final exam - Econ

A firm's real sales rise by 3% this quarter. Is this a sign of a booming economy?

No, the sales growth might have been negative in the previous quarter.

Which economic indicator tells you about the future expected profits of businesses?

S&P 500

When the Federal Reserve reduces interest rates lower than would be expected given its standard response to inflation, then this is evidence of:

an output-induced response.

If actual output growth is 5% when potential output growth is 5%, then the unemployment rate will:

not change.

The monetary policy tool whereby the Federal Reserve buys and sells government bonds is called:

open-market operations.

If unemployment is below its sustainable level, then the economy is:

operating above capacity, and inflation will likely rise.

What kind of data adjustment removes the effect of sales spikes due to the holiday season?

seasonally adjusted data

When the government increases spending, a multiplier effect will:

shift the AD curve further to the right than the effect of the spending.

An example of human capital is a person's:

job skills.

Ceteris paribus, an increase in exports leads to a:

right shift of the aggregate demand curve.

The Federal Open Market Committee (FOMC) is made up of:

the Fed governors and the Fed district bank presidents.

Consumption is $1.2 trillion, investment is $0.9 trillion, government expenditure is $0.75 trillion, exports are $0.45 trillion, and imports are $0.42 trillion. Aggregate expenditure is:

$2.88 trillion.

Which of the following is a broad indicator?

The unemployment rate

Which of these does NOT constitute a government transfer?

a reimbursement of personal income tax withheld from wages

When the economy is in recession and jobs are hard to find, inflation tends to fall.

true

An example of a lagging indicator is:

unemployment insurance claims.

When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This effect, known as the _____ effect, is one reason the _____ curve slopes _____.

wealth; aggregate demand; downward

Economic growth in a country leads to:(i) an increase in life expectancy.(ii) an increase in real GDP in the economy.(iii) a decrease in real income per person.(iv) an increase in average mortality rates.

(i) and (ii)

There are 12 Federal Reserve districts. Why is the New York Federal Reserve bank given a permanent vote on the FOMC? (i) New York is the home of the Open Market Trading Desk. (ii) New York is the home of the New York Stock Exchange. (iii) New York is the home of Wall Street. (iv) The New York Federal Reserve district bank oversees a location with a very high concentration of financial transactions.

(i), (ii), (iii), and (iv)

How can high government debt lead to slow economic growth in the future?(i) Stock markets will weaken.(ii) Governments may find it hard to fund other spending such as infrastructure projects.(iii) Governments may increase future taxes to pay interest payments on rising debt.(iv) Governments borrow funds that might otherwise have been used for investment.

(ii), (iii), and (iv)

The median annual growth in the stock index is 7%. Which of the following annual stock index growth rates indicates a particularly strong economy?

12.9

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 0.75%, and the output gap is -1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

1.125

Refer to the table below, which shows data for Ireland. What was the economic growth rate in Ireland in 2010?

1.37%

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 1%, and the output gap is -0.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

2%

According to recent estimates of Okun's law, if the unemployment rate fell by a full percentage point, it would most probably be attributable to a _____ in real GDP.

2% increase

The standard deduction is $12,200 for a single person. Suppose you file as a single person, and your current income is $35,000. This means that your taxable income is:

22,800

You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3.5%, and the output gap is 1.5%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

7.75%

Why does the aggregate supply curve change from horizontal to vertical over the course of the very short run to the long run?

As prices begin to adjust, businesses adjust production and the economy recovers to potential GDP.

Small differences in economic growth rates can lead to large differences in standards of living. Why is this the case?

Because of the cumulative effects of small differences in growth rates on real GDP over hundreds of years.

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when exports increase due to rising foreign incomes?

Both prices and GDP increase.

Why are broad indicators better than narrow indicators?

Broad indicators better capture economy-wide effects.

Why is the very short-run aggregate supply curve horizontal?

Businesses have not adjusted their prices yet after an economic shock.

Which of these does NOT constitute a government purchase of goods and services? . a federal prosecutor's salary b. new pavement for interstate highway I-95 c. a surgeon's bill reimbursed under the Medicare program d. equipping U.S. air marshals with electroshock weapons

C

Which of the following stages of the business cycle is most preferable when you graduate from college and begin looking for a job?

Expansion

The Fed rule-of-thumb sets the federal funds rate on the basis of past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

False

Which of the following is an example of property rights leading to economic growth?

Farmers, who can own their own land, invest in hybrid seeds to increase crop yields.

According to the _____, the target federal funds rate should be positively related to the _____ rate and _____ related to the unemployment rate.

Fed rule-of-thumb; inflation; negatively

If an economy has a negative output gap of 2%, this means:

GDP is 2% below potential GDP.

The government begins to provide free secondary school education. Which input in the production function changes, and what is the effect on economic growth in the country?

Human capital is enhanced, and economic growth is positively affected.

Why might maintaining an interest rate ceiling in an economy be a bad idea?

If deflation occurs and the real interest rate rises, it will discourage consumption and investment.

the level of output that occurs when all resources are fully employed.

Increased effectiveness of Federal Reserve policy

When prices fall in Germany, what is the effect on nominal debt and consumption in Germany?

Nominal debt remains unchanged, but the real value of debt rises, and this discourages consumption.

Which of the following will rise when the economy is expanding?

Real GDP growth

The government enacts regulation to institute enforceable property rights for business investment. Which input in the production function changes, and what is the effect on economic growth in the country?

The capital stock increases, and economic growth is positively affected.

Which of the following is a broad indicator?

The consumer price index

Which economic indicator tells you how fast wages and benefits are rising?

The employment cost index

Which of the following scenarios shows the multiplier at work?

