Macro Exam Questions

Assume the MPC is .80. The change in total spending for the economy due to a $200 billion increase in government purchases (G) is

$1,000 billion

If nominal GDP was $11,500 billion in 2003 and the price level (GDP deflator) in 2003 was 111.6, then real GDP would have been approximately

$10,305 billion

Suppose an economy has a real GDP of $120 billion. It also has an unemployment rate of 14%. If the full-employment unemployment rate is 5%, what is potential or full-employment GDP according to Okun's Law?

$146.3 billion

Suppose lower interest rates suddenly lead to an injection of $325 billion additional investment spending into the economy, and the marginal propensity to consume is .8. Complete the table by calculating the spending cycles as the increased investment spending works its way through the economy. In the table, what is the change in the third cycle of spending resulting from the higher initial investment?

$208 billion

Calculate the total change in aggregate demand because of an initial $100 billion increase in aggregate demand, given that MPC = .6.

$250 billion increase

If the banking system has demand deposits of $200,000, total reserves equal to $60,000, and a required reserve ratio of 25 percent, the banking system can increase the volume of loans by a maximum of

$40,000

On the basis of Table 5.1, gross domestic product is

$6,810 billion (C+G+I+(X-M)

A taxpayer pays _____ in tax if he or she has taxable income of $50,000.

$8,429

Given that C=$500+.8Y_d, if the level of disposable income is $1,000, the level of saving is

-$300

In 2008, real GDP (in 2009 constant dollars) was $14,830.4 billion. In 2009, it was $14,418.7. What was the economy's growth rate for 2009?

-2.8%

If consumers spend 90 cents out of every extra dollar received, the multiplier is

10

The price index in 2005 is 140, and in 2006 the price index is 154. What is the inflation rate between the two years?

10%

Table 1.3 shows the hypothetical trade-off between different combinations of brushes and combs that might be produced in a year with the limited capacity of Country X. Complete the table by calculating the required opportunity costs for brushes and combs. On the basis of your calculations, what is the opportunity cost of producing at point M rather than point N?

2 brushes

The taxpayer from the previous question has a marginal tax rate of

25%

If the reserve ratio is 25 percent, the money multiplier is

4

In the original market equilibrium,

40 cups of coffee are sold for $2.00 each

Suppose that the equilibrium price of broccoli increases and the equilibrium quantity of broccoli increases. Which of the following best fits the observed data?

An increase in demand (shift to right) with supply constant (no shift)

Which of the following forces, according to Keynesian theory, has the strongest influences on household consumption decisions?

Disposable income

During the last few decades in the United States, health officials have argued that eating too much beef might be harmful to human health. As a result, there has been a significant decrease in the amount of beef produced. Which of the following best explains the decrease in production?

Individual consumers, concerned about their own health, decreased their demand for beef, which lowered the price of beef, making it less attractive to produce

A recession can be represented by a point

Inside the production possibilities curve

Which of the following is not true about barter?

It allows people to obtain more goods than they would under a money payment system

Which of the following is not true about the marginal propensity to consume?

It is always equal to or greater than 1

The equation of exchange (quantity theory of money) can be stated as

MV = PQ

Which of the following federal programs provides health insurance to people aged 65 and older regardless of income?

Medicare

The term fractional reserves refers to

Reserves' being a small fraction of total transactions account (demand deposit) balances

Which of the following best describes the correct sequence of events immediately following an expansionary open market operation?

The Fed sells government bonds, the money supply shifts right, the interest rate falls, investment and consumption increase ,and GDP increases

The agency responsible for regulating the money supply in the United States is

The Federal Reserve

Which of the following statements is true about the US economy?

The United States produces about one fifth of the world's output

Which of the following is not true at the equilibrium rate of interest in the money market?

There is a tendency for the money demand curve to shift to the right

External debt of the United States refers to

US government debt held by foreigners

Which island in Micronesia uses stone money?

Yap

Demand deposit creation occurs when

a bank lends money

Friedrich Hayek was

a classically-trained economist who feared too much government involvement in the economy

In figure 10.1, which of the following could cause a shift from AD0 to AD1 (shift left)?

a decrease in investment

Which of the following events would unambiguously cause a decrease in the equilibrium price of cotton shirts?

a decrease in the price of wool shirts and a decrease in the price of raw cotton

The best definition of gross domestic output (GDP) is

a dollar measure of the amount of goods and services in the economy

Which of the following events would not be considered a leading indicator for a recession?

a drop in interest rates

The crisis of credit that preceded and accompanied the Great Recession of 2007 - 2009 did not have the following component?

a fall in the number of housing foreclosures

Which of the following would most likely not be accounted for in the construction of the consumer price index?

a military aircraft

Which of the following is not a final good or service?

a paper purchased by a textbook company

Which of the following events would cause a rightward shift in the market supply curve for automobiles?

