Econ 2120 Final Exam Review
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1. Which of the following would be considered unemployed?
d. None of the answers is correct.
Recall our discussion about the British sea captains and the convicted felons they were transporting. In what way were incentives used to solve the problem of the high mortality rate on board the ships?
d. Payment (to ship captains) was made dependent on the survival rate of prisoners.
36. In working to correct a recession with fiscal policy, the government can:
d. Raise its expenditures and/or lower taxes to increase aggregate demand.
Which of the following real shocks would NOT explain the shift of the LRAS curve from A to C in the above figure?
d. The invention of a new computer chip that makes assembly production twice as fast.
Which of the following is NOT one of four programs that make up nearly two-thirds of the federal spending in the U.S.?
d. Unemployment Insurance
36. In the Solow model of economic growth, when investment exceeds depreciation, the capital stock:
d. rises and output rises.
Following the recent election in November, there was a modest increase in consumer and business confidence. In the New Keynesian model where prices are slow to adjust, we would depict this increase in business and consumer confidence as an outward shift of the ____________ which would result in ______ inflation and _______ Real GDP growth in the short run.
e. Dynamic Aggregate Demand Curve; higher; higher
Although the unemployment rate is the single best indicator of how well the labor market is working, we discussed in class that it is considered incomplete because it I. does not measure how well people are matched to their jobs. II. does not count discouraged workers. III. counts part-time workers who would like to work full time as employed.
e. I, II, and III
Refer to the above figure which shows business cycles and unemployment. Which panel in the figure shows the expected relationship between real GDP growth and unemployment?
high gdp=low unemployment rate
As the FDA uses ______ time and resources to ensure the safety of new drugs, ______________.
less; more people will die from taking unsafe drugs.
13. The difference between nominal GDP and real GDP is that nominal GDP
measures a country's production of final goods and services at current prices, whereas real GDP measures a country's production of all final goods and services using a fixed base year price level. c. is measured in
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34. The Medicare program offers
a. Health care benefits for the elderly.
32. Cutting edge growth is due to:
b. New Ideas
What is the steady state level of output (𝑦𝑠𝑠) in this country if 𝐴 = 1, 𝑠 = 0.3, 𝛿 = 0.01, and 𝜂 = 0.02?
10
What is the steady state level of capital (𝑘𝑠𝑠) in this country if 𝐴 = 1, 𝑠 = 0.3, 𝛿 = 0.01, and 𝜂 = 0.02?
100
Suppose the tax rate on the first $20,000 of income earned is 5%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $100,000 of taxable income would have an average tax rate of ____ .
15%
1. In a small economy, the rate of money growth for the current year is 5% and velocity of money circulation is stable. If real GDP is growing at a rate of 3%, what is the inflation rate?
2%
Suppose the Solow growth rate is 3% and that spending growth is 5% (Draw the graph!). The equilibrium inflation rate is
2%
A country has 100 million people, 60 million of whom are adult non-institutionalized civilians. Of the adult non-institutionalized civilians, 15 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 10 million are still looking for work. Of those who do have jobs, 10 million are working part time but would like to work full time, and the remaining 20 million are working full time. What is the unemployment rate in this country?
25%
We discussed in class that the top 20% income earners pay close to a staggering 70% of all federal taxes. The top 1% alone pay about what percent of all federal taxes?
25%
According to the quantity theory of money, a nation that increases its money supply by 30 percent should expect its price level to increase by approximately ______ in the long run.
30%
6. You lend your little brother money for a year at a nominal interest rate of 10%, and the inflation rate for that year turns out to be 5%. Your real rate of return for that year is:
5%
Suppose the Solow growth rate is 3% and that spending growth increases from 5% to 10% due to an increase in the money supply (a permanent positive DAD shock - Draw the graph!). Assuming prices are flexible, the new equilibrium inflation rate will be
7%
Total Population 400 million 420 million Adults in Labor Force 270 million 275 million Adults Not in Labor Force 80 million 85 million Employed Workers 250 million 260 million 4. Refer to the table above. What is the labor force participation rate in in 2015?
77.14%
17. If the Consumer Price Index (CPI) was 125 last year and is now 135, then the inflation rate was:
8%
Which of the following choices best illustrates the concept of Adam Smith's "invisible hand"?
