HW 6-12 questions

(Graph: Consumption) Based on the information provided in the graph, at an income level of $300, savings equals _____, the MPC equals _____, and the APC equals _____.

-$80; 0.6; 1.27

If a one-year bond with a face value of $1,000 is sold for $950, what is the bond's approximate yield?

5.26%

Economic models must fully reflect reality.

False

Which event will shift the aggregate demand curve to the right?

decrease in taxes

If the marginal propensity to consume is 0.6; full employment income is $1,000; and the current equilibrium is $750, a(n) _____ gap exists, such that a(n) _____ in spending equal to _____ is needed to close the gap.

recessionary;increase;100

One argument against using taxation to pay off the public debt is that it will redistribute wealth from

poorer people who do not own bonds to richer bondholders.

If the marginal propensity to consume is 0.6; full employment income is $1,000; and the current equilibrium is $750, a(n) _____ gap exists, such that a(n) _____ in spending equal to _____ is needed to close the gap.

recessionary; increase; $100

Assume that the MPC is 0.75, full employment is considered to be at a GDP level of $500 billion, and the GDP is $600 billion. What should the government do to achieve full employment?

reduce spending by 25 million

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

Public goods tend to be _____ because the provider of the good cannot prevent someone from enjoying the good without paying for it, which means the good is _____.

under produced, non-excludable

(Graph: Consumption) Based on the information provided in the graph, when income equals $1,000, the average propensity to save equals

0.2.

Suppose the town of Treeville has a population of 200, of which 120 are in the labor force. Of those in the labor force, 100 are employed and 20 are unemployed. The unemployment rate in Treeville is

17% (unemployed/labor force)

(Table) According to the table, what is the labor force of this economy? Population = 500 # employed = 300 # unemployed = 50

350 employed + unemployed = labor force

If the reserve requirement is 25%, then the potential money multiplier is _____ and the actual money multiplier is _____.

4; equal to or less than 4

If the national debt is $55 million and this year's deficit is $5 million, what would the new national debt be?

60 million

(Figure: Effects of Policy Shifts) If the economy starts below full employment, an expansionary fiscal policy will shift the aggregate demand curve from _____ to _____, and equilibrium will move from point _____ to _____.

AD0; AD1; a; b

In the following PPF, between which two points would long-run growth be represented?

C to D

Which statement is NOT correct?

Discouraged workers are considered underemployed.

Esteban's annual salary is $80,000, of which he saved $20,000. When he received his bonus of $10,000, he spent $8,000 on home renovations and saved the remaining $2,000. Which statement is TRUE?

Esteban's average propensity to consume increased.

In the TED talk that we watched today in the class, what was the name of the Nobel prize winner economist?

Esther Duflo

Compared with stocks, bonds tend to reward investors with a higher average return on investment over the long run.

False

The consumer price index measures private goods as well as public goods.

False

_____ government spending, _____ transfer payments, and _____ taxes are all examples of expansionary fiscal policy.

Increasing; increasing; lowering

According to the table, which country will have the lowest real GDP per capita in 23.67 years?

Nomia

Which situation indicates that total output in a country has grown the most when the starting output is the same in all situations?

Output per worker grows by 10% while the labor force grows by 10%.

_____ occur(s) when goods are produced at the lowest possible cost, and _____ occur(s) when individuals who desire a product the most receive those goods and services.

Production efficiency; allocative efficiency

If foreign countries abandoned the use of the dollar as their only form of legal currency, the U.S. money multiplier would likely increase.

TRue

Which of these provides an accurate description regarding the slope of the short-run aggregate supply curve?

The positive slope of the short-run aggregate supply curve is steeper the more flexible prices are or flatter the more rigid prices are.

A rise in real GDP is associated with increased employment.

True

The catch-up effect is the idea that up to a certain point, developing countries can achieve greater productivity for each unit of capital invested because they have the advantage of using technologies already developed by other countries.

True

The determinants of aggregate demand include the components of GDP: consumption, investment, government spending, and net exports.

True

To convert a nominal value to a real value in dollar terms, the base year index must be set at 100.

True

Total factor productivity captures the factors that influence the overall effectiveness of inputs.

True

Which of these would NOT shift the investment demand schedule?

a change in interest rates

Which of these would likely cause the market for loanable funds to change as shown in the following figure?

a decrease in average incomes

The demand for loanable funds is downward sloping because

as interest rates fall, businesses find more projects to be profitable and thus want to borrow more.

