Macroeconomics Exam 4

The IS curve is constructed by:

adding up the level of aggregate expenditure at each real interest rate.

Insufficient demand leads to a:

surplus and falling prices.

If actual GDP is greater than potential GDP:

the economy can experience inflation.

After several years of current data lying along the same Phillips curve, economists plot the newest statistics and find that their points lie well above the old curve. Which statement is the best explanation?

Increases in the prices of essential raw materials led people to expect higher inflation in the future.

Which of the following correctly describes the business cycle?

It is the fluctuations of GDP around the potential output.

The Great Moderation refers to the:

decreased volatility of the U.S. economy.

The intersection of the IS curve and the MP curve determine:

macroeconomic equilibrium.

Which of the following changes could create a more positive output gap? (i) The U.S. dollar appreciates. (ii) The U.S. dollar depreciates. (iii) Trading partners reduce tariffs on U.S. exports. (iv) Monetary policy actions boost the economy.

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

Refer to the following table. What was the approximate output gap in 1974?

-6.5%

If expected inflation is 2%, and actual inflation is 2.8%, then unexpected inflation is:

0.8%.

c. If the unemployment rate is still 99%, what is the new inflation rate after this change in expectations?

1%

If government spending rises by $62 billion and GDP rises by $110 billion, then the multiplier in the economy is approximately:

1.77.

Suppose that in a given country, the line of best fit approximates the Phillips curve shown here. Suppose for next year, you expect GDP to be equal to potential GDP. Current inflation expectations are at 2%. How much does your salary have to change, in nominal terms, in order to maintain your purchasing power at the current level?

2%

If the risk-free rate is 1.5% and the risk premium is 2%, the MP curve is at:

3.5%.

The accompanying graph depicts a hypothetical economy's short-run Philips curve (SRPC). Please adjust the SRPC to reflect what happens when expected inflation decreases by 2 percentage points. After the shift in the SRPC, what is the unemployment rate if the public expects no inflation in the economy?

7%

The figure shows inflation expectations and actual inflation for U.S. consumers over time. Which of the following statements correctly describes the relationship between these rates?

Actual inflation tends to follow inflation expectations.

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

Applications for unemployment benefits

The new country of GoodBusiness has been tracking its business cycle for the past 10 years. The graph illustrates what has been going on in terms of output or employment every year. They do not have information prior to year 1 or after year 9. Therefore, do not assume that the curves end at those years; they do continue on, data was just not available. Between what years were there expansions?

Expansions occurred from year 3 to year 4 and year 5 to year 7

How do interest rates affect investment in the economy?

Lower interest rates lower the cost of borrowing for firms, and so investment rises.

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

S&P 500

Why are inflation expectations the key driver of inflation in the long run?

Sellers set prices in accordance with their expectations of inflation; these expectation generate the rate of inflation sellers expect, a rate that can continue indefinitely unless other factors intervene.

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

The employment cost index

The accompanying graph depicts how the Phillips curve changed for the U.S. economy in the 1970's.

The level of inflation associated with every level of unemployment was higher than expected.

Which of the following is a narrow indicator?

The stock price for JPMorgan Chase & Co.

The new country of GoodBusiness has been tracking its business cycle for the past 10 years. The graph illustrates what has been going on in terms of output or employment every year. They do not have information prior to year 1 or after year 9. Therefore, do not assume that the curves end at those years; they do continue on, data was just not available. What year or years illustrate definitive business cycle peaks?

There was a peak in year 4 and year 7

The new country of GoodBusiness has been tracking its business cycle for the past 10 years. The graph illustrates what has been going on in terms of output or employment every year. They do not have information prior to year 1 or after year 9. Therefore, do not assume that the curves end at those years; they do continue on, data was just not available. What year or years illustrate definitive business cycle troughs?

There was a trough in year 3 and year 5

Which of the following statements best summarizes how price changes affect economic activity according to rational expectations theory?

Unanticipated price-level changes result in changes in real output in the short run but not in the long run.

Under the strict monetary policy approach, output rises because

borrowing costs fall

Suppose rubber prices rise in international markets. For countries that import rubber, this scenario would lead to:

cost-push inflation.

Consider the time series graph of the unemployment rate.

cycle because it exhibits a tendency to go up and down.

If the U.S. government lowers personal income tax rates:

disposable income increases, and this leads to an increase in consumption and a right shift of the IS curve.

Planned investment is the:

expenditure on capital goods by businesses.

The risk premium is the:

extra interest charged by lenders to account for risk.

b. The role of inflation expectations in creating inflation

gives the Federal Reserve leverage over inflation, since the Fed can influence people's expectations about inflation.

When the newest economic data lies to the right of the Phillips curve, that likely means the Phillips curve

has shifted upwards.

The original Phillips curve

illustrates the short‑run trade‑off between inflation and unemployment.

According to the paradox of thrift,

individuals saving more during recessions can actually be harmful to the short‑run economy due to decreases in consumption.

At this time last year, Bryan could buy a tie for $7.99. The next year, he decides to buy the same tie again at the same place and the price has increased to $10.99. Other goods have seen similar increases in price.

inflation

In the long run, inflation is determined by:

inflation expectations.

Maytag pulls from its warehouses to sell laundry machines at a heavy discount to holiday shoppers.

inventory

A good proxy for the risk-free interest rate is the interest rate on a:

loan to the U.S. government.

Under the strict fiscal policy approach, output rises because

of an initial bout of spending that gives rise to subsequent additional rounds of spending.

According to Okun's rule of thumb, for every 1% fall in the actual output below potential output, the unemployment rate:

rises by 0.5%.

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

seasonally adjusted data

An unexpected hurricane wipes out the Jersey Shore seabed of clams, causing a shortage of clams.

shock

An economy's potential output level is:

the output that is possible when all resources are fully employed.

An example of a leading indicator is:

the stock market.

During the Great Recession of 2007‑2009, the inflation rate fell from 3.83.8% in 2008 to −0.4−0.4% in 2009. During the same period, unemployment rates went from 5.8% to 9.3%. Consider how the change in inflation and unemployment, during this period, compare to the relationships modeled in the Phillips curves. This period demonstrates

the trade‑off between unemployment and inflation modeled by the simple Phillips curve.

Consider the Phillips curve shown here. In region A:

there is insufficient demand.

What is excess demand?

too many buyers for too few goods

Consider the time series graph of real gross domestic product. The time series graph of real gross domestic product depicted in Figure 1 illustrates a

trend because it exhibits a tendency to move in one general direction.

Jack has been laid off by his law firm and has been trying to find a new job in the Bay Area in California for five months

unemployment

An economy that entered a lasting slump after experiencing a housing bubble that led to a period of declining output and living standards.

recession

Suppose that an economy is in a recession. You would expect to see the unemployment rate:

rise above the equilibrium unemployment rate.