Combined Macro Test Answers for Final
An economy produces only digital cameras, chocolate bars, and watches The table gives the quantities produced and prices in 2015 and 2016. The reference base year is 2015. What is real GDP in 2016 in terms of the reference base-year prices? Real GDP in 2016 in terms of reference base-year prices is
$11
During a year, a firm's depreciation is $1,000 and gross investment is $5,000. What is the firm's net investment? The firm's net investment is ______.
$4,000
Suppose an increase in the monetary base of $100,000 increases the quantity of money by $300,000. Calculate the money multiplier.
3
Consider a payment of $500, which will be made three years in the future. The interest rate is 3 percent.
457.57
If the nominal interest rate is 7 percent and the inflation rate is 1 percent, the real interest rate is approximately
6%
The table gives information reported by the Bureau of Labor Statistics for April, 2017. What is the employment-to-population ratio?
60.2
The table gives information about the U.S. labor market in 2013. What is the labor force participation rate?
63.2
Two countries, Alpha and Beta, have identical production possibilities frontiers. If Alpha produces at point A and Beta produces at point B, then _______.
Alpha consumes more than Beta today, but it will grow slower than Beta
Which of these is an example of an automatic fiscal policy?
An unemployment benefit program
Choose the statement that is incorrect.
A tariff creates a social loss because the domestic government loses revenue.
A tariff is a
A tax on an imported good or service.
The figure shows the flows of expenditure and income in Europa. During 2015, B was $493 billion, C was $198 billion, D was $188 billion, and E was $8 billion. In the figure, consumption expenditure is represented by the flow labeled B, investment is represented by the flow labeled D, government expenditure is represented by the flow labeled C and net exports is represened by the flow labeled E.
During 2015, aggregate income was $887 billion. GDP was $887 billion
The table provides some data on real GDP and the population of Pacifica in 2012 and 2013. What is the growth rate of real GDP in Pacifica in 2013? What is the growth rate of real GDP per person in Pacifica in 2013?
The growth rate of real GDP in Pacifica in 2013 is 14 percent. The growth rate of real GDP per person in Pacifica in 2013 is 10 percent.
Explain why a relative price is an opportunity cost. The money price of a pack of frozen burritos is $0.60 and the money price of a jar of pasta sauce is $1.50. The opportunity cost of a jar of pasta sauce is _______. The relative price of a jar of pasta sauce is an opportunity cost because ______.
b. 2.50 packs of frozen burritos, which is the relative price of a jar of pasta sauce the relative price tells us how many packs of frozen burritos we must give up to get a jar of pasta sauce
The opportunity cost to produce 1 pretzel for Mark is 2 cookies. For Jessica, the opportunity cost to produce 1 pretzel is 3 cookies. From this information, we know that
b. Mark has a comparative advantage in pretzel production.
Suppose a concert pianist practises the piano for 6 hours every day, but to prepare for an upcoming concert, she decides to practise for an extra hour. The _____ of one more hour of practising is _____.
c. marginal cost; an hour of reading, if that is her best alternate use of the time
If the demand curve for bottled water shifts rightward and the supply curve of bottled water shifts leftward, the equilibrium
c. price of bottled water definitely increases.
Supply-side economists point to the Laffer curve as evidence that higher taxes:
can lead to overall government revenues
Countries gain from specializing in producing goods in which they have a(n) __________ advantage and trading for goods in which other countries have a(n) __________ advantage
comparative; comparative
The consumer price index (CPI)
compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.
To increase the money supply, the Fed may conduct
conduct open market purchases of government bonds.
When a good is imported, _______.
consumers gain because they pay a lower price and increase the quantity they consume
When a good is exported, _______.
consumers lose because they pay a higher price and decrease the quantity they consume
When the United States places a tariff on a good, the U.S. ______ and the U.S. ______ from the tariff.
consumers of the good lose; producers of the good gain
a decline in private expenditures as a result of an increase in government borrowing is known as:
crowding out
In one hour, Sue can produce 50 caps or 10 jackets and Tessa can produce 70 caps or 7 jackets. Sue's opportunity cost of producing a cap is ______ jackets and Tessa's opportunity cost of producing a cap is ______ jackets.
d. 0.2; 0.10
When operating on its PPF, a country can produce 2 tons of butter and 200 cars OR 3 tons of butter and 150 cars. The opportunity cost of 1 ton of butter is ________ cars per ton of butter.
d. 50
Complete the following sentence. If, as Gustavo's income increases, his demand for designer blue jeans increases, then for Gustavo, designer blue jeans are _______.
