Macroeconomics Final
How does a decrease in unemployment impact a worker's bargaining power?
A decrease in unemployment improves workers' bargaining power.
Since 2008, we have gotten used to the idea that the size and behavior of the financial system can be a major source of economic instability. How can the existence of a developed financial system help to limit fluctuations in the economy?
A developed financial system can help households to 'smooth' their consumption over time.
Figure 14.10c depicts the aggregate investment function of an economy.
A forecast of a permanent demand increase shifts the investment line outwards.
Which of the following best describes the short-run relationship between inflation (π) and unemployment (U), ceteris paribus?
A leftward (up) shift in the wage-setting curve
Policies implemented in the labor market will affect the position of the wage-setting curve as well as that of the price-setting curve, which eventually will cause changes in the labor market equilibrium.
A wage subsidy will cause an upward shift of the price-setting curve.
Which of the following statements about the price-setting curve is correct?
At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level.
Imagine that the rate of inflation has been 10 percent 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:
Disinflation
Based on the Figure above, one of the effect of the presence of labor union is
Employees receives both recognition and a voice in how decisions are made, resulting in lower wages.
Which of the following statements is correct regarding measuring of 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.
Why is there a trade-off between unemployment and inflation?
High unemployment means high cost of jobs (or employment), so wages will be lower.
All of the following were considered to be contributing factors to the Great Depression except:
Housing price bubble
The diagram depicts a consumption function of an economy, where Cis 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.
If all households were not credit-constrained, and all income changes were perceived to be temporary, then the aggregate consumption line would be horizontal.
Temporary change in income affects the current consumption of credit-constrained households more than unconstrained households because:
If the household cannot borrow, its current consumption is limited by its current income.
This figure depicts the linkage between labor market and inequality (as represented by the Lorenz curve and Gini coefficient). Based on that, which statement below is correct?
Inequality will increase if the real wage falls
Consider a scenario where the Bank of England views the UK economy to be overheating and is attempting to slow the economy down using monetary policy. Which of the following statements regarding the effects of an interest rate rise is correct?
It leads to higher demand for GBP, which results in an appreciation of the GBP.
Deflation refers to a situation where prices are generally falling. Why is deflation generally undesirable?
It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further.
Suppose that everyone who had been looking for a job for more than six months gave up in despair and stopped looking for a job. What would happen to the unemployment rate?
It would decrease
Imagine that you are responsible for policymaking in an economy that is experiencing a deep recession. You and your colleagues announce a number of measures (like those in Roosevelt's 'New Deal') that you tell everyone will boost demand and output. Why does it matter whether the public believes your announcement?
People will feel more confident about the future and increase their spending, which will reinforce the actions of government.
The following figure (top) shows the unemployment rate and productivity growth in the US between 1914 and 2015. Based on this information, which of the following statements is correct?
The unemployment rate in more recent boom years is lower than unemployment rates in earlier boom years.
Figure 16.1 is a graph of unemployment rates for 16 OECD countries from 1960 to 2014.
The unemployment rates of different countries were affected very differently by the oil shocks of the 1970s.
When a labor union is present, the wage is not set by Human Resources but instead is determined through a process of negotiation between union and firm. A bargained wage will thus be set.
'bargaining curve' lying above the wage-setting curve
what will increase the multiplier
A fall in the marginal propensity to import.
All of the following would cause inflation EXCEPT:
A decrease in aggregate demand
Interest rates can influence the macroeconomy by influencing
Decisions within the households and businesses
Which of the following is a fiscal policy a government may use to stabilize the economy in response to an unexpected decline in aggregate demand?
Increase government expenditures
If Anisha repaid a loan amount of $15,000 at the interest rate of 15% what is her loan principal?
$13, 043
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:
1.48
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 will be...
3.333
Assume that the level of consumption in an economy is given by the expression 1000 + 0.7Y. When Y = 50,000, consumption will be:
36,000
According to the revised version of the Phillips curve with inflation expectations, as shown in Figure 15.7, if the rate of inflation last year was 3 percent and the bargaining gap this year and next year is 1 percent, then inflation this year and next will be:
4% then 5%
This figure depicts the Lorenz Curve. Related to the Lorenz Curve, the Gini coefficient is used to measure the degree of inequality in an economy. The Gini coefficient is measured as
A / (B1+B2+B3)
How do interest rates set by the FED affect consumer spending?
A high interest rate decreases consumer spending.
