ECO 313 FINAL

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A 10% decrease in real income usually leads to ________ in money demand. Part 2 A. a decrease of 10% B. a decrease of less than 10% C. an increase D. no change

A decrease in the effective tax rate on capital would cause the IS curve to A. remain unchanged. B. shift down and to the left. C. remain unchanged if taxes are fully deductible from income; otherwise, shift up and to the right. D. shift up and to the right.

Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why do you think that is? A. because the government increase taxes on cars, furniture, and houses in recessions B. because prices of cars, furniture, and houses rise sharply in recessions C. because companies stop making cars, furniture, and houses in recessions D. because people can more easily change the timing of their expenditure on durables

In the economy, the following statistics describe the money supply: CU = $1,500 billion RES = $125 billion DEP = $3,000 billion Given these data, calculate the amount of the monetary base: BASE = Calculate the quantity of the money supply: M = Calculate the ratio of reserves to deposits: res = Calculate the ratio of currency to deposits: cu = Calculate the money multiplier: mm = Now, suppose the Fed engages in open market sales in the amount of $10 billion. Suppose that when this happens, both cu and res do not change. However, the Fed's open-market sales will affect M, CU, RES, and DEP. Calculate the new value of the monetary base: BASE = Calculate the new value of the money supply: M = Very challenging: Calculate the new amount of bank deposits: DEP = Find the new total amount of currency held by the non-bank public: CU = Calculate the new amount of bank reserves: RES =

1625 4500 .0417 .5 2.7691 1615 4472 2981 1491 124

1.) According to Walter Bagehot, an early advocate of the idea of a lender of last resort, most banks during a financial crisis are exposed to ___ but not ___. 2.) A properly constructed central bank-lending mechanism should have borrowing banks posting ___ as collateral for the funds they receive. 3.) The failure of a central bank to act as a lender of last resort during a financial crisis may precipitate the following sequence of events: A. Banks sell assets en masse → crisis deepens → asset prices collapse → banks are further weakened B. Asset prices collapse → banks sell assets en masse → banks are further weakened → crisis deepens C. Banks sell assets en masse → asset prices collapse → banks are further weakened → crisis deepens D. Crisis deepens → banks sell assets en masse → asset prices collapse → banks are further weakened 4.) If the lender-of-last-resort mechanism works as designed, the severity of a financial crisis is ___ and the funds that banks borrowed during the panic are ___ the central bank.

liquidity problems, bankruptcy marketable securities C lessened, returned to

For the purposes of assessing an economy's growth performance, the more important statistic is

real GDP

Diversification is used to ___ in a portfolio of assets.

reduce overall risk

You are given the following information about an economy: Gross private domestic investment = 30 Government purchases of goods and services = 25 Gross national product (GNP) = 305 Current account balance = 0 Taxes = 50 Government transfer payments to the domestic private sector = 25 Interest payments from the government to the domestic private sector = 20 (Assume all interest payments by the government go to domestic households.) Factor income received from rest of world = 6 Factor payments made to rest of world = 9 Find the following, assuming that government investment is zero. Net factor payments from abroad = GDP = Net exports = Consumption = Private saving = Government saving = National saving =

-3 308 33 250 50 -20 30

Country A has an overall government budget deficit of $80 million, nominal GDP of $1300 million, and total government debt equal to $500 million. Nominal GDP is growing at an annual rate of 0.03. Country B has an overall government budget deficit of $120 million, nominal GDP of $1600 million, and total government debt equal to $300 million. Nominal GDP is growing at an annual rate of 0.08. The change in the debt-GDP ratio of country A equals The change in the debt-GDP ratio of country B equals

.05 .06

Your current income is equal to 20,000. When your income changes by 1,000, your consumption expenditure changes by 800. What is the value of the marginal propensity to consume (MPC)? MPC =

Given it = 9%, Pt = 110.0, Pt+1 = 118.8 and Pet+1 = 119.9, calculate the expected real interest rate in period t: The expected real interest rate =

Which of the following might the Fed rely on as an intermediate target? A. M2. B. The monetary base. C. The discount rate. D. The exchange rate of the dollar.

Suppose that in Mysore, the reserve-deposit ratio is: res = 0.5 − 2i, where i is the nominal interest rate. The currency-deposit ratio is 0.2 and the monetary base equals 100. The real quantity of money demanded is given by the money demand function: L(Y, i) = 0.5Y − 10i, where Y is real output. Currently, the real interest rate is 5% and the economy expects an inflation rate of 5%. The money supply equals A. 300. B. 400. C. 240. D. 200.

240

The equation for the marginal productivity of capital is given by: MPKf = 1000−10K. Suppose the price of a unit of capital is $2000, the depreciation rate is 4% per year, and the real interest rate is 10% per year. The user cost of capital (uc) = The desired capital stock (K*) = If the existing level of capital Kt is equal to 50 units, the level of gross investment (It ) =

280 72 24

In an economy, the desired consumption and investment functions are given by Cd= 1,500 + 0.70Y −4,000r Id = 2,000−4,500r where Y is output and r is the real interest rate. Government purchases are G = 2,000. The equation for desired national saving is: Sd1=−3,500 + 0.30Y + 4,000r. Using the condition that at equilibrium, quantity of goods supplied = quantity of goods demanded, determine the real interest rates that clear the goods market when Y = 10,000 and Y = 12,000. When Y = 10,000, the equilibrium rate of interest is: r = When Y = 12,000, the equilibrium rate of interest is: r =

29% 22%

Hy Marks buys a one-year government bond on January 1, 2018, for $500.00. He receives principal plus interest totaling $515.00 on January 1, 2019. Suppose that the CPI is 200.0 on January 1, 2018, and 203.0 on January 1, 2019. This increase in prices is different than Hy had anticipated; his guess was that the CPI would be at 201.0 by the beginning of 2019. The nominal interest rate is The actual inflation rate is The real interest rate is Hy's expected inflation rate was Hy's expected real interest rate was

3% 1.5% 1.5% .5% 2.5%

Suppose the demand for dollars (in exchange for euro) is given by the equation: D = 220 + 0.025 YFor −475 rFor + 900 r − 26 enom The supply of dollars is given by: S = 140 + 0.022 Y + 260 rFor −520 r + 22 enom Suppose output and the real interest rate in the domestic country and the foreign country are: Y = 7,500, YFor = 10,000, r = 0.040,rFor = 0.050. Calculate the equilibrium value of the nominal exchange rate. (In your calculations, carry out your intermediate steps to three decimals and round your answer to three decimals). enom = Suppose a productivity shock in the foreign country changes output in the foreign economy to 9,500. Calculate the new equilibrium value of the nominal exchange rate. (In your calculations, carry out your intermediate steps to three decimals and round your answer to three decimals.) enom= Returning to the initial situation in which foreign output equals 10,000, suppose a shock to domestic productivity changes output in the domestic economy to 7,000. Calculate the new equilibrium value of the nominal exchange rate. (In your calculations, carry out your intermediate steps to three decimals and round your answer to three decimals.) enom = Generalizing from your answers above, an increase in foreign output causes the domestic nominal exchange rate to _____; an increase in domestic output causes the domestic nominal exchange rate to _____. A. decrease; decrease B. increase; decrease C. decrease; increase D. increase; increase

3.855 3.595 4.084 B

The money supply is $5,500,000 currency held by the public is $500,000, and the reserve-deposit ratio is 0.025. Using the above information, determine Deposits: Bank reserves: Monetary base: Money multiplier: In a different economy, vault cash is $1,000,000, deposits by depository institutions at the central bank are $3,500,000, the monetary base is $11,000,000, and bank deposits are $20,000,000. Using the above information, determine Bank reserves: Currency held by the public: Money supply: Money multiplier:

5000000 125000 625000 8.8 4500000 6500000 26500000 2.4091

Option One: Produce $68.0 million in output and generate no pollution. Option Two: Produce $80.0 million in output and generate $20.8 million in pollution. How much will be added to GDP under Option One? How much will be added to GDP under Option Two? Which of the following correctly summarizes the current treatment of pollution-generating activities when calculating GDP and the likely preferred way to generate economic growth among Option One and Option Two? A. Output is currently adjusted for pollution when calculating GDP, so Option One would likely be seen as the best way to generate economic growth. B. Output is not currently adjusted for pollution when calculating GDP, so Option Two would likely be seen as the best way to generate economic growth. C. Output is currently adjusted for pollution when calculating GDP, so Option Two would likely be seen as the best way to generate economic growth. D. Output is not currently adjusted for pollution when calculating GDP, so Option One would likely be seen as the best way to generate economic growth. Consider a program in which economic growth is adjusted for economic damage that occurs as a result of pollution-generating activities. Any activity that generates pollution will have its value to GDP lowered by the pollution generated. Under such a program, Option Two would add ______ to GDP and _______ would be most likely to be the preferred option to generate economic growth among the two options.

68million 80million B Option one

Which of the following is NOT a legitimate reason for why Ricardian Equivalence might not hold? A. Interest rates are not zero, so people discount the future, causing them to spend more whenever the government cuts lump-sum taxes. B. People don't leave bequests, so they don't care about future generations who will face higher taxes, causing them to spend more whenever the government cuts lump-sum taxes. C. People are shortsighted or use rules of thumb for their spending, causing them to spend more whenever the government cuts lump-sum taxes. D. Consumers face borrowing constraints, causing them to spend more whenever the government cuts lump-sum taxes

A decline in expected future output would cause the IS curve to A. shift down and to the left. B. remain unchanged. C. shift up and to the right. D. shift up and to the right only if people face borrowing constraints.

A liquidity trap occurs when A. any additions to the monetary base are held as cash by people or reserves at banks. B. the demand for loans increases in a country on the gold standard, so that the monetary supply is not able to increase and interest rates rise dramatically. C. the Fed increases the money supply, causing the expected inflation rate to rise more than the real interest rate declines, so that the nominal interest rate increases. D. there are runs on banks that are solvent but illiquid.

