ECON exam 2

Suppose each of the following news items appears on the evening news. Which one would most likely cause consumption spending to increase?

"Government to issue tax rebates at the end of next month"

Using the table below, calculate GDP for a particular year. Consumption spending $1,000 Wages and salaries $ 800 Rent $ 100 Government purchases $ 200 Profit $ 300 Exports $ 400 Interest $ 250 Private investment spending $ 400 Imports $ 550

$1,450

If the expenditure multiplier is 3.5 and investment spending increases by $2,000 billion, what will be the change in GDP?

$7,000 billion

(Table) According to the table, real GDP for 2014 is approximately:

$7,540 billion.

The percentage of the world's population that is poor, defined by the $2 per day threshold, is about:

30%.

Based on the circular flow model as presented in recent lectures, and beginning in a unemployment equilibrium, an increase in the money supply:

definitely will stimulate the economy, and definitely will increase prices less than the money supply increase.

When the value of a payment is adjusted in proportion to changes in the CPI, economists refer to that as

indexation

The largest source of federal government revenues is:

individual income taxes.

Fiat money:

is acceptable as money because the government has decreed it to be so.

When an economy is going through disinflation:

prices are rising at a slowing pace.

Based on handouts or materials in the text, the 1960-1961 recession was triggered by __________; and the lowpoint was reached after _______ months.

rising interest rates; 10 months

Based on handouts or materials in the text, the 2007-2009 recession was triggered by __________; and the lowpoint was reached after _______ months.

rising oil and food prices plus collapse of US housing prices and resulting financial crisis ; 18 months

Human capital refers to:

skills, knowledge, and quality of workers.

A shock to the economy is a change in

spending or production that initially affects one or more sectors and then spreads throughout the whole economy

If people regard economic fluctuations as temporary,

spending will be less sensitive to changes in income, and the multiplier will be smaller.

Unemployment rates in many continental European countries have been consistently higher compared to the United States. The difference is mostly

structural unemployment

In 1996, an advisory committee of economists that studied the CPI found

that in a typical year the CPI overstates the inflation rate by at least 1.1 percent per year

In the money supply equation just above, assume that CT = 50; Tf = 130, Lf = 20; rd = .4 and rt = .1 , sd = .3 and st = .6; rcd = 1 and rct = 1. Then

the 'money multiplier" is 1.00

In the money supply equation just above, assume that CT = 50; Tf = 130, Lf = 20; rd = .4 and rt = .1 , sd = .3 and st = .6; rcd = 1 and rct = 1. Then

the 'money multiplier" is 1.00

In the United States, real GDP is measured by:

the Bureau of Economic Analysis.

The central bank of the United States is:

the Federal Reserve.

Suppose you accept a job in Mexico after college, your income will be part of GNP in

the U.S. only.

The most powerful person at the Fed is

the chairman of the Board of Governors

A Texas oil company extracts petroleum and sells it to a refinery for $1,000. After processing, the refinery sells the gasoline to a wholesaler for $1,500, who then sells it to a gas station for $1,700. The gas station sells it to customers for $2,500. In these transactions, how much has been added to GDP?

$2,500

In 2008, Computers, Inc. produced personal computers worth $20 million. If $16 million worth were sold and $4 million worth remained unsold at year end and were added to inventories, how much did Computers, Inc. contribute to GDP in 2008?

$20 million

Based on the following values (in $ billions per year), estimate GDP and select the most accurate answer. Consumption spending 500 Gross Investment spending 300 Government Spending 200 Transfers 100 Exports 400 Imports 300 Wages and salaries earned 800 Interest plus rent received by households 200 Profit earned by all enterprises 100

1100

Based on the following values (in $ billions per year), estimate GDP and select the most accurate answer. Consumption spending 600 Government Spending 200 Transfers 100 Exports 500 Imports 350 Wages and salaries earned 950 Interest plus rent received by households 200 Profit earned by all enterprises 100

1250

How long are the terms of members of the Board of Governors in the Federal Reserve System?

