Econ 102 Final

(Table: Pizza Economy III) Use Table: Pizza Economy III. Nominal GDP in 2019 was:

$47,000

Suppose you have $5,000 to invest in a Treasury bill for 20 years. The average annual rate of return is 1.5%. What is the future value of your investment after 20 years?

$6,734

Sarah finds a pinecone in her yard. She adds some eyes and feet from other stuff she finds in the yard (so it was free). She sells the pinecone doll to a local shop for $1. The shop sells it to a consumer for $5. How much is added to GDP?

5

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 1%, the inflation rate is 3%, and the output gap is 1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

5.5%

Which of these shows the correct effect on the IS-MP framework if there is a rise in home values and wealth in the economy?

A

Suppose the Canadian job markets report is very strong, and consumers begin to expect more economic growth and rising incomes. Which of these graphs shows the effect on the consumption function in Canada?

Figure A

Which of these graphs shows the correct effect on the consumption function when there is a decrease in income?

Figure D

Analysts in your consulting firm concluded that the current rate of unemployment is less than the equilibrium rate, which leads you to conclude that:

actual GDP is greater than potential GDP

Analysts in your consulting firm concluded that the current rate of unemployment is greater than the equilibrium rate, which leads you to conclude that:

actual GDP is less than potential GDP.

Which of these is NOT a tool of fiscal policy?

changes in the money supply

Menu costs refer to the increased cost of:

changing listed prices.

If the Canadian dollar appreciates, this makes foreign goods cheaper for Canadians. As a result:

competitive pressure on Canadian businesses is increased, leading Canadian businesses to lower prices.

Your cousin (from Boston), who was a full-time college student during the spring semester, just moved from the campus dorm back into their parents' house for the summer. When asked what they plan on doing until the fall semester, they reply, "Since I'm unemployed, I'll just enjoy the summer with friends and eat my parent's food." Your cousin is:

confusing unemployment with not being in the labor force.

The difference between a budget deficit and government debt is that a:

deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

The federal budget tends to move toward _____ as the economy _____.

deficit; contracts

Devina lost her job a while ago when the economy entered a recession. She no longer believes she can get a job and has lost hope of employment. She has several friends in the same scenario. They have all stopped looking for work. This scenario describes:

discouraged workers.

The purpose of "Fedspeak" was to:

minimize market reactions from Federal Reserve statements

A $100 million increase in government spending increases GDP by:

more than $100 million

If a short-lived recession is expected, a consumption smoother will exhibit _____ in consumption.

no change

The real interest rate is the:

nominal interest rate minus the rate of inflation.

The lower bound for the federal funds rate is set by the:

repurchase agreements and interest on excess reserves

If a spending shock increases aggregate expenditure by $35 billion, and the multiplier is 2.5, the IS curve will shift to the:

right by $87.5 billion.

Physical capital is purchased through investment spending, which in turn is MOSTLY financed by:

savings.

If Y < AE:

the stock of inventories in the economy will fall.

In the IS-MP framework of the Fed model, the risk-free interest rate rises in response to:

contractionary monetary policy.

Rapid growth in poorer countries leads to

convergence in real GDP per person between poorer countries and richer countries

Suppose aluminum prices rise in international markets. U.S. firms that import aluminum face higher marginal costs and raise prices. This scenario describes:

cost-push inflation.

Which economic indicator would you expect will decrease continuously as the economy grows?

unemployment

A negative output gap implies an unemployment rate that is:

above the natural rate.

Refer to the following statistics. Based on these statistics, the level of business investment is:

$1,550 million.

Here is U.S. economic data for 2017. What was total spending?

$19.52 trillion

Consider an economy that produces only smartphones and laptops. Last year, 10 smartphones were sold at $800 each, and 5 laptops were sold at $1,000 each, while this year, 15 smartphones were sold at $900 each, and 10 laptops were sold at $1,100 each. Real GDP this year is:

$23,250

You're deciding whether to pursue a Master's degree in Economics. With your Bachelor's degree, you'll earn $105,800 per year, but with a Master's degree, you'd earn $134,000 annually. Your degree depreciates at a rate of 2% per year, and the real interest rate is 2%. You should pursue the Master's degree if the present value of the cost of acquiring it is less than _____, which includes the cost of _____.

