Econ Comprehension Questions
When a significant fraction of the domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows:
GDP will be much larger than GNP
In the circular flow model, who supplies factors of production in exchange for income?
Households
Of the eight categories in the CPI market basket, which three categories make up more than 75% of the basket?
Housing, transportation, and food
The Taylor rule for federal funds rate targeting does which of these things?
It links the Fed's target for the federal funds rate to economic variables.
Which of these is not a shortcoming of GDP as a measure of welfare?
It only counts final goods and services and not intermediate goods.
During the mid-to-late 1970s the economy was experiencing both high inflation and high unemployment. The Fed adopted a policy of:
increasing interest rates to combat the inflation.
If the inflation rate is anticipated, __________.
inflation may not be a major problem
In determining whether or not to borrow funds, firms compare the rate of return they expect to make on an investment with the:
interest rate they must pay to borrow the necessary funds
An increase in __________ will cause savings to increase.
interest rates
The cyclically adjusted budget deficit:
is measured as if the economy were at potential real GDP.
In calculating the CPI, the __________.
market basket does not include large equipment purchased by firms
Gross domestic product is best defined as the:
market value of all final goods and services produced in a country during a period of time
Monetary stimulus designed to increase aggregate demand would have __________ on real output according to real business cycle theory.
no impact
The name given to the fraction of deposits that a bank is legally required to hold in its vault, or as deposits at the Fed, is __________.
required reserves
When aggregate expenditures are less than the GDP inventories will:
rise.
The total national income actually received by a country's residents is:
smaller than the value of GDP
The fact that wages and prices may not rapidly adjust to changes in demand or supply is called:
sticky wages and prices.
A relationship based on consumer and firm behavior that remains consistent for long periods of time is known as a:
structural relationship.
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and job requirements is called __________.
structural unemployment
If Americans still worked sixty hour weeks, as they did in 1890, __________.
the GDP would be much higher than it is but the well-being of the typical person would not necessarily be higher
When the interest rate decreases, __________.
there is movement down a stationary money demand curve
The largest and fastest growing category of federal expenditures is __________.
transfer payments
The wealth effect refers to the fact that:
when the price level falls, the real value of household wealth rises, and so will consumption
Macroeconomic equilibrium in the short run:
will occur at a point on the 45 degree line.
Which of these is a financial intermediary?
A bank
Which of these fiscal policy actions will increase real GDP in the short run?
An increase in government expenditures
Which of these will shift the money demand curve to the right?
An increase in real GDP
Which is the largest component of GDP?
Consumption
The best measure of the income households actually have available to spend is:
Disposable Personal Income
A period of real economic growth, where production and employment are both moving higher is known as:
Expansion
Which of these factors were primary cause of the recession of 2007-2009?
Falling housing prices
When the economy is at full employment, which types of unemployment remain?
Frictional and structural
Which of these shifts the aggregate demand curve to the right?
Lower interest rates
The GDP per capita is computed by dividing a country's:
Real GDP by its Population
Which phase of the business cycle is characterized by increasing levels of unemployment?
Recessions
The Board of Governors of the Federal Reserve has _________ members that are appointed for staggered _________ by the __________ and confirmed by the Senate.
Seven, 14-year terms, President
Which of these will ensure that an economy experiences sustained economic growth?
Technological change
How did the FOMC react to the recession of 2007-2009?
The FOMC reduced the target for the fed funds rate steadily in 2008.
Which of these facts is true about the creation of the Federal Reserve System (the Fed)?
The Fed was created in 1913.
Which body of the Federal Reserve System sets the majority of U.S. monetary policy?
The Federal Open Market Committee
Which of these factors will cause the long-run aggregate supply curve to shift to the right?
The accumulation of more machinery and equipment
Which market basket specifically targets intermediate goods?
The basket used by the producer price index
Which of these factors contributed to the recession of 2007-2009?
The end of the housing bubble
Which of these groups is included in the labor force?
The unemployed
Aggregate expenditure, or the total amount of spending in the economy, equals:
consumption spending plus planned investment spending plus government purchases plus net exports.
The decline in private expenditures that results from an increase in government purchases is known as:
crowding out.
The most important determinant of consumption is __________.
current disposable income
At full employment, __________.
cyclical unemployment is zero
Because of the __________ in forecasting the economy, many economists believe the Fed __________ take a very active role in trying to stabilize the economy.
difficulties, should not
All the programs that Congress authorizes on an annual basis, which are not automatically funded by the prior laws passed by Congress, are called __________.
discretionary spending
According to rational expectations theory, any announced policy change will:
have no impact on output.
A higher domestic price level will result in:
higher imports
On the balance sheet of a bank:
loans are the most important asset.
A bank panic occurs when:
many banks experience runs at the same time.