d. a normal good
Draw a demand curve and a supply curve using the numbers in the table. Label the curves. Draw a point to show the equilibrium price and equilibrium quantity. Now suppose that the price is $3 a magazine. Describe the situation in the magazine market and explain how the price adjusts.If the price is $3 a magazine, there is a ______ of magazines, so the price of a magazine ______.
d. shortage; rises
Miles graduates from college and his income increases by $20,000 a year. Nothing else changes. Miles decreases the quantity of hot dogs and bread rolls that he buys and increases the quantity of stuffed olives that he buys. For Miles, _______.
d. stuffed olives are normal goods
The government is considering raising the tax rate on labor income. Explain the supply-side effects of such an action and use appropriate graphs to show the directions of change, not exact magnitudes. What will happen to the supply of labor and the demand for labor and why? The supply of labor will ______ and the demand for labor will ______.
decrease because the tax weakens the incentive to work; not change because labor productivity doesn't change
In 2008, spending on Social Security, Medicare and Medicaid was less than 10% of the GDP. By 2030 this amount is expected to be around 17% of GDP. One government option to solve this problem is to:
decrease benefits
Tax revenues ______ during a recession. Needs-tested spending ______ during an expansion.
decrease; decreases
What will happen to potential GDP, and why? Potential GDP will ______ because ______ .
decrease; employment decreases
A decrease in the demand for loanable funds and a leftward shift of the demand for loanable funds curve results from
decreases in the expected profit
How does a tax on labor income influence the equilibrium quantity of employment? A tax on labor income ______. The equilibrium quantity of labor ______.
decreases the supply of labor; decreases
What will happen to equilibrium employment and the equilibrium before-tax and after-tax wage rates and why? Because the tax ______ , the equilibrium level of employment will ______ , the before-tax wage rate will ______, and the after-tax wage rate will ______.
drives a wedge between the take-home wage and the cost of labor; decrease; rise; fall
Consider gardening books. What will happen to the market for these books as gardening becomes more popular and simultaneously printing costs increase?
a. The price of gardening books definitely increases
Draw an aggregate demand curve in an economy with an above full-employment equilibrium. Label it AD. Draw a point at the above full-employment equilibrium. Draw a horizontal arrow at the equilibrium price level that shows the output gap. The output gap in the graph is ______ because ______.
an inflationary gap; potential GDP is less than real GDP
Discouraged workers ________ counted as officially unemployed because they ________.
are not; are not actively seeking work
Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.
automatic fiscal policy
The graph shows the U.S. production function. Draw a point that indicates potential GDP when the equilibrium quantity of labor is 250 billion hours. Show the effect of a tax on labor income. Draw either an arrow along the PF showing the direction of change, or a new production function. Draw only the one of these objects that correctly shows the effect of the tax.
drop a point at 250, then draw an arrow going down from that point
Draw a labor supply curve and a labor demand curve. Label them LS0 and LD0. Draw a point the equilibrium quantity of labor and the equilibrium real wage rate. Label it 1. Draw and label a curve that shows the effect of an increase in labor productivity. Draw a point at the new equilibrium quantity of labor and the equilibrium real wage rate. Label it 2. An increase in labor productivity increases potential GDP because ______.
employment increases and a given amount of unemployment produces more real GDP
The price of a bond _______ and the interest rate _______.
falls; rises
Government policies that increase aggregate demand are called:
fiscal stimulus
One of the primary goals of most governments with regard to the economy is:
full employment
If a country has a comparative advantage in the production of a good, then that country:
has a lower opportunity cost in the production of that good
How can the federal government use discretionary fiscal policy to stimulate the economy? An economy is experiencing a recessionary gap. The government can ______.
increase expenditure or cut taxes to increase aggregate demand
When the economy is in a recession, the Government can:
increase government purchases or decrease taxes in order to increase aggregate demand.
It is unlikely that the United States is on the "wrong" side of this curve because, if it were, a decrease in the tax rate would ______ .
increase tax revenue
An increase in the demand for computers and a decrease in the number of sellers of computers will ________.
increase the price of a computer
budget deficets automatically ________ during recessions and ________ during expansions.
increase, decrease
By itself, an increase in exports
increases GDP
The graph shows an aggregate demand curve. Draw a curve that shows the effect on aggregate demand of an increase in expected future income. Label it. An increase in expected future income _______. An increase in the expected future inflation rate _______. An increase in expected future profits _______.
increases aggregate demand today; increases aggregate demand today increases aggregate demand today
Why might fiscal stimulus crowd out investment? Fiscal stimulus that increases an existing government budget deficit ______ loanable funds, which ______ investment.
increases the demand for; increases the real interest rate and decreases
If an economy experiences a decrease in the money supply, short-run unemployment
increases, and short-run output decreases.
