econ final

The article, "Who's afraid of budget deficits?" concludes that _____.

it's time for Washington to put away its deficit obsession

(Table: Investment Projects) Use Table: Investment Projects. If the market interest rate is 11.5%, the last project undertaken is:

j

Economists of which school of macroeconomic thought are most likely to recommend that the government avoid deficit spending because of the crowding-out effect on investment spending?

monetarist

(Figure: Actual and Natural Rates of Unemployment) Use Figure: Actual and Natural Rates of Unemployment. In 2010, the output gap was:

negative.

The inflation tax is the effect on the public of:

the decrease in the real value of money caused by inflation.

If the Federal Reserve increases the discount rate:

the money supply is likely to decrease.

In the circular-flow diagram, a person or a group of people who share their income is

household

Consider an economy that produces only smartphones and laptops. Last year, 10 smartphones were sold at $800 each, and 5 laptops were sold at $1,000 each, while this year, 15 smartphones were sold at $900 each, and 10 laptops were sold at $1,100 each. Real GDP this year, using last year as a base year, is:

$22,000

(Figure: An Expanded Circular-Flow Diagram) Figure: An Expanded Circular-Flow Diagram. How much is total government spending?

$220

(Table: Unemployment and Employment Data) If marginally attached workers are included, the number of persons in the labor force in this economy is _____ million.

103

(Figure: The Labor Market) Use Figure: The Labor Market. What is the size of the labor force at an efficiency wage of $16?

110,000

(Table: Price Levels) What was the rate of inflation from 2012 to 2013 Table: Price Levels2011221.32012227.72013232.22014234.8

2.0%

In Techland, from 1990 to 2020, holding technology and human capital fixed, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that real GDP per worker actually increased from $40,000 to $320,000. What share of the annual growth rate of real GDP per capita was attributable to increasing physical capital per worker?

2.0%

According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 5%, and the expected rate of inflation is 5%, the unemployment rate will be _____%.

3.5

(Figure: AD-AS) Use Figure: AD-AS. If the economy is in equilibrium with low inflation at E1, and the Fed uses expansionary monetary policy, _____ will shift to _____, and the macroeconomic equilibrium will move from _____. Then nominal wages will _____, and _____ will shift to _____. The macroeconomic equilibrium will move from _____.

AD1; AD2; E1 to E2; rise; SRAS1; SRAS2; E2 to E3

(Table: Individual and Aggregate Consumption Functions) Use Table: Individual and Aggregate Consumption Function. Which of the following represents the aggregate consumption function?

C = 450 + 0.8YD

Which equation is CORRECT

GDP = C + I + G + X - IM

Which equation is correct

GDP = C + I + G + X - IM

(Figure: Fiscal Policy Options) Use Figure: Fiscal Policy Options. If the aggregate demand curve is AD'':

a contractionary fiscal policy may be warranted.

Suppose that a country has a progressive income tax code and that taxable income is calculated in nominal terms. If the schedule of income tax rates is NOT indexed to inflation, an individual whose income keeps pace with inflation over time will pay:

a higher percentage of income in taxes over time

(Figure: The Market for Loanable Funds II) Use Figure: The Market for Loanable Funds II. Other things being equal, if the interest rate falls below 6%, _____ quantity of loanable funds will be demanded.

a larger

Disinflation refers to:

a reduction in the inflation rate.

(Figure: Macroeconomic Equilibrium) Use Figure: Macroeconomic Equilibrium. Curve 1 represents _____, curve 2 represents _____, and curve 3 represents _____.

aggregate demand; long-run aggregate supply; short-run aggregate supply

Real GDP per capita is

an incomplete measure of a country's standard of living

Crowding out is a phenomenon in which

an increase in the government's budget deficit reduces overall investment spending.

Cyclical unemployment:

arises from a deviation of the actual unemployment rate from the natural rate of unemployment

Prior to the Great Depression, many policy makers:

believed that long-run economic performance was the most important goal.

When there is a positive output gap, the unemployment rate is:

below the natural rate.

The BEST way to reduce financial risk is to:

buy a variety of assets, both financial and physical.

The aggregate production function exhibits _____ returns to physical capital

diminishing

Since 1982, the Federal Reserve has pursued a _____ monetary policy, which has led to _____ in the money supply:

discretionary; large swings

Transaction costs are the:

expenses of negotiating and executing a deal.

If the economy is at potential output, and the Fed decreases the money supply, in the short run, interest rates will likely:

increase.

Nearly all economists agree that increases in government spending can _____ aggregate _____.

increase; demand

According to the wealth effect, when prices decrease, the purchasing power of assets _____ and consumer spending _____.

increases; increases

To be officially unemployed, a person must

not have a job and have sought work in the past four weeks

The unemployment rate is the

percent of the labor force that is unemployed

Inflation can be measured by the

percentage change in the consumer price index

If technology advances:

workers can produce more with fixed amounts of physical and human capital.

