Econ Test Numero Dos

GDP in an economy is $4600 billion. Consumer expenditures are $3500 billion, government purchases are $900 billion, and gross private domestic investment is $400 billion. Net exports are: +$200 billion. -$400 billion. -$200 billion. +$400 billion.

-$200 billion.

Other things equal, what effect will each of the following have on the equilibrium price level? A. An increase in aggregate supply, with no change in aggregate demand. B. Equal increases in aggregate demand and short-run aggregate supply. C. An increase in aggregate demand and a decrease in aggregate supply.

1. Output will increase. Price will drop. 2. Output will increase, but the price will not change. 3. The price will increase, but the change in output is not known.

If the Consumer Price Index was 166.6 in one year and 172.2 in the next year, then the rate of inflation from one year to the next year was: 5.4 percent. 6.0 percent. 4.1 percent. 3.4 percent.

3.4 percent. The rate of inflation for a certain year is found by comparing, in percentage terms, that year's Consumer Price Index with the index in the previous year. In this case, the inflation rate is (172.2-166.6)/166.6=0.034, or 3.4 percent.

Which of the following are contractionary fiscal policies? No change in taxation and increased in government spending. Decreased taxation and no change in government spending. Increased taxation and decreased government spending. Increased taxation and increased government spending.

Increased taxation and decreased government spending.

How does unanticipated inflation hurt creditors and help borrowers?

Presuming we ignore interest, the same number of dollars borrowed should be repaid. However, if unanticipated inflation occurs, prices go up and the value of the dollar goes down. Therefore, the borrower will end up paying back less-valued dollars than those they received from the lender. The loaner then suffers a loss of real income. This causes real income to be redistributed from the loaner to the borrower.

The combination of fiscal policies that would reinforce each other and be most expansionary would be a (n): increase in government spending and taxes. decrease in government spending and an increase in taxes. increase in government spending and a decrease in taxes. decrease in government spending and taxes.

increase in government spending and a decrease in taxes.

A decline in the quantity of real output demanded along the aggregate demand curve is a result of a(n): increase in the level of income. increase in the price level. decrease in the price level. decrease in the level of income.

increase in the price level.

A distinguishing characteristic of public transfer payments is that: they are counted as part of government purchases in the calculation of the gross domestic product. they are used to subsidize the major transportation carriers to reduce transportation costs. the recipients make no contribution to current production in return for them. there is a tax on the amount of the subsidy above a certain income level.

the recipients make no contribution to current production in return for them.

A statement that is often used to describe demand-pull inflation is: "It is important to have some skin in the game". "Too much money chasing too few goods". "A rising tide lifts all boats". "Money is easily earned, but not easily saved".

"Too much money chasing too few goods".

Unanticipated inflation arbitrarily: "taxes" those who receive fixed money incomes. "penalizes" those who borrow money. "subsidizes" those who receive fixed money incomes. "benefits" those who save money.

"taxes" those who receive fixed money incomes.

Suppose that an economy produces 500 units of outputs. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this output. The per-unit cost of production is: $1.24. $0.70. $0.40. $1.42.

$0.70. Per-unit production cost = total input cost/units of output = (10*15+4*50)/500=$0.70.

Suppose that real domestic output in an economy is 2400 units, the quantity of inputs is 60, and the price of each input is $30. The per-unit cost of production is: 0.25. $0.75. $2.00. $0.50.

$0.75. Per-unit production cost=Total input cost/units of output = (60*30)/2400=$0.75.

Refer to the above graph, which shows an aggregate demand curve for a hypothetical economy. If the price level is 200, the quantity of real GDP demanded is: $500 billion. $700 billion. $600 billion. $800 billion.

$600 billion.

The descriptions give the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment. 1. Mollie just graduated from college and is now looking for work. She has has three job interviews in the past month. 2. George works in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in several months when national economic conditions improve. 3. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the federal government cut defense spending. She has been looking for similar jobs, but no company seems interested in her aircraft design skills. 4. Ricardo lost his job last year when his company downsized. He tried to find another job for a year but was unsuccessful and quit looking for work. Which one best describes the frictional unemployment? 2 1 3 4

1

What are three types of unemployment? What is full employment? Why is the full employment less than 100 percent of the labor force?

