. We were generous in grading and also accepted explanation that suggested fiscal policy is less effective. Some students mentioned any of the following: more open economy (large imports/exports), higher savings rate, higher tax rates, larger welfare state.
. If in an open economy, a country imports more than it exports and the government budget deficit increases: A) interest rates will increase, but the change in borrowing is ambiguous. B) interest rates will decrease and the amount of borrowing will increase. C) interest rates will increase and the amount of borrowing will increase. D) the change in interest rates is ambiguous, but the amount of borrowing will increase.
D) the change in interest rates is ambiguous, but the amount of borrowing will increase.
What is underemployment?
Forced to work part time but want full time position (May mention having too many skills for job, but answer must have forced part time in it or only half credit).
1. Who (group, entity or assortment of people, etc.) holds most of the actual US currency in circulation? (Guess if you don't know.)
Foreigners
Thinking about the market for loanable funds, presume a country has a budget surplus and it is a closed economy. If the government budget surplus decreases and at the same business becomes more pessimistic about the future what will happen: IR amount of borrowing
IR will change is ambiguous amount of borrowing will decrease
1. What was Paul Romer's New Growth Theory?
Idea that technological progress/productivity does not just happen (it is not exogenous), but comes from polices, incentives (it is exogenous). Be very, very generous on grading. Any mention of endogenous or exogenous or that mentions "where technological progress or productivity comes from" or "rising stock of knowledge capital" should get at least 2 points and perhaps all 3 depending on how you think of it.
1. In much ado about Multipliers, the article mentions that the size of the multiplier is likely to vary depending on economic conditions (e.g. based on the business cycle). Why? Please explain.
If market is at full capacity multiplier should be zero (or close to full, multiplier is small). In a recession, there is a lot of slack and so multiplier can be higher. Not needed for answer, some students argued crowding out in an economy at or close to capacity/full employment vs. in a recession which also worked as a good answer.
1. If the CPI underestimates inflation, what group in the US is a major loser from government policies?
If they put retirees or people receiving social security full credit. If you put lenders of money also okay. Would also accept full credit for anyone mentioning inflation adjusted securities (TIPS)
We often mention multiplier in class of 2.5 (or more) for the US using our standard multiplier formula used in our calculations. But in the real world are estimates are lower. Why? Name two factors making the multiplier smaller than is captured in this formula.
Imports/Leakages Taxes (automatic stabilizers if taxes are mention
What are shoe leather costs and does the US face them?
Increase in costs due to inflation (not necessary for full credit but literally people have to run around a lot from banks to stores). US does NOT face them.
"Inflation is bad as it enriches banks by taking away from the people and destroying the middle class(e.g. borrowers)." Is this statement true or false for unanticipated inflation? True/False_FALSE___ Explain your answer:
Inflation saves borrowers money and costs lenders. (Not necessary - but most loans are fixed.) If you see any alternative answers worth of review, just use a post-it to flag and give to me.
1. What is the ISM and what does it produce/report? (2pts)
Institute of Supply Management or organization that produces estimates of GDP/business production/statistics (generous on grading here)
Assume there are no savers in the economy. The government runs a surplus. Assume the government increases its surplus this year. What will happen to the interest rate and quantity of funds for investment supplied in the economy?
Interest rate goes down and quantity of funds increases. (NO EXPLANATION NEEDED/They may sketch it, though that is not necessary). WHY? Since all funds are supplied by the government, the supply curve is vertical. Any increase in the government's surplus leads to an increased supply of money for investment. As the supply shifts to the right, interest rates fall as the supply curve meets the demand curve at a new point.
8. Why did the book argue was the major downside/problem with the Stability Pact?
It is pro-cyclical or the opposite of an automatic stabilizer. It forces states in recessions to cut spending, make recession worse.
What kind of longer-term impact would these policies have on Spain's unemployment and why? (Hint: non-cyclical unemployment)
It would reduce unemployment as it would reduce structural unemployment.
A shift away from taxing asset income toward taxing consumption would lead to: _______________interest rates (higher/lower/unchanged) GRADE ______________economic growth (higher/lower/unchanged) GRADE
LOWER_, HIGHER__
What did Franklin D. Roosevelt's budget director argue would be the end of Western Civilization?
Leaving the gold standard/Fiat Currency
Who gets hurt by unanticipated inflation? Who gets helped by anticipated inflation?
