Econ Mid-Term

28.1. The most important determinant of consumption and saving is the: A) level of bank credit. B) level of income. C) interest rate. D) price level.

B) level of income.

Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent 27.4. Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will: A) fall by about 20 percent. B) fall by about 2 percent. C) rise by about 15 percent. D) rise by about 25 percent.

D) rise by about 25 percent.

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Unemployed...................7 Total Population..........145 Employed......................95 Discouraged workers.......3 27.6. Refer to the above information. The unemployment rate in Scoob is: A. 2.5 percent. B. 3.2 percent. C. 5.0 percent. D. 6.9 percent.

D. 6.9 percent.

19. An unexpected drop in total spending in an economy will cause a decline in GDP (i.e. business cycles): a. if prices are downwards sticky. b. if prices are fully flexible. c. regardless of whether prices are sticky or fully flexible.

a. if prices are downwards sticky.

17. The phase of the business cycle in which real GDP increases from the trough to the peak is called: a. the peak. b. an expansion. c. a recession.

b. an expansion.

27. The phrase "too much money chasing too few goods" best describes: a. the GDP gap. b. demand-pull inflation. c. the inflation premium.

b. demand-pull inflation.

22. Assume that Kyle is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Kyle will be considered as: a. cyclically unemployed. b. frictionally unemployed. c. structurally unemployed.

b. frictionally unemployed.

21. The natural rate of unemployment is the: a. unemployment rate experienced at the depth of a depression. b. full-employment unemployment rate. c. unemployment rate experienced by the least-skilled workers in the economy

b. full-employment unemployment rate.

29. Unanticipated inflation: a. raises the real burden of the public debt to the Federal government. b. helps borrowers and hurts lenders. c. hurts people whose sole source of income is from Social Security benefits.

b. helps borrowers and hurts lenders.

28. Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 10 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is: a. 4 percent. b. 8 percent. c. 10 percent.

c. 10 percent.

26. The type of unemployment associated with recessions is called: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment.

c. cyclical unemployment.

24. Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon where she anticipates that a new job will be available. We can say that Susie is faced with: a. seasonal unemployment. b. cyclical unemployment. c. structural unemployment.

c. structural unemployment.

27.8. Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years. Based on this, lenders should charge a nominal interest rate of: A. 2 percent. B. 3 percent. C. 5 percent. D. 7 percent.

D. 7 percent.

29.2. The level of aggregate expenditures in the private closed economy is determined by the: A) expenditures of consumers and businesses. B) intersection of the saving schedule and the 45-degree line. C) equality of the MPC and MPS. D) intersection of the saving and consumption schedules.

A) expenditures of consumers and businesses.

28.12. If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will: A) increase by $10 billion. B) increase by $2.10 billion. C) decrease by $4.29 billion. D) increase by $4.29 billion.

A) increase by $10 billion.

Answer on the basis of the following data for a private closed economy. Possible levels of Domestic Output and Income (GDP = DI) Consumption $320 $320 330 327 340 334 350 341 360 348 370 355 380 362 2. The marginal propensity to consume (MPC) is: A. 7/10. B. 3/10. C. 2/5.

A. 7/10.

1. The level of aggregate expenditures in a private closed economy is determined by: A. expenditures of consumers and businesses. B. savings by households. C. investment expenditure by businesses.

A. expenditures of consumers and businesses

10. If the multiplier in an economy is 5, a $20 billion increase in net exports will: A. increase GDP by $100 billion. B. reduce GDP by $4 billion. C. decrease GDP by $100 billion.

A. increase GDP by $100 billion.

Disposable Income Consumption $200 $205 225 225 250 245 275 265 300 285 28.6. Refer to the above data. If disposable income was $325, we would expect consumption to be: A) $315. B) $305. C) $20. D) $290.

B) $305.

Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent 27.1. The size of the negative GDP gap as a percent of potential GDP for the above economy is: A) 9 percent. B) 12 percent. C) 15 percent. D) 18 percent.

B) 12 percent.

Disposable Income Consumption $200 $205 225 225 250 245 275 265 300 285 28.5. Refer to the above data. At the $200 level of disposable income: A) the marginal propensity to save is 2½% B) dissaving is $5. C) the average propensity to save is .20. D) the average propensity to consume is .80.

B) dissaving is $5.

29.8. Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus: A) saving is $10 billion. B) unplanned decreases in inventories of $10 billion will occur. C) the MPC is .80. D) unplanned increases in inventories of $10 billion will occur.

B) unplanned decreases in inventories of $10 billion will occur.

Answer 12 - 15 based on information in the table below: Real Consumption Gross Net Gov't GDP (after taxes) Invstmnt Exprts Purchses $0 -$20 $10 +$5 $15 10 0 10 +5 15 40 20 70 40 100 60 (All Stay Same) 130 80 160 100 15. Suppose the full-employment real GDP is $100. The increase in government spending that is necessary to take the economy to this full employment real GDP is: A. $5 B. $10 C. $6

B. $10

Answer 12 - 15 based on information in the table below: Real Consumption Gross Net Gov't GDP (after taxes) Invstmnt Exprts Purchses $0 -$20 $10 +$5 $15 10 0 10 +5 15 40 20 70 40 100 60 (All Stay Same) 130 80 160 100 14. Equilibrium GDP in the economy shown above is: A. $40. B. $70 C. $130.

B. $70

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Unemployed...................7 Total Population..........145 Employed......................95 Discouraged workers.......3 27.5. Refer to the above information. The labor force in Scoob is: A. 95 million. B. 102 million. C. 105 million. D. 145 million.

B. 102 million.

Answer 12 - 15 based on information in the table below: Real Consumption Gross Net Gov't GDP (after taxes) Invstmnt Exprts Purchses $0 -$20 $10 +$5 $15 10 0 10 +5 15 40 20 70 40 100 60 (All Stay Same) 130 80 160 100 12. The after-tax MPC in the economy shown above is: A. 2/5. B. 2/3. C. 3/4.

B. 2/3.

16. In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to: A. affect neither aggregate supply nor aggregate demand. B. increase aggregate demand. C. reduce aggregate demand.

B. increase aggregate demand.

27.10. Demand-pull inflation: A. occurs when prices of resources rise, pushing up costs and the price level. B. occurs when total spending exceeds the economy's ability to provide output at the existing price level. C. occurs only when the economy has reached its absolute production capacity. D. is also called cost-push inflation.

B. occurs when total spending exceeds the economy's ability to provide output at the existing price level.

5. Dissaving means: A. the same thing as disinvesting. B. that households are spending more than their incomes. C. that saving and investment are equal.

B. that households are spending more than their incomes.

6. The investment demand curve show an inverse (negative) relationship between: A. investment and real GDP. B. the real interest rate and investment. C. investment and disposable income.

B. the real interest rate and investment

Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent 27.3. The consumer price index was 177.1 in 2001 and 179.9 in 2002. Compared to 2001, the rate of inflation in 2002 was about: A) 6.7 percent. B) 3.4 percent. C) 1.6 percent. D) 4.1 percent.

C) 1.6 percent.

28.11. The multiplier effect means that: A) consumption is typically several times as large as saving. B) a change in consumption can cause a larger increase in investment. C) an increase in investment can cause GDP to change by a larger amount. D) a decline in the MPC can cause GDP to rise by several times that amount.

C) an increase in investment can cause GDP to change by a larger amount.

28.2. If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: A) save is three-fifths. B) consume is one-half. C) consume is three-fifths. D) consume is one-sixth.

C) consume is three-fifths.

29.7. In a private closed economy, when aggregate expenditures equal GDP: A) consumption equals investment. B) consumption equals aggregate expenditures. C) planned investment equals saving. D) disposable income equals consumption minus saving.

C) planned investment equals saving.

28.3. In the late 1990s the U.S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the: A) Keynes effect. B) interest-rate effect. C) wealth effect. D) multiplier effect.

C) wealth effect.

Answer on the basis of the following data for a private closed economy. Possible levels of Domestic Output and Income (GDP = DI) Consumption $320 $320 330 327 340 334 350 341 360 348 370 355 380 362 3. If planned investment is $12 billion, the equilibrium level of GDP will be: A. $380. B. $370. C. $360.

C. $360.

9. With MPC = 0.6, if investment spending increases by $2 billion in the economy, the level of GDP will increase by: A. $3 billion. B. $1.2 billion. C. $5 billion.

C. $5 billion.

30. Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 6 percent in each of the two years. The annual real rate of interest is: A. 6 percent. B. 8 percent. C. 2 percent.

C. 2 percent.

8. If the marginal propensity to consume (MPC) is 0.6, the size of the government expenditure multiplier will be: A. 4.0. B. 6.0. C. 2.5.

C. 2.5.

Answer 12 - 15 based on information in the table below: Real Consumption Gross Net Gov't GDP (after taxes) Invstmnt Exprts Purchses $0 -$20 $10 +$5 $15 10 0 10 +5 15 40 20 70 40 100 60 (All Stay Same) 130 80 160 100 13. The multiplier in the economy shown above is: A. 5. B. 4. C. 3.

C. 3.

11. A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because: A. government spending is more employment-intensive than is either consumption or investment spending. B. government spending increases the money supply and a tax reduction does not. C. a portion of a tax cut that adds to the household's income will be saved and hence not add to the aggregate demand.

C. a portion of a tax cut that adds to the household's income will be saved and hence not add to the aggregate demand.

7. The multiplier effect means that: A. consumption is typically several times as large as saving. B. a change in consumption can cause a larger increase in investment. C. an increase in investment can cause GDP to increase by a larger amount.

C. an increase in investment can cause GDP to increase by a larger amount

27.11. The following group(s) benefit from inflation in an economy: A. savers B. fixed income workers C. borrowers D. lenders

C. borrowers

27.9. Inflation initiated by increases in wages or other resource prices is labeled: A. demand-pull inflation. B. demand-push inflation. C. cost-push inflation. D. cost-pull inflation.

C. cost-push inflation.

Answer the question on the basis of the following information about the hypothetical economy of Scoob. All figures are in millions. Unemployed...................7 Total Population..........145 Employed......................95 Discouraged workers.......3 27.7. Refer to the above information. If the natural rate of unemployment in Scoob is 5 percent, then: A. structural unemployment is about 3 percent. B. frictional unemployment is about 2 percent. C. cyclical unemployment is about 2 percent. D. hidden unemployment is about 5 percent.

C. cyclical unemployment is about 2 percent.

29.1. In the aggregate expenditures model, it is assumed that investment: A) automatically changes in response to changes in real GDP. B) changes by less in percentage terms than changes in real GDP. C) does not respond to changes in interest rates. D) does not change when real GDP changes.

D) does not change when real GDP changes.

18. The phase of the business cycle in which real GDP is at a minimum is called: a. the peak. b. a recession. c. the trough.

c. the trough.

28.10. The immediate determinants of investment spending are the: A) expected rate of return on capital goods and the real interest rate. B) level of saving and the real interest rate. C) marginal propensity to consume and the real interest rate. D) interest rate and the expected price level.

A) expected rate of return on capital goods and the real interest rate.

4. The most important determinant of consumption and saving in an economy is the: A. level of bank credit. B. level of household income. C. interest rate.

B. level of household income.

Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent 27.2. The amount of output being forgone by the above economy is: A) $12 billion. B) $15 billion. C) $18 billion. D) $24 billion.

D) $24 billion.

Disposable Income Consumption $200 $205 225 225 250 245 275 265 300 285 28.4. Refer to the above data. The marginal propensity to consume is: A) .25. B) .75. C) .20. D) .80.

D) .80.

23. Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would: a. decline. b. increase. c. increase in the short run but eventually decline.

a. decline.

20. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is: a. 3 percent. b. 6 percent. c. 7 percent.

b. 6 percent.

25. Which of the following constitute the types of unemployment occurring at the natural rate of unemployment? a. Frictional and cyclical unemployment. b. Structural and frictional unemployment. c. Cyclical and structural unemployment.

b. Structural and frictional unemployment.