Econ Final Exam
Under the above scenario, if the interest rate increased, planned investment and planned aggregate expenditures would
remain the same
Time lags can limit the effectiveness of, and complicate, stabilization policy. When conducting monetary policy, which of the following lag types must policy makers consider most carefully?
response lags
If the economy is operating above potential GDP, then
unemployment is below the natural rate and wages will rise
When the interest rate falls, the planned aggregate expenditure curve shifts ________ because planned investment is ________.
up; higher
If the economy's policymakers seek to reverse the output loss via the implementation of expansionary policies, the result will be
even higher prices
From a macroeconomic perspective, the "best" stock market index is
Standard and Poor's 500 (S&P 500)
There is no systematic relationship between the inflation rate and the unemployment rate
if both the AD and AS curves are shifting simultaneously
Time lags can limit the effectiveness of, and complicate, stabilization policy. When conducting fiscal policy, which of the following lag types poses the biggest problem for policy makers?
implementation lags
During a boom,
investment may not decline even when the interest rate is higher because businesses expect sales and production to remain strong in the future
In country A, an expansionary monetary policy will raise prices without increasing output because
production costs adjust automatically to price increases; therefore the AS curve will be vertical. whereas in country B, input prices lag behind output prices so a rightward shift in the AD curve will increase output because the AS curve will not be vertical
During the 2008-2012 period the Fed sought to
push interest rates to their zero lower bound
Some economists argue that the "animal spirits" of investors are so important in determining the level of investment in the economy that interest rates do not matter at all. Under the above scenario. if the interest rate increased, planned investment and planned aggregate expenditures would...
remain the same
Which of the following statements would be associated with new classical economics?
since expectations are rational, anticipated policy changes will have no effect on real output, and only "surprises" matter
It can be argued that minimum wage laws raises the unemployment rate for teenagers as a group. In response to thisproblem, Congress established a sub-minimum wage for teenagers. It allows employers to hire teenagers at an opportunity wage of
$4.25 for up to 90 days
If you purchased a $1,000 General Motors (GM) 10 year coupon bond, today, with a coupon rate of a 5.0 percent, the coupon payment would be... Then, tomorrow, interest rates rose to 6.0 percent, the price of the bond would ___ to _____ Hence, there is a(n) _____ relationship between interest rates and the price of the bond.
$50 (1,000 x .05) fall; 833 inverse
Since 1970 the Fed has faced a "binding situation" during the
2008-2012 period
To counter the fall in investment, the leader of Paranoia calls for a proposal to increase government spending. To finance the program, the head of the Exchequer has proposed three alternative options: (1) Finance the expenditures with an equal increase in taxes (2) Keep taxes constant and finance the expenditures by printing new money (3) Keep tax revenues constant and borrow the money from the public by issuing new government bonds Consider the three financing options and rank them from most expansionary to least expansionary. The most expansionary policy is option __, followed by __, and option __ would be the least expansionary.
2; 3; 1
In 2014, the government raised taxes. At the same time, the Fed was pursuing an expansionary monetary policy. Assume the initial planned aggregate expenditure and interest rate were illustrated by AE1 with r equals 5 percent. Which aggregate expenditure line and interest rate combination in Figure 1 could result from this combination of fiscal and monetary policies in2014?
AE3 with r=4%
On January 1, 2013, the Social Security portion of the payroll tax rose from 4.2 percent to 6.2 percent and the top marginal tax rate increased to 39.6 percent from 35 percent. Assume the initial planned aggregate expenditure and interest rate were illustrated by AE1 with r equals 5 percent. Assuming that the Fed holds the money supply constant, which aggregate expenditure line and interest rate combination in Figure 1 illustrates the effect on aggregate expenditure, GDP, and the interest rate in 2013?
AE5 with r=4%
In January 2015, consumer confidence in the United States rose to its highest level since 2007, reflected by a rise in consumption. Assume the initial planned aggregate expenditure and interest rate were illustrated by AE1 with r equals 5 percent. Assuming that the Fed holds the money supply constant, which aggregate expenditure line and interest rate combination in Figure 1 shows the effect on aggregate expenditure, GDP, and the interest rate in 2015?
Ae2 with r=6 percent
During 2009, the Federal Reserve was easing monetary policy in an attempt to boost the economy. That same year, Congress passed the American Recovery and Reinvestment Act that cut taxes and expanded existing tax credits for working families and businesses. As a result of this policy, ____________.
