ECON 204

In an economy where the MPC is 0.7, the proportional tax rate is 0.25 and the marginal propensity to import is 0.2, the multiplier will be:

1.48 (The value of the multiplier in this case is: 1/(1-0.7(0.75)) + 0.2 = 1/(1-0.525) + 0.2 = 1.48.)

Cuts in public expenditure do not guarantee a reduction in the government's deficit because:

Aggregate demand will fall, reducing government revenue

Figure about deciles

D. The poorest decile in the US earns more than the richest decile in some poor countries. (The poorest Americans are better off than the richest people in poor countries, because the first column in the US is higher than the last column in the poorest country (which is the country furthest to the left).)

People are more productive when they specialize (focus on a limited range of activities) due to:

Difference in ability, learning by doing, economies of scale.

GDP per capita

GDP/population

Which of the following is not a way to estimate GDP?

Interest rates (you can not measure GDP by the interest rate)

Capitalism

Minimal taxation (bigger business) having competition will restrict big businesses

In a capitalist system:

Most production takes place in firms Inputs and outputs are private property

The widespread introduction of new technology into an economy takes time. The length of time between first appearance and general acceptance is known as:

The diffusion gap (The 'diffusion gap' refers to the length of time required for a technological innovation to become 'diffused' throughout the economy.)

In the expression for aggregate consumption C= C0 + C1Y the term C1 is known as:

The marginal propensity to consume (Correct. It normally take a value less than one, showing that an initial change in autonomous spending will initiate a series of changes of diminishing size.)

Which of the following statements regarding fiscal policy is correct?

Unemployment benefits and a proportional tax system are both automatic stabilizers. (In the case of an economic downturn, unemployment benefits increase (thus increasing government spending) and taxes are reduced. In the case of an economic boom, unemployment benefits decrease (thus decreasing government spending) and taxes are increased. These are therefore automatic stabilizers.)

Neoliberalism

liberal view point that embraces free market capitalism which means that you prefer to have limited government interference in taxation and labor markets.

Potential solutions to the principal-agent problem in the credit market include:

the borrower setting aside some collateral, the lender requiring requiring the borrower to put some of her wealth into the project (Both solve the principal-agent problem. When the borrower sets aside collateral for a loan, it gives the loan giver more trust in the buyer and increases the likelihood that the buyer will get the loan. When the lender requires the borrower to put wealth into the project, they have this same trust established.)

employment rent

The economic rent a worker receives when the net value of her job exceeds the net value of her next best alternative (that is, being unemployed). Also known as: cost of job loss.

If competition is reduced what will happen to the labor model?

The equilibrium real wage falls. (Decreased competition leads to a lower price-setting curve, while the wage-setting curve is unaffected. Therefore the equilibrium (the intersection of the two curves) shifts down and to the left, implying lower real wage and higher unemployment.)

Why is there a decline in membership of union workers?

The ever changing economy including outsourcing manufacturing (involved union membership). Government has taken over workers rights like paid time off, overtime and other freedoms their control is declining membership.

The figure depicts a labor market. Now consider an inflow of half a million immigrant workers who are all looking for employment. Which of the following statements is correct?

The firms' marginal cost of production is temporarily reduced. (With the downward shift of the wage-setting curve, the firms' marginal cost of production initially falls. This induces them to employ more workers, moving up the wage-setting curve, thus raising the marginal cost again.)

In a labor model what would happen if half a million immigrant workers who are looking for employment entered the market?

The firms' marginal cost of production is temporarily reduced. (With the downward shift of the wage-setting curve, the firms' marginal cost of production initially falls. This induces them to employ more workers, moving up the wage-setting curve, thus raising the marginal cost again.)

Disposable Income

The minimum amount of expenditure possible without having to borrow or sell possessions. (Disposable income is total income minus transfers and others such as taxes. Which is the minimum amount of possible expenditure without borrowing or selling)

The GDP per capita of Greece was $22,494 in 2012 and $21,966 in 2013. Based on these figures, the growth rate of GDP between 2012 and 2013 (to two decimal places) was:

-2.35% (The GDP per capita changed by $21,966 − $22,494 = −$528. The growth rate of GDP per capita is given by this change as a percentage of the 2012 figure: −$528/$22,494 = −2.35%.)

According to the world bank, real capita income in the US increased from $57,640 in 2015 to $58,030 in 2016. What is approximate growth rate?