1. frictional unemployment, structural unemployment, and cyclical unemployment 2. Full employment is when the economy only experiences structural unemployment and frictional unemployment are present. There is no cyclical unemployment. 3. Frictional and structural unemployment are unavoidable in an economy, therefore, the full employment is less than 100 percent employment of the labor force. Full-employment rate of unemployment is also called the natural rate of unemployment, which is equal to the total of frictional and structural unemployment.

Because the United States has an unemployment compensation program that provides income for those out of work, why should we worry about unemployment?

The economic cost of unemployment is equal to forgone output. When the economy fails to create enough jobs for all who have skills and are willing to work, potential production is lost, and this means forgone income for individuals. Unemployment compensation is costly, and those funds could be otherwise be spent on other goods and services. Because the government only transfers money, this is not counted as production and therefore doesn't contribute to the GDP. Unemployment compensation is not the way to solve the issue, unemployment rates need to decrease.

What are government's fiscal policy options for moving the economy out of a recession?

The fiscal policy options for the government include an increase in government spending, a decrease in taxation, or a combination of both.

Which is best considered an efficiency factor in economic growth? The quantity of natural resources. The full employment of resources. The quantity of human resources. The quality of human resources.

The full employment of resources.

An expected decline in the prices of consumer goods will: increase aggregate demand. increase the quantity of real domestic output demanded. decrease aggregate demand. decrease the quantity of real domestic output demanded.

decrease aggregate demand. This question is very tricky, expectations of lower future prices (or lower future income) will reduce the consumers' current consumption and shift the aggregate demand curve to the left. conversely, a widely held expectation of high future prices (or higher future income) will increase aggregate demand today because consumers want to buy products before their prices escalate.

Which is an example of an automatic stabilizer? As real GDP decreases, income tax revenues: and transfer payments increase. increase and transfer payments decrease. and transfer payments decreases. decrease and transfer payments increase.

decrease and transfer payments increase.

A contractionary fiscal policy can be illustrated by a (n): decrease in aggregate demand. increase in aggregate supply. increase in aggregate demand. change in the price level.

decrease in aggregate demand.

A decrease in government spending will cause a(n): decrease in aggregate demand. increase in aggregate demand. decrease in the quantity of real domestic output demanded. increase in the quantity of real domestic output demanded.

decrease in aggregate demand.

Why are only final goods counted in measuring GDP for a particular year? Why is the value of used furniture that's bought and sold not counted?

The dollar value of intermediate goods is included in the dollar value of final goods. If you were to count intermediate goods separately, there would be a case of multiple counting. GDP measures new production, therefore, resale furniture was counted in a previous year's GDP. Resale does not equal new production.

Net exports is a positive number when: a nation's exports of goods and services exceed its import. a nation's import of goods and services exceed its exports. depreciation is greater than gross private domestic investment. gross private domestic investment is greater than depreciation.

a nation's exports of goods and services exceed its import.

If the GDP gap is negative, then: actual GDP is less than potential GDP. the inflation rate is rising. the unemployment rate is falling. potential GDP is less than actual GDP.

actual GDP is less than potential GDP.

If the dollar appreciates in value relative to foreign currencies: aggregate demand decreases. aggregate demand increases. the quantity of real domestic output demanded decreases. the quantity of real domestic output demanded increases.

aggregate demand decreases. Tricky question! The dollar appreciates in value relative to foreign currencies, means that the dollar becomes more expensive or increases the purchasing power when importing goods and services from other countries, therefore, the imports will be increased, however, the appreciation of dollar makes the export goods and services more expensive for other countries who importing them, therefore, the exports will be decreased. with decreased exports and increased imports, you can tell the net exports will be decreased, and as one of the factors locate the aggregate demand curve, will shift the demand curve to the left and decrease the aggregate demand.