GDP should increase and the interest rate should decrease
Economists who advocate government intervention in the macroeconomy are known as
Keynesians
The impact of a sharp drop in oil prices in the world market will result in ____________.
a decrease in the aggregate price level and an increase in real GDP
In country A, all wage contracts are indexed to inflation. That is, each month wages are adjusted to reflect increases in the cost of living as reflected in changes in the price level. In country B, there are no cost-of-living adjustments to wages, but the workforce is completely unionized. Unions negotiate 3-year contracts. Expansionary monetary policy is likely to have _______
a greater effect in country B
Suppose an economy is in an initial short-run equilibrium at a point where aggregate demand intersects short-run aggregate supply. Which of the following best illustrates cost-push inflation?
a leftward shift of the short-run aggregate supply curve
In 1993, the Congress and the president raised taxes. At the same time, the Fed was pursuing an expansionary monetary policy. The combination of these fiscal and monetary policies led to
a reduction in interest rates, an increase in investment, and an increase in GDP
Which of the following events would NOT produce a rightward shift in the short-run AS curve?
a significant decrease I. the country's labor force participation rate
Suppose the economy is initially operating well below capacity. In this case, an expansionary macroeconomic policy will result in
a small price increase relative to the output increase
Which of the following is most likely to cause the cost shock that shifts the AS curve consistent with cost-push inflation?
a surge in the price of crude oil
Which of the following will generate a decrease in aggregate demand?
a tax increase
Suppose the government decides to increase spending and decrease taxes in an attempt to increase economic activity. If the Fed wanted to moderate the macroeconomic effects of the spending and tax changes, it could implement
a tight monetary policy and decrease the money supply
If the federal government decreases federal income tax rates in an effort to stimulate the economy, then ____________.
aggregate demand increases
Using the AS/AD model, an expansionary government action would cause a greater increase in the price level than in aggregate output when __________.
aggregate demand intersects aggregate supply on the steeper portion of the aggregate supply curve
Keynesian economics is primarily associated with which of the following concepts?
an activist federal government
Deficit targeting acts as _______. Therefore, locking the economy into spending cuts during a recession is _______ way to manage the economy.
an automatic-destabilizer; not a good
On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate by half a percentage point to 2 percent. The bank's president at the time, Willem Duisenberg, suggested that the bank could reduce rates further in the future. The likely impacts of such a rate cut were
an increase in planned aggregate expenditure, an increase in aggregate income and output, and an increase in consumption
The Standard and Poor's 500 (S&P 500) is
an index based on the stock prices of the largest 500 firms traded on the New York Stock Exchange, the HASDAQ Stock Market, and the American Stock Exchange
During the 1960s there seemed to be an obvious trade-off between inflation and unemployment (lower inflation implies higher unemployment). However, from the 1970s onward, that relationship appeared to breakdown. Which of the following are possible causes of this apparent breakdown? A.The AS shifts but the AD does not. B.The AD curve shifts but AS does not. C.Both the AD and AS supply curve shift. D.Both A and C
both A and C
Before 1995, proponents of the NAIRU theory argued that the value of the NAIRU in the U.S. was around 6 percent. After 1995, the unemployment rate steadily declined, and by the year 2000 it was 3.9 percent. Further, the 1995 to 2000 period saw slightly declining inflation. This evidence would suggest that A.increased worker productivity led to a leftward shift of the PP curve. B.increased worker productivity led to a rightward shift of the PP curve. Your answer is not correct. C.the NAIRU theory is vacuous (without meaning). D.Both A and C are correct.
both A and C are correct
Which of the following best describes your diagram's depiction of the relative changes in aggregate output and the price level?
both aggregate output and the price level decreased
Expansionary monetary policy has people concerned about future inflation, which is causes an increase in expected inflation. This will
cause the Phillips Curve to shift right
Assume the classical view of the labor market. An auto worker is laid off. After looking for a job for some time he is offered a lower paying job, but does not take it because he believes he can do better. The worker is
considered unemployed, but the labor market is working properly
Deficit targeting requires government spending to be ________ and taxes to be ________ during an economic contraction.
cut; raised
You are laid off from your job because of a general downturn in economic activity. This is an example of
cyclical unemployment
In the tiny island nation of Bongo, the nation's wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings. Last year, Bongo experienced an inflation rate of 21 percent, and housing prices and stock prices each increased by 7 percent. Real wealth in Bongo _______ last year
decreased
In the tiny island nation of Bongo, the nation's wealth is broken down as follows: 50 percent is cash in checking and savings accounts, 25 percent is housing, and 25 percent is stock holdings. Last year, Bongo experienced an inflation rate of 30 percent, and housing prices and stock prices each increased by 13 percent. Real wealth in Bongo ________ last year A change in real wealth helps explain the downward slope of the aggregate demand curve because the decline in real wealth leads to _______.
