Exam 3 Practice Problems

The point at which a recessions ends and an expansion begins is called the:

trough

What is measured on the vertical axis on the Philips curve diagram?

unexpected inflation

Future spending commitments made by governments that are made without a plan to pay for them are:

unfunded liabilities

Quantitative easing is the:

purchase of large quantitative of longer-term government bonds and other securities in an effort to drive down longer-term interest rates

The classical dichotomy means that:

purely nominal variables won't affect real variables in the long run

In late 2008, the Federal Reserve began purchasing billions of dollars' worth of mortgage-backed securities from banks. This was evidence of:

quantitative easing

Most of your competitors rely on inputs produced domestically, but you have developed global supply chains and now half of your inputs come from abroad. You and your foreign suppliers have signed contracts with long-term price guarantees denominated in the foreign currencies. Your competitors plan to raise prices next year by an average of 2/5% but the dollar has appreciated so it is possible that you could:

raise prices by less than 2.5%

A negative output gap implies an unemployment rate that is:

above the equilibrium rate

The federal government gets most of its revenue from:

payroll taxes

The largest source of federal tax revenues is:

payroll taxes

The sequence of business cycle phase is:

peak, recession, trough, and expansion

The Fed rule-of-thumb:

provides guidance for settling a federal funds rate target

The difference between the three=month interbank loan interest rate and the interest rate on short-term U.S. government debt is the:

TED spread

Which statement is FALSE?

The Fed rule-of-thumb sets the federal funds rate on the basis of past inflation rates, whereas inflation targeting is based on a target interest rate and business cycles.

What might be an unintended effect of an inflation rate ceiling?

The real interest rate can become negative if inflation is high enough

Which of the following describes a regressive tax?

Those with less income pay a higher share of their income in taxes

In macroeconomic equilibrium in an open economy:

Y = C + 1 + G + (X - M)

You have saved $747. Where should you go if you want to open a checking account?

a commercial bank

A debt crisis occurs when:

a government cannot repay its loans

Which economic indicator tracks the value of 500 publicly traded firms?

S&P 500

Payroll taxes are 6.2% of income, and Medicare taxes are 2.9% of income. Your employer owes you $665. How much will your wok cost your employer?

$725.52

If the nominal rate of interest is 4.5%, the rate of inflation is 2%, and the risk premium is 1.5%, the risk-free rate is:

1%

You are planning next year's pricing strategy for your music store in a very competitive market. The economy has been doing well, operating at full employment for several years, along with an average annual inflation rate of 2%. There are no economic black clouds on the horizon, so you decide to raise prices by:

2% since that is probably the expected inflation rates

If the nominal rate of interest is 4.8%, the rate of inflation is 2%, and the risk premium is 0.75%, the MP curve is at:

2.8%

If there has been a leftward movement along the Philips curve, the ___ curve has shifted to the ___ .

AD; left

The equation for aggregate expenditure in an open economy is:

C + 1 + G + (X-M)

According to the ___, the target federal funds rate should be positively related to the ___ rate and ___ related to the unemployment rate.

Fed rule-of-thumb; inflation; negatively

In the IS-MP framework of the Fed model, an increase in imports will shift the:

IS curve to the left

In the IS-Mp framework of the Fed model, a decrease in exports will shift the:

IS curve to the left

The Fed model combines the ___ curve, the ___ curve, and the ___ curve to link interest rates, the output gap, and inflation.

IS; MP; Phillips

Why might maintaining an interest rate ceiling in an economy be a bad idea?

If deflation occurs and the real interest rate rises, it will discourage consumption and investment

A firm's real sales rise by 3% this quarter. Is this a sign of a booming economy?

No, the sales growth might have been negative in the previous quarter

A firm's real sales rise by 2% this quarter. Is this a sign of a booming economy?

No, this could be a seasonal effect if the data is not seasonally adjusted.

