Econ Final

Assume that the level of consumption in an economy is given by the expression 1000 + 0.7Y, when Y = 50,000, consumption will be: 35,000 36,000 166,666 72,428

B

The figure shows the wage-setting curve and the real wage w*. Which of the following statements is correct? The unemployment rate is 5%. The participation rate is 76%. The employment rate is 95%. 4% of the population is unemployed.

A

In the expression for aggregate consumption C = C0 + C1Y, C1 is known as: Autonomous consumption. The average propensity to consume. The multiplier. The marginal propensity to consume.

D

Which of the following best describes the operation of 'automatic stabilizers'? Some components of government spending inevitably increase when output falls. When consumption falls, investment increases. When saving increases, investment increases. The economy always tends toward full employment.

A

The 'paradox of thrift' refers to the fact that: If we all save more, aggregate income will fall. The wealthier I become, the more tax I have to pay. Saving is a waste of time. Inflation erodes the value of savings.

A

An overseas bank announces that it is introducing a new type of savings account that pays a 3% fixed rate of interest for deposits of a one year duration. This 3% is: A real rate of interest. A post-tax rate of interest. A nominal rate of interest. A long-term rate of interest.

C

The diagram depicts a consumption function of an economy, where C is the aggregate consumption spending, Y is the current income of the economy, and c0 is the fixed (or autonomous) consumption such that c0 > 0. Assume that households that are not credit-constrained would completely smooth their consumption. Which of the following statements is correct? If all households were not credit-constrained, and all income changes were perceived to be temporary, then the aggregate consumption line would be horizontal. During a credit crunch when the banks become less willing to lend, the aggregate consumption line would become flatter. If a higher proportion of households have 'weakness of will', then the aggregate consumption line would be flatter. If the current income falls to zero, there will be zero consumption.

A

The figure depicts the labor market when there has been a negative aggregate demand shock. Which of the following statements is correct? B is not an equilibrium outcome. C is an equilibrium outcome. At C, firms are able to make higher profits by increasing the price. Moving from B to C eliminates cyclical unemployment.

A

At the end of 2015 the UK consumer price index was 258; at the end of 2016 it was 267. According to this information, the annual rate of inflation during 2016 was approximately: 3.3 per cent. 9 per cent. 2.67 per cent. 0.33 per cent.

A

In the figure shown, when employment is at level C, the real wage lies below the price-setting curve. Assume inflation is zero. In a competitive system, firms will begin to .... prices and this will start a process of .... Reduce; deflation. Reduce; inflation. Increase; rising unemployment. Increase; inflation.

A

Which of the following statements about liquidity and solvency is/are true? The relevant items on the balance sheet to assess solvency are total liabilities and total assets. Allowing banks to borrow from the central bank at a penalty rate of interest can deal with a bank's solvency but not liquidity problem. If a bank admits that many of its loans are 'non-performing' and unlikely to be repaid, this increases its liabilities.

A

Which of the following statements about the banking system is correct? The policy rate is the rate at which the central bank lends to commercial banks. The policy rate is determined by the supply and demand of the money market. The bank lending rate is the rate at which the central bank lends to commercial banks. The spread (markup) represents how the central bank's money is distributed amongst the commercial banks.

A

Which of the following statements are essential features of a 'goods market equilibrium'? Output is equal to aggregate demand. Investment is stable. The economy is at full employment. Output is fixed.

A

Which of the following statements is correct regarding measuring GDP? GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production. Both exports and imports are included in the measurement of GDP. Government production is not included in the GDP. The value added of government production is computed using the price that public goods and services are sold at in the market.

A

Which of the following statements is correct? A bank is insolvent if the value of its liabilities exceeds the value of its assets. The net worth of a bank belongs to its employees. A loan is secured if it is default-free. The more a bank holds in cash and reserves, the higher its profits.

A

Which, if any, of the following statements are true? If government expenditure including transfers and interest payments exceeds its revenue, government debt rises. Economists used the fact that recessions are deeper in Italian regions with close links to the mafia to estimate the size of the government spending multiplier. A policy of fiscal stimulus in a recession is more effective in an open economy than in a closed economy because of the stimulus it provides to neighboring economies.

