Econ Final Review

The total amount of debt owed by the Federal government is represented by the total value of the outstanding:

U.S. Government securities

A $70 price tag on a sweater in a department store window is an example of money functioning as a:

Unit of account

If unintended decrease in business inventories occurs:

We can expect businesses to increase the level of production

Which of the following would increase GDP by the greatest amount?

a $20 billion increase in government spending

According to the law of demand, an increase in the price of gasoline leads to:

a decrease in the quantity-demanded of gasoline, ceteris paribus.

According to the law of supply, a decrease in the price of gasoline leads to:

a decrease in the quantity-supplied of gasoline, ceteris paribus.

Concerning the aggregate supply curve (short run), ceteris paribus, a decrease in the price level leads to:

a decrease in the quantity-supplied of real GDP.

Assume the current equilibrium level of income is $3,200 billion as compared to the full-employment income level of $3,500 billion. If the MPC is 0.75, what change in taxes is needed to achieve full employment?

a decrease of $100 billion

Taxes represent:

a leakage of purchasing power, like saving.

The reserves of a commercial bank consist of:

deposits at the Federal Reserve Bank and vault cash

For an item to act as a medium of exchange and a store of value, it must be which of the following:

difficult to counterfeit and durable enough for repeated use, made of material that has little to no value in another use, portable and devisible

Suppose Congress believes that the economy is entering an inflationary period and approves a budget that includes decreased overall government spending (with no corresponding decrease in taxes) in order to reduce aggregate demand. This is an example of:

discretionary, contractionary fiscal policy

In constructing models, economists:

make simplifying assumptions

An increase in nominal GDP increases the demand for money because:

more money is needed to finance a larger volume of transactions.

If at some level of GDP the economy is experiencing an unintended increase in inventories:

Domestic output will decrease

National income is the sum of:

Employee compensation, profits, rent, interest, and taxes on production and imports

The investment demand slopes downward and to the right because lower real interest rates:

Enable more investment projects to be undertaken more profitably

In what stage of the business cycle will the economy most likely experience rising real output and falling unemployment rates?

Expansion

If government increases its tax revenues by $15 billion and the MPC is 2/3, then we can expect the equilibrium GDP to:

Decrease by $30 billion

Refer to the above information. The maximum amount by which the commercial banking system can expand the supply of money by lending is:

$200,000

A commercial bank has required reserves of $60 million and the reserve ratio is 20 percent. If the bank is fully loaned up, what is the maximum total checkable-deposits the bank can legally support?

$300 million

A commercial bank has checkable-deposit liabilities of $400,000 and a required-reserve ratio of 12.5 percent. What is the amount of required reserves?

$50,000

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Ca = 25 + .75 (Y - T) Ig = Ig0 = 50 Xn =Xn0 = 10 G = G0 = 70 T = T0 = 30 Refer to the information. The equilibrium level of GDP for this economy is:

$530

With no inflation, a bank would be willing to lend a business firm $10 million at an annual interest rate of 8%. But if the rate of inflation was anticipated to be 5%, the bank would most likely charge the firm an annual interest rate of:

13 percent

A bond with no expiration date has a face value of $900 and pays a fixed annual interest payment of $150. The bond's annual interest yield approximately equals:

16.7 percent

If actual reserves in the banking system are $600, excess reserves are $400, and checkable deposits are $1,000, then the legal reserve requirement is:

20 percent

If the consumer price index for a certain year is 120, this means that the average price of consumer items in that year was:

20% higher than the average price in the base period 1982-84

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Ca = 25 + .75 (Y - T) Ig = Ig0 = 50 Xn =Xn0 = 10 G = G0 = 70 T = T0 = 30 Refer to the information. the spending multiplier for this economy is:

4

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.Refer to the information. The operational lag of fiscal policy is reflected in event(s):

5

If the Consumer Price Index was 170 in one year and 180 in the next year, then the rate of inflation is approximately:

5.9 percent

Assuming the total population is 100 million, the labor force is 50 million, and 47 million workers are employed, the unemployment rate is:

