ECON FINAL EXAM
Interest rate that has not been adjusted for inflation
nominal interest rate
Which is the term for an interest rate that has NOT been adjusted for inflation?
nominal interest rate
Where is the price level and real GDP equilibrium for this economy?
price level = 100, real GDP=13
What will happen to the economy as a result of this AD shift? (check all that apply)
price level will be lower than before, real GDP will be lower than potential GDP
investment spending is spending on
productive physical capital
An example of investment spending is the:
purchase of a freezer by an ice-cream parlor.
If nominal GDP increases from one year to the next, _____ must have risen.
real GDP or prices or both
What will happen to the economy as a result of this AD shift? (check all that apply)-
real gdp will be lower than potential GDP, price level will be lower than before
If money income remains the same while the average price level doubles:
real income will fall
What are the two parts of the invisible hand?
self-interest and competition
What does the fallacy of composition teach us?
since economies are interdependent, when people try to save themselves from hard by reducing their spending, it creates a deeper recession
U.S. steelworkers who have lost their jobs to workers receiving lower wages overseas are part of _____ unemployment.
structural
What is one of Keyne's key insights?
that economies are unstable, and prone to recessions from the chain reaction of spending shocks
What does "shoe-leather" cost of inflation suggest?
that when inflation rises, people will try to get rid of their cash
Which curve does fiscal policy shift
the aggregate demand curve
In which market do households send money to firms in return for stuff?
the goods market
Shoe-leather costs are the costs of:
the increased number of transactions as inflation increases.
Macroeconomics is about understanding
the long run trend growth/ the short run fluctuations in growth
Which economic system advocates for private property?
the market system
The central mission of modern macroeconomics is to prevent:
a deep recession like the GD
A shift of the aggregate _____ curve to the _____ would cause inflation to rise and employment to increase.
demand;right
Which of the following does Reich argue?
Reagan and Thatcher's war on unions is an example of how policy can change the level of inequality, A larger middle class and more even income distribution creates more education, more skills, more spending, more investment, and ultimately more economic growth, The smaller middle class and rising inequality of the past few decades has forced families to increase debt levels to keep up, which slows future spending and growth, The flattening of mens' wages starting in the 1940's caused women to enter the paid work force as a way to prop up family incomes ALL
which example illustrates consumption
a new car purchased for personal use
Cyclical unemployment is unemployment:
due to a temporary downturn in the economy.
True or False: the U.S. minimum wage is indexed to inflation.
false
True or false: someone whose income is indexed to inflation will experience more of a decline in purchasing power when there is inflation than someone whose income is not indexed.
false
True or false: the price index is the % change in the inflation rate
false
What are the two types of unemployment that are "natural"?
frictional and strucural
_______________________ are economists who generally emphasize the importance of aggregate supply in determining the size of the macroeconomy over the _____________.
neoclassical economists;long run
When did "indexing" to inflation start?
during the revolutionary war
Which event will shift the aggregate demand curve to the right?
a new government program implemented to eliminate poverty
Suppose the government raises income taxes, so consumers have less disposable income. This policy action will cause a(n)
decrease in aggregate demand
True or false: Frictional unemployment is "unnatural" and associated with recessions.
false
Jasmine has recently moved to Florida because she loves the warm climate there. Being new to the area, she will need to spend a few weeks looking for a new job. This is an example of:
frictional unemployment
(Figure: Guns and Butter) Use Figure: Guns and Butter. On this figure, points A, B, E, and F:
indicate combinations of guns and butter that society can produce using all of its factors efficiently.
Suppose the real GDP for Macronesia is $200m in 2010 and population is 100,000. If population increases to 105,000 in 2011 and GDP increases by 5%, it must be true that real GDP per capital in Macronesia in 2011: stayed constant Suppose that real GDP per capital grows at 2% per year. How many years will it take for real GDP per capita to approximately double?
it will take 35 years bc 70/2=35
What was true about Venezuela's GDP in the chart?
nominal GDP was rising (making it look good) but really it was all due to rising prices
Which historic event culminated in the birth of macroeconomics?
the GD
Suppose that the real interest rate is 2.1% and the nominal interest rate is 5.4%. The inflation rate is _____%.
-3.3
(Table: Coffee and Salmon Production Possibilities) Use Table: Coffee and Salmon Production Possibilities. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. The opportunity cost of producing 1 unit of salmon for Alaska is _____ coffee(s).
1
(Table: Production Possibilities Schedule I) Use Table: Production Possibilities Schedule I. If the economy produces 4 units of consumer goods per period, it also can produce, at MOST, _____ units of capital goods per period.
10
(Figure: Omar's Production Possibilities) Use Figure: Omar's Production Possibilities. The opportunity cost for Tom to move from point B on the curve to point A is:
10 fish
f the labor force is 24m, the #employed is 21.5m, what is the unemployment rate?
10.4%
(Figure: Omar's Production Possibilities) Use Figure: Omar's Production Possibilities. Which point or points represent(s) a combination of coconuts and fish that is efficient in production?
A and B
What happens to the economy if interest rates rise, making borrowing more expensive?
AD (aggregate demand) drops (shifts left)
(Figure: AD-AS Model II) Refer to Figure: AD-AS Model II. If the value of household wealth increases, the _____ curve will shift to the _____.
AD;right
What do a rubber-necking traffic jam and the paradox of thrift have in common?
Individual behavior has large negative consequences for the whole of society.
Which transaction will be included in the official measurement of GDP?
Marcella bought a new truck
You make some new friends at a party. Which of your new friends described here is unemployed?
Melinda, who was just recently laid off
Robert Reich described the "virtuous" cycle of falling inequality in Inequality for All. What were his main points?
That falling inequality will help grow the middle class (where most of the spending happens) and thus stimulate the economy and leave more tax revenue for important programs like education, which further stimulates the economy
Which of the following is the best example of a zero-sum-game?
Two people deciding how to split up a pizza
What is the name of the difference between actual real GDP and potential real GDP?
a recessionary gap
How do you show economic growth on the Production Possibities Frontier graph?
a shift to the right of the curve
Diminishing returns to physical capital implies that, when the human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to _____ productivity.
a smaller increase in
Which of the following would shift the short-run (but not the long-run) aggregate supply curve?
an increase in oil prices
(Figure: Predicting Aggregate Demand Shifts) Which of these would shift the aggregate demand curve from AD1 to AD2?
an increase in taxes
people are considered unemployed if they are:
are not working but are available for work and have been actively searching for a job for the previous four weeks.
When an economy is going through disinflation, prices
are rising but at a declining rate
The word that means "cutting government spending or increasing taxes to reduce the debt" and stimulate the economy
austerity
Suppose country A sells $100m worth of goods and services to country B. Country B sells $50m worth of goods and services to country A. These are the only two countries in "Macroworld". Net exports in country:
b equal- $50m
Why is Economics called the "dismal science?"
because of malthus's prediction that human population growth would outpace food supply, leading to mass Starvation
Why will price level drop when AD shifts leftward?
because there will be more production than people will buy at the higher price level
More resources, better use of existing resources ( new technology)
black americans
An increase in capital stock would:
cause a movement to the right along a stationary production function.
What are the components of the "invisible hand" in capitalism?
competition and self-interest
Simultaneous recession and deflation can be explained by a(n)
decrease in aggregate demand
deflation is a
decreasing aggregate price level
What is the term used to describe falling price levels?
deflation
If real GDP rises while nominal GDP falls, then prices on average have:
fallen
If the price level at the end of year 1 is 150 and the price level at the end of year 2 is 160, the inflation rate in year 2 is 10%.
false
The inflation rate for the current year is the price level in the current year minus the price level in the previous year.
false
Which of the following is NOT a possible source of sticky wages?
firms tend to forecast poorly, and tend to underestimate inflation
The long-run aggregate supply curve uses the classical assumptions that all variables are _____ in the long run and that long-run equilibrium occurs at _____ employment.
flexible;full
Which of the following did Smith advocate for
free trade between countries, relying on self-interest to organize the economy
Which of the following is included in GDP?
gov purchases of new equipment
Which item is NOT a determinant of aggregate demand?
government saving
Fiscal policy refers to changes in _____ to affect overall spending in the economy:
government spending and taxation
Consider these four graphs of the labor market, showing four different minimum wage levels. Which graph(s) shows a wage level where there is an excess supply of workers?
graphs A and D
An economy is said to have a comparative advantage if it:
has the lowest cost of producing a particular good, compared with other economies.
Which group benefits from an unanticipated rise in the inflation rate?
homeowners with fixed-rate mortgages
The production possibility frontier will NOT shift outward due to an:
increase in the labor force
An example of human capital is a person's:
job skills
What is the LRAS (and why is it where it is?)
long run aggregate supply- its the economy's potential output
The nominal interest rate equals the real interest rate:
plus the rate of inflation
Income spent on imported goods:
represents income that has leaked across national boarders, must be subtracted from spending data to calculate and accurate value for domestic production, is income that is not spend on domestically produced goods/services
Dividing real GDP by the population:
results in real GDP per capita
Which of the following would be considered a government transfer payment?
social security payment
What is the super great combo of higher prices and lower GDP called?
stagflation
menu costs are the
the real costs of changing listed prices
What is the name of Adam Smith's book?
the wealth of nations
What does the Austrian school argue?
there should be less gov oversight of the economy, and less fiscal/monetary policy
GDP is the:
total market value of all final goods and services produced in an economy in one year.
