ECON FINAL EXAM Quizlet

Which of the following factors will shift AD1 to AD3? shift to the left

A decrease in consumer wealth

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net exports = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP-gap here?

A decrease in government purchases and an increase in taxes

What combination would most likely cause a shift from AD1 to AD2? (shift right, y-price level, x-real domestic output, GDP)

A decrease in taxes and an increase in government purchases

Which of the following scenarios is an example of an investment in physical capital?

A firm purchases new equipment for a manufacturing process.

Which combination of factors would most likely increase aggregate demand?

An increase in consumer wealth and a decrease in interest rates.

Which of the following factors will shift AS1 to AS3? shift to the left

An increase in input prices

Which would most likely increase aggregate supply?

An increase in productivity

Which of the following effects best explains the downward slope of the aggregate demand curve?

An interest-rate effect

Which of the following will not increase a nation's real GDP?

Average price level

What is one significant characteristic of fractional reserve banking?

Banks can create money through lending their reserves.

The economy experiences a decrease in the price level and an increase in real domestic output. Which is a likely explanation?

Business costs and wage rates have decreased.

Which of the following would not be considered an automatic stabilizer?

Defense spending

Which of the following expenses are a part of the U.S. government's discretionary spending?

Education spending

Which group is responsible for the policy decision of changing the money supply?

Federal Open Market Committee

Which of the following statements is correct?

For a given real interest rate, the nominal interest must increase if expected inflation increases.

If a country's imports of goods and services exceeds its exports, _____

GDP is less than the sum of consumption, investment, and government purchases

Which of the diagrams best portrays the effects of an increase in resource productivity?

Graph (1) AS shift to the right

If the economy is initially at full employment, which of the diagrams best portrays a recession as a result of an increase in the cost of production?

Graph (2) AS shift left

Which of the diagrams best portrays the effects of an increase in foreign spending on U.S. products and an expansion?

Graph (3) AD shift right

Which of the diagrams best portrays the effects of a substantial reduction in government spending?

Graph (4) AD shift to the left

The economy experiences an increase in the price level and a decrease in real domestic output. Which of the following is a likely explanation?

Input prices have increased.

Which of the following is correct?

It is likely that a self-correcting view economist said "The recent decline in consumer confidence will eventually move to equilibrium if we do not intervene."

Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?

M1 increases and M2 stays the same.

Marketopia's real GDP was $520 billion in 2014 and $550 billion in 2015. Its population was 150 million in 2014 and 155 million in 2015. On the other hand, Econland's real GDP was $200 billion in 2014 and $210 billion in 2015; and its population was 53 million in 2014 and 55 million in 2015. Which of the following statements is true?

Marketopia's and Econland's GDP per capita both increased from 2014 to 2015.

When a firm builds a new factory, this is an example of an investment in

Physical Capital

Which of the following would not shift the aggregate demand curve?

Productivity rates

Which of the following is false regarding the Great Recession and the Great Recession?

Real GDP returned to its pre-recession level faster during Great Depression than during the Great Recession.

Which of the following is not correct about the financial crisis of 2008 - 2009 in the U.S?

The banks' reserves kept with the Fed are in the form of illiquid U.S. Treasury bonds.

The existence of lags in designing and implementing fiscal policy helps illustrate some of the limitations of fiscal policy aimed at easing the burdens of a recession. Which of the following statements best describes a situation when fiscal policy is more appropriate?

The economy is slow to self-correct or the recession is very severe.

When the general price level in our economy increases, which of the following effects does NOT occur?

The interest rate will also tend to increase

The purchase of a computer by a person for household use would be counted in what category of GDP?

The purchase is always counted as consumption.

Which of the following statements is consistent with what happened during the Great Depression?

The unemployment rate was over 25% at the height of the Great Depression. This spike in unemployment was caused by the large decrease in aggregate demand.

When a banker records how many dollars each of his borrowers owes the bank, money is serving as a

Unit of Account

Economy X has total government debt of $40,000 and Nominal GDP 60,000. Economy Y has total government debt of $32,000 and Nominal GDP 16,000. (Hint: Economy X is more like the United States; Economy Y is more like Greece in 2011.)

Y has a more severe debt problem than X.

Which of the following led to the Great Recession?

a fall in aggregate demand

Traditionally, the Federal Reserve can give emergency loans only to

commercial banks

The cost of a higher living standard in the future is giving up __________.

current consumption.

