Econ Midterm 3 Study Guide
Trade Policy
A government policy that directly influences the quantity of goods and services that a country imports or exports
If a country had a trade surplus of $100 billion and then its exports rose by $40 billion and its imports rose by $30 billion, its net exports would now be A. $110 billion. B. $90billion. C. $70 billion. D. $60 billion.
A. $110 billion
Which of the following shifts long-run aggregate supply right? A. an increase in either technology or the human capital stock. B. an increase in human capital but not technology. C. an increase in technology, but not the human capital stock. D. neither an increase in technology nor the human capital stock.
A. An increase in either technology or the human capital stock.
An Italian company builds and operates a pasta factory in the United States. This is an example of Italian A. foreign direct investment that increases Italian net capital B. foreign direct investment that decreases Italian net capital outflow C. foreign portfolio investment that increases Italian net capital outflow D. foreign portfolio investment that decreases Italian net capital outflow
A. Foreign direct investment that increases Italian net capital
Which of the following is not included in aggregate demand? A. purchases of stock and bonds. B. purchases of services such as visits to the doctor. C. purchases of capital goods such as equipment in a factory. D. purchases by foreigners of consumer goods produced in the United States.
A. Purchases of stocks and bonds
A decrease in the interest rate could have been caused by A. a fall in the price level causing the money-demand curve to shift leftward. B. a fall in the price level causing the money-demand curve to shift rightward. C. a rise in the price level causing the money-demand curve to shift leftward. D. a rise in the price level causing the money-demand curve to shift rightward.
A. a fall in the price level causing the money-demand curve to shift leftward
A country sells more to foreign countries than it buys from them. It has A. a trade surplus and positive net exports. B. a trade surplus and negative net exports. C. a trade deficit and positive net exports. D. a trade deficit and negative net exports.
A. a trade surplus and positive net exports
Other things the same, an increase in the amount of capital firms wish to purchase would initially shift A. aggregate demand right B. aggregate demand left C. aggregate supply right D. aggregate supply left
A. aggregate demand right
According to the Phillips curve, policymakers can reduce inflation by A. contracting aggregate demand. This contraction results in a temporarily higher unemployment rate. B. contracting aggregate demand. This contraction results in a temporarily lower unemployment rate. C. expanding aggregate demand. This expansion results in a temporarily lower unemployment rate. D. expanding aggregate demand. This expansion results in a temporarily higher unemployment rate.
A. contracting aggregate demand. This contraction results in a temporarily higher unemployment rate
Other things the same, when the government spends less, the initial effect is that A. aggregate demand shifts right B. aggregate demand shifts left C. aggregate supply shifts right D. aggregate supply shifts left
B. aggregate demand shifts left
Tariff
Tax on imported goods
Trade policies __________ the trade balance a. change b. affect c. do not affect d. differ from
c. do not affect
Recession
falling incomes and rising unemployment
Contractionary Monetary Policy
occurs when a central bank acts to decrease the money supply
Expansionary Monetary Policy
occurs when a central bank acts to increase the money supply in an effort to stimulate the economy
What does a high US real interest rate do to net capital outflow? a. adds net capital outflow b. reduce net capital outflow
reduces net capital outflow
During a recession, the federal government should pursue A. expansionary fiscal policy by increasing government spending. B. expansionary monetary policy by increasing the money supply. C. contractionary fiscal policy by decreasing government spending. D. contractionary monetary policy by decreasing the money supply.
A. expansionary fiscal policy by increasing government spending
Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people to desire A. increased consumption, which shifts the aggregate-demand curve right B. increased consumption, which shifts the aggregate-demand curve left C. decreased consumption, which shifts the aggregate-demand curve right D. decreased consumption, which shifts the aggregate-demand curve left
A. increased consumption, which shifts the aggregate-demand curve right
When the Fed buys government bonds, the reserves of the banking system A. increase, so the money supply increases. B. increase, so the money supply decreases. C. decrease, so the money supply increases. D. decrease, so the money supply decreases.
A. increases, so the money supply increases
If the central bank increases the money supply, then in the short run prices A. rise and unemployment falls. B. fall and unemployment rises. C. and unemployment rise. D. and unemployment fall.
A. rise and unemployment falls
During an expansion, the economy experiences A. rising employment and prices. B. rising employment and falling prices. C. rising prices and falling employment. D. falling employment and prices.
A. rising employment and prices
Using the liquidity-preference model, when the Federal Reserve decreases the money supply, A. the equilibrium interest rate increases B. the aggregate-demand curve shifts to the right C. the quantity of goods and services demanded is changed for a given price level D. the short-run aggregate-supply curve shifts to the left
A. the equilibrium interest rate increases
Fiscal policy is determined by A. the president and Congress and involves changing government spending and taxation. B. the president and Congress and involves changing the money supply. C. the Federal Reserve and involves changing government spending and taxation. D. the Federal Reserve and involves changing the money supply.
A. the president and Congress and involves changing government spending and taxation
Which of the following is not a determinant of the long-run level of real GDP? A. the price level B. the amount of capital used by firms C. available stock of human capital D. available technology
A. the price level
A decrease in taxes shifts aggregate demand A. to the right. The larger the multiplier is, the farther it shifts. B. to the right. The larger the multiplier is, the less it shifts. C. to the left. The larger the multiplier is, the farther it shifts. D. to the left. The larger the multiplier is, the less it shifts.
A. to the right. The larger the multiplier is, the farther it shifts
If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is A. 0.2 and the multiplier is 1.25 B. 0.8 and the multiplier is 5 C. 0.2 and the multiplier is 1.25 D. 0.8 and the multiplier is 8
B. 0.8 and the multiplier is 5
If the sacrifice ratio is 3, then reducing the inflation rate from 5 percent to 3 percent would require sacrificing A. 2 percent of annual output. B. 6 percent of annual output. C. 8 percent of annual output. D. 11 percent of annual output.
B. 6 percent of annual output
If you go to the bank and notice that a dollar buys more Japanese yen than it used to, then the dollar has A. appreciated. Other things the same, the appreciation would make Americans less likely to travel to Japan B. appreciated. Other things the same, the appreciation would make Americans more likely to travel to Japan C. depreciate. Other things the same, the depreciation would make Americans less likely to travel to Japan D. depreciate. Other things the same, the depreciation would make Americans more likely to travel to Japan
B. Appreciated. Other things the same, the appreciation would make Americans more likely to travel to Japan
The law of one price states that A. a good must sell at the price fixed by law. B. a good must sell at the same price at all locations. C. a good cannot sell for a price greater than the legal price ceiling. D. nominal exchange rates will not vary.
B. a good must sell at the same price at all locations
If purchasing-power parity holds, a dollar will buy A. more goods in foreign countries than in the United States B. as many goods in foreign countries as it does in the United States C. fewer goods in foreign countries than it does in the United States D. none of the above is implied by purchasing-power parity
B. as many goods in foreign countries as it does in the United States
If the Federal Reserve decided to decrease interest rates, it could A. buy bonds to decrease the money supply. B. buy bonds to increase the money supply. C. sell bonds to decrease the money supply. D. sell bonds to increase the money supply.
B. buy bonds to increase the money supply
A firm in China sells toys to a U.S. department store chain. Other things the same, these sales A. increase U.S. net exports and decrease Chinese net exports. B. decrease U.S. net exports and increase Chinese net exports. C. increase U.S. and Chinese net exports. D. decrease U.S. and Chinese net exports.
B. decrease U.S. net exports and increase Chinese net exports
If the U.S. real exchange rate appreciates, U.S. exports A. increase and U.S. imports decrease. B. decrease and U.S. imports increase. C. and U.S. imports both increase. D. and U.S. imports both decrease.
B. decrease and U.S. imports increase
During an expansion, the federal government should attempt to A. fight inflation by increasing aggregate demand. B. fight inflation by decreasing aggregate demand. C. fight unemployment by increasing aggregate demand. D. fight unemployment by decreasing aggregate demand.
B. fight inflation by decreasing aggregate demand
In the short run, a decrease in the money supply causes interest rates to A. increase, and aggregate demand to shift right B. increase, and aggregate demand to shift left C. decrease, and aggregate demand to shift right D. decrease, and aggregate demand to shift left
B. increase, and aggregate demand to shift left
Assume the MPC is 0.8. Assuming only the multiplier effect matters, a decrease in government purchases of $100 billion will shift the aggregate demand curve to the A. left by $180 billion. B. left by $500 billion. C. right by $180 billion. D. right by $400 billion.
B. left by $500 billion
A depreciation of the U.S. real exchange rate induces U.S. consumer to buy A. fewer domestic goods and fewer foreign goods B. more domestic goods and fewer foreign goods C. fewer domestic goods and more foreign goods D. more domestic goods and more foreign goods
B. more domestic goods and fewer foreign goods
An increase in the money supply will A. increase interest rates, decreasing investment and aggregate demand. B. reduce interest rates, increasing investment and aggregate demand. C. reduce interest rates, decreasing investment and increasing aggregate demand. D. increase interest rates, increasing investment and aggregate demand.
B. reduce interest rates, increasing investment and aggregate demand
The investment component of GDP measures spending on A. financial assets such as stocks and bonds. During recessions it declines by a relatively large amount. B. residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount. C. financial assets such as stocks and bonds. During recessions it declines by a relatively small amount. D. residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively small amount.
B. residential construction, business equipment, business structures, and changes in inventory
When the Mexican peso gets "stronger" relative to the dollar, A. the U.S. trade deficit with Mexico rises. B. the U.S. trade deficit with Mexico falls. C. the U.S. trade deficit with Mexico is unchanged. D. None of the above necessarily happens.
B. the U.S. trade deficit with Mexico falls
You are planning a graduation trip to Mexico. Other things the same, if the dollar depreciates relative to the peso, then A. the dollar buys fewer pesos. Your hotel room in Mexico will require fewer dollars. B. the dollar buys fewer pesos. Your hotel room in Mexico will require more dollars. C. the dollar buys more pesos. Your hotel room in Mexico will require fewer dollars. D. the dollar buys more pesos. Your hotel room in Mexico will require more dollars.
B. the dollar buys fewer pesos. Your hotel room in Mexico will require more dollars
Which of the following tends to make aggregate demand shift further to the right than the amount by which government expenditures increase? A. the crowding-out effect. B. the multiplier effect. C. the exchange-rate effect. D. the interest-rate effect.
B. the multiplier effect
The logic of the multiplier effect applies A. only to changes in government spending. B. to any change in spending on any component of GDP. C. only to changes in the money supply. D. only when the crowding-out effect is sufficiently strong.
B. to any change in spending on any component of GDP
If exports and imports are exactly equal
Balanced Trade
If the MPC = 4/5, then the government purchases multiplier is A. 5/4. B. 4/5. C. 5. D. 20.
C. 5
Net Capital Outflow
Refers to the difference between the purchase of foreign assets by domestic residents and the purchase of domestic assets by foreigners
If the MPC is 5/6 then the multiplier is A. 6/5, so a $200 increase in government spending increases aggregate demand by $240. B. 5, so a $200 increase in government spending increases aggregate supply by $1000. C. 6, so a $200 increase in government spending increases aggregate demand by $1200. D. 6/5, so a $200 increase in government spending increases aggregate supply by $1200.
C. 6, so a $200 increase in government spending increases aggregate demand by $1200
During a recession, the federal government should attempt to A. fight inflation by increasing aggregate demand. B. fight inflation by decreasing aggregate demand. C. fight unemployment by increasing aggregate demand. D. fight unemployment by decreasing aggregate demand.
C. fight unemployment by increasing aggregate demand
Which of the following statements is correct? A. In the short run, unemployment and inflation are positively related. In the long run they are largely unrelated problems. B. Inflation and unemployment are positively related in the short run and in the long run. C. In the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems. D. Inflation and unemployment are negatively related in the short run and in the long run.
