Econ 202 Final

When disposable income increases from $6 trillion to $6.5 trillion, consumption expenditure increase from $5.5 trillion to $5.9 trillion. The MPC equals

0.8.

If the CPI was 122.3 at the end of last year and 124.5 at the end of this year, the inflation rate over these two years was

1.8 percent.

Assume that the total labor force is 100 individuals with 10 unemployed. The unemployment rate is ________. Now assume that 10 people drop out of the labor force and that 10 remain unemployed. The new unemployment rate is ________.

10 percent; 11 percent

If there are no taxes or imports and MPC = 0.75, the multiplier equals

4.0

Suppose the economy is experiencing cyclical unemployment of 4 percent, structural unemployment of 3 percent, and frictional unemployment of 2 percent. What is the natural unemployment rate?

5 percent.

There are several reasons why the aggregate demand curve is downward sloping. Which of the following correctly describes one of these explanations?

A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports

Which of the following explains why the demand for loanable funds is negatively related to the real interest rate?

A lower real interest rate makes more investment projects profitable.

According to the BEA, in the second quarter of 2012 nominal GDP rose by 1.7 percent and real GDP rose by 3.3 percent. The difference between the change in nominal GDP and the change in real GDP could be explained by

a decrease in prices of final goods and services produced.

The AD curve slopes

downward due to the wealth and substitution effects.

Because of the multiplier, a one-time change in expenditure will

generate more additional real GDP than the initial change in expenditure.

The multiplier is 2.5 and the SAS curve is upward sloping. Investment increases by $20 billion. In the short run, equilibrium real GDP will

increase by less than $50 billion.

If the Federal Reserve purchases government securities,

banks' reserves will increase.

Real interest rates around the world tend to

be equal after adjusting for differences in risk because financial capital seeks the highest possible return

The value of the marginal propensity to consume is

between 0 and 1.

In the short run, when the Fed decreases the quantity of money

bond prices fall and the interest rate rises

Bank reserves include I. the cash in the bank's vault II. the bank's deposits at the Federal Reserve

both I and II

The consumer price index (CPI)

compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period

If the marginal propensity to consume is 0.8, every $10 increase in disposable income increases

consumption expenditure by $8.00.

The money aggregate M1 consists of

currency and checking deposits, including traveler's checks

A decrease in exports of goods or services with no change in imports of goods or services

decreases GDP.

The best example of a frictionally unemployed individual is

Mary who quit her job to find work closer to her home.

The most direct way in which money replaces barter is through its use as a

Medium of Exchange

If Frito Lay, an American snack company, opens a new manufacturing facility in Mexico and produces snacks which are distributed in South America, then Mexico's GDP ________ and U.S. GDP ________.

increases; does not change

A small country is a net foreign borrower and its domestic demand for loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.

increases; increases

If the government begins to run a larger budget deficits, then assuming there is no Ricardo-Barro effect, the demand for loanable funds ________ and the real interest rate ________.

increases; rises

In the short run, an increase in government expenditure on goods and services ________ real GDP and ________ the price level.

increases; rises

When less labor is unemployed than the amount at the natural unemployment rate, then real GDP ________ potential GDP.

is greater than

The multiplier effect exists because a change in autonomous expenditure

leads to changes in income, which generate further spending.

If the real interest rate is above the equilibrium real interest rate,

lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall.

A bank creates money by

lending its excess reserves

In the Keynesian model of aggregate expenditure, real GDP is determined by the

level of aggregate demand.

The quantity theory of money predicts that in the ________, a 10 percent increase in the quantity of money leads to a 10 percent increase in ________.

long run; price level

Controlling the quantity of money and interest rates to influence aggregate economic activity is called

monetary policy.

At long-run macroeconomic equilibrium, ________.

real GDP equals potential GDP

We distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. In the long run

real GDP equals potential GDP

When the labor market is at full employment,

real GDP equals potential GDP

In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP. If aggregate demand does not change, then the

short-run aggregate supply curve will shift leftward as the money wage rate rises.

As a unit of account, money is used to

state prices of all goods and services.

Which of the following expenditures associated with the production of a new high- performance SUV will be directly included in GDP?

the purchase of new machine tools to manufacture the engines

Which of the following purchases is included in personal consumption expenditures when determining gross domestic product?

vacation expenses for a spring trip to Fort Lauderdale

Let C represent consumption expenditure, S saving, I gross private domestic investment, G government expenditure on goods and services, and X - M net exports of goods and services. Then GDP equals

C + I + G + X - M

The main policy-making organ of the Federal Reserve System is the

Federal Open Market Committee

An open market operation occurs when the ________ buys or sells securities ________.

Federal Reserve System; in the open market

Choose the best statement.

