Econ 104 Final exam

A curved line has slope values that change at every point.

true

A rise in exports, all else constant, will increase net exports.

true

One desirable outcome of a market economy is that it leads to a more equitable distribution of income.

False

The decisions Apple makes in determining production levels for its iPhone is an example of a macroeconomics topic.

False

When voluntary exchange takes place, only one party gains from the exchange.

False

A college must decide if it wants to offer more Internet-based classes. This decision involves answering the economic question of "what to produce."

True

An economic model is a simplified version of reality used to analyze real-world economic situations.

True

Every individual, no matter how rich or poor, is faced with making trade-offs.

True

Examining the conditions that could lead to a recession in an economy is an example of a macroeconomics topic.

True

One reason the aggregate demand curve slopes downward is due to the fact that if the price level falls, real money balances rise, all else constant, interest rates will fall causing an increase in consumption and investment.

True

The basis for trade is comparative advantage, not absolute advantage.

True

The slope of the investment demand function indicates how sensitive investment is to changes in real interest rates. The 'steeper' the investment demand function, the less sensitive investment is to changes in the real rate of interest, all else constant.

True

A fall in the tax rate on capital will cause the aggregate expenditure curve to shift up and the aggregate demand curve to shift to the left, all else constant.

false

A increase in tao, the effective tax rate on capital will result in the investment demand function shifting to the right.

false

A straight line has a slope of zero.

false

According to Ricardian Equivalence in a strict sense, the tax multiplier is nonzero.

false

According to one of the lectures featuring a pie chart on federal government expenditures, transfer payments went from about 5% of total expenditures in the 1960s to over 66% of total expenditures in 2010.

false

According to our discussion about the cyclicality of the aggregate supply curve, the closer the economy is to potential output, the more Keynesian the world and thus, the more effective aggregate demand side policies are in terms of effecting real GDP.

false

According to the "We are all Keynesians Now" article, the labor secretary at that time wanted the unemployment rate to fall down to 5%.

false

According to the Congressional Budget Office (CBO), the stimulus package failed in terms of creating jobs, lowering unemployment, and raising GDP.

false

According to the Phillips curve analysis, if expected inflation is equal to actual inflation then we are at NAIRU. However, if actual inflation is higher than expected, then the actual unemployment rate will be higher than that associated with NAIRU.

false

According to the Taylor Rule described in the lectures, if the Fed is getting an A+, then the federal funds rate should be set at 5%.

false

According to the Taylor principle, if actual inflation rises by 1% over target inflation, then the Fed should raise the federal funds rate by 2% to make sure that the real federal funds rate rises which is referred to as "leaning against the wind."

false

According to the Taylor rule, the Greenspan Fed was hawkish during the job-less recovery as well as the job-loss recovery.

false

According to the lecture on the cyclical properties of the aggregate supply curve, I argued that aggregate demand side policy works better, in terms of influencing output, when the economy is operating at near full employment output relative to when the economy is operating at levels of output well below full employment.

false

According to the table depicting the effective tax rate on capital for 2007, the only country that has a higher effective tax rate on capital is Greece.

false

An increase in the labor force shifts the production possibility frontier inwards over time.

false

Any output combination outside a production possibility frontier is associated with unused or underutilized resources.

false

As of 2010, interest payments on the federal debt exceeded 10% of total expenditures.

false

Assuming that natural gas for firm X is an important input to the production process, an increase in the availability of natural gas that lowers the price of natural gas, will result in a leftward shift of firm X's supply curve.

false

Consistent with his thought on spending heavily, Keynes was known as an excellent tipper.

false

Consumption is negatively related to stock market wealth but positively related to taxes and tax rates.

false

During the Reagan Administration, the current account became a major economic issue. In particular, the US began running a large current account surplus where US exports were much larger than US imports.

false

During the mid 2000s, the current account deficit in the US exceeded 10% of GDP.

false

Friedman and Phelps agreed that there is a trade-off between unemployment and inflation, but only in the long run.

