ecn 202 exam 2
The highest rate of inflation in the USA since 1900 occurred
as a result of World War I
In 2005, about 43 percent of American women ages 18 to 24 were enrolled in college, compared with 19 percent in 1967. In the AD‑AS model, this event will tend to
attenuate inflationary pressures and intensify real GDP growth.
Determine if the people in the example have benefited - i.e., are winners - or have been harmed - i.e., are losers - by unexpected inflation. b. Karen, a retired school teacher who relies upon her fixed pension to pay for her expenses
loser
John Maynard Keynes famously said: "In the long run,
"we are all dead"
Determine if the people in the example have benefited - i.e., are winners - or have been harmed - i.e., are losers - by unexpected inflation. c. Third National, a bank that loaned many people money for home purchases
loser
Suppose Mexico, one of our largest trading partners and purchaser of a large quantity of our exports, goes into a recession. Use the AD/AS model to determine the likely impact on our equilibrium GDP and price level.
The decline in our exports can be shown as a leftward shift in AD, leading to a decrease in our GDP and price level.
Employment laws can vary significantly by country. For instance, in the United States, many jobs are governed by the principle of employment at-will. Employment at-will is rarer in certain countries in Europe, such as Portugal. Regulation and collective bargaining impact labor markets to a larger extent in Europe than in the United States. How do European labor markets compare to the labor market in the United States as a result of these varying labor laws?
The labor market in Europe is less flexible than in the United States.
The accompanying graph depicts how the Phillips curve changed for the U.S. economy in the 1970's. Which of the following statements describes how the relationship between inflation and unemployment changed?
The level of inflation associated with every level of unemployment was higher than expected.
Which description most closely defines potential GDP?
The level of output an economy can produce using all its productive resources.
Which scenario would lead to a decrease in the long‑run aggregate supply curve in the hypothetical country of Saigonia?
The most successful Saigonian candy makers relocate their means of production outside of Saigonia.
The government of Coronado has voted to decrease government spending in an effort to reduce its deficit. Use the interactive graph to show the impact the decrease in spending will have on the economy. Price level,Real GDP,Potential GDP,Aggregate demand,Aggregate supply. What is the resulting impact on unemployment and the price level?
The price level decreases and unemployment increases.
Which is true if a nation is currently experiencing full employment?
The rate of cyclical unemployment is 0%0% .
Complete the statement with the correct terms. Then adjust the graph to show the effect of deflation in the economy.
The short‑run aggregate supply curve slopes upward, showing a positive relationship between real GDP, a measure of output, and price level.
Which statement is not cited by economists as a reason why wages might be sticky downward?
U.S. law prohibits firms from decreasing wages
The US experienced three big inflations over the last century. These occurred during
WW I, WW II, and the 1970s
Which is an assumption of Keynesian theory?
Wages are sticky.
Determine if the people in the example have benefited - i.e., are winners - or have been harmed - i.e., are losers - by unexpected inflation. e. Herb, who keeps his savings in an old coffee can
loser
Cattle is not an effective form of money. What essential characteristic of money does cattle lack that most makes it ineffective?
medium of exchange
Stagflation
Higher prices, higher unemployment
examples of not in the money supply
- 4.5 trillion in credit card debt - 3 trillion in govt securities belonging to FED reserve
Examples of M2
- 900 billion in checkable deposits - 2 trillion in savings account - 1.25 trillion in small time deposits
Which statement best identifies the multiplier effect in the macroeconomy?
A change in aggregate expenditure can affect Real GDP by more than the amount of the change.
Which of the statements best describes the economic condition known as "stagflation"?
A deep recession can lead to both inflation and a sputtering economy, a situation called stagflation.
Which is a valid interpretation of Say's law?
A given value of supply creates an equal value of demand somewhere in the economy.
According to Keynes, what type of economic policy is needed to return the economy to full employment when there is either a recessionary or inflationary gap?
A recessionary gap requires more government spending, and an inflationary gap requires less government spending.
Which of the statements is the best description of inflation?
An increase in the overall price level has occurred.
What effect would the shift have on the equilibrium level of GDP and the price level?
An increase in the value of the stock market would make individuals feel wealthier and thus more confident about their economic situation.
Which most accurately characterizes the method used to calculate inflation?
Analysts measure the cost of a bundle of goods representative of overall spending at two points in time and compare the difference in cost.
One explanation for the negative slope of the aggregate demand curve is the "wealth effect" (aka the "real‑balances" effect). What is this effect?
As inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines.
The Phillips curve illustrates which of the short‑run relationships?
As unemployment decreases, inflation increases
Suppose there is unexpected deflation this year that reduces the aggregate price level by 10%. How does deflation affect borrowers and lenders?
Borrowers are negatively impacted and lenders are positively impacted.
Lenders gain when inflation is higher than expected
F
Real interest rates will never go negative
F
According to the wealth effect, what happens as the price level falls?
Consumption spending increases.
