Exam 4 Econ 100 Chapters 17-20

Which of the following changes could create a more positive output gap?

(ii), (iii), and (iv)

Refer ti the following table. What was the approximate output gap in 1974

-6.5%

The figure shows inflation expectations and actual inflation for U.S. consumers over time. Which of the following statements correctly describes the relationship between these rates?

Actual inflation tends to follow inflation expectations.

Which of these statements is the best description of a business cycle?

Alternating periods of increasing and decreasing economic output

What are aggregate expenditures?

Consumption, investment, government purchases, net exports

In the IS-MP analysis in the Fed model, the MP curve shows you the:

Current real interest rate

The time series graph of the unemployment rate depicted in Figure 2 illustrates a

Cycle because it exhibits a tendency to go up and down

Macroeconomic equilibrium is currently at a real interest rate of 5%, and actual output is 8% below potential output. The Fed wishes to close the gap, so it will

Decrease the federal funds rate, which shifts MP up

From March 2018 to September 2019, Turkey's consumer confidence index fell from 99.1 to 94.2. How would such a change impact the IS curve in Turkey?

Decreased consumer confidence about the future lowers current consumption, causing the IS curve to shift left

If the U.S. government lowers personal income tax rates:

Disposable income increases, and this leads to an increase in consumption and a right shift of the IS curve.

An influx of immigrants cause the labor supply rise dramatically.

Downward shift of the curve

The role of inflation expectations in creating inflation:

Gives the Federal Reserve leverage over inflation, since the Fed can influence people's expectations about inflation.

Maytag pulls from its warehouse to sell laundry machines at a heavy discount to holiday shoppers

Inventory

A good proxy for the risk-free interest rate on a:

Loan to the U.S. government

How do interest rates affect the investment in the economy?

Lower interest rates lower the cost of borrowing for firms, and so investment rises.

Which economic indicator tells you how fast wages and benefits are rising?

The employment cost index

Which of the following statements describes how the relationship between inflation and unemployment changed?

The level of inflation associated with every level of unemployment was higher than expected.

During the Great Recession of 2007-2009, the inflation rate fell from 3.8% in 2008 to -0.4% in 2009. During the same period unemployment rates went from 5.8% to 9.3%. Consider how the change in inflation and unemployment, during this period, compare to the relationships modeled in the Phillips curves.

The trade-off between unemployment and inflation modeled by the simple Phillips curve.

The IS curve is constructed by:

adding up the level of aggregate expenditure at each real interest rate.

An increase in the real interest rate will ____ consumption, investment, government purchases, and net exports, which will ______ aggregate expenditure and ______ GDP, resulting in _______ output gap

decrease; decrease; decrease; a more negative output gap

The Great Moderation refers to the:

decreased volatility of the U.S. economy.

A large-scale purchase by the Fed of questionable mortgage-backed securities will shift the MP curve ______ through its effect on the _______.

downward; risk premium

According to the paradox of thrift,

individuals saving more during recessions can actually be harmful to the short‑run economy due to decreases in consumption.

The Fed decides to increase interest rates in an effort to decrease inflationary pressures. This would cause a _____ the IS curve _____.

movement along; upward

sticky expectations

people who revisit their views on inflation only irregularly, so they stick with their previous view

A supply shock is any change in:

production costs that leads suppliers to change the prices they charge at any given level of output.

The stock market reaches a record high, raising consumer confidence. This would cause a ______ the IS curve _____.

shift of; downward

Worried about the economy, Congress passes a massive stimulus package. This would cause a _____ the IS curve ______.

shift of; upward

An example of a leading indicator is:

stock market

Insufficient demand leads to a:

surplus and falling prices.

The federal reserve system is

the central bank of the United States

If actual GDP is greater than potential GDP:

the economy can experience inflation.

An economy's potential output level is:

the output that is possible when all resources are fully employed.

adaptive expectations

the theory that people look at past experience and gradually adapt their beliefs and behavior as circumstances change

The most common indicator in the labor market is

unemployment rate

A wave of bank failures that undermines investor confidence in major financial institutions will shift the MP curve _____ through its effect on the ______.

upward; risk premium

increased uncertainty among firms and investors about the future course of interest rates will shift the MP curve ______ through its effect on the ______.

upward; risk premium

If expected inflation is 2%, and actual inflation is 2.8%, then unexpected inflation is:

0.8%

Which of the following are reasons sellers would take inflation into account when setting prices?

1. To retain their competitive positions within their markets. 2. To continue to cover their costs over time

Which of the following factors will likely cause a spending shock that shifts the IS curve to the right?

1. an increase in business confidence 2. an increase in government spending 3. a decrease in corporate taxes

If government spending rises by $62 billion and GDP rises by $110 billion, then the multiplier in the economy approximately:

1.77

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be equal to potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in the nominal terms, in order to maintain your purchasing power at the current level?

