Macroeconomics - Test 2

Table: Employment, Unemployment, and Labor Force Participation What was the unemployment rate of the country in 2009?

3.9%

According to the quantity theory of money, a nation that increases its money supply by 30% should expect its price level to increase by approximately:

30%.

Table: Employment, Unemployment, and Labor Force Participation What was the unemployment rate of the country in 2010?

5%

Figure: Labor Market What is the number of people who are employed at the market wage? How many people end up unemployed due to the implementation of a $10 minimum wage?

60; 40

Figure: Labor Supply and Demand How much will the quantity of labor employed decline as a result of the labor union's action to increase its wage demands to $11 an hour?

700

If you earned $10 an hour in 2005 when the CPI was 100, and you earn $11 an hour today when the CPI is 120, then your real wage rate has _____ since 2005.

decreased

As the baby boomers retire, the U.S. labor force participation rate will:

decrease.

If, in an economic panic, people decide to hold their money rather than spend it, the velocity of money will:

decrease.

If stock prices go up and people feel richer, aggregate demand will:

increase.

What affects labor force participation rates?

demographics, tax structure, and technological advances such as the birth control pill

High and volatile inflation:

destroys the ability of market prices to send signals about the value of resources and opportunities.

Figure: Long-Run Aggregate Supply Curves Which of the following can explain the shift of the long-run aggregate supply curve from A to B in the figure?

development of new technology

The labor force is made up of:

employed and unemployed workers.

Which of the following is NOT a reason for the financial crisis of 2007-2008?

excessive confidence about the stock market

Critics of securitization argue that, leading up to the housing crisis, banks often:

failed to properly research their borrowers.

If spending grows by 3%, real GDP grows by 5%, and velocity is stable, then prices will be _____ at a rate of _____ according to the aggregate demand curve.

falling; 2%

Someone who recently moved to Florida because of its warmer climate will need to spend some time looking for a new job. This is an example of:

frictional unemployment.

When the government monetizes its debt, the results are:

higher inflation and losses for holders of government bonds.

Increases in the minimum wage will most likely lead to:

higher unemployment.

Workers and firms adjust to predictable inflation by:

including adjustments for it in contracts.

Higher interest rates typically _____ saving, ceteris paribus.

increase

In the basic model with AD and LRAS curves only, if spending growth is 10% and the Solow growth rate falls from 5% to 3%, then inflation will:

increase from 5% to 7%.

According to the inflation parable discussed in the text, a positive shock to spending:

increases output at first but in the long run only increases price.

The aggregate demand curve shows all the combinations of _____ and _____ that are consistent with a specified rate of _____.

inflation; real GDP growth; spending growth

Borrowed funds are demanded by _____, while borrowed funds are supplied by _____.

investors; savers

Inflation:

is an increase in the average price level.

In the long run, money:

is neutral with respect to quantity produced.

The U.S. federal government finances most of its new spending by:

issuing bonds.

Inflation hurts the economy because:

it affects the ability of market prices to send signals about the value of resources.

If the economy experiences unexpected inflation, then the actual rate of return will be _____ than its equilibrium rate, and wealth will be distributed from _____.

less; lenders to borrowers

When Lehman Brothers went bankrupt, most of Lehman's managers:

lost some money but still ended up being very rich.

The U.S. stock of physical capital was:

lower in 1940 than in 1930.

Two of the challenging factors faced by the U.S. Bureau of Labor Statistics when computing the consumer price index are:

new goods and better-quality goods.

Figure: Business Cycles and Unemployment Which panel in the figure shows the expected relationship between real GDP growth and unemployment?

panel A

Figure: Oil Market Diagrams Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts what happened in the market for oil during the 1973 OPEC oil crisis?

panel B

The natural unemployment rate is the rate of _____ unemployment plus the rate of _____ unemployment.

structural; frictional

What is an example of impatience in economic behavior?

taking the first job you are offered

Government can influence a person's choice to work or not through:

taxes on workers and benefits paid to nonworkers.

The Keynesian explanation for cyclical unemployment is:

that wage demands are too high relative to changing prices.

Which of the following do economists consider an investment?

the construction of a new factory

Which of the following best explains the crowding-out effect?

the decrease in private investment due to higher interest rates that result from increased government borrowing to finance larger budget deficits

Which of the following elements reduces structural unemployment?

the enhancement of worker retraining programs

According to the quantity theory of money, the major cause of inflation in the long run is an increase in:

the growth rate of the money supply.

Inflation occurs when the growth in _____ exceeds the growth in _____.

the money supply; output

In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy?

$1.2 million

At an 8% interest rate, the quantity of savings is $250 billion. What would the quantity of savings be if the interest rate fell to 5%?

$190 billion

If spending growth is 3% and real GDP growth is 2%, what is the inflation rate?

