Macro exam
Why are persistent budget deficits worrisome?
All of the above.
Suppose there is unexpected deflation this year that reduces the aggregate price level by 10%. How does deflation affect borrowers and lenders?
Borrowers are negatively impacted and lenders are positively impacted.
Which of the research findings by Milton Friedman and Anna Schwartz spurred new interest in monetary policy?
Business cycles are closely associated with money supply.
Which graph most accurately reflects demand and supply in the money market? The y-axis on the money market graph shows the economy's
C interest rate.
Which word or phrase best identifies the fundamental focus of economics?
Choice
Which choice best characterizes the debate over employment insurance?
Employment insurance increases the unemployment rate experienced in the economy. It is difficult to determine whether the economy would be better or worse off without employment insurance.
The accompanying table provides the annual U.S. demand and supply schedules for pickup trucks. Using the data in the table, identify the equilibrium price and quantity.
Equilibrium occurs at a price of $30,000 and a quantity of 16 million.
Which individual is out of the labor force?
John is without a job, is able to work, but is not actively looking for work.
The Japanese car maker Honda owns production facilities in Marysville, Ohio. If the cars made there are sold exclusively in the United States, in which category would the cars be counted?
U.S. GDP
Which of the following questions would be studied in the area of microeconomics?
What determines the number of hours an individual works?
Suppose the government decreases taxes. What will happen to disposable income and consumer spending? a. Disposable income b. Consumer spending will
a. increases b. increase.
Rational expectations are based on
all available public information.
Which of the statements is the best description of a business cycle?
alternating periods of increasing and decreasing economic output
Which of the items, ceteris paribus, would cause an understatement of a nation's living standard by real gross domestic product per capita?
an increase in amount of leisure time
Which of the four options best represents specialization and its relationship with trade?
comparative advantage
Which decision is least likely to be well explained by marginal analysis?
deciding which college to attend
An economy is
the system society uses to coordinate productive activities.
What is the main goal of macroeconomic policy activism?
to reduce the severity of business cycles
Identify the best definition of money.
whatever serves society in three functions: medium of exchange, store of value, and unit of account
Suppose the country of Lilliput exported $147 billion$147 billion worth of goods and imported $429 billion$429 billion worth of goods in the last calendar year. Calculate Lilliput's net exports. Lilliput is running
$ -282 billion a trade deficit.
b. If the government needed to close a recessionary or inflationary gap, which income group should it primarily target through fiscal policy?
$0 - $20,000
Which of the scenarios best reflects the meaning of the term inflation targeting?
A central bank is expected to achieve a 3% annual inflation rate.
Which statement describes capital income as it pertains to the capital and labor income measure of gross domestic product (GDP)?
Capital income includes profits from business, rents earned from land and buildings, interest from financial assets such as bonds, and royalties from copyrights and patents but excludes income from the self‑employed.
The Atlantic Investment Tax Credit is a 10% tax credit available to businesses that make specific investments in the Atlantic region and the Gaspe Peninsula. The graph shows the market for loanable funds. Show the impact of this tax credit by moving the proper curve appropriately in the graph. Which statement accurately describes the impact of the Atlantic Investment Tax Credit?
Firms find more investments are profitable and increase their demand for loanable funds. As a result, the interest rate rises.
Suppose that a bank has loaned money to two businesses: a trustworthy computer manufacturer and a risky mining venture. Unfortunately, the mining venture fails, and the mining firm goes bankrupt. The bank has no insurance for this situation. Now, on its balance sheet, the bank has more liabilities than assets. What is this situation called, and what is the result of this situation?
Insolvency. The bank cannot pay back depositors.
Which statement is not a problem associated with measuring unemployment with the household survey?
It is too costly to send the survey to any more than 10,000 households which is not a large enough sample to draw any meaningful conclusions.
Manipulate the graph to show what happens when credit markets shrink (i.e., when there is less credit available). Note that the economy starts at full employment. How does this change in the credit markets affect the price level and unemployment?
