Econ Test 2
Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?
. Aggregate demand and potential real GDP decrease continuously.
Question Help The short run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.
. positive; final goods and services; inputs
According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?
14 years
If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from
23.3 years to 17.5 years.
What is investment in a closed economy if you have the following economic data? Y = $10 trillion C = $5 trillion TR = $2 trillion G = $2 trillion
3 trillion
If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita
4.7%
If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2016, we would say that in the year 2016, the average American could buy ________ times as many goods and services as the average American in 1950.
8 times
If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money?
8 years and 9 months
Which aggregate supply curve has a positive slope?
short run only
The ________ curve has a positive slope because as prices of final goods and services rise, prices of inputs rise more slowly.
short−run aggregate supply
If Ebenezer Scrooge spends rather than saves his vast wealth he will
slow economic growth because he is reducing the amount of funds available for investment.
Potential GDP is
sometimes greater, sometimes less, and sometimes equal to actual real GDP.
which of the following best describes creative destruction
technological changes creates new products that drive old products out of the market
What two factors are the keys to determining labor productivity?
technology and the quantity of capital per hour worked
According to Douglass North, the Industrial Revolution occurred in England because
the British Parliament took control of the government and could credibly commit to upholding property rights
Human capital refers to which of the following?
the accumulated knowledge and skills workers acquire from education and training or from their life experience
Which of the following advances does your text describe as having contributed to the "New Economy" of the midminus−1990s?
the increased use of the Internet in selling products and services the lower cost and increased availability of laptop computers expanded cell phone use D.all of the above
Capital can be differentiated between physical capital and human capital. Human capital is Which of the following is the best example of human capital?
the knowledge and skills workers acquire from education and training or from their life experiences a worker gets a college degree
Potential GDP refers to
the level of GDP attained when all firms are producing at capacity.
What is potential GDP?
the level of real GDP in the long run
The economic growth model predicts that
the level of real GDP per capita in poor countries will grow faster than in rich countries.
The position of the long-run aggregate supply (LRAS) curve is determined by
the number of workers, the amount of capital, and the available technology.
Increases in real GDP since 1900 can actually underestimate growth in the standard of living for Americans since 1900 because
the quality of health care that exists today was not available in 1900.
Equilibrium in the loanable funds market determines
the real interest rate
An increase in the price level results in a(n) ___________ in the quantity of real GDP demanded because ___________.
decrease; a higher price level reduces consumption, investment, and net exports
When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.
imports; exports; net export
Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise
C. SRAS and AD do not shift.
Property rights have been determined to be a major factor that helps countries sustain economic growth. Governments can change laws and policies in order to give individuals and firms more freedom. By doing so, government can help promote growth because greater property rights
give entrepreneurs more incentive to take risks that create new products, ideas, and more technology.
________ of unemployment during ________ make it easier for workers to ________ wages.
Low levels; an expansion; negotiate higher
Potential GDP
B. increases over time as technological change occurs. C. increases over time as the labor force grows.
Which of the following policies is designed specifically to directly promote technological change in an economy?
government subsidization of research and development
Crowding out occurs when
governments must borrow funds which causes interest rates to rise and thus private investment is reduced.
Other high-income countries have had trouble completely closing the gap in real GDP per capita with the United States because the United States has
greater flexibility in labor markets and greater efficiency in the financial system.
Robert Lucas, a Nobel laureate in economics, argues that there are increasing returns t
human capital
Question Help All of the following policies are ways for a country to promote long-run economic growth except
imposing stricter regulations to limit foreign direct investment
Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?
They will shift the aggregate demand curve to the right.
The recession of 2007−2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?
This will shift the aggregate demand curve to the left.
If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?
This will shift the aggregate demand curve to the right.
Why do economic growth rates matter?
When a country sustains high growth rates, life expectancy at birth increases. High levels of sustained economic growth reduce infant mortality. High growth rates coincide with improved living standards. D.All of the above.
Which one of the following is not true when the economy is in macroeconomic equilibrium
When the economy is at long-run equilibrium, firms will have excess capacity
Which of the following best describes the "wealth effect"?
When the price level falls, the real value of household wealth rises.
Economics arrives at the conclusion that economic growth will always improve economic well-being. Do you agree?
Yes, economic growth increases living standards, improves health and education, and builds a corruption-free society.
Suppose you are discussing global trade with a friend who insists a country would be better off by restricting trade and investment with other countries. Which of the following economic responses would be the most logical for your discussion?