The tools at the disposal of the Fed for changing the quantity of money do NOT include
increasing the number of commercial banks.
Compared to a balanced budget, when the government runs a budget deficit,
interest rates rise, and firms' private investment decreases.
When the Federal Reserve Bank increases the federal funds rate, other
interest rates rise, and short-run real GDP decreases.
Because of the biases in calculating the CPI, actual inflation is
less than the measured inflation rate.
In any year, real GDP
might be greater or less than potential GDP.
The graph shows the demand for money curve and the supply of money curve. The Fed decreases the quantity of real money supplied to $5.9 trillion. Draw a new MS curve that shows the effect of the Fed's action. Label it. Draw a point at the new equilibrium quantity of money and interest rate. Before the Fed decreases the quantity of money, the equilibrium interest rate is 4 percent a year.After the Fed decreases the quantity of money, at an interest rate of 4 percent a year, people want to hold _______ money than the quantity supplied, so they _______ bonds.
more; sell
The country of Kemper is on its aggregate production function at point W in the figure. If the population increases with no change in capital or technology, the economy will
move to point such as X.
In neoclassical growth theory, technological change ________.
occurs by chance
Full employment occurs
only if the unemployment rate is equal to the natural rate of unemployment.
When nations specialize in their comparative advantage and engage in trade:
overall standards of living increase
Because pollution reduces economic welfare, on this count real GDP
overstates economic welfare
The net gain from international trade is _______.
positive. Consumers gain more than producers lose with imports, and producers gain more than consumers lose with exports.
The term "crowding out" relates to the decrease in
private investment from a government budget deficit
The use of trade barriers to shield domestic companies from foreign competition is called __________.
protectionism
Aggregate expenditures include all of the following EXCEPT
purchases of intermediate goods.
What is PPP and how does it help us to make valid international comparisons of real GDP? PPP is _______. When we use PPP we can make valid international comparisons of real GDP because ______.
purchasing power parity we calculate the value of goods and services produced in two countries using the same prices
A numerical limit on the quantity of a good that can be imported is known as a(n):
quota
The relationship between real GDP and potential GDP is that
real GDP fluctuates about potential GDP.
Labor productivity is defined as
real GDP per hour of labor.
Draw the long-run aggregate supply curve when potential GDP is $18.5 trillion. Label it. As we move up along the long-run aggregate supply curve, ______.
the real wage rate remains constant
An automatic fiscal policy is a fiscal policy action that is triggered by _____. A discretionary fiscal policy is a fiscal policy action that is initiated by _____.
the state of the economy; an act of Congress
In the figure, an economy would grow fastest if it produces at point
a. A (top left point on the PPF)
Tax cuts will not pay for themselves if ______.
the economy lies to the left of the maximum point on the Laffer curve
Which, if any, of the following causes a country's reported GDP to be less than its total economic production?
the exclusion of household production
As we move up along the short-run aggregate supply curve, ______.
the money wage rate, the prices of other resources, and potential GDP remain constant
Which of the following statements illustrates fiscal policy?
The US government has proposed a hike in the corporate tax rate.
When a shortage or a surplus arises in the loanable funds market _______.
the real interest rate is pulled to the new equilibrium level
Technological change creates economic growth. Draw a new PPF that illustrates the effect of a technological change that brings new and better ways of producing both ships and planes. Make the PPF that you draw show increasing opportunity cost. Label the curve.
Just draw a new PPF above the old one and label "ppf1"
What are the official measures of money? Are all the measures really money? The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money.
M1 and M2; are
________ predicts that real GDP per person can grow indefinitely.
New Growth Theory
An economy produces only apples and oranges. The base year is 2015, and the table gives the quantities produced and the prices. Calculate nominal GDP in 2015 and 2016.
Nominal GDP in 2015 is $140 Nominal GDP in 2016 is $625
Tony and Patty produce skis and snowboards. The tables show their production possibilities. Tony produces 2 snowboards and 16 skis a week; Patty produces 4 snowboards and 2 skis a week.
