ECO 202 Exam 1

Your father earned​ $34,000 per year in 1984. To the nearest​ dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is​ 104?

$70,288

If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)?

.08%

Would a larger multiplier lead to more severe recessions or less severe​ recessions?

A larger multiplier means that small changes in spending lead to large changes in​ GDP, and thus recessions would be more severe.

What will increase planned investment spending on the part of firms

A lower real interest rate and increased optimism about future demand for its product

Which of the following will increase planned investment spending on the part of​ firms

A lower real interest rate, and Increased optimism about future demand for its product

As April 2017, what demographic groups has the highest unemployment rate

African Americans

A decrease in the interest rate would cause the

Aggregate expenditure line to shift upward, increasing equilibrium real GDP

Conversely, an MPC equal to 1 implies an infinite​ multiplier, meaning that a​ $1 increase in autonomous expenditures would increase real GDP by an infinite amount. Why does an MPC of 1 result in an infinite​ multiplier? Explain your answer using the logic of the multiplier process.

An MPC of 1 means that any additional income induces a matching increase in consumption​ spending, which leads to a matching increase in​ income, and so on.

What would shift the aggregate expenditure line upward?

An increase in foreign real GDP

Which of the following would shift the aggregate expenditure line​ upward?

An increase in foreign real GDP

The price index which is used to measure changes in the cost of living is the

Consumer Price Index​ (CPI).

What can give an early warning of future increases in the price level

Consumer price index, GDP deflator, Producer price index

Briefly explain whether you agree or disagree with the following​ statement: ​"I don't believe government price statistics. The CPI for 2018 was 205​, but I know that the inflation rate ​couldn't have been as high as 105 percent in​ 2018."

Disagree. The inflation rate is the percentage increase in the price level from the previous​ year, not the base year.

At the beginning of a recession, aggregate expenditure

Falls short of GDP

Real GDP per capita is often used as a measure of general well-being. While increases in real GDP often do lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being

GDP does not include crime rates or income distribution, the costs of pollution are not included, the value of leisure is not included

Why is GDP an imperfect measurement of total production in the economy?

GDP does not include household production or production from the underground economy.

National income is

GDP minus depreciation

What causes changes in the CPI to overstate the true inflation rate

Increase in quality bias, substitution bias, new product bias

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP

Inventories decrease, GDP increases, and employment increases.

What is the effect on​ inventories, GDP, and employment when aggregate expenditure​ (total spending) exceeds​ GDP?

Inventories​ decrease, GDP​ increases, and employment increases.

Since 1948 what is the best description of the trend in the labor force participation rate

It is decreasing for men and increasing for women

What formula does the bureau of labor statistics use to calculate the unemployment rate

Number employed/number in labor force x 100

Even perfectly anticipated inflation imposes costs.​ Why?

Paper money loses its purchasing power by the rate of inflation, some wages will fail to keep up with anticipated inflation, menu costs

suppose the base year is 2001. looking at GDP data from the United States from 2001 to the present, what would be true of the relationship between nominal GDP and real GDP?

RGDP < NGDP because prices are rising

The horizontal line in a 45 degree line diagram measures

Real GDP

What effect do labor unions have on the unemployment rate

Since few non-government workers are unionized, there is no significant effect on the unemployment rate.

How does the U.S. economy create and destroy millions of jobs each year

Some businesses are expanding while others are contracting and in the market system new firms are constantly entering and exiting various industries

Which one of the following is not a determinant of consumption spending

The growth rate in the United States relative to the growth rates in other countries

Which one of the following is not a determinant of consumption​ spending?

The growth rate in the United States relative to the growth rates in other countries.

When the economy is at full employment

The unemployment rate is greater than zero, the natural rate of unemployment prevails, all remaining unemployment is either frictional or structural

Indicate whether the following statement is true or false and why, "a wage rising slower than the rate of inflation is actually falling"

True, if wages are increasing slower than the average price of goods and services, purchasing power falls

The largest component of gross domestic income is

Wages

An MPC equal to 0 implies a multiplier of​ 1, meaning that a​ $1 increase in autonomous expenditures would increase real GDP by only​ $1. Why does an MPC of 0 result in no multiplier​ effect? Explain your answer using the logic of the multiplier process.