The natural rate of unemployment is 5%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____%.

7.5

The rule of 70 states that a variable's approximate doubling time equals:

70 divided by the growth rate.

(Table: Kenya's Economy in 2010) Use Table: Kenya's Economy in 2010. During 2010, assuming there are no changes in the price level, aggregate output per capita in Kenya grew at a rate of:

2.6%

If a country has a working-age population of 200 million, 120 million people with jobs, and 30 million people unemployed and seeking employment, then its unemployment rate is:

20%

India is growing at a rate of 9% per year, and its real GDP per capita is about $3,500, while the United States is growing at a rate of 3% per year, and its real GDP per capita is about $47,000. How long will it take the United States to double its real GDP per capita?

23.3 years

Suppose that real GDP per capita in the United States is $32,000, while its annual growth rate is 2%, and that real GDP per capita in China is $4,000, while its annual growth rate is 7%. If current trends persist, how many years will it take for China's real GDP per capita to surpass the U.S.'s real GDP per capita?

40 to 45 years

If the actual unemployment rate is 7% and the cyclical unemployment rate is 2%, then the natural rate of unemployment is

5%

(Figure: Actual and Natural Rates of Unemployment) Use Figure: Actual and Natural Rates of Unemployment. In 2010, the natural unemployment rate was approximately:

5.5%

If the consumer price index is 180 in year 1 and 190 in year 2, the inflation rate between year 1 and year 2 is about

5.56%

Consider the perfectly competitive labor market depicted in the figure below. Assuming the government has placed a binding minimum wage at , Indicate (a) the quantity of labor demanded, (b) the quantity of labor supplied, and (c) which quantity will actually be exchanged. Supposing the government completely removed the minimum wage, what would be (d) the equilibrium price and quantity in the labor market.

A. The quantity of labor demanded is Q1B. The quantity of labor supplied is Q4C. The quantity that will actually be exchanged is Q1D The equilibrium price and quantity in the labor market would be P2 for the price and Q2 for the quantity. The minimum wage is a price floor, and follows all the rules of price floors as long as the labor market is perfectly competitive (as shown in the diagram). At the price floor of P3, the quantity demanded comes from the demand curve at that price, giving a result of Q1. The quantity supplied comes from the supply curve at that price, giving a result of Q4. In this situation, buyers of labor will be able to hire as many workers as they like, but sellers (workers) will not all be able to find jobs, so the quantity actually exchanged is Q1. If the government were to remove the price floor, the labor market would find its competitive equilibrium at the market-clearing price P2. We say it is market clearing because at that price the quantity demanded and the quantity supplied are the same, Q2.

Kelli is a server at a casual restaurant in a small town. In each of the following situations, explain Kelli's type of unemployment. (a) The local economy is in a minor recession, and the restaurant lays Kelli off. The owner assures her that she will be rehired when business picks up again.(b) The restaurant owner upgrades to an electronic system for displaying menus and taking orders. The restaurant fires Kelli because the owner does not need as many servers for each shift.(c) Kelli is dissatisfied with her schedule at the restaurant and quits her job. She is qualified to work at other restaurants and immediately begins to send her résumé to restaurants all over town.

A. This is cyclical unemployment because she is only temporarily unemployed.B. This is structural unemployment since there is less of a demand for servers since the restaurant decided to move forward with upgrading their technology that replaced Kelli.C. This is frictional unemployment. It was Kelli's decision to quit to find a better job that matches her qualifications. A recession is a downturn in the business cycle, so unemployment caused by a recession is cyclical unemployment. Changes in technology, on the other hand, are changes in the structure of the economy, and unemployment caused by structural change is called structural unemployment. Unemployment caused by workers moving around in search of better matches or better wages is called frictional unemployment.

(Figure: Fiscal Policy I) Use Figure: Fiscal Policy I. Suppose that this economy is in equilibrium at E1. If there is an increase in government purchases, _____ will shift to the _____, causing a(n) _____ in the price level and a(n) _____ in real GDP.

AD1; right; increase; increase

Suppose that, in 2000, the nations of Florin and Guilder each had $300 of physical capital per worker and that, in 2020, they each had $1,200 of physical capital per worker. Florin's production function is Function F, while Guilder's is Function E. a) What was the annual growth rate of Florin during this time?b) What was the annual growth rate of Guilder during this time?c) According to our textbook, what government policies could Guilder pursue to promote an increase in their economy's growth rate? List three possibilities.