What is the difference between measures of inflation which only use CPI and the core measures of inflation?
Core inflation does not include goods and services, included in the CPI, that experience frequent price shocks.
The BLS calculates a measure of core inflation that leaves out especially price-volatile items like Energy and Food. According to David Leonhardt's article in the NYT, the evidence indicates
Core inflation is a better predictor of short run future inflation than the standard measures
In the 2000s a "bubble" in the housing market developed in the United States. Explain what this means. The bubble burst in 2005. What effect did this have on AD and how is this related to the crash of 2008
During the housing boom, aggregate demand increased and the curve shifted to the right. After the bubble burst, the AD shifted left, which contributed to high unemployment and the Great Recession.
Why are wages sticky?
Employers are concerned that productivity will decrease because of lower morale if wages are cut.
After several years of current data lying along the same Phillips curve, economists plot the newest statistics and find that their points lie well above the old curve. Which statement is the best explanation?
Increases in the prices of essential raw materials led people to expect higher inflation in the future.
One reason that the aggregate demand (AD) curve is downward sloping is the "foreign price effect." Choose the option that best describes the foreign price effect.
Inflation makes goods produced domestically more expensive relative to foreign produced goods. Inflation therefore causes net exports to decrease.
Suppose that Latvia's potential GDP is equal to $950$950 trillion and that its real GDP is equal to $700$700 trillion. According to the neoclassical view, what can you infer about Latvia's economy?
Latvia's economy is in recession.
Why do most economists recommend against tax cuts when the aggregate supply curve is in the "neoclassical zone"
More recently in 2017, Donald Trump has pushed for tax cuts to stimulate the economy. Disputes over tax cuts often ignite at the state and local level as well
Which statement best describes how economists think about the flexibility of the price level over different periods of time?
Prices are relatively inflexible in the short run but more flexible in the long run.
AS Shift factors
Productivity growth Input prices
If inflation is higher than the nominal interest rate, the real interest rate is negative
T
Lenders gain when inflation is lower than expected
T
loan contracts specify the nominal interst rate
T
How would a dramatic increase in the value of the stock market shift the AD curve?
That would shift the AD curve to the right.
By saying the economy was in uncharted waters after 2008 the textbook authors mean
The Fed purchased non-traditional assets from banks
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. a. Desired purchases of goods and services at different price levels
aggregate demand
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. c. Shifts when consumer wealth changes
aggregate demand
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. g. downward sloping
aggregate demand
In 2005, about 43 percent of American women ages 18 to 24 were enrolled in college, compared with 19 percent in 1967. Because of this, during the period from 1967 to 2005,
both potential GDP and aggregate supply shifted to the right.
Identify how each of the scenarios affects short‑run aggregate supply. c. The government decreases the payroll tax paid by employers.
increase
AD shift factors:
consumption government spending (exports-imports) Input prices
When Joe started his job at the laundromat five years ago, his wage was $5.50$5.50 an hour. Today, his wage is $8.00$8.00 an hour. If Joe started his job in the base year, and his real wage is the same as when he started, what is the Consumer Price Index (CPI) today? Round your answer to two decimals.
current CPI: $145.45
Identify how each of the scenarios affects short‑run aggregate supply. a. The U.S. government increases the minimum wage.
decrease
Which is a valid interpretation of Keynes' law?
demand creates its own supply
Keynes was a long time and successful financial investor. He thought the financial markets and institutions
did a poor judgement in directing the capital investment of the country
Anita Job is the new Treasury Secretary, and she is trying to interpret the inflation measures for two consecutive years. In year one, the aggregate price level increased by 8%8% and, in year two, the aggregate price level increased by 2%2% . Which term describes the change in the price level from year one to year two?
disinflation
The statements refer to inflation expectations. Label each statement as either true or false. Each label will be used more than once. expected inflation is equal to the nominal interest rate plus the real interest rate.
false
The statements refer to inflation expectations. Label each statement as either true or false. Each label will be used more than once. if people expect inflation with respect to the production process, aggregate supply increases
false
The statements refer to inflation expectations. Label each statement as either true or false. Each label will be used more than once. if the Fed is concerned about inflation, the Fed will enact contractionary money policy which decreases nominal interest rates
false
When the newest economic data lies to the right of the Phillips curve, that likely means the Phillips curve
has shifted upwards.
Keynes was an economist during the Great Depression. During the Great Depression there was
high unemployment and high deflation.
Adaptive expectations are based on
historic information.
The best research indicates that
hyperinflation weakened German society in the 1920s
The original Phillips curve
illustrates the short‑run trade‑off between inflation and unemployment.
