Macro Final Practice Test, Macro Practice Test 4, Macro - Practice Test 3, Macro - Practice Test 2
According to the rule of 70, if a country's real GDP per capita grows at an annual rate of 2% instead of 3%, it will take _____ additional years for that country to double its real GDP per capita.
11.67
About ____% of the world's population lives in countries whose population is poorer than the U.S. population was a century ago.
25
Assuming a positive interest rate, the dollar amount of a future payment is _____ its present value.
more than
A $100 million increase in government spending increases equilibrium GDP by:
more than $100 million.
If government debt is increasing, but GDP is increasing faster, the:
ratio of government debt to GDP is falling.
An increase in government spending, all things equal, will cause the aggregate demand curve to:
shift to the right.
The negative relationship between the inflation rate and the unemployment rate is known as the _____curve.
short-run Phillips
A general decrease in wages will result primarily in the _____ curve shifting to the _____.
short-run aggregate supply; right
One factor that does NOT explain why frictional unemployment exists is:
the minimum wage.
All else equal, if the required reserve ratio falls:
the money multiplier increases.
Government payments to households for which no good or service is provided in return are called:
transfer payments.
An example of physical capital is a:
truck that a company purchases for deliveries.
All other things equal, an increase in the demand for loanable funds would MOST likely be caused by a(n):
forecast by the Federal Reserve of solid economic growth.
Flows into financial markets are equal to the sum of:
foreign lending and purchases of stock plus private saving.
The use of increased government spending and tax cuts to fight a recession is consistent with _____ economics.
Keynesian and Great Moderation consensus
_____ asserted that GDP will grow steadily if the money supply grows steadily.
Milton Friedman
The _____ has the official role of declaring the beginnings of recessions and expansions.
National Bureau of Economic Research
Assume an open economy in which GDP is $12 trillion. If consumption is $8 trillion, government spending is $2 trillion, taxes are $0.5 trillion, exports are $1 trillion, and imports are $3 trillion, what is national savings?
$2 trillion
Which group of economists disagrees with discretionary monetary policy in favor of a monetary rule that prescribes a slow increase in the money supply?
monetarists
According to the Great Moderation consensus:
monetary policy should play the main role in stabilization policy.
During the Great Moderation, most economists believed that _____ policy should be the main tool of stabilization policy and were skeptical about the use of _____ policy.
monetary; fiscal
Statistics and data on unemployment are reported in the Employment Situation Report:
monthly
A fall in the market interest rate makes any investment project:
more profitable, whether funds for the project are borrowed or come from retained earnings.
If the multiplier is 4, the marginal propensity to save is:
0.25.
If potential output is less than actual output, then the unemployment rate is:
below the natural rate.
Economists generally agree that sufficiently high minimum wage laws:
cause unemployment.
Countries A and B trade freely with each other. Suppose that interest rates in the loanable funds market in country A are lower than in country B. This means:
funds will flow from country A to country B.
An example of a structurally unemployed worker is a(n):
geologist who is permanently laid off because of an increase in wages won by labor unions.
In the 1980s, many economists believed that Latin America suffered from excessive _____.
government intervention in markets
Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:
5
If the marginal propensity to consume is 0.8, then the multiplier is:
5
In Techland, from 1990 to 2020, holding technology and human capital fixed, increasing physical capital per worker from $25,000 to $100,000 would have led to a doubling of real GDP per worker, from $40,000 to $80,000. However, not only did physical capital per worker increase from $25,000 to $100,000, but technological progress shifted the productivity curve upward so that real GDP per worker actually increased from $40,000 to $320,000. What share of the annual growth rate of real GDP per capita was attributable to higher total factor productivity?
5%
Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. The government spending multiplier is:
5.
Unit-of-account costs arise when inflation makes it necessary to change listed prices often.
False
If a government fixes the exchange rate _____ the market equilibrium rate, there will be a(n) _____ of the country's currency in the foreign exchange market.
above; surplus
A recessionary gap occurs if:
actual aggregate output is less than potential output.
Changes in the budget balance may result from _____.
changes in economic policy or fluctuations in the economy
The belief that neither monetary nor fiscal policy can reduce unemployment is consistent with _____ economics.
classical
Artemus believes that in the long run, all prices are flexible and that any increase in the money supply will lead only to inflation, not to an increase in aggregate output. Because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Artemus is best described as a:
classical economist.
A fixed exchange rate regime:
commits a country to avoid inflationary policies.
If an economy is operating at an aggregate output level above potential output, the Federal Reserve may:
conduct an open market sale.