An increase in labor supply would cause the IS curve to A. remain unchanged. B. shift down and to the left. C. shift up and to the right. D. shift up and to the right only if people face borrowing constraints.

Compared with most other OECD countries, how high is the ratio of U.S. government spending to GDP? A. lower than most other OECD countries B. the highest of all OECD countries C. higher than most other OECD countries D. about average

In the Keynesian model, suppose the Fed sets a target for the money supply. If the IS curve shifts to the left, and the Fed wants to keep output unchanged, what should the Fed do? A. Increase the money supply. B. Reduce taxes. C. Increase taxes. D. Reduce the money supply.

Which of the following macroeconomic variables is procyclical and coincident with the business cycle? A. Industrial production. B. Residential investment. C. Nominal interest rates. D. Unemployment.

An automatic stabilizer is a provision in the budget that causes A. government spending to rise or taxes to fall automatically when GDP falls. B. government spending to fall or taxes to rise automatically when GDP falls. C. an increase in the money supply automatically when GDP falls. D. a decrease in the money supply automatically when GDP falls. For proponents of antirecessionary fiscal policies, what advantage do automatic stabilizers have over other types of taxing and spending policies? The advantage of automatic stabilizers over legislated changes in spending and taxes is that they _____, while legislation _____. A. can be coordinated with monetary policy; cannot be coordinated with monetary policy B. occur quickly; takes a long time to put in place C. take a long time to put in place; occurs quickly D. cause the real interest rate to decline; causes the real interest rate to rise

A B

How is government debt related to the government deficit? A. The government deficit is the change in the government debt. B. The government debt is the change in the government deficit. C. The government deficit is the change in the government debt times the real interest rate. D. The government deficit is not related to the change in the government debt. What of the following factors would contribute to a large increase in the debt-GDP ratio? A. a high inflation rate B. a low deficit relative to the real interest rate times nominal GDP C. a high deficit relative to GDP D. a fast growth rate of nominal GDP

A C

Who determines monetary policy in the United States? A. The Federal Reserve System B. The Department of Commerce C. The U.S. Congress D. The President How is the Board of Governors of the Federal Reserve system appointed? A. The Chairman is appointed by the President, while other governors are appointed by the states in each bank region. B. All members of the Board of Governors are appointed by the Secretary of the Treasury. C. All members of the Board of Governors, including the Chairman, are appointed by the President. D. None of the above describe the process in which the Board of Governors is appointed.

A C

What are the major components of government outlays? A. government purchases, transfer payments, and net interest payments B. taxes, government consumption, and net interest payments C. government purchases, transfer payments, and government investment D. government purchases, government consumption, and taxes What are the major sources of government revenues? A. contributions for social insurance and indirect business taxes B. personal taxes, direct business taxes, and indirect business taxes C. personal taxes, welfare payments, indirect business taxes, and sales taxes D. personal taxes, contributions for social insurance, indirect business taxes, and corporate taxes How does the composition of the Federal government's outlays and revenues differ from that of state and local governments? A. State and local governments are large payers of net interest, while the federal government is a net recipient of interest payments. B. The federal government spends far less on transfers than on nonmilitary goods and services. C. Most spending on nondefense goods and services is done by state and local governments. D. Most of state and local governments' revenues come from personal taxes and contributions for social insurance, while the federal government relies more heavily on indirect business taxes (sales taxes).

A D C

Which one of the following four characteristics of assets is least important to holders of wealth? A. Denomination B. Risk C. Liquidity D. Expected return Money has a ___ expected return compared to other assets, ___ risk since it always maintains its nominal value, is the ___ liquid of all assets, and has ___ time to maturity

A low, low, most, the lowest

If the nominal money supply grows 5%, real income falls 2%, and the income elasticity of money demand is 0.8, then the inflation rate is A. 3.4%. B. 6.6%. C. 7.0%. D. 3.0%.

Most Keynesians suggest that the Fed A. use fiscal policy to combat unemployment in the short run. B. use discretion in setting monetary policy. C. follow a rule, such as keeping the money growth rate at 3%, regardless of the state of the economy. D. use fiscal policy to combat inflation in the long run.

The IS curve will shift down and to the left when A. government purchases increase. B. the expected future marginal product of capital declines. C. desired saving declines. D. consumption increases.

What is the evidence that there was a reduction in economic volatility around 1984? A. Inflation increased significantly around 1984. B. The standard deviation of GDP growth declined significantly around 1984. C. Inflation declined significantly around 1984. D. The standard deviation of GDP growth increased significantly around 1984.

What are the two main types of exchange-rate systems? A. A fixed-exchange-rate system and a general-equilibrium-exchange-rate system. B. A fixed-exchange-rate system and a flexible-exchange-rate system. C. A crawling-peg-exchange-rate system and a general-equilibrium-exchange-rate system. D. A crawling-peg-exchange-rate system and a flexible-exchange-rate system. Currently, which type of system determines the values of the major currencies, such as the dollar, yen, and euro? A. crawling-peg-exchange-rate system B. general-equilibrium-exchange-rate system C. fixed-exhange-rate system D. flexible-exchange-rate system

B D

1.) One potential disadvantage of the formation of the European Union is A. an increase in the difficulty of moving inputs across member nation borders. B. a decrease in flexibility in monetary policy for each member nation. C. a decrease in political cooperation among member nations. D. an increase in financial transactions costs. 2.) An important difference between the European Union and the United States concerns the implementation of fiscal policy. In the case of the European Union, the conduct of fiscal policy is more ___ than in the United States. 3.) In the aftermath of the 2008 financial crisis, banks in the European Union A. did not receive loans from any source, but were required to raise additional capital from the private sector. B. received loans from the European Central Bank and were also required to raise more private capital. C. received loans from their respective national governments and were required to raise more private capital. D. received loans from their respective national governments, but were not required to raise more private capital. 4.) One tool promoting the restoration of macroeconomic balance that is not available to individual economies sharing a common currency is adjustments to an ____

B decentralized D exchange rate

Which concept of the government budget deficit indicates what the government budget deficit would be (given the tax and spending policies currently in force) if the economy were operating at its full-employment level? A. the real deficit B. the general-equilibrium deficit C. the full-employment deficit D. the potential deficit In a recession, which deficit concept tends to rise relative to the other one, the full-employment deficit or the actual deficit?

C actual deficit

Assume that the reserve-deposit ratio is 0.2. The Federal Reserve carries out open-market operations, purchasing $1,000,000 worth of bonds from banks. This action increased the money supply by $2,600,000. What is the currency-deposit ratio? A. 0.2. B. 0.4. C. 0.3. D. 0.5.

In a fractional reserve banking system with no currency where res is the ratio of reserves to deposits, the money multiplier is A. res^2 B. 1 + res. C. 1/res. D. 1 − res.

Vault cash is equal to $2 million, deposits by depository institutions at the central bank are $1 million, the monetary base is $15 million, and bank deposits are $35 million. Currency held by the nonbank public is A. $15 million. B. $3 million. C. $12 million. D. $20 million.

What effects does expansionary monetary policy have on the nominal exchange rate in both the short and long run? A. In both the short run and the long run, the nominal exchange rate appreciates. B. In the short run, the nominal exchange rate appreciates, but in the long run, the nominal exchange rate returns to its original level. C. In both the short run and the long run, the nominal exchange rate depreciates. D. In the short run, the nominal exchange rate depreciates, but in the long run, the nominal exchange rate returns to its original level.

When an exchange rate is higher than its fundamental value, it is A. a variable exchange rate. B. a flexible exchange rate. C. an overvalued exchange rate. D. an undervalued exchange rate.

Which of these statements best characterizes the movement of the U.S. federal government debt-GDP ratio since 1939? A. The debt-GDP ratio rose sharply in World War II, declined from 1946 to the early 1970s, rose from the 1980s to 2000, and has been declining since then. B. The debt-GDP ratio fell sharply in World War II, rose from 1946 to the early 1970s, fell from the 1980s to 2000, and has been rising since then. C. The debt-GDP ratio rose sharply in World War II, declined from 1946 to the early 1970s, rose in the 1980s and early 1990s, declined from the mid-1990s to 2000, and has been rising since then. D. The debt-GDP ratio fell sharply in World War II, rose from 1946 to the early 1970s, fell in the 1980s and early 1990s, rose from the mid-1990s to 2000, and has been falling since then. Which two factors would both cause the debt-GDP ratio to rise quickly? Part 4 A. a low deficit relative to GDP and a slow rate of GDP growth B. a high deficit relative to GDP and a fast rate of GDP growth C. a high deficit relative to GDP and a slow rate of GDP growth D. a low deficit relative to GDP and a fast rate of GDP growth

C C

Discuss the relative advantages and disadvantages of flexible exchange rates, fixed exchange rates, and a currency union. Flexible exchange rates A. do not allow a country to use expansionary monetary policy to combat recessions, but currency values are stable B. do not allow a country to use expansionary monetary policy to combat recessions, but currency values fluctuate substantially, introducing uncertainty into international transactions C. allow a country to use expansionary monetary policy to combat recessions, but currency values fluctuate substantially, introducing uncertainty into international transactions D. allow a country to use expansionary monetary policy to combat recessions, but currency values are stable Fixed exchange rates A. do not allow a country to use expansionary monetary policy to combat recessions, but currency values fluctuate substantially, introducing uncertainty into international transactions B. allow a country to use expansionary monetary policy to combat recessions, but currency values are stable C. do not allow a country to use expansionary monetary policy to combat recessions, but currency values are stable D. allow a country to use expansionary monetary policy to combat recessions, but currency values fluctuate substantially, introducing uncertainty into international transactions A currency union A. Costs of trading goods and assets across countries are lower than under fixed exchange rates and speculative attacks on the currency can occur, but a currency union requires even greater coordination of political and financial institutions than a fixed-exchange-rate system does. B. Costs of trading goods and assets across countries are higher than under fixed exchange rates and speculative attacks on the currency cannot occur, but a currency union requires even greater coordination of political and financial institutions than a fixed-exchange-rate system does. C. Costs of trading goods and assets across countries are lower than under fixed exchange rates and speculative attacks on the currency cannot occur, but a currency union requires even greater coordination of political and financial institutions than a fixed-exchange-rate system does. D. Costs of trading goods and assets across countries are lower than under fixed exchange rates and speculative attacks on the currency cannot occur, but a currency union requires less coordination of political and financial institutions than a fixed-exchange-rate system does.

C C C

A financial innovation, such as the introduction of money market mutual funds, which increases the liquidity of alternatives to money, would A. increase money demand, shifting the LM curve up and to the left. B. increase money demand, shifting the LM curve down and to the right. C. decrease money demand, shifting the LM curve up and to the left. D. decrease money demand, shifting the LM curve down and to the right.

Discuss four reasons why the Ricardian equivalence proposition isn?t likely to hold exactly. A. Ricardian equivalence might not hold if people do not face borrowing constraints, if they are shortsighted, if they fail to leave bequests, or if taxes are lump sum. B. Ricardian equivalence might not hold if people do not face borrowing constraints, if they are shortsighted, if they fail to leave bequests, or if taxes aren't lump sum. C. Ricardian equivalence might not hold if people face borrowing constraints, if they are shortsighted, if they fail to leave bequests, or if taxes are lump sum. D. Ricardian equivalence might not hold if people face borrowing constraints, if they are shortsighted, if they fail to leave bequests, or if taxes aren't lump sum.

Suppose the intersection of the IS and LM curves is to the left of the FE line. A decrease in the price level would most likely eliminate a disequilibrium among the asset, labor, and goods markets by A. shifting the IS curve up and to the right. B. shifting the IS curve down and to the left. C. shifting the FE curve to the left. D. shifting the LM curve down and to the right

Suppose there was a banking crisis. The money supply would shrink by the greatest amount if the public ________ their currency-deposit ratio and the banks ________ their reserve-deposit ratio. A. increased; decreased B. decreased; decreased C. decreased; increased D. increased; increased

The FE line is vertical because the level of output at full employment doesn't depend on the A. marginal product of labor. B. level of employment. C. real wage rate. D. real interest rate.

The IS curve would unambiguously shift up and to the right if there were A. a decrease in both corporate taxes and the expected future marginal product of capital. B. an increase in both government purchases and corporate taxes. C. an increase in the expected future marginal product of capital and a decrease in expected future output. D. an increase in both government purchases and the expected future marginal product of capital.

The new monetary policy tool that the Fed began using in 2008 is A. imposing a surcharge on credit cards. B. borrowing from China. C. putting a tax on all financial transactions. D. changing the interest rate paid on reserves.

Vault cash is equal to $8 million, deposits by depository institutions at the central bank are $2 million, the monetary base is $40 million, and bank deposits are $90 million. The money multiplier is equal to A. 5.0. B. 4.0. C. 2.5. D. 3.0.

What is the J curve? A. The J curve shows the response of net exports to a real appreciation, in which at first net exports are unchanged, but later they decline. B. The J curve shows the response of net exports to a real depreciation, in which at first net exports rise, but later they decline. C. The J curve shows the response of net exports to a real appreciation, in which at first net exports decline, but later they rise. D. The J curve shows the response of net exports to a real depreciation, in which at first net exports decline, but later they rise.

What would likely happen if the government tries to raise more seignorage revenue than the maximum possible amount? A. deflation B. depression C. recession D. hyperinflation

Which of the following is NOT a reasonable explanation for the Great Moderation? A. changes in technology B. changes in the behavior of the labor market C. improved supply-chain management D. higher oil prices

Which of the following macroeconomic variables is procyclical and leads the business cycle? A. Unemployment. B. Business fixed investment. C. Nominal interest rates. D. Residential investment.

For the past 35 years, which category of U.S. federal, state, and local government tax receipts has been the largest? Part 2 A. contributions from social insurance B. corporate profit taxes C. taxes on production and imports D. personal taxes For the past 35 years, which category of U.S. federal, state, and local government tax receipts has been the smallest? A. corporate profit taxes B. taxes on production and imports C. contributions from social insurance D. personal taxes

D A

The revenue that the government raises by printing money is called Part 2 A. a direct tax. B. an indirect tax. C. fiscal policy. D. seignorage. Another name for seignorage is A. the inflation tax. B. the fiscal tax. C. the marginal tax. D. the surcharge

D A

Why do foreigners demand dollars in the foreign exchange market? A. to gain economic advantage over the United States. B. to speculate on a depreciation of the dollar. C. to speculate that U.S. inflation will increase more than expected. D. to be able to buy U.S. goods, services, and assets. Why do U.S. residents supply dollars to the foreign exchange market? A. to be able to buy foreign goods, services, and assets. B. to speculate on an appreciation of the dollar. C. to gain economic advantage over other countries. D. to speculate that U.S. inflation will decrease below what is expected.

D A

"It is plain to see that discretion is a better way to run monetary policy than following a rule because a policy of discretion gives the central bank the ability to react to news about the economy." Which of the following best represents the monetarist response to this statement? A. Discretion is better than rules. B. Credibility does not matter in affecting the macroeconomy. C. Policy actions are always counterproductive. D. Because of information lags, it is difficult for the central bank to tell what the appropriate policy is at a particular time. Which of the following best represents a response utilizing more recent arguments? A. Credibility can be enhanced by using a rule. If people believe the bank is committed to a rule, they will believe that the central bank will not take advantage of them by using unexpected inflation to temporarily increase output, so inflation is lower. B. Because of uncertainty, no one will know what the central bank is doing. C. Policy actions are always counterproductive. D. Discretion is better than rules.

D A

For a given real exchange rate, how are a country's net exports affected by an increase in domestic income? A. An increase in domestic income leads foreigners to buy more goods, including exported goods, so net exports increase. B. An increase in domestic income leads foreigners to buy fewer goods, including exported goods, so net exports decline. C. An increase in domestic income leads people to buy fewer goods, including imported goods, so net exports increase. D. An increase in domestic income leads people to buy more goods, including imported goods, so net exports decline. For a given real exchange rate, how are a country's net exports affected by an increase in foreign income? A. An increase in foreign income leads foreigners to buy fewer goods, including exported goods, so net exports decline. B. An increase in foreign income leads foreigners to buy more goods, including exported goods, so net exports increase. C. An increase in foreign income leads people to buy fewer goods, including imported goods, so net exports increase. D. An increase in foreign income leads people to buy more goods, including imported goods, so net exports decline. How does an increase in the domestic real interest rate affect the real exchange rate and net exports? A. The real exchange rate declines and net exports decline. B. The real exchange rate rises and net exports decline. C. The real exchange rate rises and net exports rise. D. The real exchange rate declines and net exports rise.

D B B

In what ways is the government debt a potential burden on future generations? A. distortions from higher future tax rates and higher future capital B. distortions from lower future tax rates and higher future capital C. distortions from lower future tax rates and lower future capital D. distortions from higher future tax rates and lower future capital What is the relationship between Ricardian equivalence and the idea that government debt is a burden? A. If the Ricardian equivalence proposition is valid, a tax cut causes consumption to rise, so there is no change in national saving. B. If the Ricardian equivalence proposition is valid, a tax cut does not cause consumption to rise, so there is an increase in national saving. C. If the Ricardian equivalence proposition is valid, a tax cut does not cause consumption to rise, so there is no change in national saving. D. If the Ricardian equivalence proposition is valid, a tax cut does not cause consumption to rise, so there is a decrease in national saving.

D C

1.) When we say that the United States was "pricing their products out of foreign markets," we mean the dollar was worth A. too much inside the United States. B. too little in trading partner countries. C. too little inside the United States. D. too much in trading partner countries. 2.) Which of the following accurately depicts an event described in this application and shown in this figure LOADING...? A. The dollar was weak between 1997 and 2001. B. Net exports in the United States rose between 1997 and 2001. C. The dollar's real value fell between 1985 and 1987. D. Net exports in the United States rose between 1985 and 1987. 3.) The decrease in American net exports between 1997 and 2001 is best explained by A. the high value of the dollar in trading partner nations. B. slow growth or a recession in trading partner nations. C. bad diplomatic relations between the United States and its trading partners. D. low productive capacity in the United States.

D C B

1.) Under a pay-as-you-go system, as described in the article, the payroll taxes paid by today's workers A. are set aside for those same workers when they retire. B. pay interest on loans taken out to pay for workers' future retirement needs. C. are spent on other non-Social Security programs today. D. pay for the benefits of those receiving benefits today. 2.) Which of the following statements accurately represents dates given in the Application box? A. In 2016, Social Security is scheduled to start spending more tax revenue than it takes in. B. In 2021, payouts from Social Security are estimated to exceed tax revenues by about 1.3% of GDP. C. In 2034, payouts from Social Security as a percentage of GDP are scheduled to increase sharply. D. The Social Security trust fund is scheduled to be exhausted by 2034. 3.) One of the possible fixes for Social Security would be an increase in taxes. Which of the following, based on the Application box, is a downside to this method? A. Increases in taxes distort labor supply decisions. B. Increases in taxes could pay for future recipients but not current recipients. C. Increases in taxes would have to be invested in high-risk choices like the stock market. D. None of the above are mentioned in the Application box as a possible downside.

D D A

If you knew that the economy was falling into a recession, what would you expect to happen to production during the next few quarters? To investment? To average labor productivity? To the real wage? To the unemployment rate?

