ECON 211 Exam 2 Problem Sets

Assume that the price level is flexible upward but not downward. An increase in aggregate supply with no change in aggregate demand will:

Increase real output.

The natural rate of unemployment:

Is also the full-employment unemployment rate.

In an aggregate demand and aggregate supply graph, a contractionary fiscal policy is shown as a:

leftward shift in the economy's aggregate demand curve.

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The per unit cost of production in this economy is:

$2.00 Per unit cost of production = total input cost / total output, which is = (10 x $4.00 ) / 20 = $2.00.

Suppose the total population is 300 million of whom 150 million are in the labor force. Of this labor force, 100 million people are employed full time and another 38 million are employed part time. There are 6 million people in the population who are classified "discouraged workers." The unemployment rate is:

8% There are 138 million employed workers out of 150 million in the labor force, meaning 12 million are officially unemployed for an unemployment rate of 8%.

Assume that the economy has an annual inflation rate of 4.35%. Approximately how many years will it take for the price level to double?

16 years Use the rule of 70. 70 / 4.35 = 16

Assume that the CPI is currently 164. A year ago it was 160. The rate of inflation over the past year was:

2.5% The rate of inflation is the percentage increase in the value of the CPI. In this example, inflation is (164-160) / 160= 4/160 = .025, or 2.5%.

If the natural rate of unemployment is 3.0% and the actual unemployment rate is 4.5%, then according to Okun's law, the GDP gap is:

3% Okun's law states that there is a negative GDP gap of 2% for every percentage point that the unemployment rate is above the natural rate.

Suppose the total population is 350 million of whom 140 million are in the labor force. Of this labor force, 124 million people are employed full time and another 6 million are employed part time. There are 1 million people in the population who are classified "discouraged workers." The Unemployment rate is:

7.1% There are 124+6=130 million employed workers out of 140 million in the labor force, meaning 140-130=10 million are officially unemployed for an unemployment rate of (10/140)*100% which is approximately 7.1%.

Which one of the following would be considered to be an expansionary fiscal policy?

A decrease in taxes and an increase in government spending.

Which of the following would most likely increase aggregate demand?

A depreciation in the value of the U.S. dollar U.S. exports are less expensive for foreigner to buy and that U.S. imports are now more expensive. Net export therefore will increase and increase aggregate demand.

Which of the following would most likely lead to an increase in aggregate demand?

A sustained increase in stock prices increases consumer wealth

Which large change in aggregate demand or aggregate supply would be most closely associated with a recession when there is no change in the price level?

Aggregate demand decreases

In which of the following sets of circumstances can we confidently expect price inflation?

Aggregate supply decreases and aggregate demand increases If aggregate supply decreases it contributes to cost-push inflation. And if aggregate demand increases, then is increase contributes to demand-pull inflation. The combination of the two are certain to contribute to inflation of some type.

An increase in the aggregate supply curve is best explained by:

An increase in productivity.

Which of the following would most likely decrease aggregate demand?

An increase in real interest rates

If the aggregate supply decreases due to a major environment disaster that leads to a large increase in resource prices, the resulting increase in the price level is known as:

Cost-Push Inflation.

What is the effect of cost-push inflation on real output?

Decreases real output Cost-push inflation increases the price level because costs rise. This change makes it more expensive for the economy to produce goods and services so they reduce production.

An increase in the price level that results from excess spendings beyond the economy's capacity to produce is known as:

Demand-Pull Inflation.

If aggregate demand increases, this situation is most likely to lead to:

Demand-Pull Inflation.

When the Federal government passes legislation to increase government spending and also to decrease taxes, it is conducting:

Discretionary fiscal policy.

Which type of industries are typically most affected by a downturn in the business cycle?

Durable goods industries

Suppose that the Federal government's cyclically-adjusted budget rises from a deficit of 3 percent in Year 1 to a deficit of 8 percent of GDP in Year 2. This situation indicates that fiscal policy is:

Expansionary.

In the context of aggregate supply, the basic difference between the short run and the long run is that in the short run:

Firms will produce more output when the price level rises, but in the long run output is restricted to the full-employment level of output.

If the level of spending unexpectedly rises and prices are fixed, then:

Output rises, income rises and employment rises.

When prices are sticky in an economy, the economy adjusts to negative demand shocks mostly through changes in:

Output.

Which ones of the following is most likely a substantive problem with the U.S. public debt?

Public borrowing will crowd-out private investment.

A period of decline in total output, income, and employment is known as:

Recession

The effect of unanticipated inflation is to arbitrarily:

Redistribute income from lenders to borrowers .

A major advantage of built-in or automatic stabilizers is that they:

Require no legislative action by the U.S. Congress to have an effect on the economy.

Last year, Jillian's nominal income increased by 4% while the price level rose by 1%. Consequently, Jillian's real income:

Rose by approximately 3% Jillian's real income increased by the difference between the increase in her nominal income (4%) and the increase in the price level (1%), so her real income rose by approximately 3 percent.

Other things equal, an increase in government spending on health care will:

Shift aggregate demand curve to the right.

The aggregate demand curve:

Shows the amount of real output that will be purchased at each possible price level.

Kevin has lost his job in an automobile plant because of the use of robots for welding on the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is:

Structural.

A tax cut may not achieve its intended objective of stimulating the economy if households reasonably expect the policy to be:

Temporary.

During a recession, the Federal government will increase have an expansionary fiscal policy. Most state governments in the United States are required by their state constitution to balance their budget each year so their fiscal policies would be contractionary. In this case, which would best describe the fiscal policy of the Federal government and state governments in regards recession.

The actions of the Federal government is counter-cyclical and the actions of the state governments are pro-cyclical. When the Federal government has an expansionary fiscal policy in a recession it is counter-cyclical because it is supposed to help counter the negative effects of the recession.

Suppose that the Federal government had budget deficits of $40 billion in year 1, $50 billion in year 2, and $50 billion in year 3. In year 4 it had a surplus of $20 billion. Which one of the following statements is correct about the size of the public debt at the end of four years?

The public debt was $120 billion after year 4.

The crowding-out effect of expansionary fiscal policy suggests that:

an increase in government spending financed through borrowing may increase the interest rate and thereby reduce investment spending.

Assume that the U.S. Congress realizes that there is a recession and passes a bill that the U.S. President signs. The bill calls for an increase in government spending to counter the effects of the recession. Which problem of timing with fiscal policy is now most likely to affect this fiscal policy action?

an operational lag to see if the policy works.

The primary reason why bankruptcy is considered to be a false concern with the U.S. public debt is that U.S. government:

can refinance the debt by issuing and selling more U.S. government securities.