2%

Take a look at the IS-MP-PC model shown here. The equilibrium real interest rate is:

3%

If the risk-free rate is 1.5% and the risk premium is 2%, the MP curve is at:

3.5%

The risk-free interest rate is currently 3.5%, inflation is 1%, and the risk premium is 1.5%. The real interest rate is

5%

The accompanying graph depicts a hypothetical economy's short-run Phillips curve (SRPC). Please adjust the SRPC to reflect what happens when expected inflation decreases by 2 percentage points. After the shift in the SRPC, what is the unemployment rate if the public expects no inflation in the economy?

7%

When using the Fed model to diagnose the economy, if a shock causes the real interest rate to rise, then the economy has been hit by ______ shock.

A financial

If you see a newspaper headline that say "Steel prices rise sharply," this is an example of ______ shock.

A supply

Since 1900, what has been the long term pattern of growth in the United States?

An increase in real GDP( gross domestic product) per capita

Which of the following will fall when the economy is expanding?

Applications for unemployment benefits

The next generation of digital technology is incorporated into production processes throughout the economy

Downward shift of the curve

An effort by the Fed to stimulate the economy through expansionary monetary policy will shift the MP curve _____ through its effect on the _______.

Downward; Risk-free real interest rate

The risk premium is the:

Extra interest charged by lenders to account for risk

Business cycles last for approximately nine months.

False

When a business cycle reaches the trough, the economy is usually operating at its capacity.

False

Business cycles are common in emerging economies but not in developed economies.

False.

The economy is in a recession, so the government reduces taxes. This causes

IS curve to shift to right

The Fed model links the IS, MP, and Phillips curves. In the IS-MP analysis, an increase in exports will shift the:

IS curve to the right.

After an escalation in tensions, China imposed a tariff on American exports

IS curves shifts right

At this time last year, Bryan could buy a tie for $7.99. The next year, he decided to buy the same tie again at the same place and the price has increased to $10.99. Other goods have seen similar increases in price.

Inflation

Which of the following correctly describes the business cycle?

It is the fluctuations of GDP around the potential output

There is a sudden downturn in business confidence

Leftward movement along the curve

The intersection of the IS curve and the MP curve determine:

Macroeconomic equilibrium

In the IS-MP analysis in the Fed model, a fall in the interest rate causes a:

Movement to the right along the IS curve.

The U.S. imposed a tariff on solar panels produced in China. How did this affect China's IS curve?

Net exports increased, leading to a right shift of the IS curve

An economy that entered a lasting slump after experiencing a housing bubble that led to a period of declining output and living standards.

Recession

The government implements a fiscal stimulus.

Rightward movement along the curve

Suppose that an economy is in a recession. You would expect to see the unemployment rate:

Rise above the equilibrium unemployment rate.

According to Okun's rule of thumb, for every 1% fall in the actual output below potential output, the unemployment rate:

Rises by 0.5%

Real interest rate

Risk-free real interest rate + Risk Premium

Which economic indicator tells you about the future expected profits of businesses?

S&P 500

What kind of data adjustment removes the effect of sales spikes due to the holiday season?

Seasonally adjusted data

Why are inflation expectations the key driver or inflation in the long run?

Sellers set prices in accordance with their expectations or inflation; these expectation generate the rate of inflation sellers expect, a rate that can continue indefinitely unless other factors intervene.

An unexpected hurricane wipes out the Jersey Shore seabed of clams, causing a shortage of clams.

Shock

What is the MP curve?

The real interest rate

Which of the following is a narrow indicator?

The stock price for JPMorgan Chase & Co.

Consider the Phillips curve shown here. In region A:

There is insufficient demand

What is excess demand?

Too many buyers for too few goods

The time series graph of real gross domestic product depicted in Figure 1 illustrates a

Trend because it exhibits a tendency to move in one general direction

Business cycles can be described as fluctuations from the economy's long-term growth trend.

True

The four phases of business cycle are peaks, troughs, expansions, and recessions.

True

The peak of a business cycle is followed by a downturn or recession.

True

Which of the following statements best summarizes how price changes affects economic activity according to rational expectations theory?

Unanticipated price-level changes result in changes in real output in the short run but not not in the long run.

Jack has been laid off by his law firm and has been trying to find a new job in the Bay area in California for five months

Unemployment

The dollar depreciates:

Upward shift of the curve.

A financial shock is any change in:

borrowing conditions that changes the real interest rate at which people can borrow.

Suppose rubber prices rise in international markets. For countries that import rubber, this scenario would lead to:

cost-push inflation

Planned investment is the:

expenditure on capital goods by businesses.

Recessions typically hurt:

firms and individuals

In the long run, inflation is determined by:

inflation expectations

anchored expectations

inflation expectations are said to be anchored if they do not respond to actual inflation

rational expectations

the theory that people optimally use all the information they have, including information about government policies, when forecasting the future