ECON: Unit 7-8 (Practice Set, Practice Quiz, Quiz)

Let's say a country is 4 years old. In Year #1 the country's government spent $12 billion and collected $7 billion in revenue. In Year #2 it spent $14 billion and collected $12 billion. In Year #3 it spent $15 billion and collected $16 billion. In Year #4 it spent $17 billion and collected $17 billion. What is this country's national debt after these four years?

$6 billion

According to our text, which of the following is correct about inflation measures?

(None of the above is true.) a) Inflation measures like the CPI and the PPI take quality changes of products into account. If a product increases in quality over time, the price increase is adjusted to reflect the greater quality of the product. b) Inflation measures are accurate because government statisticians receive information from millions of retail stores who report price changes of their products. c) The GDP price deflator provides a list of products whose prices have decreased over time. Most of these products are high-tech products and services.

If a government runs a deficit, then, unless it is in a default state, it can obtain this borrowed money from:

(all of the groups listed in this question lend money to our federal government.) a) the public, when the public buys bonds from the government. b) its central bank(s) (indirectly), when the central bank buys bonds. The central bank prints money to pay for the bonds. c) businesses, when businesses buy bonds from the government. d) foreign investors, when foreign investors buy bonds from the government.

Competition among producers and suppliers always results in:

(all of the listed answers) technological innovation. more choices for consumers. lower prices.

Disadvantages of inflation include:

*all of the listed answers are correct.* 1. mal-investments. 2. increases in long-term interest rates. 3. public illusions that certain government programs are free. 4. increases in taxes. 5. a lower savings rate.

Which of the following would/could NOT included in the Consumer Price Index measure of inflation?

A conveyor belt used by a small business

According to our text, which one of the following is a common misconception related to inflation in the short run?

A fast growing economy causes inflation.

According to John Maynard Keynes, what is the cause of inflation?

A fast growing economy. This is an economy which is at full employment and continues to expand.

As a result of what economic conditions can falling prices be beneficial to the economy?

Falling prices that occur as a result of technological growth and an increase in production.

As a result of what positive economic condition are falling prices beneficial to the economy?

Falling prices that occur as a result of technological growth and an increase in production.

A gold standard helps to keep prices constant because, if implemented properly, it:

forces the Federal Reserve to keep the money supply growth limited.

Which of the following is the most likely outcome of a government running a large deficit and borrowing large amounts of money from domestic and foreign investors?

future taxes will rise.

Falling prices are beneficial if:

(All of the listed answers are correct.) a) they are caused by increases in the supply of goods and services. b) they are consistent and not temporary and sporadic. c) they are not caused by decreasing demand for goods and services. d) banks anticipate falling home prices and practice responsible lending (significant down payment).

According to our text, significantly increasing the money supply does the following to the economy in the long run:

harms the economy, because it causes inflation.

According to Classical and Austrian school economists, an increase in the money supply will:

lower interest rates in the short run, but in the long run raise interest rates and slow down economic growth

Supporters of an annually balanced budget believe that:

our government's expenses during a fiscal year should equal its revenue during the same fiscal year.

If the money supply increases substantially more than production in the economy increases , then the country's price level:

rises. (If the money supply rises by, for example, 8%, and production rises by 3%, then prices will rise by approximately 5%.)

The main reason why the Gold Standard failed in many industrialized countries is that:

the monetary authorities failed to adhere to the limited growth rule. In other words, they increased the money supply more than the gold supply grew.

When economists look at a government's health in terms of its national budget, then the one most important statistic they consider is:

the nation's debt as a percentage of its GDP.

The Phillips curve implies that:

when inflation increases, then unemployment decreases, and vice versa.

According to the federal government's Office of Management and Budget, the federal deficit in 2011 was roughly:

$1.3 trillion.

If the total available amount of money in the economy is $200, and production equals 5 products, then the average equilibrium price of each product is:

$40 (The equilibrium price of each product is $40: Money supply available = $200. Number of products = 5. The average price of each product is: $200/5 = $40.)

Let's say that a state's (for example, California's) revenues decline and that a budget deficit is inevitable unless changes are implemented. What will a state do in this situation?

A state would need to lower its spending or raise tax revenue or do a combination of both until its budget is balanced.

Which of the following is correct about increases in the money supply, according to our text?

An increase in the money supply lowers interest rates in the short run, but raises them in the long run.

***Unit 7 Practice Set*** A falling price level is a symptom of a healthy economy, if prices have fallen due to:

An increase in the supply and production of goods and services while keeping the money supply constant or relatively constant. (An increase in the supply and production of goods and services while keeping the money supply constant or relatively constant.: When the money supply stays constant and production increases, then the overall price level will fall (ceteris paribus).)

If during a particular year nominal GDP is smaller than real GDP, then according to the definition of the GDP deflator:

Average prices of final goods and services must have fallen.

In the United States, which of the following form(s) of government is/are required to balance its (their) budget by law?

Both county and state governments are required to balance their budgets.