PATTY has a comparative advantage in producing snowboards; TRUE Patty has a comparative advantage in producing skis; FALSE If Tony and Patty specialize in trade, _____ would specialize in snowboards and produces ______; Answer: PATTY; 8 snowboards If Tony and Patty specialize in trade, _____ would specialize in skis and produces ______; Answer: Tony; 20 skis The number of snowboards INCREASES by 2. The number of skis INCREASES by 2.
Fiscal imbalance is the ___ value of the government's commitments to pay benefits minus the ____ value of its tax revenues.
PRESENT; PRESENT
Summers Calls for Infrastructure Spending Larry Summers, the outgoing director of the White House National Economic Council, said the United States must ramp up spending on domestic infrastructure to drive the economic recovery. He said that a combination of low borrowingcosts, cheap building costs, and high unemployment in the construction industry make this the ideal time to rebuildroads, bridges, and airports. Read the news clip, then answer the following questions. This infrastructure spending is fiscal stimulus. T/F Such spending is _______ fiscal policy.
TRUE discretionary
The people on Coral Island buy only juice and cloth. The CPI basket contains the quantities bought in 2013 (the reference base year). The average household spent $20 on juice and $18 on cloth in 2013 when the price of juice was $2 a bottle and the price of cloth was $6 a yard. In 2014, juice is $6 a bottle and cloth is $8 a yard. Calculate the CPI and the inflation rate in 2014.
The CPI in 2014 is 221.1 >>> Answer to 1 decimal place. The inflation rate in 2014 is 121.1 percent.
Suppose the United States goes from a free-trade policy to a no-trade policy with other countries. Which of the following is a result of this new policy?
The U.S. no longer consumes outside its production possibilities frontier
The table gives information reported by the Bureau of Labor Statistics for February, 2017. What is the unemployment rate?
The unemployment rate is 4.7 percent.
What happens when government spending is greater than government tax revenues?
There is borrowing by the government and the government debt rises.
The graph shows the demand for labor curve and supply of labor curve for an economy. Draw a point at the equilibrium real wage rate and equilibrium quantity of labor. Label it 1. Now the government imposes a tax on labor income. Draw a curve that shows the effect of this tax. Label it. Draw points at the new equilibrium quantity of labor to show: 1) the before-tax wage rate. Label it 2. 2) the after-tax wage rate. Label it 3. When the government imposes a tax on labor income, ______ the production function occurs and potential GDP ______.
a leftward movement along; decreases
Draw a labor supply curve and a labor demand curve for the United States. Label the curves LS0 and LD0. Draw a point at the equilibrium quantity of labor and the equilibrium real wage rate. Label it 1. Now suppose the United States returns millions of illegal immigrant workers to their home countries, decreasing the population of workers in the United States. Draw and label a curve that shows the effect of this return of workers. Draw a point at the new equilibrium quantity of labor and the equilibrium real wage rate. Label it 2. The effect of the United States returning millions of workers to their countries of origin is _____ the U.S. aggregate production function and _____ in potential GDP.
a movement down along; a decrease
The figure shows Megan's PPF. Megan currently produces 15 bags of crackers and no cookies. If Megan decides to produce 1 bag of cookies, her opportunity cost of the bag of cookies is _______ of crackers.
a. 3 bags
______ has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 7 caps, ______
a. Tessa; both Sue and Tessa gain
If shoes rise in price, the demand curve for shoes ________ and the quantity of shoes demanded ________.
a. does not shift; decreases
What is the law of supply and how do we illustrate it? The law of supply states that other things remaining the same, the _______ the price of a good, the _______. A supply curve that illustrates the law of supply _______.
a. higher; greater is the quantity supplied d. is upward sloping
Flights to Paris are a normal good and people's incomes rise. At the same time, the price of jet fuel rises. The equilibrium price of a flight to Paris ________ and the equilibrium quantity of flights to Paris ________.
a. rises; might increase, decrease, or not change
Which of the following statements are normative? 1. We ought to have a cure for cancer 2. Air travel has increased since September 11 3. The greatest number of accidents are caused by drunk drivers 4.
a. statements 1 and 4 are normative
Using the figure, suppose that roses are a normal good. If incomes decrease while simultaneously there is an increase in the price of the resources used to produce roses, then
a. the quantity will definitely decrease below 10 dozen roses.