a technological improvement that reduces the cost of production

Assume that the cost of doing evil was $100 billion in 1996. The price index for 1996 is 156.9, and the price index for 1966 is 32.4. The cost of doing evil in 1996 was equivalent to a 1966 cost of

about $20 billion

GDP can be calculated by all of the following methods except

adding up all the income and expenses of consumers and businesses

The Federal Open Market Committee (FOMC) includes

all 7 governors and 5 of the regional Reserve bank presidents

Which of the following will cause the investment demand curve to shift to the right?

an improvement in technology

Which of the following will cause an increase in US exports?

an increase in foreign consumer income

What might cause demand to shift from the Original Demand to the New Demand?

an increase in income

Assume the economy is at full employment and prices are reasonably stable. If the government wants to increase spending for public schools, which of the following policies will have the least inflationary impact?

an increase in taxes by an amount greater than the increase in spending

Inflation is

an increase in the average level of prices of goods and services

Interest payments on the national debt

are a redistribution of income from taxpayers to bondholders

Goods and services produced and sold illegally

are excluded from GDP

In a market economy, the people who receive the goods and services produced are those who

are willing and able to pay the market price

If the structural deficit is zero,

at full employment, the budget would be balanced

Monetary stimulus will fail if

banks are reluctant to lend money

If a bank does not have enough reserves to satisfy the reserve requirement, it is likely to do any of the following except

borrow from Congress

The tool of monetary policy that the Federal Reserve System (the Fed) uses daily is

buying and selling government bonds

People own or hold money because it

can directly be used to buy goods and services

In economics, a public good

cannot be denied to consumers who have not paid

If the Fed wants to increase aggregate demand, it should do which of the following?

conduct open market Treasury bond purchases

A tax cut

contains less fiscal stimulus than an increase in government spending of the same size

Which of the following is not included in the narrowest definition of the money supply or M1?

credit card balances

Assume the MPC is .80. If the government wants to eliminate an AD shortfall of $300 billion, it should

cut taxes by $75 billion

The 2009 fiscal stimulus package of $787 billion did all of the following except

decrease interest rates

During the time period represented in figure 7.3, the purchasing power of the average worker

decreased because real income decreased

Inflation _____ the purchasing power of money

decreases

In the Great Depression, President Hoover's prescription in 1932 was for cutbacks in government spending and higher taxes. He was effectively

decreasing the level of aggregate demand

If consumers attempt to buy more goods than the economy can produce, the result is

demand-pull inflation

Which of the following best describes what the Solman video means by the title "Productivity: The Dark Side"? Advances in productivity

displace workers who may have trouble finding a new job

Monetary policy is most effective when the money demand curve is _____ and investment demand is _____.

downward-sloping; elastic

When the economy goes into a(n) _____, the amount of transfer payments paid out by the government _____ automatically.

expansion; falls

The interest rate targeted by the Federal Reserve in its monetary policy is the

federal funds rate

All of the following actions increase government purchases of goods and services (that is, increase G) except the

federal government's sending a Social Security check to Betty Jones

The type of unemployment that economists generally associate with normal growth of the labor force and expanding job opportunities in a dynamic economy is

frictional unemployment

When an economy is producing efficiently, it is

getting the most goods and services from the available resources

Opportunity cost may be defined as the

goods or services that are forgone in order to obtain something else

Deficit spending occurs when

government spending is greater than the tax revenue collected

according to the law of demand, a demand curve

has a negative slope

In all countries, the unmistakable tendency is for high money growth to be associated with

high rates of inflation

Deficit financing of federal government expenditures occurs when

households and firms buy new bonds from the US Treasury

According to the law of increasing opportunity costs,

in order to produce additional units of a particular good, it is necessary for society to sacrifice increasingly larger amounts of alternative goods

Suppose the Federal Reserve System has a required reserve ratio of .10 and there are no excess reserves in the system. If the Federal Open Market Committee buys $50 million of Treasury bonds from the commercial banking system, the total lending capacity for the system

increases by $500 million

The crowding-out effect of fiscal policy refers to a decrease in

investment as a result of an increase in government borrowing

If an economy is producing inside the production possibilities curve, then

it can produce more of one good without giving up some of another good

The basic factors of production include

land, labor, capital, and entrepreneurship

Market failure implies that the market mechanism

leads the economy to the wrong mix of output

The GDP per capita is the most practical way to

make international comparisons of the standard of living

When money is used to acquire goods and services, it is functioning as a(n)

medium of exchange

DVD players can be added to bicycles to compute the GDP by

multiplying dollar values of output by price and adding the result

If a nation experiences a year of unusually high immigration that increases the size of the labor force, we can conclude that the

nation's production possibilities curve will shift outward

Real GDP is more accurate than nominal GDP in making comparisons of output over time because

nominal GDP can increase simply because of price increases over time

A chemical engineer with expertise in industrial pharmacy who has been unable to find work for so long she has stopped looking for work is considered to be

not in the labor force

Average living standards are best measured using

per capita GDP

The item weight in the consumer price index is the

percentage of the typical consumer budge spent on the item

A change in the reserve requirement causes a change in all of the following except

pretax income

According to the classical economics point of view, if consumer demand slowed down,

prices and wages would decrease, and the economy would return to its long-term growth trend