Lenders are hurt by unanticipated inflation. No one is helped by anticipated inflation.
would it make the fiscal multiplier larger?
More imports___No_____ High Unemployment__Yes/Check________ High Taxes___No________ Tax cut is targeted to wealthy__No________ Tax cut is targeted to poor___Yes/Check__________ Government spending is targeted toward construction/public works___Yes/Check__________ Public concerns that taxes will be higher in future years to finance current spending ___No____________
What did Kuznets develop that was called "one of the greatest inventions of the 20th century"?
National Income Accounts (system for tracking GDP, spending, etc.
According to the textbook, does fiscal austerity work?
No
1. How do used goods affect GDP calculations? How do they affect CPI calculations?
Not in GDP. Used in CPI calculations
1. How did the Federal Reserve balance sheet change after 2007? What is the most common type of security (asset) it normally trades with banks to influence interest rates?
Part 1 - either grew in size or took on new types of assets (non traditional, etc.) Part 2 - US treasuries, US securities, US bonds. If your answer mentioned bonds or security and do not mention government we just took -1 off
Oil prices are collapsing lately (from $105 this summer to $80 today). Presume this sharp decline in oil prices persist over time. What would be the impact of this on the US economy in the short run (increase, decrease, unchanged)?
Price level____Decrease___________________ GDP___Increase___________________________ Unemployment______Decrease___________________
1. What is disinflation? What costs are associated with it?
Process of bringing down inflation. Cost is slowing down your economy or answer could mention recession or answer could mention unemployment
Suppose there are no households in an economy that save. The government runs surpluses every year. Firms continue to invest. What would be the result if the demand for funds at every interest rate suddenly fell? quality of funds supplies? interest rate?
Quantity of funds supplied___No Change____________(increase/decrease/no change) (2pts) Interest rate__Decrease_____________(increase/decrease/no change) (2pts)
What was regulation Q?
Rule prohibiting banks paying interest on deposits (anything mentioning interest by banks was accepted as this was a pretty hard question...)
What is the Zero lower Bound Problem according to the textbook?
That interest rates can not go below zero.
What is the "lump of labour fallacy" from the external article from the Economist entitled "Productivity: Technology isn't working"? (hint: it involves the debate/fear about technology destroying jobs)
That there is some set amount of work to go around. Not necessary for full credit, but they may talk about how there is fear that as robots/technology/automation replace labor, there won't be jobs for people to take in future.
What was the information technology paradox?
The fact that the information technology revolution did not (at least did not until recently) lead to increases in productivity. Any answer that talks about the lack of productivity is fine.
If the Fed conducts an open market sale of bonds, which of the following will happen?
The interest rate will increase, The aggregate expenditure line will decrease aggregate demand curve will shift leftward
What is Ricardian equivalence?
The notion that any increase in a budget deficit will lead to a decrease in spending. See page 383 Krugman 3rd edition.
Economists argue that "the level of prices doesn't matter" according to the textbook. So what does matter about prices then?
The rate of change or inflation rate.
1. According to McKinsey and Company, a famous business consulting firm, which sector is responsible for most of the growth that took place in the United States during the 1990s? a) The financial service sector b) The manufacturing sector c) The mining sector d) The agriculture sector e) The retail sector
The retail sector
1. What are two central problems a country would face if Bitcoin became accepted as leading currency (even if people had faith in it) according to the article about it assigned for the module?
This is again a case where we need to be extremely generous. Looking for some insight about fixed quantity of bitcoins (and NOT that people don't trust it) Any two answers -Fixed quantity of bitcoins leave open the possibility of deflation (quantity of bitcoins must rise with growth in GDP/Y/output) -Money supply is not adjustable to circumstances (crisis/recession/etc.) or for setting monetary policy -Paradox of thrift -Bank runs?
Why does Jeffrey Sachs argue Africa is poor?
Unfavorable geography/landlocked/weather or sickness/disease/heath or poor soil. Any one of these 3 factors mentioned anywhere gets full credit. Don't care (no points off or credit given) for stuff on infrastructure, instability, corruption, etc.) See page 245.
Give an example of a labor market institution that affects the natural rate of unemployment.
Unions, Minimum wage, any possible rule or organization affecting employment was great.
Are used goods and imports part of GDP? Part of CPI? (4pts)
Used Goods in GDP: No Imports in GDP: No Used Goods in CPI: Yes Imports in CPI: Yes
What are efficiency wages?