The government builds a new highway, which costs $35 billion. The construction company and the workers are paid and spend some of the money on buying goods and services from grocery stores and department stores. The grocery store employees and the department store employees then are paid and purchase more goods and services.

Why does the Federal Reserve target inflation rather than unemployment?

The inflation rate is directly related to monetary policy and is thus an easier target to maintain.

The 2009 U.S. stimulus was an expansionary fiscal policy that _____ aggregate _____.

increased; demand

When prices rise in the United States, what is the effect on consumption and aggregate expenditure?

The real value of wealth decreases, leading to a decrease in consumption and a decrease in aggregate expenditure.

Suppose that aggregate output is below potential output. Which statement is FALSE?

The short-run aggregate supply curve will gradually shift to the left.

Because businesses adjust prices at different speeds, there is partial but incomplete adjustment of prices, and this results in the upward-sloping short-run aggregate supply curve.

True

A group of people moves onto a forested piece of land (which has no established owner), cuts down all the trees, and acquires all the lumber on the land. Thereafter, the land is farmed until all the mineral properties of the soil are depleted. Ultimately, the land becomes a barren desert property. This is an example of:

a lack of established property rights leading to the depletion of a resource.

Diminishing returns to physical capital imply that, with human capital per worker and technology held fixed, each successive increase in physical capital leads to _____ productivity (or real GDP per worker).

a smaller increase in

If the federal government lowers government expenditure:

aggregate expenditure will fall, leading to a decrease in equilibrium GDP.

One normally expects that unemployment decreases while aggregate output and aggregate incomes increase during:

an expansion.

If the economy is at potential output, and consumer spending suddenly decreases because of a fall in consumer confidence, the appropriate fiscal policy is:

an increase in government spending.

Which of the following would lead to a slowdown in economic growth?

an increase in the dependency ratio

When the output gap is positive, the unemployment rate is:

below the equilibrium unemployment rate.

New ideas can generate unlimited economic growth because they:

can be freely shared, do not depreciate, and can generate further ideas.

Rapid growth in poorer countries leads to:

convergence in real GDP per person between poorer countries and richer countries.

A reduction in government transfers _____, therefore shifting the aggregate demand curve to the _____.

decreases after-tax income and consumption; left

A dressmaker's shop doubles in size, buys a second sewing machine, hires a second tailor, buys double the cloth, and then produces 90% more dresses than it did before. The dressmaker is experiencing:

decreasing returns to scale.

Banks whose current reserves are lower than the reserve requirement:

demand overnight loans.

The Federal Reserve uses the _____ to fulfill its function as lender of last resort.

discount window

If Congress decides to increase military spending, this is an example of:

discretionary spending.

One of the reasons that ideas can lead to sustainable and long-term economic growth is that they:

do not depreciate with use.

To encourage economic growth, governments should _____.

enforce intellectual property rights

In Malaysia, the Community Communications Development Program teaches computer literacy skills to people in rural communities, especially women. This initiative is an example of a project that

enhance human capital.

The decision to build more aircraft carriers to keep employment high is an example of:

expansionary fiscal policy.

If interest rates are at the zero lower bound:

normal monetary policy is ineffective.

When banks borrow from and lend reserves to each other, they are participating in the _____ market.

federal funds

Discretionary fiscal policy refers to temporary changes in:

government spending or taxes to close a recessionary or inflationary gap.

Consumer spending will likely rise if:

government transfers rise.

Typically, business cycles:

have short and sharp recessions, followed by long and gradual expansions.

The U.S. Department of Education sponsors the i3 program (Investing in Innovation), which provides grants to educational institutions and schools that have a proven track record of high student achievement. This is an example of a government program designed to build:

human capital.

Because of diminishing returns to physical capital, doubling the amount of physical capital available to one worker will _____ GDP per worker by _____ a factor of 2.

increase; less than

According to the wealth effect, when prices decrease, the purchasing power of assets _____ and consumer spending _____.

increases; increases

Bowing to political pressures, a central bank decides to print money. What can this scenario lead to?

inflation

The international trade effect is the:

inverse relationship between domestic prices and net exports.

If the economy is in a recession, actual output will be _____ potential output.

less than

When inflation falls below its target rate, the Federal Reserve will:

lower interest rates.

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 1%, then the Fed will want the new real interest rate to be:

lower than the neutral interest rate.

If the problem in the economy is very high cyclical unemployment, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

lower; induce

In a recessionary situation, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

lower; induce

Food stamps are an example of:

mandatory spending.

An inflation-induced monetary policy response to lower interest rates causes a:

movement along the same aggregate demand curve.

When the output gap is _____, the unemployment rate is _____ the equilibrium unemployment rate.

positive; below

The level of output that the economy would produce if all prices, including wages, were fully flexible is called:

potential output.

Forward guidance occurs when the Federal Reserve:

provides information about the future course of monetary policy in order to influence expectations about future interest rates.

When inflation rises above its target rate, the Federal Reserve will:

raise interest rates.

If the problem in the economy is continuous higher-than-expected increases in the consumer price index, we expect the Federal Open Market Committee (FOMC) to _____ interest rates to _____ spending today.

raise; reduce

The neutral interest rate is the rate at which:

real GDP equals potential GDP.

If all prices, including the nominal wage rate, double in the long run, then aggregate output supplied will:

remain unchanged.

Recessions tend to be _____, and expansions tend to be _____.

short; long

Which curve is easiest to shift through government policy?

the aggregate demand curve

The zero lower bound for interest rates refers to:

the fact that interest rates can't go below zero.

The catch-up effect would be largest in an economy where:

the initial level of capital is low.

Potential output is the level of real GDP that:

the level of output that occurs when all resources are fully employed.

What are overnight reverse repurchase agreements?

the sale of government bonds to financial institutions, with an agreement to purchase the bonds back the next day, at a higher price