The set of fiscal policies that would be most contractionary would be a(n)

decrease in government purchases and an increase in taxes.

If the dollar appreciates in value relative to foreign currencies, aggregate demand _____.

decreases because net exports decrease

When the federal government changes purchases and/or taxes to stimulate the economy or rein in inflation, such policy is

discretionary fiscal policy.

The economy's long-run AS curve assumes that wages and other resource prices _____.

eventually rise and fall to match upward or downward changes in the price level

As the economy contracts, tax revenues

fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.

The financial crisis of 2008-2009 in the U.S. led to ____.

greater government involvement and funding for troubled industries

Fractional reserve banking refers to a system where banks

hold only a fraction of their deposits in their reserves.

Which of the following is an example of built-in stability? As real GDP decreases,

income tax revenues decrease and transfer payments increase.

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to _____.

increase aggregate demand

A decrease in the price of crude oil would most likely _____.

increase aggregate supply in the U.S.

Use the following graph to answer the next question. A shift of the aggregate demand curve from AD1 to AD0 might be caused by a(n) _____.

increase in investment spending

Congress's passage of new laws significantly increasing the regulation of business would tend to _____.

increase per-unit production costs and shift the aggregate supply curve to the left

Providing a constant number of workers with additional capital with which to work will ______ labor productivity at a(n) ______ rate.

increase; decreasing

The benefits of economic growth are _____, while the costs of economic growth are _____.

increased output per person; the consumption sacrificed in exchange for capital formation

If the national incomes of our trading partners increase, then our aggregate demand _____.

increases because net exports increase

Which of the following is a measure of economic growth that is most useful for comparing changes in standards of living?

increases in real GDP per capita

If the MPC in an economy is 0.9, the government could shift the aggregate demand curve rightward by $40 billion by

increasing government purchases by $4 billion.

The short-run aggregate supply curve is most likely to shift to the right if _____.

input prices decrease

The application of new technologies to the production process will increase

labor productivity.

Suppose the total monetary value of all final goods and services produced in a particular country during 2010 is $500 billion, and the total monetary value of final goods and services sold is $450 billion. We can conclude that _____

nominal GDP in 2010 is $500 billion

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium _____.

output would necessarily rise

In the diagrams, AD1 and AS1 are the "before" curves. Stagflation is depicted by _____.

panel (B) only AS shift left

The reason for the Fed being set up as an independent agency of government is to

protect it from political pressure.

According to real business cycle theory,

recessions result from declines in long-run aggregate supply, rather than decreases in aggregate demand.

If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, its real GDP per capita will

remain constant

Which of the following items are included in money supply M2 but not M1?

savings deposits

According to real business cycle theory economists, there is an importance of _______ and resource availability in determining aggregate ________ and therefore the level of output in the economy.

technological innovation; supply

Physical capital is

the factories and machinery used to produce other goods and services.

The principle of diminishing returns to capital states that if the amount of labor and other inputs employed is held constant, then the greater the amount of capital in use the

the less an additional unit of capital adds to production.

Which of the following varies directly with the interest rate?

the opportunity cost of holding money

Human capital is

the talents, training, and education of workers.

Using fiscal policy to stabilize the economy is difficult because

there are time lags involved in the use of fiscal policy.

When a consumer wants to compare the price of one product with another, money is primarily functioning as a

unit of account.

Classical economists emphasize _____, while monetarist economists focus on ____.

volatility in investment spending; monetary policy

The size of the M1 money supply is

$1,236 billion.

A commercial bank has checkable-deposit liabilities of $50,000 and a required-reserve ratio of 20%. What is the amount of required reserves?

$10,000

An individual deposits $12,000 in a commercial bank. The bank is required to hold 10% of all deposits on reserve. The deposit increases the loan capacity of the bank by

$10,800.

A commercial bank has actual reserves of $1 million and checkable-deposit liabilities of $9 million, and the required reserve ratio is 10%. The excess reserves of the bank are

$100,000.

Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actual reserves of $85,000. If the reserve ratio is 25%, the banking system can expand the supply of money by a maximum of

$100,000.

If the average level of nominal income in a nation is $44,000 and the Consumer Price Index is 175, the average real income would be about

$25,143.