A

Why is deflation generally undesirable? It might lead to a cumulative reduction in aggregate demand as firms and households wait for prices to fall further. It disadvantages creditors. It reduces the value of debts. It redistributes real income.

A

Your monthly real wage is: The amount you earn each month. The amount you earn each month after the deduction of taxes. The amount you earn each month after the deduction of taxes and the addition of any benefits. The amount you earn each month, divided by the average price of the goods and services that you buy.

A

In the current year, your economy is expected to make exports of $100bn and to import $80bn worth of goods and services. When it comes to measuring GDP (or aggregate demand) the net effect of your external sector is that the: External trade contributes $20m. External trade reduces GDP by $20bn. We cannot tell. It depends on the composition of imports and exports.

A.

A flatter aggregate consumption function, if plotted on a graph with output on the horizontal axis and aggregate consumption on the vertical axis, would indicate which of the following: A larger marginal propensity to consume and a larger multiplier. A smaller marginal propensity to consume and a smaller multiplier. A smaller marginal propensity to consume and a larger multiplier. A smaller marginal propensity to save (MPS = 1 - MPC) and a smaller multiplier.

B

According to the revised version of the Phillips curve, as shown in the figure, if the rate of inflation last year was 3 per cent and the bargaining gap this year and next year is 1 per cent, then inflation this year and next will be: 3 per cent then 4 per cent. 4 per cent then 5 per cent. 4 per cent then 3 per cent. 3 per cent then 2 per cent.

B

Assume that the central bank has an inflation target of 2% per year but inflation is currently running at 4%. The nominal policy (interest) rate is currently 5%. The central bank needs to create a negative bargaining gap and estimates that the real policy rate required to achieve this is 3%. Consequently it needs to set the nominal policy rate at: 6%. 7%. 8%. 4%.

B

Assuming that there is no government spending or trade, an economy's aggregate demand is given by its domestic consumption (C) and investment (I), AD = C+ I= c0+ c1Y+ I. In the economy's goods market equilibrium, AD = Y. Solving for Y, this yields: Y = [1/(1 - c1)] ( c0 + I). Given this equation, which of the following statements is correct? The multiplier is given by 1 - c1. The boost in the economy's output is the same, regardless of whether the aggregate demand shock comes from an increase in investment or in autonomous consumption, c0. The larger the marginal propensity to consume (c1), the smaller the multiplier. If c1= 1/3, then a £1 million increase in investment would result in a £2 million increase in output, ceteris paribus.

B

Considering the balance sheets of firms, households, and banks in the economy: Loans made by banks to firms are the banks' liabilities and the firm's assets. Household deposits are the banks' liabilities and the households' assets. For a bank run to occur, its assets must be less than its liabilities. No answer text provided.

B

Cuts in public expenditure do not guarantee a reduction in the government's deficit because: Firms will try to pay less tax. Aggregate demand will fall, reducing government revenue. Aggregate demand falls, and firms invest less. There is a fall in autonomous consumption.

B

In a linear aggregate demand model: c1(1-t) + m is the slope of the AD line in the 45-degree diagram. 1/(1 - c1(1 - t) + m) is the size of the multiplier. A lower tax rate leads to a new equilibrium at higher output by shifting the AD curve upwards.

B

In the figure shown, the distance between the price-setting curve and the wage-setting curve at C indicates: A labor market equilibrium. A negative bargaining gap. A positive bargaining gap. The start of an inflationary process.

B

Inflation is best described as: A rise in prices. A persistent rise in the general level of prices. Too much money chasing too few goods. Fall in the value of the pound (dollar, euro etc...).

B

Insert the correct combination of terms in the following sentence: 'The budget deficit refers to...., while government debt refers to.....' Households' borrowing; government borrowing. Firms' borrowing; government borrowing. The government's current borrowing requirement; the accumulation of past government borrowing. Consumer credit; the national debt.