14 years

Population 500 Number employed 300 Number unemployed 50 (Table) According to the table, what is the unemployment rate of this economy?

14.3%

Suppose in 2010 the cost of purchasing a basket of goods was $100. That same basket cost $150 in 2011. If 2010 is the base year, the consumer price index for 2011 is:

150.

In what year was the Federal Reserve System created?

1913

The Federal Reserve System was created in

1913

If the full-employment rate of unemployment is 5 percent, and the economy is experiencing a 7 percent unemployment rate, what is the rate of cyclical unemployment?

2 percent

Assume that the firefighters have gone without a pay in- crease for 4 years during a tough time in their city's finances. Suppose that things start to look up and the Mayor wants to make up for lost time. If the CPI in 2002 was 125 and 150 in 2006, how much will salaries have to increase to bring the firefighters back up to their real income from 2002?

20.0%

Assume that the firefighters have gone without a pay increase for 4 years during a tough time in their city's finances. Suppose that things start to look up and the Mayor wants to make up for lost time. If the CPI in 2002 was 125 and 150 in 2006, how much will salaries have to increase to bring the faculty back up to their real income from 2002?

20.0%

Which recession was triggered by rising oil prices, a collapse of real estate prices and also a financial crisis. The recession which started in:

2008

If you lend money at a nominal interest rate of 9 percent and the inflation rate is 1 percent, what real interest rate will you earn?

8%

Last year the consumer price index (CPI) was 115 and this year's CPI is 125. The rate of inflation is:

8.7%.

Last year the consumer price index (CPI) was 115 and this year's CPI is 125. The rate of inflation is:

8.7%.

Which of the following statements about measuring prices are true? 1) If my "base year basket" costs $1,000 to purchase this year, and one year from now it costs $1,200 to purchase the same base year basket, then the price index based on this basket tells you that prices have risen by 20%. 2) If dingbats are one of the goods in the base year basket, and 30% of the base year budget was spent on dingbats, and in some future year all prices are unchanged except the price of dingbats has increased by 30%, then the price index will have risen by 9%. 3) Suppose people are now purchasing more computers and fewer typewriters than in the base year, however we are still using the base year basket to calculate inflation. Suppose also that typewriter prices have been rising and computer prices have been falling. Then the computed price index will show more inflation than actually exists.

All the above statements are correct.

Here are several statements about government debt and deficit spending. 1) Government should not borrow for current expenditures such as paper or electricity for gov- ernment buildings, but can borrow for spending which will have lasting benefits, such as spending to educate a child, construct a national park or build a building. If the building will be useful for 50 years it is ok to borrow using a 50 year bond. 2) If the military is buying bullets which will be stored just in case there is a war, it is ok to bor- row the money to buy them, but if the bullets are being purchased to be used for border patrol and target practise, then they should be paid for by taxes. 3) If the government wants to increase spending to stimulate the economy, since this will require increased borrowing it is better to spend the extra on new roads or new national parks rather than projects with little long term benefit. Which of the following is the most complete and best answer?

All three statements are correct.

Choose the most complete answer. Assume the Keynesian model as presented in lecture gives correct answers. Suppose a recession abroad reduces exports by $100 billion per year, also gross investment spending in the U.S. declines by $100 billion per year, and also an increase in un- employment insurance payments increases autonomous consumption spending ("a" in the equation) by $50 billion. Now decide if each of the following statements is true or false, and then choose the best answer be- low: 1) The economy will grow. 2) If, also, the Government increases government spending by $150 billion, then the economy will grow.

Both statements 1 and 2 are false.

Evaluate the following statements, then select the best answer.

Both statements are true.

Which of the following would be most likely to increase the demand for money?

More than one of the other answers is correct

Which of the following would be included in the consumption component of GDP?

Movie ticket sales

If all of the following events occurred in 2008, which ones would contribute to GDP for 2008?

None of these transactions counts towards GDP for 2008.