Wages given to workers as an incentive to be more productive. (Not necessary for full credit: but this can distort the labor market, lead to structural unemployment.)
Which of the following is the most accurate statement concerning the relationship between government budget deficits and economic growth? a) Deficits increase economic growth. b) Deficits decrease economic growth. c) Deficits have no impact on economic growth. d) We can not say unambiguously whether government spending that increases deficits lowers or increases economic growth.
We can not say unambiguously whether government spending that increases deficits lowers or increases economic growth.
Can you give an example of unit of accounts costs?
We were generous on accepting examples students came up with. Any example where it is clear than inflation makes using money as a unit of measure more difficult. Problems of doing contracts, of measuring prices, affect on taxes are all good examples. Again, we were generous. I saw answers all over the place. See Page 217.
Do airlines (like United Airlines) fair better or do they fair worse than most industries in a recession and why?
Worse. 1.5 points High fixed cost industry 1.5 points
6. Is defense spending an example of an automatic stabilizer?
__ NO_____(Yes/No) (2pts)
The book mentions several proposals to reduce carbon emissions (for example Lieberman-McCain and Sanders-Boxer proposals). By approximately/roughly, what percent would either of these proposals if enacted reduce GDP?
__Any value less than 5%_________ (2pts)
Assume the stock market doubles in value this year. Would this impact aggregate supply, aggregate demand or neither?_
__DEMAND_____________ (3pts)
A country economy has had a chronic trade surplus for the last 20 years. If the trade surplus gets smaller next year, the supply of loanable funds gets smaller.
__False
What is the name for an economic recovery where the real GDP growth rate is positive, but the unemployment rate is still rising?__
__Jobless Recovery______________________________
When the stock of physical capital of US firm is low, Aggregate Demand will increase
__TRUE__________ (true/false)
5. The natural unemployment rate includes structural unemployment?
___True__________(True/False) (3pts)
5. Assume that there is an increased likelihood of a recession. How is the following statement incorrect:
"Responding to signs of economic weakness, the federal reserve board of governors FMOC could decide to increase the money supply to alter the interest rate that banks lend to each other at (the discount Federal Funds rate). To accomplish this, the Federal Reserve would buy bonds from the banks, increasing the supply of funds available for lending, decreasing increasing the price of the bonds and leading to lower interest rates."
9. Who has had higher productivity growth since 2000? Europe or US?
___US________ (2pts)
What is an advantage of the PPI over the CPI in trying to measure inflation trends?
"Responds to changes in prices more quickly" or "is an early warning signal" See page 204 Krugman 3rd edition.
What is the Walmart effect/big box boom?
"The fact that Walmart and other big box stores were important drivers of productivity." Or "Everyday small improvements drove productivity improvements" Or words to that effect See page 269 Krugman 3rd edition.
Under what circumstance might monetary policy fail to work?
-When interest rates approach zero. -When you are in a Keynesian liquidity trap -When the banking system is in turmoil (like now) and banks hold onto money as excess reserves
1. If the Fed conducts an open market purchase of bonds, which of the following will happen? a. The interest rate will decrease, the aggregate expenditure line will shift upward and the aggregate demand curve will shift rightward b. The interest rate will decrease, the aggregate expenditure line will shift upward and the aggregate demand curve will shift leftward c. The interest rate will decrease, the aggregate expenditure line will shift downward and the aggregate demand curve will shift rightward d. The interest rate will increase, the aggregate expenditure line will shift downward and the aggregate demand curve will shift leftward e. The interest rate will increase, the aggregate expenditure line will shift upward and the aggregate demand curve will shift leftward f. The interest rate will increase, the aggregate expenditure line will shift downward and the aggregate demand curve will shift leftward
. The interest rate will decrease, the aggregate expenditure line will shift upward and the aggregate demand curve will shift rightward
4. What are two ways that a change in wealth can affect the AD curve?
1) Can move the AD curve to the right. AND 2) Can also be movement along the curve. Please check and see how people do on this question so we can if this was reasonable to too subtle.
What government polices in India have limited the growth of productivity according to the Power of Productivity article (by Lewis)?
1) Limits on competition or 2) Difficulty getting scare land/land ownership problems See Power of Productivity Article in Macro folder on blackboard for any questions.