6 percent

The economising problem faced by a society is

A consequence of the fact that productive resources are scarce relative to economic wants

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

Refer to the diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

AD0

At equilibrium GDP in a private closed economy:

Aggregate expenditures (C+Ig) equal GDP (Y), There are no unplanned changes in inventories, saving (S) equals planned investment (Ig) thus leakages equal injections

At equilibrium GDP in a mixed open economy

Aggregate expenditures (Ca + Ig + G +Xn) equals GDP (Y),unplanned inventories don't change, after-tax saving (Sa), imports (M), and taxes (T) equal investment (Ig), exports (X), and government purchases (G) -- thus, leakages equal injections

An inflationary expenditure gap is the amount by which

Aggregate expenditures exceed the full-employment level of GDP

"Other things equal, the lower price of bananas, the greater the amount of bananas purchased." This statement indicates that:

All factors other than the price of bananas are assumed to be constant

Adding the market value of all final and intermediate goods and services ices in an economy in a given year would result in:

An amount great then GDP for that year

The investment demand curve will shift to the left as a result of:

An increase in operating costs for capital goods

Refer to the given market-for-money diagrams. The asset demand for money is shown by:

D2

The increase in personal income tax payments that occurs when an economic expansion causes incomes to rise and does not require congressional action is an example of:

Automatic, Contractionary fiscal policy

As disposable income decreases

Both consumption and savings decrease

The amount by which government expenditures exceed tax revenues during a particular year is the:

Budget deficit

If government decreases its purchases by $5 billion and the MPC is 0.75, then we would expect the equilibrium GDP to:

Decrease by $20 Billion

Which of the following is a normative economic statement? A.) The federal budget deficit rose by 120 billion B.) the unemployment rate is expected to fall next month C.) A trade surplus of 200 billion should be our policy goal D.) The federal funds rate was reduced by half a percentage point

C.) a trade surplus of 200 billion should be our policy goal

The Industries or sectors of the economy in which business cycle fluctuations tend to affect output most are:

Capital and durable consumer goods

"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the:

Coordination problem under central planning

Refer to the diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2and thereby to increase GDP from X to Z. In terms of graph B, which of the following might explain why GDP increases to Y rather than to Z?

Crowding-out effect

Increasing the share of your income that you save is good for you. Therefore it would be good for the whole economy if everyone saved more. This exemplifies the:

Fallacy of composition

The "coincidence of wants" problem associated with barter refers to the fact that:

For exchange to occur, each seller must have a product that some buyer wants

The use of money for exchange and trade:

Fosters more specialization in production

John Maynard Keynes created the aggregate expenditures model based primarily on what historical event?

Great Depression

A change in borrowing would shift the consumption schedule and the saving schedule ______; a change in taxes would shift these two schedules ______.

In opposite directions; in the same direction

If MPC = .5, a simultaneous increase in both taxes and government spending of $20 will:

Increase GDP by $20

Ceteris paribus, a decrease in the real interest rate will result in a(n):

Increase in the quantity-demanded for the product

Other things equal, an increase in an economy's exports will:

Increase its domestic aggregate expenditures and therefore increase its equilibrium GDP

An increase in demand for oil along with a simultaneous increase in supply of oil will

Increase quantity, but whether it increases price depends on how much each curve shifts

What are the general sources of shocks that can cause business cycles?

Irregular occurrence of innovations and productivity changes, monetary factors and financial instability, and political events

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:

Leftward by $40 billion at every price level

what is true about the risk management in market systems versus command systems

Market systems manage risk better because entrepreneurs taking risks bear the costs of poor decisions, where in command systems government decision makers don't bear those costs.

What is the difference between national income and personal income?

National income represents income earned by American-owned resources, while personal income measures received income, whether earned or unearned.

An example of intermediate goods would be:

Paper and ink bought by a publishing company

Which of the following best describes the built-in stabilizers as they function in the United States?

Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.

The aggregate expenditures model is built upon which of the following assumptions?

Prices are fixed

The aggregate supply curve (short run) is upsloping because:

Producers respond to higher prices and profits by increasing output, per-unit production costs rise as the economy moves toward and beyond its full-employment real output, and wages and other resource prices adjust more slowly than the price level.

