Econ 103 exam 2
What is Alice's marginal propensity to consume if she increases her spending by $1,000 after she receives a $5,000 raise in salary?
0.2 Alice's marginal propensity to consume is 0.2. It is determined by dividing the change in consumption by the change in income. The equation is: MPC = $1,000/$5,000 = 0.2.
Suppose a new island is discovered in the Atlantic Ocean and a new colony is created on that island with the production function output = f(A, L, K, H, N) = A × (L + K + H + N). If A equals 4, L and K each equals 5, and H and N each equals 15, then how much output would this new colony produce?
160 Substitute value of inputs in the production function. This would yield output = 4 × (5 + 5 + 15 + 15) = 4(40) = 160.
Suppose a new island is discovered in the Atlantic Ocean and a new colony is created on that island with the production function output = f(A, L, K, H, N) = A × ((L + K + H + N). If A equals 3, L and K each equals 7, and H and N each equals 14, then how much output per worker would this new colony produce?
18 Output per worker is calculated by A × (L/L + K/L + H/L + N/L). Substitute value of inputs in the production function. This would yield output per person = 3 × (1 + 1 + 2 + 2) = 3(6) = 18.
Why is this wrong: When the aggregate price level decreases, this causes purchasing power to decrease.
A decrease in the aggregate price level would increase household purchasing power because of the wealth effect.
When the aggregate price level decreases, this causes net exports to increase.
A decrease in the aggregate price level would make American goods less expensive for foreigners; this causes net exports to increase.
Why is this TRUE: When the aggregate price level increases, this causes net exports to fall.
A rising aggregate price level lowers the amount of exports because U.S. goods are now more expensive. Foreigners purchase fewer American products, so U.S. exports decline.
Why is the effectiveness and stability of a country's financial system essential to economic growth?
It allows firms to finance technological advancements, which lead to economic growth.
In the short run, everything else held constant, what happens to output when the aggregate price level decreases?
It decreases. Other things held constant, the price level decreases in the short run when output decreases.
The Revenue Act of 1932, signed by President Herbert Hoover, increased taxes across the board on individuals and corporations. The top income tax rate on high earners increased a staggering amount, from 25% to 63%. How would this affect aggregate demand?
It would cause the aggregate demand curve to shift to the left. Factors that decrease aggregate demand at any given price level will cause the aggregate demand curve to shift to the left.
What would be the likely effect of government actions that would decrease the concentration of industries?
It would cause the short-run aggregate supply curve to shift to the right. Market power causes firms to restrict supply in order to increase profits. By reducing firms' market power, the government can increase short-run aggregate supply.
At the end of June 2011, it was reported that consumer confidence had hit a seven-month low. How would a decrease in consumer confidence affect the aggregate demand curve?
There would be a shift to the left of the entire aggregate demand curve. A decrease in consumer confidence would lead to a decrease in consumer spending, which would be illustrated by a different aggregate demand curve to the left of the original curve.
Which of these is NOT true of unanticipated price changes?
They can improve standards of living in the short run. Unanticipated price changes can worsen standards of living in the short run.
What would likely happen if the amount of capital employed per worker grew?
Wages would rise because workers would become more productive.
Which of these countries would have the HIGHEST GDP per capita?
a country categorized as free by the Index of Economic Freedom Nations with the most economic freedom also have the highest per capita GDP.
What does the aggregate supply curve look like in the long run at full employment?
a vertical line In the long run, the aggregate supply curve is represented by a vertical line at full employment, which means that the economy has reached its productive capacity.
What is Kyle's marginal propensity to save if his saving increases by $200 after receiving a $1,000 increase in salary?
d0.2 Kyle's marginal propensity to save is 0.2. This is determined by dividing the change in saving by the change in income. The equation is: MPS = $200/$1,000 = 0.2.
Which government policy might enhance labor force participation?
day care subsidies Day care subsidies might enhance labor force participation.
Patents and copyrights ___ economic growth
encourage
A competitive market system _____ economic growth
encourages
Free trade __ economic growth
encourages
Government spending on _____ is considered a contribution to human capital.
financial assistance for students This is a contribution to human capital.
Investments in human capital are
improvements to the overall quality of workers and their productivity. These improvements to the labor force come from investments in skills and knowledge.
In September 2010, President Obama talked about a plan to spend more on U.S. infrastructure. Which of these would be included in such a plan?
improving interstate highways Infrastructure is the public capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible resources, such as protection of property rights and a stable monetary environment. President Obama's plan called for rehabbing and constructing roads and interstate highways, upgrading railways, and improving airport facilities like runways and air traffic control systems.
for living standards to rise _____ must grow faster than the population
output
Which definition best describes productivity
per capita GDP
How is real GDP per capita calculated?
real GDP divided by population Real GDP per capita is real GDP divided by population.
Economic growth is most accurately measured by changes in
real gdp
Snowdonia is a small country which produces wrought iron and cheesecakes and is experiencing fixed capacity growth in year 1. Which part of the business cycle is Snowdonia in?
recovery Fixed capacity growth means they are using resources that they weren't using before
Command based systems ____ economic growth
restrict
Protectionist trade policies___ economic growth.
restrict
Which of these is the primary explanation for the extraordinary economic growth the United States has enjoyed over the past century?
technological advancements Technological advancements is the primary explanation for the extraordinary economic growth the United States has enjoyed over the past century.