It will result in deflation and higher unemployment.
Which of the situations is an example of the crowding-out effect on investment as it pertains to macroeconomics?
Jack wants to borrow money to create a cowboy-themed inflatable bounce house for kids called "Wild Wild West." However, the government is running a deficit which has increased interest rates so much that Jack can no longer afford to borrow the money.
Which of the statements best describes the idea of economic convergence?
Lower GDP per capita countries will catch up with higher GDP per capita countries.
In the economy of Spendsalot, the marginal propensity to save, MPS, is 0.6. What is the marginal propensity to consume, MPC, for Spendsalot? Which value does MPC determine?
MPC= 0.4 the slope of pre‑tax consumption as a function of GDP
If Mary can bake a cake at a lower opportunity cost than Sarah can, then:
Mary has a comparative advantage in baking cakes.
Listed are four macroeconomic theories or schools of thought. Which of the four is most closely tied to the assumptions necessary for the results predicted by the natural rate hypothesis?
Rational expectations: the key concern of the natural rate hypothesis is that people will begin to expect the inflation incurred by attempts to keep the unemployment rate below the natural rate.
Which of the statements is not one of the reasons monetarists believe discretionary fiscal or monetary policy interventions are ineffective?
Short-run economic conditions have no impact on macroeconomic fluctuations.
If the price of hockey pucks goes up from $7.99 to $14.99, what can be expected from suppliers of hockey pucks as a result?
There will be an increase in quantity supplied.
Which of the choices is an example of offshore outsourcing?
Toyota, a Japanese car manufacturer, employs around 40,000 autoworkers in the United States.
Andrew, a college student, loves drinking coffee late at night to study for exams. Having a small income, he is used to buying cheap, bad tasting coffee that he needs to grind and brew himself. The coffee tastes putrid but, with enough cream and sugar, Andrew is able to tolerate it. Occasionally, he does go out to Starbucks when he has spare money. After graduation, Andrew gets a job working at a database firm as a programmer. His income is now a healthy $75,000 a year and he decides he's had enough bad tasting coffee. He ends up buying coffee daily from Starbucks even though it costs significantly more. Andrew's demand for Starbucks coffee changed as a result of
a change in income.
Answer the given two questions relating to demand and the law of demand. A shift in the demand curve can be caused by Which of the choices illustrates the law of demand?
a change in one of the determinants of demand. Sue wants to buy more candy bars at $1 than at $2.
Okun's law states that Which is a prediction consistent with Okun's law?
a change in the output gap occurs with a change in the rate of unemployment that is smaller in magnitude and in the opposite direction. An increase in real GDP of 4% leads to a decrease in the unemployment rate of 2%.
The graph depicts employment in the United States from 1986-2014. The shaded bars represent recessions. Based on the graph, a major characteristic of a recession is
a decrease in employment.
According to the law of demand,
a decrease in price increases quantity demanded.
Which scenario would not lead to an increase in money demand?
a decrease in the aggregate price level
Collaboration with Congress during the Clinton Administration allowed for an aggressive deficit-cutting plan to pass. As a result, the government was able to reach a balanced budget at the end of the 90's. Move the supply and/or demand curves to describe the expected effect that this deficit-reduction likely had upon the loanable funds market. As a result, private investment should have
increased because the cost of borrowing decreased.
According to the Solow growth model, which of these would not increase economic output in a developing nation?
increasing their government ownership of agricultural land
The demand curve
is a graphical representation of the relationship between price and quantity demanded.
On the graph, demonstrate what happens in the short-run if the central bank increases the money supply. What happens to the aggregate price level when the central bank increases the money supply?
it increases
The term liquidity trap describes a macroeconomic scenario in which
low interest rates cause people to hoard money, making output and employment stagnate.