`I am not sure I agree. Countries that allow more globalization have experienced higher rates of economic growth and typically can utilize greater levels of foreign direct investment to increase economic growth
During the expansion phase of the business cycle, which of the following eventually increases
income, production, employment all of the above
"Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else." The statement is
incorrect. The supply of loanable funds is determined by household saving
There has been catchminus−up among ________, but there has not been catchminus−up among _______
industrialized countries such as Japan; all countries of the world
Which of the following increases labor productivity?
inventions of new machinery, equipment, or software
One concern with economic growth is that it may occur through a process Joseph Schumpter referred to as creative destruction. An issue that may arise with creative destruction
`is that the benefits of the creation of new goods, services, and industries may not be distributed evenly as some people lose their profits or employment in old services and industries.
Which of the following is an example of human capital
a college education
Which of the following would encourage economic growth through increases in the capital stock?
a decrease in the government deficit, a change from an income tax to a consumption tax, an increase in household savings all of the above
Countries with high rates of economic growth tend to have
a labor force that is more productive
The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off
investment and consumption spending.
The Congressional Budget Office reported that federal budget deficits in the United States were likely to increase in future years, and these higher deficits might "pose a threat to the economy by crowding out business investment and threatening a spike in interest rates." This higher budget deficit would be represented graphically by
a shift in the supply curve for loanable funds to the left
Which of the following is not one of the three sources of technological change
additional amounts of existing capital
Which of the following would cause the short−run aggregate supply curve to shift to the left?
an increase in inflation expectations
Which of the following is a factor explaining why low-income countries have not experienced rapid economic growth?
many low income countries have wars and revolutions disrupting economic activity
From August 2009 to August 2015, the Standard & Poor's Index of 500 stock prices more than doubled, while the consumer price index increased by just over 10 percent. These changes would have caused
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right
Milton Friedman argued that the Federal Reserve should adopt a ________ to reduce fluctuations in real GDP, employment, and inflation.
monetary growth rule
One of the lessons from the economic growth model presented in this chapter is that technological change is
more important than increases in physical capital in explaining long-run growth.
An increase in the price level will
move the economy up along a stationary short run aggregate supply curve.
Which of the following is not one of the key services provided by the financial system?
decreasing taxes
Actual real GDP will be above potential GDP if
firms are producing above capacity.
The financial system of a country is important for long-run economic growth because
firms need the financial system to acquire funds from household
the government policy that does not increase economic growth is
foreign trade policy that favors imposing a high tariff on imported high-tech goods
Longminus−run economic growth requires all of the following except
political instability.
Full-employment GDP is also known as
potential GDP
The long run aggregate supply curve shows the relationship between the ________ and _______
price level; quantity of real GDP supplied
The only way the standard of living of the average person in a country can increase is if ________ increases faster than ________.
production; population
New growth theory LOADING... suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge capital?
public education, patents, subsidies all of the above
India's rapid growth can be explained by
reduced regulations and market based reforms
Recessions typically cause the unemployment rate to ________ and the inflation rate to ________.
rise; fall
Workers expect inflation to rise from 3% to 5% next year. As a result this should
shift the short run aggregate supply curve to the left.
Which of the following policies would not help promote economic growth?
A law requiring that the funds in an individual retirement account be taxed
In the dynamic aggregated demand and aggregate supply model, inflation occurs if
AD shifts faster than SRAS
Which of the following is one explanation as to why the aggregate demand curve slopes downward?
Decreases in the price level raise real wealth and increase consumption spending.
Which of the following are assertions made by opponents of globalization?
Globalization has contributed to multinational firms moving production to low-income countries so they can pay their workers very low wages. Globalization has contributed to multinational firms moving production to low-income countries to avoid safety and environmental regulations that high-income countries require such firms to follow. Globalization has undermined the distinctive cultures of many countries. D.All of the above are assertions made by opponents of globalization.
How do changes in income tax policies affect aggregate demand?
Higher taxes reduce disposable income, consumption, and aggregate demand.
Find out which one of the following is not one of the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model.
In the dynamic AD-AS model, the economy does not experience long-run growth, whereas in the basic AD-AS model, the economy experiences both continuing inflation and growth.
The role of the entrepreneur becomes much more important in the new growth theory LOADING... long dash—the endogenous growth modellong dash—than in the traditional economic growth model LOADING... because
In the new growth theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies
When low income countries begin to experience economic growth, they often do so at rates much higher than current growth rates of industrial nations. Which of the following does not provide an explanation of this phenomenon?
Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital.
If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?
It is a vertical line at $4.2 trillion of GDP.
