Macro Exam 2

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is: 4 percent 8 percent 10 percent 2 percent

8 percent Actual - Natural = Cyclical 9-5 = 4 Every 1% cyclical unemployment = 2% GDP gap 4 x 2 = 8

If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is: $510 billion $490 billion $10 billion $990 billion

$510 billion GDP Gap = Actual GDP - Potential GDP -10 = 500 - x x = 510

If the marginal propensity to consume is .9, then the marginal propensity to save must be: 1.0 0.1 1.1 0.9

0.1 MPC + MPS = 1 .9 + x = 1 x = .1

The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about: 2.8 percent 3.4 percent 1.6 percent 4.1 percent

1.6 percent 179.9-177.1 = 2.8 (2.8/177.1) x 100 = 1.6

If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is: 11 percent 33 percent 91 percent 10 percent

11 percent 333 - 300 = 33 33/300 = .11

Unemployed: 7 Total population: 145 Employed: 95 Discouraged workers: 3 The table contains information about the hypothetical economy of Scoob. All figures are in millions. The unemployment rate in Scoob is: 2.5 percent 3.2 percent 5.0 percent 6.9 percent

6.9 percent

A large negative GDP gap implies: An excess of imports over exports A low rate of unemployment A high rate of unemployment A sharply rising price level

A high rate of unemployment

The real-balances effect indicates that: An increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending A lower price value will decrease the real value of many financial assets and therefore reduce spending A higher price level will increase the real value of many financial assets and therefore increase spending A higher price value will decrease the real value of many financial assets and therefore reduce spending

A higher price value will decrease the real value of many financial assets and therefore reduce spending

The multiplier effect means that: Consumption is typically several times as large as saving A change in consumption can cause a larger increase in investment An increase in investment can cause GDP to change by a larger amount A decline in MPC can cause GDP to rise by several times that amount

An increase in investment can cause GDP to change by a larger amount

The interest-rate effect suggests that: A decrease in the supply of money will increase interest rates and reduce interest sensitive consumption and investment spending An increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending An increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending An increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending

An increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending

The aggregate demand curve is: Vertical under conditions of full employment Horizontal when there is considerable unemployment in the economy Downsloping because of the interest-rate, real-balances, and foreign-purchases effects Downsloping because production costs decrease as real output rises

Downsloping because of the interest-rate, real-balances, and foreign-purchases effects

Other things equal, a decrease in the real-interest rate will: Expand investment and shift AD curve to the left Expand investment and shift AD curve to the right Reduce investment and shift AD curve to the left Reduce investment and shift AD curve to the right

Expand investment and shift AD curve to the right

The determinants of aggregate demand: Explain why the aggregate demand curve is downsloping Explain shifts in the aggregate demand curve Demonstrate why real output and the price level are inversely related Include input prices and resource productivity

Explain shifts in the aggregate demand curve

For a given amount of nominal income, the real income will: Fall if the price level rises Fall if the price level falls Be unaffected if the price level falls Rise as the price level rises

Fall if the price level rises

Core inflation refers to the inflation picture after stripping away the: Capital goods prices Food and energy prices Government-regulated prices Service-sector prices

Food and energy prices

The natural rate of unemployment is the: Unemployment rate experienced at the depth of the depression Full-employment unemployment rate Unemployment rate experienced by the least skilled workers Unemployment rate experienced by the most-skilled workers in the economy

Full-employment unemployment rate

An unexpected increase in total spending will cause an increase in GDP: If prices are sticky If prices are fully flexible Regardless of whether prices are sticky or fully flexible Only if prices are stuck in the long term

If prices are sticky

Unlike demand-pull inflation, cost-pull inflation: Is self-limiting Drives up the price level Increases nominal income Increases real income

Is self-limiting

The annual rate of inflation can be found by subtracting: The real income from the nominal income Last year's price index from this year's price index This year's price index from last year's price index and dividing the difference by this year's price index Last year's price index from this year's price index and dividing the difference by last year's price index

Last year's price index from this year's price index and dividing the difference by last year's price index

A decline in investment will shift AD curve to the: Left by a multiple of the change in investment Left by the same amount of the change in investment Right by the same amount of the change in investment Right by a multiple of the change in investment

Left by a multiple of the change in investment

Demand-pull inflation: Occurs when prices of resources rise, pushing up costs and the price level Occurs when total spending exceeds the economy's ability to provide output at the existing price level Occurs only when the economy has reached its absolute production capacity Is also called cost-push inflation

Occurs when total spending exceeds the economy's ability to provide output at the existing price level

Demand-pull inflation: Occurs when total spending in the economy is excessive Is measured differently than cost-push inflation Can be present during an economic depression Is also called "hyperinflation

Occurs when total spending in the economy is excessive

Full-employment output is also called: Zero-unemployment output Equilibrium output Potential output Zero-savings output

Potential output

An increase in net exports will shift the AD curve to the: Left by a multiple of the change in net exports Left by the same amount of the change in net exports Right by the same amount of the change in net exports Right by a multiple of the change in net exports

Right by a multiple of the change in net exports

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift: Leftward by $50 billion at each price level Rightward by $10 billion at each price level Rightward by $50 billion at each price level Leftward by $40 billion at each price level

Rightward by $50 billion at each price level Multiplier = 1/1 - MPC 1/1 - .8 = 5 5 x 10 = 50

The aggregate demand curve: Is upsloping because a higher price is necessary to make production profitable as production costs rise Is downsloping because production costs decline as real output increases Shows the amount of expenditures required to induce the production of each possible level of real output Shows the amount of real output that will be purchased at each possible price level

Shows the amount of real output that will be purchased at each possible price level

Potential Real GDP = $200 billion Natural Rate of Unemployment = 6 percent Actual Rate of Unemployment = 12 percent Refer to the accompanying data, which is for a specific year in a hypothetical economy for which Okun's Law is applicable. If the unemployment rate in the economy fell to 6%, we could conclude that: Only structural unemployment remained The economy's production possibilities curve shifted outward The economy had moved from a point inside its production possibilities curve to a point on or very near the curve Nominal GDP would rise, but real GDP would fall

The economy had moved from a point inside its production possibilities curve to a point on or very near the curve

The real-balances, interest-rate, and foreign purchases effects all help explain: Why the aggregate demand curve is downsloping Why the aggregate demand curve is upsloping Shifts in the aggregate demand curve Shifts in the aggregate supply curve

Why the aggregate demand curve is downsloping