Which of the following statements about measuring prices are true? 1) If my "base year basket" costs $30,000 to purchase this year, and three years from now it costs $33,000 to purchase the same base year basket, then the price index based on this basket will tell you that prices have risen by 10%. 2) If the cost of my base year basket has risen by 10%, then the cost of your base year basket has also risen by 10%. 3) A new base year basket must be calculated every few years, otherwise inflation starts looking lower than it really is. 4) If a good rises in price and also in quality, calculated inflation will be lower than actual inflation.

Only statement 1 is correct.

If the Aggregate Demand and Aggregate Supply curves intersect to the right of Full Employment Output, , 1) There is a "deflationary gap". 2) Prices and wages will begin to rise, shifting the AS curve upward.

Only statement 2 is correct.

If, in the Aggregate Demand/Aggregate Supply model (as presented in the text and lecture) the two curves intersect to the right of Full Employment Output, 1) There is a "deflationary gap". 2) Prices and wages will begin to rise, shifting the AS curve upward.

Only statement 2 is correct.

Which of the following statements about measuring prices are true? 1) If my "base year basket" costs $1,000 to purchase this year, and one year from now it costs $1,200 to purchase the same base year basket, then the price index based on this basket tells you that prices have risen by 10%. 2) If dingbats are one of the goods in the base year basket, and 30% of the base year budget was spent on dingbats, and in some future year all prices are unchanged except the price of dingbats has increased by 20%, then the price index will have risen by 6%. 3) Suppose people are now purchasing more computers and fewer typewriters than in the base year, however we are still using the base year basket to calculate inflation. Suppose also that typewriter prices have been rising and computer prices have been falling. Then the computed price index will show less inflation than actually exists.

Only statement 2 is correct.

Think about an "experiment" in which the economy begins in a macroeconomic equilibrium, except that the money supply is growing for many years at the rate of 5% per year more than is needed, so prices have been rising at the rate of 5% per year. The economy is at full employment. The "real" interest rate, r, is about 4%. Now the experiment begins. Telling nobody, the Fed begins buying government securities more slowly than before, permanently reducing the rate of excessive money growth from 5% per year down to 2% per year. Evaluate the following statements, and then choose the best answer. 1) Even if it was not discussed in lecture, there is no reason to believe a recession will be caused by this experiment, since the money supply is still growing, just at a slower rate. 2) Just before the experiment begins, nominal interest rates will be about 9%. 3) After the experiment begins, real interest rates probably will rise, and after a year or two the economy probably will go into a recession.

Only statements 2 and 3 are correct.

Refer to the graph above. Evaluate statements 1 through 4 and then select the answer from A) through E): 1) Moving from point E to point F is accompanied by an increase in demand. 2) Moving from point E to point F is accompanied by a decrease in demand. 3) Moving from point E to point C is accompanied by no change in demand. 4) Moving from point E to point C is accompanied by an increase in demand.

Only statements 2 and 3 are true.

Here are several statements which your instructor may believe to be true about "models" as discussed in lecture. Decide which statements he probably agrees with and select the best answer.

Only statements 3 and 4 are true.

Which of the following can occur simultaneously?

Positive national debt and a budget surplus

__________ government spending, _____ transfer payments, and ____ taxes are all examples of contractionary fiscal policy

Reducing; reducing; raising

Based on the circular flow model as presented in recent lectures, and starting from an "unemployment equilibrium", decide whether each of the following statements is True or False, then choose the best answer from among a. through e. below. 1) If the government cuts taxes, this will stimulate the economy to grow. 2) If the government increases government spending, this will stimulate the economy to grow. 3) If the government increases the money supply, this will stimulate the economy to grow.

Statements 1) and 2) are false but 3) is true.