The U.S. economy is currently experiencing high unemployment and low inflation. To lessen the unemployment problem, the Federal Reserve could

buy bonds through open market operations, thereby enabling banks to lend more money, increase the money supply, stimulate spending, and create jobs.

Which list represents monetary policy actions that are consistent with one another?

buy government bonds, lower reserve requirements, lower the discount rate

Order the following saving mechanism in descending order of liquidity.

cash in pocket; checking account; savings account; corporate bond; a house

What are the determinants of short-run aggregate supply?

changes in input prices, taxes, and business and inflationary expectations

Which item is most likely an inferior good?

city bus ticket

_____ unemployment is the result of changes in the business cycle.

cyclical

Willingness-to-pay _____ from person to person and _____ under varying circumstances.

differs;differs

Changes in taxes first cause changes in _____, and thus the government tax multiplier is _____ than the government spending multiplier.

disposable income; smaller

When a good has an external cost, the market is said to

fail because it overproduces the good

Under which condition would the Fed be most likely to engage in its role as the lender of last resort?

if a lack of confidence in the financial system causes savers to withdraw money from banks

Which scenario is the MOST likely effect of a decrease in the price of milk on the market for cereal?

increased equilibrium price of cereal and increased equilibrium quantity of cereal

Unanticipated _____ is detrimental to economic growth.

inflation or deflation

If the marginal propensity to consume is 0.6; full employment income is $500; and the current equilibrium is $750, a(n) _____ gap exists, such that a(n) _____ in spending equal to _____ is needed to close the gap.

inflationary; decrease; $100

The _____ is the change in consumption associated with a change in income.

marginal propensity to consume

A bond's price and yield

move in opposite directions

A bond has a face value of $1,000 and an annual interest payment of $44. What is its coupon rate, and what is its yield if it is sold for $1,100 in the secondary market?

4.4% and 4.0%, respectively

A bank has $50,000 in deposits from its checking account customers and loans of $49,000. Of the $49,000 loaned out, $43,000 remains in the checking accounts of the loan recipients. The bank has $50,000 cash on hand, and the reserve requirement is 25%. The reserve ratio for this bank is _____, and it _____ meeting its reserve requirement.

53.76%; is

If an employer uses an escalator clause to determine an employee's raise each year, in an inflationary environment, the employer is more likely than the employee to want to use the personal consumption expenditures price index in this clause.

True

Knowing the marginal propensity to consume makes it possible to calculate the marginal propensity to save.

True

Money leakages make it more difficult to use monetary policy to pull the economy out of a recession.

True

One country has a comparative advantage in producing a good if its opportunity cost to produce that good is lower than that of another country.

True

In September 2013, the Federal Open Market Committee said it would wait for more evidence that progress had been made on the economic recovery before it cut back on open market purchases. The Bureau of Economic Analysis did not release its advanced estimate of the third quarter's GDP growth until a month after the quarter ended. The second estimate was released two months after the quarter ended, and a third revised estimate was released about three months after the quarter ended. This wait for accurate data to be collected is known as the _____ lag.

Information

Last year, the consumer price index was 115 while the consumer price index for this year is 125. The rate of inflation is

8.7%. (increase / original) (10/115)

What is a difference between the typical structure of a retirement savings account (401(k)) and an individual retirement arrangement (IRA)?

Employers often match 401(k) contributions, but they do not match IRA contributions.

Which statement(s) is/are TRUE regarding the paradox of thrift? I. People intend to save less but their actions actually lead to an increase in savings. II. For the paradox of thrift to occur, investment must be positively related to income. III. The increased savings of households leads to more consumption, income, and output, increasing investment and aggregate savings.

II only

Which change is likely to increase wages the MOST in a country?

The capital-to-labor ratio rises by 2%.

(Figure: Aggregate Demand and Supply) The graph depicts an economy originally in equilibrium at point e. Assume that the government uses expansionary fiscal policy. Which statement is TRUE?

The movement from point a to point b is due to workers and suppliers adjusting their expectations to higher price lev

Thomas Malthus believed that the geometric growth of the population and the arithmetic growth of the food supply would never be altered.