B

Ms. Moneypenny's wealth depreciates at £5,000 a year. Her net annual income is £25,000. She will spend 40% of this net income on an extension on the house, another 40% on general consumption and save the remaining 20% in a pension fund. The tax rate is 40%. Based on this information, which of the following statements is correct? Her annual disposable income is £20,000. Her before-tax income is £50,000. Her investment is £5,000. She pays a tax of £12,000.

B

Okun's law implies that: Unemployment and GDP growth are positively correlated. Unemployment goes down in booms and up in recessions. Every change in the level of employment is exactly matched by an opposite change in the level of unemployment. Output and unemployment are inversely correlated.

B

Suppose that in an economy with no taxation and no external trade, the marginal propensity to consume is 0.7. The size of the multiplier (rounded to 2 decimal places) will be? 7 3.33 0.33 0.14

B

Suppose that the bargaining power of workers rises relative to that of employers because government legislation improves the security of employment. In terms of the wage-setting/price-setting model shown in the figure: We move along the wage-setting curve, to the right. The wage-setting curve moves up. The wage-setting curve moves down. The wage-setting curve becomes flatter.

B

The figure depicts the labor market model. The figure depicts the labor market model, which is currently at point X. In which of the following cases would the employment rate rise? A higher unemployment benefit. Better monitoring of employees' effort. A higher degree of product differentiation. No answer text provided.

B

The figure depicts the price-setting curve. Assume that the average product of labor λ is given. Based on this figure, which of the following statements is correct? At C, the markup is below the firm's profit-maximizing level. To go from A to B, the firm would be raising its price. The firm's profit is higher at A than at C. D is not a feasible choice for a firm.

B

The figure describes the effect of immigration on unemployment in the labor market. The labor market equilibrium is at A and C before and after the influx of immigration, respectively. Based on this figure, which of the following statements is correct? All incumbent workers are unaffected while the labor market adjusts. All incumbent workers are no worse off in the new equilibrium. The unemployment rate is unchanged in the new equilibrium. Firms claim a higher markup in the new equilibrium.

B

The following diagram depicts the price-setting curve. Based on this information, which of the following statements is correct? At point A, the markup is too high, and therefore the firm will raise its price. This leads to lower demand for the good and hence lower employment towards B. At point C, the real wage is too low and the markup is too high. Therefore the firm is able to increase profit by lowering prices and hiring more workers. Higher competition implies a lower price-setting curve. For any given markup, higher labor productivity implies a lower price-setting curve, which means a lower real wage.

B

Which of the following propositions best sums up the core of 'Keynesian' economics? Supply creates its own demand. In the short-run, output depends on the level of aggregate demand. Governments should always run budget deficits. An increase in government spending is likely to cause inflation.

B

Which of the following statements are correct? Your material wealth is the largest amount that you can consume without borrowing, which includes the value of your house, car, financial savings, and human capital. Net income is the maximum amount that you can consume and leave your wealth unchanged. In economics, investment means saving in financial assets such as stocks and bonds. Depreciation is the loss in your financial savings due to unfavourable movements in the market.

B

Which of the following statements is correct? If the annually compounding interest rate is 5%, then the present value of £100 in two years' time is £90.91. If the annually compounding interest rate is 5%, then the total present value (in Year 0) of receiving £100 at the end of Year 1 and £100 at the end of Year 2 is £185.94. £95 today is worth the same as £100 in one year's time if the interest rate is 5%. If you pay £96 for an investment that pays £100 in one year's time when the interest rate is 5%, then your net present value is £0.76.

B

Which of the following statements regarding fiscal policy is correct? Expansionary fiscal policy (e.g. increasing the government deficit or reducing the surplus) always has a stabilizing effect on the economy. Unemployment benefits and taxes automatically increase government spending and cut taxation in a downturn, while they trim spending and raise taxes in a boom. These are therefore automatic stabilizers. In a recession, the aim of a government fiscal expansion is to over-ride the effects of automatic stabilisers. Just as a family worried about mounting debts should cut spending and save more, an economy should adopt austerity measures when its debt level is high to restore its public finances to balance.