Suppose Sternland (a fictional, but very cool country) has no taxes or foreign trade. Assume household save 25% of their income. The level of potential output in $600 billion. Now suppose the government (the Dean's office!) decides to tax its citizens. The tax multiplier is: a) 3/4 b) 4 c) 2 d) 3 e) 4/3 f) None of the above
3
Does an decrease in the nominal wages affect aggregate demand or aggregate supply?________ Would it shift leftward or rightward __________________?
AS___Rightward____
1. What is an automatic stabilizer? Give an example.
Any time government spending automatically increases due to a recession (or an expansion) without any needed change in policy. For example, as economy expands taxes increase. Some unemployment insurance is an automatic stabilizer (as more people lose jobs, spending on unemployment goes up). Medicaid and Food stamps are also good examples.
lease describe one benefit and one risk of fiat money?
Benefits: 1. Low cost to produce. 2. Supply can be adjusted based on needs of economy Risks: 1. Counterfeiting 2. Government's may use printing press to pay bills 3. Inflation
1. Why has the current administration turned to fiscal policy? What problem is there currently with relying on monetary policy to get us out of the current recession? (2009 exam)
Both questions are answered by the fact that with interest rates at or close to zero, monetary policy is losing its effectiveness. Or a student could allude to this condition by just mentioning a Keynesian liquidity trap.
Why has the discount rate historically been a less popular tool for the Fed to use than the Federal Funds rate?
Correct answers may state that banks did not want to borrow as they would be put under Fed scrutiny/review. Or they may state that banks feared borrowing from the fed using the discount rate would signal to the Fed or other banks that they were in trouble. (This changed in 2003. Correct answers need not note this, but you can give some credit if an incorrect answer does. All of this is outlined on pages 306-7).
Suppose that Mr. Green Jeans sells $5,000 of wheat to Big Ben Bakery. Big Ben uses the wheat to make flour and then hamburger buns, which they sell to Hamburger Heaven for $11,000. Hamburger Heaven also buys $20,000 of beef from a rancher. Hamburger Heaven uses the beef and buns to make 10,000 hamburgers which are sold for $5 each. How much do these transactions add to GDP? A) $86,000 B) $36,000 C) $31,000 D) $50,000 E) none of the above
D) $50,000
3. Assume for the typical country (like the US) the government decides to cut government spending by $10 billion dollars. Assume at the same time it also cuts taxes by $10 billion dollars. What would be the likely effect on aggregate expenditure (increase, decrease or unchanged and why)?
Decrease. This is because the spending multiplier is different and tax cuts have less stimulative effect. So 10 billion in spending cuts followed by 10 billion in tax cuts would have a negative effect. 4. How is the Federal Reserve independent of the rest of the Federal Government (what aspects of its organization and decision making increase its independence from political pressures)? Why was it designed to be independent? Answers should note that the members have long terms and can not be fired by the President. Decisions on interest rates are made by the FOMC, not just the board of governors and this includes members of the regional Fed banks as well (who are appointed by local banks and not the government). It was designed to be independent because it must make politically unpopular decisions.
1. What does the book argue is the major advantage of a consumption tax over existing income taxes?
Encourages savings/increases supply of loanable funds/leading to more investment
What is the Federal Reserves Dual Mandate? Under what circumstances would the fed have trouble following both parts of the mandate?
Fight inflation and unemployment (aka full employment/natural unemployment and stable prices). Stagflation or a negative supply shock.
Other than the US, name a country that suffered a banking crisis according to the book:
Finland, Sweden, Japan and Ireland were main ones, Figure 17-3 (3rd edition page 15) includes more. Note chapter 17 is not assigned every semester and so this might not be something for your semester's class.
If you had heard that in the market for loanable funds that the interest rate had fallen, equilibrium investment had increased and household savings had declined slightly, what else must have occurred (i.e. what must have changed)?
Government must be running a surplus. If we saw the world "surplus" chances are it is correct. Only took off 1.5 for any wrong answer.
Where does the convergence hypothesis appear to have held? Where does it not appear to have held? Where is has not, why hasn't it?
Holds among wealthy countries. (1pt) Does not hold among poor countries. (1pt) Factors like education, infrastructure, rule of low or similar factors prevent it being held (1pt
If labor unions lose memberships and become less popular, then productions costs _______ ((SRAS/LRAS/AD curve) the ________will shift to then __________
If labor unions lose memberships and become less popular, then productions costs __DECREASE_______________ (increase/decrease/stay steady) the __SRAS________________ (SRAS/LRAS/AD curve) will shift to the __RIGHT___________ (left/right).