Countercyclical discretionary fiscal policy calls for: surpluses during recessions and deficits during periods of demand-pull inflation. deficits during recessions and surpluses during periods of demand-pull inflation. deficits during both recessions and periods of demand-pull inflation. surpluses during both recessions and periods of demand-pull inflation.

deficits during recessions and surpluses during periods of demand-pull inflation.

Inflation caused by an increase in aggregate spending is referred to as: hyperinflation. demand-pull inflation. cost-push inflation. demand-push inflation.

demand-pull inflation.

The short-run aggregate supply curve shows the: direct relationship between the price level and real GDP purchased. direct relationship between the price level and real GDP produced. inverse relationship between the price level and real GDP produced. inverse relationship between the price level and real GDP purchased.

direct relationship between the price level and real GDP produced.

The intersection of the aggregate demand and aggregate supply curves determines the: per-unit cost of production in the economy. shape of the aggregate supply curve. shape of the aggregate demand curve. equilibrium level of real domestic output and prices.

equilibrium level of real domestic output and prices.

In calculating the unemployment rate, "discouraged" workers who are not actively seeking employment are: treated the same as part-time workers. excluded. included. included in the labor force.

excluded.

If the Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a (n): expansionary fiscal policy. contractionary fiscal policy. nondiscretionary fiscal policy. supply-side fiscal policy.

expansionary fiscal policy.

A federal budget deficit exists when: federal government taxation is decreasing. federal government assets are less than liabilities. federal government spending exceeds tax revenues. federal government spending is increasing.

federal government spending exceeds tax revenues.

To avoid multiple counting in national income accounts, only: final goods and services should be counted. primary, intermediate, and final goods and services should be counted. both final and intermediate goods and services should be counted. intermediate goods and services should be counted.

final goods and services should be counted.

When the federal government uses taxation and spending actions to stimulate the economy, it is conducting: monetary policy. incomes policy. fiscal policy. employment policy

fiscal policy.

The immediate-short-run aggregate supply curve is: vertical. horizontal. upward sloping. downward sloping.

horizontal.

The slope of the immediate-short-run aggregate supply curve is based on the assumption that: both input and output prices are fixed. input prices are fixed, but output prices are flexible. neither input nor output prices are fixed. input prices are flexible, but output prices are fixed.

both input and output prices are fixed.

An expected rise in the rate of inflation for consumer goods will: decrease current aggregate demand. increase current aggregate supply. increase current aggregate demand. decrease current aggregate supply.

increase current aggregate demand.

A nation has a population of 260 million people. Of these, 60 million are retired, in the military, in institutions, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate? 27 percent. 9 percent. 6 percent. 4 percent.

6 percent. Calculating the unemployment rate requires dividing the number of unemployed into the labor force. In this case, there are 12 million unemployed and 200 million in the labor force, so unemployment is 12million/200 million, or 6 percent.

Assuming the total population is 200 million, the labor force is 100 million, and 92 million workers are employed, the unemployment rate is: 8 percent. 10 percent. 4 percent. 6 percent.

8 percent.

Inflation caused by a rise in per-unit production costs is referred to as: demand-pull inflation. hyperinflation. unanticipated inflation. cost-push inflation.

cost-push inflation.

When the federal government cuts taxes and increases spenidng to stimulate the economy during a period of recession, such actions are designed to be: countercyclical. automatic. passive. nondiscretionary.

countercyclical.

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, the official unemployment rate would: decline. increase in the short run but eventually decline. be unchanged. increase.

decline.

If Congress passed new laws significantly increasing the regulation of business, this action will tend to: increase per-unit production costs and shift the aggregate supply curve to the right. increase per-unit production costs and shift the aggregate demand curve to the right. increase per-unit production costs and shift the aggregate demand curve to the left. increase per-unit production costs and shift the aggregate supply curve to the left.

increase per-unit production costs and shift the aggregate supply curve to the left.