GDP equals aggregate expenditure and equals aggregate income.

Which of the following is NOT a reason that real GDP is a poor measure of a nation's economic welfare?

Real GDP overvalues household production

________ gross domestic product is the value of ________ linked back to the prices of a single year.

Real; total production

Which of the following best describes the chain of events in the money creation process?

The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.

In response to the financial crisis of 2007 and the ensuing recession, the Fed announced three rounds of "quantitative easing," where the Fed purchased billions of dollars of securities. What impact would quantitative easing have on the monetary base?

The monetary base would increase.

During the financial crisis in 2007 and 2008, financial institutions believed that default risks were higher. As a result, there was ________ in the supply of loanable funds and a ________ in the real interest rate.

a decrease; rise

A loaf of bread purchased by one of your instructors would be best described as

a final good

In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on how to reduce the federal deficit, automatic tax increases and drastic cuts in government spending would take effect. What would be the result if the fiscal cliff occurred?

a recessionary gap

The U.S. personal savings rate for the first quarter of 2012 dropped to its lowest level since the start of the recession. Americans stashed away 3.6 percent of personal income in the first quarter, down from 4.2 percent in the fourth quarter of 2011 and a near-term peak of 6.2 percent in the second quarter of 2009. Which of the following could explain this drop in savings?

a rise in consumer confidence that their incomes will be higher in the future

The consumption function shows how much

all households plan to consume at each level of real disposable income

In a simple economy in which prices are constant and with no income taxes or imports, the the marginal propensity to consumer is 0.8. In order to increase real GDP by $500 billion, then

an increase in autonomous expenditure of $100 billion will lead to the increase of $500 billi

In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for $55,000. While both models include anti-lock brakes and air bags (along with other similar features), the 2011 model also includes satellite radio and new technology that provides improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it would create

an upward bias in the CPI as a result of quality change bias.

Suppose that in a particular economy, the multiplier is equal to 5. In terms of aggregate demand and aggregate supply, this value for the multiplier means that after an increase in investment

at each price level, the aggregate demand curve shifts rightward by an amount equal to 5 times the change in investment

Nominal GDP is the value of final goods and services

at the prices of that year.

The short-run multiplier is equal to 3, real GDP equals potential GDP of $8,000, and the price level is equal to 100. Suppose that government expenditure decreases by $200. The long-run effect of the decrease in government expenditure changes real GDP by

nothing; that is, in the long run real GDP equals $8,000.

When the nominal interest rate rises, the quantity of money demanded decreases because

people shift funds from money holdings to interest-bearing assets.

The term capital, as used in macroeconomics, refers to

physical capital.

The short-run aggregate supply curve is upward sloping because in the short run the

price level changes but the money wage rate does not.

In August 2012, the CPI inflation rate was 0.5 percent while the core CPI inflation rate was 0.1 percent. The difference between these two measurements of inflation indicates

prices for food and fuel were increasing more rapidly than prices for other goods.

U.S. investment is financed from

private saving, government budget surpluses, and borrowing from the rest of the world.

In the post World War II period, considerable growth in total production took place in the United States. But at the same time, businesses were dumping their waste into the Great Lakes with minimal cost to themselves, significantly polluting the bodies of water as a result. This occurrence is an example where

real GDP gives an overly positive view of economic welfare

The ________ interest rate approximately equals the ________ interest rate minus ________.

real; nominal; the inflation rate

Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond decreases from $1,666 to $1,000, then the interest rate on the bond

rises from 6 percent to 10 percent.

When the quantity of money demanded is greater than the quantity of money supplied, people ________ bonds and the interest rate ________.

sell; rises

Suppose the country of Tiny Town decided to open its borders to free trade. As a result, a number of its workers lost their jobs to international competition and can't find new jobs because their skills don't match what is required for job openings. The workers who lost their jobs and searched for new ones are best be considered part of

structural unemployment

The relationship between the multiplier and the MPC is

that as the MPC increases, so does the value of the multiplier.

If U.S. exports are $2.7 billion and our imports are $2.2 billion,

the United States is "lending" to the rest of the world

Assume the inflation rate falls from 4 percent to negative 2 percent. This means that

the economy is experiencing deflation.

An individual holds $10,000 in a checking account and the price level rises significantly. Hence

the individual's real wealth and consumption expenditure decrease.

In a change to immigration policy during 2012, "people younger than 30 who came to the United States before the age of 16, pose no criminal or security threat, and were successful students or served in the military can get a two-year deferral from deportation, Homeland Security Secretary Janet Napolitano said," according to CNN, 06/16/2012. If many of these immigrates had previously been afraid to work, now as a result of being able to work legally,

the long-run aggregate supply curve shifts rightward and potential GDP increases.

Potential GDP is the

the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation.