Econ 102 Final

What is not a consequence of increased interest rates at home

The depreciation of domestic currency

Assume MPC is 0.5. Which of the following would create the largest increase in aggregate expenditure? a. $55 million increase in exports b. $50 million increase in autonomous consumption c. $50 million decrease in taxes d. $32 million increase in government spending financed entirely by taxes

$50 million increase in autonomous consumption

Find the output gap: 1999 Actual GDP (in millions): 4.38 Potential GDP (in millions): 4.30

(4.38-4.30)/(4.30)*100= 1.86

What kind of data adjustment removes the effect of sales spikes due to the holiday season?

Seasonally adjusted data

If an economy is experiencing zero unexpected inflation, the labor market Phillips Curve stillshows a positive unemployment rate because of which of the following?

Structural and frictional unemployment are positive

What happens to the IS curve and output gap when household wealth is increased due to appreciating assets

The IS curve shifts out, and the output gap becomes more positive

A using the Fed model: describe the economic consequences of a government debt crisis

The MP curve shifts up, the output gap becomes more negative, unexpected inflation decreases

According to Okun's rule of thumb, for every 1% fall in the actual output below potential output, the unemployment rate

rises by 0.5%

What is the output gap formula

(real output-potential output)/potential output

What are consequences of increased interest rates at home

- increased capital inflow - decreased net exports - decreased consumption

If the nominal exchange rate with Germany is 0.90 euros per U.S. dollar, how many euros will a US$38 sweater cost a German shopper?

0.90 euros/1 dollar= ?/38 dollars, so we would multiply 0.9 by 38 to get 34.20 euros

The government plans to increase its spending by $1.2 billion. Suppose that $1 billion of thisspending is financed by increased taxes, whereas the remaining $0.2 billion is financed viadebt. If the MPC in the economy is estimated to be 0.7, what would be the total increase in the aggregate expenditure? a. $1 billion b. $3.5 billion c. $4 billion d. $1.7 billion

1 billion

Describe the three sources of inflation

1. expected inflation: when people are expecting inflation so they raise their prices right away 2. demand-pull expectation: when there's increased demand so the prices for things rise (demand exceeds supply) 3. cost- push expectation: when the marginal cost of production increases so the price increases

If government spending rises by $62 billion and GDP rises by $110 billion, then the multiplier in the economy is approximately:

110 billion/62 billion = 1.77

To combat the national debt, the federal government decides to substantially cut spending. They decrease spending by $50 billion, but GDP decreases by $125 billion. What is the government spending multiplier? a. 1 b. 1.25 c. 2 d. 2.5

2.5

The Canadian government increases spending on early life education programs that total $5billion. The total change in GDP is $12.5 billion. The government spending multiplier is _______ and the Canadian economy can expect _______. a. 2, an increase in unexpected inflation b. 2, an increase in inflation c. 2.5, an increase in unexpected inflation d. 2.5, an increase in inflation

2.5, an increase in unexpected inflation

What is a reason that the US shouldn't be upset that its current account is in deficit? (Must name a benefit associated with a CA deficit)

A current account deficit means there is a financial account surplus, which means that money is going towards investment and will yield higher future income/profits

How do increasing interest rates affect aggregate expenditures? Why?

A higher real interest rate leads to lower aggregate expenditure because a higher real interest rate means a higher opportunity cost for spending.

26. Which of the following is true about recessions? a. Recessions are sharp and long. b. Average happiness increases during recessions due to decreased workload. c. A recession is defined as at least two consecutive months of negative growth. d. A recession appears on average every 8 years in the U.S.

A recession is defined as at least two consecutive months of negative growth

Which would lead to a movement along the Phillips curve?

An increase in excess demand

The economy has been experiencing deflation for several years in a row. The Fed wants to stimulate the economy, and convincingly announces that starting next year, they will lower interest rates to near zero percent. Which of the following is true? a. All agents are backward looking and nobody adjusts their inflation expectations b. Agents internalize the Fed's announcement, and change their behavior such that there is no unexpected inflation next year, all else equal c. The Phillips Curve will shift up d. Lower interest rates drive agents to stop investing, lowering aggregate expenditure and shifting down the Phillips curve

Agents internalize the Fed's announcement, and change their behavior such that there is no unexpected inflation next year, all else equal

Why are long run inflation expectations typically closer to the Feds target rate of 2%, compared to short run inflation expectations?