Evaluate the following statements about real and nominal interest rates and then select the best answer from among A through E. 1) Nominal interest rates are very low interest rates, so low they are nominal. 2) Real interest rates plus the expected inflation rate equals the nominal interest rate. 3) Nominal interest rate plus the expected inflation rate equals the real interest rate. 4) The nominal interest rate is the interest rate actually observed in a financial market. 5) According to the text, the real interest rate is the nominal interest rate adjusted for expected inflation

Statements 2, 4 and 5 are correct, statements 1 and 3 are wrong.

Which of the following assumptions is NOT a problem in using the consumer price index (CPI) to accurately state the rate of inflation?

The CPI does not deal with producer prices.

John Maynard Keynes was the author of

The General Theory of Employment, Interest, and Money

Which of the following prices is least likely to be included in the Consumer Price Index?

The price of a steamroller

Which of the following would be included in the GDP Price Index, but not the Consumer Price Index?

The price of an aircraft carrier

In the Keynesian multiplier model, if the multiplier is 1.5, exports rise by $90 billion per year, and government spending declines by $50 billion per year the economy will

expand by $60 billion per year

Question on economic growth. Evaluate the following state- ments, then select the best answer. 1. The US 200-year growth rate (of income per capita) has averaged only somewhere between one and two percent per year. 2. Today's poorer countries grow faster than the US in their good years, but decline much farther in their bad years. 3. Today's poorer countries tend to have shorter periods of decline than today's advanced countries, but they don't grow fast enough in the good years to make up for it.

only statements 1 and 2 are correct.

Assuming the Keynesian model is correct, in the simplest Keynesian model as given in the text, evaluate each of the following statements and select the best answer: 1) If mpc = .8 the multiplier will be 5 2) If mpc = .9 the multiplier will be 9 3) The country does not trade with the rest of the world.

only statements 1 and 3 are correct

Choose the best answer. Based on what your professor has said in lecture, if the economy is in a full employ- ment equilibrium and the money supply increases by a small amount, like 3%,

prices may take a very long time to rise, and will not rise more than about 3%

If people used to expect prices to rise at 2% per year, but expected inflation recently has risen to 7% per year,

there is no way to know whether wealth will be redistributed in haphazard ways, since wealth is only redistributed if actual inflation is different from expected inflation.

The major reasons why economists have grown increasingly skeptical about countercyclical fiscal policy are

timing problems, irreversibility, forward looking behavior, and the reaction of the Federal Reserve.

In class we developed a formula which can be used to help calculate the average rate of worker productivity per hour in a country. Without telling you what the symbols stand for, the formula is: G = Newab (The final symbol is actually the Greek letter beta). Here is some data for a country: GDP per capita is $20,000 per year. 60% of the population is working. The typical worker works 60 hours per week when working and 50 weeks per year. What is worker productivity?

$11.11 per hour

What is real GDP in 2014 if nominal GDP in 2014 is $15,000 billion, the GDP deflator in 2014 is 110, and the GDP deflator in 2010 was 100?

$13,636 billion

Between 1960 and 1983 the price index rises from 80 to 120. Over the same period your nominal wage rises from $10/hour to $12/ hour. Assume your real wage was $20 in 1960. Then in 1983 your real wage becomes:

$16

Given the balance sheet selected below and assuming a required reserve ratio of 20 percent, how much must the bank hold in required reserves

$16 million

This year, Tom sold his 1998 minivan to Honest John's Used Car Emporium for $5,000. Honest John then sold the van to Bob for $7,000. How much would be recorded in GDP this year from these transactions?

$2,000

Using the table below, calculate GDP for a particular year. Wages and salaries $2,000 Government purchases of goods and services $ 500 Exports $ 800 Rental income $ 300 Consumption spending $3,000 Transfer payments $ 300 Private investment spending $ 600 Profit $1,300 Transfer Payments $ 600 Interest income $ 800

$4,400

Pick the closest answer. In the US, in normal times, ________ of the unemployed will be unemployed 15 weeks or more

. less that 33%

To be considered employed, a person must have worked at least __________ hour(s) during the previous week

