Economics Exam 2

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. The per-unit cost of production in this economy is

$0.10.

The effect of contractionary fiscal policy is shown as a

leftward shift in the economy's aggregate demand curve.

Graphically, cost-push inflation is shown as a

leftward shift of the AS curve.

The nominal interest rate

minus the inflation rate is the real interest rate

The losers from inflation are those with

fixed incomes in nominal terms.

Net exports are a country's export of

goods and services less its imports of goods and services.

The immediate-short-run aggregate supply curve is

horizontal.

Place the phases of the business cycle in order, starting with the highest level of GDP: recession, trough, peak, expansion.

peak, recession, trough, expansion.

A political business cycle is the idea that

politicians are more interested in reelection than in stabilizing the economy.

The problem of time lags in enacting and applying fiscal policy is

in the time it takes to identify the situation, enact a policy, and allow it to work, economic circumstances may have changed

The crowding-out effect of expansionary fiscal policy suggests that

increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

Contractionary fiscal policy is so named because it

is aimed at reducing aggregate demand and thus achieving price stability.

The more reliable measure for comparing changes in the standard of living over a series of years is

real GDP.

Which of the following formulas is correct? Percentage change in

real income approximates percentage change in nominal income minus percentage change in price level.

Inflation

reduces the purchasing power of the dollar.

Government's fiscal policy options for ending severe demand-pull inflation include

reducing government spending, increasing taxes, or both.

The effect of expansionary fiscal policy is shown as a

rightward shift in the economy's aggregate demand curve

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

simultaneously stabilize the economy and reduce the absolute size of the public debt.

Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called

structural unemployment.

The Bureau of Labor Statistics (BLS) calculates the inflation rate from one year to the next by

subtracting the CPI of the previous year from the CPI of the most recent year, and then dividing by the CPI of the previous year.

Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is

not in the labor force.

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. Politicians recognize a sudden recession, but it takes many months of political deal making before they finally approve a stimulus bill.

Administrative lag

Graphically, demand-pull inflation is shown as a

rightward shift of the AD curve along an upsloping AS curve.

Which of the following statements is true?

Deflation means that the price level is falling, whereas with inflation overall prices are rising.

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A stock market crash reduces people's wealth.

Demand decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Consumers become more pessimistic about the economy.

Demand decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Government spending increases.

Demand increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The United States enters into an arms race with China, resulting in a significant increase in military spending.

Demand increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. The spread of democracy around the world increases consumer confidence in the United States.

Demand increases

What is the primary reason that changes in total spending lead to cyclical changes in output and employment?

Prices are sticky in the short run.

Which of the following statements is true?

Real GDP is nominal GDP divided by the price index.

Expectations of a near-term policy reversal weaken fiscal policy because

consumers may hesitate to increase their spending because they believe that tax rates will rise again.

Inflation initiated by increases in wages or other resource prices is labeled

cost-push inflation.

Real GDP measures

current output at base year prices.

The crowding-out effect is

a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending.

Other things equal, appreciation of the dollar

decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.

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

budget deficit.

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

budget surplus.

Recurring upswings and downswings in an economy's real GDP over time are called

business cycles.

What is the efficiency factor?

The level of economic efficiency and full employment needed to reach full production potential

Expansionary fiscal policy is so named because it

is designed to expand real GDP.

Productivity measures

real output per unit of input.

Who gains from inflation?

Borrowers

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.A recession causes a local factory to lay off 30 workers.

Cyclical unemployment

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment.Tim just graduated from college and is looking for a job.

Frictional unemployment

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.

Operational lag

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag.To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental-impact statement for each new project will take at least two years to complete before any building can begin.

Operational lag

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.

Which of the following best describes the idea of a political business cycle?

Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections.

Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent.

Recognition lag

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India.

Structural unemployment

Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Thousands of bus and truck drivers permanently lose their jobs to self-driving vehicles.

Structural unemployment

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A hurricane destroys manufacturing plants.

Supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A revolution in Iran results in a significant reduction in the world's supply of oil.

Supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Employers are required to provide paid sick leave to part-time as well as full-time employees.

Supply decreases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. A new computer chip is developed that is faster and cheaper than previous chips.

Supply increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Manufacturing firms expect steel prices to decrease significantly.

Supply increases

For each of the following events, indicate whether it causes a demand-side or supply-side change, other things equal, and how the change will affect that side of the economy. Technological changes enable workers to be more productive.

Supply increases

What is the demand factor?

The level of purchases needed to maintain full employment.

The public debt is held as

Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.

Which one of the following would not shift the aggregate demand curve?

a change in the price level

A large negative GDP gap implies

a high rate of unemployment.

The GDP price index is

a measure of the price of a specified collection of goods and services compared to the price of a highly similar collection of goods and services in a reference year.

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to

a price level that is inflexible downward.

At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:

above equilibrium.

The GDP gap measures the difference between

actual GDP and potential GDP.

Which of the following would most likely shift the aggregate demand curve to the right?

an increase in stock prices that increases consumer wealth

Economic growth can be portrayed as

an outward shift of the production possibilities curve.

Which of the following is the best example of public investment?

construction of highways

The immediate-short-run aggregate supply curve represents circumstances where

both input and output prices are fixed.

The determinants of aggregate demand

explain shifts in the aggregate demand curve.

Given the annual rate of economic growth, the "rule of 70" allows one to

calculate the number of years required for real GDP to double.

The Consumer Price Index (CPI) is determined each month by

comparing the value of a market basket of goods that consumers typically purchase to the value of the basket in a base year

Discretionary fiscal policy will likely cause budget

deficits during recessions and surpluses during periods of demand-pull inflation.

Fiscal policy refers to

deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability.

The phrase "too much money chasing too few goods" best describes

demand-pull inflation.

Economic growth is best defined as an increase in

either real GDP or real GDP per capita.

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

expansion

The largest contributor to increases in the productivity of American labor is

technological advance.

To say that "the U.S. public debt is mostly held internally" is to say that

the bulk of the public debt is owned by U.S. citizens and institutions.

The public debt is the amount of money that

the federal government owes to holders of U.S. securities.

Nominal GDP is

the market or money value of all final goods and services produced by the economy in a given year, whereas real GDP is adjusted for inflation.

The phase of the business cycle in which real GDP is at a minimum is called

the trough.

Per-unit production cost is

total input cost divided by units of output.

The shape of the immediate-short-run aggregate supply curve implies that

total output depends on the volume of spending.