A Vietnamese farmer grows rice, an exporter ships it to the United States, and a grocer in New York sells it to a customer
Fiscal policy is subject to the same real shock dilemma as monetary policy. Which of the following illustrates an additional issue fiscal policy faces when trying to combat a recession brought on by a negative real shock (hint: the converse of this is what makes fiscal policy especially productive at responding to shocks to aggregate demand)?
After a real shock, the economy is still producing at their potential growth rate, and the economy has few unemployed resources to target.
. According to the quantity theory of money, which of the following would cause the price level to decrease?
An increase in real GDP because the population becomes more productive.
We discussed several examples of growth miracles and growth disasters in class. An example of a growth disaster that we discussed is:
Argentina
17. The largest spending component of GDP in the United States is:
Consumption
The reason that the United States has experienced sustained economic growth for over 200 years is mostly due to which of the following?
Continued advances in technological knowledge.
40. Conditional convergence refers to the tendency for:
Countries with similar steady-state levels of output to grow faster when they're poor than when they're rich until their per capita GDP levels converge.
Ice Cube is a talented performer who can sing and act. He could earn $5,000,000 singing or $3,000,000 acting. Ice-T can also sing and act. He could earn $5,000,000 singing or $4,000,000 acting. Vanilla Ice can sing and dance. He could earn $3,000,000 singing or $100,000 dancing. Assuming all three individuals have only two options for work, and can only pursue one of their respective activities, who has the highest opportunity cost of singing?
Ice-T
Which of the following is NOT a true statement related to the economics of ideas?
Ideas for increasing output are primarily researched, developed, and implemented by the government
21. The correlation between the infant survival rate and real GDP per capita is
Positive
30. The difference between per capita GDP in North Korea and South Korea is due to:
Institutions
16. The most volatile spending component of GDP in the United States is:
Investment
Joe is a high school graduate with no college education. He has completed a training course at an accredited truck driving school and has his commercial driver's license (CDL). He had been a truck driver for 20 years but recently lost his job because of the new self-driving truck technology that eliminated any need for truck drivers in the trucking industry. Joe would be considered
Structurally unemployed.
20. We care so much about wealth as measured by real GDP per capita because:
Wealth is positively correlated with many aspects an individual's standard of living and wellbeing
3. Under fractional reserve banking, banks:
b. Hold only a fraction of deposits in reserve, lending the rest.
37. The fiscal multiplier concept is important because it shows:
b. How small changes in government spending may have large impacts on overall output.
Using the data from Table 3 of a country that produces only iPhones, it's nominal GDP in 2010 is _______ and its real GDP in 2010 (in 2000 dollars) is _________:
a. $9,900, $9,000
Since the mid-1950s, the federal government has raised about _____ of GDP in tax revenues and has spent about _____ of GDP.
a. 18%; 20%
25. Which of the following is NOT a cost of inflation?
a. A definite decrease in real wages throughout the period of inflation.
Based on the textbook and our discussion in class, the Great Depression was caused by:
a. Both aggregate demand shocks and real shocks.
30. Movements in real GDP around its long-term trend are called:
a. Business fluctuations
31. Catching up growth is due to:
a. Capital Accumulation.
35. Which statement explains why growth in China has been so rapid recently?
a. China began with very little capital, so its marginal product of capital was very high.
Suppose the current administration decides to reduce the amount of government spending. If the Federal Reserve was concerned that this may cause a recession, the Fed would most likely:
a. Conduct open market purchases of government bonds.
Monetary Policy is conducted to mitigate business fluctuations by using the Fed's control over the money supply. This awesome power allows them to influence the:
a. DAD curve.
Since 1980, structural unemployment in many European countries has been high relative to that of the United States. Which of the following is NOT a likely explanation of this phenomenon?
a. Employment protection laws in Europe make labor markets less flexible and dynamic. b. The minimum wage rate is higher and labor unions are a greater share of the labor force in Europe. c. Unemployment compensation is more generous in terms of length and money in Europe. d. All of the above are likely explanations of the difference in structural unemployment between Europe and the United States.
43. When countries have severe debt problems (such as Argentina around the year 2000):
a. Expansionary fiscal policy can reduce real growth.
In cities where people typically go to retire, there tends to be larger markets for Viagra. Nancy, a Viagra saleswoman, recently moved from Park City Utah (an amazing place to retire) to Florida (another common place to retire) simply because of its warmer climate and will need to spend some time looking for a new job at one of the many Viagra sales firms in Florida. Nancy would be considered
a. Frictionally unemployed.