In year 1, inventories rose by $25 billion. In year 2, inventories fell by $20 billion. In calculating total investment, national income accounts would have: increased it by $25 billion in year 1 and decreased it by $5 billion in year 2. decreased in by $25 billion in year 1 and increased it by $20 billion in year 2. decreased it by $25 billion in year 1 and increased it by $5 billion in year 2. increased it by $25 billion in year 1 and decreased it by $20 billion in year 2.

increased it by $25 billion in year 1 and decreased it by $20 billion in year 2.

Refer to the above diagram, when AD1 shifts to AD2, real output: increases from Q1 to Q3, while the price level declines. increases from Q1 to Q2, while the price level stays the same. stays the same, while the price level rises. increases from Q1 to Q2, while the price level rises.

increases from Q1 to Q2, while the price level rises.

The crowding-out effect suggests that: high taxes reduce both consumption and saving. increases in government spending will close a recessionary expenditure gap. increases in consumption are always at the expense of saving. increases in government spending may raise the interest rate and thereby reduce private investment.

increases in government spending may raise the interest rate and thereby reduce private investment.

Money spent on the purchase of a new house is included in the GDP as a part of: investment. personal saving. personal consumption expenditures. the consumption of private fixed capital.

investment.

A peak in the business cycle: occurs when the unemployment rate is its greatest. occurs when the inflation rate is its lowest. is a temporary maximum point. is a temporary minimum point.

is a temporary maximum point.

The best example of a "frictionally unemployed" worker is one who: is discouraged and not actively seeking work. is in the process of voluntarily switching jobs. is laid off during a recessionary period in the economy. reduces productivity by causing frictions in a business.

is in the process of voluntarily switching jobs.

Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated inflation occurs in the economy, then: lenders are hurt, but borrowers benefit. both lenders and borrowers benefit. borrowers are hurt, but lenders benefit. both lenders and borrowers are hurt.

lenders are hurt, but borrowers benefit.

An aggregate supply curve shows the: level of real domestic output that will be produced at each possible price level. level of real domestic output that will be purchased at each possible price level. price level at which real domestic output will be in equilibrium. price level at which real domestic output will be purchased.

level of real domestic output that will be produced at each possible price level.

Fiscal policy refers to the: fact that equal increases in government spending and taxation will be contractionary. manipulation of government spending and taxes to achieve greater equality in the distribution of income. altering of the interest rate to change aggregate demand. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

An example of a final good in national income accounts would be a new: tractor purchased by a construction company. microcomputer purchased by an executive for business use microcomputer purchased by an executive for personal use. automobile purchased by a travel agency

microcomputer purchased by an executive for personal use.

GDP measured using current prices is called: nominal GDP. constant GDP. real GDP. deflated GDP.

nominal GDP.

Refer to the above diagram, the phase of the business cycle from points A to D are, respectively: expansion, recession, trough, peak. peak, recession, expansion, trough. trough, recovery, expansion, peak. peak, recession, trough, expansion.

peak, recession, trough, expansion.

The aggregate demand curve is the relationship between the: price level and the purchasing of real domestic output. price level and the sales of producers. real domestic output bought and the real domestic output sold. price level and the distribution of real domestic output.

price level and the purchasing of real domestic output.

If the price index is 130, this means that: nominal GDP must be inflated to determine the real GDP. prices are 0.13 times higher than in the base year. prices are 130 percent higher than in the base year. prices are 30 percent higher than in the base year.

prices are 30 percent higher than in the base year.

The time that elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a (n): oerational lag. budget lag. recognition lag. administrative lag.

recognition lag.

A worker who loses a job at a call center because business firms switch the call center to another country is an example of: disguised unemployment. structural unemployment. frictional unemployment. cyclical unemployment.

structural unemployment.

The value of U.S. import is: subtracted from exports when calculating GDP because imports do not constitute spending by Americans. added to exports when calculating GDP because imports reflect spending by Americans. added when calculating GDP because imports do not constitute production in the United States. subtracted from exports when calculating GDP because imports do not constitute production in the United States.

subtracted from exports when calculating GDP because imports do not constitute production in the United States.