B

A temporary change in income affects the current consumption of credit-constrained households more than it does that of the unconstrained because: A credit-constrained household is unlikely to have savings to fall back on. If the household cannot borrow, its current consumption is limited by its current income. A credit-constrained household cannot foresee the future. Credit-constrained households are likely to be shortsighted.

B.

A fall in the world price of commodities will: Shift the price-setting curve down and the Phillips curve up. Create a positive bargaining gap. Shift the price-setting curve up and the Phillips curve down. Trigger accelerating inflation.

C

A household's net worth (or equity) is best described as: The total value of its assets. The value of its house and other consumer durables. The total value of assets minus the total value of its liabilities. The value of its house minus the amount of the outstanding mortgage.

C

Assume that a bargaining gap remains constant at 1 per cent. The rate of inflation in future years will: Remain constant at 1 per cent per year. Remain unchanged. Accelerate by 1 per cent per year. Settle at 1 per cent.

C

Ceteris paribus, in which of the following cases would the wage-setting curve shift up? Better monitoring by the employer. A lower unemployment rate. A more generous unemployment insurance scheme. A sudden influx of immigration.

C

Compared with investment spending, government spending is relatively stable. Why might his be? A large part of government spending is on transfers (benefits and pensions) which are 'contractual' and have to be paid whatever the state of the economy. The government can spend what it likes. Much government spending is independent of the state of the economy. Government spending is constrained by international agreements.

C

Consider this labor market which is at equilibrium. If there is a reduction in the degree of competition facing the firms, which of the following statements is true? The price-setting curve shifts up. The wage-setting curve shifts down. The equilibrium real wage falls. The unemployment level falls.

C

Figure 14.2 depicts a consumption function of an economy, where C is the aggregate consumption spending and Y is the current income of the economy.Based on this information, which of the following statements is correct? The marginal propensity to consume (MPC) is the proportion of current income spent on consumption, C/Y. The MPC is given by the line's intercept on the vertical axis. The MPC is normally less than 1 as some households are able to smooth their consumption. If the current income of a country is Y = $100 trillion and the MPC = 0.6, then the aggregate consumption spending is C = $60 trillion.

C

Figure 9.12 depicts the labor market when there has been a negative aggregate demand shock. Based on this information, which of the following statements is correct? The new equilibrium B is an equilibrium. At B, unemployment is purely cyclical. At B, the firms are able to make higher profits by lowering the wage. The adjustment back from B to X is immediate.

C

Higher labor productivity means a higher average product of labor curve. For any given markup this means a higher price-setting curve, which means a higher real wage. The price-setting curve shifts up. The wage-setting curve shifts down. The equilibrium real wage falls. The unemployment level falls.

C

If inflation is generally undesirable, why do policymakers choose inflation targets that are greater than zero? They don't believe they can achieve a zero rate. Zero inflation is too costly in terms of unemployment. If prices are generally rising, real wages can fall without a reduction in nominal wages. The official figures exaggerate the true inflation rate.

C

Imagine that the rate of inflation has been 10 per cent per year for a number of years. The central bank then introduces a 'tight' monetary policy and the rate of inflation comes down to 5 per cent per year. This reduction is an example of: Deflation. Falling prices. Disinflation. Austerity

C

In an economy where the MPC is 0.7, the proportional tax rate is 0.25 and the marginal propensity to import is 0.2, the multiplier will be: 0.675 2.1 1.48 2.35

C

In an economy with underutilized resources, the government stimulates aggregate demand by increasing its spending. The effect on output and employment will be greater if: The economy has a high propensity to import. The spending is financed by additional taxation. Its trading partners undertake a similar policy. The central bank simultaneously tightens monetary policy.

C

In the figure shown, a fall in output is caused by a reduction in investment. Which of the following would help restore output to its original level? A reduction in autonomous consumption. An increase in target wealth. An increase in actual wealth. A tightening of credit conditions.

C

In the multiplier model, we assume the following: Only the capital stock is fixed. Only the state of technology is fixed. That the capital stock and the state of technology are both fixed. That aggregate demand can affect the size of the capital stock in the short run.