22. What key fact about the wealth of nations and economic growth does the above figure best illustrate?
a. GDP per capita varies enormously among nations.
38. In the Solow model, if a country increases its savings rate (draw the graph!):
a. Growth increases as the economy moves toward a new, higher steady-state capital stock.
. Which of the following would be consistent with a shift of the Dynamic Aggregate Demand curve out and to the right (a positive shock)? I. A faster money growth rate. II. Increased consumer and investor confidence. III. Higher taxes
a. I and II only
One of the Fed's tools to influence the money supply is their ability to manage the reserves of banks held at the Fed. If the Fed wanted to decrease the money supply, they would _______ the Required Reserve Ratio and/or _______ the interest rates on reserves held at the Fed.
a. Increase; Increase
14. In response to the rising uncertainty following the terrorist attacks of September 11, 2001, the Fed:
a. Increased the Monetary Base.
33. The position of the vertical Long-Run Aggregate Supply curve shows the economy's:
a. Potential growth rate (or "Solow growth rate") given by the real factors of production.
18. If the inflation rate falls from 10 percent to 3 percent, then:
a. Prices on average have declined by 7 percent. b. Deflation has occurred. c. The value of the dollar has increased d. None of the above
31. A recession is defined as a significant, widespread decline in
a. Real income (GDP) and employment.
The Real Business Cycle (RBC) model, where prices are assumed to be flexible, predicts that business fluctuations are caused by
a. Real shocks only.
1. Which is NOT a function of the Federal Reserve?
a. Serving as the lender of last resort. b. Serving as the Government's bank. c. Serving as the Banker's bank. d. Providing loans to small businesses. e. Regulating the U.S. money supply. D
When inflation functions as a type of tax (often referred to as "the inflation tax"), which of the following groups of people will be hurt the most?
c. People who hold currency and coins in their wallet, purse, or at home.
2. Business fluctuations being caused by shocks to Aggregate Demand rely on the assumption that prices and wages are slow to adjust to economic shocks (sticky). Which of the following could explain why some prices and wages are sticky?
a. Some goods and service have high menu costs (costs associated with changing prices). b. Some goods, services, and wages are specified by a contracted price.
15. Which of the following is NOT a difficulty that the Fed faces in conducting monetary policy?
a. The Fed must operate in real time when much of the data about the state of the economy is unknown. b. An increase in the money supply typically affects the economy with a lag that can vary in time from 6 to 18 months. c. The Fed's control of the money supply is incomplete because banks and the public influence what happens to the money supply by affecting the size of the money multiplier. d. Real shocks. e. All of the above are difficulties that the Fed faces in conducting monetary policy
6. Which price index measures the average price for a basket of goods purchased by a typical American consumer?
a. The consumer price index.
25. What are the most proximate (or direct) causes of growth in real GDP per capita?
a. The factors of production.
Akemi, who is a Japanese citizen, works in the United States as a computer programmer. The value of her output is included in:
a. U.S. GDP.
Suppose the Fed carries out an open market purchase and credits the account of a bank by $120,000. Further suppose that all banks maintain a reserve ratio (RR) of 20% even though the Fed has set a required reserve ratio of 10%. If the currency to deposit ratio is 5%, by how much is the money supply (M1 and M2) expected to change?
b. $360,000.
Suppose a small economy produces only the four goods listed in Table 2 above. All of the country's tomatoes are used only in the production of pizzas. What is the value of GDP in this economy?
b. $7,200
Assume that your nominal wage working at Cookout was $10 per hour in 2011 and through a series of year-end raises, by 2016 your nominal wage increased to $12 per hour. If the CPI in 2011 was 220 and because of inflation the CPI in 2016 increased to 280, what was your 2016 real hourly wage rate using 2011 dollars?
b. $9.43 per hour.
Suppose an economy is in a long run equilibrium with potential growth rate 3% and spending growth 7%. If there is a negative shock to private spending such that spending growth decreases to 1%, real growth would be ______ and inflation would be ______ in the short run.
b. 0%; 1%
Given the difficulties that central bankers face in conducting monetary policy, it is extremely hard to get the amount and timing of monetary policy "just right". The main problem associated with too much expansionary monetary policy is:
b. Additional inflation.
6. When two people voluntarily trade with each other:
b. Both of them will be made better off.