decreased a decrease in planned aggregate expenditure AND a decrease in consumption
According to the real wealth effect (or real balance effect), an increase in the price level
decreases consumers' expenditures due to a decrease in the purchasing power of household wealth
In the first few chapters of this book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity demanded per time period by an individual household. Now we have derived what is called the aggregate demand curve. The two look the same and both seem to have a negative slope, but the logic is completely different. The negative slope of a simple demand curve...
depends on the price of a single product relative to other product prices
During the third quarter of 1997, Japanese GDP was falling at an annual rate of over 11 percent. Many blame the big increase in Japan's taxes in the spring of 1997, which was designed to balance the budget. Usually, if taxes are increased,
disposable income declines, consumption falls, planned aggregate expenditure falls, and aggregate income (output) declines
Empirical studies of labor markets have identified several benefits firms receive from paying workers more than themarket-clearing wage. These studies tend to support the
efficiency wage theory
During the third quarter of 1997, Japanese GDP was falling at an annual rate of over 11 percent. Many blamed the big increase in Japan's taxes in the spring of 1997, which was designed to balance the budget. How could an increase in taxes with the economy growing slowly precipitate a recession? When taxes increase, disposable income will _______. As disposable income _______, it causes consumption to ______ which _______output/income.
fall; decreases; decline; reduces
According to sticky wage theory, wages are just as likely to be stuck in the upward direction as they are in the downward direction.
false
Because the Phillips Curve broke down during the 1970s, this shows that aggregate demand has no effect on inflation.
false
Deficit targeting acts as an automatic stabilizer.
false
During the late 1970s and early 1980s the Fed used monetary policy primarily to
fight inflation
Economists who hold the classical view of the labor market believe that
fiscal and monetary policy have little or no effect on employment and real GDP
Which of the following is incorrect if interest rates do not affect investment?
fiscal policy would become less effective than monetary policy because fiscal policy directly influences investment, which depends on interest rates
According to advocates of the long-run vertical Phillips curve, the natural rate of unemployment is determined by
frictional and structural unemployment
All else equal, a cost shock that shifts the aggregate supply curve to the left leads to a ________ price level and a________ level of aggregate output if the aggregate demand curve is downward sloping.
higher; lower
As shown in the diagram to the right, the short-run aggregate supply curve (AS) is upward-sloping. This positive slope is explained in part by the fact that
in the short-run, input prices- particularly wage rates- are slower to adjust to increasing aggregate demand than are output prices
A capital gain is a(n) ____ in the value of an asset
increase
In the early 1980s, the U.S. economy was experiencing a severe recession. The Economic Recovery Act of 1981 sharply cut both personal and corporate income tax rates. President Reagan argued that these were supply-side tax cuts. Therefore, he believed that the primary effect of these tax cuts would be to
increase work and investment incentives
What action could the central bank take to counteract the affects of the increase in taxes? The central bank could _______ the money supply, which would _______ interest rates and _______ investment.
increase; decrease; stimulate
On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate by half a percentage point to 2 percent. At that time, the European countries were growing very slowly or were in recession. It was hoped that, due to the rate cut, planned investment would _______ and aggregate output or income would _______
increase; increase
Which of the following will generate an increase in aggregate demand?
increased government expenditures for war
The Phillips Curve models the relationship between __________________________. It asserts that these variables are________________ correlated.
inflation and unemployment; negatively
During a recession,
investment may not respond positively to lower interest rates since low demand for goods leads to low capital utilization and low investment
The long-run aggregate supply curve
is vertical because all prices (both input and output prices) change at the same rate in the long run.
If the government implements a spending and tax policy in which it promises to neither increase nor decrease spending and taxes,
it is still possible for the budget deficit to change if there is a change in GDP
Some economists argue that the "animal spirits" of investors are so important in determining the level of investment in the economy that interest rates do not matter at all. a. Suppose that this were true-that investment in no way depends on interest rates. What would the investment curve would look like in this case?
it would be a vertical line
From May 2014 to March 2015, the price of oil dropped sharply on world markets. Suppose an economy is in a short-runequilibrium at a point where the aggregate demand and aggregate supply curves intersect. What would be the impact on this graph of the sharply dropping oil prices in the world market?
it would cause aggregate supply to shift right
When considerable overlap occurred between inflation and recession in the last half of the 1970s and early 1980s, the Fed responded by
keeping interest rates high
Assume the classical view of the labor market. During a recession,
labor demand will decrease, the real wage will fall, and there will be no unemployment
On a short-run aggregate supply curve, wages tend to be sticky at ________ levels of aggregate output and prices tend to be sticky at ________ levels of aggregate output.
low; low
Which of the following policies is NOT intended to alter frictional unemployment? A.improving the information about available jobs and current wage rates B.lowering the minimum wage for teenagers C.creating a computer list of job openings and a service that matches employees with job vacancies D.All of the above are designed to alter this type of unemployment.