When the MPC is​ 0, any additional income does not induce any additional consumption spending.

On a 45 degree line diagram the macroeconomic equilibrium will be

Where the AE line intersects the 45 degree line

Would a larger multiplier lead to more severe recessions or less severe recessions?

a larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.

A decrease in the interest rate would cause the

aggregate expenditure line to shift​ upward, increasing equilibrium real GDP.

In the 45 degree line diagram, the 45 degree line shows

all the points where aggregate expediture equals real GDP

The multiplier effect is the process by which

an increase in autonomous expenditure leads to a larger increase in real GDP

The multiplier effect is the process by​ which

an increase in autonomous expenditure leads to a larger increase in real GDP.

An economics student raises the following​ objection: "The textbook said that a higher interest rate lowers​ investment, but this​ doesn't make sense. I know that if I can get a higher interest​ rate, I am certainly going to invest more in my savings​ account." What's the problem with the​ student's argument?

confusing saving with investment.

What index is used to measure the average prices paid by a typical​ family? An average of the prices of the goods and services purchased by a typical family is​ the:

consumer price index​ (CPI)

What are the four major categories of expenditure

consumption, investment, government purchases, and net exports

The most important determinant of consumption spending is

current personal disposable income

The most important determinant of consumption spending is

current personal disposable income.

At the beginning of a​ recession, aggregate expenditure falls short of GDP. As a​ result, firms accumulate large amounts of unplanned inventory, and GDP and employment

decrease

Lower prices usually cause consumers to buy​ more, not less.​ However, in this​ case, consumers may

delay buying until prices fall​ further, so current lower prices would not have the ususal effect.

Suppose John Q. Worker is currently unemployed. Each​ day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of​ skills, abilities, and interests. If someone asks John Q. what he does for​ work, he tells them that he is currently​ "in-between jobs." Which of the following best classifies John​ Q.'s unemployment​ status?

frictionally unemployed

What is the key idea in the aggregate expenditure macroeconomic​ model? The key idea in the aggregate expenditure model is that

in any particular​ year, the level of GDP is determined mainly by the level of aggregate expenditure.

A rise in stock prices and housing prices

increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

What is the rule of​ 70?

is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double.

Personal income is

national income minus retained corporate earnings plus government transfer payments and interest on government bonds.

The difference between a nominal variable and a real variable is that

nominal variables are calculated in​ current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.

disposable personal income is

personal income minus taxes

Consumers could see deflation as a​ "signal to defer​ purchases" because if deflation is expected to​ continue,

prices would be lower in the future.

The vertical line in a 45 degree line diagram measures

real aggregate expenditure

The true cost of borrowing and lending is best measured by

real interest rate

The difference between the nominal interest rate and the real interest rate is

the nominal interest rate is the stated interest rate whereas the real interest rate is the nominal interest rate minus the inflation rate.

If the economy is experiencing​ deflation,

the nominal interest rate will be lower than the real interest rate.

If inflation is expected to​ increase,

the nominal interest rate will increase.

The two key factors that cause labor productivity to increase over time are

the quantity of capital per hour worked and the level of technology.

The value of the multiplier is larger when

the value of the MPC is larger

The value of the multiplier is larger when

the value of the MPC is larger.

What is the meaning of the​ 45° line in the​ 45°-line diagram?

the​ 45° line shows all the points where aggregate expenditure equals real GDP.

Macroeconomic equilibrium occurs where

total spending, or aggregate expenditure, equals total production, or GDP

Macroeconomic equilibrium occurs where

total​ spending, or aggregate​ expenditure, equals total​ production, or GDP.

On a 45°​-line diagram, The aggregate expenditures line will be

upward sloping with a flatter slope than the 45°​-line.

What are the four categories of income

wages, interest, rent, and profit

On a 45°​-line diagram, The macroeconomic equilibrium will be

where the AE line intersects the 45°​-line.