If inflation is unanticipated, then income may be redistributed from creditors to debtors.
true
The inflation rate for the current year is the percentage change in the price level from the previous year.
true
True or False: Social security payments and tax brackets are indexed to inflation.
true
True or False: the unemployment rate rises during recessions.
true
True or false: changes in inventories are considered to be part of investment spending in the national accounts?
true
The unemployment rate is defined as the number _____ divided by the _____.
unemployed; number in the labor force
The long-run supply curve is
vertical
Which of the following is the best example of an "efficiency wage?"
when your employer pays you more than the going rate for your work to increase productivity and loyalty
If deflation occurs and your income is fixed, your real income:
will go up
Menu costs refer to the increased cost of:
of changing listed prices
Are the following included in US GDP? (1) the price paid by a German tourist when staying at a NYC hotel. (2) the price paid by an American tourist when staying at a Berlin hotel-
only (1)
Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.
right;increase
Robert lost his job and now takes care of his children while his wife works. He would take a job similar to the one he lost if it were offered, but he is not actively seeking work. How is Robert categorized in the unemployment figures?
robert is not part of the labor force
The introduction of ATMs reduced the:
shoe-leather costs of inflation.
if wages are not flexible downward (they do not fall towards equilibrium), what is the effect?
unemployment
If your nominal wage rose by 4% and you figured out that your real wage rose by 3%, what must inflation be?
1%
Given the data showing in the video currently, (in 2011 oranges cost $.050, apples cost $0.25 and bananas cost $0.40 and in 2012 oranges cost $0.40, apples cost $0.40 and bananas cost $0.50) and the typical consumer buys 200 oranges, 100 apples and 100 bananas) what is the value of the price index in 2011 (if 2011 is the base year)?
100
Given the data showing in the video currently, (in 2011 oranges cost $.050, apples cost $0.25 and bananas cost $0.40 and in 2012 oranges cost $0.40, apples cost $0.40 and bananas cost $0.50) and the typical consumer buys 200 oranges, 100 apples and 100 bananas) what is the value of the price index in 2012 (if 2011 is the base year)?
103
What's the lowest rate of unemployment that the US has experienced?
2.9%
What is the name of the economist who argued that economists should focus on stabilizing the economy in the short run?
JM keynes
Intermediate goods are NOT counted in GDP because:
doing so would result in double counting
If the frictional rate of unemployment is 1.45%, the structural rate of unemployment is 2.3%, and the total unemployment rate is 6%, then we can conclude that the:
economy is experiencing an economic downturn.
Wages set high to discourage employee turnover are called _____ wages.
efficiency
Which of the following people are not in the labor force?
a consultant, was laid off and after looking for work for a year, decided to go back to school for an MBA full time
The Great Depression was primarily the result of
a decrease in aggregate demand.
Which of these will NOT shift the aggregate supply curve to the left?
a decrease in corporate taxes
What is the correct monetary policy for a recession
a decrease in interest rates
How do interest rate changes affect the economy
a decrease in interest rates will stimulate business investment spending
What is expansionary Fiscal Policy and when is it appropriate?
a decrease in tax rates or an increase in gov. Spending or transfers, appropriate for a recession
Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% with the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2%
creditors gain at the expense of debtors.
What would an advocate of Trickle-Down economics advocate to stimulate the economy?
cutting corporate tax rates
Lilliana was recently laid off from her job as an accountant as a result of an economic downturn. Liliana is:
cyclically unemployed
Why and when did "Classical" Economics fall from dominance?
during the GD, bc smith and marshall had nothing to say ab the causes or solutions for recessions
_____ is an overall decline in prices throughout the economy.
deflation
In which decade did the U.S. and other rich countries experience higher than normal (double-digit) inflation?
1970's
_____ is a reduction in the rate of inflation.
disinflation
Given the data showing in the video currently, (in 2011 oranges cost $.050, apples cost $0.25 and bananas cost $0.40 and in 2012 oranges cost $0.40, apples cost $0.40 and bananas cost $0.50) and the typical consumer buys 200 oranges, 100 apples and 100 bananas) what is the inflation rate between 2011 and 2012?
3%
(Table: Production Possibilities Schedule II) Use Table: Production Possibilities Schedule II. If an economy is producing at alternative W, the opportunity cost of producing at X is _____ unit(s) of consumer goods per period.
4
What is the estimated natural rate of unemployment for the US (choose the closest one)
4.5%
(Table: Comparative Advantage I) Use Table: Comparative Advantage I. The opportunity cost of producing 1 box of cell phones for Finland is _____ box(es) of herring.
5
What are the basic sources of economic growth?
More resources, better use of existing resources ( new technology)
who is the founder of economics
Adam Smith
(Figure: Productivity) Use Figure: Productivity. An improvement in technology with everything else remaining unchanged is shown on the diagram as a movement from:
B to C
(Figure: Determining SRAS Shifts) If there are advancements in technology, the short-run aggregate supply curve will shift from SRAS0 to _____, and the price level will shift to _____.