The federal budget deficit is calculated each year by: subtracting consumption and investment from government spending. adding up the difference between government revenues and spending over the years of the nation's existence. subtracting government spending from government revenues. adding up consumption, investment, government purchases, and net exports.

subtracting government spending from government revenues.

If the government wishes to increase the level of real GDP, it might reduce: taxes. its purchases of goods and services. the size of the budget deficit. transfer payments.

taxes.

The single most important source of productivity for economic growth for the United States has been: economies of scale. improved resource allocation. technological advance. education and training.

technological advance.

Inflation is a rise in: the standard of living over time. real GDP. the general level of prices over time. industrial production.

the general level of prices over time.

An increase in aggregate demand would be most likely caused by a decrease in: expected future prices. the wealth of consumers. the tax rates on household income. consumer confidence.

the tax rates on household income.

GDP tends to underestimate the productive activity in the economy because it excludes the value of output from: public transfer payments to households. the consumption of fixed capital. intermediate goods. the underground economy.

the underground economy.

The long-run aggregate supply curve is: vertical, and a graph of the short-run aggregate supply curve is upsloping. horizontal, and a graph of the short-run aggregate supply is upsloping. upsloping, and a graph of the short-run aggregate supply is vertical. downsloping, and a graph of the short-run aggregate supply is horizontal.

vertical, and a graph of the short-run aggregate supply curve is upsloping.

Wage contracts, menu costs, and the minimum wage are explanations for why there is little support for the existence of a real-balances effect. competition results in price wars. the aggregate demand curve slopes downward. wages tend to be inflexible downward.

wages tend to be inflexible downward

You might wonder if the large public debt may bankrupt the United States or at least place a tremendous burden on your children and grandchildren. However, the large U.S. public debt doesn't threaten to bankrupt the federal government, leaving it unable to meet its financial obligations. Please list at least two main reasons WITH EXPLANATIONS. Your own words are highly encouraged.

(1).The country with higher income, which is GDP, usually can carry a heavier debt than a poor country does, and GDP indicates the ability of a country to pay the debt, therefore, as one of the top countries making over 18 trillion dollars per year, United States has the stable ability to pay off the debt. (Please understand that the interest is actually the huge burden, and every year we pay over 4% of the GDP as interest, and of course, the longer term and larger size generate heavier interest.) (2).Refinancing—As long as the U.S. public debt is viewed by lenders as manageable and sustainable, the public debt is easily refinanced. How? It refinances the debt by selling new bonds and using the proceeds to pay holders of the maturing bonds. (3).Taxation—The federal government has the constitutional authority to levy and collect taxes, which is the major income of federal government. A tax increase is a government option for gaining sufficient revenue to pay interest and principal on the public debt. (4).The U.S. owes a substantial portion of the public debt to itself (over 68%), which means over 68% of the public debt is a liability to Americans (taxpayers), it is simultaneously an asset to Americans (as holders of Treasury bills, Treasury notes, Treasury bonds, and U.S. saving bonds), only 32% of the public debt owned by foreigners. When the liabilities pass down to the next generations, so does the asset.

Refer to the above graph, which factor will shift AS1 to AS2? A decrease in business taxes. An increase in input prices. A decrease in business subsidies. An increase in real interest rates.

A decrease in business taxes.

Which of the following are included in this year's GDP and which are not? Explain your answer in each case. A. Steak bought by the restaurant. B. Lettuce bought by a housewife. C. An auto dealer's sale of a new car to a nonbusiness customer. D. The money received by Susan when she sells her used clothes to her neighbor. E. The unemployment compensation purchased by government.

A. Not counted. This would be a case of an intermediate good. Only final goods are counted. B. Counted. This would be a consumption good. C. Counted. This is a final good and therefore should be counted. D. Not counted. Resale goods were already counted into GDP of the year they were made. E. Not counted. There is no production, just transferring of money.

