All Eco 304L past test questions (multiple choice)

On which of these bonds is the prospect of default most likely?

A) a junk bond

When financial institutions buy mortgages from banks and other mortgage originators and "bundle" them into an MBS, the process is referred to as

A. Securitization

Biff was a steel worker in Pittsburgh until the steel mill went bankrupt and shut down. Now, Biff is unemployed and taking classes to learn the skills necessary to work in a semiconductor fab. Economists would consider Biff to be unemployed for what reason?

A. Structural

What is the group that met on Tuesday and Wednesday last week in Washington D.C. that reduced the target range for the federal funds rate, which they announced via press release following the meeting?

A. The Federal Open Market Committee

Which of the following three price indexes represents an index of covers the broadest set of prices of goods and services in the economy?

A. The GDP deflator

According to the statistics produced by the CIA, the developed economy with the highest degree of wealth inequality is

A. The U.S.

The 2017 Tax Act allows firms to deduct capital expenditures from their tax bill in the year those expenditures were make, instead of over the next 10 years, as the law allowed for previously. This provides an incentive for firms to increase investment. What will be the effect on the market for loanable funds?

A. The demand for loanable funds increases, investment increases and the real interest rate increases

Assume that aggregate demand increases by 10%. According to the classical model of the business cycle, what impact would this have?

A. The price level will increase by 10%

Assume that both the employment to population ratio and the labor force participation rate are falling due to a decline in economic activity. If the employment-to-population ration falls more slowly than the labor force participation rate (both fall during a recession., then

A. The unemployment rate falls

In the classical model with a fixed AS curve, fluctuations in AD produce a __________________ correlation between real GDP and the price level.

A. Zero

On which of these bonds is the prospect of default most likely?

A. a junk bond

Imagine that the economy is in long-run equilibrium. Then, perhaps because of improved international relations and increased confidence in policy makers ability to resolve the current trade wars, people become more optimistic about the future and stay this way for some time. Which curve shifts and in which direction?

A. aggregate demand shifts right

The Federal Funds rate is the interest rate

A. banks charge each other for short-term loans.

If the federal government cuts government spending, but does not change taxes, then interest rates _____________ and the equilibrium quantity of loanable funds ______________.

A. decrease; decreases

Assume that the economy enters a recession, and the government responds by implementing a new investment tax credit. As a result, interest rates ____________ and the equilibrium quantity of loanable funds _____________.

A. increase; increases

If inflation turns out to be lower than expected, then

A. lenders gain at the expense of borrowers

Over the past decade, the growth rate of real GDP for the U.S. economy has been

A. lower than in previous decades

Which of the following persons is unemployed (according to the official definition)?

C. A woman who is looking for a job after having stayed at home to raise children for several a few months ago

Which of the following is not a component of M1?

C. Bank reserves

According to the loanable funds model, increases in budget deficits should result in higher nominal interest rates. Yet, the U.S. budget deficit has been increasing to historic highs and yet interest rates in the U.S. have remained low? This is primarily due to which of the following?

C. Continued global uncertainty has resulted in foreigners choosing to save by purchasing U.S. assets such as Treasury bonds, driving down yields in the U.S.

Since the Great Recession, nominal and real interest rates in the U.S. have been very low, yet the federal government budget deficit has been relatively high as a percentage of GDP and then increased substantially following the Trump tax cut. These facts cast doubt on the relevance of what macroeconomic effect?

C. Crowding out

The monetary base is

C. Currency plus bank reserves

Taking these two transactions into account, what is the effect on GDP?

C. GDP increases by $

According to the Natural Rate Hypothesis, which is embedded in the theory of the Phillips Curve, if the unemployment rate is below the NAIRU

C. Inflation will increase

The NAIRU is

C. Less volatile than the actual unemployment rate

Maria transfers funds from her saving account to her checking account. What is the effect on M1 and M2?

C. M1 increases and M2 stays the same

Which of the following is true?

C. Marginal tax rate are always greater than average tax rates.

Which of the following assets were purchased by the Fed from banks and other financial institutions to implement Quantitative Easing?