An overseas bank announces that it is introducing a new type of savings account paying a 5.4 percent fixed rate of interest for deposits of one year duration. This 5.4 percent is:
A nominal rate of interest.
The term demand shock refers to
A shift in the aggregate demand
In Econoland, let the amount of consumption that is independent of income is equal to 80; all expenditures are in billion US dollars. Investment in the economy is autonomous at 600. From any dollar change in national income, households use up ¾ of it to spend on consumption. Government spending is fixed at 300, and the tax rate is known to be 5%.
After accounting for the tax rate, the marginal propensity to consume is 0.7125
Cuts in public expenditure do not guarantee a reduction in the government's deficit because:
Aggregate demand will fall, reducing government revenue
Recall a government budget and budget deficit. A rise in public expenditure does not guarantee an increase in the government's deficit, because:
Aggregate demand will increase, which causes GDP to increase, which can lead to higher revenues for the government.
Which of the following is likely to lead to a fall in the level of investment spending?
An official forecast of a downturn in the economy
Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption?
An unexpected promotion to a senior position.
The Phillips curve models which relationship?
As unemployment decreases, inflation increases.
Which of the following statements about the wage-setting curve is correct?
At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate.
Money in the form of bank deposits created by commercial banks when they extend credit to firms and households is known as
Bank money
Why is investment spending likely to be more volatile than consumption spending?
Because a large part of consumption spending is on items that cannot painlessly be postponed. ('non-discretionary') - food, heating, lighting, shelter, for example
One aspect that is strongly related to borrowing and lending in the life of an individual consumer is the opportunity cost. In this context, opportunity cost refer to
Borrowing allows us to buy more now, but constrains us to buy less later.
The diagram depicts the Phillips curve and the indifference curves of an economy. This economy has an independent central bank with an inflation target of 2%.
Consider an aggregate demand shock that increases unemployment. Without monetary or fiscal policy to counter the negative bargaining gap, the Phillips curve would shift downwards.
In the economy, the supply side and the demand side are linked primarily because:
Cyclical fluctuations of unemployment are linked to fluctuations in aggregate spending
Which of the following scenarios would cause the wage-setting curve to shift down?
Firms implementing a new monitoring device used to detect shirking
Which of the following might help to minimize the costs of adapting to new technology?
Government re-training schemes
What's the best explanation of crowding out?
Government spending and borrowing reducing private investment and consumption
Scoopy's autonomous consumption is 20 every month. He spends 0.9 cents for every $1 and he earns $100. How much is Scoopy consuming AND at what point does Scoopy stop having to borrow?
He is consuming 110 AND he stops borrowing when his consumption is equal to his income
The crisis that marked the end of the golden age is sometimes described as a supply-side phenomenon in contrast to the crisis of the 1930s, which was caused by inadequate demand. Which of the following did NOT contribute to problems on the supply side in the 1970s?
High levels of employment.
Lackson's consumption function is C = 100 + 0.75*Y. What is his overall consumption spending (C) when his saving is zero so that he consumes all of his income?
His consumption spending is 400
Which of the following statements is correct?
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.
The following diagram shows the path of income for a household that receives news about an expected rise and fall in future income at the depicted times.
If the household is credit-constrained and has 'weakness of will', then its consumption will still end up with higher level of consumption in later age.
The 'paradox of thrift' refers to the fact that:
If we all save more, aggregate income will fall
Figure 15.6 is a scatter plot of the inflation rate and the unemployment rate for the US for each year between 1960 and 2014.
In the 1960s, the Phillips curve suggests a trade-off of a 2% fall in the unemployment rate and a 2-3% rise in the inflation rate.
Economic activity is subject to fluctuations (booms and slumps). Thinking about the US economy since the 1800's which of the following statements is correct?
In the early nineteenth century the effects of weather on a large agricultural sector were a major source of economic fluctuations but during the twentieth century these have been replaced by fluctuations in industrial investment.
Figure 17.26 depicts the US aggregate demand between 2006 Q2 and 2010 Q4.
In the recession, not only did households stop purchasing new houses and other consumption goods, but also firms stopped investing.
Which of the following was NOT a policy reform used in the US to deal with the stagflation of the 1970s?
Increasing government expenditures
When measured over time, the nominal value of many variables in economics grows more rapidly than their corresponding real values. Why might this be?
Inflation
Which of the following statements regarding inflation and deflation is correct?
Inflation transfers wealth from lenders to borrowers.
The Beveridge curve will shift downward (toward the origin) if:
Information about job vacancies improves.