Suppose the Federal Funds Rate is currently at 3.5% and the Fed sets a target Federal Funds Rate of 4%, to achieve its goal, the Fed should:
b. Conduct open market sales of government bonds.
18. In nations that have large underground, or illegal, sectors:
b. GDP will underestimate total production in the economy.
39. In the Solow model, if a country's population growth rate increases (draw the graph!):
b. Growth decreases as the economy moves toward a new, lower steady-state capital stock.
9. In the short run, if the Fed responds to a negative real shock by raising the growth rate of money supply, inflation will be:
b. Higher than the rate would be without having responded to the negative shock.
Crowding out occurs when: I. The government borrows money from the public that firms would have used for investment funds. II. The government sells bonds, raising interest rates and causing people to save more and consume less. III. An economy is closed and does not trade with the outside world.
b. I and II only.
6. The most likely influence of the internet on the rate of frictional unemployment has been to:
b. Lower it.
24. The tax rate paid on an additional dollar of income is the
b. Marginal tax rate.
One measure of student output is the number of completed math problems produced. Using pen and paper only, a student can complete 50 math problems in 2 hours. Using pen, paper, and calculator, this same student can complete 100 math problems in 2 hours (the student is already familiar with, and knows how to use the calculator). This scenario illustrates how the addition of which factor of production can increase output?
b. Physical capital
29. The income tax system in the United States is:
b. Progressive
Between 1978 and 1983, food production in China rose by 50% and 170 million people rose above the international poverty line. This occurred because of the:
b. Return to private property rights in farming.
28. What is the Fisher Effect?
b. The tendency of nominal interest rates to rise with higher expected inflation rates.
You lend your little brother money for a year at a nominal interest rate of 10% based on your expectation that inflation will be 10% (after all, he is your little brother). The inflation rate however, turns out to actually be only 5%. As a result,
b. Wealth is redistributed from your brother to you.
A country has a 2008 growth rate of 4.2% and a 2007 GDP of $8,222 (in billions). What was the GDP in 2008 (in billions)?
c. $8,567
Suppose an economy is in a long run equilibrium with potential growth rate 3% and spending growth 7%. Suppose further that there is a negative real shock that shifts the LRAS curve to a new potential growth rate of -2% (note that the economy is now in a new long run equilibrium with potential growth rate -2% and spending growth 7%). If the government attempts to combat the recession by increasing government spending, thereby increasing spending growth from 7% to 13%, real growth would be ______ and inflation would be ______ in the short run.
c. 1%; 12%
Suppose the Solow growth rate is 3% and that spending growth increases from 5% to 10% due to an increase in the money supply (a permanent positive DAD shock - Draw the graph!). Assuming prices are sticky, and that in the short run actual inflation increases to 4%, then in the short run real growth would be:
c. 3% (This would be correct if you interpreted the question as asking how much real growth increased in the short run relative to where it was.) d. 6% (This would be true if you read the question as "then in the short run the real growth rate would be:")
A country has 100 million people, 60 million of whom are adult non-institutionalized civilians. Of the adult non-institutionalized civilians, 15 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 10 million are still looking for work. Of those who do have jobs, 10 million are working part time but would like to work full time, and the remaining 20 million are working full time. How many people in this country are in the labor force?
c. 40 million
Refer to the figure above. What is the number of people who are employed at the market wage? How many people end up unemployed due to the implementation of a $10 minimum wage?
c. 60; 40
Which is the MOST effective fiscal policy to fight a recession if people react to uncertainty by saving all additional money that they earn or receive?
c. An increase in government spending.
If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be:
c. An increase in money supply growth.
According to the textbook and our discussion in class, all of the following would be considered major reasons for the increase in the female labor force participation rate after World War II EXCEPT:
c. An increase in the overall population because of the baby boom
15. Inflation is an increase in the:
c. Average level of prices.
How can people who are laid off from work due to a recession (cyclical unemployment) eventually turn into structurally unemployed people?
c. By staying unemployed so long that their skills become outdated.
37. In a steady state, output is:
c. Constant.
We increase human capital by engaging in _________ and technological knowledge by engaging in ___________.
c. Education and training; research and development
On average, the social security system redistributes income from I. High-wage workers to low wage workers. II. Men to women. III. People with longer life expectancies to people with shorter life expectancies
c. I and II only
6. Discount rate lending occurs when the Federal Reserve:
c. Lends reserves directly to banks.