Decrease Decrease Decrease Decrease Increase

Define monetary base: A. The total amount of money held by the non-bank public. B. The total amount of money held by banks as reserves. C. The total amount of money held by the Federal Reserve. D. The total amount of currency held by the non-bank public and money held by the Federal Reserve. E. The total amount of money held by private banks as reserves and the Federal Reserve. F. The total amount of currency held by the non-bank public and money held by banks as reserves. G. The total amount of money held by the non-bank public, private banks as reserves, and the Federal Reserve. How does the monetary base differ from the money supply? A. The money supply equals the monetary base times the money multiplier. B. The monetary base equals the money supply. C. The monetary base is equal to all money held in banks. D. The monetary base is zero, because the reserve ratio is zero.

F A

In an economy, the desired consumption and investment functions are given by, Cd = 4500 + 0.20Y−4500r Id = 2400−5000r where Y is output and r is the real interest rate. Government purchases, G = 2000. Determine the equation for the national saving function to show how desired national saving, Sd, depends on r and Y.

Sd=−6500 + .8Y + 4500r.

An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium. Part 2 A. fall; rise B. rise; rise C. rise; fall D. fall; fall

Which of the following was NOT one of the main tools the Fed used in the Great Recession to avoid problems caused by the zero lower bound? A. exchange rate easing B. forward guidance C. quantitative easing When the Fed alters the types of assets it owns, it is using A. forward guidance B. exchange rate easing C. quantitative easing When the Fed increases its quantity of assets, by effectively printing money and buying securities in the open market, it is using A. exchange rate easing B. quantitative easing C. credit easing D. forward guidance When the Fed signals to the market how long it thinks interest rates will remain low, it is using A. quantitative easing B. forward guidance C. credit easing D. exchange rate easing

a c b b

How would each of the following events affect the U.S. money supply? Banks decide to hold more excess reserves. (Excess reserves are reserves over and above what banks are legally required to hold against deposits.) This would cause ___ in the money supply. People withdraw cash from their bank accounts for Christmas shopping. This would cause ___ in the money supply. The Federal Reserve sells gold to the public. This would cause ___ in the money supply. The Federal Reserve reduces the interest rate it pays on deposits of depository institutions held at the Fed. This would cause in the money supply. A financial crisis leads people to sell many of their stocks and deposit the proceeds in bank accounts, which are federally insured. This would cause ___ in the money supply. The Federal government sells $20 billion of new government bonds to the Federal Reserve. The proceeds of the sale are used to pay government employees. This would cause ___ in the money supply. The Federal Reserve sells some of its government securities in Tokyo for yen. This would cause in the money supply.

a decrease a decrease a decrease an increase an increase an increase no change

Consider the equilibrium condition for the asset market MP=LY,r+πe. Using this condition, answer the following questions. A decrease in inflation expectations(πe), with no change in output, real interest rate, or the money supply, will result in ___ in the price level. An increase in the nominal money supply (M), with no change in output, real interest rate, or inflation expectations, will result in ___ in the price level. A decrease in output (Y), with no change in the money supply, real interest rate, or inflation expectations, will result in ___ in the price level.

a decrease an increase an increase

An increase in the personal income tax rate on interest income will A. increase desired saving because the expected real after-tax interest rate rises. B. decrease desired saving because the expected real after-tax interest rate falls. C. decrease desired saving because the expected real after-tax interest rate rises. D. increase desired saving because the expected real after-tax interest rate falls.

Which of the following is NOT an example of an intermediate target of the Fed? A. monetary aggregates B. core inflation C. short-term interest rates D. All of these are examples of intermediate targets. These intermediate targets are macroeconomic variables the Fed can directly control. A. True B. False

b b

What is the impact on the money supply when the Federal Reserve increases reserve requirements? A. The money supply increases. B. The money supply decreases. What is the impact on the money supply when banks reduce the amount of borrowing from the discount window? A. The money supply increases. B. The money supply decreases. What is the impact on the money supply when the Federal Reserve decreases the discount rate? A. The money supply increases. B. The money supply decreases. What is the impact on the money supply when the Federal Reserve increases the interest rate it pays on reserves? A. The money supply increases. B. The money supply decreases.

b b a b

1.) The quantitative easing employed by the world's major central banks in the aftermath of the 2008 financial crisis produced increases in the monetary base mainly in the form of ____. 2.) The increase in the monetary base of the world's biggest economies following the implementation of quantitative easing led to ___ expansions of the money supply because of ____ increases in reserve-deposit ratios and concomitant ____ in the money multipliers. 3.) Which of the following are cited as reasons why inflation remained low in the major economies after quantitative easing? (Check all that apply.) A. Currencies appreciated. B. Wage and price controls were installed. C. Money supply growth was limited. D. Money demand increased. 4.) As the world's economy strengthens and "normality" returns, renewed bank lending is not expected to ignite inflation largely because central banks have committed to ____ interest rates. 5.) The fact that long-term interest rates have remained low in countries employing quantitative easing suggests that investors ___ the commitment central banks have made to block future inflation.

bank reserves modest, significant, decreases C, D raising trust

Assume that the currency-deposit ratio is 0.2 and the reserve-deposit ratio is 0.1. The Federal Reserve carries out open-market operations, purchasing $1 million worth of bonds from banks. This action will increase the money supply by A. $2 million. B. $1 million. C. $4 million. D. $3 million.

Consumer expenditures on durable goods such as cars and furniture, as well as purchases of new houses, fall much more than expenditures on nondurable goods and services during most recessions. Why do you think that is? A. because prices of cars, furniture, and houses rise sharply in recessions B. because the government increase taxes on cars, furniture, and houses in recessions C. because people can more easily change the timing of their expenditure on durables D. because companies stop making cars, furniture, and houses in recessions

Suppose that in Mysore, the reserve-deposit ratio is: res = 0.5 − 2 i, where i is the nominal interest rate. The currency-deposit ratio is 0.2 and the monetary base equals 100. The real quantity of money demanded is given by the money demand function: L(Y, i) = 0.5Y − 10i, where Y is real output. Currently, the real interest rate is 5% and the economy expects an inflation rate of 5%. The money multiplier equals A. 3.00. B. 2.00. C. 2.40. D. 4.00.

The Boskin Commission concluded that the CPI overstates increases in the cost of living by ________ percentage point(s) per year. A. less than 1 B. about 3 C. 1 to 2 D. over 4

1.) During the Great Depression, A. the currency-deposit ratio fell, the reserve-deposit ratio fell, and the money multiplier rose. B. the currency-deposit ratio fell, the reserve-deposit ratio fell, and the money multiplier fell. C. the currency-deposit ratio rose, the reserve-deposit ratio rose, and the money multiplier fell. D. the currency-deposit ratio rose, the reserve-deposit ratio rose, and the money multiplier rose. 2.) As a result of those changes during the Great Depression, A. both the monetary base and the money multiplier fell. B. the monetary base rose and the money multiplier fell. C. both the monetary base and the money multiplier rose. D. the monetary base fell and the money multiplier rose. In theory, the effect on the money supply would be ambiguous. But, in practice, the money supply fell as a result of the changes in the monetary base and multiplier. 3.) During the 2008 financial crisis, A. the currency-deposit ratio rose, the reserve-deposit ratio rose, and the money multiplier rose. B. the currency-deposit ratio fell, the reserve-deposit ratio rose, and the money multiplier fell. C. the currency-deposit ratio rose, the reserve-deposit ratio fell, and the money multiplier rose. D. the currency-deposit ratio fell, the reserve-deposit ratio fell, and the money multiplier fell.

c b b

Which of the following was NOT one of the main tools the Fed used in the Great Recession to avoid problems caused by the zero lower bound? A. forward guidance B. quantitative easing C. exchange rate easing When the Fed alters the types of assets it owns, it is using A. forward guidance B. exchange rate easing C. quantitative easing When the Fed increases its quantity of assets, by effectively printing money and buying securities in the open market, it is using A. quantitative easing B. forward guidance C. exchange rate easing D. credit easing When the Fed signals to the market how long it thinks interest rates will remain low, it is using A. quantitative easing B. forward guidance C. exchange rate easing D. credit easing

c c a b

Consider the general-equilibrium effects of a temporary adverse supply shock. For each of the following variables, select whether you would expect it to increase, decrease, or remain constant in general equilibrium as a result of the temporary supply shock. Output will ___ The real interest rate will ___ The price level will ___ For each of the following variables, select whether you would expect it to increase, decrease, or remain constant as a result of the temporary adverse supply shock. Consumption will ___ Investment will ___ Government spending will ___ The nominal money supply will ___

decrease increase increase decrease decrease stay same stay same

The correct interest rate for studying most economic decision is

expected real interest rate

1.) The formation of a currency union (or area) is viewed as an alternative to ____ among a group of countries. History shows that currency unions have been relatively ___ largely because countries typically ___. 2.) Which one of the four criteria for an optimum currency area does Europe appear to most sufficiently fulfill? A. Similar business cycle patterns. B. Extensive trade. C. The possibility of fiscal transfers. D. High levels of labor and capital mobility. 3.) Among the four criteria for an optimum currency area, which one was most noticeably lacking in Europe during and after the financial crisis? A. Similar business cycle patterns. B. High levels of labor and capital mobility. C. The possibility of fiscal transfers. D. Extensive trade. 4.) In 2016 the voters in the United Kingdom (UK) voted to leave the European Union (EU), what were the positives and negatives of this decision? A. The UK no longer has to conform to immigration and labor market standards set by the EU, but they miss out on having the euro as a currency and must go back to the British pound. B. The UK will have more trade with the EU, but they miss out on having a standardized immigration policy. C. The UK no longer has to conform to EU labor standards and will have an influx of financial firms into the country, but they miss out on having the euro as a currency and must go back to the British pound. D. The UK no longer has to conform to immigration and labor market standards set by the EU, but leaving means paying an exit fee and missing out on unfettered trade with Europe.