Which is NOT a supply factor in economic growth? The quantity and quality of labor. An efficient allocation of resources. Natural resources. Technological knowledge.

An efficient allocation of resources.

Which combination of factors would most likely increase aggregate demand? An increase in household indebtedness and a decrease in foreign demand for products. An increase in consumer wealth and a decrease in interest rates. An increase in personal taxes and a decrease in government spending. An increase in business taxes and a decrease in profit expectations.

An increase in consumer wealth and a decrease in interest rates.

What is one major measure of economic growth? The rise in the price level. The fall in the rate of unemployment. Changes in real GDP. Changes in interest rates

Changes in real GDP.

What is the crowding-out effect, and why might it be relevant to fiscal policy?

Crowding-out effect is a decrease in private investment caused by higher interest rates that result from the federal government's increased borrowing to finance deficits (or debt). Whenever government borrows money, it increases the overall demand for money. If the monetary authorities are holding the money supply constant, this increase in demand will raise the price for borrowing money: the interest rate. Because investment spending varies inversely with the interest rate, some investment will be choked off or "crowded out". Therefore, crowding-out may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy.

Refer to the above diagram. The economy is at equilibrium at point B. What fiscal policy would increase real GDP? Increase aggregate demand from AD2 to AD3 by decreasing taxes. Increase aggregate demand from AD2 to AD1 by decreasing taxes. Decrease aggregate demand from AD2 to AD3 by increasing government spending. Decrease aggregate demand from AD2 to AD3 by decreasing government spending.

Increase aggregate demand from AD2 to AD3 by decreasing taxes.

Which combination of fiscal policy would most likely be offsetting? Decrease in taxes but no change in government spending. Increase in taxes but no change in government spending. Increase in taxes and government spending. Decrease in taxes and increase in government spending.

Increase in taxes and government spending.

What assumptions cause the immediate-short-run aggregate supply curve to be horizontal? Why is the long-run aggregate supply curve vertical? Explain the shape of the short-run aggregate supply curve?

The immediate-short-run aggregate supply curve assumes that both input prices and output prices are fixed. When businesses set fixed prices for their customers and then agree to supply whatever quantity demanded result at those fixed prices. Therefore the immediate-short-run aggregate supply curve is horizontal. In the long run, both the input prices and output prices are flexible, profit levels will always adjust so as to give firms exactly the right profit incentive to produce exactly the full-employment output level. Therefore, the long-run aggregate supply curve is vertical. In the short run, output prices are flexible, but input prices are fixed or nearly fixed. The short-run aggregate supply curve slopes upward, because with input prices fixed, changes in the price level will raise or lower real firm profits.

What is the general relationship between a country's price level and the quantity of its domestic output (real output) demanded? This would be an inverse relationship. This is because the aggregate demand curve shows that when the country's real GDP increases, the price levels drop.

This would be an inverse relationship. This is because the aggregate demand curve shows that when the country's real GDP increases, the price levels drop.

When national income on other nations increases: aggregate demand decreases. aggregate demand increases. the quantity of real domestic output demanded increases. the quantity of real domestic output demanded decreases.

aggregate demand increases. This is another tricky question. When you look at the question, you might be wondering how the other nations' income get related to the aggregate demand. Well, if the other nations increased their national incomes, that means they become richer, or have more money to import goods and services from out country, for our country, it will increase the exports (and net exports), so net exports as one of the factors that locate the aggregate demand curve, will shift the aggregate demand curve rightward, and increase the aggregate demand.

GDP is the market value of: all expenditures on consumption, investment, and net exports in an economy in a given year. all intermediate goods and services produced in an economy in a given year. all expenditures on natural resources, labor, and capital goods in an economy in a given year. all final goods and services produced in an economy in a given year.

all final goods and services produced in an economy in a given year.

A supply factor in economic growth would be: a rise in the rate of resource depletion. an increase in consumption spending. a fall in the efficient use of resources. an increase in the quantity of labor.

an increase in the quantity of labor.