$705,000; tuition and foregone income while completing the degree

Structural unemployment can be caused by: (i) efficiency wages. (ii) union-determined wages. (iii) minimum wage laws. (iv) job protection regulations.

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

When output exceeds potential output: (i) there is excess demand (according to the AD-AS model). (ii) demand-pull inflation occurs. (iii) the output gap becomes negative. (iv) the output gap becomes positive.

(i), (ii), and (iv)

How can high government debt lead to slow economic growth in the future? (i) Stock markets will weaken. (ii) Governments may find it hard to fund other spending such as infrastructure projects. (iii) Governments may increase future taxes to make interest payments on rising debt. (iv) Governments borrow funds that might otherwise have been used for investment.

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

Suppose that last year, wages rose by 4.1 percent while prices rose by 5.1 percent. By what percentage did real wages rise or fall (include negative sign if they fall).

-1

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% below potential GDP. What is your forecast for unexpected inflation?

-1%

Which of these would shift the Phillips curve?

-An appreciation of the US dollar. -A rise in input costs

Padma always assumes the Federal Reserve will reach its goal of 2% inflation despite the latest data, whereas Chemali pays no attention to her economist friends and expects the recent high rates of inflation will persist. Padma's expectations are ______ , whereas Chemali's are ______ .

-anchored -adaptive

The Fed controls interest rates by...

-borrowing money from banks overnight -buying and selling government bonds -paying interest on excess bank reserves -lending to banks through the discount window

Refer to the table that shows data for Panama. What was Panama's economic growth rate between 2001 and 2002?

0.30%

If the average marginal propensity to consume is 0.68, then a $1 trillion increase in total income will lead to a $_____ in consumption.

0.68 trillion increase

Suppose you get a one time $4,362 bonus at work. You immediately spend $3,889 and save the rest. You marginal propensity to consume (MPC) is what?

0.89

If the nominal rate of interest is 4.5%, the rate of inflation is 2%, and the risk premium is 1.5%, the risk-free rate is:

1%

Consider the following data. By what percentage did Real GDP grow in Macroville between 2021 and 2022

11.6

Consider the following data. What is the unemployment rate? -Working age pop = 270560 -labor force = 204304 -employed = 173028

15.3

A survey reveals that, on a small island, 1,000 people have jobs, 200 people don't have jobs but are looking for jobs, and 200 people are neither working nor looking for work. The unemployment rate on the island is _____.

16.7%

The table shows consumer price index data for the United States. Based on this information, what is the rate of inflation in 1993 (so, from 1992 to 1993)? U.S. Consumer Price Index

2.26%

Nominal GDP in the United States was $20.3 trillion in 2018 and $21.2 trillion in 2019. If the inflation rate in 2018-2019 was approximately 2%, real GDP increased by approximately:

2.4%

The approximate rate of inflation in year 5 is:

20%

In 1986, Top Gun earned $180 million in the US Box Office. In 2022, Top Gun Maverick earned $720 million in the US Box Office. CPI in 1986 was 110 CPI in 2022 was 294 How much more or less did Maverick earn than the original Top Gun in 2022 dollars?

239 million

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Next year, you expect GDP to be 3% above potential GDP. If the expected rate of inflation is 2%,what is your forecast next year's inflation?

3%

Suppose that the real interest rate is 2.1%, and the nominal interest rate is 5.4%. The inflation rate is _____%.

3.3

Consider the IS curve in the following graph:

4% to 3%.

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3%, and the output gap is 1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

6.5%

If the population of the United States is 260 million, the labor force is 130 million, and 120 million workers are employed, the rate of unemployment is _____.

7.7%

The Labor Market. What will be the level of employment if firms decide to pay an efficiency wage of $16?

80,000

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the long-run impact of a decrease in aggregate demand?

All prices adjust, and the economy returns to long-run potential.

What happens to the equilibrium price and quantity when demand decreases and simultaneously supply increases, but the demand shift is larger than the supply shift?

