ECON 1B Midterm #2 Review

If v=4%, P=3%, and Yr=2%, then M must equal: A) 1%. B) 2%. C) 6%. D) 7%.

A) 1%.

A bank lends money for a year at an interest rate of 7%, and the inflation rate for that year turns out to be 5%. What is the bank's real rate of return for that year? A) 2% B) 3.5% C) 6% D) 12%

A) 2%

Suppose the money supply equals $100 million, the average price level equals 40, and real GDP equals $50 million. Given this information, the velocity of money equals: A) 20. B) 80. C) 100. D) 125.

A) 20.

What does "crowding out" mean? A) Government borrowing causes private investment and consumption to decrease. B) Too many private lenders make it difficult for the government to borrow. C) Too many private savers compete for higher rates of return. D) The government gives tax breaks to many segments of the economy at one time.

A) Government borrowing causes private investment and consumption to decrease.

In the AD/AS model, Yr represents the: A) growth rate of real GDP. B) level of real GDP. C) reference year. D) growth rate of the money supply.

A) growth rate of real GDP.

If stock prices go up and people feel richer, aggregate demand will: A) increase. B) decrease. C) stay the same because there have been no changes to the underlying assets. D) be unpredictable.

A) increase.

If the supply of loanable funds decreases, ceteris paribus, interest rates will: A) increase. B) decrease. C) remain the same. D) change indeterminately.

A) increase.

Inflation tends to cause nominal wages to: A) increase. B) decrease. C) remain constant. D) become more difficult to predict.

A) increase.

The quantity theory of money predicts that the price level: A) increases with the quantity of money in the economy. B) decreases with the quantity of money in the economy. C) is relatively constant. D) is difficult to predict.

A) increases with the quantity of money in the economy.

An increase in unemployment benefits tends to: A) lower the incentive to search for a job and raise structural unemployment. B) lower the incentive to search for a job and lower structural unemployment. C) raise the incentive to search for a job and raise structural unemployment. D) raise the incentive to search for a job and lower structural unemployment

A) lower the incentive to search for a job and raise structural unemployment.

Nobel Prize-winning economist Milton Friedman says, "Inflation is always and everywhere a _____." A) monetary phenomenon B) risky phenomenon C) velocity phenomenon D) growth phenomenon

A) monetary phenomenon

The price of savings is: A) the interest rate. B) the investment rate. C) the savings rate. D) the rate of time preference.

A) the interest rate.

The savings supply curve is: A) upward sloping. B) downward sloping. C) horizontal. D) vertical.

A) upward sloping.

Nominal wage confusion occurs when: A) workers respond to their nominal wage instead of to their real wage. B) workers respond to their real wage instead of to their nominal wage. C) nominal wage is much greater than the real wage. D) real wage is much greater than the nominal wage.

A) workers respond to their nominal wage instead of to their real wage.

Why is the demand for loanable funds downward sloping? A) People save less when the interest rate is low. B) More people borrow money when interest rates are low than when they are high. C) Fewer investment projects have returns that can beat higher interest rates, so people are more willing to invest at higher interest rates. D) People save more when the interest rate is high.

B) More people borrow money when interest rates are low than when they are high.

As the baby boomers retire, the United States labor force participation rate will: A) increase. B) decrease. C) remain the same. D) fluctuate unpredictably.

B) decrease.

If the interest rate rises from 5% to 9%, the number of new businesses will: A) increase. B) decrease. C) remain the same. D) sharply increase, then level off.

B) decrease.

The loanable funds market is the market where: A) the government brings buyers and sellers together to finance capital expenditures. B) equilibrium interest rates are determined by the actions of borrowers and lenders. C) stocks are bought and sold. D) overall investment rates in the economy are determined.

B) equilibrium interest rates are determined by the actions of borrowers and lenders.

Disinflation occurs when the overall price level: A) falls. B) rises at a decreasing rate. C) rises at an exponential rate. D) falls at an increasing rate.

B) rises at a decreasing rate.

An increase in spending growth will cause the aggregate demand curve to: A) shift inward. B) shift outward. C) not shift at all. D) shift randomly.

B) shift outward.

Frictional unemployment is best defined as: A) long-term unemployment caused by changing features of an economy. B) short-term unemployment caused by difficulties of matching employees to employers. C) unemployment caused by cyclical conditions of an economy. D) a normal level of unemployment caused by high wages.

B) short-term unemployment caused by difficulties of matching employees to employers.

