ECON 2

With the economy in a recession because of inadequate aggregate demand, the government increases its purchases by $1,200. Suppose the central bank adjusts the money supply to hold the interest rate constant, investment spending is fixed, and the marginal propensity to consume is 2323. How large is the increase in aggregate demand?

$3,600

A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving?

$300

If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases by

$480

Angus the sheep farmer sells $20 worth of wool to Barnaby the knitter. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby's store to be sold later. What is GDP here?

$80 (market value of goods produced)

If the consumer price index is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as ________ today.

$900

1. Carlos is a 24-year-old professional tennis player. When he's not competing, he works as a coach at a local tennis club. 2. Deborah is a 35-year-old professional basketball player. She finished her last season as a player 3 weeks ago and is currently interviewing for a coaching position. 3. Felix is a 78-year-old retired professor. He enjoys volunteering at the local public library. 4. Megan is a 31-year-old science teacher who taught at West Valley Middle School last year. Due to budget cuts, she was laid off at the end of the school year. It's the summer now, and after a few weeks of vacation with her family, she is looking for a part-time job as a tutor. 5. Larry is a 20-year-old American Studies major at the University of Tennessee. It's summer now, and he is working as a lifeguard in Mobile, Alabama. 6. Janet is a 10-year-old student at Southside Middle School. She babysits her younger sister and does other chores, so her parents give her an allowance of $30 per week.

1. Employed 2. Unemployed 3. Not in the labor force 4. Unemployed 5. Employed 6. not in the adult population

1. The looms used to weave the textiles 2. A special technique that workers can use to create stronger textiles 3.The grasslands supporting the sheep whose wool is used for weaving 4. The accumulated weaving experience of the workforce

1. physical capital per worker 2. technological knowledge 3. natural resources per worker 4. human capital per worker

1. Larry left his job as a plumber when his wife took a position in another region. The quantity of plumbing services demanded is considerably lower in the new region, in part because of high union-negotiated wages. He would like to work at the high union wage but remains unemployed due to a lack of plumbing jobs. 2. A recent recession has reduced the number of visitors to a local theme park. The park has had to lay off many of its employees, including Susan. 3. Megan just moved with her husband to Portland, Oregon. She's looking for a job as a paralegal.

1. structural 2. cyclical 3. frictional

If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate?

1/3 euro per dollar

The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for a job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the number of unemployed?

10 (not employed, available for work, and tried to find work within 4 weeks)

If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as _____ hamburgers.

15

1. Musashi's employer upgrades all of its computer systems using U.S.-made parts. 2.The Federal Aviation Administration expands the runways at Philadelphia International Airport, which is just a few miles from Musashi and Rina's house. 3.Rina gets a new video camera made in the United States. 4.Rina's father in Sweden orders a bottle of Vermont maple syrup from the producer's website. 5.Rina buys a new BMW, which was assembled in Germany.

2. investment 2. government purchases 3. consumption 4. exports 5. consumption and imports

1. Roadway Motors, a U.S. automobile company, produces a convertible at a plant in Germany on March 17, 2018. Roadway Motors imports the convertible into the United States on May 21, 2018. 2.Tasty's, a U.S. fast-food company, produces a hamburger at one of its many St. Louis locations on January 9, 2018. It sells the hamburger to a customer that same day. 3.Sofaland, a Swedish furniture company, produces a table at a plant in Virginia on December 5, 2018. It sells the table to a college student on December 24. 4.An accountant starts a client's 2018 tax return on April 14, 2019, finishing it just before midnight on April 15, 2019. 5.Rotato, a U.S. tire company, produces a set of tires at a plant in Michigan on September 13, 2018. It sells the set of tires to Speedmaster for use in the production of a two-door coupe that will be made in the United States in 2018.

2018 GDP 1. excluded 2. included 3. included 4. excluded 5. excluded

You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest rate is _____ percent.

5,3

The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for a job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the size of Ectenia's labor force?