The idea that a 1% increase in the output gap will lead to a decrease in the unemployment rate of 0.5% in known as ___ law.

Okun's

At the bottom of the screen of CNN Newsroom, the scrolling banner reads, " Consumer confidence reaches decade high. Economists project impressive GDP growth." You recognize this as a ___ shock.

Spending

Your friend, a real estate agent, says that people aren't buying many homes these days, although the economy seems to be doing well. He also tell you that his clients have been unable to afford mortgages as large as they'd like because the interest rate they could qualify for is higher than they expected. Which o the following is NOT a possible explanation for this situation?

Stock market return rose

An excise tax is a tax on:

a specific product

Analysts in your consulting firm concluded that the current rate of unemployment is less than the equilibrium rate, which leads you to conclude that:

actual GDP is greater than potential GDP

Inflation has been low, in the 1%-2% range, recently. If you expect that to continue you have ___ expectations.

adaptive

Taxable income is the:

amount of your income that you pay taxes on

Rising total output accompanied by increasing employment is generally known as:

an expansion

The labor market Phillips curve shows:

an inverse relationship between unemployment and inflation

For the past several months, per capita output has grown more and more slowly, and unemployment has fallen, but both trends appear to have leveled off. Where in the business cycle is the economy?

at a peak

The discount rate is the interest rate the Federal Reserve charges on loans to:

banks

A financial shock is any change in:

borrowing conditions that changes the real interest rate

Which of these services are provided by the local government?

bus services

The short-term fluctuations in economic activity are known as the _____ cycle.

business

Which indicator might be a good predictor of investment?

business confidence

A pattern of expansion, then recession, then expansion again is a(n):

business cycle

Which of these is a tool used by the Federal Reserve to conduct monetary policy?

buying and selling federal government bonds

The Open Market Trading Desk is where the Federal Reserve:

buys and sells government bonds

Congress increases personal income tax rates to balance the budget. Automatic stabilizer will ___ the ___ effect of the ___ in aggregate demand.

decrease; contractionary; decrease

The difference between a budget deficit and government debt is that a:

deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes

Excess demand occurs when:

demand is in excess of supply at the market price

The affordable care act is an example of:

discretionary spending

Planned investment is:

expenditure on capital goods by businesses

If a government is using spending and tax policy to attempt to stabilize the economy, it is using:

fiscal policy

In order to prepare for each meeting, the Federal Open Market Committee (FOMC) members prepare their responses to queries regarding their:

forecasts of economic growth, their suggested policy choices, and their ideas on effective communication regarding Fed plans

When a competitive business sets prices, it takes into account: i. marginal costs ii. competitive prices iii. prices from two decades back iv. monopoly prices

i and ii

Which of these is a tool of monetary policy used by the Federal Reserve? i. open market operations ii. government purchases of goods and services

i only

Which of these changes could lead to a more negative output gap? i. The United States places additional tariffs on imports ii. Foreign countries place tariffs on U.S. exports iii. There is a reduction in availability of money or credit from banks and lenders iv. Consumer pessimism increases

i, ii, iii, iv

The rate of change of inflation is affected by: i. inflation expectations ii. demand iii. the measurement of inflation iv. supply shocks

i, ii, iv

Which of these changes could create a more positive output gap in an economy? i. Government spending increases ii. There is a reduction in taxes iii. The risk premium increases iv. The default rates on loans falls.

i. ii. iv

When using the Fed model, the first step is to:

identify the shock and shift the curve

Which of these changes could lead to a more positive output gap? i. The GDP of an important trading partner falls ii. Defense spending increases iii. Consumer wealth increases iv. The risk premium decreases

ii, iii, iv

You're a Wall Street analyst, constantly incorporating current events into your economic forecasts. Today, the Fed announced that it will lower the federal funds rate to stimulate the economy. Also today, major banks sent out a press release citing concerns that, as unemployment rises, borrowers may not be able to repay their loans. These two circumstances will work:

in opposition, as one raise the real interest rate, and the other lower it.