According to the diagram, the economy grows from $5,000 to $10,000 if Florin stays on Function F. This is a doubling in 20 years, so the rule of 70 says the growth rate should be 70/20, or 3.5 percent. Guilder grows from $1,500 to $3,000 in the same time period, which is also doubling, so the growth rate is the same. The textbook mentions several ways the government can promote higher growth. These include direct government subsidies to infrastructure, education, and R&D, thus directly boosting the production function. They could also build institutions that promote growth by maintaining a well-functioning financial system, protecting property rights, and encouraging political stability and good governance. Only three of these six need be mentioned to answer the question.

The economy is experiencing significantly above average inflation. The head of the president's Council of Economic Advisers is an ardent proponent of the neoclassical synthesis. What will this economist recommend? Briefly explain (remember to mention the tools policymakers would use to carry out this recommendation).

According to the neoclassical synthesis the main stabilization tool should be monetary policy (especially when dealing with inflation), conducted by an independent Fed, and that to avoid a political business cycle, fiscal policy should be used sparingly, if at all. To counter the inflation, such an economist would generally advocate that the Fed undertake an contractionary monetary policy consisting of open market sales, a higher interest rate on reserve balances, and a higher discount rate.

(Figure: Technological Progress and Productivity Growth) Use Figure: Technological Progress and Productivity Growth. A significant increase in human capital per worker, with all other factors remaining unchanged, is BEST indicated by a move from:

B to C.

In class, we made the point that sustained, long-run improvements in the standard of living could not be produced by increasing physical capital per worker or human capital per worker. a) As discussed in class, what two features do physical and human capital share that guarantee they can't produce sustained growth forever?b) In our production function model, this only left technology as the necessary source of long-run economic growth. According to Matt Ridley's TED Talk, what is the most important source of technological progress over the long run (allowing the "meeting and mating" of ideas)?

Both in class and in the book, we made the point that both types of capital suffer from diminishing returns: as we invest in more and more, the additional payoff gets smaller and smaller. Both also suffer from depreciation, meaning that they wear out over time. Alternatively to talking about depreciation, since both have increasing opportunity costs for investing in them, they will both arrive at some equilibrium level. Matt Ridley spent his entire talk presenting evidence and arguments for the idea that technological progress is the result of exchange between groups. Trade allows us to combine and recombine ideas, even ones that no individual fully understands.

Consider the market for loanable funds. For each of the following examples, state how the change described will affect the equilibrium interest rate and the equilibrium quantity of loanable funds. Assume the market for loanable funds starts in equilibrium in each case, and each example is independent of the others. a) Business owners become more pessimistic about the returns from future investment opportunities.b) The government increases its tax revenue without a corresponding increase in spending.c) In a panic about international conditions, there is a massive increase in net capital inflows to the country.

Businesses that think their investments will earn low returns will be less inclined to borrow, so the demand for loans shifts to the left, lowering both interest rates and the quantity of loans in equilibrium. The government increasing its taxes revenue without raising spending will require them to borrow less, so the demand for loans shifts to the left, lowering both interest rates and the quantity of loans in equilibrium. If financial capital flows in to the country, this means there is more savings at any rate of interest and thus shifts the supply of loans to the right, lowering interest rates and raising the quantity of loans in equilibrium.

Consider the matching pair of diagrams below. Suppose initially the economy is in equilibrium at E1 in both figures, and that potential GDP is $10 trillion. Assuming the central bank purchases enough bonds on the open market to shift from AD1 to AD2, answer the following questions:

If the central bank purchases enough bonds to shift the economy to AD2, the short run equilibrium will be E2 in both diagrams. In this equilibrium, the price level is 102, real GDP is $10.4 trillion, the inflation rate is 2%, and the unemployment rate is 4%. The central bank purchasing bonds shifts the money supply to the right, causing the nominal interest rate to fall. It also shifts the supply of loans to the right, causing the real interest rate to fall as well.

Suppose that the natural rate of unemployment is 5.5% and that the economy is operating at 104% of potential output. (A) Use Okun's law to determine the unemployment rate. (B) If the expected inflation rate is 5%, and the short-run Phillips curve has a slope of -1 (that is, when unemployment rises 1%, the

Okun's law says that if the output gap rises by 1%, the unemployment rate will fall by 0.5%. In this case, the output gap has risen by 4%, so the unemployment rate will fall by 2%. So, Okun's law predicts that the unemployment rate will be 3.5%. The Phillips curve says that at the natural rate of unemployment, the inflation rate should equal the expected inflation rate. Since unemployment has fallen from the natural rate by 2%, inflation should have risen from the expected rate by 2%. So, the short-run Phillips curve predicts that the inflation rate will be 7%

Suppose it is the year 2050 and the US economy appears to be heading into recession, including rising unemployment. You have been asked for your advice as to what macroeconomic policies should be implemented to improve the economy. (A) Choose a policy. (B) Identify the tools used to implement the policy. (C) Explain how the policy would work.