70

Elaine wants to buy and operate an ice-cream truck but doesn't have the financial resources to start the business. She borrows $10,000 from her friend George, to whom she promises an interest rate of 7 percent, and gets another $20,000 from her friend Jerry, to whom she promises a third of her profits. What best describes this situation?

Jerry is a stockholder, and George is a bondholder.

Which of the following will occur as a country's education becomes dumbed down?

Labor demand will shift left, decreasing the equilibrium wage and decreasing equilibrium employment.

Which of the following will occur as the marginal product of labor increases due to a technological advancement?

Labor demand will shift right, increasing the equilibrium wage and increasing equilibrium employment.

Which of the following will occur in with a decrease in the working age population?

Labor supply will shift left, increasing the equilibrium wage and decreasing equilibrium employment.

Which of the following will occur in the United States if it adopts an open border policy?

Labor supply will shift right, decreasing the equilibrium wage and increasing equilibrium employment.

An American buys a pair of shoes manufactured in Italy. How do the U.S. national income accounts treat the transaction?

Net exports fall, while GDP is unchanged. (consumption rose too)

Why is real GDP a more accurate measure of an economy's production than nominal GDP?

Real GDP is not influenced by price changes, but nominal GDP is.

Which of the following does NOT add to U.S. gross domestic product? Air France buys a plane from Boeing, the U.S. aircraft manufacturer. General Motors builds a new auto factory in North Carolina. The city of New York pays a salary to a policeman. The federal government sends a Social Security check to your grandmother.

The federal government sends a Social Security check to your grandmother.

If the value of a nation's imports exceeds the value of its exports, which of the following is NOT true? Net exports are negative. GDP is less than the sum of consumption, investment, and government purchases. Domestic investment is greater than national saving. The nation is experiencing a net outflow of capital.

The nation is experiencing a net outflow of capital. (To finance the excess of the nation's purchases from abroad over its receipts, it must sell assets abroad—that is, capital must flow into the country, so that the nation is experiencing a net inflow (not an outflow) of capital. Recall that GDP equals the sum of consumption, investment, government purchases, and net exports (Y=C+I+G+NX). If NX is negative, GDP must be less than the sum of consumption, investment, and government purchases. Since Y<C+I+G, you can see that Y−C−G<I. Thus, domestic investment is greater than national saving (Y−C−G).

Which of the following will occur if a minimum wage is implemented above the market-clearing wage?

There will be a labor surplus and unemployment will be created.

Lower interest rate by

To do this, the Fed will use open-market operations to increase the supply of money by buying bonds from the public. The Fed's policy of targeting a lower interest rate will reduce the cost of borrowing, causing residential and business investment spending to increase and the quantity of output demanded to increase at each price level. (shift AD to right)

change needed to worsen AD Consumer expectations about future profitability Government spending Interest rates The value of the domestic currency relative to the foreign currency

Worsen Decrease Increase Appreciate

Suppose the Fed doubles the growth rate of the quantity of money in the economy. In the long run, the increase in money growth will change which of the following? a.The price level b.The level of technological knowledge c.The size of the labor force d.The quantity of physical capital

a (In the long run, the economy's real GDP depends on labor, capital, natural resources, and technological knowledge. Since changes in the quantity of money do not influence these factors, they do not influence the long-run level of output. If the Fed increases money growth, the price level will rise more quickly, and the inflation rate will increase, but the economy's long-run potential output will not change. In the long run, two related propositions hold: Real and nominal variables are separate (the classical dichotomy), and changes in the quantity of money impact only nominal prices, not production (monetary neutrality).)

Stagflation is caused by

a leftward shift in the aggregate-supply curve.