1

A labor union anticipates a 7 percent inflation rate in each of the next three years. It wants to obtain a 3 percent increase in real wages in each of those three years. To obtain this goal, the requisite nominal wage hike it should negotiate is

10 percent each year

Suppose an economy has 90,000 employed persons and 10,000 unemployed persons, the unemployment rate is

10.0%

(Table) According to the table, the GDP deflator for 2012 is:

100

What is the unemployment rate for a nation with 6 million employed and 2 million unemployed

25%

In class we developed a formula which can be used to help calculate the average rate of worker productivity per hour in a country. Without telling you what the symbols stand for, the formula is: G = Newab (The final symbol is actually the Greek letter beta). Here is some data for a country: The country's population is 100 million. GDP of the country is $10,000 billion per year. 50% of the population is working. The typical worker works 40 hours per week when working and 50 weeks per year.

100 dollars per hour

Use the table below to calculate the CPI in 2007. Assume the base year is 2006 and the cost of the market basket in the base year is $200. 2006 2007 Price Quantity Price Quantity Oranges $1.00 100 $1.10 125 Apples $0.50 200 $0.60 230 The CPI in 2007 is?

115

The $787 billion stimulus for the 2008 recession was broken down as roughly ______ tax cuts, roughly ______ greater government purchases, and roughly ______ was transfer payments to help those affected by the recession, along with state and local governments.

33 percent, 33 percent, 33 percent.

The $787 billion stimulus was broken down as roughly ______ tax cuts, roughly ______ greater government purchases, and roughly ______ was transfer payments to help those affected by the recession, along with state and local governments.

33 percent, 33 percent, 33 percent.

At present, what is the approximate natural rate of unemployment in the United States?

4.5 percent

At present, what is the approximate natural rate of unemployment in the United States?

4.5%

If the base year for an index is 2005 and the value of the index in 2008 is 165.1, by what percent has the mea- sure grown over those 3 years?

65.1 percent

By the definition given in lecture, a model is

A logical structure and collection of ideas for thinking about a problem or answering a question.

Which of the following best describes the term deflation?

A negative inflation rate

Which of the following is FALSE regarding the Keynesian model?

Aggregate spending is always less than aggregate income.

The father of modern demand and supply analysis is:

Alfred Marshall.

Choose the most complete answer. Which of the following can be a source of increases in productivity?

All of the answers are correct.

Which of the following is a common reaction to a decrease in the interest rate?

An increase in spending on new homes.

Which of the following will shift the aggregate supply curve upwards

Bad weather, which increases farmers costs per unit of output

Bill can cook dinner in 45 minutes and mow the lawn in 1.5 hours. Eileen can cook dinner in 1.5 hours and mow the lawn in 2 hours. Which of the following statements is correct?

Bill should specialize in cooking dinner; Eileen should specialize in mowing the lawn.

Choose the most complete answer. The equation iN = r + ei (which tells us about the relationship between nominal and real interest rates) tells us:

Both A and C are true.

If the Fed sells bonds, we should expect to see the money supply

Decrease, the interest rate increase, autonomous consumption decrease, business investment decrease, and real GDP decrease

Approximately how often is the Consumer Price Index (CPI) market basket updated?

Every 2 years

Which statement best describes economic fluctuations?

Expansions and contractions vary in duration and magnitude, with expansions tending to last longer than contractions.

If there is no government and no foreign sector in the economy:

GDP = C + I.

Which of the following is the correct formula for computing GDP?

GDP = consumption + private investment + government spending + exports - imports

The index used to translate nominal GDP into real GDP is the

GDP Price Index

The natural unemployment rate includes the rates of: I. cyclical unemployment. II. structural unemployment. III. frictional unemployment.

II and III only

What is a good historical example of when the Fed created a recession to reduce inflation expectations

In the early 1980s

What does it mean for the government to "roll over" its debt?

Issuing new bonds to pay off old bonds

Which of the following statements is true about the behavior of the CPI?

It has risen steadily since 1960.