false

Goods market equilibrium in an open economy requires that savings equals investment.

false

If Ethel sold her 2003 Ford Focus for $2,250 in 2017, the sale of her car contributed $2,250 to 2017 GDP.

false

If NX is positive then the country is consuming beyond their means and must borrow from the rest of the world.

false

If Sanjaya can shuck more oysters in one hour than Tatiana, then Sanjaya has a comparative advantage in shucking oysters.

false

If a country is producing efficiently and is on the production possibilities frontier, the only way to produce more of one good is to produce less of the other.

false

If actual inflation rises one percent above target and the central bank raises the actual funds rate by one percent then according to the Taylor rule, the central bank is being hawkish.

false

If aggregate expenditures exceed aggregate income then inventories will rise and firms will eventually lay off workers.

false

If aggregate expenditures rise unexpectedly, then inventories will also rise unexpectedly.

false

If income exceeds absorption, then the economy is 'consuming beyond its means.'

false

If labor markets become "loose" and wages fall, all else constant, the short run aggregate supply curve will shift to the left.

false

If output prices rise without the nominal wage rising, then real wages rise and workers are willing to work more. This is one of the main reasons that the short-run aggregate supply curve slopes upward.

false

If savings exceeds investment then the country is running a trade deficit where NX < 0.

false

If the US economy is growing faster than the rest of the world, then we would expect a surge in US exports.

false

If the actual federal funds rate is higher than the funds rates implied by the Taylor rule, then we say that the central bank is dovish.

false

In a consumption function with income (Y) on the horizontal axis and consumption (C) on the vertical axis, a rise in stock market wealth, all else constant, will result in a movement along the consumption function.

false

In a consumption function with income (Y) on the horizontal axis and consumption (C) on the vertical axis, a rise in the price level (all else constant) will cause a shift upward of the consumption function.

false

In a open economy, savings = investment is the same as the closed economy goods market equilibrium condition we know as Y = C + I + G.

false

In a two-good, two country world, if one country has an absolute advantage in the production of both goods, it cannot benefit by trading with the other country.

false

Keynes believed that it was not the responsibility of the government to use its powers to increase production, incomes and jobs.

false

Monetary policy is thought to be stronger in an open economy relative to a closed economy since if the Fed, for example, wanted to prevent the economy from overheating, they would lower interest rates. Along with the normal closed economy impact on consumption and investment, we also would have a stronger dollar which would lower net exports, adding to the power of monetary policy.

false

One reason fiscal policy is thought to be stronger in an open economy relative to a closed economy is due to the fact that in an open economy setting, the change in the interest rate effects the exchange rate and thus, adds power to fiscal policy through this exchange rate channel.

false

A country that intervenes in the foreign exchange market to keep their currency weak is consistent with the country being export oriented.

true

One way to explain the apparent tradeoff between inflation and unemployment during the 1960s, expected inflation was consistently higher than the actual inflation implying that firms would be willing to hire more workers given this difference between expected and actual inflation. The result therefore would be higher inflation and lower unemployment, consistent with the facts during the 1960s.

false

Positive real interest rates imply that if you save today, you can purchase a smaller basket of goods and services in the future, relative to the basket you could have consumed today.

false

Services are the most interest rate sensitive component of consumption.

false

Spending by local governments to stimulate or slow down their local economies is an example of fiscal policy.

false

Suppose the value of the US dollar changes from $1 = 1.2 euros to $1 = 1.30 euros. This being the case, imports from the US to Europe, have become less expensive to European citizens, all else constant.

false

The Obama administration in 2013 let a tax holiday expire which effectively increases income taxes for all workers who pay into social security. The effect of this increase in taxes, all else constant, would shift the consumption function down, the aggregate expenditure curve down, and the short-run aggregate supply curve to the left.

false

The full-employment rate of unemployment is zero.

false

The mid to late 1970s was the 'heyday' of Keynesian economics in the US economy.