lowering the minimum wage for teenagers
The somewhat unique shape of the short run aggregate supply curve is based in part on how firms respond to an increase in aggregate demand. As firms and the economy move closer to full capacity, the response of firms is likely to change from
mainly increasing output to mainly increasing prices
A realized capital gain is the gain that occurs when the owner of an asset actually sells it for _____ than he or she paid for it
more
Many workers commit to employment contracts with 1 to 3 year terms. These contracts stipulate workers' wages for each year of the contract. Given the uncertainty of future economic conditions, why do workers and firms bind themselves in this way?
negotiating wages is costly
Rational expectations means that
people know the true model of the economy and use it to form their expectations of the future
Since the 1970's changes in expected inflation and the price of oil and other imports have shown the Phillips Curve to be unstable. This has led economists to conclude that
policy involves more than choosing a point along a nice smooth Phillips Curve
Stabilization policy has the following objective(s):
smooth fluctuations in output, and maintain inflation at a rate consistent with sustainable growth and full employment
According to the classical view of the labor market, if there is an excess supply of labor,
some workers will work for a lower wage and others will exit the labor market
How would the following event impact the economy's short-run aggregate supply (AS) curve? Event: High taxes and excessive regulation cause firms to reduce the quantity of their physical capital.
the AS curve shifts leftward
Paranoia the largest country in centralAntarctica, receives word of an imminent penguin attack. The news causes expectations about the future to be shaken. As a consequence, there is a sharp decline in investment spending plans a. What will be the effects of such an event on the economy of Paranoia assuming no response on the part of the central bank or the Treasury, so that the money supply, taxes, and government spending all remain constant?
the decrease in investment will reduce aggregate expenditure causing equilibrium output/input to decrease in the goods market
Assume that congress and the president make tax and spending decisions without a balanced-budget amendment or any other deficit targeting measure. In the event of a negative demand shock,
the deficit would increase, lessening the decrease in AD caused by the shock
In January 2015, the Congressional Budget Office (CBO) issued a report estimating that the federal budget deficit for 2015 was expected to fall slightly to $468 billion, or 2.6 percent of GDP. Working under the assumption that current laws affecting the budget will not change (i.e., no revisions in planned tax changes or fiscal stimulus spending), the CBO also estimated that the deficit as a percentage of GDP would hold steady at 2.6 percent through 2018. What most likely explains the CBO's estimates for the 2015-2018 period?
the economy is likely to experience a structural deficit during the 2015-2018 period
Consider that from May 2014 to March 2015, the price of oil dropped sharply in world markets. If the Fed held the money supply constant, you would expect the ____________.
the effect on the interest rate to be ambiguous
What effects will a decrease in taxes and an increase in government spending supported by a cooperative Fed acting to keep output from rising have on GDP and the price level?
the fiscal and monetary policies have opposing effects on the AD curve, therefore GDP and the price level will be unchanged
Suppose the economy portrayed by the figure to the right simultaneously experiences a surge of technological breakthroughs and a dramatic increase in household wealth. Manipulate both curves to derive the impact on the price level of these combined events. A careful analysis of your graph leads to the conclusion that...
the impact on the price level is indeterminate
What effects will an increase in the money supply with the economy operating at near full capacity have on GDP and the price level?
the price level will increase significantly and GDP will increase very little
The magnitude of the inflation initiated by the change in aggregate demand depends upon
the slope of the AS curve
An increase in the price level that lowers the real value of wealth is one reason for the downward slope of the AD curve.
true
One explanation for downwardly sticky wages is that firms enter into social, or implicit contracts with workers not to cut wages.
true
The IS curve shows the relationship between output and the interest rate.
true
When the AD curve is vertical and a cost shock shifts the AS curve to the left, there is no change in output.
true
Workers in one industry may be unwilling to accept a pay decrease because they are concerned that their wage will fall relative to workers in other industries.
true
When output is above potential GDP, there is ________ pressure on wages. As the economy approaches short-run capacity, these changing wages shift the short-run AS curve to the ____.
upward; left
In the long run, if wages adjust fully to rising prices, the aggregate supply curve will be ________ and fiscal policy will have ________ on output.
vertical; no effect
Refer to Figure-1 to the right. Consider an economy where the current GDP is higher than potential GDP. Assuming that input prices fully adjust to output prices after some lag. In the long run,
wages and other input prices will rise, shifting the aggregate supply curve to the left to AS1
Suppose the economy portrayed by the figure to the right simultaneously experiences the cost shock of higher oil prices and a national security related surge in defense expenditures. Manipulate both curves to derive the impact on the price level of these combined events. According to your graph, the price level...
will unambiguously rise