Which of the following statements help to explain why, in the real world, the Fed cannot precisely control the money supply? a. The Fed cannot control the amount of money that households choose to hold as currency. b. The Fed cannot prevent banks from lending out required reserves. c. The Fed cannot control whether and to what extent banks hold excess reserves.

a, c

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? a. As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers. b. Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor, but this quality change is hard to measure. c. Professors required each student to buy eight textbooks, regardless of the price. d. A new mobile device for personal computing became available for purchase.

a, c, d

Because of the identity equation that relates to net exports, the decrease in U.S. net exports is matched by a decrease in U.S. net capital outflow. Which of the following is an example of how the United States might be affected in this scenario? a. The Indian tea producer purchases $1,500,000 worth of stock spread out over a few U.S. companies. b. The Indian tea producer hangs on to the $1,500,000 so that it can use the U.S. dollars to make investments. c.The United States sells $1,500,000 worth of bonds to the Indian tea producer.

a,b,c

In the Two Period Consumer model, the net effects from an increase in the interest rate for a net saver is that current consumption ___________________, future consumption___________________, and savings ___________________.

ambiguous, increases, ambiguous

Which of the following actions by the Federal Reserve would reduce the money supply? an open-market purchase of government bonds a reduction in banks' reserve requirements an increase in the interest rate paid on reserves a decrease in the discount rate on Fed lending

an increase in the interest rate paid on reserves (The more interest banks receive on reserves, the more incentive they have to hold on to reserves rather than make loans, and the lower the reserve ratio. A lower reserve ratio means a lower money multiplier and, in turn, a lower money supply.)

If a nation's currency doubles in value on foreign exchange markets, the currency is said to ________, reflecting a change in the ________ exchange rate.

appreciate, nominal

Suppose First Main Street Bank, Second Republic Bank, and Third Fidelity Bank all have zero excess reserves. The required reserve ratio is 5%. Manuel, a client of First Main Street Bank, deposits $200,000 into his checking account at First Main Street Bank.

assets +200,000 (change in excess reserves +190,000, change in required reserves) +10,000) deposits +200,000, increase in loans +190,000

Which of the following policies would lead to greater productivity in the fishing industry? a. Imposing a tax on fishing poles b. Offering free public education to every worker in the country c. Subsidizing research and development into new fishing technologies d. Imposing restrictions on foreign ownership of domestic capital

b, c

Suppose the government wants to reduce frictional unemployment. Which of the following policies would help achieve this goal? a. Extending the number of weeks for which unemployed workers are eligible for unemployment insurance benefits from the government b. Offering recipients of unemployment insurance benefits a cash bonus if they find a new job within a specified number of weeks c. Improving a widely used job-search website so that it matches workers to job vacancies more effectively

b,c

Which of the following groups are better off as a result of the union action in the northern state? a.Workers who find new jobs in the southern state b.All workers in the northern state c.Workers in the northern state employed at the union wage d.The original workers in the southern state

c

Which of the following statements correctly describe discouraged workers? a. They are full-time workers who would like to work only part-time. b. They are counted as part of the labor force by the Bureau of Labor Statistics. c. They have given up on looking for a job. d. They are employed workers who want to earn higher wages.

c

Which is the largest component of GDP?

consumption

If the government wants to contract aggregate demand, it can ________ government purchases or ________ taxes.

decrease, increase (directly reduce the quantity of output demanded or indirectly reduce the quantity demanded by reducing disposable income)

In the Two Period Consumer model, the effects from a decrease in current income are that current consumption ___________________, future consumption___________________, and savings ___________________.

decreases, decreases, decreases

With and increase in the wage tax, the value of being employed _______________________, the reservation wage _______________________,the flow of workers from unemployment to employment _______________________, and long term unemployment _______________________.

decreases, increases, decreases, increases

If the business community becomes more optimistic about the profitability of capital, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.

demand, up

The theory of purchasing-power parity says that higher inflation in a nation causes the nation's currency to ________, leaving the ________ exchange rate unchanged.

depreciate, real

which is true along short run phillips curve?

expected inflation rate is x% (inflation rate percent where LRPC and SRPC cross bc at this point expected and actual inflation must be the same)

When the economy goes into a recession, real GDP ________, and unemployment ________.

falls, rises (producing fewer goods)

Because capital is subject to diminishing returns, higher saving and investment does not lead to higher

growth in the long run. (As the stock of capital rises, the extra output produced from an additional unit of capital falls. Although an increase in the saving rate leads to higher growth in the short run, growth eventually slows because of diminishing returns. On the other hand, higher saving and investment lead to higher income in both the short and the long run.)