1%

Figure: Labor Supply and Demand What is the quantity of labor that is unemployed as a result of the labor union's action to increase its wage demands to $11 an hour?

1,800

Table: Consumer Price Index Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2009 to 2010?

1.68%

Figure: Aggregate Demand Point B on this aggregate demand curve represents an inflation rate of:

4%.

When business firms become more pessimistic about the state of the economy, the:

demand to borrow shifts to the left.

_____ is a decrease in the average level of prices, whereas _____ is a reduction in the inflation rate.

Deflation; disinflation

The ratio of the nominal value of economic output to the real value of economic output multiplied by 100 is the:

GDP deflator.

Why is the demand for loanable funds downward sloping?

More people borrow money when interest rates are low than when they are high.

Which is true about the direction, size, and timing of real shocks that hit the economy?

Shocks can vary in direction and size and can hit at any time.

Which of the following is a concern among economists regarding the aging of the U.S. population?

Since older people are less likely to work, an aging population will lead to a decreased labor force participation rate in the United States and lower tax revenues.

What is meant by the claim that inflation redistributes wealth?

Some people gain and some people lose from inflation.

How do taxes impact spending in the economy?

Taxes have a negative relationship with both consumption and investment spending.

Which of the following is TRUE of the effects of employment protection laws?

They create employment security for workers with a job.

Which of the following is an example of money illusion, assuming that inflation is 5%?

You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.

According to the Fisher effect, a 5% decrease in the expected inflation rate results in:

a 5% decrease in the nominal interest rate.

In the market for loanable funds, _____ coordinates between the savers and borrowers.

a financial intermediary

Unanticipated high inflation always means:

a loss in purchasing power for lenders of fixed-rate loans

The main reason people save during their working years is:

a preference toward a smooth consumption path over time.

Figure: Three Aggregate Demand Curves Consider the three aggregate demand curves shown in the graph. Movement from point A to point D represents:

an increase in spending growth from 4% to 6%.

An investment tax credit results in:

an increase in the demand for loanable funds and an increase in the interest rate.

A negative real shock leads to:

an increase in the inflation rate but a decrease in the real GDP growth rate.

From an initial equilibrium in the basic model that includes only the AD and LRAS curves, aggregate demand shocks caused by changes in the growth of money supply:

are neutral in both the short run and the long run.

Table: Unemployment Statistics for Country X Using the data in the table, country X is likely to be in a recession in:

both 1995 and 2005.

In the short run, an increase in spending will cause:

both output and prices to rise.

The crowding-out effect of government borrowing refers to a decrease in:

both private consumption and private investment.

If the interest rate increases, then:

both the quantity saved and the quantity supplied of loanable funds will increase.

An unexpected increase in money growth leads to increased inflation in:

both the short run and the long run.

How do banks earn a profit?

by charging higher interest rates on loans than they pay on deposits

The shadow banking system includes each of the following except:

commercial banks.

Because of money illusion, inflation often confuses:

consumers, workers, and firms.

The position of the long-run aggregate supply curve shows the economy's:

potential growth rate given by the real factors of production.

According to the quantity theory of money, in the long run, an increase in money supply causes an increase in:

prices.

During the financial crisis, because of high leverage, losses on mortgages:

pushed banks toward insolvency.

Deflation:

raises the real value of debts.

For a tax system in which higher-income earners pay a larger share of their incomes in taxes, a higher inflation rate:

raises the tax burden of taxpayers.

When using the quantity theory of money to analyze the relation between inflation, money, real output, and prices, we typically assume that:

real output and the velocity of money are constant.

For savers, the role of financial intermediaries is to:

reduce the default risk on money they save and lend.

People with a high time preference are less likely to:

save.

In the market for loanable funds:

savers supply loanable funds and borrowers demand loanable funds.

The supply of loanable funds comes from _____, and the demand for loanable funds comes from _____.

saving; investment

Figure: Market for Loanable Funds If the interest rate is 5% in this market for loanable funds, then:

savings exceed borrowing demands by $100 million.

The process of bundling loans together and selling them on the market as financial assets is called:

securitization.

Frictional unemployment is best defined as:

short-term unemployment caused by the difficulties of matching employees to employers.

Which of the following would likely cause a shortage in the loanable funds market?

strict limits on interest rates

The effect of a shock on the economy is larger when:

wages and prices are sticky.

A bank lends money for a year at an interest rate of 7%, and the inflation rate for that year turns out to be 5%. What is the bank's real rate of return for that year?

2.0%

Figure: Labor Market If this market is initially in equilibrium when a $10 minimum wage is imposed, the quantity of labor employed will fall by:

20.

Table: Anticipating Inflation Using the inflation data in the table, assume that all loan contracts have fixed nominal interest rates of 10% and mature after 1 year. In which year did lenders gain relative to borrowers?