false

The misery index in 1980 exceeded 25.

false

The more 'sticky' nominal wages and other input costs are, the steeper the slope of the aggregate supply curve and therefore, the less effective demand side policies in terms of effecting real output.

false

The more sensitive consumption is to real wealth, the steeper the aggregate demand curve.

false

The sensitivity parameter in the consumption function that measures how sensitive consumption is to changes in consumer confidence is referred to as the marginal propensity to consume.

false

The term 'voodoo economics' is a term used by the proponents of supply side economics trying to explain to its critics that lower tax rates will result in higher tax revenue.

false

Unemployment benefits are an example of fiscal policy.

false

We argued that cash flow (CF) increased during the Great Recession and thus, had a positive effect on investment.

false

We argued that the $ US was appreciating in the early years of the Reagan Administration due to the contractionary fiscal policy during this time.

false

We argued that the E. Asian and Russian crises would map to our foreign exchange market analysis as a decrease in the supply of dollars resulting in a stronger US dollar.

false

We argued that the tax multiplier is higher in absolute value than the government spending multiplier.

false

We argued that when the economic growth in the US is greater than the (economic) growth rates of our trading partners, the trade deficit in the US should get smaller, all else constant.

false

When looking at the GDP data from quarter 3 of 2012, government purchases accounted for a smaller share of the economy than investment expenditures did.

false

When people refer to the twin deficits in the US they are most likely referring to the new economy years since this was the time twin deficits occurred in the US economy.

false

When we discussed the stagflation of the 1970s, we argued that policymakers should have acted more aggressively with expansionary policies the fight the recession that occurred during that time.

false

A rush to the safe haven of $ US during a financial crisis is depicted in the supply/demand model in the $ US market as an increase in the demand to exchange foreign currencies in for $. The end result should be $ US appreciation, all else constant.

true

According to our discussion of supply side economics, there are positive aggregate demand side effects and positive supply side effects, similar to what happened during the new economy.

true

According to the Laffer curve, increases in tax rates can result in less tax revenue.

true

According to the Taylor rule, the Greenspan Fed was hawkish during the new economy years.

true

According to the results of the estimated consumption function, consumption is less sensitive to changes in stock market wealth relative to changes in real estate wealth.

true

An increase in the unemployment rate may be represented as a movement from a point on the production possibilities frontier to a point inside the frontier.

true

Anything that shifts the investment demand curve to the right will also shift the aggregate demand curve to the right.

true

Barro is considered to be a supply side economist which is consistent with his idea that we should eliminate the corporate income tax.

true

During the Great Recession, we argued that the aggregate expenditure curve shifted downward and the short-run aggregate supply curve and the aggregate demand both shifted to the left.

true

Economic resources are also called factors of production.

true

Export oriented countries prefer a weaker currency relative to a stronger currency.

true

For a person to have a comparative advantage in producing a product, she must be able to produce that product at a lower opportunity cost than her competitors.

true

Given that the working age population is shrinking in Japan, our discussion about the determinants of the potential growth rate of the economy suggests that this demographic reality would lower the potential growth rate of the economy for Japan, all else constant.

true

If a country produces only two goods, then it is not possible to have a comparative advantage in the production of both those goods.

true

If actual inflation is lower than expected inflation, then the actual real wage is higher than the expected real wage. This being the case, firms will lay off workers.

true

If an increase in residential burglaries results in households spending more money on security systems, GDP will rise.

true

If firms and workers had perfect foresight as to inflation so that actual = expected inflation at all times, then the Phillips curve would be vertical and thus, there would be no trade between unemployment and inflation, even in the short run.

true

If the US is growing faster than the rest of the world, then all else constant, the trade deficit will widen (get more negative assuming we were running a trade deficit to begin with).

true

If the exchange rate between the US dollar and Japanese yen changes from $1 = 100 yen to $1 = 120 yen, then US exports to Japan will become more expensive to Japanese importers.

