Macroeconomics Final Exam

Present consumption supported by large trade deficits may come at the expense of

all of these.

Tariffs and import quotas would benefit the following groups, except

consumers of the product.

Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. Because of the ratchet effect

contractionary fiscal policy that shifts aggregate demand to AD1 will cause real GDP to fall below its full-employment level.

Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply

expands and commercial bank reserves increase.

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that

the price level is inflexible downward and a recession has occurred.

Bankruptcy of a firm means that it

is unable to make timely promised payments on its debt.

Since 2002, the United States has had

large federal budget deficits.

Refer to the graph. Consider asset D. We would expect arbitrage to

lower the price of D.

If a nation has a comparative advantage in the production of X, this means the nation

must give up less of other goods than other nations in producing a unit of X.

Which of the following is a popular type of investment?

mutual funds

The currency, or money, of the United States, like those of other countries, is

token money.

Mainstream economists question the new classical assumption that

wages and prices are equally flexible upward and downward.

Suppose the balance on the current account is +$100 billion and the balance on the capital account is −$1 billion. The balance on the financial account is

−$99 billion.

Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves?

$24,000

Price Level C Ig G X M Real GDP 128 $18 $2 $3 $1 $5 125 20 4 3 2 4 122 22 6 3 3 3 119 24 8 3 4 2 116 26 10 3 5 1 In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. If the amounts of GDP supplied at the price levels shown (in descending order) are $27, $25, $22, $18, and $13, the equilibrium price level will be

125

The Federal Reserve System was established by the Federal Reserve Act of

1913

In the diagram, the economy's immediate-short-run aggregate supply curve is shown by line

3

S=−20 + 0.4Y Ig=25−3i (Advanced analysis) The equations refer to a private closed economy, where S is saving, Ig is gross investment, i is the real interest rate, and Y is GDP. In equilibrium, the level of saving will be

$10

The economy is in a recession. The government enacts a policy to increase spending by $2 billion. The MPS is 0.2. What would be the full increase in real GDP from the change in government spending, assuming that the aggregate supply curve is horizontal across the range of GDP being considered?

$10 billion

Security Amount (in Billions) Treasury Bills $220 Corporate Bonds 140 Treasury Notes 80 Corporate Stock 200 US Savings Bonds 60 Treasury Bonds 100 The public debt for the economy is

$460 Billion

GDP Consumption $440 $450 490 490 540 530 590 570 640 610 Refer to the accompanying consumption schedule in an economy. All figures are in billions of dollars. If gross investment is $34 billion, net exports are zero, and there is a lump-sum tax of $30 billion at all levels of GDP, then the after-tax equilibrium level of GDP will be

$540 Billion

Refer to the accompanying graph, where Sd and Dd are the domestic supply and demand curves for a product. The world price of the product is $6. If this market were closed to international trade, the total revenue that would go to domestic producers would be

$600, but only $120 if the domestic market were open to international trade.

Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money that the banking system could create is about

$660 Million

[Real GDP][ Consumption (after taxes)][Gross Investment][Net Exports] [Government Purchases] $0 -$20 $10 $+5 $15 10 0 10 +5 15 40 20 10 +5 15 70 40 10 +5 15 100 60 10 +5 15 130 80 10 +5 15 160 100 10 +5 15 Refer to the table. Equilibrium GDP is

$70

Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The recognition lag of fiscal policy is reflected in events

1 and 2

If a certain household earns and spends $24,000 per year and, on the average, holds a money balance of $6,000, then the velocity of money for this household is

4

Interest Rate Asset Demand for Money (Billions) 7% $200 6 300 5 400 4 500 Suppose that the transactions demand for money is equal to 20 percent of the nominal GDP, the supply of money is $800 billion, and the asset demand for money is that shown in the table. If the nominal GDP is $2,000 billion, the equilibrium interest rate is

5 Percent

Rupert recently purchased a nonmaturing bond for $10,000 that pays $350 semiannual coupons. His expected rate of return per year on the bond is

7 percent

Refer to the graph. Suppose that the economy is at an initial equilibrium where the AD1 and AS1 curves intersect. Demand-pull inflation in the long run can best be illustrated as a shift of

AD1 to AD2, consequently making AS1 shift to AS2

Refer to the graph. Stagflation in the short run is best represented as resulting from a shift of

AS1 to AS2, given a stable AD1 curve.

John Maynard Keynes expressed his ideas about the macroeconomy and attacked classical economics in his book, The

General Theory of Employment, Interest, and Money.

Which of the following is considered an advantage of monetary policy compared to fiscal policy?

It is relatively isolated from political pressure.

Refer to the graph. Assume that the economy is initially at equilibrium at point A. If there is a recession in the economy because AD1 shifts to AD2, and wages and prices are flexible, then in the long run the price level will be

P3 and real output will be Qf.

inflationary expenditure gap is ei.