In a closed economy, the values for GDP, consumption spending, investment spending, transfer payments, and taxes are as follows: Y = $13 trillion C = $10 trillion I = $4 trillion TR = $3 trillion T = $4 trillion Using the information above, what is the value of private saving and public saving?
Private saving equals $2 trillion and public saving equals $2 trillion.
Which of the following is a true statement about long-run economic growth?
Small differences in economic growth rates result in big differences in living standards over time.
What is one difference between stocks and bonds?
Stocks represent partial ownership in a firm, while bonds do not.
German luxury car exports were hurt in 2009 as a result of the recession. How would this decrease in exports have affected Germany's aggregate demand curve?
The aggregate demand curve would have shifted to the left.
Milovia is a small open economy. The general price level in the economy has been increasing at a rate of about 7.5 percent each year. Jane Wilson, an industry analyst, is of the opinion that such high inflation is adversely affecting aggregate demand in the economy and therefore its ability to grow. Her colleague, Harry Gomes, however, disagrees. According to Harry, some amount of inflation is unavoidable in a growing economy. Higher prices for products help to increase the level of corporate profits and induce firms to increase aggregate output. Jane's argument is based on which of the following assumptions?
The purchasing power of nominal assets declines with an increase in the price level.
An economy that does not experience increases in technological progress
can experience economic growth by increasing capital, however, this will eventually stagnate and the economy will not continue to grow.
An economic growth model explains
changes in real GDP per capita in the long run.
An article in the Wall Street Journal notes that "raising productivity in the long run is the most effective way to elevate standards of living." Source: Greg Ip, "Politicians Should Pay Heed to Productivity Problem," Wall Street Journal, July 22, 2015. The claim of this article is
consistent with economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
In the long run, a country will experience an increasing standard of living only if it experiences
continuous technological change.
Economist Robert Gordon of Northwestern University has argued that: My interpretation of the [information] revolution is that it is increasingly burdened by diminishing returns. The push to ever-smaller devices runs up against the fixed size of the human finger that must enter information on the device. Most of the innovations since 2000 have been directed to consumer enjoyment rather than business productivity, including video games, DVD players, and iPods. iPhones are nice, but the ability to reschedule business meetings and look up corporate documents while on the road already existed by 2003. Source: Robert J. Gordon, "U.S. Productivity Growth over the Past Century with a View of the Future, "National Bureau of Economic Research Working Paper 15834, March 2010. If Gordon's observations about the information revolution are correct, that implies
it will be difficult to sustain high growth rates in U.S. labor productivity in the future.
At the macro-economy level,
knowledge capital exhibits increasing returns and physical capital exhibits decreasing returns
According to new growth theory,
knowledge capital is subject to increasing returns.
Because of the slope of the aggregate demand curve we can say that a decrease in the price level
leads to a higher level of real GDP demanded
The American Trucking Association anticipates a shortage of trucker drivers in coming years as the number of retirees exceeds the number of new drivers who enter the profession. The number of train boxcars is also expected to fall by over 40 percent in coming years because federal regulations limit boxcars to 50 years of service and many currently in use will reach that limit by 2020. Lumber and paper producers that depend on boxcars for their shipments fear that they will have to depend more on trucks for transportation, which will cost as much as 20 percent more than shipping by rail. Sources: Lindsay Ellis and Laura Stevens, "International Paper Focuses on Improving Shipment Planning, Wall Street Journal, July 30, 2015; and Bob Tita, "Why Railroads Can't Keep Enough Boxcars in Service," Wall Street Journal, June 21, 2015. The reduction in the number of trucks and boxcars will
likely increase transportation costs and shift the short-run aggregate supply curve to the left.
Since 1950, expansions in the United States have become ________, while recessions have become ________.
longer; shorter
Shortly before the fall of the Soviet Union, the economist Gur Ofer of the Hebrew University of Jerusalem, wrote this: "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." Source: Gur Ofer, "Soviet Economic Growth, 1928-1985," Journal of Economic Literature, December 1987, p. 1,784. This turned out to be a very poor growth strategy because
there were diminishing returns to capital.
Knowledge capital is nonrival in the sense that
two people can use the same knowledge to develop and produce a product.
Typically, as an economy begins to emerge from a recessionary phase of the business cycle,
unemployment continues to rise.
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." Source: Mary C. Daly, Bart Hobijn, and Timothy Ni, "The Path of Wage Growth and Unemployment," Federal Reserve Bank of San Francisco Economic Letter, July 15, 2013. Employers are hesitant to cut workers' salaries because wage cuts
upset workers and lower their productivity.