Macro Exam 2

GDP is $12 trillion this year in a closed economy (M-X = 0). Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion and government transfers are zero. How much is private saving? $4 trillion -$0.5 trillion Correct! $3.5 trillion $2.5 trillion

$3.5 trillion

END HW 5

END HW 1

Income-expenditure equilibrium real GDP is the level of real GDP at which: autonomous consumption equals planned inventory investment. Correct! GDP equals planned aggregate spending. there is no savings. the unemployment rate is zero.

GDP equals planned aggregate spending.

Reference: Ref 10(25)-4 Figure: Loanable Funds (Figure: Loanable Funds) Use Figure: Loanable Funds. Which scenario might produce a new equilibrium interest rate of 5% and a new equilibrium quantity of loanable funds of $150 billion? Businesses become more optimistic about the return on investment spending. Correct! There is an increase in capital inflows from other nations. Consumption as a fraction of disposable income increases. The federal government has a budget surplus, rather than a budget deficit.

There is an increase in capital inflows from other nations.

A financial asset is: the value of accumulated savings. a physical asset like a car. Correct! a claim that entitles the owner to future income from the seller. another term for capital.

a claim that entitles the owner to future income from the seller.

Figure: Policy AlternativesReference: Ref 12(27)-9 Figure: Policy Alternatives(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a) and the government does not intervene, the result will likely be: Correct! a shift of SRAS1 to SRAS2. a shift of LRAS to the left. no change in AD or SRAS. a shift of AD1 to the left.

a shift of SRAS1 to SRAS2.

Reference: Ref 9(24)-4 Figure: Productivity (Figure: Productivity) Use Figure: Productivity. An improvement in technology with everything else remaining unchanged is shown on the diagram as a movement from: A to B. B to A. A to C. C.B to C.

C.B to C.

Compared with individual loans, loan-backed securities provide _____diversification and _____ liquidity than individual loans. less; more Correct! more; more more; less less; less

more; more

A financial intermediary that sets up a diversified portfolio of stocks and then resells that portfolio to individual investors is known as a: brokerage company. credit card company Correct! mutual fund. life insurance company.

mutual fund.

Four types of financial intermediaries are: Correct! mutual funds, pension funds, life insurance companies, and banks. the central bank, government, the stock market, and the Dow Jones Industrial Average. mutual funds, pension funds, government, and the central bank. banks, stock markets, pension funds, and the central bank.

mutual funds, pension funds, life insurance companies, and banks.

The marginal propensity to consume is: the change in consumer spending minus the change in aggregate disposable income. Correct! the change in consumer spending divided by the change in aggregate disposable income. increasing if the marginal propensity to save is increasing. the proportion of total disposable income that the average family saves.

the change in consumer spending divided by the change in aggregate disposable income.

Human capital is: robots that can perform tasks that only humans could do in the past. not as important as physical capital. the machinery and tools that each worker owns. the improvement in labor made possible by education and knowledge that is embodied in the workforce.

the improvement in labor made possible by education and knowledge that is embodied in the workforce.

The BEST way to reduce financial risk is to: buy stock only in a major company. never buy stock in foreign companies. Correct! buy a variety of assets, both financial and physical. buy bonds only in a major company.

buy a variety of assets, both financial and physical.

An illiquid asset: Correct! cannot quickly be converted into cash with little loss of value. cannot be sold. provides the owner no return or income. is a tangible asset.

cannot quickly be converted into cash with little loss of value.

Conditional convergence suggests that poorer countries: are still catching up to richer countries. have growth rates that are dependent on their birth rates. have growth rates that are dependent on their ties to a richer country. Correct! have GDPs that may not catch up to those of richer countries without changes in education and infrastructure.

have GDPs that may not catch up to those of richer countries without changes in education and infrastructure.

Suppose that productivity increases as workers' health improves. This increase in productivity will: cause a movement down the short-run aggregate supply curve from right to left. Correct! shift the short-run aggregate supply curve to the right. cause a movement up the short-run aggregate supply curve from left to right. shift the short-run aggregate supply curve to the left.

hift the short-run aggregate supply curve to the right.

