Econ 202
Suppose the country of East Nowhere, labor anticipated a 0% increase in prices while in the same year, prices increased by 6%. a) This would cause b) Given the same situation,
a) Real output to increase and aggregate supply to be upward sloping b)The expected real wage will fall
Voluntary exchanges between buyers and sellers generate
economic wealth
Permanent tax cuts shift the Aggregate Demand curve
farther to the right than temporary tax cuts
The multiplier effect
increases the effects of an increase in government expenditures, while the crowding-out effect diminishes the effects
If prices should double, in the long run
laborers will want trice as much money to work the same number of hours
Over the last century, real GDP has
risen and fallen, but stayed fairly stable around the long run level of GDP
The variables on the vertical and horizontal axes of the aggregate demand and supply graph are
the price level and real output
An increase in the budget deficit causes interest rates
to rise and investments to fall
While the costs of unemployment are high, the personal cost to the unemployed
varies greatly among individuals
Suppose in year 10, the following goods were all that were produced in country A 6 pairs of shoes with 2 laces per pair at $20/pair 20 shoe laces at $2/lace 8 pairs of socks at $5/pair Then Country A's GDP in year 10 was
$176
If the marginal propensity to consume is 2/3, an initial increase in investment spending of $2,000 will cause a total change in aggregate demand by
$6,000
Suppose there are three periods and our representative family earns $300 the first period, $800 the second period, and $400 the final period. According to the permanent income hypothesis, the family will save, in the third period,
-$100
Which of the following policies will increase aggregate demand?
-A decrease in the reserve ratio -A decrease in the discount rate
A decrease in the interest rate will lead to
-An increase in the supply of loans -A decrease in the supply of loans -An increase in the demand for loans -A decrease in the demand for loans NONE OF THE ABOVE
Which of the following will shift the labor supply curve in the short run?
-An increase in the wage rate -An increase in the price level -An increase in the marginal product of labor NONE OF THE ABOVE
The level of aggregate supply in the long run is not affected by
-Changes in the price level
Suppose the wage rate is increasing. Which of the following will occur?
-Employment is rising -Employment is falling -The real wage is rising -The real wage is falling -Any of these are possible
Suppose the MPC= 7/8 and the economy is below its ideal level of aggregate demand by $640. The government wants to change its spending to meet this goal. Assume there is no crowding out, the government should
-Increase its spending by $640 -Decrease its spending by $640 -Increase its spending by $60 -Decrease its spending by $60 NONE OF THE ABOVE
The long run aggregate supply curve is vertical and reflects the fact that
-Interest rates are constant -There is no deficit -Aggregate demand is downward sloping -Labor supply has no effect on aggregate supply NONE OF THE ABOVE
When the government has a deficit of $100, we would expect that the number of private loans crowded out to be greater when
-The demand for loanable funds is relatively flat -The supply of loanable funds is relatively steep -When suppliers of loanable funds do not respond very much to changes in the interest rate ALL OF THE ABOVE
The higher the reserve ratio,
-The smaller the supply of credit -The fewer loans will likely be made -The lower is aggregate demand
The diminishing marginal concept ensures that
-The supply curve slopes upward -The demand curve is downward sloping -Increasing opportunity costs occurs ALL OF THE ABOVE
Takes the following information as given for a small, imaginary economy -Income in year one is $10,000 and consumption in year one is $6,500 -Income in year two is $11,000 while consumption in year two is $7,300 The marginal propensity to consume for this economy is:
0.800
In 1973 the consumer price index was 44; in 1994 it was 148. The increase in consumer prices between 1973 and 1994 was approximately
236%
If the labor force participation rate is 50% and the working age, non-institutionalized eligible population is 10,000 and 3,725 people are employed, then the unemployment rate is:
25.5%
If a bank has total deposits of $100,000, against which $8,000 is set aside to meet its reserve requirements of the Fed, its reserve ratio is
8%
The situation when the total amount of government spending exceeds the government's total revenue from taxes and fees is called
A Budget Deficit
For a market cycle to occur,
A change in a variable that affects the market must affect both suppliers and demanders at different times
Seller Z, who was originally willing to supply 800 units of a commodity at $5 per unit, is now only willing to supply the same number of units at $7 per unit. Evidently, seller Z has experienced
A decrease in supply
Which of the following would not cause an increase in the demand for boys' suits, a normal good?