C

The Consumer Price Index (CPI): Records the price of all goods and services in the economy. Records the price of all goods produced in the domestic economy, including exports. Measures the general level of prices that consumers pay for goods and services. Measures the rate of inflation.

C

The GDP deflator differs from the CPI in the following way: It includes the price of exports. It only records the prices of goods while CPI includes the price of services. It includes the prices of exports but excludes the prices of imports. The GDP deflator gives higher measures of inflation than the CPI.

C

The aggregate demand of an open economy is given by the after-tax domestic consumption C, the investment I (which depends on the interest rate r), the government spending G and net exports X − M: Given this equation, which of the following increases the multiplier? A fall in government spending. A fall in the interest rate. A fall in the marginal propensity to import. A rise in the tax rate

C

The diagram depicts the change in the aggregate goods market equilibrium when there is a €2 billion increase in investment. The economy's marginal propensity to consume is 0.5. Based on this information, which of the following statements is correct? The new goods market equilibrium after the investment increase is E. Aggregate demand increases by a total of €2 billion × 0.5 = €1 billion due to the increase in investment. The multiplier is 2. The distance between C and D is three-quarters the distance between A and B (€1.5 billion).

C

In an economy with no taxation and no external trade, the size of the multiplier depends on: Investment. The current level of aggregate demand. Autonomous consumption. The marginal propensity to consume.

D

In periods of rapid inflation, which of the following tend to lose out? Low-income households. Households with substantial financial wealth. Borrowers (debtors). Lenders (creditors).

D

In the context of aggregate demand, which of the following constitutes investment? Putting money in a savings account. Buying company shares. Buying a new car for personal use. Upgrading your firm's IT equipment

D

The following are the labor market and the multiplier diagrams, representing the medium-run supply side and the short-run demand side of the aggregate economy, respectively: Assume that the economy's production function is given by Y = N, where Y is the output and N is the employment. Based on this information, which of the following statements is correct? A rise in investment shifts the AD curve up, resulting in a higher aggregate output. This causes the price-setting curve to shift up in the short run, leading to higher employment. A fall in autonomous consumption shifts the AD curve down, resulting in a lower aggregate output. This causes the wage-setting curve to shift to the left in the short run, leading to higher unemployment. Labour productivity shifts with the changes in aggregate demand in the short run. The shifts in the aggregate demand cause short-run cyclical fluctuations in unemployment around the medium-run level shown in the labour market diagram.

C

The original Phillips curve shown in the figure suggested that the policymaker could choose: Any preferred level of unemployment and inflation. Any preferred rate of inflation, for a given level of unemployment. A stable combination of inflation and unemployment. A temporary combination of inflation and unemployment.

C

Total investment spending can be volatile because the interaction of individual firms' decisions can lead to vicious (low profit) or virtuous (high profit) circles. Which of the following might encourage all firms in the economy to behave in such a way that they all increase their investment spending together? A fall in the exchange rate (the domestic currency becomes cheaper for foreign buyers). A major technological breakthrough - say in batteries for electric cars. The use by government of fiscal policy to increase aggregate demand. Calls from government for firms to increase investment.

C

Which of the following statements about the wage-setting curve is correct? The price-setting curve depicts the firms' profit-maximising price level for different levels of economy-wide employment. Firms have to pay a higher real wage when the employment rate is higher. Therefore the price-setting curve is upward-sloping. At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. The reduction in competition from Europe due to Brexit would result in the UK's price-setting curve shifting up.

C

Which of the following statements is correct? Base money includes accounts held by households and businesses at commercial banks. The majority of money is legal tender issued by the central bank. Not all of broad money is legal tender. Money created by banks is an asset on their balance sheet.

C

Which of the following statements is correct? Money is the cash (coins and notes) used as the medium of exchange to purchase goods and services. Bank money is the total money in the savers' deposit accounts at the bank. Base money is broad money minus bank money. Liquidity transformation occurs when the banks transform illiquid deposits into liquid loans.