When a waiter deposits his cash tips in his savings account: A) M1 immediately increases. B) M2 immediately decreases. C) M1 immediately decreases. D) M2 immediately increases. E) M1 and M2 immediately increase. F) M1 and M2 immediately decrease. G) None of the Above.
M1 immediately decreases.
1. What is monetary neutrality and does the international evidence suggests it holds or not?
Monetary neutrality holds that the supply of money/inflation has no effect on potential output in the long run. Evidence suggests it does hold.
What is the life cycle hypothesis of spending?
People smooth their income over their lives. Note, you can see how you might word this answer differently. Naturally, TFs and Professor were careful to read what you had.
. One way a recessionary gap is eliminated is through a self correcting adjustment. Another way would be through government intervention. If the government had intervened using fiscal policy, how might the price level differ relative to if gap had self corrected on its own? (2pts)
Price level will be lower if it eventually self corrects versus if there is government intervention. This is because government is reducing the impact of the recession.
Please offer three reasons why the natural rate of unemployment fell in the US since the 1970s? (Just 1 sentence each is fine.)
See 212-213 for different reasons for this. Students could mention either overall concepts or specific examples. Lots of guessing, so key factor was finding something in the 3 areas listed and the examples (e.g. changes in experience of workers, decline of unions, temporary placement businesses, the internet use to find jobs, minimum wage laws, government job training, employment subsidies, other government policies).
Why does the United States have a lower savings rate than most other wealthy countries? Offer two arguments from the book.
Strong system of financial intermediation Strong government retirement system (social security)
4. Explain the structure and function of the FOMC and how its members appointed.
Structure: Consists of 7 Fed governors and 5 of the 12 district presidents for a total of 12. Function: It sets the federal funds rate/conducts open market operations. Students may note that deliberations are prive and notes are released later, but not necessary for full credit. Members appointed: 7 Fed governors by the President and confirmed by senate. 5 district presidents are elected by directors with representation by local member banks. Fed governors are appointed by President with Congress and that member banks have a voice in selected the district bank presidents
What are five of the functions of the Federal Reserve? (Just list them)
Supervising and Regulating Banks Acting as a Bank for Banks Issuing Paper Currency Check Clearing Controlling the Money Supply
Workers who would like to find full-time jobs but are currently working part time for economic reasons are called_
__UNDEREMPLOYED___?
2. What is debt deflation and how can it make depressions hard to escape?
Under deflation, debts become more expensive to repay as prices fall (e.g. wages, profits) but the debt fixed. This means firms and individuals are reluctant to borrow money (take out loans) and so it is very hard to escape the depression.
As economy is contracting and unemployment is rising. You open the newspaper one day to see that the unemployment rate fell even though the contraction continues. What would be a logical explanation for the reported unemployment rate falling even though the economy continues to contract?
Unemployed people give up hope of finding work and leave the labor market (e.g. or they may write they become discouraged workers). Such workers are not counted as part of unemployment.
3. In an inflationary gap, the ____(AS/AD/Demand for Loanable funds curve) moves to the _________(right/left) In response, the federal reserve goes to banks and __________________(buy bonds/sells bonds) the money demand curve ___is unchanged____________ (moves left/moves right/is unchanged) the money supply curve___Moves left____________(moves left/moves right/is unchanged) in response to fed policy the interest rate to ___Increases___ (increases/decreases/stay the same) aggregate expenditure __decreases_____________increases/decreases/stay the same) aggregate ___Demand___ (supply/demand) shifts __leftward_____ (leftward/rightward) in the short run in response (
_AD, RIGHT, __SELLS BONDS_
One of the lags associated with fiscal policy is the time it takes to recognize that the economy has developed a recessionary or inflationary gap. True or False?
__TRUE______ (2pts
1. An example of a capital good a. Food produced by U.S. farmers in 2003 b. The pickup truck that your friend drives to school c. A house owned and occupied by a family d. The rent your friend paid last year for a college apartment e. A share of General Electric stock
a house owned and occupied by a family
The higher the current production capacity of the economy a) the higher is investment spending b) the lower is investment spending c) the higher is actual production d) the lower is current production
a) the lower is investment spending
. If banks decide to hold some of their excess reserves instead of lending them all out, then: a) the money multiplier will be less than 1 divided by the required reserve ratio. b) a loan of $1 will lead to a change in the money supply by a multiple amount equal to 1 divided by the required reserve ratio. c) the money multiplier becomes 1 divided by the excess reserves. d) depositors will have to borrow more in order to increase the money supply.
a) the money multiplier will be less than 1 divided by the required reserve ratio.