A(n) _____ monetary policy is appropriate during a(n) _____.
contractionary; expansion
If policy makers want to decrease real GDP by $100 billion, and the marginal propensity to consume is 0.6, they should _____ government purchases of goods and services by _____.
decrease; $40 billion
If the Federal Reserve wanted to increase the money supply, it could _____ the required reserve ratio, _____, and _____ bonds on the open market.
decrease; decrease the discount rate; buy
If the government wants to _____ the value of its currency in the foreign exchange market, it can use _____ monetary policy.
decrease; expansionary
If a country's currency appreciates, all else equal, exports will _____ and imports will _____.
decrease; increase
If wages and prices are perfectly flexible, a decrease in aggregate demand will cause a(n) _____ in the price level and _____ in unemployment.
decrease; no change
A decrease in the supply of money with no change in the demand for money will lead to a(n) _____ in the equilibrium quantity of money and a _____ in the equilibrium interest rate.
decrease; rise
If, during 2019, the interest rate on one-month Treasury bills was 1.5%, and during 2020, it was 1%, the opportunity cost of holding money, assuming a constant inflation rate:
decreased
As aggregate demand declined from 1929 to 1933, during the Great Depression, the GDP deflator:
decreased by 26%.
Deflation is a:
decreasing aggregate price level.
A policy maker who aims to maintain unemployment at 5%, while the NAIRU for this economy is 4%, will most likely find the economy encountering:
deflation.
After a _____, other things equal, a country's balance of payments on current account will likely _____.
devaluation; increase
A factory owned by the Japanese car maker Toyota in San Antonio is an example of _____.
direct foreign investment
The political business cycle is MOST prevalent when:
discretionary fiscal policy is used.
Monetarism suggests that:
discretionary monetary policy does more harm than good.
Keynes believed that wages and prices were sticky. Therefore, a rightward shift of the aggregate demand curve would cause a(n):
increase in employment, production, and income.
A shift to the right of the short-run aggregate supply curve may be caused by a(n):
increase in productivity.
An increase in the demand for money would result from a(n):
increase in the price level.
According to supply-side economics, tax cuts:
increase incentives to work and save, fostering increases in potential output.
If a country with a floating exchange rate implements a contractionary monetary policy, other things equal, interest rates will _____, and the currency will _____.
increase; appreciate
( Figure: Crowding Out) Use Figure: Crowding Out. If the supply curve for loanable funds shifts to the right, and the demand for loanable funds does not change, the result will be a(n) _____ in borrowing and a(n) _____ in the interest rate.
increase; decrease
The value of a euro goes from US$1.25 to US$1.50. In the United States, exports will _____, and imports will _____.
increase; decrease
A shift to the left of the demand curve for loanable funds could be caused by:
less business investment spending financed through borrowing.
Holding everything else constant, the multiplier effect for taxes is _____ that for changes in autonomous aggregate spending.
less than
The planned aggregate spending line has a slope:
less than 1.
Economists of which school of macroeconomic thought are most likely to recommend that the government avoid deficit spending because of the crowding-out effect on investment spending?
monetarist
When a currency becomes _____ in terms of other currencies, it _____.
more valuable; appreciates
If the price of a share of stock is expected to rise, then investors will demand _____ of it today, owners will be less willing to sell it today, and its price will _____ today.
more; rise
The formula for the rule of 70, where n is number of years a variable takes to double, and r is growth rate, is expressed as:
n × r = 70.
An increase in the price of imported oil leads to a _____ shock.
negative supply
A fixed exchange rate: I. leaves monetary policy available for domestic stabilization. II. is less expensive to maintain than a floating exchange rate.
neither I nor II
Disinflation:
policies may plunge the economy into a recession.
Fixed exchange rates are determined by the:
policies of the domestic government.
Examples of fiscal policy do NOT include:
reducing the money supply to raise the interest rate.
The aggregate consumption function:
relates disposable income to total consumer spending.
If the economy is at potential output, and the Fed decreases the money supply, in the long run, real GDP will likely:
remain the same.
Income to the owners of commercial real estate takes the form of:
rent and profit from selling the property at a price higher than its purchase price.
An increase in the value of a currency under a fixed exchange rate regime is a(n):
revaluation.
If a country runs a deficit in its balance of payments on goods and services, to pay for its imports, it must:
sell assets to foreigners.
A fixed exchange rate is:
set by government.
If inflation increases from 2% to 5%, the money demand curve will:
shift to the right.
An increase in the expected disposable income of households _____ the planned aggregate spending line.
shifts up
Key features of Keynesian economics are the importance of the _____ and emphasis on _____.
short run over the long run; the AD curve and an upward-sloping SRAS curve
An increase in the aggregate price level will increase:
the quantity of aggregate output supplied in the short run.
Disinflation means a decrease in:
the rate of inflation.
As a result of a downturn in the economy, a firm reduces workers' hours but does not fire workers. Following Okun's law, this is one reason:
the relationship between the output gap and the unemployment is negative and less than one-to-one.
International macroeconomics concerns:
the relationships between economies of different nations.
Actual investment spending equals:
the sum of planned investment spending and unplanned investment spending.
According to the liquidity preference model, _____ money determines the interest rate.
the supply of and demand for
Which of the following would be included in the U.S. current account?
the trade balance
If the rate of unemployment is 10%, and the labor force is 130 million, the number of unemployed workers is _____ million.
13
Government borrowing will not crowd out private investment spending if unemployment is _____ and the fiscal expansion causes a(n) _____ in incomes and a(n) _____ in saving at each interest rate.
high; increase; increase
An increase in the capital stock would:
cause a movement to the right along a stationary production function.
