ECON Exam #2
Consider the following two alternative definitions of a recession: (1) period of negative output growth, (2) period when the output level is below the country's potential, or normal, level. Now consider a country that has been producing a lot of oil, whose oil wells have suddenly run out. This results in both its potential, and actual, output falling. Which of the following statements are correct? a) According to the first definition, the country is now unambiguously in a recession. b) According to the second definition, the country is now unambiguously in a recession. c) The policymaker using the first definition may underreact to the slowing output. d) The policymaker using the second definition may overreact to the slowing output.
a
If the Federal Reserve increases the reserve requirement, then a) Banks are required to hold a greater amount in reserves, they have less money available to lend out. b) Banks are allowed to hold a smaller amount in reserves, they will have a greater amount of money available to lend out c) Banks will not change their lending behavior. d) None of the above.
a
If the Federal Reserve lowers the discount rate it charges to banks, then a) banks will increase their borrowing of reserves from the Fed and thus increase money supply. b) banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, increasing the money supply. c) banks will reduce their borrowing of reserves from the Fed, and instead call in loans to replace those reserves, decreasing the money supply. d) banks will increase their borrowing of reserves from the Fed and thus decrease money supply.
a
In the current year, your economy is expected to make exports of $100bn and to import $80bn-worth of goods and services. When it comes to measuring GDP (or aggregate demand) the net effect of your external sector is to: a) External trade contributes $20bn. b) External trade reduces GDP by $20bn. c) We cannot tell. d) It depends on the composition of imports and exports.
a
Money in the form of bank deposits created by commercial banks when they extend credit to firms and households. a) Bank money b) Base money c) Broad money d) Fiat money
a
Temporary change in income affects the current consumption of credit-constrained households more than unconstrained households because: a) If the household cannot borrow, its current consumption is limited by its current income. b) A credit-constrained household can foresee the future. c) A credit-constrained household is unlikely to have savings to fall back on. d) Credit-constrained households are likely to be shortsighted.
a
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
The average interest rate charged by commercial banks to firms and households is called the a) bank lending rate b) policy rate c) short-term interest rate d) Interest rate
a
When the Federal Reserve wants to change the money supply, it most frequently a) Conducts open market operations. b) Changes the discount rate. c) Changes the reserve requirement d) Issues Federal Reserve notes
a
Which of the following statements is correct regarding measuring of GDP? a) 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. b) Both exports and imports are added in the measurement of GDP. c) Government production is not included in the GDP. d) The value added of government production is computed using the price that public goods and services are sold at in the market.
a
Assume that a household has access to credit. Which of the following is likely to have a significant effect on long-run consumption? a) A temporary reduction in income. b) An unexpected promotion to a senior position. c) A temporary freeze in the value of Social Security retirement benefits.
b
Assume that the level of consumption in an economy is given by the expression 1000 + 0.7Y, when Y = 50,000, consumption will be: a) 35,000 b) 36,000 c) 166,666 d) 72,428
b
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
Okun's Law tells us that: a) Unemployment and GDP growth are positively correlated. b) That unemployment goes down in booms and up in recessions. c) Every change in the level of employment is exactly matched by an opposite change in the level of unemployment. d) Output and unemployment are inversely correlated.
b
Since 2008, we have gotten used to the idea that the size and behavior of the financial system can be a major source of economic instability. How can the existence of a developed financial system help to limit fluctuations in the economy? a) A developed financial system means that firms and households can always borrow. b) A developed financial system can help households to 'smooth' their consumption over time. c) A developed financial system facilitates government borrowing. d) A developed financial system provides facilities for trading currencies and for lending and borrowing overseas.
b
Suppose that in an economy with no taxation and no external trade, the marginal propensity to consume is 0.7. The size of the multiplier will be? a) 7 b) 3.333 c) 1/3 d) 0.14
b
Which of the following statements regarding fiscal policy is correct? a) Expansionary fiscal policy (e.g. increasing the government deficit or reducing the surplus) 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
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
Compared with investment spending, government spending is relatively stable. Why might this be? a) A large part of government spending is on transfers (benefits and pensions) which are 'contractual' and have to be paid whatever the state of the economy. b) The government can spend what it likes'. c) Much of government spending is independent of the state of the economy. d) Government spending is constrained by international agreements.
c
Economic activity is subject to fluctuations (booms and slumps). Thinking about the US economy since the 1800's which of the following statements is correct? a) The main cause of economic fluctuations over the years has been the size of the agricultural sector and the effects of weather. b) The main cause of economic fluctuations over the years has been the speculative nature of the financial system. c) In the early nineteenth century the effects of weather on a large agricultural sector were a major source of economic fluctuations but during the twentieth century these have been replaced by fluctuations in industrial investment. d) In the nineteenth century, bank failures (and the absence of a central bank) were the main causes of economic fluctuations.