fixed exchange rates, rare, dislike not having their own monetary policies B A D

Given the following: Output (Y) : 2,000 Government Spending (G): 400 Desired Consumption (Cd): 1,600 Real interest rate: 20% If the level of desired investment is equal to 200, the real interest rate is likely to

increase

The equation for the marginal productivity of capital is given by: MPKf = 1000−10K. Suppose the price of a unit of capital is $2000, the depreciation rate is 2% per year, and the real interest rate is 15% per year. The user cost of capital (uc) = The desired capital stock (K*) = If the existing level of capital Kt is equal to 40 units, the level of gross investment (It ) =

$340 66 26.8

In the economy, the following statistics describe the money supply: CU = $750 billion RES = $125 billion DEP = $2,500 billion Given these data, calculate the amount of the monetary base: BASE = Calculate the quantity of the money supply: M = Calculate the ratio of reserves to deposits: res = Calculate the ratio of currency to deposits: cu = . Calculate the money multiplier: mm = Now, suppose a shock causes banks to change the amount of reserves they hold relative to deposits, so that res changes from 0.0500 to 0.0455. Suppose that when this happens, both cu and BASE do not change. However, the change in res will affect mm, M, CU, RES, and DEP. Calculate the new value of the money multiplier: mm = Now, calculate the new value of the money supply: M = Very challenging: Calculate the new amount of bank deposits: DEP = Find the new total amount of currency held by the non-bank public: CU = Calculate the new amount of bank reserves: RES =

875 .05 .3 3.7143 3.7627 3292 2533 759 116

During the period 1973-1975, the United States experienced a deep recession with a simultaneous sharp rise in the price level. Would you conclude that the recession was the result of a supply shock or a demand shock? A. a supply shock, because if it was a demand shock, the price level would have declined B. a supply shock, because if it was a demand shock, output would have increased C. a demand shock, because if it was a supply shock, the price level would have declined D. a demand shock, because if it was a supply shock, output would have increased

For constant output, if the real money supply exceeds the real quantity of money demanded at some initial real interest rate, A. people with excess money balances purchase nonmonetary assets, thus increasing the market price of the nonmonetary assets and reducing the real interest rate until an equilibrium is reached. B. people with excess money balances purchase nonmonetary assets, thus increasing the market price of the nonmonetary assets and increasing the real interest rate until an equilibrium is reached. C. the price level in the economy increases until a new equilibrium is reached. D. nothing happens until output adjusts.

If nominal money supply grows 3% and real money demand grows 8%, the inflation rate is Part 2 A. −5%. B. 5%. C. 11%. D. 8/3%.

Nominal GDP in 1970 was $1,035.6 billion, and in 1980 it was $2,784.2 billion. The GDP price index was 30.6 for 1970 and 60.4 for 1980, where 1992 was the base year. Calculate the percent change in real GDP in the decade from 1970 to 1980. Round off to the nearest percentage point. A. 36%. B. 169%. C. 136%. D. 97%.

Since U.S. investment is generally higher than U.S. national saving: A. the U.S. current account balance is generally negative. B. U.S. national saving will rise in the future. C. U.S. investment will fall in the future. D. the U.S. current account balance is generally positive

The IS curve represents: A. combinations of output and the real interest rate such that desired national saving is equal to desired investment. B. combinations of output and the real interest rate such that money demand is equal to money supply. C. combinations of output and the real interest rate such the output is equal to full-employment output. D. combinations of output and the real interest rate such that the real interest rate is equal to the full-employment interest rate.

What are the two components of the user cost of capital? A. The real interest rate and the rate of depreciation. B. The rate of depreciation and salvage cost. C. The price of a unit of capital and the rate of inflation D. The real interest rate and salvage cost.

What is the desired capital stock? A. The desired capital stock is the amount of capital that allows the firm to earn the largest possible profit. B. The desired capital stock is the difference between gross investment and net investment. C. The desired capital stock is the amount of capital that exactly replaces worn out capital. D. The desired capital stock is defined where the marginal productivity of capital equals zero.

What is comovement? A. Macroeconomic variables that tend to move in the same direction over time. B. Macroeconomics variables that are always perfectly correlated with each another C. Macroeconomic variables the change independently of each another over time.

When economists say that money is neutral, this means that: A. a change in the money supply changes nominal variables but not real variables. B. a change in the money supply changes real variables but not nominal variables. C. a change in the money supply will stall the economy, preventing further growth. D. a change in the money supply has no effect on the economy.

1.) The job loss rate is the _____ and the job finding rate is the ______. A. probability that an employed person will lose his or her job during the year; probability that an unemployed person will find a job during the year. B. probability that an employed person will lose his or her job during the month; probability that an unemployed person will find a job during the month. C. probability that an unemployed person will find a job during the month; probability that an employed person will lose his or her job during the month. D. probability that an unemployed person will find a job during the year; probability that an employed person will lose his or her job during the year. 2.) Suppose the job finding rate is 40% during both expansions and recessions. In an economic expansion, there are 4 million unemployed people. Each month, ___ million people find jobs. In a recession, there are 7 million unemployed people. Each month, ___ million people find jobs. 3.) Explain why a large fall in the job finding rate during recessions does not necessarily imply that the job finding rate is mainly responsible for the rise in unemployment, even though the job loss rate does not rise very much. A. The number of people who are employed is much larger than the number who are unemployed. B. The number of people who are unemployed is much larger than the number who are employed. C. The job loss rate rises less than the job finding rate declines. D. The job loss rate rises more than the job finding rate declines.

A 1.6 2.8 A

What is the effect on the monetary base when the Federal Reserve purchases U.S. Treasury securities in the open market? A. The monetary base increases. B. The monetary base decreases. C. The monetary base does not change. D. You have insufficient information to answer this question. What is the effect on the money supply? A. The money supply increases. B. The money supply decreases. C. The money supply does not change. D. You have insufficient information to answer this question.

A A

How does the expected rate of return on an asset affect its desirability? A. They are directly related - the higher the expected return, all else equal, the more attractive the asset. B. They are inversely related - the higher the expected return, all else equal, the less attractive the asset. C. They are unrelated - expected return does not affect an asset's desirability. How does the level of risk affect an asset's desirability? A. They are inversely related - the higher the level of risk, all else equal, the less attractive the asset. B. They are directly related - the higher the level of risk, all else equal, the more attractive the asset. C. They are unrelated - an asset's level of risk is unrelated to its desirability. How does the level of liquidity affect an asset's desirability? A. They are directly related - the more liquid the asset, all else equal, the more desirable the asset. B. They are inversely related - the more liquid the asset, all else equal, the less desirable the asset. C. They are unrelated - liquidity does not affect an asset's desirability.

A A A

Define money multiplier. A. The number of dollars that can be created from each dollar of monetary base. B. The reciprocal of the reserve-deposit ratio. C. The number of dollars that can be issued by the Federal Reserve. D. All of the above are correct. If the public elects to increase their holdings of currency, what happens to the money multiplier, all else equal? A. It decreases B. It increases C. It remains the same - the desire by the public to hold more or less currency does not affect the money multiplier. If banks choose to hold more reserves, what happens to the money multiplier, all else equal? A. It decreases B. It increases C. It remains the same - the desire by banks to hold more or less reserves does not affect the money multiplier. Does the fact that the public and banks can affect the money multiplier imply that the central bank cannot control the money supply? A. Yes B. No

A A A B

What terms are used to describe the way a variable moves in terms of direction when economic activity is rising or falling? A. procyclical and countercyclical B. peak and trough C. stable and unstable D. leading, coincident, and lagging What terms are used to describe the timing of cyclical changes in economic variables? A. peak and trough B. leading, coincident, and lagging C. procyclical and countercyclical D. stable and unstable

A B

Explain why the saving curve slopes upward in the saving-investment diagram. A. Higher interest rates provide higher returns for savers and also a higher opportunity cost of current consumption. B. Higher interest rates reduce the opportunity cost of future consumption activity. C. Higher interest rates provide an incentive for individuals to consume more in the present and future. D. Higher interest rates lead to increased government purchases. Explain why the investment curve slopes downward in the saving-investment diagram. A. Higher interest rates increase the gap between gross and net investment. B. Higher interest rates reduce the productivity of capital thus reducing the desired capital stock. C. Higher interest rates increase the user cost of capital thus reducing the desired capital stock. D. Higher interest rates lead to an increase in the per-unit price of capital.

A C

Wars, inventions, and droughts are examples of A. shocks. B. propagation mechanisms. C. endogenous variables. D. leading indicators. A shock that reduces the full-employment level of output is A. a permanent shock. B. a temporary shock. C. an aggregate supply shock. D. an aggregate demand shock.

A C

Suppose the real interest rate is 4% and the expected inflation rate is 3%. If the money supply increases by 10% and output, the real interest rate, and the expected inflation rate are unchanged, then the price level increases by A. 3%. B. 10%. C. 4%. D. 7%.

In each of the following cases, what is the effect on the IS curve? An increase in the effective tax rate on capital A. shifts the IS curve down and to the left. B. shifts the IS curve up and to the right. C. does not change the IS curve. An increase in the money supply A. shifts the IS curve down and to the left. B. shifts the IS curve up and to the right. C. does not change the IS curve. A temporary increase in goverment spending A. shifts the IS curve down and to the left. B. shifts the IS curve up and to the right. C. does not change the IS curve.

A C B

1.) Events in the stock market in August 1987 _________, while events in the stock market in October 1987 ________. A. increased consumption; decreased consumption B. decreased consumption; decreased consumption further C. decreased consumption; increased consumption D. increased consumption; increased consumption further 2.) In the 1980s and 1990s, increases in consumption A. were a surprise because of generally poor stock market growth in the 1990s. B. came almost entirely from wealth gains due to a booming stock market. C. occurred at least in part due to a long-term trend unrelated to events in the stock market. D. occurred because of decreases in GDP. 3.) The theory described in the text suggests that an increase in stock prices should lead to increases in consumption. Which of the following time periods exhibited the opposite effect—that is, an inverse (negative) relationship—between stock prices and consumption? A. Financial crisis of 2008. B. Early 2000s with its decline in stock prices. C. Late 1990s with its growth in the stock market. D. Stock market crash of 1987. 4.) The explanation given for the high consumption following the decline in stock prices in the early 2000s is best described by which of the following? A. Consumption changed in nominal terms, but not real terms. B. Consumers refused to change their behavior from the record-high increases in consumption in the late 1990s. C. Increases in consumption, like wealth, are spread out over the consumer's lifetime. D. Home prices before the early 2000s were so low that consumption had already gone as low as it could.