If a country imports more than it exports, and the government budget deficit increases, interest rates will _____, and the amount of borrowing will _____.
change unpredictably; increase
A change in taxes shifts the aggregate _____ curve by _____ than a change in government purchases of goods and services and has a smaller effect on real GDP.
demand; less
A drop in the inflation rate is called:
disinflation
A common strategy employed to reduce risk of a financial loss is to:
diversify financial assets, so that their risks of failure are unrelated.
An example of human capital is a person's:
job skills.
When the output gap is _____, reflecting an inflationary gap, the unemployment rate is _____ the natural rate of unemployment.
positive; below
According to the accelerator principle, there is a _____ relationship between _____ and planned investment spending.
positive; expected growth
Aggregate demand will decrease if:
the public becomes more pessimistic.
If government spending increases and taxes decrease:
the public debt will increase.
You have an opportunity to pay $1,000 today and receive $1,200 a year from now. If the annual nominal interest rate is 20%, the difference between the present value of the benefit and your investment is:
$0
Assume a closed economy with no government and a fixed aggregate price level and constant interest rate. Furthermore, assume that the country's consumption function is C = 200 + 0.75 YD , where YD is disposable income, and C is consumption, and that planned investment is $75. What is the income-expenditure equilibrium GDP for this country?
$1,100
Suppose that real GDP equals $10 trillion, nominal GDP equals $20 trillion, and the aggregate price level equals 2. If the velocity of money is 2, then the money supply is:
$10 trillion.
The present value of a $110 payment in one year, given an annual 10% interest rate, is:
$100.
If money held by the public is $300 billion, and the inflation rate is 5%, then the inflation tax that year is:
$15 billion.
Banks create money when they:
make loans.
In a checkable-deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 could increase the total amount of bank deposits by up to:
$20,000.
If the wage rate is $9 per hour, and the price level is 2, then the real wage is:
$4.50.
Suppose that there is no trade and no government. GDP is $25 trillion, and consumption spending is $18 trillion. What is the level of private saving?
$7 trillion
The reserve requirement is 20%. Oleg receives $2,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit?
$8,000
Suppose that the money supply is equal to $20 billion and that the velocity of money is 4. If the aggregate price level is 2, then the nominal GDP is:
$80 billion.
Assume the nominal exchange rate is £0.593 per dollar, the price level in the United States is 250, and the price level in Britain is 225. The real exchange rate is £_____ per dollar.
0.659
If the U.S. dollar-euro exchange rate is $1.38, $1 exchanges for €_____.
0.7246
If 99 million people are working, and 1 million are unemployed but actively seeking work, then the unemployment rate is _____%.
1
The multiplier is:
1 / (1 - MPC ).
The reserve requirement is 20%. Oleg receives $2,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $2,000 deposit can the bank lend out?
1,600
From 1996 to 2005, the average annual growth rate of total factor productivity in the United States was _____%.
1.6
In 2019, 10 million people did not have a job but were actively looking for employment, and 85 million people had either a full-time or a part-time job. The unemployment rate in 2019 was _____%.
10.5
If the monetary authorities decide to increase the nominal money supply by 10% when the economy is potential output, in the long run, the aggregate price level will increase by _____%, and real GDP will _____.
10; return to potential output
If the exchange rate is $1 = 12.95 Mexican pesos, then the price of a $10,000 Harley Davidson motorcycle is _____ pesos in Mexico.
129,500
The consumer price index in 1979 was 72.6. In 1980, it was 82.4. What was the rate of inflation from 1979 to 1980?
13.5%
During the hyperinflation in Germany in 1922-1923, prices rose at _____% per day.
16
( Table: Unemployment and Employment Data) Use Table: Unemployment and Employment Data. The labor force in this economy is _____ million. Table: Unemployment and Employment Data (in millions)Population260Employed155Unemployed and looking for work7Discouraged workers4Retired40
162
If real GDP doubles in 35 years, its average annual growth rate is approximately:
2%.
If a bank has deposits of $100,000, loans of $80,000, cash on hand of $10,000, and $10,000 on deposit at the Federal Reserve, then its reserve ratio is:
20%.
If the required reserve ratio is 25%, and the money supply increases by $100,000, then the initial reserve injection by the Federal Reserve was:
25,000
If the exchange rate is $1 = 12.95 Mexican pesos, then the price of a $20,000 Harley Davidson motorcycle is _____ pesos in Mexico.
259,000
Assume an economy has grown by 4% per year over the past 30 years. During the same period, the labor force has grown by 1% per year, and the quantity of physical capital has grown by 5% per year. Each 1% increase in physical capital per worker is estimated to increase productivity by 0.4%. Assume that human capital has not changed during the past 30 years. What is the growth rate of productivity?
3%
Suppose Sweden has a real GDP per capita of $50,000, while Chile has a real GDP per capita of $25,000. If Sweden's real GDP per capita grows at a 2% annual rate, and Chile's real GDP per capita grows at a 4% annual rate, how long will it take for real GDP per capita in the two nations to converge?