When the Federal Reserve increases the money supply and expands aggregate demand, it moves the economy along the Phillips curve to a point with ________ inflation and ________ unemployment.

higher, lower (Increasing the money supply increases aggregate demand. an increase in the aggregate demand leads to higher output and higher inflation. Since higher output means higher employment, the rate of unemployment falls)

The largest component in the basket of goods and services used to compute the CPI is

housing.

An increase in the aggregate demand for goods and services has a larger impact on output ________ and a larger impact on the price level ________.

in the short run, in the long run (wages and prices adjust to bring output back to the natural rate of output in long run)

In a competitive labor market, when the government increases the minimum wage, the result is a(n) ________ in the quantity of labor supplied and a(n) ________ in the quantity of labor demanded.

increase, decrease

If the central bank wants to expand aggregate demand, it can ________ the money supply, which would ________ the interest rate.

increase, decrease (An increase in the money supply shifts the money-supply curve to the right. Because the money-demand curve has not changed, the interest rate falls to balance money supply and money demand. That is, the interest rate must fall to induce people to hold the additional money the Fed has created, restoring equilibrium in the money market)

If the Federal Reserve increases the rate of money growth and maintains it at the new higher rate, eventually expected inflation will ________ and the short-run Phillips curve will shift ________.

increase, upward

Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ________, but if the bank lends out some of the $100, the money supply ________.

is unchanged, increases (Depositing money into a bank reduces currency and increases demand deposits by equal amounts. If the bank keeps this entire deposit as part of its reserves, the $100 deposit has no effect on the money supply. However, if the bank lends a portion of this deposit—say, $10—that portion now exists both as a demand deposit and as currency, thereby increasing the money supply.)

Change needed to increase AS Inflation expectations Human capital Burdensome regulations

lower improves decrease

In a system of fractional-reserve banking, even without any action by the central bank, the money supply declines if households choose to hold ________ currency or if banks choose to hold ________ excess reserves.

more, more (The more money households hold (and thus the less they deposit), the less reserves banks have, and the less money the banking system can create. Similarly, the more excess reserves banks choose to hold, the fewer loans they make, and the less money the banking system can create.)

In an open economy, national saving equals domestic investment plus

plus the net outflow of capital abroad.

If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income, then

private saving is negative, but public saving is positive.

Suppose the government increases its purchases by $1,200 while holding the money supply constant. The change in aggregate demand resulting from an increase in government purchases if the government allows interest rates to adjust (as compared to the change if it were to hold them constant) will be

smaller but still positive. (As an increase in government spending increases aggregate demand, the demand for money increases as well. If the money supply is held constant, this leads to higher interest rates. Higher interest rates dampen private investment spending, one of the components of aggregate demand. crowding-out effect)

If a popular TV show on personal finance convinces Americans to save more for retirement, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.

supply, down (saving = supply, investment=demand)

Because consumers can sometimes substitute cheaper goods for those that have risen in price,

the CPI overstates inflation.

The consumer price index measures approximately the same economic phenomenon as

the GDP deflator (overall price level)

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase

the GDP deflator but not the CPI. (CPI is purchased by typical consumer but GDPd is all produced domestically)

A sudden crash in the stock market shifts

the aggregate-demand curve (any event that causes consumers to cut back on spending and firms to cut back on their investment, reduces aggregate demand)

Advocates of the theory of rational expectations believe that

the sacrifice ratio can be much smaller if policymakers make a credible commitment to low inflation.

A change in the expected price level shifts

the short-run aggregate-supply curve, but not the long-run aggregate-supply curve (If people expect lower prices in the future, they will accept lower wages (supply more labor) and set lower prices (or produce more output at any given price level). This would be reflected in a rightward shift of the short-run aggregate-supply curve. The long-run aggregate-supply curve is not affected by a change (either real or expected) in the price level, since the price level (a nominal variable) does not affect the supply of goods and services in the long run.