Anchored expectations: people believe that in the long run, the Fed will honor its promise and work to keep inflation low

What shifts the Philips curve

Another currency depreciating or appreciating against ours

Changes in the exchange rate can alter which curve? a. Aggregate Supply b. Aggregate Demand c. Both Aggregate Supply and Aggregate Demand d. Neither Aggregate Supply and Aggregate Demand

Both Aggregate Supply and Aggregate Demand

In a yearly real GDP graph, a peak represents the beginning of _____, and a trough represents the beginning of _____?

Recession, expansion

Multiplier formula

Change in income/change in spending

The economy has experienced elevated levels of inflation for over a year now. Which of the following actions would reduce inflation while minimizing harm to the economy? a. Communicate strongly that Fed will reduce inflation b. Unexpectedly increases interest rates c. Unexpectedly decrease interest rates d. Communicate that the Fed may or may not increase the interest rate in the future

Communicate strongly that Fed will reduce inflation

What does the demand curve not represent a. Desire to purchase domestic goods b. Desire to participate in domestic financial markets c. Desire to purchase foreign goods d. Desire to use domestic goods as intermediate goods in the production of a foreign good

Desire to purchase foreign goods

T or F: All variables are free to move in the short run

False

T or F: Potential GDP is equal to aggregate expenditure

False

T or F: The economy has a tendency to move in the long run

False

T or F: unemployment is cyclical

False

The Congressional Budget Office (CBO) conducts research and informs Congress that the government spending multiplier is equal to 2. Excited by this news, Congress launches a large spending program, increasing government spending on a variety of programs by $200 billion. A year later, the CBO reports that the total change in real GDP was only $330 billion. What is most likely to have happened?

Government spending crowded out private investment (i.e there was more government spending than investment

According to Okun's Law, if the output gap decreased by 0.5 percentage points, how would you expect unemployment to change?

Increase by 0.25 percentage points

What causes movements along the Philips curve

Increase in excess demand

Which of the following is one of the reasons why the IS curve is downward sloping? a. Increased taxes decrease aggregate expenditure b. Increased real interest rates decrease investment c. Decreased government spending decreases aggregate expenditure d. Increased risk premium increases real interest rates

Increased real interest rates decrease investment

Draw the Fed model (IS MP and Phillips curves together) where the output gap is 0. Graphically show the impact and report the changes to macroeconomic variables (output gap, inflation, and interest rates) of the Fed pursuing expansionary monetary policy.

Interest rates decrease, output gap more positive, inflation increases

Why is investment spending a leading indicator of economic activity?

Investment indicates the economy is heading in a good direction and people are hopeful/they expect to make a return since they are choosing to invest. Likewise, investment will be lower when companies are worried about the future of the economy

If the unemployment rate is above the equilibrium level, what can you say about the inflation rate?

It is below expectations

Due to a surprise policy shift in Turkey, the Turkish Lira suddenly depreciates against the USDollar. What happens to the Phillips Curve in the US?

It shifts down

What is not true about potential output? a. It's the amount of GDP recorded b. It's unaffected by prices c. It's the amount of GDP produced when the economy is at full-employment d. It can different than actual output

It's the amount of GDP recorded

Describe the overnight reverse repurchase agreement facility and its role in setting the Federal Funds Rate.

It's the overnight selling and rebuying by the Fed of government bonds lended to financial institutions; intended to put/establish lower bound on the federal funds rate

Banking regulators have long upheld a rule that increases information and makes lending safer. A new political party is elected, challenges the law in court, and unexpectedly gets the law declared unconstitutional. Which curve does this shift?