A C B C

1.) If we want to study the current state of the economy, we would use a A. coincident index such as the Chicago Fed National Activity Index (CFNAI). B. leading index such as the Chicago Fed National Activity Index (CFNAI). C. coincident index such as The Conference Board's index of economic indicators. D. leading index such as The Conference Board's index of economic indicators. 2.) Which of the following is not true about the Aruoba-Diebold-Scotti (ADS) Business Conditions Index? A. Its average value over time is zero by design. B. It uses fewer economic variables than the CFNAI. C. It uses data that vary in frequency of collection. D. It is older than the CFNAI. 3.) Which of the following is a problem with the composite index of leading economic indicators? A. Its data are rarely revised. B. It gives no information on whether a recession is likely. C. It almost never gives false signals (predicting recessions that never actually occur). D. It gives no information on how severe a recession is predicted to be.

A D D

Which of the statements below, regarding the functions of money, is true? A. Money serves as a medium of exchange, as a unit of account, and as a store of value. B. Money serves as a medium of exchange and a store of value, but not as a unit of account. C. Money serves as a medium of exchange, but does not serve as a unit of account or a store of value. D. Money serves as a medium of exchange and as a unit of account, but not a store of value. Suppose that Sam Student buys a new iPod for $200. In this example, money serves the role of Suppose that Sam Student saved $15 every week for the past 10 weeks in order to buy the iPod. Here, money served the role of store of value. While shopping, Sam Student noticed that an iPod was priced at $200, a competing MP3 player was selling for $100. When he realized that the iPod was twice as expensive as the MP3 player, money served the role of

A medium of exchange store of value unit of account

What are the two components of a theory of business cycles? A. procyclical and countercyclical variables B. exogenous and endogenous variables C. a description of shocks and how the economy responds to the shocks D. leading and lagging variables

Last year, Linus earned a salary of $25,000 and he spent $24,000, thus saving $1,000. At the end of the year, he received a bonus of $1,000 and he spent $500 of it, saving the other $500. What was his marginal propensity to consume? A. 0.04 B. 0.50 C. 0.02 D. 0.96

Real GDP is a better measure of economic growth than nominal GDP because A. an increase in nominal GDP only shows increases in output. B. an increase in nominal GDP may show an increase in prices rather than an increase in output. C. an increase in nominal GDP only shows increases in prices. D. an increase in nominal GDP does not correctly measure market values of production in the economy.

The yield curve generally slopes upward because A. longer maturity bonds typically pay lower interest rates than shorter maturity bonds. B. longer maturity bonds typically pay higher interest rates than shorter maturity bonds. C. longer maturity bonds are not taxable. D. shorter maturity bonds have more default risk.

Which of the following best describes the FE line? A. The FE line slopes upward. B. The FE line is vertical at the full-employment level of output. C. The FE line is horizontal at the equilibrium real interest rate. D. The FE line slopes downward.

In each of the following cases, what is the effect on the FE line? An adverse supply shock A. shifts the FE line rightward. B. shifts the FE line leftward. C. does not change the FE line. An increase in the labor supply A. shifts the FE line rightward. B. does not change the FE line. C. shifts the FE line leftward. An increase in the money supply A. does not change the FE line. B. shifts the FE line leftward. C. shifts the FE line rightward.

B A A

In each of the following cases, what is the effect on the LM curve? An increase in the expected inflation rate A. does not shift the LM curve. B. shifts the LM curve down and to the right. C. shifts the LM curve up and to the left. An increase in government spending A. does not shift the LM curve. B. shifts the LM curve down and to the right. C. shifts the LM curve up and to the left. An increase in the price level A. shifts the LM curve up and to the left. B. does not shift the LM curve. C. shifts the LM curve down and to the right.

B A A

According to the classical model, after an economic disturbance, which of the following is true? A. Price adjustment will eventually return the economy to general equilibrium, but this may take several years. B. The economy will rapidly return to general equilibrium as prices adjust quickly. C. The economy will be unable to return to general equilibrium without government intervention. D. The economy will be unable to return to general equilibrium without intervention by the Federal Reserve. According to the Keynesian model, after an economic disturbance, which of the following is true? A. The economy will be unable to return to general equilibrium without intervention by the Federal Reserve. B. Price adjustment will eventually return the economy to general equilibrium, but this may take several years. C. The economy will be unable to return to general equilibrium without government intervention. D. The economy will rapidly return to general equilibrium as prices adjust quickly.

B B

The LM curve shows A. the combinations of the price level and output such that both the goods market and the money market are in equilibrium. B. the combinations of the real interest rate and output such that the asset market is in equilibrium. C. the combinations of price level and output that maintain labor market equilibrium. D. the combinations of the real interest rate and output such that the goods market is in equilibrium. All of the following can shift the LM curve down and to the right except A. an increase in excepted inflation. B. a decrease in the risk of holding alternative assets relative to the risk of holding money. C. a reduction in money supply. D. a reduction in price level.

B C

Who determines the nation's money supply? A. The U.S. Treasury. B. The Federal Reserve System. C. The Securities and Exchange Commission. D. The Federal Deposit Insurance Corporation. If all money is in the form of currency, the money supply can be ___ if the central bank uses newly minted currency to buy financial assets from the public or directly from the government itself. To ___ the money supply, the central bank can sell financial assets to the public or the government.

B expanded, reduced

General equilibrium occurs at which point in the IS−LM diagram? A. the point at which the IS and LM curves intersect B. the point at which the FE line and the LM curve intersect C. the point at which the FE line and the IS and LM curves intersect D. the point at which the FE line and the IS curve intersect If the economy isn't in general equilibrium, what determines output and the real interest rate? A. the point at which the FE line and the IS and LM curves intersect B. the point at which the IS and LM curves intersect C. the point at which the FE line and the IS curve intersect D. the point at which the FE line and the LM curve intersect What economic forces act to bring the economy back to general equilibrium? A. adjustment of output moves the LM curve B. adjustment of the real interest rate moves the IS curve C. adjustment of the price level moves the LM curve D. adjustment of future income moves the IS curve

C B C

Identify the following variables as being leading, lagging or coincident: Business fixed investment Residential investment: Inventory investment: Stock prices: Money supply: Nominal interest rates:

Coincident Leading Leading Leading Leading Lagging

Identify the following variables as being procyclical or countercyclical: Unemployment: Consumption Expenditure: Inflation: Nominal Interest Rates:

Countercyclical Procyclical Procyclical Procyclical

Consider an economy with a constant growth rate of nominal money supply and a constant real interest rate r = 0.07. Which of the following statements about the inflation rate of the economy would be valid? A. The ultimate determinant of the inflation rate is how people form their expectation of future inflation. B. The long-term inflation rate would be equal to the money growth rate regardless of the output growth. C. Without knowing the nominal interest rate, π + 0.07, one can not tell the real demand for money and hence the inflation rate. D. The faster the economy's real output grows, the lower the inflation rate.

Desired national saving would increase unambiguously if there were A. an increase in both current output and expected future output. B. an increase in both expected future output and the expected real interest rate. C. an increase in both expected future output and government purchases. D. a fall in both government purchases and expected future output.

In 2018, inflation exceeded expected inflation. In 2019, expected inflation exceeded inflation. Therefore the real interest rate was ________ than the expected real interest rate in 2018 and the real interest rate was ________ than the expected real interest rate in 2019. A. greater; less B. greater; greater C. less; less D. less; greater

Rank the following assets in terms of liquidity, from the most liquid to the least liquid: a) Savings Account; b) Cash; c) Land; d) a U.S. Savings Bond A. Cash; U.S. Savings Bond; Savings Account; Land B. Land; U.S. Savings Bond; Cash; Savings Account C. Cash; Land; Savings Account; U.S. Savings Bond D. Cash; Savings Account; U.S. Savings Bond; Land

What is the evidence that there was a reduction in economic volatility around 1984? A. The standard deviation of GDP growth increased significantly around 1984. B. Inflation increased significantly around 1984. C. Inflation declined significantly around 1984. D. The standard deviation of GDP growth declined significantly around 1984.

Which of the following machines has the lowest user cost? Machine A costs $15,000 and depreciates at a 25% rate, machine B costs $10,000 and depreciates at a rate of 20%, machine C costs $20,000 and depreciates at a rate of 10%, and machine D costs $17,000 and depreciates at a rate of 11%. The expected real interest rate is 5%. A. Machine A. B. Machine D. C. Machine C. D. Machine B.

Bitcoin is an example of a A. non-valued asset. B. non-monetary wealth management tool. C. credit-based application. D. cryptocurrency. A claim to a resource that is recorded in a computer system is a A. cryptocurrency. B. blockchain widget. C. blockchain element. D. blockchain mechanism.

D A

Money is said to be neutral if: A. if a change in the money supply does not change the price level or other nominal variables. B. if a change in the money supply changes the price level and all real variables proportionately. C. if a change in the money supply does not change the level of full-employment output. D. if a change in the money supply changes the price level and other nominal variables but has no effect on real variables. After prices adjust, money is neutral in the IS-LM model because: A. when the economy returns to the full-employment level, there is no net change in the price level. B. any change in money supply that shifts the LM curve is finally matched by a proportional change in the price level that shifts the LM curve to its original position. C. any shift in the aggregate demand curve caused by the change in the money supply is offset by a shift of the aggregate supply curve. D. the shift in the LM curve due to the change in the money supply is matched by an equal shift of the IS curve. Regarding neutrality of money: A. Keynesian economists believe that money is neutral in both the short run and the long run, but classical economists believe that money is neutral only in the long run but not in the short run. B. both classical and Keynesian economists agree that money is neutral only in the long run but not in the short run. C. classical economists believe that money is neutral in both the short run and the long run, but Keynesians believe that money is neutral only in the long run but not in the short run due to sluggish adjustment of the price level in the short run. D. classical economists believe that money is neutral in both the short run and the long run, but Keynesians believe that money is neutral only in the short run but not in the long run.