How do economists refer to the amount of capital employed per worker?
the capital‑labor ratio
Match the cause for the negatively sloped aggregate demand curve with the correct term. As prices rise in the United States, foreigners purchase fewer U.S. goods.
the export effect
Match the cause for the negatively sloped aggregate demand curve with the correct term. The purchasing power of money held in savings accounts falls as prices rise.
the wealth effect
Government spending on _____ is considered a contribution to physical capital.
transportation networks This is a contribution to physical capital.
Diminishing returns to capital
Diminishing returns to capital occurs when each additional unit of capital provides a smaller increase in output than the previous unit of capital.
Heavy government regulation____ economic growth
restricts
The _____-run aggregate supply curve is _____ sloped.
short; positively The short-run aggregate supply curve is upward-sloping, indicating a positive relationship between the aggregate price level and aggregate output.
Match the cause for the negatively sloped aggregate demand curve with the correct term. a. As prices rise, the cost for businesses to finance new equipment increases, causing a drop in quantity demanded of real GDP.
the interest rate effect
_____ refer(s) to the ability of firms to open and close businesses without unnecessary restrictions or other burdens.
Competitive markets Competitive markets refer to the ability of firms to open and close businesses without unnecessary restrictions or other burdens.
_____ are reflected in a flatter short-run aggregate supply curve (SRAS) curve, where increases in aggregate output can be achieved without a large increase in the price level.
Sticky prices Many input costs are slow to change (sticky) in the short run.
_____ refers to the real GDP that firms will produce at various price levels.
Aggregate supply Aggregate supply shows the real GDP that firms will produce at various price levels.
When does short run growth occur
Short-run growth occurs when production moves from a point inside the PPF to a point closer to or on the PPF.
Developing countries
may grow faster than developed countries because they lack the most basic tools and capital investment leads to higher productivity growth.
Which of these is not assessed in determining the INdex of Economic Freedom corruption labor right and freedom to vote fiscal policy
right and freedom to vote The index of economic freedom incorporates information about freedom in 12 categories: property rights government integrity judicial effectiveness taxes government spending fiscal health business labor money trade investment finance
Why is this wrong: When the aggregate price level increases, this causes net exports to increase.
A rising aggregate price level lowers the amount of exports because U.S. goods are now more expensive. Foreigners would purchase fewer American products, so U.S. exports decline.
One explanation for the negative slope of the aggregate demand curve is the "wealth effect" (aka the "real‑balances" effect). What is this effect?
As inflation occurs, consumers buy fewer goods and services because the value of their accumulated wealth declines.
Which statement is not true? The legal enforcement of contracts promotes economic growth. Establishing and protecting property rights are key elements that promote economic growth. Price signals distorted by extreme inflation or deflation lead to uncertainty and lower the ability of citizens to make good decisions. Countries with relatively large public sector shares in the economy have the highest growth rates in GDP per capita.
Countries with relatively large public sector shares in the economy have the highest growth rates in GDP per capita.
The Economic Recovery Act of 1981, signed by President Ronald Reagan, decreased taxes on individuals and corporations and slashed the estate tax. The top income tax rate on high earners fell from 70% to 50%. How would aggregate demand be affected?
It would cause the aggregate demand curve to shift to the right. Factors that increase aggregate demand at any given price level will cause the aggregate demand curve to shift to the right.
Suppose a drought in Australia has seriously impaired agricultural productivity. How would that impairment in productivity affect short-run aggregate supply?
It would cause the short-run aggregate supply curve to shift to the left. Droughts that reduce agricultural productivity will cause the short-run aggregate supply curve to shift to the left.
What would likely happen to short-run aggregate supply if excessive environmental regulations were relaxed?
It would cause the short-run aggregate supply curve to shift to the right. Relaxed environmental regulations would reduce the cost of production, resulting in an increase in short-run aggregate supply. The short-run aggregate supply curve would shift to the right.
How would hiring unemployed workers to increase production be illustrated on the production possibilities frontier?
The economy would move from a point inside the PPF to one on the PPF. Short-run growth occurs when production moves from a point inside the PPF to a point closer to or on the PPF.
Which of these does NOT result in long-run economic growth
an increase in wages and incomes Productivity is a key driver of wages and incomes, but higher wages and income do not necessarily increase productivity, which leads to economic growth.
Suppose the government passes a new law providing companies with low-cost alternative energy sources such as solar and wind. This would lead to a(n):
increase in aggregate supply
Which term refers to a nation's transportation and communications networks, power generating facilities, educational institutions, and legal, economic, and financial systems?
infrastructure
Economic growth is important to understand because
it is closely tied to standard of living
An outward shift of the production possibilities frontier illustrates _____ growth.
long-run A rightward shift illustrates long-run growth.
When an economy finds better ways to use existing resources, that economy is likely to undergo _____ growth.
long-run Long-run growth occurs when an economy finds better ways to use existing resources.
The _____ curve is vertical at full employment.
long-run aggregate supply Full employment means that the economy has reached its productive capacity; thus, further increases in output are extremely difficult to achieve.
The _____ is the change in saving associated with a given change in income.
marginal propensity to save The marginal propensity to save refers to the change in saving associated with a given change in income.
Which of these is/are classified as land and natural resources?
mineral deposits, oil, natural gas, and water Land and natural resources include mineral deposits, oil, natural gas, and water.
Reopening idled manufacturing plants to produce additional product will produce _____ growth.
short-run Short-run growth occurs when an economy makes use of existing but underutilized resources.
If productivity increases, this would cause the _____ curve to shift to the _____.
short-run aggregate supply; right Rising productivity causes an increase in aggregate output; this would shift the short-run aggregate supply curve to the right.