The ability of an individual, firm, or country to produce more of a good or service than competitors using the same amount of resource is known as:
absolute advantage
According to the theory of comparative advantage, specialization and free trade will benefit:
all trading partners who specialize in goods where they have comparative advantage
Which of these fiscal policy actions will increase real GDP in the short run?
an increase in government expenditures
In the short run, which of the following actions raise the interest rate?
an increase in the demand for money
If demand and supply change in the same direction, we _____ the direction of change of the equilibrium quantity and we_____ the direction of change of the equilibrium price.
b. can predict; cannot predict
Kelsey has two slices of pizza for lunch. The marginal benefit that Kelsey receives from the second slice of pizza is _______.
b. the benefit she receives from eating the second slice of pizza
The table shows some of Brazil's production possibilities for ethanol and food crops. Complete the following statements. Marginal cost of a good is _______. When the quantity of food produced is 2.5 tons a day, the marginal cost of producing a ton of food is ____barrels of ethanol.
b. the opportunity cost of producing one more unit of it 14
If the price of chocolate chip cookies falls, then
b. there is a movement downward along the supply curve of chocolate chip cookies
Every time the federal government runs a budget deficit, the government must:
borrow, which adds to the government debt.
Trade between a rich and a poor country benefits
both countries.
An increase in potential GDP increases ______.
both long-run aggregate supply and short-run aggregate supply
A government that spends more than it collects in taxes experiences a:
budget deficit
A government that collects more in taxes than it spends experiences a:
budget surplus
If the federal government's expenditures are less than its revenue, there is a __________.
budget surplus
Refer to this graph, which represents Alice's Production Possibilities Frontier. At which levels of production is Alice producing inefficiently?
c. 200 units of lemonade and 50 units of pizza (inside the PPF)
Which of the following always raises the equilibrium price?
c. an increase in demand combined with a decrease in supply
John has two hours of free time this evening. He ranked his alternatives, first go to a concert, second go to a movie, third study for an economics exam, and fourth answer his e−mail. What is the opportunity cost of attending the concert forJohn?
c. attending a movie
The income earned by the people who sell the services of the factor of production _______ is called _______.
c. capital; interest
The cost of saving jobs through trade barriers like tariffs and quotas is:
relatively high
At the new equilibrium quantity of labor, the before-tax wage rate _______ and the after-tax wage rate _______.
rises; falls
How is real GDP calculated? Real GDP is calculated by _______.
summing together the value of the year's production using the prices of the reference base year
What is the Laffer curve and why is it unlikely that the United States is on the "wrong" side of it? The Laffer curve is the relationship between the ______ and the ______ .
tax rate; amount of tax revenue collected
An open market operation involves
the Federal Reserve's purchase or sale of government securities.
Which of the following measurements of inflation strips out volatile food and fuel prices?
the core PCE
Generational imbalance is ______ .
the division of the fiscal imbalance between the current and future generations, assuming that the current generation will enjoy the existing levels of taxes and benefits
Business cycles are
unpredictable, but always have two phases and two turning points.
The tax wedge is the gap between the before-tax and after-tax ______.
wage rates
If tax revenues are $3,500 billion and the government's budget balance is a $720 billion deficit, calculate the government's outlays.
$4,220
Ski trips and ski jackets are complements. If the price of a ski trip decreases, how does the demand for ski jackets change? If the price of a ski trip decreases, the demand for ski jackets will _______.
B. Increase, and the demand curve for ski jackets will shift rightward
The relationship between the tax rate and the amount of tax revenue collected is called the ______ curve. This curve shows that ______.
Laffer; tax cuts can increase tax revenue
Describe three types of short-run macroeconomic equilibrium. A macroeconomic equilibrium in which real GDP equals potential GDP is _____ equilibrium. And one in which real GDP exceeds potential GDP is _____ equilibrium.
a full-employment; an above full-employment
Complete the sentence. When the unemployment rate ______ the natural unemployment rate, real GDP ______ potential GDP.
is less than; is greater than
If potential GDP increases, what happens to aggregate supply? When potential GDP increases, ______.
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward
A tax cut pays for itself if the economy lies to the ______ of the maximum point on the Laffer curve. This statement implies that the absolute value of the tax multiplier is ______.
right; greater than 1
Suppose that the world price of tomatoes is 60 cents a pound, the United States does not trade internationally, and the equilibrium price of tomatoes in the United States is 40 cents a pound. The United States then begins to trade internationally. The price of tomatoes in the United States ______. U.S. consumers buy ______ tomatoes. The United States ______ tomatoes. The United States ______tomatoes. ______ gain from international trade in tomatoes. ______ lose from international trade in tomatoes.
rises;fewer tomatoes and U.S. firms produce more; exports EXPORTS U.S. producers; U.S. consumers
When a tax is applied to labor income, the result is a ______ full-employment quantity of labor and a ______ potential GDP.
smaller; lower