A decrease in the price of suits
An increase in taxes will cause
AD to decrease (move to the left)
Which would not shift the demand curve for television sets?
An increase in the price of television sets
Workers who are discouraged after being unable to find a job for a long period of time and this, are no longer interested in finding a job:
Are not counted as part of the labor force
Suppose the market for toothpaste has an upward sloping supply curve and a downward sloping supply curve. If it costs tooth paste manufacturers $2 more per unit of output when it contains menthol and consumers value such toothpaste $3 more than toothpaste without menthol, then compared to toothpaste without menthol, the price of the toothpaste with menthol will be
Between $2 and $3 higher
The substitution bias in the consumer price index refers to the idea that consumers ____________ the quantity of the different products they buy in response to differential price changes. Since the consumer price index does not reflect this change, it _______________ the cost of a rise in the consumer price index
Change; over-estimates
Which of the following is a factor which cannot shift the aggregate demand curve?
Changes in the price level
An increase in the budget deficit
Changes the demand for loanable funds
When the Federal Reserve wants to increase aggregate demand it can
Decrease the required reserve ratio or decrease the discount rate
Which of the following is an example of an expansionary fiscal policy
Decreasing taxes
Suppose the demand curve for a product is vertical and the supply curve is upward sloping. If the government puts on a tax on the sale of the product, then
Demanders bear the entire burden of the tax
The labor force equals the number of people who are
Employed plus the number of people who are unemployed
When the average price level falls, target savings tends to
Fall
In order to increase the number of students that can afford to go to college, the government should set a maximum interest rate that banks can can charge students for loans
False
T or F: A onetime change in government spending is very stimulating for the economy since it has a large multiplier effect
False
T or F: For the equilibrium quantity of loans to be increasing, it must mean that the interest rate is falling
False
T or F: If one wants to know whether changes in the credit market will lead to an increase or a decrease in aggregate demand, one can just examine what is happening to the interest rate
False
T or F: In the credit market, increases in borrowing cause a decrease in aggregate demand
False
T or F: It is always better to make loans in commodities (Mountain Dew, Candy, etc.) than to make loans in money since the price of a commodity might rise before one gets repaid
False
T or F: Levels of Y and Y^lr are good for the economy since more goods and services are being produced
False
T or F: On average, inflation is bad for the economy because it causes people to pay higher prices for the goods they purchase
False
T or F: The biggest problem with the government running a deficit is that future generations will have to pay it off and as a result, they will have less income to purchase goods and services
False
T or F: The equilibrium price occurs whenever the quantity bought equals the quantity sold
False
T or F: The participation rate is the percentage of the population that is employed
False
T or F: The permanent income hypothesis says that current spending depends on current income
False
Which is false
In the credit market, increases in borrowing cause a decrease in aggregate demand
When the Fed conducts open market purchases when aggregate demand is below its ideal level
It buys government bonds, which increases the supply of credit
Suppose you found a $100 bill that was stored under your grandmother's mattress and you decided to deposit this money in a bank. If the reserve ratio were 20% and the supply of loans increased by the entire amount of excess reserves, the new deposit of $100 would lead to loans increasing by
Less than $80
The economy is in a situation when aggregate demand is below its ideal level. Which of the following policy actions could the Federal Reserve System use to help increase aggregate demand toward its ideal level?
Lower the discount rate
What is not a resource?
Money
The stated interest rate on a loan is
Nominal interest rate
Someone who is available for work but has not been actively looking for a job is
Not in the labor force
Along which curve do money wages and the price level change in the same proportion?