C. Mortgage-backed securities (MBS)

According to the sticky wage theory, the correlation between real wages and real GDP is

C. Negative

If the money supply increases and velocity is constant, then the quantity equation predicts

C. Nominal GDP will increase

The Bureau of Labor Statistics classifies people who would like to work but have given up looking for a job as

C. Out of the labor force. If they were classified as unemployed, the reported unemployment rate would be larger.

According to the Fisher Effect, the primary reason that U.S. interest rates trended downward for over 3 decades following the early 1980s was

C. Reduced inflationary expectations

When the Federal Reserve buys government bonds from the banking system

C. Reserves and M1 both increase

To forecast the inflation rate that is expected to prevail on average over the next 5 years, one could

C. Subtract the 5-year TIPS yield from the 5-year Treasury yield

If Ricardian Equivalence holds,

C. Tax cuts will have no effect on spending

The price index targeted by the Fed in the conduct of monetary policy is the

C. The "Core" PCE Index

If the federal government increases taxes, but does not change government spending, then

C. The AD curve shifts in

Which of the following monetary transmission mechanisms does not depend on a change in interest rates due to a change in the money supply?

C. The Bank Lending Channel

Which of the following has increased steadily since the Great Recession, and is projected to increase substantially over at least the next two decades?

C. The U.S. government debt-to-GDP ratio

Assume that the price level at which SRAS and LRAS intersect is PA. Now, if the economy moves down along SRAS (Y is declining), what is the impact on the expected price level?

C. The expected price level stays constant at PA.

If the Fed engages in an open market purchase, injecting reserves into banks in the process, the increase in the M1 money supply will be lower

C. The greater the amount of cash held by people and firms in the economy.

If the Natural Rate Hypothesis and it's embodiment in the Phillips Curve are "true" representations of the economy, then

C. The inflation rate should be higher than it is today

Assume that aggregate demand increases by 10%. According to the Keynesian model of the business cycle, what impact would this have in the short run?

C. The price level will increase, but by less than 10%

Which of the following is an intermediate good?

C. The tires that are purchased from a tire manufacturer and installed on a new car to be sold to

According to our consensus model, if real output is above its natural rate, or potential level, then

C. Unemployment will be below the NAIRU

Which of the following is included in investment (according to the definition used by the national income and product accounts.?

C. a developer builds a new condominium complex

Changes in nominal GDP reflect

C. both changes in prices and changes in the amounts being produced.

If the income received by US factors of production from abroad is equal to the income paid to foreign factors of production for factor services performed in the US, then we can conclude that

C. gross domestic product is equal to gross national product

The sticky-price theory of the short-run aggregate supply curve implies that if the price level rises by 5% and agents in the economy (firms and households) were expecting it to rise by 2%, then at lease some firms have

C. lower then desired prices, leading to an increase in the aggregate quantity of goods and services supplied.

Under which of the following circumstances would M1 decrease , with no change in M2?

D. A household withdraws money from a checking account and deposits in a money market savings account

When the economy is in a liquidity trap, which of the following is true?

D. All of the above

Which of the following tools does the Fed have at its disposal to change the monetary base (and therefore M1) but that it does not use? Changes in the discount rate Changes in reserve requirements Changes in interest on reserves

D. All of the above. The Fed can use all of these but actually uses none of them as an active policy by which to change the monetary base.

Compared to other OECD countries, total tax revenue as a percentage of GDP for the U.S. is

D. Below the average

Nominal GDP is the value of goods and services measured in ___________ prices.

D. Current

Assume that two firms produce the same product in an industry where consumer demand has declined. Firm A reduced the wages it paid to workers, and Firm B did not. The Firm A saw its profits decline more than Firm B. Which of the following is a likely explanation?

D. Firm B is paying efficiency wages, and Firm A is not

Unemployment will be below the natural rate of unemployment when

D. Frictional and structural unemployment are below their normal levels

Which of the following is true?

D. None of the above

According to the classical dichotomy, which of the following increases when the money supply increases?