The collapse of the housing bubble in the late 2000s
impacted AD through both direct effects and effects on the financial system
Identify how each of the scenarios affects short‑run aggregate supply. b. Widespread adoption of the Internet by businesses increases productivity and efficiency.
increase
If Kelly transfers $500 from her savings account to her checking account, M1 will ..... and M2 will......
increase, remain the same
Shelby bought her dream car, a 1966 red convertible Mustang, with a loan from her credit union. If Shelby paid 5.7%5.7% and the bank earned a real rate of return of 3.1%3.1%, what was the inflation rate over the life of the loan?
inflation rate: 2.6%
What did Keynes identify as the fundamental problem occurring during an economic recession?
insufficient aggregate demand
Considering the impact on unemployment and the price level, in which "zone" of the AS curve is the economy operating?
intermediate zone
Keynes attitude toward what he called the "classical theory" was that
it was logical but did not apply to the world in which we actually live
Identify how each of the scenarios affects short‑run aggregate supply. d. The U.S. government decreases the personal income tax rate paid by households.
no change
According to Ben Casselman, writing in The New York Times,
nominal GDP growth is back on track with where it would have been without the pandemic
Tim is feeling magnanimous and decides to loan his mother enough for her to pay off her credit card bills. If Tim wants to earn 2.3%2.3% and expects inflation to be 5.5%5.5%, how much will he charge his mother for the loan?
nominal rate: 7.8%
The International Disc Jockey's Union has a wage contract that stipulates a yearly wage increase based on the Consumer Price Index. If this year's wage is $29.00$29.00, the current CPI is 160160, and the contract was first signed in the base year, what was the original salary the first year of the contract? Round your answer to two decimals.
original salary: $18.125
Wolff does not believe that increased regulation will work so long as corporate boards of directors are able to use profits to evade and undermine those regulations. Instead he advocates a socialist alterative of "democracy at work" which would
people in every enterprise who do the work of that enterprise, will become collectively their own board of directors.
The difference between the Great Depression and the Great Recession was that
policymakers acted completely differently
Pillars of the neoclassical school of macroeconomics include
prices are sufficiently flexible for the economy to adjust to a major demand shock
Which would NOT be a policy pursued by a Keynesian?
resettle unemployed to places with lots of jobs
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. b. Shifts when productivity changes
short-run aggregate supply
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. d. Upward‑sloping
short-run aggregate supply
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. e. Real GDP that firms produce at various price levels
short-run aggregate supply
Consider the different characteristics of the aggregate demand curve and the short‑run aggregate supply curve. For each statement below, determine which curve is being described. f. Shifts when the cost of oil changes significantly
short-run aggregate supply
For each of the scenarios, please indicate whether there will be an increase or decrease in short-run aggregate supply or if there will be no change. b. The price of lumber, a commodity, rises drastically due to the effect of heavy winter weather in the American Northwest, where much of the world's lumber is grown.
short-run aggregate supply decreases
For each of the scenarios, please indicate whether there will be an increase or decrease in short-run aggregate supply or if there will be no change. c. A major hurricane in the Gulf of Mexico destroys several oil rigs.
short-run aggregate supply decreases
For each of the scenarios, please indicate whether there will be an increase or decrease in short-run aggregate supply or if there will be no change. a. The production of a new type of blade for combine harvesters, a tractor used to harvest crops, has allowed wheat farmers to increase productivity by 40%.
short-run aggregate supply increase
The Federal Reserve uses the Personal Consumption Expenditures index as its primary measure of inflation. This rose 6% in the last year and the war is generally expected to push inflation higher. The experts quoted in Smalek's "A Key Inflation Gauge Is Still Rising, and War Could Make It Worse" believe the Fed will
still raise interest rates going forward
fresh fish is not an effective form of money. what essential characteristic of money does fresh fish lack that most makes it ineffective
store of value
The best predictor of the future CPI is
the current core inflation rate
According to Peter Goodman, writing in The New York Times, supply chains are unlikely to normalize this year because
the pandemic highlighted existing fragility in global supply chains
Russia's political economy is heavily influenced by the dominant group in its ruling coalition, the
the siloviki, politicians who emerged from law enforcement, intelligence, and the military
When he says "The current crisis did not start with finance, and it won't end with finance" RIck Wolff means
the underlying causes of the crisis were consumerism, rising labor exploitation, and increased work hours of American households
The statements refer to inflation expectations. Label each statement as either true or false. Each label will be used more than once. if people expect the price level of goods and services to increase, aggregate demand increases
true
The statements refer to inflation expectations. Label each statement as either true or false. Each label will be used more than once. the survey results of what economists think inflation will be can be used as a measure of expected inflation.
true
Given that wages are sticky, what happens when demand shifts from D to D1 on the graph?
unemployment increases
What is the shape of the neoclassicallong-run Phillips curve?
vertical
Determine if the people in the example have benefited - i.e., are winners - or have been harmed - i.e., are losers - by unexpected inflation. The U.S. federal government, which had almost $15 trillion in debt in 2011
winner
Determine if the people in the example have benefited - i.e., are winners - or have been harmed - i.e., are losers - by unexpected inflation. d. Joy, who borrowed $40,000 to pay for her college education
winner