True

If your goal was to have the largest amount of money in your bank account as possible in two years, which option would you choose? (Assume that the beginning deposit and all interest earnings remain in the account for the full two years.)

a beginning deposit of $930, earning 8% per year

Suppose a government finances its expansionary fiscal policy by borrowing from the public. Joseph is concerned that this will increase the demand for loanable funds, drive up interest rates, and leave less loanable money available for consumers and businesses. Joseph is concerned about the _____ effect.

crowding out effect

Suppose three years ago a nation's inflation rate was 8%, two years ago it was 5%, and last year it was 2%. This nation is undergoing

disinflation

A production function says output per worker equals A × f(L/L, K/L, H/L, N/L) and tells us all of these EXCEPT _____ will lead to a better standard of living.

more people

Bond prices and their yields are _____ because the bond's face value and _____are fixed, forcing its _____ to change in response to changing market conditions.

negatively related; coupon payment; sales price

(Figure: Aggregate Demand and Supply) The graph depicts an economy originally in equilibrium at point e. Assume that the government uses expansionary fiscal policy. The movement from point a to point b is due to

workers and suppliers adjusting their expectations to higher price levels.

(Figure: Simple Keynesian Model) In the figure, suppose investment has increased from AE = C + I0 to AE = C + I1. The multiplier equals

2.5.

Assume that Macroland starts in long-run equilibrium and then faces a reduction in government spending. What chain of events will lead to a new long-run equilibrium?

Aggregate demand falls causing unemployment; unemployed workers eventually accept lower wages, increasing short-run aggregate supply and leading to a new long-run equilibrium with lower prices and the original output.

If the economy shown in the figure begins on AD1 and SRAS1, what will happen in the short run and long run if the price of oil rises significantly?

The economy will move from point C to A to B.

An economy is expected to produce higher profits for business owners at the same time that the country's stock market surges. What changes can be expected in the country's market for loanable funds?

an increase in demand and a decrease in supply

Assume the reserve requirement is 25% and the Federal Open Market Committee buys $4 million of U.S. government bonds from the public. As a result of this transaction, the supply of money is

directly increased by $4 million and has the potential to be increased by another $12 million.

Assume the economy is currently experiencing aggregate expenditures greater than aggregate income. The economy will move toward equilibrium as businesses begin to produce _____, leading to _____ employment and _____ income.

more; more; more

A simple circular flow diagram shows that the factors of production are

purchased by businesses

(Figure: Simple Keynesian Model) In the figure, equilibrium savings equals _____ when investment is at AE = C + I0, and _____ when investment is at AE = C + I1.

$100; $200

Which statement regarding discretionary and mandatory spending is correct?

Mandatory spending may act as an automatic stabilizing force in the macro economy.

When Main Street Bank buys new automatic teller machines, the quantity of _____ in the economy increases.

Physical capital

If the economy shown in the figure begins on AD1 and SRAS1, what will happen in the short run and long run if the government begins a sustained period of increased spending?

The economy moves from point C to E to B.

In which situation is a country LEAST likely to be producing on its production possibilities curve?

There are legal disputes over the ownership of 15% of the factory buildings in the country.

Which event would NOT be included in total factor productivity measurements?

a large investment in physical capital that makes labor more productive

Which of these is NOT a financial intermediary in the market for loanable funds?

a school

If the economy shown in the figure begins at point C, an increase in consumer confidence leads to what changes in the short run?

demand-pull inflation

A passive job search

entails merely talking to friends about jobs.

Cost-push inflation occurs because of a shift to the

left of the short-run aggregate supply curve

Bonds are considered to be _____ than stocks because _____.

less risky; bondholders are less affected by a firm's bankruptcy

Suppose that a recent study shows that non‑fatal traffic accidents have risen due to an increase in aggressive driving. This information comes after the implementation of mandatory seat belt laws requiring all drivers and passengers to wear seat belts.

moral hazard.

In the national income accounts, which of these is NOT classified as government spending?

payments to Social Security recipients

A breakthrough in solar energy research that halves the cost of electricity will

shift the aggregate supply curve to the right.

Which assumption is NOT a problem related to using the consumer price index (CPI) to accurately state the rate of inflation?

The CPI does not deal with producer prices.

When a perpetual bond with a face value of $1,000 is issued, general interest rates are 3%, so the annual interest payment is _____. After the bond is issued, market interest rates rise to 4%, which forces the price of the bond to _____ to _____.

$30; fall; $750

A bank has excess reserves of $4,000 and demand deposits of $40,000; the reserve requirement is 20%. Its current level of total reserves is _____. If the reserve requirement is increased to 25%, the new level of excess reserves would be _____.

12000,2000

If an economy is growing at 10%, how long will it take for $1,000 to turn into $4,000?

14yrs

If Kelly transfers $500 from her savings account to her checking account, M1 will increase and M2 will

Increase;remain the same