0.7% because growth rate equation is (present-pat/past)

According to the revised version of the Phillips curve, as shown in Figure 15.7 (Links to an external site.), if the rate of inflation last year was 3 percent and the bargaining gap this year and next year is 1 percent, then inflation this year and next will be:

4% then 5% (The rate this year will be 3% + 1% (=4%). And next year, if the bargaining gap persists it will be 4 % + 1%(=5%))

technological progress

A change in technology that reduces the amount of resources (labour, machines, land, energy, time) required to produce a given amount of the output.

Imagine an economy that grows at a constant rate for the 21st century. A plot of the level of GDP over time will fit:

A convex line on a linear scale, and straight upward-sloping line on a ratio scale (a series that grows at a constant rate looks like a convex line on a linear scale and a straight upward-sloping line on a ratio scale)

In an imaginary economy, GDP falls from $100 billion to $95 billion while output per worker rises from $5000 to $5020. In this economy there has been:

A fall in production and an increase in productivity. (There has been a fall in production but an increase in productivity per worker. In these circumstances, it is a reasonable inference that unemployment must have risen as well.)

gross domestic product (GDP)

A measure of the market value of the output of the economy in a given period.

Which of the following cases would the wage-setting curve shift up?

A more generous unemployment insurance scheme. (A more generous unemployment insurance scheme improves workers' outside option, so their best response function curve shifts to the right. This raises the firm's profit-maximizing wage level (the wage at which the firm's isocost is tangent to the best response function curve) at each employment rate, so the wage-setting curve shifts up)

An overseas bank announces that it is introducing a new type of savings account paying a 3 percent fixed rate of interest for deposits of one year duration. This 3 percent is:

A nominal rate of interest

technology

A process taking a set of materials and other inputs, including the work of people and machines, to produce an output.

Figure 14.5 shows a downward shift of the aggregate demand curve, reducing the level of output from A to Z.

A rise in the general level of prices (Attempts to increase aggregate demand when the economy is already at full employment will almost certainly cause a rise in the general price level)

Industrial Revolution

A wave of technological advances and organizational changes starting in Britain in the eighteenth century, which transformed an agrarian and craft-based economy into a commercial and industrial economy.

Which statement regarding Adam Smith is correct?

Adam Smith claimed that coordination amount large number of economic actors, often unknown to each other, might spontaneously arise without any person or institution consciously attempting to create or maintain it. (This is the "Invisible Hand". "It is not from the benevolence of the butcher, the brewer, or the baker that we except our dinner, but from their regard to their own interest, led by an invisible hand to promote an end which was no part of his intention")

Federal Reserve

Also known as the central bank, acts as a bank for all banks, providing financial services to commercial and federal banks. They make sure there is currency in the system (ex: more during holidays) and regulate banks to keep them to standard.

capitalism

An economic system in which private property, markets, and firms play an important role.

inflation

An increase in the general price level in the economy. Usually measured over a year.

Which of the following is likely to lead to a fall in the level of investment spending?

An official forecast of a downturn in the economy (A forecast of a downturn in the economy (assuming it is believed) will normally have the effect of reducing the level of investment spending.)

Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption?

An unexpected promotion to a senior position. (A promotion to a senior position is likely mean an increase in future income over a long period. (This promotion may lead to others). If it was expected, then it might already have been taken into consumption plans and have little effect. But if it was unexpected then it is very likely to increase consumption.)

The unemployed are the people who:

Are not in paid employment or self employment Are available for work Are actively seeking work

Which of the following statements about the wage-setting curve is correct?

At each point on the wage-setting curve, the workers are choosing their best response effort level given the real wage and unemployment rate.(This is true. The wage-setting curve gives the real wage necessary at each level of economy-wide employment to provide workers with incentives to work hard and well.)

Which of the following statements about the price-setting curve is correct?

At points below the price-setting curve, the firms are setting prices too high compared to their profit-maximizing level. (The price-setting curve represents the profit-maximizing real wage. At points below the curve, the real wage is too low and the markup (and thus the price) is too high. )

If the Federal Reserve increases the reserve requirement, then

Banks are required to hold a greater amount in reserves, and they have less money available to lend out.

Why is investment spending likely to be more volatile than consumption spending?

Because a large part of consumption spending is on items that cannot be postponed. ('non-discretionary') - food, heating, lighting, shelter, for example (These items include food, heating, lighting, shelter, for example. Such spending is sometimes referred to as 'non-discretionary' spending.)

The Federal Reserve helps prevent bank runs by

Both by providing deposit insurance and by operating as banks' lender of last resort.