Expansionary fiscal policy:

increases aggregate demand

On the border between Venezuela and Colombia, vendors make art with Venezuelan bolivars (the currency of Venezuela). This scenario shows the:

loss in the value of the currency

Which would be LEAST likely to cause you to raise prices at your coffee-roasting business next year?

lower demand throughout the economy

If the problem in the economy is very cyclical unemployment, we expect the Federal Open Market Committee (FOMC) to ___ interest rates to ___ spending today.

lower; increase

When the Federal Reserve purchases more long-term bonds, this:

lowers long-term bond interest rates

A bank run occurs when

many people want to withdraw their savings from a bank at the same time, and the bank does not have enough cash on hand

The difference between real GDP and potential GDP is known as the:

output gap

An expansion is a period in which:

output rises

If the output gap is positive, then the Federal Reserve will use its floor framework to ___ the interest on excess reserves, borrow ___ money from financial institutions to set the lower bound for the federal funds rate, and ___ the discount rate to set up the upper bound for the federal funds rate.

raise; more; increase

If the output gap is positive, then the Federal Reserve will use its floor framework to ___ the federal funds rate, influence short- and long-term interest rates ___, and ___ total spending in the economy.

raise; upward; decrease

You read the financial news in The Wall Street Journal every day and subscribe to various government e-mail bulletins about the economy, and you have developed a deep understanding of how macroeconomic variables interact. You are best described as having ______ expectations.

rational

The neutral interest rate is the rate at which:

real GDP equals potential GDP

A period of falling real GDP is the ___ of the business cycle.

recession phase

In 2022 the Federal Reserve made several large interest rate increases, resulting in fears of recession as stock markets rumbled. The Federal Reserve will probably pursue its aggressive policy because it is important to policymakers to:

reduce the public's inflation expectation

What kind of data adjustment removes the effect of sales spikes due to the holiday season?

seasonally adjusted data

As an economist on the Council of Economic Advisers (CEA), your job is to advise the presidents on the economic implications of federal government policies. The United States is experiencing high inflation, which the current administration wishes to ease. Which policy strategy would you recommend?

shifting the IS curve to the left to decrease spending and make the output gap more negative

A business cycle is a:

short-run shift between economic upturns and downturns

When a supply chock causes higher inflation but also causes output to fall, then the economy experiences:

stagflation

Insufficient demand occurs when:

supply is in excess of demand at the market price

If the government's revenues are greater than its purchases of goods and services, then it has a budget:

surplus

The Federal Open Market Committee (FOMC) is made up of:

the Fed governors and the Fed district bank presidents

The members of the Federal Open Market Committee (FOMC) who can actually vote on policy decisions are:

the Fed governors, the New York Fed president, and a rotating group of four other district bank presidents

The framework that the Federal Reserve uses to analyze, forecast, and adjust the economy is called:

the Fed model

Fluctuations between recessions and expansions are known as:

the business cycle

Periodic fluctuations of a country's real gross domestic product (GDP) are known as:

the business cycle

Net government debt is:

the debt that the government owes to individuals, businesses, and other governments both here and abroad

If actual GDP is less than potential GDP

the economy can experience deflation

Social insurance is provided by:

the government

The Phillips curve is upward-sloping because:

the more positive the output gap, the higher inflation rises above expected inflation

In the IS-MP framework of the Fed model, the intersection of the IS and MP curves determines:

the output gap

You hear the host of a podcast discuss the tradeoff between the level of output and inflation, saying that we should be willing to accept higher prices because they will always be accompanied by more output. You turn it off because you know:

the tradeoff is only a short-term phenomenon and output above potential output can only be sustained for so long

There is no long-run trade-off between inflation and output because:

there is a self-fulfilling prophecy of higher inflation expectations leading to higher inflation

What is excess demand?

too many buyers for too few goods

Government payments to households for which no good or service is provided in return are called:

transfer payments