Both the equilibrium price and quantity fall

Congress is considering a bill that would eliminate all automatic stabilizers to free up funding for targeted programs. Which is TRUE?

Eliminating automatic stabilizers would require a massive overhaul of tax and spending programs.

Suppose that the Federal Reserve has recently cut interest rates, and there is a credible forecast that the Fed will again cut interest rates in the future. A manager who is IS-MP-savvy will expect that:

GDP will rise, and sales will increase

The government begins to provide free secondary school education. Which input in the production function changes, and what is the effect on economic growth in the country?

Human capital is enhanced, and economic growth is positively affected

In the IS-MP-PC framework of the Fed model, a fall in investment will shift the:

IS curve to the left.

In the IS-MP framework of the Fed model, a decrease in imports will shift the:

IS curve to the right.

In the IS-MP-PC framework of the Fed model, an increase in net exports will shift the ___ curve ____ and lead to an _____ in inflation.

IS, right, increase

As the CFO for Delta Airlines, a U.S.-based airline, which of the following would be one of your concerns for long-term future projections regarding the rising public debt?

If the government increases its borrowing, it could drive up interest rates, making it more difficult to replace your fleets in the future.

Which of these is true about investment and saving?

Investment creates new productive capacity, whereas saving does not involve any spending on new capital.

As Figure 8 in the text shows, whereas average income for U.S. adults has risen steadily over the last 40 years, it has remained stubbornly constant for the poorest half of adults. Which limitation of GDP as a measure of material living standards do these data highlight?

It ignores distribution.

If the Japanese electronics company Sanyo sells 3,000 televisions to the American hotel chain Wyndham, that contributes to _____ GDP as _____. If the U.S. law firm Baker McKenzie LLP litigates a copyright infringement case in Japan on behalf of a Japanese client, that contributes to _____ GDP as _____.

Japanese; an export; U.S.; an export

In the IS-MP framework of the Fed model, if the Federal Reserve raises the federal funds rate, the:

MP curve shifts up.

Do most economists believe that the budget should be balanced each fiscal year?

No, a budget should be balanced only on average; it can be in a deficit during a recession and offset by surpluses when the economy is doing well.

The current administration announces that it will enact protectionist policies, making imports from China more expensive. General Motors (GM), a U.S. auto maker, uses motor vehicle parts and accessories imported from China in its manufacturing plants. As GM's chief economist, how would you assess how this policy impacts GM and the economy at large?

Rising import prices raise input costs, shifting the Phillips curve up, and raising the prices that American consumers pay.

Which of these is an example of someone who is experiencing money illusion?

The CPI in an economy has decreased by 5%, but Vivian will not accept a lower nominal wage because she believes this is unfair.

Why should you avoid holding cash during periods of high inflation?

The cash loses value as prices keep rising.

Between 1993 and 2013, the Mexican peso fell against the U.S. dollar by almost three-fourths of its initial value. However, economists have concluded that this did not result in a corresponding fall in the prices of Mexican products expressed in dollars. What explains this apparent paradox?

The inflation rate in Mexico over that period was high

What happens to the investment line if the real interest rate increases?

There is a movement up and to the left along the same investment line

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the medium run impact of a decrease in aggregate demand?

There is a slow fall in prices as the short-run aggregate supply begins to have a positive slope, and the initial decline in output will moderate.

Half of the costs you incur at your artisan picture frame shop come from the imported hardwoods you use for the frames. You expect the reduction of a tariff on imported lumber, including the exotic hardwoods you use, will lower those costs by 8%. You expect the other half of your costs to rise by 3%. How will you adjust your prices for next year?

You decide to reduce them by 2.5%

Which of these scenarios shows evidence of inflation?

You go to the soda machine and realize that a bottle of Fanta now costs 15 cents more.

Which of these will shift the IS curve to the left?

a fall in government spending

If there is news of a future rise in income, a consumption smoother will exhibit _____ in consumption, and a hand-to-mouth consumer will exhibit _____ in consumption.

a large increase; no change

The economy shown here begins at a 0% output gap. A rise in the risk premium by 2% leads to:

a new real interest rate of 3%.