C. in the short run, unemployment and inflation are negatively related. In the long run they are largely unrelated problems
Which of the following sequences best explains the negative slope of the aggregate-demand curve? A. price level ↑ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↑ ⇒ quantity of goods and services demanded ↓ B. pricelevel↑⇒demandformoney↑⇒equilibriuminterestrate↓⇒quantityofgoodsand services demanded ↓ C. price level ↓ ⇒ demand for money ↓ ⇒ equilibrium interest rate ↓ ⇒ quantity of goods and services demanded ↑ D. price level ↓ ⇒ equilibrium interest rate ↓ ⇒ demand for money ↑ ⇒ quantity of goods and services demanded ↑.
C. price level decrease, demand for money decrease, equilibrium interest rate decrease, quantity of goods and services demanded increase
If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds, A. the dollar would appreciate which would cause aggregate demand to shift right B. the dollar would appreciate which would cause aggregate demand to shift left C. the dollar would depreciate which would cause aggregate demand to shift right D. the dollar would depreciate which would cause aggregate demand to shift left
C. the dollar would depreciate which would cause aggregate demand to shift right
If the multiplier is 3, then the MPC is A. 1/3 B. 3/4 C. 4/3 D. 2/3
D. 2/3
If Chileans buy more U.S. stocks and bonds and U.S. residents buy more Chilean wine, then A. both U.S. net exports and U.S. net capital outflows rise B. U.S. net exports rise and U.S. net capital outflow fall C. U.S. net exports fall and U.S. net capital outflows rise D. both U.S. net exports and U.S. net capital outflow falls
D. both U.S. net exports and U.S. net capital outflow falls
During an expansion, the federal reserve should pursue A. expansionary fiscal policy by increasing government spending. B. expansionary monetary policy by increasing the money supply. C. contractionary fiscal policy by decreasing government spending. D. contractionary monetary policy by decreasing the money supply.
D. contractionary monetary policy by decreasing the money supply
People are likely to want to hold more money if the interest rate A. increases, making the opportunity cost of holding money rise. B. increases, making the opportunity cost of holding money fall. C. decreases, making the opportunity cost of holding money rise. D. decreases, making the opportunity cost of holding money fall.
D. decreases, making the opportunity cost of holding money fall
If the U.S. real exchange rate appreciates, U.S. exports to Europe A. and European exports to the U.S. both rise B. and European exports to the U.S. both fall C. rise, and European exports to the U.S. fall D. fall, and European exports to the U.S. rise
D. fall, and European exports to the U.S. rise
During a recession, the economy experiences A. rising employment and prices. B. rising employment and falling prices. C. rising prices and falling employment. D. falling employment and prices.
D. falling employment and prices
When taxes decrease, consumption A. decreases as shown by a movement to the left along a given aggregate-demand curve B. decreases as shown by a shift of the aggregate demand curve to the left C. increases as shown by a movement to the right along a given aggregate-demand curve D. increases as shown by a shift of the aggregate demand curve to the right
D. increases as shown by a shift of the aggregate demand curve to the right
When households decide to hold more money, A. interest rates fall and investments decrease B. interest rates fall and investments increase C. interest rates rise and investment increases D. interest rates rise and investments decreases
D. interest rates rise and investment decreases
When the money supply decreases A. interest rates fall and so aggregate demand shifts right B. interest rates fall and so aggregate demand shifts left C. interest rates rise and so aggregate demand shifts right D. interest rates rise and so aggregate demand shifts left
D. interest rates rise and so aggregate demand shifts left
A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a U.S. company. As a result of these transactions, Chinese A. net exports increase, and U.S. net capital outflow increases B. net exports increase, and U.S. net capital outflow decreases C. net exports decrease, and U.S. net capital outflow increases D. net exports decrease, and U.S. net capital outflow decreases
D. net exports decease, and U.S. net capital outflow decreases
A Chinese company exchanges yuan (Chinese currency) for dollars. It uses these dollars to purchase scrap metal from a U.S. company. As a result of these transactions, Chinese A. net exports increase, and U.S. net capital outflow increases B. net exports increase, and U.S. net capital outflow decreases C. net exports decrease, and U.S. net capital outflow increases D. net exports decrease, and U.S. net capital outflow decreases
D. net exports decrease, and U.S. net capital outflow decreases
If the interest rate is below the Fed's target, the Fed should A. buy bonds to increase the money supply. B. buy bonds to decrease the money supply. C. sell bonds to increase the money supply. D. sell bonds to decrease the money supply.