It is often said that independent central banks are more likely to run a successful monetary policy than governments because their commitment to low inflation is more 'credible' than government promises. One reason for this is that:

Central banks are less subject to political pressures (e.g. for lower unemployment) than governments. (The argument for putting the decision in the hands of an independent central bank is based upon the view that central banks face fewer conflicts of interest, because they are not subject to political pressures. If inflation requires a very high (and unpopular) rate of interest, this is less of a problem for central banks than for governments whose electors may be more concerned about jobs.)

Why are strong unions able to push fro higher wages? How do unions improve bargaining power?

Collectively that can push their bargaining power because the bigger the union the more power they have.

Economic power is:

Concentrated in the hands of owners and managers Limited by competitions with other firms

When the Federal Reserve wants to change the money supply, it most commonly

Conducts open market operations. (Conducting open market operations, like selling or buying bonds, is the most common way that the Fed changes the money supply.)

Imagine that the rate of inflation has been 10 percent per year for a number of years. The central bank then introduces a 'tight' monetary policy and the rate of inflation comes down to 5 per cent per year. This reduction is an example of:

Disinflation (Disinflation refers to a situation where inflation (the rate of change of increasing prices) is being reduced.)

The weakness of the original Phillips curve is that it ignored:

Expectations (The problem was expectations. The original Phillips curve was based upon data drawn from a period when inflation was generally very low (excluding the two world wars). Therefore, in the process of wage bargaining, the future expected rate of inflation was not a major factor. In more inflationary times (1960+) it was inevitable that whatever the level of unemployment and the size of the bargaining gap, workers would also be trying to take account of what they expected inflation to be, guided by the most recent rate.)

consumption (C)

Expenditure on consumer goods including both short-lived goods and services and long-lived goods, which are called consumer durables.

Temporary change in income affects the current consumption of credit-constrained households more than unconstrained households because

If the household cannot borrow, its current consumption is limited by its current income. (If it cannot borrow, then it cannot consume more than its income.)

Interest rates can influence the macro economy by influencing:

Household decisins to borrow and spend, businesses decisions to invest in new projects, the attractiveness of holding equities (All of these answers influence the macro economy. When the interest rate is low, households pay less for borrowing and are more likely to borrow. Paying less in the interest rate also gives borrowers more money to spend. Business' are less likely to invest when the interest rate is high because they are paying more if the interest rate is high. If interest rates rises, then the risk free rate of holding equities rises.

Which of the following statements is correct regarding measuring of GDP?

GDP can be measured either as the total spending on domestically produced goods and services, or the total value added in domestic production, or the sum of all incomes received from domestic production.

Which of the following might help to minimize the costs of adapting to new technology?

Government re-training schemes (Government-funded schemes that help workers retrain in order to work with the new technology reduce the costs to workers who might otherwise be unemployed)

The wage-setting curve shows that at relatively low levels of unemployment, economy-wide real wages will be relatively:

High (at low levels of unemployment, real wages will be relatively high)

Reserve Requirement

How much the bank can legally hold in cash or in deposits with the central bank(vaulted), how much they are able to have in cohorts with the Fed order to run the bank. If the requirement is high then less is lended to customers, if it is low more is lended to customers.

The 'paradox of thrift' refers to the fact that:

If we all save more, aggregate income will fall (If an individual reduces his/her consumption in order to save more, he/she will usually be successful. But if we all save more, this reduces the level of aggregate demand. This in turn will reduce the level of employment and total income. Since saving (and consumption) depend upon the level of income, the fall in income will reduce the total level of saving. Hence a general attempt to save more leads to the paradox that less actual saving takes place.)

Why are strong unions able to push for higher wages? How do unions improve workers' bargaining power?

In general, strong unions can improve workers' collective bargaining power with their employers. When workers all agree to only work under certain standards, firms (sometimes) have few other hiring alternatives. This allows workers to have more power over their working conditions or incomes.

Which of the following statements is correct regarding the model of the labor market?

In the short- and medium-run models the amount of capital is fixed, while in the long-run model the amount of capital can vary. (This is how we define the long run.)

Which of the following variables has NOT followed the so-called 'hockey-stick' trajectory? Recall, the 'hockey-stick' trajectory refers to graphs which illustrate that there has been little to no growth for most of history, followed by a sudden and sharp change to a positive growth rate.

Inequality (There is no unidirectional trend in inequality over time. While early hunter gather tribes were undoubtedly almost perfectly equal,economies in the modern era have varied from highly equal to highly unequal.