MP

Which of the below two events have the same effect on the output gap? (Note: consider the events separately) a. Decreased federal funds rate & Decreased net exports b. Reduced taxes & Decreased imports c. Increased real interest rates & Increased government spending d. Increased consumption & increased risk premium

Reduced taxes & Decreased imports

Supply chain issues and global conflict have caused the prices of many goods to increase. Many in the economy renegotiate their wages at the start of the fiscal year on October first, which is still 6 months away. In terms of Aggregate Supply and Demand, the economy is in the: a. Very short run equilibrium b. Short run equilibrium c. Medium run equilibrium d. Long run equilibrium

Medium run equilibrium

Assume the economy is in the short run equilibrium. Intel produces a new microchip thatincreases productivity of manufacturing equipment by 100%. What happens to aggregate pricesand real GDP?

Price decreases and real GDP increases

Two major trading partners with the US sign a peace deal, ending a conflict that left businesses very uncertain of the future. If businesses find this peace deal credible, how would we expect aggregate price level and real GDP in the US to change in the short term. a. Prices decrease and GDP decreases b. Prices decrease and GDP increases c. Prices increase and GDP decreases d. Prices increase and GDP increases

Prices increase and GDP increases

Which of the following is not a policy rate of the Federal Reserve a. The discount rate b. The interest on reserve balances rate c. The federal funds rate d. The overnight reverse repurchase agreement rate

The federal funds rate

Suppose the economy is still recovering from the last recession when another negative economic shock hits. The Fed has held the interest rate at almost zero since the last recession. What policy could the government take to prevent an even more negative output gap?

The federal government could increase spending on education and domestic infrastructure projects

Banking regulators have long upheld a rule that increases information and makes lending safer. A new political party is elected, challenges the law in court, and unexpectedly gets the law declared unconstitutional. How would we expect the output gap to change?

The output gap would decrease

In response to building inflation pressures, the Fed increases interest rates. At the same time, market participants believe the economy will continue to boom, and spending continues to increase. What happens to the output gap?

There is not enough information

22. To combat the national debt, the federal government decides to substantially cut spending. The Fed is worried that the economy is dangerously close to deflation and wants to avoid that outcome. What action should they take? a. They should increase interest rates b. They should decrease interest rates c. They should not change interest rates, they will adjust automatically d. The Fed cannot influence price levels

They should decrease interest rates

Difference between trade and financial flows

Trade flows= things like apples or cameras Financial flows= investments

T or F: The output gap is equal to 0 in the long run

True

Which of the following is not true? a. We can almost perfectly predict how long the next recession will last by analyzing the past recessions b. Levels tell you where the economy is c. Changes tell you where the economy is going d. Lagging variables follow the business cycle with a delay

We can almost perfectly predict how long the next recession will last by analyzing the past recessions

Select the statement that is true: a. The current account is always positive b. The financial account is always positive c. When the current account is in deficit, the financial account is in surplus d. When the current account is in deficit, the financial account is in deficit

When the current account is in deficit, the financial account is in surplus

Interest and Inflation Rate Relationship

When the inflation rate is 1% higher, the Fed responds by setting the real interest rate half a point higher (interest follows inflation)

Risk premium is

extra interest charged by lenders to account for risk

With a progressive tax, those with a ____ income tend to pay a _____.

higher; higher share of their income in taxes

Which of the following will increase long run real GDP? i. The Fed slashes interest rates for several years ii. A breakthrough in a new manufacturing technology iii. Consumer confidence increases to its highest point in a decade iv. The average educational attainment in the economy increases after significant government investment a. i, iii, and iv b. ii only c. i and ii d. ii and iv

ii and iv

A good proxy for the risk-free interest rate is the interest rate on a:

loan to the U.S government (bc the gov. is the safest option for getting paid back)

How do interest rates affect investment in the economy?

lower interest rates LOWER the cost of borrowing for firms, and so investment rises

Supply of U.S dollars

reflects Americans buying imports and investing abroad ex. supplying dollars to be exchanged to Yen so that you can buy a Japanese good

The government raises taxes. We would expect to see the interest rate ________, the output gap ________, and unexpected inflation ________. a. Remain unchanged, decrease, decrease b. Remain unchanged, decrease, remain unchanged c. Decreases, decrease, decrease d. Decrease, remain unchanged, decrease

remain unchanged, decrease, decrease