SRAS 1 ; P1
During rapid price inflation, firms must frequently change prices. The cost of changing listed prices is known as the _____ cost.
menu
(Figure: Determining SRAS Shifts) If there is a decrease in input prices, the short-run aggregate supply curve will shift from SRAS0 to _____, and the price level will shift to _____.
SRAS1;P1
which item does NOT qualify as physical capital
mineral deposits
If the economy shown in the figure begins on AD1 and SRAS1, what will happen in the short run and long run if the government begins a sustained period of increased spending?
The economy moves from point C to E to B.
Which of the following statements is true?
The natural rate of unemployment is the sum of frictional and structural unemployment
Suppose Indiana produces only steel and corn, with fixed amounts of land, labor, and capital resources. Which scenario BEST sets the stage for economic growth?
The percentage of Indiana residents with a college degree rises from 25% to 30%.
Which of the following is true in the past few decades in the US?
Unions have lost power and corporations have gained power
Diminishing returns to physical capital means that as more and more physical capital is combined with a fixed amount of human capital and a fixed technology, eventually:
additions to aggregate output of real GDP decline
_____ will MOST likely increase the economy's long-run aggregate supply.
advancements in technology
During the 1970s, some countries stopped oil sales to the United States. As petroleum prices rose
aggregate supply fell, and the aggregate price level rose.
Which of the following would shift the production function upward?
an improvement in technology
Which change will NOT increase the productivity of labor?
an increase in the size of the labor force
With everything else held constant, if 5% of those considered to be frictionally unemployed found work while the number of people considered to be structurally unemployed increased by 5%, the natural rate of unemployment
does not change
In 2011, consumption spending is $7,000, government purchases of goods and services is $2,000, and investment spending is $1,500. If GDP for 2011 is $10,300, exports are _____ and imports are _____.
$600;$800
Which of these would NOT cause a shift in the aggregate demand curve?
change in the price level
(Table: Coffee and Salmon Production Possibilities II) Use Table: Coffee and Salmon Production Possibilities II. This table shows the maximum amounts of coffee and salmon, both measured in pounds, that Brazil and Alaska can produce if they just produce one good. Brazil has a comparative advantage in producing:
coffee only
Menu costs of inflation are the:
costs associated with businesses changing prices.
Unit-of-account costs of inflation are the:
costs associated with money not being a reliable unit of measurement.
If we add up the consumer spending on goods and services, investment spending, government purchases of goods and services, and the value of exports, then subtract the value of imports, we have measured the nation's:
gross domestic product
If the opportunity cost of manufacturing automobiles is lower in the United States than in Britain and the opportunity cost of manufacturing airplanes is higher in the United States than in Britain, then the United States will:
import airplanes from Britain and export automobiles to Britain
Purchases of foreign-produced goods and services are:
imports
A(n) _____ in oil prices and a(n) _____ in taxes will shift short-run aggregate supply to the left.
increase;increase
Over the past year, Eli has been working very hard. His employer has taken notice and is giving Eli a 6% raise in salary. During this past year, overall prices in the economy have increased by 4%. Given this information, Eli's real wage has:
increased by 2%
In the paradox of thrift:
increased saving by individuals increases their chances of becoming unemployed.
Which event causes a decrease in aggregate demand?
increases in taxes
Stagflation is a combination of _____ unemployment and _____ inflation.
increasing;increasing
Besides consumption, the component(s) of aggregate demand is/are:
investment expenditures, government expenditures, and net exports.
What is thought to be the effect of unstable prices and uncertainty on business investment?
it causes a decline in business investment
If oil prices increase, what happens to SRAS (short run aggregate supply?)/ Where will the new short-run equilibrium be?
it decreases ( shifts left)/ at a higher price level and lower GDP
What is so powerful and important about specialization?
it increases output, and thus potentially increases standard of living for most people
Unit-of-account costs refer to the:
loss of the reliability of money as a relative unit of measurement.
True or false: The existence of the quality and substitution bias means the actual inflation rate is ____ the official inflation rate.
lower than
The presence of discouraged workers:
makes the official unemployment rate look understated
The short-run aggregate supply curve is positively sloped because
many input prices are slow to change in the short run.
Maria expects the inflation rate to be 5%, and she is willing to pay a real interest rate of 3%. José expects the inflation rate to be 5%, and he is willing to lend money if he receives a real interest rate of 3%. If the actual inflation rate is 6% and the loan contract specifies a nominal interest rate of 8%, then:
maria is glad she borrowed the funds because her real interest rate has fallen
What are the three economic questions?
what to make, how to make it, and who gets it.
Consider the graph of the labor market shown here. At the wage rate of $14, the number of unemployed people in this market is:
zero