The defining characteristic of long-run economic growth is:
rising productivity
The 2007-2009 recession was a clear example of the impact:
that a decrease in aggregate demand can have on the economy
The cycle of short-term ups and downs in the economy is called:
the business cycle
Real GDP is:
the value of goods and services evaluated at base year prices
The natural rate of unemployment is the __________.
unemployment rate that results when the economy produces the potential level of real GDP
Most economists agree that in the long run there is no tradeoff between inflation and unemployment which means the long-run Phillips curve is:
vertical.
Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of:
$400
Which of these statements about the federal debt is correct?
At some point, the government may have to raise taxes or cut spending to pay interest on the debt.
Which of these statements about autonomous expenditure is correct?
Autonomous expenditure does not depend on the level of GDP.
An alternating period of economic contraction and economic expansion measured over time with real GDP is known as the:
Business cycle
How does the Bureau of Economic Analysis of the U.S. Department of Commerce measure GDP?
By adding the value in dollar terms of all the final goods and services produced domestically.
Which of these factors can cause the natural rate of unemployment to change?
Demographic changes
Which of these are the largest sources of federal government revenues?
Individual income taxes and social security withholdings
What is the relationship between investment and real interest rates, all other things being equal?
Lower interest rates stimulate investment.
The aggregate demand curve shows the relationship between:
The price level and the quantity of real GDP demanded
Which of the following is included in the economist's definition of investment?
The purchase of new machines, factories, or houses
Velocity is defined as:
V = (P x Q) / M
At points above the 45 degree line in the AE model:
aggregate expenditure is greater than GDP.
If the Federal Reserve wishes to decrease the money supply to slow the economy, it will conduct:
an open market sale.
The tax multiplier equals the change in:
equilibrium GDP divided by the change in taxes.
All of these will most likely increase as a result of expansionary monetary policy except:
government purchases.
The flow of funds from __________ into the financial system makes it possible for government and firms to borrow.
households
Unanticipated deflation __________.
hurts net debtors
A Phillips curve is a curve showing the __________.
short-run relationship between the unemployment rate and the inflation rate
We would expect the tax multiplier to be __________ in absolute value than the government purchases multiplier.
smaller
The 1974-1975 recession was a result of a:
supply shock that caused a leftward shift of the short-run aggregate supply curve
The Federal Reserve System is __________.
the central bank of the United States
In the long-run, the level of output is:
the full-employment level of output
If the FOMC orders the trading desk to sell Treasury securities:
the money supply curve will shift to the left and the equilibrium interest rates will rise.
Actual investment will equal planned investment only when __________.
there is no unplanned change in inventory
The theory concerning the link between the money supply and the price level that assumes the velocity of money is constant is called the:
quantity theory of money.
The aggregate expenditure model focuses on the relationship between total spending and __________.
real GDP in the short run
Monetarism is a school of economic thought that favors:
a monetary growth rule.
The producer price index tracks the prices firms receive for goods and services at:
all stages of production
The long-run Phillips curve __________.
is vertical at the natural rate of unemployment
If inflation is anticipated, __________.
it costs less to society than if unanticipated
One of the criticisms of the Fed's active intervention to stabilize the economy is that:
it is difficult to time monetary policy because of the impact lags.
The consumer price index __________.
measures the cost of an unchanging basket of goods and services
As interest rates decline, stocks become a __________ attractive investment relative to bonds, and this causes the demand for stocks and their prices to __________.
more, rise
If high unemployment continues to be a problem for several years it is possible that the:
natural rate of unemployment may increase.
Which of these factors will cause the quantity of goods and services that can be produced by one worker, or in one hour of work, to increase?
A technological change
Which of these is an example of an automatic stabilizer?
An unemployment benefit program
Which of these statements is true about using fiscal policy to stabilize the economy?
The delay caused by the legislative process is typically longer for fiscal policy than for monetary policy.
If technological change increases the profitability of new investment to firms, which of these will occur?
The demand for loanable funds will increase.
If firms reduce investment spending and the economy enters a recession, which of these contributes to the adjustment that causes the economy to return to its long-run equilibrium?
The eventual agreement by workers to accept lower wages
Which of these is the main reason for the long-run funding problems of Social Security?
The number of workers per retiree continues to decline.
How can the Fed fight a combination of rising unemployment and rising inflation?
These goals are conflicting and cannot be addressed simultaneously.
Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?
To reduce real GDP in order to reduce inflation, which occurs if real GDP is above potential GDP.
When incomes rise faster in the United States than in other countries:
U.S. net exports will fall.
Which of these is the prevailing view of economists about the unemployment insurance program in the United States?
Unemployment insurance is a good idea because it helps the unemployed maintain their income and spending, which helps reduce the severity of recessions.