Which of the following would shift the long-run aggregate supply curve to the right? A) a decrease in the rate of inflation B) the invention of a new computer chip that makes assembly production twice as fast C) a severe drought that decreases crop production and as a result raises prices D) an increase in the growth rate of spending

B) the invention of a new computer chip that makes assembly production twice as fast

If spending growth is 3% and real GDP growth is 2%, what is the inflation rate? A) 3% B) 5% C) 1% D) 2%

C) 1%

If the adult population of a country is 200 million, 100 million are employed, and 10 million are unemployed, this country's labor force is: A) 200 million. B) 190 million. C) 110 million. D) 100 million.

C) 110 million.

Which of the following is a case of cyclical unemployment? A) Glenn quit his job to move to another state. B) Grace is an accountant temporarily unemployed since tax season has ended. C) Garrett lost his job after the company closed during last year's recession. D) Gwyneth is still seeking a job that will use her skills in statistics.

C) Garrett lost his job after the company closed during last year's recession.

An increase in spending growth causes: A) an upward movement along the AD curve. B) a downward movement along the AD curve. C) a rightward shift of the AD curve. D) a leftward shift of the AD curve.

C) a rightward shift of the AD curve.

The long-run aggregate supply curve is: A) upward sloping. B) downward sloping. C) a vertical line. D) a horizontal line.

C) a vertical line.

The Great Depression was due primarily to the: A) excessive amount of money supply. B) extensive underutilization of resources. C) great fall in aggregate demand. D) rising labor unions.

C) great fall in aggregate demand.

The unemployment rate is expected to _____ during a recession. A) decrease B) remain the same C) increase D) change indeterminately

C) increase

The term "business fluctuations" refers to: A) the different stages of a product cycle. B) changes in the prices of goods and services over time. C) movement in real GDP around its long-term trend. D) the trend in real GDP over a long period of time.

C) movement in real GDP around its long-term trend.

An increase in inflation will cause the long-run aggregate supply curve to: A) shift inward. B) shift outward. C) not shift at all. D) shift randomly.

C) not shift at all.

A discouraged worker is a: A) person working for fewer hours than he or she prefers. B) worker being discouraged by his or her employer when asking for a promotion. C) person who has given up looking for work but would still like a job if one is available. D) unemployed person who has temporary part-time employment.

C) person who has given up looking for work but would still like a job if one is available.

The "Solow" growth rate is the rate of economic growth that occurs when: A) inflation is moderate. B) prices and wages are sticky. C) prices and wages are flexible. D) the money supply is growing.

C) prices and wages are flexible.

What two components of the quantity theory of money are assumed to be stable over time? A) the velocity of money and the price level B) real GDP and price level C) real GDP and the velocity of money D) the money supply and the velocity of money

C) real GDP and the velocity of money

Oil shocks, the shift from manufacturing to service jobs, and the use of new technologies are reasons for _____ unemployment. A) frictional B) cyclical C) structural D) permanent

C) structural

If bond prices fall, what happens to interest rates? A) They will fall. B) They remain stable. C) They initially fall, and then return to their initial level. D) They will rise.

D) They will rise.

Inflation is: A) the average number of times a dollar is spent on final goods and services in a year. B) when people mistake changes in nominal prices for changes in real prices. C) a decrease in the average level of prices. D) an increase in the average level of prices.

D) an increase in the average level of prices.

In times when prices rise unexpectedly: A) producers are made better off at the expense of consumers. B) consumers are made better off at the expense of producers. C) lenders are made better off at the expense of borrowers. D) borrowers are made better off at the expense of lenders.

D) borrowers are made better off at the expense of lenders.

An unemployed person is one who: A) stays at home and is not looking for work. B) works for a job that pays less than he or she expected. C) is not willing to work even though he or she is able to. D) does not have a job but is actively looking for one.

D) does not have a job but is actively looking for one.

Countries in Western Europe have: A) higher minimum wages than the United States. B) higher median wages than the United States. C) higher unemployment rates than the United States. D) higher minimum wages, higher median wages, and higher unemployment than the United States.

D) higher minimum wages, higher median wages, and higher unemployment than the United States.

Money illusion occurs when people: A) become irrational about money use. B) become rationally ignorant about money. C) mistake changes in prices for changes in quality. D) mistake changes in nominal prices for changes in real prices.

D) mistake changes in nominal prices for changes in real prices.

The actual unemployment rate varies around the: A) frictional unemployment rate. B) structural unemployment rate. C) cyclical unemployment rate. D) natural unemployment rate.

D) natural unemployment rate.

In economics, investment refers to: A) saving. B) dissaving. C) the purchase of consumption goods. D) the purchase of capital goods.

D) the purchase of capital goods.