Investment spending tends to be volatile because
Investment decision today affects investment decision tomorrow and does not follow a smoothing pattern
When the interest rate is higher, what is true according to the simple multiplier model?
Investment spending will be lower
Which statement is true regarding The Gold Standard monetary system?
It adopted a fixed exchange rate in which the dollar has a specific gold value.
Which of the following is not a function of money?
It determines the terms of trade between goods.
Why do firms create and destroy jobs?
It is an attempt to extract as much as possible Schumpeterian rent
Which is true regarding Consumption Expenditure:
It represents spending on durable and non-durable goods.
In the aggregate demand model for an open economy, shrinking exports will lead to
Lower aggregate spending and smaller GDP
Figure 16.9b depicts the long-run adjustment process in the Labor market after technological progress.
Lower unemployment at E implies a higher wage required to induce workers to exert high effort, resulting in the higher real wage at B.
A new labor-saving technology will likely result in.....
Lower wage share of output and higher Gini coefficient in the short run.
The Consumer Price Index:
Measures the general level of prices that consumers pay for goods and services
Which the following statements is correct?
Money allows purchasing power to be transferred between consumers.
Morgan has a wealth of $200,000 and a market income of $60,000 per year, on which he is taxed 35%.
Morgan's disposable income is $39,000.
When investment spending in the economy is rising, we can expect that:
National income will increase.
Which statement below is true about an individual's balance sheet?
Net worth equals the difference between assets and liabilities
The loan repayment amount is
Principal + Interest Payment
In Figure 15.4b, when employment is at level C, the real wage lies below the profit curve (labor productivity). Assume inflation is zero. In a competitive system, firms will begin to _____ prices and this will start a process of _____.
Reduce; deflation
Imagine that the rate of inflation has been 3.5 percent per year for a number of years. The central bank then introduces an expansionary monetary policy and the rate of inflation to 5 per cent per year.
Rising inflation
Which of the following was NOT a problem that arose from the great moderation?
Rising real wages
The paradox of thrift suggests that
Saving more may be beneficial for households but can be detrimental for the economy at-large.
A shift of the aggregate demand curve will cause
Short run fluctuations in unemployment
What is not true about involuntary unemployment?
Some workers are coerced to work
Figure 17.16 is a graph of the unemployment rate and consumer price inflation in advanced economies between 1960 and 2013.
Stagflation was caused by the shifting up of the Phillips curve, propelled by higher inflation expectations.
Causes of inflation
Stronger labor unions, Less competition for firms, An economic boom leading to a lower unemployment rate
Which of the following statements regarding the multiplier is correct?
Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier.
Okun's Law tells us that:
That unemployment goes down in booms and up in recessions
The relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labor force) is known as:
The Beveridge curve
According to Alejandro Reuss' article about fiscal policy in Real World Macro,
The Conservatives argue that fiscal policy is ineffective in boosting aggregate spending.
This unit suggests that there have been three distinctive periods ('epochs') in capitalist economies since 1914. Which of the following Is not one of those periods?
The Second World War.
Which statement below is true regarding US policy responses in the recession era?
The US government implemented a policy mix to cope with the recession.
Look at the budget line depicted in the above graph. If Julia faces a higher interest rate when borrowing, what is the impact on the budget line?
The budget line becomes steeper
When households have smaller tendency to consume out of every dollar of income change, based on the aggregate demand model we can expect that the following will happen:
The consumption curve will be flatter
When the amount that households consume out of every dollar of income decreases, based on the aggregate demand model we can expect that the following will happen:
The consumption curve will be flatter
Your economy is estimated to be producing about $800bn-worth of goods and services this year. However, your official statisticians estimate that if all resources were fully-employed, it could produce about $1000bn. The ratio 0.8 (or 80%) therefore indicates:
The degree of capacity utilization
The widespread introduction of new technology into an economy takes time. The length of time between first appearance and general acceptance is known as:
The diffusion gap
The figure below depicts the labor market model. Consider a reduction in the degree of competition faced by the firms. Which of the following statements is correct regarding the effects of reduced competition?
The equilibrium real wage falls.
Firms are often capacity-constrained. This means that
The firm is not able to fulfill orders using its current production capacity
A large government debt is necessary but can also be problematic, because
The government has to pay interest on its debt and it has to raise revenue to pay the interest, which may require raising tax rates.
Which statement below is not true regarding government debt?
The government needs to minimize the amount of debt until it reaches zero, otherwise the economy cannot grow.