(Advanced analysis) Answer the question on the basis of the following information for a mixed open economy. The letters Y, Ca, Ig, Xn, G, and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars. Ca = 25 + .75 (Y - T) Ig = Ig0 = 50 Xn =Xn0 = 10 G = G0 = 70 T = T0 = 30 Refer to the information. If government desire to raise the equillibrium GDP to $650, it could:

Raise G by $30 or reduce T by $40

Which phase of the business cycle would be most closely associated with an economic contraction?

Recession

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to:

Reduce government expenditures or increase taxes

One way to enhance the stability of the banking system is to:

Require higher bank capitalization or net worth

If you place a part of your summer earnings in a savings account, you are using money primarily as a:

Store of value

The Laffer curve suggests that

Tax rates that are too high will actually lead to less tax revenue for the government

Which situation would most likely cause a nation's production possibilities curve to shift inward?

The destruction caused by bombing and warfare in a losing military conflict

The fundamental difference between the command system an laissez-faire capitalism is that, in command systems:

The division of output is decided by central planning rather than by individuals operating freely through markets

When bankers hold excess reserves:

The money-creating potential of the banking system decreases

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result:

The official unemployment rate will remain unchanged

Which of the following will decrease the lending of commercial banks and, thus, decrease the money supply?

The sale of government bonds in the open market by the Federal Reserve Banks.

The most basic premise of the aggregate expenditures model is that:

The total output produced in the economy depends directly on the level of total spending

Which of the following statements best describes the 12 Federal Reserve Banks?

They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.

Which of the following statements regarding Monetarists is true?

They believe an important determinant of inflation in U.S. history has been decisions by the Fed to allow the money supply to grow too quickly, They believe the Fed should follow a policy of stable and predictable expansion of the money supply, They desire a constant rate of money supply growth and believe in constraining the Fed through rules.

If the economy is initially in equilibrium at full employment real GDP (QN), and a stock market crash reduces household wealth and lowers investor confidence, ceteris paribus, the ____________ curve will shift to the ____________ resulting in a ____________ price level (P), ____________ output/real GDP level (Q), and ____________ unemployment level (U).

aggregate demand, left, lower, lower, higher

Ceteris paribus, an increase in the domestic price level causes:

an increase in the quantity-demanded of imports and a decrease in the quantity-demanded of exports.

Ceteris paribus, a decrees in the price level leads to:

an increase in the quantity-demanded of real GDP

Assume the current equilibrium level of income is $1,200 billion as compared to the full-employment income level of $1,300 billion. If the MPC is 0.8, what change in government spending is needed to achieve full employment?

an increase of $20 billion

Bank panics:

are a risk of fractional reserve banking but are unlikely when banks are highly regulated and lend prudently.

economic profits:

are essential to the reallocation of resources from less desired to more desired goods

If the Fed were to reduce the legal reserve ratio, we would expect:

lower interest rates, an expanded GDP, and a higher rate of inflation.

Fractional reserve banking is a term used to describe a banking system in which:

banks hold reserves equal to only a fraction of their deposit liabilities

During periods of hyper-inflation, money may cease to work as a medium of exchange:

because people and businesses will not want to accept it in transactions

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:

buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

the money supply is back:

by the governs ents ability to control the supply of money and therefore to keep its value relatively stable

Suppose Congress increases taxes and decreases government spending. This is an example of ____________ fiscal policy, which would result in shifting the ____________ curve to the ____________.

contractionary, aggregate demand, left

Economists refer to a budget deficit that exists when the economy is achieving full employment as a:

cyclically adjusted budget

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would:

decline

Refer to the diagram for the federal funds market. If the Fed wants to raise the federal funds rate from if1 to if3, it can use open-market operations to:

decrease the supply of federal funds by selling bonds.

Assume in a competitive market that price is initially above the equilibrium level. We can predict that price will:

decrease, quantity demanded will increase, and quantity supplied will decrease.

All other things equal, as the price of a bond increases, its yield:

falls

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2:

government should undertake neither an expansionary nor a contractionary fiscal policy.