The development of market power by a firm is considered to be a market failure because firms with market power will

produce less and charge a higher price than what would be socially optimal

Suppose that if your income is $100,000, your tax is $20,000, but if your income is $200,000, your tax is $50,000. Such a tax is

progressive

Suppose that the equilibrium price of a physical examination by a doctor is $200, and the government imposes a price ceiling of $150 per physical. As a result of the price ceiling, the

quantity demanded of physicals increases, and the quantity supplied of physicals decreases

The multiplier process can occur when a decrease in investment spending

reduces household incomes, causing consumers to buy fewer goods and services

Government intervention can serve to stabilize the macro economy by

reducing inflation and reducing unemployment

A recession is a

reduction in the level of real GDP that lasts at least two quarters

The liquidity trap

refers to the possibility that interest rates may not respond to changes in the money supply

The optimal mix of output is the most desirable combination of output on the production possibilities curve attainable with existing

resources, technology, and social values

The choice to hold money in the form of cash

results in forgone interest

If market interest rates fall, the selling price of existing bonds in the market will, ceteris paribus,

rise

Productivity

rises when the ratio of output to input increases

Typically unemployment _____ during a recession and _____ during an expansion

rises; falls

The money supply M2 includes M1 plus balances in

savings accounts and money market mutual funds

The current US economy is based primarily on the production of

services

Monetary policy involves the use of money to

shift the aggregate demand curve

Which of the following is not a basic decision that all nations must confront?

should we have economic growth?

A basic conclusion of Keynesian analysis is that

small microeconomic disturbances can lead to much larger macroeconomic problems

Investment spending includes expenditures on all of the following except

stocks and bonds

Net domestic product (NDP) is determined by

subtracting depreciation from GDP

If autonomous consumption decreases, then

the AD curve will shift to the left

Which of the following contributes to the high productivity of American workers?

the abundance of capital relative to labor

A price index of 425 means that

the average price is 325% higher than in the base year

Which of the following would you not expect as a consequence of a change in buyer-industry demand for an input into production?

the demand for gasoline rises as a result of a rise in the demand for oil

Full employment in the US economy meas that

the economy has reached the lowest level of unemployment compatible with price stability

When there is a decrease in the unemployment rate,

the economy moves closer to the production possibilities curve

Assuming that the aggregate supply curve is vertical in the national market for goods and services, which of the following is most likely to occur if the Fed pursues expansionary monetary policy?

the equilibrium price level will increase but output will stay the same

Which of the following statements is true concerning income inequality?

the free market produces an unequal distribution of income

The main source of profits to commercial banks is

the interest earned on their loans

The discount rate is

the interest rate on loans the Fed makes to banks

Which of the following statements about the way markets allocate resources is most accurate from society's perspective?

the market may allocate resources in a way that is not in society's best interest

Using the equation of exchange (quantity theory of money), if real output increases by 5% per year and velocity is stable, in order to keep the price level stable,

the money supply must increase by 5% per year

The real interest rate is

the nominal interest rate minus the anticipated rate of inflation

Which of the following can change without shifting either the demand curve or supply curve?

the price of the good or service itself

The individual income tax is a progressive tax because

the right pay a higher percentage of their income in income taxes than the poor

Which of the following is directly included in the calculation of GDP?

the sale of a brand new Cadillac

The fundamental problem of economics is

the scarcity of resources relative to human wants

The principal mechanism the government has for redistributing income is

the tax-and-transfer-payment system

Suppose the local slaughterhouse gives off an unpleasant stench. The price of meat in the market would then be _____ because not all of the _____ are accounted for in the marketplace.

too low; external costs

Which of the following is a bank liability?

transaction account (checking account) balances

WHen people 16 years old and older start looking for jobs for the first time, the

unemployment rate increases and the labor force increases

Money is functioning as a standard of value when you

use it to compare two houses that have different prices

An externality affecting demand can be measured graphically as the

vertical distance between the market demand curve and the social demand curve

The money supply curve as determined by current Federal Reserve policy is

vertical since its not determined by interest rate

Which of the following is a source of government failure but is not typically an example of market failure?

waste

If the reserve ratio is 20%, and a bank receives a new deposit of $100, this bank

will initially see its total reserves increase by $100

The national debt

will never be paid off in any given year, but it will be entirely paid off when it is refinanced over a number of years