Suppose that with a real interest rate of 3%, there is no output gap. If the real interest rate is below 3%, the economic forecast predicts:

a positive output gap.

As a policy advisor for the federal government, which of the following would you NOT recommend as a vehicle through which Congress might implement a spending policy?

a sales tax

Raising income taxes shifts the _____ curve to the _____.

aggregate demand; left

An increase in government spending on health care is likely to shift the _____ curve to the _____.

aggregate demand; right

In the context of the IS-MP-PC model, a spending shock is any change in:

aggregate expenditure at a given interest rate

High rates of anticipated inflation affect:

all aspects of the economy.

Which of these exemplifies an expansionary fiscal policy?

an increase in unemployment benefits

The efficient markets hypothesis states that:

at any given time, stock prices are fairly valued, reflecting all available information.

Which of these services are provided by the local government?

bus services

When the United States gives foreign aid to developing nations in Africa, the _____ account is affected.

current

Depreciation refers to the:

decline in capital due to wear and tear, obsolescence, accidental damage, and aging.

The demand curve for loanable funds slopes:

downward, because quantity of loanable funds demanded falls when the price of borrowing money rises.

The rule of 70 is a simple rule of thumb for:

evaluating long-term growth rates.

Automatic stabilizers are government spending and taxation rules that cause fiscal policy to be automatically _____ when the economy _____ and automatically _____ when the economy _____.

expansionary; contracts; contractionary; expands

Structural unemployment cannot be caused by:

granting Social Security benefits to laid-off workers.

People who are changing jobs are counted in _____ unemployment.

frictional

A recent college graduate with a major in psychology attends a job fair but has not yet found a job. This graduate is _____ unemployed.

frictionally

Zhou got laid off by Google and it's taking a while to find a new job that pays well enough to accept. Zhou is _____ unemployed.

frictionally

Banks solve information problems by:

gathering information pertinent to a borrower's creditworthiness

In 2020, Tesla produced 509,737 electric vehicles, of which it sold 499,550, placing the remaining 10,187 in inventory. The 499,550 vehicles sold would have been counted in GDP in 2020 as consumption; the remaining 10,187 would:

have been counted in GDP in 2020 as investment.

Because of diminishing returns to physical capital, doubling the amount of physical capital available to one worker will _____ GDP per worker by _____ a factor of 2.

increase; less than

When China joined the World Trade Organization, Americans:

increased their imports from China, leading to an increase in the supply of the U.S. dollar in the dollar market.

Discretionary fiscal policy may fail to stabilize the economy and even destabilize it because of:

lags in assessing problems, and in creating and implementing policy changes.

In the long run, the most powerful determinant of inflation is

inflation expectations

Consider the Phillips curve shown here. In region A:

inflation falls below expected inflation.

Devin earns $35,000 conducting a market research project for an investment bank. In the circular flow diagram, this transaction occurs in the market for _____, as a flow of _____ from households to businesses and a flow of _____ from businesses to households.

inputs; resources; money

The steady state in the Solow growth model occurs when:

investment equals depreciation.

Which factor is NOT a determinant of consumption?

investment spending

When inflation falls below its target rate, the Federal Reserve will:

lower interest rates

If the output gap is negative, then the Federal Reserve will use its floor framework to _____ the interest on excess reserves, borrow _____ money from financial institutions to set the lower bound for the federal funds rate, and _____ the discount rate to set the upper bound for the federal funds rate.

lower; less; decrease

If the output gap is negative, the Federal Reserve will _____ the real interest rate to _____.

lower; reduce unemployment

A law requiring the federal budget to be balanced each year would likely:

make business cycles more severe.

A bank run occurs when:

many bank customers try to withdraw their funds at one time

Because of Substitution Bias and other issues, the CPI...

may overstate the negative impact of inflation on peoples' lives.

Last week I made my kid vacuum the house for free. This week he refused to do it unless I paid him $5 (which he did not report to the IRS). Last week, the vacuuming added ______ to GDP. This week, the vacuuming added _____ to GDP.

nothing; nothing

If unemployment is above its "equilibrium" level, then the economy is:

operating below capacity, and inflation will likely fall.