Suppose the MPC is 0.6 and the marginal tax rate and the mar- ginal propensity to import are both zero. Now government spending, and also Tp (taxes which are indepen- dent of income), both increase by $20 billion. By how much will equilibrium output change?

It will increase by $20 billion.

Jennifer just got news that she is getting a 5% raise. However, the Bureau of Labor Statistics just reported that prices are rising by 7%.

Jennifer is losing purchasing power by 2%.

If inflation is higher than anticipated and benefits are not indexed, which group loses purchasing power?

Lenders and retirees

Checking accounts are counted as part of:

M1 and M2.

A banking panic occurs when

Many banks fail simultaneously

Evaluate each of the following statements over the past 50 years, then select the best answer. 1) If real GDP grew 2% last year, that was an unusually good year of growth. 2) If prices rose 5% last year that was an unusually large inflation rate. 3) There have been at least two years when prices rose by 10% or more.

Only statements 2 and 3 are true

Evaluate each of the following statements, then select the best answer. 1) If real GDP grew 2% last year, that was an unusually good year of growth. 2) If prices rose 5% last year, based on the record since 1930 that was a large inflation rate. 3) Since 1960 there have been at least two years when prices rose by 10% or more.

Only statements 2 and 3 are true

When explaining expansions and recessions, the classical model is

Seriously flawed

In which of the following situations would a worker have the greatest increase in real income?

She receives a pay cut and her nominal wage falls by 5 percent, while the CPI falls by 20 percent.

Which of the following statements is believed by the authors of your text book AND ALSO by your instructor (as explained in lecture): 1) Countries will remain poor if they lack the essential infrastrucure for communication and transportation. 2) Widespread education in the population seems essential if a country is to experience growth and develop- ment. 3) Regularly increasing capital, labor and productivity all are essential if a country is to experience growth and development.

Statements 1 and 2.

_____ is a measure of the change in average prices paid by urban consumers for a typical market basket of goods and services.

The consumer price index

Which of the following is included in GDP?

The imputed rental value of a family-owned home

If political influences, independent of any economic forces, lead to a larger government budget deficit, what will be the effect on the financial market (called the "loan- able funds market" in the text)?

The interest rate will rise and the amount of saving will increase.

Which of the following is not true about the Consumer Price Index (CPI)?

The majority of labor union contracts have wages indexed by the CPI.

In lecture you were given a model to account for the difference in prices of the different goods. Which of the following most accurately describes it?

The price of a good must be sufficient to attract all resources needed for its production plus additional amounts to cover the costs of taxes or possible monopolistic behavior at various stages of production.

The large U.S. government budget deficits in the early 1980s were caused by

a recession, expanded military spending, and income tax cuts

If prices (as measured by the CPI) fell by one-half and nominal wages fell by one-third, what would happen to real wages?

They would increase

Which of the following would not be included in government purchases?

Welfare payments

Under which of the following circumstances should we be concerned about a rising national debt?

When it rises at a faster pace than GDP.

Fiscal policy is

a change in government purchases or net taxes designed to change total spending

Suppose that the economy is at the full-employment level of output of $6 trillion when a demand shock increases real GDP to $6.5 trillion. In the long run, we would expect the

aggregate supply curve to shift upward until the economy returns to full employment, but at a higher price level

Considering "unemployment",

all of these statements are true, except the answer beginning with the word "none".

Choose the best answer, Cyclical unemployment

all the others except "none of the other answers."

In his essay on population, Malthus argued that any improvement in the standard of living would lead to:

an increase in the population that would outstrip the growth in food supply

The collapse of home values that began in 2008 led to ____ in Americans' saving rates, shifting aggregate demand to the ____.

an increase; left

At what U.S. unemployment rate do most economists believe full employment occurs?

between 4.5 and 5.0 percent

Choose the best answer. When the govern- ment spends more than its tax proceeds the result is a deficit, and government borrowing. Your in- structor believes:

borrowing is perhaps appropriate if the government will spend the money on something yielding benefits for a long time, for example winning an important war or creating a national park

Choose the best answer. When the government spends more than its tax proceeds the result is a deficit, and government borrowing. Your instructor believes:

borrowing is perhaps appropriate if the government will spend the money on something yielding benefits for a long time, for example winning an important war or creating a national park.