c
Figure 14.10c depicts the aggregate investment function of an economy. Based on this information, which of the following statements is correct? (graph) a) Ceteris paribus, an increase in the interest rate would lead to a fall in investment due to an inward shift of the investment line. b) A rise in corporate tax would shift the investment line outwards. c) A forecast of a permanent demand increase shifts the investment line outwards. d) A steeper line indicates the higher sensitivity of the level of aggregate investment to changes in interest rate.
c
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
Interest rates can influence the macroeconomy by influencing a) Households' decisions to borrow and spend b) Businesses' decisions to invest in new projects c) All of the above
c
The aggregate demand of an open economy is given by the after-tax domestic consumption C, the investment I (which depends on the interest rate r), the government spending G and net exports X − M: A D = C + I + G + X − M = c 0 + c 1 ( 1 − t ) Υ + I ( r ) + G + X − m Υ c₀ is autonomous consumption, c₁ is the marginal propensity to consume, and m is the marginal propensity to import. In the economy's equilibrium this equals its output: AD = Y. Solving for Y yields: Υ = ( 1 1 − c 1 ( 1 − t ) + m ) ( c 0 + I ( r ) + G + X ) Given this equation, which of the following increases the multiplier? a) A fall in government spending. b) A fall in the interest rate. c) A fall in the marginal propensity to import. d) A rise in the tax rate.
c
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%? a) Unemployment increases by 2.46 percentage points b) Unemployment increases by 1.73. c) Unemployment increases by 1.02 percentage points. d) Unemployment increases by 1.67 percentage points
c
Which of the following is likely to lead to a fall in the level of investment spending? a) An increased optimism about future demand b) An increase in the money supply by the central bank c) An official forecast of a downturn in the economy d) A rise in the expected rate of profit.
c
Why is investment spending likely to be more volatile than consumption spending? a) Because firms are less likely to be credit constrained than households b) Because firms cannot foresee the future. c) Because a large part of consumption spending is on items that cannot painlessly be postponed. ('non-discretionary') - food, heating, lighting, shelter, for example d) Interest rates fluctuate.
c
Your economy is estimated to be producing about $800bn-worth of goods and services this year. However, your official statisticians estimate that if all resources were fully-employed, it could produce about $1000bn. The ratio 0.8 (or 80%) therefore indicates: a) The level of unemployment b) The savings ratio c) The degree of capacity utilization d) A budget surplus
c
A fall in Real GDP... a) indicates a fall in prices. b) implies nominal GDP has also decreased. c) indicates a rise in prices. d) indicates a fall in output.
d
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
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
In the expression for aggregate consumption C = C 0 + C 1 Y, the term C 1 is known as: a) Autonomous Consumption b) The average propensity to consume. c) The multiplier d) The marginal propensity to consume
d
Providing collateral ameliorates the conflict of interest between lender and borrower because a) It disincentivizes hard work b) She has a greater interest in working hard c) It is a signal to the lender d) B and C
d
The Consumer Price Index: a) Records the price of all goods and services in the economy. b) Records the price of all goods produced in the domestic economy, including exports. c) Equals the rate of inflation d) Measures the general level of prices that consumers pay for goods and services
d
The Federal Reserve helps prevent bank runs by a) Providing deposit insurance b) Operating as banks' lender of last resort c) Outlawing bank runs d) Both providing deposit insurance and operating as banks' lender of last resort.
d
The following are the labour market and the multiplier diagrams, representing the medium-run supply side and the short-run demand side of the aggregate economy, respectively (graph): a) A rise in investment shifts the AD curve up, resulting in a higher aggregate output. This causes the price-setting curve to shift up in the short run, leading to higher employment. b) A fall in autonomous consumption shifts the AD curve down, resulting in a lower aggregate output. This causes the wage-setting curve to shift to the left in the short run, leading to higher unemployment. c) Labour productivity shifts with the changes in aggregate demand in the short run. d) The shifts in the aggregate demand cause short-run cyclical fluctuations in unemployment around the medium-run level shown in the labour market diagram.
d
What's the best explanation of crowding out? a) Private investment preventing public investment b) Government taxing and spending c) Slow economic growth due to borrowing crowding out investment d) Government spending and borrowing reducing private investment and consumption
d
When measured over time, the nominal value of many variables in economics grows more rapidly than their corresponding real values. Why might this be? a) Because of errors in the data recording process. b) Because of population growth. c) Increases in productivity. d) Inflation.
d
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.
d
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 constant 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