During the Great Depression, businesspeople in the United States were very pessimistic about the future of economic growth and reluctant to increase investment spending even when interest rates fell. This pessimism limited the potential for monetary policy to help alleviate the Depression because
monetary policy leads to changes in the interest rate, which influences investment spending and aggregate demand.
All of the concepts are integral to the definition of economics as a social science EXCEPT
money
Which tax is the largest source of tax revenue in the United States?
personal income taxes
The cyclically adjusted budget balance is the budget balance after accounting for
the difference between GDP and potential GDP.
Suppose a report on CBC says that there is an impending recession coming in Canada. As a result, Bert's family, as well as many other like‑minded families and individuals, reduce their spending and instead fill up their piggy banks for a potential rainy day. As a result of this behavior, In macroeconomics, this result is known as
the economy is actually harmed as there is a sharp decease in consumer spending. the paradox of thrift.
Classical and Keynesian macroeconomics differ fundamentally in their assumptions about This difference stems in part from different ideas about
the economy's ability to self‑correct. the opportunity cost of fiscal stimulus versus the expenditure multiplier effect.
Bertrand is an avid supporter of protectionism. His primary political principle is the idea that the United States imports too many foreign goods. He dislikes that many of his clothes are made in China instead of the United States because clothing is a basic need, even for babies. He would prefer that the United States drill in the Arctic National Wildlife Refuge (ANWR) instead of importing oil from Kuwait because oil powers our military's tanks and planes. Which argument for protectionism is Bertrand using?
the national security argument
The labor force is comprised of
the number of people who are counted as employed and unemployed.
Financial advisers frequently advise clients to diversify their portfolios. a. What does it mean to diversify a portfolio? b. Why do savers diversify?
to invest in a variety of assets to minimize exposure to risk
The Canadian nominal interest rate in 2010 was 0.10%.0.10%. Inflation in 2009 was measured at 0.28%.0.28%. Calculate the real interest rate. Round your answer to two places after the decimal. real interest rate: Which of the statements is true?
-0.18 The nominal interest rate is typically greater than the real interest rate due to inflation.
The Fisher Effect equation can be used to determine the real interest rate. Use this equation to determine the answer to the question. If the nominal interest rate is 0.08, and the inflation rate is 0.025, what is the real interest rate?
0.055
A farmer produces both beans and corn on her farm. If she must give up 1616 bushels of corn to be able to get 66 bushels of beans, then her opportunity cost of 11 bushel of beans is
2.67 bushels of corn.
The demand schedule for chicken feet, a dim sum delicacy served at some Chinese restaurants, is shown in the table. Although some people find the texture strange, others have developed a taste for it. How many more chicken feet were demanded in 2018, at a price of $0.50 a pound, than in 2008? Based on the demand schedule, you conclude
9.3 million pounds the demand curve shifted to the right.
One benefit of using money to facilitate economic activity is that it does not require a double coincidence of wants. Which of the examples describes a double coincidence of wants?
A baker, who is interested in acquiring meat, meets a butcher interested in acquiring bread.
Which statement best identifies the multiplier effect in the macroeconomy?
A change in aggregate expenditure can affect Real GDP by more than the amount of the change.
Which of the following is true of a central bank that employs inflation targeting?
A target rate of annual inflation is maintained by expanding or contracting the money supply.
Assume Aaron and José each own a small ranch, and each produces milk and cheese. One of them is better than the other at producing both milk and cheese (but we do not know who). Which of the statements cannot be true regarding absolute or comparative advantage?
Aaron could have a comparative advantage in producing both milk and cheese.
Which of the statements is an example of offshore outsourcing?
An America bank hires an Indonesian company to provide customer service.
Which of the statements is the best description of inflation?
An increase in the overall price level has occurred.
The accompanying table provides the inflation rate in the year 2005 and the average inflation rate over the period 2006-2019 for seven different countries. Did borrowers who took out 10‑year loans in Japan gain or lose overall versus lenders?