If, in the Aggregate Demand/Aggregate Supply model (as presented in the text and/or lecture) the two curves intersect to the left of Full Employment Output, 1) There is a "deflationary gap". 2) Prices and wages will begin to fall, shifting the AS curve downward.

both statements are correct

The Fed typically increases the money supply by

buying government bonds

Based on the circular flow model as presented in lecture, a reduction in government spending will:

cause a decrease in interest rates but not affect the economy much overall.

An important function of the Federal Reserve is

clearing checks

One of the main reasons that Malthus' prediction of repeated wars and famines did not come true is

continuing technological change

In the Keynesian multiplier model, if exports rise by $50 billion per year and government spending declines by $80 billion per year the economy will

contract

In the Keynesian multiplier model, if the marginal propensity to consume falls, the economy will

contract

The standard definition of the money supply called M1 is

currency + checking account balances + travelers' checks

Using the Keynesian model as developed in recent lectures, if "the multiplier" = 4, gross investment, I g , decreases by $15 billion, exports, X, increase by $5 billion, and government spending, G, drops by $10 billion, then economic activity, Y, will

decrease by $80 billion.

Workers who want to work but have been frustrated by the inability to find work and have stopped searching are known as:

discouraged workers.

Suppose three years ago a nation's inflation rate was 8%, two years ago it was 5%, and last year it was 2%. This nation is undergoing:

disinflation.

In the United States, people are considered UNEMPLOYED if and when they:

do not have a job but are available for work and have been actively seeking work.

The recession of 1974 was triggered by ________________, and the recession of 1980 was triggered by ______________

dramatic increase in oil prices; dramatic increase in oil prices.

Assume that the Fed is successful in keeping the money supply constant, and suppose the economy is in an unemployment equilibrium. Earlier in the semester we "learned" that if government spending is increased, or taxes are cut, there will be no change in total economic activity, only interest rates will rise. But in that reasoning we left out an important fact, namely: when interest rates rise, this might cause the demand for money to decline. Now my question to you is this: If you take this additional possibility into account, so an increase in government spending (or a tax cut) increases interest rates resulting in an excess supply of money, we might need to modify the results of our circular flow model experiments. Which answer comes closest to what your instructor probably believes under this more complete model:

either an increase in government spending or a tax cut would raise interest rates re- sulting in an excess supply of money, therefor spending larger than income, caus- ing the economy to grow.

The national debt

exists because of past government budget deficits

Suppose that a $1 trillion increase in government spending shifted the demand for funds curve from D1 to D2 . What would happen to the sum of investment and consumption spending? That sum would

fall by $1 trillion

If a piece of currency must be accepted for payment because the government says so, the currency is called

fiat money

Changes in government spending or taxes designed to stimulate the economy are examples of

fiscal policy

In the Keynesian model, the price level is ___________; in the aggregate demand and supply model, the price level is _______________.

fixed; flexible

Inflation is a:

general rise in prices.

Government outlays consist of

government purchases, transfer payments, and interest on the national debt

Consider the following statements about inflation, expected inflation and interest rates.

if the real interest rate is 10% for a 4 year auto loan, and expected inflation for the next four years is 5% per year, then auto loans will have an interest rate of 15%.

In the money supply equation just above, as- sume the "money multiplier" is .60. Now what will be the change in the money supply if three things happen at once: 1--the Fed lends $10 billion to banks at the discount window; 2--the Fed sells $10 billion of Treasury bonds, and; 3--the Fed executes $10 billion of repurchase agreements. Then the money supply will:

increase by $6 billion

Based on the circular flow model as presented in recent lectures, and beginning in a unemployment equilibrium with 3% cyclical unemployment, if the money supply is increased by 5%:

it may take much longer than two years, but eventually employment will increase by about 3 percentage points and prices will increase by about 2%.