Use the following table to answer the next question. GDP figures are in billions of dollars.Year Nominal GDP Real GDP Price Index1 5,200 4,800 --2 5,500 -- 1123 5,750 5,000 --What was real GDP in year 2?

$4,911 billion

Use the following table to answer the question below. GDP figures are in billions of dollars.Year Nominal GDP Real GDP Price Index1 5,200 4,800 --2 5,500 -- 1123 5,750 5,000 -- What is the GDP price index in year 1?

108.3

"Full employment" refers to the situation when there is

no cyclical unemployment.

For a nation's real GDP per capita to rise during a year,

real GDP must increase more rapidly than population.

Nominal GDP differs from real GDP because _____

real GDP results from adjusting for changes in the price level

Year 1 2 3 4 5 6Price Index 100 95 105 125 125 120If output increases by 8% from year 5 to year 6, then in that period _____

real GDP will rise faster than nominal GDP

As the economy declines into recession, the collection of personal income tax revenues automatically falls. This phenomenon best illustrates how a progressive income-tax system

serves as an automatic stabilizer for the economy.

Suppose that oil prices increase sharply while the rate of growth in labor productivity declines. The combination of these two factors should ______.

shift the short-run aggregate supply curve to the left

Most economists agree that ______ are the single most important source of economic growth.

technological advances

Which measure of inflation would include consumer goods and capital goods?

the GDP Price Index

During the Great Recession, a major financial crisis followed the collapse of housing prices, which led to ____.

the decline in the health of many large financial firms and banks

In calculating the unemployment rate, the "discouraged" workers who are not seeking employment are:

Excluded from the labor force

The convergence hypothesis ____.

seems to hold only when other things such as education and infrastructure are held equal.

Payments made by the government that do not require an exchange of economic activity in return are also known as

transfer payments.

GDP excludes most nonmarket transactions. Therefore, GDP tends to _____

underestimate the amount of production in the economy

Official unemployment statistics

understate unemployment because discouraged workers are not counted as unemployed.

Assume that the real GDP of a developing nation increases from $120 billion to $140 billion while its population expands from 100 to 110 million. As a result, real GDP per capita has increased by about _____.

$72 per person

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But if the rate of inflation was expected to be 4%, the bank would most likely charge the firm an annual interest rate of

10%.

Answer the next question on the basis of the following information about the hypothetical economy of Asland. All figures are in millions. Unemployed7Total population145Employed95Discouraged workers3 The labor force in Asland is

102 million.

Consumers in an economy buy only three general types of products, A, B, and C. Changes in the prices of these items over a period are shown below. Average Price per Unit Product Quantity Year 1 Year 2 A 10 $10 $ 8 B 15 20 22 C 8 50 55 Using year 1 as the base year, the country's Consumer Price Index in year 2 is

106.25

Average Price per UnitProduct Quantity Year 1 Year 2A 10 $10 $8B 15 20 22C 8 50 55 Using year 1 as the base year, the country's price index in year 2 is _____

106.3

Answer the next question on the basis of the following information about a hypothetical economy. Full-time employed = 80 Part-time employed = 25 Unemployed = 15 Discouraged workers = 5 Members of underground economy = 6 Consumer price index = 110 The unemployment rate is

12.5%.

The Consumer Price Index for the year 2008 is

171.5.

Answer the question below based on the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Year Units of Output Price per Unit 1 8 $2 2 10 3 3 15 4 4 18 5 5 20 6 If year 2 is the base year, the Consumer Price Index for year 5 is

200.

Year Real GDP Population2008 $20,000 2002009 40,000 4002010 60,000 4002011 70,000 500 Real GDP per capita is highest in which year?

2010

Year Nominal GDP Price Index1 $35 902 40 1003 45 1104 48 1205 56 140The country's real GDP declined between years..

3 and 4

A person's real income will increase by 3% if her nominal income increases by

5% while the price index rises by 2%.

If the Consumer Price Index was 170 in one year and 180 in the next year, then the rate of inflation is approximately

5.9%.

A nation has a population of 260 million people. Of these, 60 million are retired, in the military, institutionalized, or under 16 years old. There are 188 million who are employed and 12 million who are unemployed. What is the unemployment rate?