1. If the Federal Reserve purchases $1,000 in bonds and the reserve requirement ratio is 0.2, what will be the total change in reserves at all banks assuming there are no excess reserves? a. $500 b. $1,000 c. $5,000 d. -$500 e. -$1,000 f. -$5,500 g. None of the above
a. $1,000
1. If at an interest rate of 7 percent, planned investment is $2 trillion, government spending is $3 trillion, net taxes as $2.8 trillion, and household savings is $2.2 trillion, what is the quantity of funds demanded at an interest rate of 7 percent? a. $1.8 trillion b. $2.2 trillion c. $2.8 trillion d. $1.8 trillion e. $5.0 trillion f. $5.8 trillion g. None of the above
a. $2.2 trillion
1. Which of the following can lead to stagflation? a. A decrease in the money supply b. A decrease in autonomous consumption c. A prolonged increase in oil prices d. An increase in government spending e. An usually severe recession f. Decreases in crop prices
a. A prolonged increase in oil prices
1. In the short run, a decrease in government purchases would a. Decrease real GDP because of the multiplier effect and price level changes, but be offset somewhat decreases in the interest rate b. Decrease real GDP because of the price level increase and increase in the interest rate c. Decrease real GDP because of the multiplier effect and increase in the interest rate, but be somewhat offset but the decreases in the price level d. Decrease real GDP because of the multiplier effect, but be somewhat offset but the decreases in the price level and interest rate e. Not change in output because of the multiplier effect, price level and interest rate changes completely cancel each other out
a. Decrease real GDP because of the multiplier effect, but be somewhat offset but the decreases in the price level and interest rate
1. Joe recently completed his college degree and is entering the labor market for the first time as a plumber. He has been submitting applications and has been interviewed twice in the last two weeks, but so far has not found a job (should have gone to Stern). Joe would be classified as:
a. Frictionally unemployed
1. Increases in investment spending cause interest rates to increase. As a result, a. Households will demand more loanable funds b. Households will save a smaller fraction of their incomes c. Households will voluntarily decrease their consumption spending d. The investment curve will shift leftward e. Firms will receive greater profits from households who are consuming goods f. None of the above
a. Households will voluntarily decrease their consumption spending
1. Which of the following would not increase autonomous consumption spending? a. Expectations of greater future income b. A lower interest rate c. Reduced consumer debt d. Increased household wealth e. Increased disposable income
a. Increased disposable income
1. Suppose there are no firms, only the government and households. What would the result if for some reason the supply of savings at every interest rate suddenly fell? a. Interest rates would fall and the levels of savings would fall. b. Interest rates would fall and the levels of savings would not change. c. Interest rates would fall and the levels of savings would rise. d. Interest rates would rise and the levels of savings would fall. e. Interest rates would rise and the levels of savings would not change. f. Interest rates would rise and the levels of savings would rise. g. Interest rates would not change and the levels of savings would fall. h. Interest rates would not change and the levels of savings would not change. i. Interest rates would not change and the levels of savings would rise. (Recall that the government's demand curve for funds is inelastic/vertical.)
a. Interest rates would rise and the levels of savings would not change.
1. If the actual interest rate is above the equilibrium interest rate, the a. Fed must intervene in financial markets to restore the interest rate to its equilibrium value b. Price of bonds will increase c. Price of bonds will decrease d. Money supply will increase until the interest rate rises e. Money supply will decrease until the interest rate rises
a. Price of bonds will increase
1. Suppose the population grows by 2 percent annually. For the standard of living to rise, which of the following MUST occur (hint: more than one could occur, but this one MUST be the case)? a. Nominal GDP must grow by more than 2 percent. b. Real GDP must grow by more than 2 percent c. Consumption spending must grow by more than 2 percent. d. Private investment spending must grow by more than 2 percent. e. New York University cuts tuition
a. Real GDP must grow by more than 2 percent
1. GDP as predicted by the classical, long-run model is a. Lower than the actual level of GDP b. Higher than the actual level of GDP c. Smoother and steadier than actual GDP d. More unstable over time than actual GDP e. An accurate predictor of GDP
a. Smoother and steadier than actual GDP
1. What must the change in taxes have been if the GDP increased by $300 billion and the marginal propensity to consume is 0.8? a. Taxes must have increased by $60 billion b. Taxes must have been decreased by $60 billion c. Taxes must have been decreased by $75 billion d. Taxes must have increased by $75 billion e. Taxes must have increased by 1,500 billion f. None of the above
a. Taxes must have been decreased by $75 billion
When actual output is above potential output: a) nominal wages will increase, and the short-run supply curve will shift to the right. b) nominal wages will increase, and the short-run supply curve will shift to the left. c) the aggregate demand curve will shift to the right. d) the short-run aggregate supply curve will shift to the right. e) none of the above.
b) nominal wages will increase, and the short-run supply curve will shift to the left.