Borrowers gained and lenders lost.
Why is a hypothetical basket of goods used to measure inflation?
Consumers can see the general increase in price over time by using a basket of goods.
Suppose the tires used on pickup trucks are found to be defective. Using the following graph, what do you expect will happen to demand and supply in the market for pickup trucks?
Demand will shift from 𝐷1D1 to 𝐷2D2, and supply will remain constant.
The table shows the units of steel and personal computers a worker can produce per month in Germany and South Korea. Use this table to answer the question. Tons of steel, Personal computers (PCs) Germany 40, 10 & South Korea 16, 8 Which statement about absolute advantage is true?
Germany has an absolute advantage in the production of both steel and PCs.
Which of these items was not a characteristic of the Great Recession? Which of these items was not a characteristic of the Great Depression?
Gross domestic product (GDP) increased. Business spending doubled,
Suppose the Fed decreases the money supply by 55%, and as a result, the price level falls. What is the impact on the real demand for money?
Money demand does not change when the price level changes.
Which of the phrases is not a stated function of money?
Money is used to adjust an individual's income for inflation.
Economics is characterized by many statistics and measurements. Suppose that an analyst is interested in comparing the economy of today with the economy ten years ago. Which term is least likely to be useful for this purpose?
Nominal GDP
Select the best definition of labor productivity
Output per worker
Below is a supply curve for a slice of gourmet pizza. Illustrate on the graph the impact of a decrease in price from $8 per slice, denoted by point P★, to $5 per slice. Based on your graph, which of the following correctly describes the relationship between price and quantity supplied.
Price and quantity supplied move in the same direction.
Adjust the graph to show the effect of a decrease in the aggregate price level. Which of the statements offers the best explanation for the change demonstrated in the graph?
Prices of goods and services decrease on average.
Although both tariffs and quotas are tools used to restrict or reduce trade, which of the statements best describes their differences?
Tariffs are a tax on imported goods, and quotas are limits on the number of imported goods.
What does productivity, or labor productivity, measure?
The amount of goods or services that can be produced by one worker in one hour of work
Which statement is an example of an open market operation?
The central bank sells bonds to the public via the commercial banking system.
In economics, what is meant by "optimal decisions are made at the margin?"
The idea of the margin is related to making decisions while thinking about the benefits and costs of small changes in behavior.
In which of the hypothetical scenarios would austerity measures most likely be considered by a country's lawmakers?
The national debt increases significantly over a number of years.
Which is NOT an example of a behavior exhibited in a market economy?
The president of the European country of Semolina decrees that pasta must be consumed at all meals in an effort to help domestic pasta makers.
Why is the shape of the production possibilities frontier (PPF) often curved instead of straight?
Typically, some resources are better suited for producing one good than another, which means that there are diminishing returns when moving such resources away from producing what they are best suited for.
A household consumption function is shown on the graph. Move the curve to the appropriate place to illustrate a decrease in the consumption function. Then, answer a question about the consequences of a decrease in the consumption function. Which statement is not a (general) consequence of a decrease in the consumption function?
Unexpected changes in income will now result in a smaller change in the level of consumption.
Which best describes why the multiplier exists?
When people spend money, that money ends up in the pockets or bank accounts of other people or organizations, who then use that money in some way.
The natural rate of unemployment equals
frictional unemployment plus structural unemployment.
The term inventories is best described as Actual investment spending tends to be different from planned investment spending. Which of the choices best explains why this is true?
goods that have been produced but remain unsold. Firms are unable to perfectly anticipate sales of their products.
Prior to the ______________ most economists believed that the economy ______________. Had government officials known at the time of the event what is known now about the macroeconomy, what course of action might the government have taken?
great depression, would adjust quickly to any changes in market conditions. gone into debt in order to increase government spending
Suppose the island of Catsylvania experiences a recession. As a result, consumers reduce spending on Kitty Chow and planned aggregate expenditures fall short of real GDP. As a result, unplanned inventories at Kitty Chow firms will Thankfully, the recession is very short and consumer spending on Kitty Chow increases to prerecession levels. What is most likely to occur first at Kitty Chow firms during this period of recovery?
increase Firms will sell off excess inventories before returning to increased production levels.