Refer to the diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE1, the

Which of the following statements is most accurate about the U.S. current account since the Great Recession (the period covering 2009-2015)?

The current account deficit has grown in absolute terms, but remained relatively constant as a percentage of GDP.

Which of the following is a true statement?

The long-run Phillips Curve is vertical.

An adverse aggregate supply shock could result from

a rapid rise in oil prices.

An efficiency wage

an above-market wage that minimizes a firm's labor cost per unit of output.

Year Actual Budget, Percent of GDP (-deficits, +surpluses) Cyclically-Adjusted Budget, Percent of GDP (-deficits, +surpluses) 1998 0 0 1999 -3 0 2000 -5 -2 2001 -2 -2 2002 +2 +1 Refer to the table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect

an expansion of real GDP and an automatic increase in tax revenues.

Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves

are $20,000.

In comparing monetarism and rational expectations theory, we find that

both favor policy rules, but for different reasons.

With inflation targeting, the Federal Reserve would be required to announce its targeted band for

changes in the price level.

The set of fiscal policies that would be most contractionary would be a(n)

decrease in government spending and an increase in taxes.

If a nation imposes a tariff on an imported product, then the nation will experience a(n)

decrease in total supply and an increase in the price of the product.

Refer to the graph. If the interest rate rises from 2 percent to 3 percent, the supply of money must have

decreased by $50 billion.

Mutual funds may contain

either stocks or bonds

Refer to the graph. Assume that the economy is initially in equilibrium at the intersection of AD1 and AS1. Suppose that there is economic growth that shifts AS1 to AS2. If the application of a monetary rule is designed to shift AD1 to AD3, but because of pessimistic business expectations AD1 only shifts to AD2, then mainstream economists would suggest that the actions to be taken to avoid deflation would be to implement a(n)

expansionary fiscal policy and an easy money policy.

(1) Goods Exports +$200 (2) Balance on Capital Account 0 (3) Net Transfers 0 (4) Imports of Services −100 (5) Net Investment Income 0 (6) US Purchases of Assets Abroad −50 (7) Goods Imports -250 (8) Foreign Purchases of Assets in the US +150 (9) Exports of Services +50 The plus items in the table are "export-type" entries and the minus items are "import-type" entries in the balance of payments for the hypothetical country of Zippo. Zippo has a

financial account surplus

Most mainstream macroeconomists oppose a strict requirement to balance the federal budget annually because they conclude that such a requirement would

force government to undertake expansionary fiscal policy during inflation and contractionary fiscal policy during recession.

Refer to the diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2,

government should undertake neither an expansionary nor a contractionary fiscal policy.

Commercial banks and thrift institutions

have become increasingly similar in recent years.

Refer to the diagram. Assume that the natural rate of unemployment is 5 percent and that the economy is initially operating at point a, where the expected and actual rates of inflation are each 6 percent. In the long run, the decline in the actual rate of inflation from 6 percent to 4 percent will

have no effect on the unemployment rate.

If the price of crude oil decreased, then this would most likely

increase aggregate supply in the U.S.

In the view of real-business-cycle theory, an increase in the long-run aggregate supply would lead to a(n)

increase in aggregate demand by an equal amount, so real output would increase and the price level would be unchanged.

Refer to the diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to

increase spending and decrease taxes

Gross Domestic Product (GDP) Consumption (C) $0 $40 100 120 200 200 300 280 400 360 The accompanying table is the before-tax consumption schedule for a closed economy. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, we can conclude that the tax

neither increases nor decreases built-in stability.

Joe deposits $200 in currency into his checking account at a bank. This deposit is treated as

no change in the money supply because the $200 in currency has been converted to a $200 increase in checkable deposits.

The settling of any net deficit in the combined current, and capital and financial accounts is done with

official reserves.

Requiring banks to use less leveraging is equivalent to

requiring a higher level of bank net worth.

Refer to the diagram for a specific economy. A reduction in structural unemployment or bottleneck problems in labor markets will

shift this curve to the left.

In the short run, if the price level increases, then nominal wages

stay fixed and the firms' revenues and profits will increase.

In the long run, if the price level decreases, then the economy's output level will

stay the same.

Research for industrially advanced countries indicates that

the more independent the central bank, the lower the average annual rate of inflation.

The so-called eurozone refers to

the EU nations that have adopted a common currency.

When a bank has a check drawn and cleared against it,

the amount of required reserves the bank must have will fall.

The traditional monetary rule is the idea that

the annual rate of increase in the money supply should be equal to the potential annual growth rate of real GDP.

Refer to the graph. Which of the following factors does not explain a movement along the AD curve?

the expenditure multiplier effect

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

the inflation rate.

The traditional Phillips Curve suggests a trade-off between

the level of unemployment and inflation.

(Consider This) The 2007-2009 recession began with reductions in investment and consumption spending, precipitated by a financial crisis. This explanation for the recession is consistent with

the mainstream view of macroeconomic instability.