Which of the following is likely to grow in the long run as a direct result of our growing national debt?

Net interest payments by the government

What does our text conclude about an economy, which keeps it money supply constant?

If the money supply stays constant, prices will fall when production rises. Real incomes will rise.

According to our text, which of the following is NOT a harmful effect of inflation? a) Inflation leads to higher long-term interest rates. b) Inflation leads to a decrease in exports. c) ***Correct!*** Inflation leads a decrease in government revenue. This lowers government spending. d) Inflation decreases business investment in productive activities (starting up or expansion of businesses; investment in research and development). e) Inflation leads to a decrease in savings.

Inflation leads a decrease in government revenue. This lowers government spending.

More and more nations are facing problems due to their high government debt ratios. What is likely to happen if a country's debt gets too high?

Investors (potential purchasers of government securities) expect that the government may be unable to pay back its loans (securities). Consequently, investors will stop buying government securities or demand very high interest rates.

According to the table in section 3, Unit 8, which of the following countries has a greater debt to GDP ratio than the United States?

Japan

Compared to most countries in the world, one of the countries with the highest amount of debt as a percentage of GDP during this past fiscal year is:

Japan

Which of the following is likely to grow as a direct result of our growing national debt?

Net interest payments by the government

Let's say that we are operating in a constant money supply economy. This year technology causes our aggregate supply to increase. Ceteris paribus, which of the following do you expect to happen?

Prices will fall and average real incomes will increase.

How was the George W. Bush administration able to create and maintain its budget surpluses between 2005 and 2007?

The George W. Bush administration never ran a budget surplus.

According to Keynesian economic thought, falling (equilibrium) prices occur when:

The demand curve shifts to the left with a constant supply curve.

***Practice Quiz*** Which of the following statements is correct about national debts and/or deficits?

The federal deficit is usually smaller than the federal national debt for any country.

If a country has an excessive amount of debt and consequently, lenders are not sure if the government will be able to pay back its debt, then:

The interest on this debt will be relatively high.

Which of the following situations is most like that of the United States and other industrialized countries?

The national government spends more than it receives in tax revenues. It borrows from domestic and foreign investors in the form of government treasuries. The government pays interest to these investors.

According to Classical economic thought, falling (equilibrium) prices occur when:

The supply curve shifts to the right with a constant demand curve.

Let's say that in year 1 our government spending is $300 and our revenue is $200. In year 2 our government spending is $450 and our revenue is $500. In year 3 our government spending is $550 and our revenue is $550. Assuming no other deficits and surpluses, what is our government's national debt/surplus?

We have a debt of $50.

Our federal government uses various strategies to finance its budget deficit. Which of the following is the most common strategy?

borrowing from the public through the issuance of treasury securities (government bonds).

***Unit 8 Practice Set*** Crowding out is when our government:

borrows from the private sector and thus reduces (crowds out) private sector funds.

Which of the following statements is NOT true? a) Keynesians believe falling prices are due to a downward (to the left) shift in the demand curve, with a constant supply curve. b) Classical economists believe falling prices are due to an upward (to the right) shift in the supply curve, with a constant demand curve. c) Classical economists believe savings leads to lower long-term interest rates, which in turn spur investment in new technologies and capabilities. d) ***Correct Answer*** Keynesians believe falling prices are due to a downward (to the left) shift in the demand curve, with a corresponding shift in the supply curve. e) Keynesians believe savings are bad for the economy, because an increase in the marginal propensity to save, by definition, means a decrease in the marginal propensity to consume.

d) Keynesians believe falling prices are due to a downward (to the left) shift in the demand curve, with a corresponding shift in the supply curve.

Supporters of the Functional Finance budget philosophy believe that:

deficits do not harm the economy much; full employment is most important.

Countries which experience greater increases in their money supply:

experience higher rates of inflation.

Which of the following is a harmful effect of inflation?

inflation discourages saving.

Inflation calculators will indicate that since 1976 consumer prices in the United States approximately:

quadruppled

Considering how much our volume of goods produced has increased during the past several decades, the price level should have fallen drastically over this time. The reason why it has not is because of:

significant increases in the quantity of money.

According to our text, the Clinton administration budget surpluses of fiscal years 1999 and 2000 happened because:

the economy, through advances in technology and low inflation, has grown and created considerable increases in tax revenue.

***Quiz*** According to our text, a constant money supply, in the long run, results in:

the elimination of inflation. It helps maintain the value of our currency and usually leads to lower prices.

Hyperinflation is usually caused by a combination of:

too much money in circulation and increased velocity.

According to our text, when the U.S. government borrows funds from the public (by issuing bonds), it:

transfers money from one sector (the private sector) to another (the government sector). This does not add money to our money supply and is not inflationary.

Some economists claim that falling prices (deflation) will harm the economy. Our text concludes about falling prices that:

when prices fall continuously and consistently and people expect prices to always fall (i.e. computers, high tech gadgets), then demand and the economy will not be adversely affected.