2003

Figure: Three AD Curves Beginning at point A in the accompanying diagram, a positive money shock could result in a short-run growth rate of:

3.0%

Which is NOT an example of a major reason that funds are borrowed to make large investments in physical capital and human capital?

A woman chooses to borrow funds to buy a new car rather than choosing to withdraw funds from her savings to pay in cash.

Figure: Aggregate Demand and Aggregate Supply 1 If the money supply has increased, the long-run equilibrium in this economy will occur at intersection:

A.

Which of the following scenarios could result in a recession?

Aggregate demand decreases, and wages are sticky.

Figure: Aggregate Demand and Aggregate Supply 2 If consumers become nervous about job security, what will happen in the figure?

Aggregate demand will shift to left.

Which is an example of someone who is fooled by money illusion in a certain country with a 4% inflation rate?

An employee thinks he can buy 7% more goods and services after receiving a 7% raise.

How do banks engage in specialization and division of labor?

Banks coordinate the collection of lenders' funds and employ specialists in risk assessment to ensure that the funds are safely used.

Which accurately describes who gains and who loses from unexpected inflation that occurs after the interest rate is set?

Borrowers gain and lenders lose.

Figure: Loanable Funds Contraction Which of the following reasons could cause the supply curve for loanable funds to shift to the left from S1LF to SLF in the figure?

Consumers become less patient.

A country's total civilian noninstitutionalized adult population is 1 million, and 500,000 people in this country are working, with another 20,000 people looking for work. Which of the following statements about the labor force statistics in this country is accurate?

The employment rate is 96.15% and the labor force participation rate is 52%.

If the actual rate of inflation turns out to be higher than the expected rate of inflation, what happens to the growth rate of output before expectations are updated?

The growth rate is higher than the Solow growth rate.

Suppose the inflation rate is 3% when a 15-year mortgage loan is given at a fixed rate of 4.5%. Five years later the inflation rate rises to 4%. What impact does this change have on the nominal interest rate and the real interest rate on the mortgage loan?

The nominal interest rate remains the same and the real rate interest decreases.

A $10,000 face-value bond costs $9,250 and matures in one year. If the interest rate on similar bonds rises by 2%, what is the approximate price change for this bond?

The price of the bond falls to $9,082.

If individuals become more impatient, what will happen in the market for loanable funds?

The supply of loanable funds will decrease, interest rates will rise, and the quantity of saving and borrowing will decrease.

When the U.S. government borrows, it sells:

Treasury bonds.

Figure: Real Shocks From point X in the accompanying graph, a negative real shock could cause the economy to move to point:

Y.

Which of the following is an example of an unemployed person?

a recent college graduate looking for her first job

What information does the World Bank's "rigidity of employment index" provide?

a summary of firms' costs for hiring, firing, and adjusting employment hours

In the short run, the inflation rate is found where the _____ curves intersect, and in the long run, the inflation rate is found where the _____ curves intersect.

aggregate demand and short-run aggregate supply; aggregate demand and long-run aggregate supply

Which of the following would cause the AD curve to shift to the right?

an increase in consumer wealth

A wealth shock in the economy is _____ spending suddenly changing in response to a sudden change in _____.

consumer; the value of assets

A seasonal worker saves more when her income rises and saves less when her income falls. This behavior is referred to as:

consumption smoothing.

Since the mid-1960s, the male labor force participation rate in the United States has _____ and the female labor force participation rate has _____.

decreased; increased

During a financial crisis in the early 2000s, the government of Argentina partially froze bank accounts for a year. Given the supply of savings and the demand to borrow functions, we would expect this action to cause the interest rate to:

increase and borrowing to decrease.

Figure: Loanable Funds Contraction In the accompanying figure, if the supply of loanable funds decreases from S1LF to SLF and the demand for loanable funds remains at D1LF, the equilibrium interest rate will:

increase to i1.

When a family's income becomes more uncertain, we expect its saving to:

increase.

The term "business fluctuations" refers to:

movement in real GDP around its long-term trend.

Monetizing the debt occurs when a government:

pays off its debts by printing money.

A discouraged worker is a(n):

person who has given up looking for work but would still like a job if one is available.

Many economists blame the severity of the Great Depression on:

poor monetary policy conducted by the Federal Reserve.

Two influences on the rise in the female labor force participation rate in the United States are _____ and _____.

the rising proportion of services in national output; the availability of birth control

An unexpected increase in money growth leads to increased real GDP growth in:

the short run.

If an earthquake strikes, destroying a large number of factories, the long-run aggregate supply curve will move:

to the left.

The presence of discouraged workers causes the measured unemployment rate to be:

understated.

Which of the following programs could help overcome structural unemployment?

worker retraining, limitations to unemployment benefits, and job-search assistance

Table: CPI Data The table provides CPI data for a certain country over five years. In which years did inflation occur?

year 2 and year 4

Which of the following correctly represents deflation?

π < 0