When target wealth is below the expected wealth,
The household will reduce savings and increase consumption.
Equilibrium in the labor market is established by
The intersection of the wage-setting and price-setting curves
What is the primary difference between the aggregate consumption line and aggregatedemand line?
The investment amount
We have two models for thinking about total output, employment, and the unemployment rate in the economy: The supply side (labour market) model and the demand side (multiplier) model.
The labor market model is a medium-run model
In the expression for aggregate consumption C = C0 + C1.Y, the term C1 is known as:
The marginal propensity to consume
You are given the following information for a country: Participation rate is 75%, the unemployment rate is 10%, the employment rate is 67.5%, and the number of employed is 27 million. Based on this information, which of the following is correct?
The number of unemployed is 3 million
Which of the following happens to the trade off between consumption now and and consumption in the future when the interest rate increases?
The opportunity cost increases.
According to the aggregate demand model, a country's GDP will increase if, all other things equal (ceteris paribus),
The private sector has positive expectation about the business cycle.
This Figure illustrates the effects of union wage-setting. What can we conclude from this figure?
The resulting bargained wage-setting curve will be above the wage-setting curve with no union.
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:
The shifts in the aggregate demand cause short-run cyclical fluctuations in unemployment around the medium-run level shown in the labor market diagram.
This Figure depicts Julia's indifference curves for consumption in periods 1 (now) and 2 (later). Based on this information, which of the following statements is correct?
The slope of the indifference curve is the marginal rate of substitution between the consumption in the two periods.
The following figure (bottom) shows the income share of the top 1% richest households in the US between 1914 and 2013. Based on this information, which of the following statements are correct?
The top 1% richest US households received nearly one-fifth of the total income in 2010
A household's net worth (or equity) is best described as:
The total value of assets minus the total value of its liabilities
The figure shows the wage-setting curve and the real wage w*. Based on this figure, which of the following statements is correct?
The unemployment rate is 5%
Among the statements below, the reason for individual consumption smoothing is
There are diminishing returns to consumption at any given time.
The goal of an expansionary fiscal policy is
To induce economic growth
Labor productivity refers to
Total output divided by the number of hours or some other measure of labor input.
Which of the following statements regarding fiscal policy is correct?
Unemployment benefits and a proportional tax system are both automatic stabilizers.
The data for Spain suggests that Okun's Law can be written as y = -0.3597x +1.741. What is the predicted change in unemployment if GDP grows by 2%?
Unemployment increases by 1.02 percentage points.
Okun's Law states that GDP must grow 2.5% faster than potential GDP to lower the unemployment rate by 1% (on average). Assume potential GDP is not growing. Actual GDP declines 7.5% in recession. What happened to the unemployment rate?
Unemployment rate increased by 3%
Which of the following best describes the short-run relationship between inflation and unemployment?
Unemployment rises; inflation falls.
In the context of aggregate demand, which of the following constitutes investment:
Upgrading your firm's IT equipment
When household saving decreases,
Wealth decreases.
Which of the statements below is true about wealth?
Wealth is the largest amount that you could consume without borrowing.
Among the following, which is NOT the characterization of investment spending?
When GDP increases, it will automatically cause investment to also increase.
The price-setting curve shows how output per worker is split between:
Workers (real wage) and firm owners (real profit)
When did the era of great moderation start?
around 1983
The average interest rate charged by commercial banks to firms and households is called the
bank lending rate
A fall in Real GDP...
indicates a fall in output.
What is NOT true regarding the labor market model?
it does not determine the distribution of income between workers and employers in the economy
Profit-maximizing condition for the firm occurs when
marginal rate of substitution equals marginal rate of transformation
The firm's labor-hiring decisions is NOT determined by
public relations department
policy reforms used in the US to deal with the stagflation of the 1970s?
restrictive monetary policy, reducing union power, cutting unemployment benefits
contributing factors to the Great Depression
the banking crisis, the stock market crash of 1929, and deflation
Suppose the government budget is in a surplus position. The government budget will improve towards a more balanced position, if, holding everything else constant (ceteris paribus),
the government issues a relief package in a recession.
The real wage refers to
the purchasing power of the workers or anyone who receives income
What is the wage share in an economy?
the ratio of real wage per output produced by each worker per day
involuntary unemployment
the wage-setting curve is always to the left of the labor supply curve, Some unemployment is necessary, which means the employer can motivate workers to provide effort on the job, It is also known as excess supply in the labor market