D. None of the above increases.

According to the classical model of the business cycle, which of the following could be responsible for the fact that the economy has been in an expansion?

D. Positive technology shocks that shift LRAS

In 2012, the Fed first began

D. Targeting inflation

Which of the following has been a reliable predictor of previous U.S. recessions?

D. The 3-month Treasury yield is greater than the 10-year Treasury yield

Which of the following price indexes is constructed by gathering prices on a distinct "basket" of goods and services?

D. The CPI

Which of the following is also referred to as "high powered money?"

D. The monetary base

When the Fed implemented quantitative easing in 2008,

D. The money multiplier "collapsed" to a value less than one

If Apple builds a new factory in China that produces Apple products for sale around the world, the output of this factory counts for

D. U.S. GNP and Chinese GDP

The ex post or realized real interest rate will exceed the ex ante or expected real interest rate

D. When actual inflation is less than expected inflation

A decrease in personal income taxes increases Aggregate Demand through

D. an increase in personal consumption.

Suppose that banks are less able to raise funds and therefore, reduce loans to households and businesses. Consequently, because people and households are less able to borrow, they spend less than they would otherwise. The lending crisis is persistent, so lending should remain depressed for some time. What happens to the price level and real GDP in the short run, according to the AS-AD model of the business cycle?

D. both the price level and real GDP fall

A person is out of work and searching for a job. After a while, she stops searching for job, and decides to go back to school full time, instead. Due to this, the labor force participation rate _____, and the unemployment rate _____.

D. decreases; decreases

If the interest rate is below the Fed's target, under the channel-corridor system, the Fed should

D. sell bonds to decrease the money supply.

In a closed economy, if Y is 10,000, T is 1,000, G is 3,000, and C is 5,000, then _____. (T is tax revenue minus transfers minus interest on the government debt.)

D. the government has a budget deficit and investment is 2,000

If the money supply grows at 10% per year and the growth rate of real GDP is 3% per year, then according to the Quantity Theory of Money, the inflation rate should be

B. 7%

Which of the following would cause investment to decrease?

B. A decline in business confidence

Which of the following policies will have the most effect on AD?

B. A permanent tax cut targeted and low-income households

Which of the following is a payment for a final good or service?

B. Amazon pays a law firm for writing several legal contracts it will use with suppliers.

Which of the following correctly explains the crowding-out effect? A. An increase in government debt decreases the interest rate and so increases investment spending.

B. An increase in government debt increases the interest rate and so reduces investment spending.

Under the "Floor System" of monetary policy

B. Banks are holding substantial amounts of excess reserves

Which of the following is a liability of a bank and an asset of its customers?

B. Deposits of its customers, but not consumer loans

Sarah is dissatisfied with her job as a software developer at Xion and decides to leave her job and search for a new position in the same occupation. Economists classify Sarah as unemployed for what reason?

B. Frictional

According to Olivier Blanchard, former chief economist of the IMF and Professor of Economics at MIT, the Natural Rate Hypothesis is the basis for

B. Inflation targeting by central banks

If Congress were to enact a new law such that interest income were no longer taxable like ordinary labor income, then according to the market for loanable funds,

B. Interest rates would fall and investment would increase

________ is the relative ease and speed with which an asset can be converted into a medium of exchange.

B. Liquidity

In a closed economy, if Y, G and C are all unchanged, but public savings decreased, what would happen to private savings and national savings?

B. National savings is unchanged and private savings increased

Which of the following is the best measure of living standards for an economy?

B. Real, per capita GDP

The discount rate, or primary credit rate is the short term interest rate

A. On loans from the Fed to commercial banks

In 2008, the Fed first began

A. Paying interest on bank reserves

What policy mandate is shared by all central banks?

A. Price stability

Smaller firms normally finance a large percentage of their investments using

A. Retained earnings

Assume that in a particular year, quantities of all final goods double, but prices of all final goods remain the same. What will be the effect on nominal and real GDP?

A. Nominal GDP and real GDP both double.

If P denotes the price of goods and services measured in terms of money, then

A. 1/P represents the value of money measured in terms of goods and services.

Which of the following changes in the price index produces the greatest rate of inflation: 80 to 100, 100 to 120, or 150 to 170?