When measured over time, the nominal value of many variables in economics grows more rapidly than their corresponding real values. Why might this be?

Inflation. (If inflation is positive, then nominal values will increase more rapidly than real values because nominal values incorporate two changes simultaneously: the change in volume or size and the change in price. This compares with real values that record only changes in volume or size.)

The Beveridge curve will shift downward (toward the origin) if:

Information about job vacancies improves. (The fact that workers cannot find the matching vacancies and employers cannot find the relevant workers is another reason why vacancies exist alongside unemployment. Helping the two sides to find each other result in more of the vacancies being filled at every level of unemployment, and so the Beveridge curve shifts down.)

Discount rates

Interest that bank pays for loans. If this rate is raised it will reduce how much they can borrow from the Feds and money supply will decrease.

The Consumer Price Index:

Measures the general level of prices that consumers pay for goods and services (It records the price of goods and services in a typical "shopping basket")

Deflation refers to a situation where prices are generally falling. Why is deflation generally undesirable?

It might lead to a reduction in aggregate demand as firms and households wait for prices to fall further. (If prices are falling, consumers may postpone planned spending because they think that prices will be even lower in future. If this happens, aggregate will fall. This may increase deflationary pressure, causing further price falls and creating a circular, cumulative, process that is very difficult to break out of.)

Suppose that everyone who had been looking for a job for more than six months gave up in despair and stopped looking for a job. What would happen to the unemployment rate?

It would decrease (If unemployed individuals stop looking for a job, that means they are now no longer 'unemployed' but now merely out of the labor force. This means the unemployment rate would fall. This is an issue in that many might see this as a sign of macroeconomic improvement, but these individuals still do not have work)

In periods of rapid inflation, which of the following groups tend to lose out?

Lenders (creditors) (Generally speaking, loan contracts specify a nominal amount that has to be repaid at some point in the future. The higher the rate of inflation, the lower is the real value of this amount at repayment. Lenders lose out because the amount that they receive when the loan is repaid has a lower real value than when it was lent.)

The introduction of a new labor-saving technology results in:

Lower wage share of output and higher income inequality in the short run (The increase in unemployment lowers total wages and hence the wage share in the economy.)

The Federal Reserve does all except which of the following?

Make loans to individuals (This is the responsibility of individual banks, not the Federal Reserve.)

Which of the following statements is correct? A.In economics, money refers to the coins and notes in circulation. B. I can exchange my apples for your oranges. Therefore apples can be classified as money. C. Banks must exist for money to do its work. D. Money allows purchasing power to be transferred between consumers.

Money allows purchasing power to be transferred between consumers. (Money allows purchasing power to be transferred between people so that they can exchange goods and services, even when payment takes place at a later date (e.g. through the clearing of a cheque or the settlement of credit card and trade credit balances). This is the correct answer.)

Compared with investment spending, government spending is relatively stable. Why might this be?

Much of government spending is independent of the state of the economy. (Leaving aside transfers, government spending consists of capital spending - on schools, health, roads, railways etc. These spending decisions are made largely with reference to social needs and political preferences. These do not change rapidly. Furthermore, the projects once begun, cannot easily be abandoned. Likewise with current spending - on salaries in education, health police etc. The level of service and hence the level of spending is dictated by the community's preferences which tend to be stable.)

Which of the following statements are correct?

Net income is the maximum amount that you can consume and leave your wealth unchanged. (Net income is the flow that corresponds to your stock of wealth, so if you consume it all your wealth is unchanged.)

In the short run, successive additions to capital produce smaller and smaller increases in output. In the long run, however, GDP continues to rise. This is because:

New capital equipment incorporates the latest technological developments. (In the short run, the additions to capital consist of the same kind of equipment as earlier additions to the capital stock. Eventually, 'more of the same' type may still increase the level of output, but at a diminishing rate. But once we relax the short-run constraint, successive additions to capital cease to be 'more of the same' and rather will consist of more and more productive equipment.)

Capitalism is an economic system based on

Private property, markets and firms (while many economic systems are built on private property and markets, capitalism is unique in that most people work for firms rather than for themselves.

Communism

Property is publicly owned and everyone is paid based on abilities and skills.

Which of the following statements is correct?? A. In the credit market, asymmetric information regarding the quality of the project leads to a principal-agent problem, where the borrower is the principal and the lender is the agent. B. Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. C. Borrowers whose limited wealth makes it impossible to get a loan at any interest rate are termed 'credit-constrained'. D. The amount that the lender puts into the project is called the equity.