35 years
If policy makers want to decrease real GDP by $100 billion, and the marginal propensity to consume is 0.6, they should decrease government purchases of goods and services by $_____ billion.
40
The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit can the bank lend out?
800
Suppose that the aggregate consumption function is given by the equation C = 200 + 0.8 YD , where C represents consumption, and YD represents disposable income. If all employers announce in September a guarantee to give all employees a large bonus in December, which equation could represent the new aggregate consumption function?
C = 250 + 0.8 YD
According to some economic historians, the first true modern recession took place in:
Great Britain in 1825.
Economists of which school of macroeconomic thought are most likely to generally recommend the use of monetary policy to stabilize the economy and the use of fiscal policy only when monetary policy is ineffective?
Great Moderation consensus
If the equilibrium exchange rate is above the target rate, the government should: I. buy its domestic currency in foreign exchange markets. II. engage in expansionary monetary policy. III. restrict the purchase of foreign currencies.
II only
The nominal exchange rate is: I. the evaluation and ranking of different global stock exchanges. II. the price of a country's money in terms of another country's money.
II only
Which statement is NOT true of a fixed exchange rate system?
It makes pursuing domestic macroeconomic objectives easier.
_____ argued that the most effective way to bring the economy out of the Great Depression was through expansionary fiscal policy.
John Maynard Keynes
_____ emphasized the short-run effects of aggregate demand on aggregate output.
John Maynard Keynes
The groundbreaking book The General Theory of Employment, Money, and Interest was written by famed economist:
John Maynard Keynes.
Which statement is TRUE?
Keynes emphasized the short-run effects of shifts in aggregate demand on aggregate output, employment, and prices, whereas the classical economists focused on the long-run determination of the aggregate price level.
Economists of which school of macroeconomic thought are most likely to recommend a decrease in taxes to alleviate a recessionary gap?
Keynesian
Kiara believes that changes in aggregate demand alter both real output and the price level. She believes that an economic recession will not necessarily self-correct in the long run and therefore that active fiscal and monetary policy is justified to smooth out the business cycle. Kiara is BEST described as a:
Keynesian
If asset owners in China and the United States consider Chinese and U.S. assets to be substitutes, and the U.S. interest rate is 6%, and the Chinese interest rate is 3%, what will NOT occur?
Loanable funds will be exported from the United States to China.
Which statement is TRUE?
The financial account balance is the negative of the current account balance.
( Figure: The Minimum Wage) Use Figure: The Minimum Wage. What is the quantity of labor supplied at the binding minimum wage of P 3 ?
Q 4
( Figure: The Effect of a Minimum Wage) Use Figure: The Effect of a Minimum Wage. Suppose the labor market is in equilibrium at E when the government imposes a minimum wage of W F . Assuming all workers without jobs are seeking work, structural unemployment will equal:
Q S - Q D .
Between 1993 and 2013, the Mexican peso fell against the U.S. dollar by almost three-fourths of its initial value. However, economists have concluded that this did not result in a corresponding fall in the prices of Mexican products expressed in dollars. What explains this apparent paradox?
The inflation rate in Mexico over that period was higher than in the United States.
_____ is the idea that efforts to keep unemployment below the natural rate of unemployment will cause accelerating inflation.
The natural rate hypothesis
A negative output gap implies an unemployment rate that is:
above the natural rate.
Other things equal, if the economy of Europe expands rapidly, leading to increased tourism in the United States, the:
U.S. dollar will appreciate.
Both _____ and _____ may cause structural unemployment.
a binding minimum wage; union wages
A default occurs when:
a borrower fails to make payments as specified by the loan or bond contract.
An example of a double coincidence of wants is:
a car mechanic who wants a TV finding an owner of an electronics store who wants a car repaired.
According to the rational expectations model, individuals respond to expansionary monetary policy by predicting:
a higher rate of inflation.
A high demand for money (as in Japan) would result from:
a low crime rate and a widespread lack of capacity to accept noncash payments.
In an open economy, government spending is $30 billion, consumption is $70 billion, taxes are $20 billion, GDP is $100 billion, and investment spending is $10 billion. As a result, there is:
a net capital inflow of $10 billion.
Disinflation is costly to the economy if _____ is forced on the economy, _____, and _____.
a recession; unemployment increases; aggregate output falls
Disinflation refers to:
a reduction in the inflation rate.
Real business cycle theory contends that the:
aggregate supply curve is vertical and shifts to the left during recessions.
A negative supply shock often results in:
an increase in the aggregate price level and a decrease in aggregate output.
Classical economists maintained that:
an increase in the money supply leads to a proportional rise in the price level.
Assume that the economy is contracting, and unemployment is rising. Which of the following would be a logical explanation of a sudden fall in the unemployment rate even as the economy continues to contract?
an increase in the number of discouraged workers
An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.
an increase; an increase
Contractionary monetary policy causes _____ in interest rates in the short run and _____ in interest rates in the long run.
an increase; no change
Investment in human capital causes _____ the aggregate production function.
an upward shift of
From 2014 to 2015, many U.S. companies that sell a lot overseas experienced declining profits due to the:
appreciation of the dollar.