D B C

1.) Which of the following is not true of cryptocurrencies? A. Cryptocurrencies can be bought and sold with dollars at a flexible exchange rate. B. One popular cryptocurrency is called Bitcoin. C. Cryptocurrencies are sponsored and backed by the government. D. Cryptocurrencies come in both a digital and physical form for purchases. Transactions through Bitcoin ___ anonymous, therefore people trying to avoid taxes or to launder money will be ___ to use bitcoins. 2.) Which of the following is a benefit of blockchain technology used by cryptocurrencies? A. All blockchain transactions are executed and recorded on a well-protected centralized computer to ensure the system is anonymous and safe from hacking. B. Blockchain technology allows for multiple records of transactions across the system to help avoid fraudulent activity. C. Since blockchain technology is implemented by the government, all deposits in cryptocurrency are fully insured by the government. D. Blockchain technology keeps the exchange rate between cryptocurrencies and the dollar within a specified range in order to maintain its value. 3.) To be considered money an asset must serve as a medium of exchange, a unit of account, and a store of value. Which of the following best describes how Bitcoin falls short on these functions of money? A. It is not possible to list the prices of goods in the economy in terms of bitcoins so it fails the store of value function. B. Bitcoin is still not widely accepted across the economy so it fails the medium of exchange function. C. It is not possible to list the prices of goods in the economy in terms of bitcoins so it fails the medium of exchange function. D. Bitcoin's value has experienced large upswings and downswings making it fail the unit of account function.

D can be, likely b b

Which of the following best describes a general equilibrium? A. The level of output is equal to full-employment output. B. Aggregate supply is equal to aggregate demand. C. The goods market is in equilibrium, but the asset market might not be in equilibrium. D. The asset market is in equilibrium, but the goods market might not be in equilibrium. E. All markets are simultaneously in equilibrium.

A Japanese company builds an auto plant in Tennessee for $100,000,000, using only local labor and materials. The auto plant is a capital good produced by Americans and purchased by the Japanese. Using the expenditure approach, this transaction would be recorded as A. a $100,000,000 increase in investment. B. no change in GDP since the production of the plant is a transfer to the Japanese owners. C. $100,000,000 paid to domestic factors of production. D. a $100,000,000 increase in production of capital goods. E. a $100,000,000 increase in net exports. According to the income approach, this transaction would be recorded as A. a $100,000,000 increase in net exports. B. $100,000,000 paid to domestic factors of production. C. no change in GDP since the production of the plant is a transfer to the Japanese owners. D. a $100,000,000 increase in production of capital goods. E. a $100,000,000 increase in investment. According to the product approach, this transaction would be recorded as A. a $100,000,000 increase in net exports. B. a $100,000,000 increase in investment. C. a $100,000,000 increase in production of capital goods. D. no change in GDP since the production of the plant is a transfer to the Japanese owners. E. $100,000,000 paid to domestic factors of production.

E B C

The National Bureau of Economic Research (NBER) identifies and dates U.S. business cycles strictly on the basis of changes in real GDP.

False

A problem with using the expected real interest rate to study economic decisions is that: A. it is difficult to determine what the public's expected rate of inflation is. B. interest rates change frequently, so the public cannot form stable expectations. C. interest rates are important to banks and businesses but not to consumers. D. people do not generally make informed economic decisions.

With no inflation and a nominal interest rate (i) of .03, a person can trade off one unit of current consumption for ________ units of future consumption. A. 1.03 B. −0.03 C. 0.03 D. 0.97

High inflation rates, such as those in European economies in transition described by the application, are most often explained by A. high rates of money growth. B. high rates of unemployment. C. corrupt politicians. D. all of the above. 2.) Consider a nation in which the nominal money supply is growing at 11%, real income (output) is growing at 2%, and the income elasticity of demand for money is 0.75. We can estimate the inflation rate for this nation to be approximately 3.) If high rates of money growth tend to cause inflation, why would national leaders tolerate high rates of money growth? A. Monetary policy is out of the hands of national leaders in most cases, and this policy causes high inflation. B. Money growth is the only way to maintain the currency's value against that of other nations. C. The leaders must "print money" in this case to finance government spending. D. Leaders do not decide the rate of money growth—citizens do.

a 9.5% c

1.) The biggest reason for the discrepancy between the stock of money per person in the United States and the actual cash holdings of the average person is A. U.S. currency held in foreign countries. B. statistical and/or measurement error. C. the underground economy. D. mismanagement of funds. 2.) The underground economy would include A. the income of someone who mows lawns for cash and does not report this income for tax purposes. B. the purchase of cocaine. C. profits from games at an illegal gambling den. D. all of the above. 3.) Which of the following is a situation that would contribute to people in other countries wanting to hold U.S. dollars? A. High inflation in the United States increases the purchasing power of U.S. dollars. B. High inflation makes their local currency a poor store of value. C. The local currency experiences constant appreciation. D. All of the above are situations that would contribute to foreign holdings of U.S. dollars. From the point of view of the United States, dollars held abroad act as an

a d b interest-free loan to the U.S. government

In a given year, a country's GDP = $9841, net factor payments from abroad = $889, taxes = $869, transfers received from the government = $296, interest payments on the government's debt = $103, consumption = $8148, and government purchases = $185. The country had private saving equal to Part 2 A. $3850. B. $2112. C. $2397. D. $285.

It is discovered that businesses bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in North Carolina. A. Consumption increases by $6 billion and GDP increases by $6 billion. B. Investment increases by $6 billion and GDP increases by $6 billion. C. Consumption increases by $6 billion, imports increase by $6 billion, and GDP does not change. D. Investment increases by $6 billion, imports increase by $6 billion, and GDP does not change. E. None of the above answers are correct.

How is the price level related to nominal money demand? A. They are inversely related-the higher the price level, the lower the demand for money. B. They are directly related-the higher the price level, the higher the demand for money. C. They are unrelated-changes in the price level have no effect on the demand for money. How is the level of real income related to money demand? A. They are directly related-the higher the level of real income, the higher the demand for money. B. They are inversely related-the higher the level of real income, the lower the demand for money. C. They are unrelated-changes in the level of real income have no effect on the demand for money. How is the interest rate on other assets (stocks and bonds for example) related to money demand? A. They are inversely related-the higher the interest rate on other assets, the lower the demand for money. B. They are directly related-the higher the interest rate on other assets, the higher the demand for money. C. They are unrelated-change in the interest rate on other assets have no effect on the demand for money.

b a a

Say that Americans view butter and cream cheese as perfect substitutes - in other words, they are completely indifferent between them. If the price of butter increases greatly while the price of cream cheese stays the same, Americans will likely A. buy more cream cheese, the price of the market basket will look too high, and inflation will look lower than it really is. B. buy more cream cheese, the price of the market basket will look too high, and inflation will look higher than it really is. C. buy more cream cheese, the price of the market basket will look too low, and inflation will look higher than it really is. D. buy more butter, the price of the market basket will look too high, and inflation will look higher than it really is. 2.) Consider a common medical procedure included in the market basket of the CPI. Over time the price of this procedure increases significantly, but so does the quality of the procedure (in terms of reduced mortality rates and decreased pain and recovery time afterward). If the CPI does not include accurate information about quality in its market basket A. the procedure will seem more expensive in real terms than it really is and inflation will be understated. B. the procedure will seem less expensive in real terms than it really is and inflation will be overstated. C. the procedure will seem less expensive in real terms than it really is and inflation will be understated. D. the procedure will seem more expensive in real terms than it really is and inflation will be overstated. 3.) Which of the following is a potential problem if official measures of the inflation rate make it look higher than it is in reality? A. The government deficit will rise faster because the government will spend more than necessary on public programs. B. The economy will look better than it actually is, giving citizens a false sense of security. C. Social Security recipients will not receive enough money to keep up with inflation. D. All of the above.

b d a

Colonel Hogwash purchases a Civil War-era mansion for $1,000,000. The broker's fee is 6%, which the colonel also pays, for a total expenditure of $1,060,000. Using the expenditure approach, this transaction would be recorded as a A. $1,060,000 increase in domestic value added, for the value of the house. B. $60,000 increase in residential investment. C. $60,000 increase in domestic value added by the brokerage service. D. $1,060,000 increase in consumption. E. $60,000 increase in income received by the real estate broker. According to the income approach, this transaction would be recorded as a A. $60,000 increase in residential investment. B. $1,060,000 increase in domestic value added, for the value of the house. C. $1,060,000 increase in residential investment. D. $60,000 increase in income received by the real estate broker. E. $60,000 increase in domestic value added by the brokerage service. According to the product approach, this transaction would be recorded as a A. $60,000 increase in income received by the real estate broker. B. $1,060,000 increase in residential investment. C. $1,060,000 increase in domestic value added, for the value of the house. D. $60,000 increase in domestic value added by the brokerage service. E. $60,000 increase in residential investment.

b d d

1.) The yield curve slopes upward. Which of the following best explains this observation? A. The interest rate on a municipal bond tends to be higher than the interest rate on a Treasury bill. B. The interest rate on a bond with a 30-year maturity tends to be higher than the interest rate on a bond with a 10-year maturity. C. Treasury bonds and municipal bonds have about the same amount of default risk. D. There are many interest rates in the economy, but they all tend to rise and fall together. 2.) The basic rate that banks charge on loans to their best customers is called the ___, the interest rate on a Treasury bond is called the ___ and the interest rate on overnight loans between banks is called the ___ 3.) Which of the following would cause a bond to have a relatively high interest rate? (Select all that apply) A. The bond being a U.S. Treasury bill. B. A bond that has high default risk. C. There is a high probability that the firm issuing the bond will go out of business. D. A bond that has a long maturity. 4.) In general, the prime interest rate and the federal funds rate tend to move in ___ direction.

b prime rate, default risk free rate, federal funds rate b, c, d the same

At the start of the year, your firm's capital stock equaled $100 million, and at the end of the year it equaled $105 million. The average depreciation rate on your capital stock is 20%. Gross investment during the year equaled Part 2 A. $7 million. B. $1 million. C. $25 million. D. $5 million.