When is the opportunity cost of holding money higher?
When interest rates are high
Suppose you are available for work but have not looked for a job for at least the last four weeks because you believe that no jobs are available. You would then be counted as __________.
a discouraged worker
An unexpected change in the price of oil would be called __________ by economists.
a supply shock
If workers and firms have rational expectations and wages and prices adjust quickly, an expansionary monetary policy will result in higher inflation;
but no change in the unemployment rate
To increase the money supply, the FOMC directs the trading desk located at the Federal Reserve Bank of New York to:
buy U.S. Treasury securities from the public.
If the FOMC decides to increase the money supply, it orders the trading desk at the Federal Reserve Bank of New York to:
buy U.S. Treasury securities.
An increase in the real interest rate will:
cause a movement along the demand curve for loanable funds
If the Fed decreases the money supply and increases interest rates in order to reduce inflation, it is engaging in __________.
contractionary monetary policy
In the short run, a supply shock as a result of an unexpected decrease in oil prices will:
decrease the price level but increase real GDP
Assuming there are no leakages out of the banking system, a money multiplier equal to 5 means that:
each additional dollar of reserves creates $5 of deposits.
The labor market may take a long time to adjust to economic growth due to __________.
excess capacity in production
Changes in the federal tax rate or changes in government spending designed to achieve some macroeconomic policy objective are known as:
fiscal policy.
The short-term unemployment that arises from workers, in the process of changing jobs, is called __________.
frictional unemployment
If the economy moves into a recession, monetarists argue that the Fed should:
keep the money supply growing at a constant rate.
Countries that grant their central banks higher degrees of independence from the political process are more likely to have:
lower inflation.
The __________ the interest rate, the more investment projects firms can profitably undertake, and the __________ the quantity of loanable funds they will demand.
lower, greater
The unemployment rate in the United States is usually __________ than the unemployment rates in most other high-income countries, partly because the United States has __________ requirements for the unemployed to receive government payments.
lower, more stringent
Which of these would be a fiscal policy the government might want to use if the economy is operating at too high a level of output?
Increasing income tax rates
The value of the multiplier is larger when the value of the __________.
MPC is larger
Which of these policies affects the economy through intended changes in the money supply?
Monetary policy
Economic variables that are calculated in current year prices are referred to as __________ variables, while variables that have been corrected to account for the effects of inflation are __________ variables.
nominal, real
Credit cards are:
not part of the money supply.
The economy is in long-run equilibrium when the short-run aggregate supply and the aggregate demand curve intersect at a point:
on the long-run aggregate supply curve
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals:
one.
The Fed conducts monetary policy primarily through:
open market operations.
The output gap is the difference between __________.
potential GDP and actual GDP
One of the primary goals of the Federal Reserve is __________.
price level stability
The theory that workers will use all available information to form forecasts of the future expected inflation is known as:
rational expectations.
According to Milton Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to __________.
rise above or fall below the natural rate
The long-run aggregate supply curve:
shifts to the right as technological change occurs
According to real business cycle theory, a major source of fluctuations in economic activity is __________.
shocks to technology
The aggregate demand and aggregate supply model explains:
short-run fluctuations in real GDP and the price level
The amount by which consumption spending increases when disposable income increases is called __________.
the marginal propensity to consume
If the price level increases, __________.
the money demand curve shifts to the right
If real GDP increases:
the money demand curve shifts to the right.
The process that occurs when an increase in autonomous consumption leads to a bigger increase in real GDP is known as:
the multiplier effect.
The point where economic activity bottoms out in a full business cycle is known as:
the trough
In the late 1970s Federal Reserve Chairman Paul Volcker contracted the money supply to reduce the rate of inflation. One result of this monetary policy was:
to increase interest rates which reduced aggregate demand.
Macroeconomic equilibrium occurs where:
total spending, or aggregate expenditure, equals total production or GDP.
The national debt is best measured as the:
total value of U.S. Treasury securities outstanding.
How many Federal Reserve districts are there?
12
What happens when there is an unplanned decrease in inventories?
Actual investment is less than planned investment.
To calculate personal income from national income, which of the following must be done by the BEA?
Add government transfer payments
Assume that banks are always fully loaned and people hold no cash. Given a required reserve ratio of 10%, an infusion of $100 billion in reserves will result in a maximum of:
$1,000 billion in deposits.
Suppose that velocity is 3 and the money supply is $500 million. According to the quantity theory of money, nominal output equals:
$1.5 billion.
A federal government budget deficit will:
decrease the supply of loanable funds and increase the equilibrium interest rate
When the tax rate increases, the size of the multiplier effect:
decreases.