33. Marginal product of capital is the increase in:
c. Output when one more unit of capital is added.
The money you pay into Social Security goes to:
c. Pay current beneficiaries.
If initially an economy is in a long run equilibrium with 𝑀⃗ = 5%, 𝑣 = 3%, 𝜋 = 2%, and potential growth rate 𝑌𝑅 ⃗ = 6% and then because of economic uncertainty 𝑣 falls to 1% , what should the Fed do?
c. Publicly demonstrate a commitment to keep 𝑀⃗ + 𝑣 at 8% by raising 𝑀⃗ .
The New Keynesian model, where prices are assumed to be sticky (or slow to adjust to economic shocks), predicts that business fluctuations are caused by
c. Real shocks and shocks to aggregate demand.
able Household Income Taxes Paid (in dollars) $10,000 $1,000 $20,000 $1,500 $30,000 $2,000 $40,000 $2,500 28. Using the data in the table above, this country uses a _________ tax system:
c. Regressive
The following are some of the most important assets that serve as means of payment in the United States. Which is the LEAST liquid?
c. Small-time deposits.
7. GDP is defined as:
c. The market value of all final goods and services produced within a country in a year.
Suppose the country is currently at the steady state found in questions 41 and 42. What would happen to output over time if there was a sudden increase in productivity from 𝐴 = 1 to 𝐴 = 2?
c. The steady state would increase, and output would grow until it reached the new steady state.
Which of the four towns in Table 1 has the lowest standard of living (as measured by Real GDP per capita)?
c. Town C
15. What are the components of the factor income approach to splitting GDP?
c. Wages, rent, interest, and profit.
If a country's real per capita GDP is $10,000 at the beginning of 2015, and each year the economy grows at 7%, approximately what will be the value of the country's real per capita GDP in 2055?
d. $160,000
Suppose the Fed carries out an open market purchase and credits the account of a bank by $120,000. Further suppose that all banks maintain a reserve ratio (RR) of 5%. If banks don't hold any excess reserves and the currency to deposit ratio is zero, by how much is the money supply (M1 and M2) expected to change?
d. $2.4 million.
18. When hit with a negative real shock, the Fed must pick a policy that chooses between:
d. A growth rate that's too low and an inflation rate that's too high.
40. The time necessary for a fiscal policy plan to have an impact is called the:
d. Effectiveness lag.
19. Which of the following statements is TRUE about GDP?
d. GDP does not account for the distribution of income in a country.
39. If Ricardian equivalence holds, then an expansionary fiscal policy will:
d. Have no effect on aggregate demand either in the short run or in the long run.
34. Diminishing returns to tractors indicates that:
d. Having more tractors leads to more output, but at a decreasing rate.
What kind of rising costs will most likely cause U.S. government spending to increase dramatically in the future?
d. Health care
. If a country's real GDP per capita declines, this means that which of the following may have occurred?
d. I and II only
Examples of active labor market policies that can reduce structural unemployment include: I. Job re-training programs. II. Job search assistance. III. Early re-employment bonuses.
d. I, II, and III
44. Ideal fiscal policy will:
d. Increase aggregate demand in bad times and pay off the debt in good times.
0. Milton Friedman said that "Inflation is always and everywhere a monetary phenomenon." This is consistent with the quantity theory of money's prediction that:
d. Increases in the money supply are the primary cause of inflation.
23. Which of the following accounts for the largest source of tax receipts for the U.S. federal government?
d. Individual income tax.
The aggregate demand curve shows all the combinations of ______ and ______ that are consistent with a specified rate of ______ .
d. Inflation; real GDP growth; spending
28. Which of the following is NOT an institution of economic growth?
d. Labor unions
In 2014 and 2015, GDP growth slowed because of unusually cold weather in the Midwest and North East. In the Real Business Cycle framework, we would depict this as an inward shift of the ___________ which would result in ________ inflation and ________ Real GDP Growth
d. Long-Run Aggregate Supply Curve; higher; lower
2. Which of the following measures of the money supply contain(s) "currency"?
d. Monetary Base, M1, and M2.
When economists state that "money is neutral," they mean that the:
d. Money supply does not affect real GDP in the long-run.
When deciding how much to study for an economics class, students should study until
d. The marginal costs exceed marginal benefits.