Only the long run aggregate supply curve
The Fed uses three policy tools in using monetary policy. These are:
Open Market Operations The Discount Rate Reserve Requirements
Which is not a price?
Opportunity cost
If there is an increase in the equilibrium quantity of loans, ceteris paribus
Output won't rise because changes in loans do not have an impact on output
The permanent income hypothesis says that
Permanent changes in government spending policy yield the strongest result
Suppose the demand curve increases in period one while the supply curve increases in period two. Then there will be a market cycle with respect to
Price
A decrease in the supply of loans
Raises the interest rate, decreases investment, and decreases aggregate demand
Crowding out causes "the" multiplier to
Remain unchanged
If the reserve ratio is 10% and a bank has $300 of deposits,
Required reserves are $30
According to the crowding out effect, if there is a government deficit, the interest rate will ________ and investment will ____________
Rise; Fall
Because of diminishing marginal product, the quantity of labor demanded
Rises as the money wage rate falls
According to the aggregate demand curve, when the aggregate price level __________, the quantity of _________
Rises; Aggregate output that is demanded falls
Peter, a lifeguard, does not work in the winter. He is:
Seasonally unemployed
Which is the worst kind of unemployment?
Structural unemployment
Sam, a college football coach, cannot find a job since he was fired from Easy Central University, because there are no openings for football coaches at the university level. Sam is:
Structurally Unemployed
Suppose there is too much aggregate demand in the economy. If this is the case then
The Fed should raise the discount rate and reserve ratio
Assume that expected prices adjust gradually to changes in the price level. Under this condition we would expect that:
The aggregate supply curve is upward sloping
What will happen to the equilibrium price of iPads, a normal good, if income rises and the cost of producing iPads falls
The change in the equilibrium price cannot be determined from the information
Over the past several years, the price of computers has decreased, yet more computers are being sold than ever before. This indicates
The demand curve for computers must be rising slower than the demand curve for computers
Suppose there is an increase in the average price level. Then,
The demand curve for labor will shift before the supply of labor
Suppose the labor market is initially in equilibrium and there is an increase in the actual price level. In the long run, which will occur?
The equilibrium wage will rise and the equilibrium quantity of labor will remain unchanged
Consider two possibilities: a) An increase in the marginal product of labor that increases employment by 20 workers b) An increase in the labor force that increases employment by 20 workers Which will raise output the most?
The increase in the marginal product of labor
The discount rate is
The interest rate the Fed charges on loans to banks
Whenever inflation occurs:
The most we can say about inflation is that prices on average are rising
What is true of the multiplier effect?
The multiplier rises as the MPC rises
Henry spends one hour shopping and buys one sweater for $30. The opportunity cost of the sweater is
The next best alternative uses of the $30 and the one hour
Assume that the makers of a good called Z have found a way to make Z last longer. However this new method will increase the cost of making Z by $10. (An example of Z is a car battery). Assume that the buyers of car batteries value the long lasting batteries $15 more than the old battery. The result will be that
The quantity of Z sold will increase
Suppose the marginal product of labor increases, then in the long run
The real wage increases
Which aggregate supply curve has a positive slope?
The short run only
If the quantity of loanable funds supplied is greater than the quantity demanded, then
There is a surplus of loanable funds and the interest rate will fall
If the unemployment rate is 8%, we can say that the economy
There is not enough information to give a definitive answer to this question
An increase in the interest rate will lead to
There isn't enough information to answer this question
An increase in the interest rate will signal that
There isn't enough information to answer this question
An increase in the unemployment rate means that:
There isn't enough information to determine what is happening to the strength of the economy
T or F: The credit market offsets some of the spending effect when there is a change in the price level
True
T or F: The purpose of monetary policy is to change the supply of credit, and thereby change aggregate demand
True
The government encounters a deficit in its budget when its total receipts are less than its total expenditures
True
Labor supply curves are generally
Upward sloping, as higher wages attract workers away from their next best alternatives
For banks to remain solvent
Withdrawals + loans must be less than or equal to deposits + loan payments