Consider an economy with a constant growth rate of nominal money supply and a constant real interest rate r = 0.07. Which of the following statements about the inflation rate of the economy would be valid? A. The long-term inflation rate would be equal to the money growth rate regardless of the output growth. B. Without knowing the nominal interest rate, π + 0.07, one can not tell the real demand for money and hence the inflation rate. C. The faster the economy's real output grows, the lower the inflation rate. D. The ultimate determinant of the inflation rate is how people form their expectation of future inflation.

If the substitution effect of the real interest rate on saving is smaller than the income effect of the real interest rate on saving, then a rise in the real interest rate leads to a ________ in consumption and a ________ in saving, for someone who's a lender. A. fall; rise B. rise; rise C. rise; fall D. fall; fall

It is discovered that consumers bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in North Carolina. A. Investment increases by $6 billion, imports increase by $6 billion, and GDP does not change. B. Consumption increases by $6 billion, imports increase by $6 billion, and GDP does not change. C. Consumption increases by $6 billion and GDP increases by $6 billion. D. Investment increases by $6 billion and GDP increases by $6 billion. E. None of the above answers are correct.

It is discovered that consumers bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in Sweden. A. Investment increases by $6 billion and GDP increases by $6 billion. B. Consumption increases by $6 billion and GDP increases by $6 billion. C. Consumption increases by $6 billion, imports increase by $6 billion, and GDP does not change. D. Investment increases by $6 billion, imports increase by $6 billion, and GDP does not change. E. None of the above answers are correct.

Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries A. purchase large amounts of military wares from other countries. B. have a large portion of their GNP produced by multinational corporations. C. have a large number of citizens working abroad. D. have a high level of imports and exports relative to GNP.

The interest rate on long-term bonds is somewhat higher than suggested by the expectations theory because A. an inflation premium must be added to long-term bonds. B. the Fed can only control short-term interest rates. C. a risk premium exists. D. the expectations theory doesn't account for taxes.

In November of 2007, the Fed announced that it would increase the frequency of its forecasts of inflation and other variables from 2 times per year to 44 times per year. At its FOMC meetings, the Fed reports A. the overall PCE inflation rate. B. the CPI inflation rate. C. both the overall PCE inflation rate and core PCE inflation rate. D. the core PCE inflation rate. Using the data in the figure, which data series displays the least amount of volatility? A. Overall PCE inflation. B. Core PCE inflation. C. Both series exhibit about the same amount of volatility.

c b

Which of the following is an example of a time period in the United States when changes in consumer sentiment were not met with changes in consumption spending in the same direction? A. The period of large productivity gains in the United States in the mid-1990s. B. Late 2007 to early 2008, when financial markets crashed. C. Late 1998, when the Russian government defaulted on a large amount of debt. D. The recession between 1978 and 1980. 2.) Which of the following statements best summarizes the behavior of the Thomson Reuters/University of Michigan Index of Consumer Sentiment as related to a recession? A. The index turns down sharply during an economic expansion and turns up sharply during an economic recession—the opposite of initial economic expectations. B. The index remains roughly constant over time regardless of what is going on in terms of a recession or expansion in the economy as a whole. C. The index exhibits sharp downturns that begin months before recessions occur, providing economists and politicians with reliable warnings of recessions to come. D. The index tends to turn down sharply during recessions, but there are also significant turndowns when no recession exists. 3.) The application indicates that the Thomson Reuters/University of Michigan Index of Consumer Sentiment is ___ as a way to measure consumer perceptions about the current economy, ___ as a tool to help explain past changes in spending, ___ as a way to measure consumer perceptions about likely future changes in the economy, and ___ as a method of forecasting consumer spending. 4.) The study by Croushore cited in the application indicates that the best models to predict future consumer spending would include information on A. consumer sentiment and interest rates, but not necessarily consumer income. B. past consumer spending and stock prices, but not necessarily consumer sentiment. C. stock prices and consumer sentiment, but not necessarily interest rates. D. consumer knowledge of monetary and fiscal policy, but not necessarily past consumer spending.

c d useful, useful, useful, not useful b

The four characteristics of assets that are the most important to holder of wealth are A. real income, risk, velocity and liquidity. B. expected return, real income, liquidity and time to maturity. C. expected return, risk, liquidity and time to maturity. Your answer is correct. D. expected return, real income, risk and time to maturity. E. expected return, risk, velocity and liquidity. Money has an expected return that is ___ other assets. Money has a risk level that is ___ other assets. Which statement below is true when comparing money against other assets in terms of liquidity? A. Money is considered to be of low liquidity. B. Money is considered the most liquid asset. C. Money is considered to be of average liquidity. Compared to other assets, money has ___ time to maturity.

c lower than lower than b the lowest

Evidence suggests that the 2001 tax rebates were A. almost entirely spent by consumers. B. initially spent by consumers who later increased their saving. C. initially saved by consumers who later increased their spending. D. almost entirely saved by consumers. 2.) Compared to earlier research, later research indicates that a ___ amount of the 2001 tax rebates was spent than originally thought, implying that the rebates did a ___ job of stimulating the economy than originally thought. 3.) Agarwal, Liu, and Souleles's study indicates that the Ricardian equivalence theory seems to hold A. true for neither those with high credit limits nor low credit limits. B. more true for people with low credit limits than for people with high credit limits. C. equally true for those with high credit limits and low credit limits. D. more true for people with high credit limits than for people with low credit limits. 4.) The application implies that ___ people are more likely to have binding borrowing constraints and therefore that they are likely to spend ___ of a tax rebate than other groups.

c smaller, better d younger, more

If the government cuts taxes today, issuing debt today and repaying the debt plus interest next year, a rational taxpayer will A. increase consumption today, before taxes go up next year. B. spend the full amount of the tax cut today and reduce consumption next year. C. leave a smaller gross bequest to her or his heirs. D. increase saving today, leaving consumption unchanged.

It is discovered that businesses bought $6 billion more furniture than previously thought. This furniture was manufactured during the current year in Sweden. A. Consumption increases by $6 billion, imports increase by $6 billion, and GDP does not change. B. Investment increases by $6 billion and GDP increases by $6 billion. C. Consumption increases by $6 billion and GDP increases by $6 billion. D. Investment increases by $6 billion, imports increase by $6 billion, and GDP does not change. E. None of the above answers are correct.

The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made into gas. The Bigoil company's gas is sold for a total of $600 million. What is the total contribution to the country's GDP from companies Bigdrill and Bigoil? A. $800 million. B. $400 million. C. $200 million. D. $600 million.

What is a subprime mortgage? A. A mortgage loan made to a borrower who has declared bankruptcy. B. A mortgage loan that is in default. C. A mortgage loan that is sold from one bank to another. D. A mortgage loan made to a borrower who does not meet the lender's usual standards for income. 2.) How could a bad decision by banks to make substantial amounts of subprime mortgages potentially cause a recession? A. The mortgage crisis led to credit problems throughout the economy. B. So many people went bankrupt that consumer spending declined sharply. C. The mortgage crisis led most banks to declare bankruptcy. D. Most housing developers went bankrupt, causing a depression. 3.) Why would some borrowers agree to the higher interest rates charged by subprime loans? A. They knew they did not meet the usual credit standards and they expected home prices to keep rising, making refinancing easy. B. Though high, the interest rates were still lower than those charged on other types of home loans. C. The oversupply of houses meant that they could miss payments and banks would still not seize the houses. D. All of the above explain why some borrowers agreed to the higher interest rates. Why would risk-averse lenders agree to make subprime loans? A. The relatively low creditworthiness of subprime borrowers made them willing to pay high interest rates. B. The relatively low creditworthiness of subprime borrowers made them willing to put up high amounts of collateral. C. Extensive credit checks on these borrowers made the lenders feel secure. D. All of the above explain why risk-averse lenders agreed to make subprime loans.

d a a a

Which of the following would increase the public's expected rate of inflation? A. an increase in the real interest rate B. an increase in income growth C. an increase in wealth D. an increase in money growth All else being equal, how would this increase in the expected inflation rate affect interest rates? A. increase the real interest rate B. decrease the nominal interest rate C. increase the nominal interest rate D. increase the short-term nominal interest rate but decrease the long-term nominal interest rate

d c

An increase in the nominal money supply will cause the price level to: An increase in output will cause the price level to: An increase in the real interest rate will cause the price level to:

increase decrease increase.

How are desired consumption and desired saving affected by increases in current income, expected future income, and wealth? When current income rises, desired consumption ___ and desired saving ___ When expected future income rises, desired consumption ___ and desired saving ___ When wealth rises, desired consumption ___ and desired saving ___

increase, increase increase, decrease increase, decrease

In an economy, the desired consumption and investment functions are given by Cd = 2,000 + 0.80Y −5,000r Id = 2,000−4,000r where Y is output and r is the real interest rate. Government purchases are G = 2,000. The equation for desired national saving is: Sd1=−4,000 + 0.20Y + 5,000r. Using the condition that at equilibrium, quantity of goods supplied = quantity of goods demanded, determine the real interest rates that clear the goods market when Y = 10,000 and Y = 12,000. When Y = 10,000, the equilibrium rate of interest is: When Y = 12,000, the equilibrium rate of interest is:

ECO 313 FINAL

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