D. sell bonds to decrease the money supply
Monetary policy is determined by A. the president and Congress and involves changing government spending and taxation. B. the president and Congress and involves changing the money supply. C. the Federal Reserve and involves changing government spending and taxation. D. the Federal Reserve and involves changing the money supply.
D. the Federal Reserve and involves changing the money supply
If you are vacationing in France and the dollar depreciates relative to the euro, then A. the dollar buys more euros. It will take fewer dollars to buy a good that costs 50 euros B. the dollar buys more euros. It will take more dollars to buy a good that costs 50 euros C. the dollar buys fewer euros. It will take fewer dollars to buy a good that costs 50 euros D. the dollar buys fewer euros. It will take more dollars to buy a good that costs 50 euros
D. the dollar buys fewer euros. It will take more dollars to buy a good that costs 50 euros
The dollar is said to appreciate against the euro if A. the exchange rate falls. Other things the same, it will cost fewer euros to buy U.S. goods. B. the exchange rate falls. Other things the same, it will cost more euros to buy U.S. goods. C. the exchange rate rises. Other things the same, it will cost fewer euros to buy U.S. goods. D. the exchange rate rises. Other things the same, it will cost more euros to buy U.S. goods.
D. the exchange rate rises. Other things the same, it will cost more euros to buy U.S. goods
People choose to hold a larger quantity of money if A. the interest rate rises, which causes the opportunity cost of holding money to rise B. the interest rate falls, which causes the opportunity cost of holding money to rise C. the interest rate rises, which causes the opportunity cost of holding money to fall D. the interest rate falls, which causes the opportunity cost of holding money to fall
D. the interest rate falls, which causes the opportunity cost of holding money to fall
If aggregate demand shifts left, then in the short run A. the price level and real GDP both rise B. the price level rises and real GDP falls C. the price level falls and real GDP rises D. the price and real GDP both fall
D. the price and real GDP both fall
The long-run effect of an increase in net exports is to raise A. both real output and the price level. B. real output and lower the price level. C. real output and leave the price level unchanged. D. the price level and leave real output unchanged.
D. the price level and leave real output unchanged
Federal Gov is related to
Fiscal policy
Foreign Direct Investment
If McDonalds opens up a fast food restaurant in Russia
Foreign Portfolio Investment
If an American bought stocks in Russian corporation
Federal reserve is related to
Monetary policy
Net capital outflow must always equal net exports (x-m)
NCO=NX
Net exports are also called ______
Trade Balance
If net exports are negative, exports are less than imports, indicating that they country sells fewer goods and serviced abroad than it buys from other countries
Trade Deficit
If net exports are positive, exports are greater than imports, indicating that the country sells more goods and services abroad than it buys from other countries
Trade Surplus
Depreciation
a decrease in the value of a currency as measured by the amount of foreign currency it can buy
Law of one price
a god must sell for the same price in all locations
Capital flight
a large and sudden reduction in the demand for assets located in a country
Import quota
a limit on the quantity of a good produced abroad that can be sold domestically
depression
a severe recession
Appreciation
an increase in the value of a currency as measured by the amount of foreign currency it can buy
A higher interest rate encourages people to ____ and, therefore, _______ the quantity of loanable funds supplied a. save, decreases b. save, increases c. invest, decreases d. invest, increases
b. save, increases
Fluctuations in the economy are often called ____ a. changes b. the fluctuation cycle c. the business cycle d. economy
c. the business cycle
If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S. bonds, a. the dollar would appreciate which would cause aggregate demand to shift right b. the dollar would appreciate which would cause aggregate demand to shift left c. the dollar would depreciate which would cause aggregate demand to shift right d. the dollar would depreciate which would cause aggregate demand to shift left
c. the dollar would depreciate which would cause aggregate demand to shift right
Nominal exchange rate
the rate at which a person can trade the currency of one country for the currency of another
Real exchange rate
the rate at which a person can trade the goods and services of ones country for the goods and services of another
Purchasing-power parity
theory states that a unit of any given currency should be able to buy the same quantity of goods in all countries
