ECON 2301 Final Review 2

In the graph below, Which of the follow points on the graph are considered inefficient?

A

It is good to have your money in an insolvent bank.

False

Macroeconomics is the study of economics from the ground up, the small-scale transactions that make up individual markets.

False

Pro Market economists think that wages are "sticky" and that investments are often non-responsive to the interest rate.

False

The graph below can be used to identify periods of economic growth. True or False, there have been more periods of decline in America since the mid-1980's then growth.

False

Velocity is the amount of stuff purchased in the economy in a year.

False

In the Keynes point of view, production under the PPF isn't sustainable.

False

Real GDP in a small country is worth $6 billion. The population of the country is 200,000. What is per capita Real GDP?

$30,000

Suppose the economy is self-regulating, the price level is 132, the quantity demanded of Real GDP is $4 trillion (or $4,000 billion), and the quantity supplied of Real GDP in the short run is $3.9 trillion (or, $3,900 billion). Refer to the graph below. What is the quantity supplied of Real GDP in the long run?

$4.3 trillion or $4,300 billion

The Fed creates $100,000 in new money that is deposited in someone's checking account in a bank. What is the maximum change in the money supply if the required reserve ratio is 5 percent?

1 / 0.05 × $100,000 = $2,000,000

Who is considered the father of modern economics and the inventor of the term "invisible hand"?

Adam Smith

John Maynard Keynes, the English economist, challenged the beliefs on which the classical position of the economy was based, this included which of the following (mark all the correct answers):

B. Keynes on Wage Rates Keynes believed that wage rates may be inflexible in a downward direction if employees and labor unions resist wage cuts, and that this inflexibility means that the economy may not be self-regulating. C. New Keynesians and Wage Rates New Keynesian economists focused on, among other things, long-term contracts and efficiency reasons for firms paying higher-than-market wages; thus providing a solid microeconomic explanation for inflexible wages. A. Keynes's Criticism of Say's Law in a Money Economy Keynes believed that Say's law might not hold in a money economy. He believed that an increase in savings might not be matched by an equal increase in investment, since both saving and investment depend on a number of factors that may be far more influential than the interest rate. In this event, more output may be produced than will be demanded. D. Keynes on Prices Keynes believed that anticompetitive or monopolistic elements in the economy would sometimes prevent prices from falling.

According to the debt clock, how much of the federal debt is your share? Specifically, what is the debt per citizen of the U.S. National Debt?

Between $60K and $90K

The Federal Reserve System was created by the Federal Reserve Act of 1913. The act divided the country into Federal Reserve Districts; each has a Federal Reserve Bank with its own president. It includes a Board of Governors and a Federal Open Market Committee. Which list below correctly identifies all of their major functions:

Controlling the Money Supply; Supplying the Economy with Paper Money (Federal Reserve Notes); Providing Check-Clearing Services; Holding Depository Institutions' Reserves; Supervising Member Banks; Serving as the Government's Banker; Serving as a Lender of Last Resort; Handling the sale of U.S. Treasury Securities (Auctions)

We learned economics has many nicknames and definitions. Select the ones we studied.

Economics is the study of the use of scare resources which have alternative uses. The dismal science. The science of how individuals and societies deal with the fact that wants are greater than the limited resources available to satisfy those wants. The science of scarcity.

Economists agree on everything.

False

What duo co-wrote a ground breaking book on monetary policy and what was the name of the book?

Friedman and Schwartz, Monetary History of the United States

Suppose the economy is self-regulating, the price level is 132, the quantity demanded of Real GDP is $4 trillion (or $4,000 billion), and the quantity supplied of Real GDP in the short run is $3.9 trillion (or, $3,900 billion). Refer to the graph below. Will the price level in the long-run equilibrium be greater than, less than, or equal to 132?

Less than 132

Who was inspired by books like Friedrich Hayek's The Road of Serfdom and the Pretense of Knowledge?

Margaret Thatcher Anti-Communist Forces in the Eastern Bloc The Folks at Marginal University

If the Federal Reserve were to lower the required reserve ratio, how would money supply change?

Money supply will increase

Candide believes that there is always sufficient (aggregate) demand in the economy to buy all the goods and services supplied at full employment, as shown in the graph below: If true, the economy would always be at:

Natural Real GDP, where LRAS equals SRAS.

Suppose the economy is self-regulating, the price level is 132, the quantity demanded of Real GDP is $4 trillion (or $4,000 billion), and the quantity supplied of Real GDP in the short run is $3.9 trillion (or, $3,900 billion). Refer to the graph below. In the starting condition (SRAS), is the economy in short-run equilibrium?

No, AD is greater than SRAS

Visit this website: Click Here! (Links to an external site.) and mark which one of the following it accurate.

One of the most striking labor market trends during the second half of the 20th century was the steep decline in labor force participation among men 55 years and older. The labor force participation rate of older men decreased from 70.6 percent in 1948 to 37.7 percent in 1993

What is Say's Law?

Supply creates its own demand; or interest rates go up and down and thereby balance savings and investment which balances production and consumption.

