Econ 204 Final exam

Which of the following is likely to lead to a fall in the level of investment spending? A) a rise in interest rates are increased optimism about future demand B) an easing of monetary policy by the central bank C) an official forecast of a downturn in the economy D) a rise in the expected rate of profit

C) 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

The beveridge curve will shift downward (toward the origin) if: A) vacancies are increasingly concentrated in given sector of the economy B) vacancies are increasingly concentrated in a geographical region C) information about job vacancies improves D) unemployment benefits become more generous

C) 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

A household's net worth (or equity) is best described as: A) the total value of its assets B) the value of its house and other consumer durables C) the total value of assets minus the total value of its liabilities D) the value of its house minus the amount of the outstanding mortgage

C) 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

Which of the following is a distinctive characteristic of 'inclusive unions'? A) they bargain for the highest possible wage, regardless of the consequences B) they bargain for the maximum degree of job protection by the government C) they set their wage demands in accordance with the productivity of labor D) they aim to push up the wage curve regardless of the productivity growth

C) 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

Which of the following best describes the short-run relationship between inflation and unemployment? A) unemployment falls; inflation falls B) unemployment falls; inflation falls at a faster rate C) unemployment rises; inflation falls D) there is no relationship between unemployment and inflation

C) unemployment rises; inflation falls -an inverse relationship means that inflation and unemployment move in opposite directions

The expression for aggregate consumption c=c0+c1y the term c1 is known as A) Autonomous consumption B) the average propensity to consume C) the multiplier D) the marginal propensity to consume

D) the marginal propensity to consume -it normally takes a value less than one, showing that an initial change in autonomous spending will initiate a series of changes of diminishing size

Read Dollars & Sense Real World Macro Article 3.3 "A Future for Growth-- If we Choose It?" by Gerald Friedman. Write a discussion post responding to the following questions: What has contributed to the slowdown in growth during the 20th and 21st centuries? In your own words, describe both the supply-side arguments (from Gordon) and the demand-side arguments (presented by Friedman). Why do you think wages have grown at a much slower rate than productivity since the 1970s? How has this trend impacted income inequality in the United States?

1) Gordon claims that the supply side is the reason for the slow economic growth. He believes that the slow down that we are observing can be attributed to the lack of game-changing innovations. Innovations like water-supply networks, electricity, and the internal combustion engine. These innovations that were developed over a 50 year period had the US growing at a per capita income rate of 2.4%. After 1972 it lowered until the tech boom of the 1990s which reached the old rates for a brief moment. Gordon's argument looks pretty valid as he has numbers to back it up, but his argument completely ignores the demand side of the economy. Friedman argues on the other side, that a shortfall in aggregate demand is the reason for the economic slowdown. Friedman claims that rising demand can fuel faster growth in the economy leading to more productivity-enhancing investments and innovation. He goes on to explain how since the 1970s the government has been targeting the inflation rate and trying to keep it low which will come at the expense of growth in incomes and employment. These factors trigger a chain effect in the economy causing a decline in things like new investment, R&D, and more all of which slow down economic growth. 2) I think Friedman's theory about wages is the one that I agree the most with. From the 1970s and on there has been a decline in the demand for output. Around the same time, men's employment began to decrease as well with women's employment following the same trend in 2000. If demand isn't growing then companies do not have a reason to grow beyond the existing demand, and with so many unemployed people workers bargaining power has gone down. Because of this most of the wage control lies in the power of the companies who would rather pay a low wage and hire someone new if the previous employee is unsatisfied with the amount they are being paid. This is why if demand isn't increasing neither will the wages because companies will see look at as why would I pay an employee more if our output is not going to change. This gives the company and its executives all the bargaining power which they will use to set unfair wages and make sure they get higher pay. This will further increase the income inequality as the people at the top will be getting more and the people at the bottom will be getting less or not as much as they should be getting.

The 'paradox of thrift' refers to the fact that: A) if we all save more, aggregate income will fall B) the wealthier I become, the more tax I have to pay C) saving is a waste of time D) inflation erodes the value of savings

A) if we all save more, aggregate income will fall

Which of the following statements is correct regarding the model of the labor market? A) in the short run and medium run models that amount of capital is fixed, while in the long-run model the amount of capital can vary B) labor-saving technological progress raises unemployment in both the short and long run C) in the long-run model, the markup is independent of the number of firms D) in the long run model, firms enter the market when the makeup is low

A) in the short run and medium run models that 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

Deflation refers to a situation where prices are generally falling, why is deflation generally undesirable? A) it might lead to a reduction in aggregate demand as firms and households wait for prices to fall further B) it disadvantages creditors C) it reduces the value of debts D) it redistributes real income