If Europeans begin to view the United States as a more attractive investment opportunity, the outcome will be a(n) _____ of the dollar, which will _____.
appreciation; discourage Europeans from buying U.S. goods and services
Who loses from unexpected deflation?
borrowers
During periods of deflation, _____ are hurt, and _____ are helped.
borrowers; lenders
The Republic of Gizmoa wants to maintain the exchange rate of its currency, the gizmo, at $0.60, but the current exchange rate for the gizmo is $0.90. If Gizmoa uses foreign exchange controls, it should require licenses to _____ gizmos and _____ dollars.
buy; sell
If a country's fixed exchange rate is falling, it:
can use foreign exchange reserves to purchase some of its currency.
If the economy is at potential output, and the Fed decreases the money supply, in the short run, the price level will likely:
decrease
Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. Immediately after the withdrawal, reserves _____, and checkable deposits _____.
decrease by $6,000; decrease by $6,000
If aggregate output is above potential output, then an appropriate fiscal policy would be to _____, which will shift the _____ curve to the _____.
decrease government purchases; AD ; left
If interest rates rise, there will be a(n):
decrease in aggregate demand.
Demand shocks do NOT include a(n):
decrease in commodity prices.
An increase in energy prices will:
decrease short-run aggregate supply.
Assume that the marginal propensity to consume is 0.8 and that potential output is $800 billion. If real GDP is $850 billion, to bring the economy to potential output, the government should:
decrease spending by $10 billion.
It is generally accepted that a binding minimum wage does NOT:
decrease the amount of labor supplied.
In a simple, closed economy (no government or foreign sector), any ____ that is not consumed is _____.
disposable income; saved
( Figure: The Aggregate Consumption Function and Planned Aggregate Spending) Use Figure: The Aggregate Consumption Function and Planned Aggregate Spending. If current disposable income increases in this economy, then the:
economy will move upward along the aggregate spending line.
Core inflation excludes:
energy and food prices.
If the Fed seeks to increase the inflation rate from 1% to 2%, it is:
engaging in inflation targeting.
Natural unemployment is:
equal to the sum of frictional unemployment and structural unemployment.
The rule of 70 is MOST useful in:
estimating the doubling time of real GDP for a given growth rate.
Technological progress allows workers to produce more:
even when the amount of physical capital and human capital do not change.
Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.
expansionary
Direct foreign investment means the purchase of:
factories in a foreign country.
The interest rate is 5% in the market for loanable funds. Investors wish to borrow $100 million, and savers wish to save $125 million at this interest rate. We would expect the interest rate to _____, as there is a _____ of loanable funds.
fall; surplus
The interest rate is 7% in the market for loanable funds. Investors wish to borrow $90 million, and savers wish to save $135 million at this interest rate. We would expect the interest rate to _____, as there is a _____ of loanable funds.
fall; surplus
According to the liquidity preference model, if the Federal Reserve increases the money supply, the equilibrium interest rate _____, which leads to a(n) _____ in the quantity demanded of nonmonetary interest-bearing financial assets.
falls; increase
If a government runs large budget deficits over consecutive years, with the public debt growing _____ GDP, the ratio of debt to GDP will _____.
faster than; increase
Currency in the United States today is _____ money.
fiat
A government with a large deficit will also produce high inflation in the economy if it:
finances the deficit via seigniorage.
When a Japanese investor buys stock in General Motors, the _____ account is affected.
financial
If a country has a current account deficit, it must have a:
financial account surplus.
Devaluation of a currency occurs under _____ exchange rates when the price of the domestic currency in terms of foreign currency _____.
fixed; falls
Classical economists believed that wages and prices were _____, and as a result, the aggregate _____ curve was vertical.
flexible; supply
According to the classical model, prices are _____, making the aggregate supply curve _____ in the short run.
flexible; vertical
Historically, governments have turned to seigniorage to pay their bills when the:
government lacks the will to reduce the budget deficit by raising taxes or reducing spending.
Changes in aggregate demand can be caused by changes in:
government spending.
According to the notion of Ricardian equivalence, households and businesses will view an increase in _____ as a sign that tax burdens will increase in the future, compelling them to ____ their private spending in anticipation of higher future taxes.
government spending; decrease
Workers today are more productive than workers in the past because they:
have more physical capital that embodies better technology.
In 1820, Mexico had a higher real GDP per capita than did Japan. Yet now Japan is one of the richest countries in the world, and Mexico is poor. Japan's high rate of economic growth likely CANNOT be explained by:
heavy government intervention in markets.
The political business cycle implies that:
high inflation is likely after an election.
In the long run, an increase in aggregate demand from a position of full employment leads to:
higher prices and the same output.
If Medicaid is expanded to cover a greater percentage of the population:
implicit liabilities will increase.
The natural rate hypothesis:
implies sharp limits on what macroeconomic policy can achieve.