M2 is ____ in dollar value than M1; it also contains ____ assets.

larger; less liquid

As discussed in lecture, if steel manufacturers now have come to expect that the price of steel will rise in the next six months, this will

lead to a decreased supply of steel and an increased production of steel

Labor productivity is a major determinant of:

living standards.

Federal spending that is authorized by permanent laws and does not go through the annual appropriation process is called ___________ spending

mandatory

According to an economist, the most liquid asset from among the following probably is:

money

According to Thomas Malthus, the human race is doomed to suffer repeated famines and wars because

population increases geometrically while food supply increases arithmetically

In the money supply equation just above, if the "money multiplier" is .60, then if the Fed sells $5 billion of Treasury bonds and at the same time puts $5 billion of new currency into circulation, then the money supply will:

neither increase nor decrease.

In Keynesian multiplier equation just above, if c = .7, t = .2 and w = .06, then if "autonomous spending" increases by $200 billion, nominal GDP:

no other answer is correct

Based on information presented in the text, since 1940 the annual inflation rate in the US

none of the other answers are right.

In the classical model, a falling demand for labor will

not cause unemployment because the labor market always clears

The recession of 1982 was largely caused

on purpose by the Federal Reserve's decision to raise interest rates to combat inflation.

The federal funds rate is the rate at which

one bank loans money to another

Most economists believe that the consumer price index ______ the rate of inflation.

overstates

If you are a Keynesian, you may refer to the equation above. Assume the marginal propensity to consume, the marginal tax rate and the marginal propensity to import all remain steady at .9, .3 and .13 respectively. And measured in $ billions per year, autonomous consumption spending declines by 50, exports rise by 70, gross private investment declines by 40, taxes like property taxes decline by 100 and government spending declines by 70. The result will be that autonomous spending will

remain unchanged

According to classical economics

the economy moves to full employment in the long run

Assume an economy has a natural rate of unemployment of about 5%, which means that unemployment cannot be lower than 5% without cre- ating inflation. Assume the economy is in macroeconomic equilibrium with 15% total unemploy- ment. Now the Federal Reserve increases the money supply by 15% then roughly the following will happen:

the economy will grow by about 10% and then prices will rise by 5%.

Assume an economy has a natural rate of unemployment of about 5%, which means that unemployment cannot be lower than 5% without creating inflation. Assume the economy is in macroeconomic equilibrium with 15% total unemployment. Now the Federal Reserve in- creases the money supply by 15% then roughly the following will happen:

the economy will grow by about 10% and then prices will rise by 5%.

Assume an economy has a natural rate of unemployment of about 5%, which means that unemployment cannot be lower than 5% without creating inflation. Assume the economy is in macroeconomic equilibrium with 10% unemployment. If the Federal Reserve increases the money supply by 15% then roughly the following will happen:

the economy will grow to full employment and prices will rise by 10%.

The three methods for computing GDP include

the expenditure approach, the value-added approach, and the factor payments approach

When considering the challenge of achieving economic development and growth in a country or region, your instructor believes a significant factor is not even mentioned in the textbook. The most important such unmentioned factor probably is:

the problem of violence and the destruction it causes

Which of the following would be counted in U.S. GDP?

the purchase of a new textbook

Economists maintain that the wage rate that workers should really care about is

the real wage rate

Aggregate expenditures are equal to:

the total of consumption plus investment plus government expenditures plus exports minus imports.

GDP is

the total value of all final goods and services produced for the marketplace during a given period, within a nation's borders

Some of the inaccuracies in measuring GDP are attributable to

the underground economy and quality changes

Which of the following is NOT included in GDP?

the value of childcare services rendered to their own children by housewives.

Mandatory spending comprises nearly ________ of the federal budget.

two-thirds

Discouraged workers and underemployed workers are examples of:

workers not included in the unemployment rate.