A) it might lead to a reduction in aggregate demand as firms and households wait for prices to fall further

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 *blank* prices and this will start a process of *blank* A) reduce; deflation B) reduce; inflation C) increase; rising unemployment D) increase; inflation

A) reduce; deflation

According to the revised version of the Phillips curve, as shown in figure 15.7, 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: A) 3% then 4% B) 4% then 5% C) 4% then 3% D) 3% then 2%

B) 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%

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) a real rate of interest B) a nominal rate of interest C) a post-tax rate of interest D) a long-term rate of interest

B) a nominal rate of interest

Cuts in public expenditure do not guarantee a reduction in the government's deficit because: A) firms will try to pay less tax B) aggregate demand will fall, reducing government revenue C) aggregate demand falls, and firms invest less D) there is a fall in autonomous consumption

B) aggregate demand will fall, reducing government revenue -the cuts in public spending constitute a reduction in the autonomous components of aggregate demand. through the multiplier,we must expect a fall in aggregate demand somewhat larger than the initial cut in public spending. with the fall in aggregate demand, output, and employment, there will be a fall in government revenue as fewer workers pay tax and firms pay less tax on their lower profits

Which of the following might help to minimize the costs of adapting to new technology? A) strict regulation of new start-ups B) government re-training schemes C) a poorly developed financial sector D) a shortage of skilled labor

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

The introduction of a new labor-saving technology results in: A) higher wage share of output and higher income inequality in the short run B) lower wage share of output and higher income inequality in the short run C) lower wage share of output and lower income inequality in the short run D) higher unemployment, lower wage share of output, and higher income inequality in the long run

B) 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

Unemployment is a stock. the size of that stock will increase if: A) the rate of job destruction is 4% per year and the rate of job creation is 5% per year B) the rate of job destruction is 2% per year and the rate of job creation is 1% per year C) the rate of job destruction is 4% per year and the rate of job creation is 4% per year D) the government restrictions access to unemployment benefits

B) the rate of job destruction is 2% per year and the rate of job creation is 1% per year -since the rate of job creation (1%) is less then the rate of job destruction, the stock of unemployment must increase

Which of the following statements regarding fiscal policy is correct? A) expansionary fiscal policy always has a stabilizing effect on the economy B) unemployment benefits and a proportional tax system are both automatic stabilizers C) in a recession, the aim of a government fiscal expansion is to override the effects of automatic stabilizers D) as a family worried about mounting debts should cut spending and save more, so should an economy adopt austerity measures when its debt level is high, to restore its public finances to balance

B) unemployment benefits and a proportional tax system are both automatic stabilizers -in the case of economic downturn, unemployment benefits increase and taxes are reduces. in the case of an economic boom, unemployment benefits decrease and taxes are increased. these are therefore automatic stabilizers

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: A) 0.675 B) 2.1 C) 1.48 D) 2.35

C) 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

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 percent per year. this reduction is an example of: A) deflation B) falling prices C) disinflation D) austerity

C) disinflation -refers to a situation where inflation is being reduced

A fall in the world price of commodities will: A) shift the price-setting curve down and the the Phillips curve up B) create a positive bargaining gap C) shift the price setting curve up and the Phillips curve down D) trigger acceleration inflation

C) shift the price setting curve up and the Phillips curve down

Which of the following statements regarding the multiplier is correct? A) if two countries were identical except for the share of credit-constrained households, then the country with the higher share would have a smaller multiplier B) the multiplier is consistent over the business cycle C) an increase in exports leads to a higher multiplier D) Taxation and imports are "leakages" from the circular flow of income, which reduce the size of the multiplier

D) 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

In an imaginary economy, GDP falls from $100 billion to $95 billion while output per worker rises from $5,000 to $5,020 in this economy there has been: A) an increase in production and a fall in productivity B) an increase in production and an increase in productivity C) a fall in production and a fall in productivity D) a fall in production and an increase in productivity

D) 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 interference that unemployment must have risen as well

Figure 14.5 shows a downward shift of the aggregate demand curve, reducing the level of output from A to Z. suppose that we begin again at A and that this is a full-employment level of output, an increase in aggregate demand in these circumstances will most likely cause: A) an increase in employment B) a fall in wages C) an increase in output D) a rise in the general level of prices

D) 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

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: A) independent central banks are better at economic forecasting B) people who work in central banks have a strong dislike of inflation C) central banks can set interest rates D) central banks are less subject to political pressures (e.g. for lower unemployment) than governments