During bad times, the blame game is the biggest game in Washington. Wall Street "greed" or "predatory" lenders seem to be favorite targets to blame for our current economic woes. When government policy is mentioned at all in handing out blame, it is usually blamed for not imposing enough regulation on the private sector. But there is still the question whether any of these explanations can stand up under scrutiny. Take Wall Street "greed." Is there any evidence that people in Wall Street were any less interested in making money during all the decades and generations when investments in housing were among the safest investments around? If their greed did not bring on an economic disaster before, why would it bring it on now? As for lenders, how could they have expected to satisfy their greed by lending to people who were not likely to repay them? The one agency of government that is widely blamed is the Federal Reserve System — which still keeps the heat away from elected politicians. Nor is the Fed completely blameless. It kept interest rates extremely low for years. That undoubtedly contributed to an increased demand for housing, since lower interest rates mean lower monthly mortgage payments. But an increased demand for housing does not automatically mean higher housing prices. In places where supply is free to rise to meet demand, such as Manhattan in the 1950s or Las Vegas in the 1980s, increased demand simply led to more housing units being built, without an increase in real prices — that is, money prices adjusted for inflation. What led to a boom in housing prices was increased demand in places where supply was artificially restricted. Coastal California was the largest of these places where severe legal restrictions on building houses led to skyrocketing housing prices. Just between 2000 and 2005, for example, home prices more than doubled in Los Angeles and San Diego, in response to rising demand in places where supply was not allowed to rise to meet it. At the height of the housing boom in 2005, the ten areas with the biggest home price increases over the previous five years were all in California. That year, the average home price in California was more than half a million dollars, even though the average size of the homes sold was just 1,600 square feet. Although California — and especially coastal California — was the biggest place with skyrocketing housing prices, it was not the only place. Other enclaves, here and there, with severe housing restrictions also had rapidly rising housing prices to levels far above the national average. If the housing boom was so localized, how did this become a national problem? Because the money that financed housing in areas with housing price booms was supplied by financial institutions across the country and even across the ocean. Mortgages made in California were sold to nationwide financial institutions, including Fannie Mae and Freddie Mac, and to firms in Wall Street which bundled thousands of these mortgages into financial securities that were sold nationally and internationally. The problem was that, not only were these mortgages based on housing prices inflated by the Federal Reserve's low-interest rate policies, many of the home buyers had been granted mortgages under federal government pressures on lenders to lend to people who would not ordinarily qualify, whether because of low income, bad credit history or other factors likely to make them bigger credit risks. This was not something that federal regulatory agencies permitted. It was something that federal regulatory agencies — under pressure from politicians — pressured and threatened lenders into doing in the name of "affordable housing." The housing market collapse was set off when the Federal Reserve returned interest rates to more normal levels, but it was a financial house of cards that was due to collapse, sending shock waves through the economy. It was just a matter of when, not if. ....It's not that politicians never learn. They learn how much they can get away with, when they can blame others. The author anticipates the argument that greed was to blame for the financial crisis by pointing out:

That housing used to be a 'safe' investment and that Wall Street has been around for a long time during which we did not have housing crisis.

In the chart below What indicates a recession?

The % change in GDP (blue line) going down and the Unemployment Rate (green line) going up

Mark all the items below that are part of the case for activist monetary policy.

The economy does not always equilibrate quickly enough. It is flexible, enabling policy makers to respond to changing needs. It is effective in smoothing out the business cycle.

The graph below shows Aggregate Demand and Short Run Aggregate Supply depicting a decrease in wealth. What is the correct interpretation of the resulting new equilibrium:

The price level will *drop* and Real GDP will *fall*.

A moral hazard occurs when one party to a transaction changes his or her behavior in a way that is hidden from or costly to the other party. For example, I start smoking 8 packs of cigarettes each day and I don't pay for health insurance because I know when I get lung cancer I can just use the rule that says the insurance company can't exclude my preexisting condition. I would have bought insurance but now I change my behavior and I don't buy insurance.

True

Adam Smith wrote the Wealth of Nations in 1776 in which he offered the revolutionary idea that free trade between people and businesses in different countries was the key to generating wealth in a Country. Before him, it would have been popular to say that colonialism, war, mercantilism and other central government activities created the wealth of a nation. So, it safe to say that Adam Smith was pro-trade and against punitive tariffs, quotas and other restrictions to free trade.

True

Comparative Advantage teaches us that the United States should import many things because we have high opportunity costs, meaning that a U.S. citizen or business would have to give up quite a bit more than a person or business in another country in order to produce a good or service.

True

GDP can be represented as Q or T or Y in an equation of exchange. It's all good.

True

In the classical view, the economy is self regulating, therefore "hands off" or "laissez-faire" is the correct government action.

True

In the classical viewpoint, interest rates change such that savings equal investment.

True

Monetarists think the economy is self-regulating.

True

One reason for the recent housing crisis is that people didn't pay off real estate loans at an unexpectedly high rate.

True

Public Choice Theory gives an explanation as to why political actors might assume certain policy positions.

True

If the United States goes into a recession, this tends to shift Japan's AD curve _____________ because Japan will __________________.

leftward; export less to the U.S.

Mark all of the answers below that are part of the case of a rules-based monetary policy.

Wages and prices are sufficiently flexible to allow the economy to equilibrate at a reasonable speed. After all, contracts with Unions used to prevent wage flexibility, now Union employment is so small that their effect on the economy doesn't require intervention as it did in the past. Activist monetary policies may not work. Businesses watch the Fed so closely that they simply adjust as necessary and eliminate the effectiveness of the desired activist policy. Activist policies are likely to be destabilizing and make matters worse. Lags inherent in the Fed/Banking system mean our timing is always off.

The chart below shows a single exchange rate change from the Mexican point of view and the American point of view. What happens to the value of the Dollar against the Peso?

appreciation