true

If the inflation rate rises in China so that it exceeds that of the US, then net exports for the US should increase, all else constant.

true

If the long-run aggregate supply curve is vertical so is the long-run Phillips curve.

true

If there is pressure for the Chinese yuan to appreciate against the US dollar, then China can 'fight' this appreciation by buying $ with their yuan.

true

In a consumption function with income (Y) on the horizontal axis and consumption (C) on the vertical axis, a fall in the real rate of interest (all else constant) will cause a shift upward of the consumption function.

true

In general, economists rely more heavily on the establishment survey rather than the household survey to evaluate the state of the labor market.

true

In the open economy goods market equilibrium with two large countries, the sum of the absorptions must equal the sum of the incomes produced by the two countries.

true

Investment is the least cyclical component of aggregate expenditures.

true

It is possible to have a comparative advantage in producing a good or service without having an absolute advantage.

true

One reason that tax revenue may fall when tax rates are increased is due to tax evasion, that is, the higher the tax rate, the higher the probability of the tax evasion and thus, lower tax revenue. The example I used was when Canada quadrupled the tax rate on cigarettes Canadian citizens sought out to buy illegally smuggled in US cigarettes to evade the tax on Canadian cigarettes.

true

One reason that the aggregate demand curve slopes downward is that when prices rise, say in the US, the relative price of imports fall and thus, US citizens substitute away from domestically produced goods toward imported goods and thus, GDP in the US will fall (all else constant).

true

One reason the short-run aggregate supply curve slopes upward is due to the 'stickiness' of input prices relative to output prices. We saw this in the plastering example when we let output prices rise and kept nominal wages constant. This being the case, the firm's profit maximizing output rises with the rise in prices, all else constant.

true

Suppose that expected inflation is 5% and thus, nominal wages rise, along with all other input prices by 5%. Suppose also, that actual inflation over this period was only 2%. In terms of the behavior of the short-run aggregate supply curve, it would shift up given the expectations of higher inflation and then shift downward to adjust for the actual rate of inflation.

true

The 'job-loss' recovery occurred following the 2001 recession.

true

The higher the marginal propensity to consume the more powerful tax policy is to influencing consumption.

true

The more flexible wages and prices, the steeper the short-run aggregate supply curve. In fact, if prices and wages (and other inputs costs) are perfectly flexible then we are in a 'classical' world, where the short-run aggregate supply curve is vertical.

true

The more the Fed accommodates shocks to money demand, the larger the (government) spending multiplier.

true

The steeper the SRAS curve, the steeper the short-run Phillips curve.

true

The weaker the US dollar is relative to the rest of the world, all else constant, the larger the net exports in the US.

true

We argued that a federal funds rate target of 4% is consistent with the stance of monetary policy being neutral as in neither tight nor loose.

true

We argued that cutting the corporate income tax will have supply side effects in that cutting the corporate income tax can potentially increase the pace of technological change with the implication being the aggregate supply will shift to the right.

true

We argued that one reason that interest rates are low on government securities is due to China's exchange rate regime.

true

We argued that the modified version of the Taylor rule during the jobless recovery following the 1990 - 1991 recession explained Greenspan and the Fed's behavior much better than the original Taylor Rule.

true

We argued that the tax revenue that the federal government collects is pro-cyclical, that is, when economic activity is growing so is tax revenue. An example of this is the new economy when tax revenue increased along with the economic growth.

true

We argued that when the US economy grew briskly during the new economy, the supply of US dollars in exchange for other currencies rose since along with economic growth, our appetite for imports grows as well. This effect, all else constant, would weaken the value of the $.

true

When talking about tax multipliers using tax rates instead of the more simple lump sum taxes, we argued that the social security tax cut resulted in a higher tax multiplier.

true

When we add the marginal propensity to import to our model, the spending multiplier falls. In fact, the higher the marginal propensity to import, the smaller the spending multiplier, all else constant.

true