Providing collateral is a signal to the lender that the project is of sufficient quality to succeed. (Providing collateral is one way to reduce the principal-agent problem. It provides the borrower a greater incentive to work hard, and gives the lender the signal that the borrower thinks that the project is of sufficient quality to succeed.)

In Figure 15.4b, when employment is at level C, the real wage lies below the profit curve. Assume inflation is zero. In a competitive system, firms will begin to _____ prices and this will start a process of _____.

Reduce; deflation (In these circumstances, there is a negative bargaining gap. Firms will reduce prices and this will initiate a process of deflation.)

A fall in the world price of commodities will:

Shift the profit curve up and the Phillips curve down. (If commodity prices fall, firms will make larger profits than they need and so competition will lower prices. The price level falls. This raises real wages so the price-setting curve moves up. This creates a negative bargaining gap. This gap will be eliminated if the level of unemployment falls, so that zero inflation is now associated with a higher level of employment The Phillips curve has shifted down.)

Which of the following statements regarding the multiplier is correct?

Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier. (Some household income goes back to the government via taxes, and some is spent on goods and services produced abroad. These both reduce the effect of government spending on the domestic economy.)

The relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labour force) is known as:

The Beveridge curve (The Beveridge curve shows the relationship between the unemployment rate and the job vacancy rate.)

Unemployment is a stock. The size of that stock will increase if:

The rate of job destruction is 2% per year and the rate of job creation is 1% per year. (Correct. Since the rate of job creation (1%) is less than the rate of job destruction, the stock of unemployment must increase.)

The historical process which led to requiring fewer inputs to produce the same output is:

The technological revolution(The industrial revolution launched permanent technological revolution in Britain around 1800)

aggregate output

The total output in an economy, across all sectors and regions.

What does US GDP per capita measure?

The total output of the US's economy, divided by the country's population.

A household's net worth (or equity) is best described as:

The total value of assets minus the total value of its liabilities (Net worth is the difference between total (or gross) assets and total (or gross) liabilities.)

The figure shows the wage-setting curve and the real wage w*. Based on this figure, which of the following statements is correct?

The unemployment rate is 5% (Unemployment rate = Unemployed / Labor force = (0.8 - 0.76)/0.8 = 5%)

What do you think has caused the decline in union membership over the last several decades?

There are several possible answers here. One may be the changing structure of the global economy, which places U.S. workers in competition with poorly paid workers elsewhere. The reading also mentions that worsening income inequality might encourage policies that weaken unions (they write, for example, that wealthy individuals have worked to get people who are hostile to unions appointed to the National Labor Relations Board).

Which of the following is a distinctive characteristic of 'inclusive unions'?

They set their wage demands in accordance with the productivity of labor (Inclusive unions take account of their actions on other agents in the economic system. In particular, they accept that workers' productivity must be sufficient to supply the target real wage while leaving adequate profits for firms)

In figure above, the data for Spain suggests that Okun's Law can be written as y = -0.3597x +1.741. What is the predicted change in unemployment if GDP grows by 2%?

Unemployment increases by 1.02 percentage points. (1.741 - 0.3597(2) = 1.02)

Which of the following best describes the short-run relationship between inflation and unemployment?

Unemployment rises; inflation falls (An inverse relationship or 'trade-off' means that inflation and unemployment move in opposite directions.)

Which of the following statements regarding labor unions and wage bargaining is correct?

Unions may choose to restrain their use of bargaining power and will not ask for a wage lower than the firms' profit-maximizing level. (Demanding too high a wage may squeeze profits sufficiently, leading the firm to close down or cut back on employment. Therefore unions may choose to restrain their bargaining power.)

In the context of aggregate demand, which of the following constitutes investment:

Upgrading your firm's IT equipment. (Upgrading your firm's IT system is a form of investment in (real) capital equipment.)

disposable income equation

Wages + profit + rent + interest - taxes + transfers

The price-setting curve shows how output per worker is split between:

Workers (real wage) and firm owners (real profit) (Recall that the price setting curve gives the real wage paid when firms choose their profit-maximizing price.)

If the Federal Reserve lowers the discount rate it charges to banks, then

banks will increase their borrowing of reserves from the Fed and thus increase money supply.

Socialism

business and exchange of goods should be regulated by community members. They want centralized business and equality.

Firms and customers:

firms set a markup above the cost of production, to maximize their profits subject to demand

Firms and employees:

firms set w age sufficiently high to make job loss costly, in order to motivate employees work hard in the absence of complete contracts