If a bank needs more extra money (a quick overnight loan), normally it will first turn to the:

other member banks and borrow money at the federal funds rate.

As an economist with Bank of America, you estimate how the Federal Reserve's enactment of a monetary policy that shifts the MP curve downward should affect the interest rate your bank charges new borrowers. Shifting theMP curve downward will result in a more:

positive output gap, due to a financial shock.

During recessions:

precautionary saving rises.

he short-run aggregate supply curve may shift to the right if:

productivity increases

A bond is a(n):

promise to pay back a loan with interest.

A sales tax is a tax on:

purchases of goods and services

In late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of:

quantitative easing

If the actual inflation rate is greater than the target inflation rate, then the Federal Reserve will _____ the real interest rate to drive _____ consumption and investment.

raise; down

Which will rise when the economy is expanding?

real GDP growth

As part of your work in the economic forecasting office in the governor's administration, you read a report predicting that the unemployment rate will fall two percentage points to its equilibrium rate of 4%. Based on this information and Okun's rule of thumb, you conclude that output will:

rise by 4%.

If corporate tax rates fall in the United States, the demand for the dollar will _____, and the dollar will _____.

rise; appreciate

An example of an intermediate good is:

steel purchased by aircraft manufacturers

The three major pillars of the financial sector are the:

stock market, the bond market, and the banks

Using the Fed model to diagnose the economy, if inflation rises even though the economy is weak or if it falls even though the economy is strong, you will conclude that the economy has been hit by a(n) _____ shock.

supply

Thomas Malthus's predictions about the earth did not come true because:

technological advances in agriculture outpaced population growth rates.

The production function does NOT depend on:

the amount of natural resources available.

Which price measure indicates changes in the cost of a market basket containing raw commodities such as steel, electricity, and coal?

the producer price index

Suppose falling interest rates in Australia discourage saving. What effect does this have on the consumption function in Australia?

the consumption function line shifts up

Researchers at the Federal Reserve Bank of New York estimate that, as a result of the collapse of the housing bubble in 2007-2008, homeowners' equity in the United States fell by over 50%, or about $6 trillion. This caused:

the consumption function to shift downward

The point where the long-run aggregate supply curve intersects the horizontal axis is:

the economy's potential output.

If the frictional rate of unemployment is 1%, the structural rate of unemployment is 2.1%, and the total unemployment rate is 7%, then we can conclude that:

the equilibrium rate of unemployment is 3.1%

Which type of payment is NOT a government transfer payment?

the federal payroll

Take a look at the IS-MP-PC model shown here. If the Fed lowered the real interest rate,

the output gap would become more positive (output would move to the right) and inflation would rise.

Government spending will NOT crowd out private spending if:

there is a recessionary gap

If income increases:

there will be a rightward movement along the consumption function.

Fiscal policy works best when it is:

timely, targeted, and temporary.

Suppose that the Federal Reserve announces that it will lower the federal funds rate. Why might the Fed pursue this policy?

to raise output

The economy shown here begins at a 0% output gap. Now suppose that consumers fear a recession and reduce their spending. This leads to:

unexpected inflation of −1%

Consider the graph of the labor market shown here. At the wage rate of $13, the number of unemployed people in this market is:

zero

When the economy is at potential GDP, the unexpected inflation rate is _____, and the unemployment rate is equal to _____.

zero; the natural rate of unemployment

The economy shown here begins at a 0% output gap. Now suppose that consumers fear a recession and reduce their spending. This leads to:

-a new output gap of −4%. -inflation 1% below expected

Consider the data shown in the table. Assume that the economy produces only textbooks. What is the growth rate of real GDP between the two years?

5%

When there is a deficit in the U.S. balance of payments on current account, people pay the difference by:

selling assets to other countries

The Federal Reserve was created after a(n):

series of bank runs and bankruptcies.

True or false: The Phillips Curve/Fed Model can be used to assess the effects of long term changes in expected inflation.

False

You just bought two used textbooks for $25 each. How much does GDP change because of your purchase?

GDP does not change.