C

Which of the following statements is correct? Participation rate = employed ÷ labor force Unemployment rate = unemployed ÷ population of working age Employment rate = employed ÷ population of working age Employment rate + unemployment rate = 1

C

Which of the following statements regarding a bond is correct? The coupon is the certificate that you receive when you buy a bond. The face value of a bond is how much you pay for the bond. When the nominal interest rate is 3%, then the price of a bond with a face value of £100, yearly coupon of £5, and a maturity of 2 years is £103.83. If the price of a bond with a face value of £100, yearly coupon of £4, and a maturity of 1 year is £100.97, then the bond's yield is 4%.

C

Which of the following would increase GDP? A decline in imports, holding all other components of GDP constant. An increase in remittances paid to domestic residents by relatives living abroad. An increase in government spending. A decline in exports.

C

Why is investment spending likely to be more volatile than consumption spending? Because investment depends entirely on 'animal spirits'. Because firms cannot foresee the future. Because a large part of consumption spending is on items that cannot be postponed. ('non-discretionary') - food, heating, lighting, shelter, for example. Interest rates fluctuate.

C

You are given the following information for a country: Participation rate = 75%, Unemployment rate = 10%, Employment rate = 67.5% and Number of employed = 27 million. Based on this information, which of the following is correct? The working age population is 30 million. The size of the labour force is 40 million. The number of unemployed is 3 million. The unemployment rate is 12%.

C

Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption? A temporary reduction in income. A rise in interest rates. An unexpected promotion to a senior position. A freeze in the value of state retirement benefits.

C.

"The following example is a simplified balance sheet of a commercial bank. Based on this information, which of the following statements is correct? The bank's base money consists of cash and reserves and financial assets. Secured borrowing is borrowing with zero default risk. The bank's net worth is its cash and reserves of £2 million. The bank's leverage is 33.3.

D

A country's GDP is being measured by expenditure. Various categories of expenditure are recorded as follows: Households' spending on consumption = $100bn, Firms' spending on capital goods = $15bn, Firms' addition to inventories = $1bn, Government spending on services = $10bn, Government spending on capital goods = $2bn, Government transfers (social security etc) = $10bn, Exports = $12bn, Imports = $10bn. What is the correct estimate of GDP? $150bn $160bn $129bn $130b

D

A multiplier of 3 or above would be considered exceptionally high for most modern economies. Which of the following statements gives the most complete explanation for this fact? The national accounts overstate consumption. Credit is probably easier to obtain than we think. We have overlooked the effect of taxation. We have overlooked the effect of taxation and external trade.

D

Imagine that at the end of 2014 your monthly income in nominal terms was £2000 per month while the index of retail prices was 100. At the end of 2015, your monthly income was £2100 while the index of retail prices was 110. During 2015, your real income had: Increased by £100. Fallen by 10 per cent. Increased by 5 per cent. Fallen by 5 per cent.

D

Ms. Bond has wealth of £500,000. She has a market income of £40,000 per year, on which she is taxed 30%. Ms Bond's wealth includes some equipment, which depreciates by £5,000 every year. Based on this information, which of the following statements is correct? Ms Bond's disposable income is £40,000. Ms Bond's net income is £28,000. The maximum amount of consumption expenditure possible for Ms Bond is £23,000. If Ms Bond decides to spend 60% of her net income on consumption and the rest on investment, then her investment is £9,200.

D

Suppose that the economy enters a recession. Unemployment rises, which reduces workers' negotiating power. In terms of the wage-setting/price-setting model in the figure: We move along the wage-setting curve, to the right. The wage-setting curve moves up. The wage-setting curve moves down. We move along the wage-setting curve, to the left.

D

The figure shows a downward shift of the aggregate demand curve, reducing the level of output from A to Z. Suppose that we begin again at A and that this is a full-employment level of output. An increase in aggregate demand in these circumstances will most likely cause: An increase in employment. A fall in wages. An increase in output. A rise in the general level of prices.

D

The figures in the textbook show that the severity of the business cycle has declined since 1945. Which of the following is most likely to have contributed to this moderation? A decline in the importance of agriculture. A reduction in the inequality of income distribution. The spread of home ownership. The increase in government spending in the economy.

