Final Exam Review
You just built your own home. You spent 1000 hours of your own time, which you estimate is worth $40/hour. You also bought $50,000 worth of materials. The market value of your house, if decided to sell it, is $100,000. How much did your project add to GDP?
$ 50,000 Note: The only contribution to GDP is output that is actually sold through the market. Your time spent building your own house is not a market transaction; therefore it is not part of GDP. Similarly, even though the house is worth $100,000, that value is not part of GDP, because it is not actually being sold.
If the reserve ratio is .10, the money multiplier can be as high as
10.
If the reserve ratio is .20, the money multiplier can be as high as
5.
Which of the following would qualify as an aggregate demand shock?
An unexpected surge in consumer confidence, resulting in increased purchases of new automobiles. Note: the increased consumer confidence is an external influence on spending, because aggregate demand will rise without any policy actions. The other possible answers are supply shocks, rather than demand shocks, because they affect productive capacity.
One of the reasons that an increase in Real Gross Domestic Product does not always mean that there was an increase in social welfare is
GDP excludes production that is not sold in the marketplace.
In the diagram above, GDP is nearly $20 billion. Suppose that people get nervous about the economy, resulting in a decline in consumer confidence that leads to a $200 billion drop in consumer spending this year. What effect will this have on GDP?
GDP will fall by more than $200 billion, because the drop in spending will start a downward spiral in jobs, spending, and output.
What effect will an increase in government spending of $500 billion have on an economy that is in the middle of a deep recession?
GDP will rise by more than $500 billion. Note: The initial increase of $500b in spending will create more income, leading to more spending and more GDP through a multiplier effect.
Suppose an apple pie sells at a grocery store is for $5. Suppose that the grocery store purchased it from a baking company for $4. Suppose the baking company paid $2 for ingredients, $1 for labor, and made $1 in profit. What is the GDP contribution of the pie?
It is $5
How do we count production that does not get sold this year?
It is included in GDP as business investment this year.
Which of the following are goals for monetary policy?
Preventing boom and bust cycles in the economy.
Which type of unemployment occurs when job hunters have the wrong skills for available jobs?
Structural Note: structural unemployment means that people are out of work because even though jobs are available, they have the wrong skills, or they are in the wrong location.
The Nominal GDP of the U.S. is:
The market value in current dollars of the nation's output of final goods and services for a year.
The stimulus package proposed in 2009 by newly-elected President Obama included
a combination of tax changes and significant increases in federal government spending.
A major factor in the recession of 2007-2009 was
a drop in the housing market, with many home mortgage defaults.
An example of a discretionary fiscal policy would be
a tax cut adopted to stimulate consumption.
An example of discretionary fiscal policy would be
a tax cut adopted to stimulate consumption.
Which of the following would cause a demand shock like the one shown in the graph above?
a war that results in a big increase in defense spending.
Contractionary monetary policy would shift the
aggregate demand curve to the left.
The deepening recession in late 2008 sharply reduced consumer confidence, causing
aggregate demand to contract markedly.
Using the aggregate supply - aggregate demand model, the tax cuts of 2001 and 2003 that came in the form of tax rebate checks would cause
aggregate demand to shift to the right.
The upper and lower loops of the circular flow diagram are
always equal, because all spending becomes income for someone else.
Monetary policy designed to counteract a reduction in aggregate demand might include
an increase in the money stock
Monetary policy designed to counteract a reduction in aggregate demand might include
an increase in the money stock.
Money is
anything people accept in exchange for goods and services.
The economy depicted in the graph above prior to the demand shock is
at or near full employment.
In early 2005, inflation increased unexpectedly due to an increase oil prices. This helped
borrowers.
To increase the money supply, the Federal Reserve could
buy U.S. government bonds on the open market.
An income tax cut designed to stimulate the economy would cause
consumer demand to increase, shifting aggregate demand to the right.
Through the taking of deposits and making loans banks
create more money that physically exists.
If a person is laid-off from a job because of a downturn in the economy, then economists call this person
cyclically unemployed.
If the unemployment rate falls because the number of people not working but searching for work falls, economists would attribute this to the
discouraged worker effect.
The 2003 tax rebate is an example of
discretionary fiscal policy.
The Trump tax cut of 2018 is an example of
discretionary fiscal policy.
A drop in consumer confidence will result in a
drop in both consumer spending and business investment.
The slow growth coming out of the Great Recession caused the Fed to
employ new tools of monetary policy.
Monetary policy is most effective in
fighting inflation
Monetary policy is most effective in periods of
high inflation
The effect of lowering the bank reserve ratio from .20 to .10 would be to:
increase aggregate demand.
Suppose that Fred sells his used Chevy to Honest John's Used Car Lot for $5000. Honest John repairs the car then sells it for $8000. This will cause GDP to:
increase by $3000.
To restrict credit availability, the Federal Reserve could
increase the discount rate.
Through the taking of deposits and making loans banks
increase the money supply.
The stimulus package proposed in 2009 by newly-elected President Obama included
increased federal government aid to state and local governments.
If the CPI increases from 120 to 132 from one year to the next, then the:
inflation rate was 10% from year 1 to year 2.
The Congressional Budget Office (CBO) reported earlier this month that a rising deficit is predicted to hit $1 trillion by 2020, because of the recent tax cuts and spending increases. Given today's low unemployment, the expected result for the economy will be
inflation.
Expansionary monetary policy is used to
lower interest rates, shifting aggregate demand.
A reason given why the CPI overstates the cost of living is it
makes no attempt to control for substitution to cheaper goods.
A fully anticipated change in the rate of inflation hurts:
nobody.
The NDFP shift in the graph above refers to
nondiscretionary increases in tax payments that result when more people are working and paying more in taxes, instead of receiving unemployment compensation.
The main effect on the economy of the financial sector crisis in late 2008 was
reduced aggregate demand.
Last month, a $12 million bridge under construction collapsed in Miami, Florida. Not including the tragic loss of life, if it costs another $12 million to replace it, then GDP will
rise by another $12 million because of the additional cost of the replacement.
If a person is laid-off from a job because of lack of the necessary skills to do the job properly, we would categorize that person as:
structurally unemployed.
Monetary policy is controlled by
the Federal Reserve.
Deflation occurs only when
the average price level (CPI) falls.
Inflation means that:
the average price level is rising, even though some prices may rise and some may fall.
The main argument against President Trump's 2018 tax cut and proposed infrastructure spending is that:
the new policies will be inflationary, since we are already at or near full employment.
The inflation rate is
the percentage increase in the price index from one year to the next.
The Federal Reserve expanded their traditional tools set in the 2007-2009 recession to include
the purchase of mortgage backed securities.
One of the reasons that Real Gross Domestic Product is not synonymous with social welfare is
the underground economy (unreported and illegal income and sales) is not counted.
Conservative critics of the Obama stimulus plan focused their concern on
their belief that the package was too large, with big deficits that would be inflationary.
Liberal critics of the Obama stimulus plan focused their concern on
their belief that the package was too small and therefore insufficient to the task.
When a recession causes tax receipts to fall and unemployment compensation payments to rise,
this is a nondiscretionary fiscal policy that results in government budget deficits. Note: the nondiscretionary fiscal policies are those that occur automatically when the economy enters a downturn, as people lose their jobs, resulting in falling tax receipts and higher welfare and unemployment payments. These occur automatically without any government intervention, and they help to minimize the effects of the downturn.
The slow growth coming out of the Great Recession caused the Fed to
try new tools of monetary policy, along with the traditional policies.
The unemployment rate sometimes understates the seriousness of a downturn because of
underemployment.