6%

Use the following table to answer the next question. The base year is 2007. Year Hot Dogs Price Quantity Baseballs Price Quantity Bottles of Beer Price Quantity 2005 $ 2.50 100 $ 2.50 50 $1.00 100 2006 4.00 100 5.00 100 2.00 150 2007 5.00 100 5.00 100 2.00 200 2008 8.00 150 8.00 200 4.00 200 2009 10.00 200 10.00 200 4.00 250 Inflation for the year 2008 is

71%.

If the total population is 200 million, the labor force is 100 million, and 92 million workers are employed, then the unemployment rate would be

8%.

Year Units of Output Price per Unit1 8 $22 10 33 15 44 18 55 20 6 If year 2 is the base year, then the percentage increase in real GDP from year 2 to year 4 is ____

80%

The unemployment rate in an economy is 6%. The total population of the economy is 290 million, and the size of the civilian labor force is 150 million. The number of unemployed workers in this economy is

9 million.

GDP does not include which of the following activities?

Couples remodeling their own homes (with their own labor)

Use the following information to answer the next question. The following items describe the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment. Mollie just graduated from college and is now looking for work. She has had three job interviews in the past month but still has not gotten a job offer. George used to work in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in a few months when national economic conditions improve. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the federal government cut defense spending. She has been looking for similar work for a year but no company seems interested in her aircraft design skills. Ricardo lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year but was unsuccessful and quit looking for work. Which individual is cyclically unemployed?

George

In year 1, the Consumer Price Index was 120 and the average nominal income was $30,000. In year 2, the Consumer Price Index was 125 and the average nominal level of income was $32,000. What happened to real income from year 1 to year 2?

It rose by $600.

If labor market institutions change so that it becomes easier to find a job, and unemployed people are unemployed for smaller durations of time, what would happen to the natural rate of unemployment?

It would decrease.

Use the following information to answer the next question. The following items describe the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment. Mollie just graduated from college and is now looking for work. She has had three job interviews in the past month but still has not gotten a job offer. George used to work in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in a few months when national economic conditions improve. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the Federal government cut defense spending. She has been looking for similar work for a year but no company seems interested in her aircraft design skills. Ricardo lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year but was unsuccessful and quit looking for work. Which individual is frictionally unemployed?

Mollie

Use the following information to answer the next question. The following items describe the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment. Mollie just graduated from college and is now looking for work. She has had three job interviews in the past month but still has not gotten a job offer. George used to work in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in a few months when national economic conditions improve. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the federal government cut defense spending. She has been looking for similar work for a year but no company seems interested in her aircraft design skills. Ricardo lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year but was unsuccessful and quit looking for work. Which individual(s) would be included in the calculation of the natural unemployment rate?

Mollie and Jeanette

Full-time homemakers and retirees are classified in the BLS data as:

Not in the labor force

Which phase of the business cycle would be most closely associated with an economic contraction?

Recession

Kevin has lost his job in an automobile plant because the company switched to robots for its welding step in the assembly line. Kevin plans to go to technical school to learn how to repair microcomputers. The type of unemployment Kevin is faced with is

Structural

In the second quarter (three-month period) of 2016, U.S. nominal GDP increased but U.S. real GDP declined. What can we conclude?

The price level rose by more than nominal GDP.

Suppose Canada has a population of 30 million people and a labor force participation rate of 2/3. Furthermore, suppose the natural rate of unemployment in Canada is 7%. If the current number of unemployed people is 2 million people, what can we conclude about Canada's economy?

The unemployment rate is above the natural rate of unemployment.

Suppose Canada has a population of 30 million people and a labor force participation rate of 2/3. Furthermore, suppose the natural rate of unemployment in Canada is 7%. If the current number of unemployed people is 1.4 million people, what can we conclude about Canada's economy?

There is no cyclical unemployment present in the economy.

A worker would be hurt least by inflation when the

Worker is protected by a cost-of-living adjustment clause in an employment contract

Recently a teachers' union argued that the standard of living of teachers working for the school district was falling. The negotiating team for the school board replied that this was not true because the teachers had received significant increases in nominal income through collective bargaining. Could the union statement be correct?

Yes, because real income may fall if price increases are proportionately greater than the increases in nominal income.

When the Fed acts as a "lender of last resort," like it did in the financial crisis of 2007-2008, it is performing its role of

being the bankers' bank.

Some economists prefer to use the term business fluctuations rather than business cycles to describe the historical growth record in the United States because

cycles imply regularity while fluctuations do not.