In measuring changes in the standard of living of a country, economists rely heavily on comparisons over time of real GDP per capita because:
despite its well-known flaws, it is the best means we have of comparing the performance of an economy over time
Which of these predictions can be made using the growth rates associated with the quantity equation?
If the money supply grows at a faster rate than real GDP, there will be inflation.
Taxes and transfer payments that stabilize GDP without requiring explicit actions by policymakers are called __________.
automatic stabilizers
The money multiplier for the United States is __________.
between 2 and 3
If the federal government's expenditures are less than its revenue, there is a __________.
budget surplus
The American Recovery and Reinvestment Act of 2009 is a clear example of:
expansionary fiscal policy.
When many depositors decide simultaneously to withdraw their money from a bank, there is __________.
a bank run
Stagflation is a:
combination of inflation and recession
Which of these do we subtract from GDP to obtain national income?
Depreciation
Who is the chairperson of the Federal Open Market Committee (FOMC)?
The chairperson of the Board of Governors
The federal funds rate is the rate:
at which banks lend to each other.
How can government policies shift the aggregate demand curve to the right?
By increasing government purchases
Which of these factors will cause the aggregate demand curve to shift?
A change in the expectations of households and firms
Which of these factors will shift the short-run aggregate supply to the left?
A decrease in the size of the labor force
Economic growth is important to an economy because it typically translates to:
A higher standard of living for the country's population.
Which of these persons is officially unemployed?
A non-working individual who has looked for a job in the past week
When the economy is in a recession, the government can:
increase government purchases or decrease taxes in order to increase aggregate demand.
An increase in household wealth will:
increase the consumption component of aggregate expenditure.
Budget deficits automatically __________ during recessions and __________ during expansions.
increase, decrease
The only way that the standard of living of the average person in a country can increase is by:
increasing production faster than population growth
Which of the following are not counted as final goods and used in the GDP calculation?
Intermediate goods
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion in disposable income?
$90 billion
Which of these is not one of the four main goals of monetary policy?
Home ownership
The role of technological progress in determining economic growth can be described by which statement?
Per capita output will rise when we discover new and more effective uses of capital and labor.
Disposable personal income is equal to personal income minus
Personal tax Payments
When we say that money serves as a unit of account, we mean that:
Prices are quoted in terms of money.
Which of these government policies can help economic growth?
Promoting the existence of an efficient financial system
Which of these is a function that the financial system provides for savers and borrowers?
Providing increased liquidity for savers and Matching savers and borrowers
Which measure of GDP represents changes in the quantity of goods and services produced in the economy, holding prices constant?
Real GDP
If the MPC is 0.8, then a $100 million increase in government expenditures will increase equilibrium GDP by __________.
$500 million
If the marginal propensity to save (MPS) is 0.2, how much additional consumption will result from an increase of $100 billion in disposable income?
$80 billion
Which of the following goods and services would be excluded from personal consumption expenditures in the Bureau of Economic Analysis (BEA) statistics?
A new house
In the real business cycle model, which of these best explains an increase in real GDP above the full-employment level?
A positive technology shock
Which of these statements about interest rates and inflation is true?
If there is zero inflation, the nominal interest rate is equal to the real interest rate.
The sum of all currency in the hands of the public plus demand deposits and other checkable deposits plus traveler's checks is the official definition of:
M1
The actions the Federal Reserve takes to manage the money supply and interest rates in order to pursue economic objectives are called __________.
Monetary policy
If the government begins running a budget deficit, what impact will the deficit have on the loanable funds market?
The supply of loanable funds will decrease.
Every time the federal government runs a budget deficit, the Treasury must:
borrow funds from savers by selling U.S. Treasury securities.
In general, __________ have much lower unemployment rates than other individuals with other levels of education.
college graduates
As the value of a country's real GDP increases, the country is likely to:
devote more resources to pollution reduction
Government policies that increase aggregate demand are called __________.
expansionary policies
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall, increase
When aggregate demand increases, unemployment will usually __________ and inflation will __________.
fall, rise
Under Fed Chairman Alan Greenspan's leadership the Federal Reserve shifted its policy and began targeting the __________ to accomplish policy goals.
fed funds rate
The "normal or natural" underlying level of unemployment in the economy is the __________.
full employment rate of unemployment
According to real business cycle theory, shifts in aggregate demand:
have no impact on real GDP.
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is __________ , so the quantity of money demanded will be __________.
low, high
When we say that one of the functions of the Fed is to be a lender of last resort, we mean that the Fed:
provides funds to troubled banks that cannot find any other source of funds.
Because the focus of long-run economic growth is on the standard of living of the average person, we measure the standard of living in terms of:
real GDP per capita
The buying and selling of goods and services that is hidden from the government in order to avoid taxes and/or regulation is known as the:
underground economy