A current account deficit generally results from:
imports exceeding exports.
If the economy is at potential output, and the Fed increases the money supply, in the short run, real GDP will likely:
increase
If the Fed decreases the reserve requirement from 10% to 5%, the money multiplier will _____, and the money supply will most likely _____.
increase; increase
According to Keynesian economics, a tax cut will _____ aggregate demand and output by _____.
increase; increasing income and consumption
As people try to avoid the inflation tax, the government must _____ the rate of growth of the money supply to _____.
increase; raise the same revenue from seigniorage
According to the principle of purchasing power parity, the 2001 devaluation of the Argentine peso:
increased the inflation rate in Argentina relative to the inflation rate in the United States.
Under a fixed exchange rate, a devaluation:
increases aggregate demand.
According to the classical model:
increases in the money supply lead to proportional increases in the price level but not to changes in real output.
According to the concept of monetary neutrality, _____ in the money supply _____ real GDP _____ the price level.
increases; do not change; but do raise
When the interest rate in the United States decreases as a result of expansionary monetary policy, investment spending _____, and consumption _____.
increases; increases
All else equal, a decrease in the value of the dollar against the euro _____ U.S. net exports and shifts the aggregate demand curve to the _____.
increases; right
Assume that marginal propensity to consume is 0.8 and potential output is $800 billion. If the real GDP is $700 billion, _____ government spending by _____ would bring the economy to potential output.
increasing; $20 billion
If the economy is in a liquidity trap, monetary policy is _____, and fiscal policy is _____.
ineffective; effective
In the classical model, an increase in the money supply will result in:
inflation only, without affecting aggregate output.
Planned investment spending is _____ the interest rate because fewer projects are profitable at higher interest rates.
inversely related to
Keynes believed that "animal spirits" had their greatest impact on:
investment spending.
The nominal exchange rate:
is unadjusted for inflation.
Firms and businesses hold some of their assets in the form of money because:
it allows them to make purchases directly.
An asset is _____ if it is easily convertible into cash with little or no loss of value.
liquid
Generally, the more liquid an asset is, the:
lower its rate of return.
The unemployment rate will fall if the growth of potential output is:
lower than the growth of actual output.
Expansionary monetary policy will _____ interest rates and _____ savings in the short run.
lower; increase
You are choosing whether to purchase a bond or stock. If you purchase the bond, you are likely to receive a _____ return in exchange for a _____ level of risk.
lower; lower
If the money supply is growing at a constant rate of 3%, and the economy undergoes a negative demand shock, monetarist theory recommends:
maintaining the growth rate of the money supply at 3% and letting the aggregate price level fall.
Expansionary fiscal policies
make the budget surplus smaller.
A revaluation of a currency, other things equal:
makes foreign goods more attractive in the domestic economy.
An expansionary fiscal policy:
may include decreases in taxes.
Underemployed people are counted as employed, even though they are _____.
not fully using their skills
A currency has depreciated when:
one unit of that currency buys fewer foreign goods than it did previously.
Assuming that the reserve requirement is greater than zero, if it looks as if a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:
other member banks and borrow money at the federal funds rate.
The life-cycle hypothesis of consumer spending says that consumers plan their spending:
over their lifetimes.
During deflation, the:
overall price level falls.
If an administration pursues expansionary policy before an election to bring down the unemployment rate, it can:
produce inflation if the targeted rate of unemployment is too low.
Economists usually use GDP rather than GNP because they are tracking:
production rather than income.
Contractionary fiscal policy includes:
raising tax rates.
Joseph believes that changes in the business cycle can be attributed to shifts in the vertical aggregate supply curve—shifts in turn caused by fluctuations in productivity growth. Joseph is best described as a _____ theorist.
real business cycle
If a high inflation rate leads people to _____ their money holdings, this may lead to a further increase in the money supply and _____ inflation.
reduce; higher
Expectations of a lower inflation rate shift the short-run aggregate supply curve to the _____, changing the trade-off between inflation and unemployment. As a result, the short-run Phillips curve shifts _____.
right; downward
If an economy has just had a serious recession, but real GDP is expanding once again, we can expect the unemployment rate to:
rise if previously discouraged workers enter the work force but do not find jobs immediately.
If a country's loanable funds market is initially in equilibrium and then there are capital outflows, the equilibrium interest rate will _____, and the equilibrium quantity of loanable funds will _____.
rise; fall
Positive unplanned inventory investment occurs when actual:
sales are less than expected.
A general increase in wages will result primarily in the _____ curve shifting to the _____.
short-run aggregate supply; left
Crowding out is MOST likely when expansionary fiscal policy is accompanied by:
slow growth of the money supply.
The political business cycle refers to policies that:
speed the economy up in election years.
The permanent income hypothesis suggests that consumer:
spending depends on income people expect over the long term rather than on current income.
Consider an economy that already has a sizable budget deficit. If the economy faces a major downturn, most economists agree, the government should:
stimulate the economy by raising expenditure as long as the ratio of debt to GDP is declining.