A headline states: "Real GDP falls again as the economy slumps." This condition is most likely to produce what type of unemployment?

cyclical

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would

decline.

Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as

employed.

For a given amount of nominal income, the real income will

fall if the price level rises.

Real income will rise from one year to the next if nominal income

falls and the price level falls faster.

Kara voluntarily quit her job as an insurance agent to return to school full time to earn an MBA degree. With degree in hand, she is now searching for a position in management. Kara presently is

frictionally unemployed.

Part-time workers who want full-time work are counted as

fully employed and therefore the official unemployment rate may understate the level of unemployment.

If the actual rate of unemployment is above the natural rate of unemployment, then potential GDP is

greater than actual GDP.

The natural rate of unemployment

is equal to the total of frictional and structural unemployment.

Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unexpected inflation occurs in the economy, then

lenders are hurt, but borrowers benefit.

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result, the

official unemployment rate will remain unchanged.

A GDP price index of 130 in year 2 means that _____

prices in year 2 are on average 30% higher than in the base year

For a person to keep his real income steady at a certain level from one year to the next, his nominal income must

rise as fast as the price index.

The service a homeowner performs when she mows her yard is not included in GDP because _____

this is a non market transaction

The size of the M2 money supply is

$5,899 billion.

Consumption $5,100Investment 1,100Transfer payments 1,050Government purchases 1,400Exports 850Imports 950Net foreign factor income 20Gdp for this economy is

$7,500

Consumption $5,100Investment 1,100Transfer payments 1,050Government purchases 1,400Exports 850Imports 950Net foreign factor income 20 What are the net exports for this economy?

-100 billion

Between 2013 and 2014, the economy experienced a growth rate of 1.8% in real GDP per capita. If nominal GDP had increased by 3% and the population growth rate was 1%, then the annual inflation rate would be ____.

0.2%

With no inflation, a bank would be willing to lend a business firm $5 million at an annual interest rate of 6%. But if the rate of inflation was anticipated to be 4%, the bank would most likely charge the firm an annual interest rate of

10%.

The commercial banking system has excess reserves of $200,000. Then new loans of $800,000 are subsequently made, and the system ends up just meeting its reserve requirements. The required reserve ratio must be

25%

A nation's real GDP was $250 billion in 2014 and $265 billion in 2015. Its population was 122 million in 2014 and 125 million in 2015. What is the growth rate of real GDP per capita in 2015?

3.4%

If the reserve requirement were 15% percent, the value of the monetary multiplier would be

6.67.

Suppose that lenders want to receive a real rate of interest of 5%, and that they expect inflation to remain steady at 2% in the coming years. Based on this, lenders should charge a nominal interest rate of

7%

According to the Rule of 72, if a country experiences an average growth rate of 10%, its real GDP per capita will double in ____.

7.2 Years

You are an economic advisor to the president. You observe a decrease in gross investment. Assume the economy was operating at the full-employment level of real GDP prior to the decrease in gross investment. Describe the state of the economy and advise the president on the appropriate policy action by completing the following sentences.

a. The decrease in gross investment will lead to a decrease in aggregate demand. As a result, real GDP will decrease. b. The problem that this event will cause is increased unemployment. c. Appropriate expansionary policy actions would include decreasing taxes and/or increasing government purchases. d. These actions will smooth out the business cycle by increasing actual real GDP back toward full-employment GDP.

Suppose the federal government observes an increase in gross investment. Examine this event in terms of the aggregate demand and aggregate supply model.

a. The increase in gross investment will cause an increase in aggregate demand. b. This will lead to an increase in the price level and an increase in real GDP. c. Contractionary fiscal policy will be used to reduce inflation. d. The fiscal policy actions may include an increase in taxes and/or a decrease in government purchases. e. The goal of fiscal policy is to smooth out business cycles.

Unemployment compensation is

an automatic stabilizer because it falls as income increases, slowing an economic expansion.

First time home buyers tax credit in 2009 was an example of ____.

an expansionary fiscal policy

One advantage of automatic stabilizers over discretionary fiscal policy is that automatic stabilizers

are not subject to the timing problems of discretionary fiscal policy.

In the economy, tax revenue collected by the government this year is $15 million and government outlays are $13 million. This country currently has a ____.

budget surplus of $2 million