D) central banks are less subject to political pressures (e.g. for lower unemployment) than governments

the weakness of the original Phillips curve is that it ignored: A) time B) household preferences C) policymaker preferences D) expectations

D) expectations

In periods of rapid inflation, which of the following groups tend to lose out? A) low-income households B) households with substantial financial wealth C) borrowers (dentors) D) lenders (creditors)

D) lenders (creditors)

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: A) workers work harder B) government policy encourages economic growth C) economies benefit from economies of scale D) new capital equipment incorporated the latest technological developments

D) new capital equipment incorporated the latest technological developments

The relationship between the unemployment rate and the job vacancy rate (each expressed as a fraction of the labor force) is known as: A) the phillips curve B) the labor demand curve C) the wage curve D) the beveridge curve

D) the beveridge curve -the beveridge curve shows the relationship between the unemployment rate and the job vacancy rate

The widespread introduction of new technology into an economy takes time. the length of time between first appearance and general acceptance is known as: A) the innovation lag B) the time gap C) the knowledge lag D) the diffusion gap

D) 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 context of aggregate demand, which of the following constitutes investment A) Putting money in a savings account B) buying company shares C) buying a new car for personal use D) upgrading your firm's IT equipment

D) upgrading your firm's IT equipment -upgrading your firm's IT system is a form of investment in (real) capital equipment

Read Dollars & Sense Real World Macro Article 6.2 "Fiscal Policy and 'Crowding Out'" by Alejandro Reuss. Write a discussion post responding to the following questions: Describe the 'crowding out' perspective on fiscal policy in your own words. In your opinion, what are the strengths and weaknesses of this argument? Why might government spending create a larger multiplier effect when unemployment is high and have a smaller multiplier effect when the economy is at full employment?

Describe the 'crowding out' perspective on fiscal policy in your own words. As discussed in the reading, the perspective of "crowding out" refers to when government spending is increased with the goal of getting the American economy out of a recession, and this in turn has a negative effect on private spending and investment. When the government decides to increase spending the money used comes from ether borrowing, an increase in taxes, or a combination of the two. This theory believes that if the government increases taxes, this will reduce the after-tax income of individuals, which in turn means they will reduce their amount of spending. If the government chooses to borrow money, there will be an increased government demand for loans which will result in interest rates being raised and will then "crowd out" private investment. This all adds up to what conservative economists believe will have zero effect on GDP. In your opinion, what are the strengths and weaknesses of this argument? To me, this argument does make a lot of sense, in order for the government's stimulus plan to work the money does have to come from somewhere. the "crowding out" perspective states that if money is taken away from Americans through taxes, or high-interest rates bar people from investing, both will hurt the problem and not get an economy out of a recession. Some of the weaknesses of this argument include the fact that it doesn't take into account that increased government spending can result in an increase in total demand which also improves output and employment. If all of those things were to increase that makes a very valid argument that the Keynesian model could in fact get an economy out of a recession. Why might government spending create a larger multiplier effect when unemployment is high and have a smaller multiplier effect when the economy is at full employment? Government spending causes the multiplier effect to become larger when the economy has a high unemployment rate because more money being put into the economy means there will be more spending and production which translates to increased GDP. When there is a high unemployment rate many resources do not get used, the increase in demand caused by government spending results in a higher multiplier effect. Government spending causes the multiplier effect to become smaller when the economy is at full employment because if all resources are already being used, the only way to produce more of certain goods, is to produce less of others

Read Dollars & Sense Real World Macro Article 7.1 "What is Money?" by Doug Orr. Write a discussion post responding to the following questions: What forms of 'money' have been successfully used in the past? Compare the role of the Federal Reserve to that of Banks with respect to money and money creation.

What forms of 'money' have been successfully used in the past? There have been many different kinds of 'money' used by lots of different societies in history that were successful at the time. Some examples include; salt, shark's teeth, cows, gold, frankincense, myrrh, and tobacco leaves. Compare the role of the Federal Reserve to that of Banks with respect to money and money creation. If the Federal Reserve wants to increase the money supply, they will choose to increase banks' reserves. This allows banks to be able to loan out more money because the amount in their reserves is now higher thanks to the Fed depositing a reserve check in their account at the Federal Reserve. It is worthy to note here that while the Federal Reserve can allow banks to lend out more money because of this, it is entirely up to the banks if they choose to do so. The power to create money lies in the hands of the banks the Federal Reserve can simply influence them to create more money through this process. The Federal Reserve can also restrict the money supply through increasing the reserve requirement for banks making it so they have less money to loan out and, thus, less money is in circulation.