In 2008, consumption spending is $7,000, government purchases is $2,000 and investment spending is $1,500. If GDP for 2008 is $10,300, then: a) export is $400 and import is $200. b) export is $100 and import is $200. c) export is $600 and import is $800. d) export is $500 and import is $300.
c) export is $600 and import is $800.
5. Which of the following would an economic policy maker rank as the most preferred type of shock? a) positive demand shock b) negative demand shock c) positive supply shock d) negative supply shock
c) positive supply shock
1. Which of the following would lead to a rightward movement along the aggregate expenditure line rather than a shift in the line itself? a. A reduction of the marginal propensity to consume b. A decrease in income of $100 billion a. The interest rate will decrease, the aggregate expenditure line will shift upward and the aggregate demand curve will shift rightward
c. An increase in income of $50 billion
1. Dennis is an excellent typist. However, because he has been unable to adapt to his company's new computer system, he has lost his job. He is currently seeking another secretarial position, but it is likely that he will have to acquire new skills to become employable as a secretary again. Dennis would best be described as: a. Frictionally unemployed b. Seasonally unemployed c. Structurally unemployed d. Cyclically unemployed e. Involuntarily Underemployed f. A victim of seasonal dumping by foreign firms
c. Structurally unemployed
If Congress places a $5 tax on each ATM transaction (and let's assume people use ATMs to access a variety of interest bearing accounts and not just checking), there will likely be: a) a movement up a stationary real money demand curve. b) a movement down a stationary real money demand curve. c) a shift to the left of the real demand money demand curve. d) a shift to the right of the real demand for money curve.
d) a shift to the right of the real demand for money curve.
National savings in a closed economy is all of the following except: a) the sum of private savings plus the government budget balance. b) The total savings generated within the economy c) GDP-C-G d) Government spending less consumption e) All of the above are equal to national savings f) None of the above are equal to national savings
d) government spending less consumption
In the closed economy of Sildavia, government spending during 2005 was $30 billion, consumption was $70 billion, taxes were $20 billion, and GDP was $110 billion. If investment spending in Sildavia during 2005 was $10 billion, we can conclude that: a) private savings were equal to $10 billion. b) the government's budget balance was equal to a surplus of $10 billion. c) net savings were equal to $0. d) private savings were equal to $20 billion. e) a and b. f) b and d. g) none of the above.
d) private savings were equal to $20 billion.
a. Measures the prices of all goods produced in the economy b. Includes prices of raw materials c. Is found by averaging the prices of all goods consumed in the economy d. Includes only the prices of domestically produced consumer goods e. Includes the prices of some used consumer goods f. All of the above
e. Includes the prices of some used consumer goods
1. If labor supply and labor demand both increase, employment a. And the real wage rate will both increase b. Will increase but the real wage rate will fall c. Will increase but the real wage rate will remain constant d. And the real wage rate will both remain constant e. Will increase but the effect of the real wage rate cannot be determined without more information
e. Will increase but the effect of the real wage rate cannot be determined without more information
Negative inventory investment occurs when companies: A) add to their inventories when sales fall. B) add to their inventories by increasing production. C) reduce their inventories by decreasing production. D) reduce their inventories when sales increase. E) scrap inventory in favor of new innovations. F) fail to hire enough Stern graduates . G) hire to many Stern graduates .
reduce their inventories when sales increase.
. Stabilization policies have: a) not reduced the effects of business cycles caused by other demand shocks or supply shocks. b) reduced the economic fluctuations caused by demand shocks but have not been effective against supply shocks. c) reduced the economic costs of supply shocks but have not been so successful against demand shocks. d) been successful in reducing economic fluctuations by neutralizing the effects of both supply and demand shocks
reduced the economic costs of supply shocks but have not been so successful against demand shocks.