Assuming the short-run aggregate supply curve is upward sloping, an increase in short-run aggregate supply (while aggregate demand remains unchanged) results in a ____________ price level (P), ____________ output/real GDP level (Q), and ____________ unemployment level (U).

lower, higher, lower

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions and each question should be answered independently of changes specified in any preceding ones. Refer to the given data. Suppose the Fed bought $20 billion of U.S. securities from the banks. This would:

increase bank reserves to $80 billion, reduce bank-held securities to $120 billion, and, assuming a full money multiplier effect, increase the money supply (checkable deposits) by $200 billion.

If the Fed wants to discourage commercial bank lending, it will:

increase the interest paid on reserves held at the Fed.

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is AD1 and the monetary authorities desire to increase it to AD2, they should:

increase the money supply from $80 to $100.

Assume the economy is operating at greater than full employment. A contractionary (restrictive) monetary policy will cause interest rates to ________, which will ___________ investment spending.

increase, decrease

Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will:

increase, quantity demanded will decrease, and quantity supplied will increase.

The invisible hand promotes society's interests because

individuals pursuing their self-interest will try to produce goods and services that people in society want and are willing to purchase.

Monetary policy may be ineffective if:

investment and consumer spending are not sensitive to changes in short-term interest rates.

The production possibilities curve:

is a frontier between all combinations of two goods that can be produced and those combinations that cannot be produced.

In Year 1, the price level was 120 and the average nominal income was $30,000. In Year 2, the price level was 125 and the average nominal level of income was $32,000. What happened to real income from Year 1 to Year 2?

it rose by $600

The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves:

its larger the smaller the required reserve ratio

When economists say that people act rationally in their self-interest, they mean that individuals:

look for and pursue opportunities to increase they utility

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium:

output will necessarily rise

The primary purpose of the legal reserve requirement is to:

provide a means by which the monetary authorities can influence the lending ability of commercial banks.

The Federal Reserve System performs the following functions, except:

providing banking services to the general public

If the actual unemployment rate (U) is greater than the natural rate of unemployment (UN), a(n):

recessionary gap exists and actual real GDP (QE) is less than natural real GDP (QN).

Answer the question on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions and each question should be answered independently of changes specified in any preceding ones. Refer to the given data. Suppose the Fed sold $10 billion of U.S. securities to the banks. This would:

reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and ultimately decrease the money supply (checkable deposits) by $100 billion.

Supply-side economics suggests focusing fiscal policy on the short-run aggregate supply curve to stimulate economic growth by:

reducing the cost of producing goods and services, reducing corporate (business) taxes, reducing regulations

A ____________ income tax system is one in which taxes as a percentage of income decrease as income increases.

regressive

Refer to the table. If the legal reserve ratio falls from 25 percent to 10 percent, excess reserves of this single bank will:

rise by $6,000 and the monetary multiplier will increase from 4 to 10.

Economists profits in an industry suggest the industry:

should be larger to better satisfy consumers' desire for the product

The asset demand for money is most closely related to money functioning as a:

store of value

Value added can be determined by:

subtracting the purchase of intermediate products from the value of the sales of final products.

The liquidity trap refers to the situation where:

the Fed adds excess reserves to the banking system, but it has minimal positive effect on lending, investment, or aggregate demand.

A recessionary expenditure gap is

the amount by which the full-employment GDP exceeds the level of aggregate expenditures.

The voting members of the Federal Open Market Committee (FOMC) include:

the seven members of the Board of Governors, the President of the New York Federal Reserve District Bank, and four Federal Reserve District Bank Presidents on a rotating basis.

Specialization- the division of labor- is beneficial in production because:

the total output of goods produced may be increased even without adding more workers, workers are employed more efficiently by utilising differences in there abilities and skills, it fosters learning by doing and avoids time lost in shifting from one production take to another

GDP is:

total market value of all final goods and services produced within a country's borders in a given time period

If aggregate demand increases and aggregate supply decreases, the price level:

will increase, but real output may increase, decrease, or remain unchanged.