D

The following is a simplified balance sheet of a commercial bank. Based on this information, which of the following statements is correct? £34 million of the assets are owned by the bank. The value of the bank's equity is £120 million. The bank's leverage ratio is 95. A fall of over 5% in the asset value would make the bank insolvent.

D

The main weakness of the original Phillips curve is that it ignored: Time. Household preferences. Policymaker preferences. Expectations.

D

The rate of interest that you are paying on a mortgage loan is 6.5 per cent per year. Inflation is running at 3 per cent per year. The real rate of interest that you are paying is therefore: 6.5 per cent. 9.5 per cent. 3 per cent. 3.5 per cent.

D

The table shows a balance sheet of a bank. The interest rate charged on loans is 10%. Which of the following statements is correct? The bank holds £110 million of base money. In one year's time, both assets and liabilities grow by £10 million. The possibility that the loans will not be repaid is called the liquidity risk. There is a bank run if depositors ask to withdraw more than £10 million of their deposits at the same time and the bank is unable to raise the difference.

D

When a country's GDP is being measured by the output method, the total figure comes to $500bn. When measured by expenditure, we have the following components: Households' spending on consumption = $300bn, Firms' spending on capital goods = $50bn, Government spending on services = $80bn, Government spending on capital goods = $ $50bn, Government transfers (social security etc) = $10bn, Exports = $10bn and Imports = $20bn. In the circumstances, how can we say the output and expenditure methods of calculating GDP are equivalent? There is no problem. The expenditures sum to $500bn which matches the output measure. Both of these methods should give the same answer when calculated using real-world data. Adding to stocks of unsold goods is treated as a form of investment. Both methods of calculating GDP should, in theory, give the same answer.

D

When measured over time, the nominal value of many economic variables systematically grows more rapidly than their corresponding real values. Why might this be? Because of errors in the data recording process. Because of population growth. Increases in productivity. Inflation

D

Which of the following best describes the short-run relationship between inflation (π) and unemployment (U), ceteris paribus? U falls; π falls. U is unchanged; π falls. U is unchanged; π rises. U rises; π falls.

D

Which of the following does NOT provide a way for governments to finance a budget deficit? A sale of government bonds to households. A sale of government bonds to the overseas sector. Creating new money. An increase in taxation.

D

Which of the following is a definite consequence of a high inflation rate? It reduces everyone's real wealth and real income. It makes borrowing more expensive. It makes poor people worse off. Answer It can distort price signals.

D

Which of the following statements is correct? In economics, money solely refers to the coins and notes in circulation. I can exchange my apples for your oranges. Therefore apples can be classified as money. Banks must exist for money to do its work. Money allows purchasing power to be transferred between consumers.

D

Which of the following statements is correct? Maintaining fiscal balance in a recession helps to stabilize the economy. Automatic stabilizers refer to the fact that economic shocks are partly offset by households smoothing their consumption in the face of variable income. The multiplier on a fiscal stimulus is higher when the economy is functioning at full capacity. A fiscal stimulus can be implemented by raising spending to directly increase demand, or by cutting taxes to increase private sector demand.

D

Which of the following statements is correct? The supply of base money entirely depends on how many transactions commercial banks have to make. The central bank intervenes in the money market by committing to lend whatever quantity of base money is demanded at the current bank lending rate. The central bank sets the policy rate in order to maximise its profits. When savers buy bonds they are lending money in the money market.

D

Which of the following statements is correct? To maximize profits, firms set the wage at the level where the workers are indifferent between working and not working. Firms aim to set as high a price as possible. In equilibrium, the wage clears the labor market, so there is no unemployment. If all firms set the same price and pay the same nominal wage, then the higher the real wage that they pay, the lower is their markup.

D

You are given the following data for the five countries. The numbers are in thousands. Of the five countries, which of the following statements is correct? UK has the smallest number of unemployed people. The US has the highest participation rate. Italy has the lowest employment rate. Japan has the lowest unemployment rate.

D