The interest rate effect
is the change in consumer and investment spending due to changes in interest rates resulting from changes in the aggregate price level.
Megan has a 1 hr gap in her course load for the fall semester. There are two courses available for her to take at that time: reading piano sheet music and beginning rock climbing. She does not have any experience with piano or rock climbing. In the end, she decides to enroll in the rock climbing course, despite her fear of heights. Identify which activity exhibits a potential trade-off with enrolling in rock climbing.
learning to read piano sheet music
If an economy experiences deflation, then the
overall price level is declining.
Worker productivity is one of the most important factors that help determine the performance of an economy. Which definition best describes productivity?
per capita GDP
When considering economic growth, many policy makers focus on real gross domestic product (GDP) per capita since it takes into account the potentially distorting effects of Any large, sustainable increase in real GDP must be due to steadily increasing
population change. labor productivity.
In a competitive market, all of the choices along the production possibility frontier display ________________ efficiency, while the specific choice on the frontier that society picks is the one with _______________ efficiency.
productive; allocative
Which of the choices is most directly related to cyclical unemployment?
recessions
The government of Balearic is concerned about a recession, so it decides to implement expansionary fiscal policy. How would this policy be depicted in an AD-AS model? Expansionary fiscal policy would
shift the AD curve to the right.
The graph shows a short‑run aggregate supply curve. Please move the endpoints to turn the curve into a long‑run aggregate supply curve. Long‑run aggregate supply has this characteristic because
the ability of the economy to produce determines long‑run output. This ability is independent of price levels.
Daniel has decided to open his own bakery using locally sourced ingredients and supplies. He provides income and jobs to local suppliers. He also provides his community with a place to buy delicious baked goods. This is an example of
the invisible hand.
The labour force is comprised of
the number of people counted as employed and the number of people counted as unemployed.
Which factor brings the supply and demand of loanable funds into balance?
the real interest rate
Which is NOT an example of a resource?
firms
The purpose of growth accounting is to
estimate the contribution each component of the aggregate production function makes to overall economic growth.
a. The graph below shows a production possibility frontier (PPF) for cheese and bread. Place each point to illustrate the indicated situations. A efficient and maximum production of cheese B efficient with a high opportunity cost for cheese C inefficient output combination D efficient with a high opportunity cost for bread E efficient and maximum production of bread F unattainable production combination b. Assume point D represents the socially optimal point. Point D illustrates
a. A (0,16) B (4,15) C (6,9) D (15,3) E (16,0) F(14,15) b.allocative efficiency.
Fans of music often bemoan the high price of concert tickets. One superstar argued, "It just isn't worth $75 to see me play. No one should have to pay that much to go to a concert." Assume this star sold out arenas around the country within minutes of tickets going on sale at an average ticket price of $75. Many fans were unable to buy tickets, even though they were willing and able to pay the average price of $75. How would you evaluate the argument that ticket prices are too high? a. $75 is b. Suppose that, due to this star's protests, ticket prices were lowered to $50. In the accompanying graph, move the price line to illustrate how the market changes. c. A price of $50 causes the market to experience
a. too cheap, since there are more fans who are willing and able to buy a ticket at $75 than there are tickets. b. Only the price line will move down to $50 c. a shortage.
An economic transaction in which one party trades a good or service for another good or services is called
barter.
Banks are known to act as financial intermediaries. Between whom do banks serve this function?
between savers and borrowers
Banks, also known as depository institutions, function as intermediaries between which two groups?
between savers and borrowers
The consumption function describes the relationship between consumption spending and The slope of the consumption function is equal to
disposable income. the marginal propensity to consume.