Responding to a recession with rising unemployment may involve a variety of policy responses, including efforts to collect more information such as what is happening to inflation. In general, based on the information provided, expansionary fiscal policy, expansionary monetary policy, or a combination would seem appropriate. The tools used will depend on the policy suggested. Expansionary fiscal policy will use some combination of tax cuts, increased government expenditures, and increased transfers to address the unemployment problem. Expansionary monetary policy will involve lowering policy rates (such as the discount rate or the interest rate on reserves) and purchasing additional assets through open market operations in order to address the unemployment problem. Whichever policy is chosen, the answer should discuss how the policy implementation will increase Aggregate Demand, and thereby raise real GDP and the Price Level. Because wages are sticky in the short run, this will in turn lower the unemployment rate. Finally, there will be a few further effects that depend on the policy chosen: Fiscal policy in particular will rely in the feedback to their policies through the multiplier, but will likely have to borrow more (increasing the deficit) and if this drives up interest rates, may crowd out private investment. Monetary policy, on the other hand, will increase the money supply and thus lower interest rates (unless they cannot go lower, running into the zero lower bound).

(Figure: Shifts of the AD-AS Curves) Use Figure: Shifts of the AD-AS Curves. An increase in wages in the short run is illustrated by panel:

d

if the Fed conducts an open-market sale, bank reserves _____, and the money supply is likely to _____.

decrease; decrease

(Figure: Expected Inflation and the Short-Run Phillips Curve) Use Figure: Expected Inflation and the Short-Run Phillips Curve. SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%. Suppose that this economy has an unemployment rate of 6%, inflation of 2%, and inflation expectations of 2%. If the central bank decreases the money supply, so that the aggregate demand curve shifts to the left, and the unemployment rate rises to 8%, then the inflation rate will:

fall to zero.

In the circular-flow diagram, an organization that produces goods and services for sale is a

firm

Long-run economic growth is sustainable:

if its impact on the supply of natural resources and the environment can be limited.

The European Central Bank was established:

in 1999, when the euro was adopted.

Efficiency wages are usually set by employers to

provide an incentive for better performance

A hypothesis that individuals base their expectations on available information and act on that information is called the:

rational expectations hypothesis.

(Figure: Fiscal Policy with a Fixed Money Supply II) Use Figure: Fiscal Policy with a Fixed Money Supply. Assume that this economy is at E2. Government deficit spending now increases, but the Federal Reserve decreases the money supply. According to this model:

real GDP will increase but not as much as it would if the Federal Reserve had failed to contract the money supply.

Efficiency wages encourage workers to

remain in their current jobs

(Figure: Expected Inflation and the Short-Run Phillips Curve) Use Figure: Expected Inflation and the Short-Run Phillips Curve. SRPC0 is the Phillips curve with an expected inflation rate of zero; SRPC2 is the Phillips curve with an expected inflation rate of 2%. Suppose that this economy has an unemployment rate of 6%, no inflation, and inflation expectations of zero. If the central bank increases the money supply, so that the aggregate demand curve shifts to the right, and the unemployment rate falls to 4%, then the inflation rate will:

rise to 2%.

(Figure: A Money Market) Use Figure: A Money Market. If the current interest rate is r1, the interest rate will _____ because there is a _____ of money in the market.

rise; shortage

The savings-investment spending identity says that:

savings and investment spending are always equal for the economy as a whole

In an inflationary gap:

short-run aggregate supply gradually decreases.

Nancy believes that the best way to promote economic growth is through tax cuts that increase incentives to work and invest. Though these tax cuts might initially increase the budget deficit, Nancy is convinced that the economic growth that results will ultimately increase government tax revenues. Nancy is BEST described as a:

supply-sider.

The aggregate production function does NOT depend on:

the amount of natural resources available.

Bank reserves are:

the fraction of deposits held in bank vaults plus deposits held at the Federal Reserve

If there is too much deflation:

the nominal interest rate will be constrained by the zero lower bound.

The inflation tax refers to:

the reduction in the real value of money when inflation rises.

Normania is a small nation that produces only one service, the lecture. The table shows production and prices of lectures for two consecutive years, as well as the population of Normania.

to calculate nominal GDP we find total expenditure (P x Q) for every final good and service, then add them up. Since there is only one service, lectures, nominal GDP is just P x Q for that good. In 2018 nominal GDP is 10,000 × $700 = $7 million. Since this is the base year, real GDP is the same. To calculate real GDP for years other than the base year, we use prices from the base year (this is sometimes called "constant prices") rather than from the current year. In 2019 real GDP is 13,000 × $700 = $9.1 million because it uses 2018 prices. To determine the standard of living, we calculate real per capita GDP for each year taking real GDP and dividing by population in that year. In 2018 real GDP per capital is $7 million / 200 = $35,000, while in 2019 it is $9.1 million / 500 = $18,200. So, the standard of living has actually fallen, as measured by real GDP per capita.