A. 80 to 100

According to the Phillips Curve, there is ________________ correlation between the unemployment rate and the inflation rate

A. A negative

Leading up to the Great Recession, national housing prices increased faster than at any other time in U.S. history. This results in

A. An increase in AD

According to a classical economist, which of the following can cause an expansion in the economy?

A. An increase in the quality of the labor in the economy, perhaps through better training

The money multiplier is lower when

A. Banks hold large quantities of excess reserves; households hold substantial cash balances

Which of the following assets is not a component of the monetary base?

A. Checking deposits

Due to the presence of automatic stabilizers in government spending, when the economy goes into a recession

A. Consumption falls by less than it would without automatic stabilizers

M1 is

A. Currency plus checking deposits

When the inflation rate is negative, it is referred to as

A. Deflation

Which of the following components of U.S. federal government spending is projected to decrease over the next several years?

A. Discretionary spending

When there is slack in the economy, policy can increase AD and move the economy to the NAIRU along a stable Phillips Curve so long as

A. Expected inflation is stable

According to most Keynesian economists, when the economy enters a severe recession,

A. Government policy should be utilized to stabilize the economy

A computer is produced in the U.S. by Dell in the first quarter of 2018, but it is not sold to a household until the third quarter of that same year. In what quarter will the computer count for U.S. GDP?

A. In the first quarter only B.

Which component of real GDP fluctuates the most over the business cycle?

A. Investment

The Bureau of Economic Analysis uses 2012 as the base year for U.S. real GDP. This implies which of the following

A. Nominal GDP exceeds real GDP after 2012

Rosita was employed at a chocolate factory in the past year, but was laid off and instead of looking for work, decided to stay home to be the primary care-giver for her sick mother. Abraham worked at the same factory and was also laid off at the same time. He looked for a new job, but eventually decide that no there were no jobs available with his skill, and gave up looking. Which of the following describes Rosita and Abraham?

B. Rosita is marginally attached and Abraham is a discouraged worker

The process whereby financial institutions purchase mortgages from banks and other mortgage lenders, pool them into a Mortgage Backed Security, and then selling bonds to the public based on the returns on the underlying mortgages is referred to as

B. Securitization

Which of the following U.S. recessions is viewed as having multiple causes, not just a single event or phenomenon that economists perceive to be the root cause of the downturn?

B. The Dot-Com Recession of 2001

Which of the following is true?

B. The U.S. currently has a trade surplus in services, but a trade deficit in goods

The unemployment gap is negative when

B. The actual unemployment rate is less than the NAIRU

In the consensus macroeconomic model, when output, Y, is below the natural rate, YN,

B. The expected price level is greater than the actual price level

Along SRAS, if output is above the natural rate,

B. The expected price level is less than the actual price level

Which of the following both make the interest rate on a bond higher than otherwise?

B. The interest it pays is taxed and it was issued by a financially weak corporation.

According to the Fed "Dot Plot," the Federal Funds rate

B. Will most likely be higher in future years than it is now

Under the normal course of monetary policy, if the Fed wants to keep the economy from "overheating," then it will

B. Withdraw reserves from the economy using open market sales

If actual inflation is lower than what was expected

B. Workers gain at the expense of employers

A recent college graduate who has not previously looked for a job now begins to look for a job. Due to this, the employment-to-population rate _____, and the unemployment rate _____.

B. does not change; increases

From year 1 to year 2, all final goods prices double and the quantities produced of all final goods double. Real GDP _____ and the inflation rate is _____ percent.

B. doubles;

Short-term bonds are generally

B. less risky than long-term bonds and so they feature lower interest rates.

As the price level falls

B. people are more willing to lend (save), so interest rates fall.

In 2009 President Obama and Congress increased government spending. Some economists thought this increase would have little effect on output. Which of the following would make the effect of an increase in government expenditures on aggregate demand smaller?

B. the MPC is small and changes in the interest rate have a large effect on investment

Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase?

B. the multiplier effect