Nancy believes that the best way to promote economic growth is through tax cuts that increase incentives to work and invest. Though these tax cuts might initially increase the budget deficit, Nancy is convinced that the economic growth that results will ultimately increase government tax revenues. Nancy is BEST described as a:
supply-sider.
If real business cycle theory uses an upward-sloping aggregate _____ curve, aggregate _____ is _____ to the determination of aggregate output.
supply; demand; potentially relevant
Decisions about monetary policy are made by:
the Federal Open Market Committee.
A current account deficit exists when:
the balance of payments on current account is negative.
If the U.S. dollar changes from $1 = €1 to $1 = €0.8:
the dollar depreciates against the euro.
If the U.S. dollar changes from $1 = ¥200 to $1 = ¥100, then:
the dollar has depreciated relative to the yen.
During the Great Recession, critics warned that a surge in _____ would lead to _____.
the monetary base; high inflation
Changes in _____ will not shift the aggregate demand curve.
the price level
When the economy faces an inflationary gap:
the unemployment rate is less than the natural rate of unemployment.
Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If GDP is $850 billion:
there is an inflationary gap.
Keynes argued that the most effective way to bring the economy out of the Great Depression was:
through expansionary fiscal policy.
A major drawback of a floating exchange rate is the:
uncertainty it generates regarding the value of goods traded internationally.
A negative output gap is associated with a(n) _____ unemployment rate.
unusually high
According to the classical model of the price level, the short-run aggregate supply curve is:
vertical
According to classical economists, the short-run aggregate supply curve is _____, while according to Keynesian economists, the short-run aggregate supply curve is _____.
vertical; upward sloping
As people get used to inflation:
wages adjust more quickly, and the short-run aggregate supply shifts quickly to the left.
During the 1960s and 1970s, most monetarists believed that the velocity of money:
was stable.
Someone who is risk-averse is:
willing to spend more resources to avoid losing a given sum of money than to gain the same sum of money.
If the rate of exchange is €1 = US$2, then US$1 =
€0.50.
In the circular-flow diagram, households:
supply resources.
When the output gap is negative, the unemployment rate is:
above the natural rate.
If banks were required to keep 100% of deposits in reserves, they could:
make no loans.
An example of infrastructure that promotes economic growth is _____.
public health services, such as vaccinations
If you expect to get a substantial raise six months from now, and you are like most people, it will _____.
affect your current consumption
If unplanned inventory investment is positive, then most likely:
aggregate expenditure on goods and services is less than forecast.
If interest rates on bonds rise, holding other things constant, stock prices will:
decrease.
If the economy is at potential output, and the Fed decreases the money supply, in the short run, the price level will likely:
decrease.
In a simple, closed economy (no government or foreign sector), if the marginal propensity to consume increases, the marginal propensity to save will:
decrease.
The reserve requirement is 10%, and Olga withdraws $3,000 for travel money from her checking account. Assume that banks do not hold excess reserves and that the public holds only checkable bank deposits, that is, no currency. As a result of the withdrawal, excess reserves _____ by _____.
decrease; $2,700
Lucia withdraws $6,000 from her checking account to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves. As a result of the withdrawal, loans _____ by _____.
decrease; $4,800
A supply shock caused by an increase in the price of gasoline causes a(n) _____ in output and a(n) _____ in prices.
decrease; increase
A liquidity trap is NOT associated with:
fiscal policy becoming ineffective.
Seigniorage refers to the:
government's right to print money.
Net exports are calculated by subtracting:
imports from exports.
As a result of a decrease in the value of the dollar in relation to other currencies, U.S. imports decrease and exports increase. Consequently, there is a(n):
increase in aggregate demand.
Consider an economy that produces only smartphones and laptops. Last year, 10 smartphones were sold at $800 each, and 5 laptops were sold at $1,000 each, while this year, 15 smartphones were sold at $900 each, and 10 laptops were sold at $1,100 each. Real GDP this year, using last year as a base year, is:
$22,000.
The reserve requirement is 20%. Oleg receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. How much of the $1,000 deposit can the bank lend out?
$800
If the cost of the market basket in the base year is $5,000, and the cost of the market basket in the current year is $5,100, the price index for the current year is ___ .
102
A price index:
- is normalized so that it equals 100 in the base year. - is used to measure the cost of a market basket across different years. - always includes a base year.
From 2006 to 2018, the average annual growth rate of total factor productivity in the United States was _____%.
0.4
In 1815, Mexico had a real GDP per capita that was _____ times that of Japan.
1.5
If the nominal interest rate is 4%, and the inflation rate is 1%, then the real interest rate is _____%.
3
If a bank has deposits of $10,000 and reserves of $5,000, and the reserve requirement is 20%, its excess reserves are $_____.
3,000
According to current estimates of Okun's law, if the output gap is 3%, the natural rate of unemployment is 5%, and the expected rate of inflation is 5%, the unemployment rate will be _____%.
3.5
Assume an economy has grown by 4% per year over the past 30 years. During the same period, the labor force has grown by 1% per year, and the quantity of physical capital has grown by 5% per year. Each 1% increase in physical capital per worker is estimated to increase productivity by 0.4%. Assume that human capital has not changed during the past 30 years. How fast has physical capital per worker grown?
4%
Assume an economy has grown by 4% per year over the past 30 years. During the same period, the labor force has grown by 1% per year and the quantity of physical capital has grown by 5% per year. Each 1% increase in physical capital per worker is estimated to increase productivity by 0.4%. Assume that human capital has not changed during the past 30 years. How much has the growth of physical capital per worker contributed as a percentage of total productivity growth?
53%
As the opportunity cost of holding money changes from _____% to _____%, the quantity of money demanded _____.
5; 3; increases
_____ is often a result of a government financing its spending through the inflation tax.
Hyperinflation
If monetary aggregates were ranked from most liquid to least liquid, the order would be:
M1 and M2.
_____ costs may be especially important in the tax system when inflation distorts the measures of income on which taxes are collected.
Unit-of-account
According to the accelerator principle:
a higher growth rate of real GDP leads to higher planned investment spending.
In the absence of a minimum wage, efficiency wages, or labor unions, a decline in the demand for labor will likely result in _____ if wages are flexible.
a lower level of employment but likely no change in the unemployment rate
Commodity-backed money is:
a medium of exchange with no intrinsic value.
The short-run Phillips curve shows:
an inverse relationship between unemployment and inflation.
Goods that are sold in 2020 but produced in 2018:
are included in investment in 2018.
In an economy with no international trade, no government expenditure, no transfers, and no taxes, disposable income equals GDP. Therefore, it follows that:
as GDP decreases, planned aggregate spending decreases.
Diminishing returns to physical capital suggest that:
at some point, increasing the amount of physical capital per worker is not worth the cost of the additional capital.
If the required reserve ratio rises:
banks must keep a larger share of each deposit in reserve.
When there is a positive output gap, the unemployment rate is:
below the natural rate.
According to the short-run Phillips curve, when actual output is _____ potential output, the price level _____, and the unemployment rate rises.
below; decreases
Financial intermediaries involved in shadow banking typically:
borrow money short term and lend or invest long term.
An increase in the wealth of households, other things equal, will _____ the aggregate consumption function.
cause an upward shift of
If the economy is at potential output, and the Fed increases the money supply, in the short run, interest rates will likely:
decrease
A decrease in the demand for loanable funds would MOST likely be caused by a(n):
decrease in perceived business opportunities.
If the economy is at potential output, and the Fed _____ the money supply, the likely result will be a(n) _____ in investment spending and a(n) _____ in consumer spending in the short run.
decreases; decrease; decrease
An increase in interest rates _____ the demand for money.
does not affect
Including intermediate goods in calculations of GDP is:
double counting.
During the Great Depression, the United States underwent a movement _____ along the short-run aggregate supply curve; during the 1979 oil crisis, the United States underwent a _____ shift of the short-run aggregate supply curve.
down; leftward
An increase in the price level that is extremely rapid (say, 400% per year) is called:
hyperinflation.
An increase in the money supply will decrease interest rates in the short run but not affect interest rates in the long run because an increase in the money supply will eventually _____ prices and _____ money demand.
increase; increase
An autonomous increase in aggregate spending _____ real GDP by _____.
increases; more than that amount
If the natural rate of unemployment is 5%, and the actual rate of unemployment is 4%:
inflation will increase.
A firm does NOT want to borrow money for a project when the:
interest rate is higher than the expected rate of return on the project.
Changes in the money supply have no _____ effects on the interest rate because when the _____ changes, the demand for money changes to offset the short-run changes in the money supply.
long run; price level
An increase in interest rates on business loans will change _____ investment spending.
planned
Financial markets spread the potential gains and losses of borrowing and lending among many firms and individuals, decreasing overall uncertainty. The financial system thereby:
reduces risk.
Crowding out hampers the economy by:
reducing private investment spending.
Examples of fiscal policy do NOT include:
reducing the interest rate by increasing the money supply.
An example of an automatic stabilizer that takes effect when the economy contracts is a:
rise in government transfers as more people receive unemployment insurance benefits.
Efficiency wages are:
set above the equilibrium wage to incentivize better performance.
A budget surplus exists when:
taxes are greater than government spending.
Because revenue from personal income taxes automatically decreases as disposable income decreases, a recession causes:
the size of the multiplier to increase.
Banks are illiquid because:
their loans are less liquid than their deposits.
Assume that the marginal propensity to consume is 0.8 and potential output is $800 billion. If real GDP is $700 billion:
there is a recessionary gap.
Government spending will NOT crowd out private spending if:
there is a recessionary gap.
Assume a closed economy with no government and a fixed aggregate price level and constant interest rate. Furthermore, assume that the country's consumption function is C = 200 + 0.75 YD , where YD is disposable income, and C is consumption, and that planned investment is $75. If real GDP is $1,100:
unplanned investment equals zero.
GDP calculated via factor payments includes:
wages, interest payments, rent, and profits.