Long-run economic growth will be sustainable: because pollution and urban sprawl are not real problems. Correct! if it can continue in spite of the limited supply of natural resources and the impact of growth on environment. because there are plenty of natural resources left to be consumed in the future. because the natural resource scarcity and other environmental issues are not really as serious as they seem.

if it can continue in spite of the limited supply of natural resources and the impact of growth on environment.

Figure: Inflationary and Recessionary GapsReference: Ref 12(27)-7 Figure: Inflationary and Recessionary Gaps(Figure: Inflationary and Recessionary Gaps) Refer to Figure: Inflationary and Recessionary Gaps. The intersection of SRAS with AD in panel (a) indicates an economy: in an inflationary gap. Correct! in a recessionary gap. with an unusually low unemployment rate. in long-run equilibrium.

in a recessionary gap.

Reference: Ref 11(26)-13 Figure: Aggregate Expenditures Curve I (Figure: Aggregate Expenditures Curve I) Use Figure: Aggregate Expenditures Curve I. Suppose that the government's purchases of goods and services in this economy rise by $100. Real GDP will: decrease by $100. Correct! increase by $200. increase by $800. decrease by $200.

increase by $200.

Reference: Ref 10(25)-12 Figure: Crowding Out (Figure: Crowding Out) Use Figure: Crowding Out. The demand for loanable funds curve DLF1 will shift to DLF2 when there is a(n): decrease in private savings. decrease in the government budget deficit. increase in private savings. Correct! increase in the government budget deficit.

increase in the government budget deficit.

Figure: Policy AlternativesReference: Ref 12(27)-9 Figure: Policy Alternatives(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. In panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it will MOST likely: decrease the quantity of money. Correct! increase its spending. increase taxes. decrease its spending.

increase its spending.

Suppose the marginal propensity to consume equals 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, real GDP will _____ by _____. increase; $90 billion decrease; $500 billion Correct! increase; $500 billion increase; $450 billion

increase; $500 billion

Reference: Ref 10(25)-12 Figure: Crowding Out (Figure: Crowding Out) Use Figure: Crowding Out. If the supply of loanable funds curve shifts to the right, the result will be a(n) _____ in the total amount of borrowing and a(n) _____ in the interest rate. decrease; increase increase; increase Correct! increase; decrease decrease; decrease

increase; decrease

Reference: Ref 10(25)-12 Figure: Crowding Out (Figure: Crowding Out) Use Figure: Crowding Out. If the demand for loanable funds curve shifts to the right, the result will be a(n) _____ in the interest rate and a(n) _____ in the total amount of borrowing in the funds market. Correct! increase; increase decrease; decrease decrease; increase increase; decrease

increase; increase

According to the wealth effect, when prices decrease, the purchasing power of assets _____ and consumer spending _____. Correct Answer increases; increases increases; decreases decreases; increases decreases; decreases

increases; increases

The economic slump in the 1970s looked different from the slump at the beginning of the Great Depression because it was: the result of a lack of confidence that led businesses and consumers to spend less. the result solely of a negative demand shock. the direct result of a contractionary monetary policy. Correct! largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil.

largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil.

Suppose that the stock market crashes, which causes a large decrease in the value of many households' financial assets. The most likely outcome is a _____ the aggregate demand curve. Correct! leftward shift of movement up rightward shift of movement down

leftward shift of

In 1820, Mexico had a higher real GDP per capita than did Japan. Yet now Japan is one of the richest countries in the world and Mexico is poor. Japan's high rate of economic growth can likely NOT be explained by a high: investment in human capital. investment in physical capital. investment in technological progress. Correct! level of government interference.

level of government interference.

The present value of $1 realized one year from now equals: Correct! $1 / (1 + r). $1 * (1 + r). 1 / r. 1 + r.

$1 / (1 + r).

Reference: Ref 11(26)-13 Figure: Aggregate Expenditures Curve I (Figure: Aggregate Expenditures Curve I) Use Figure: Aggregate Expenditures Curve I. The equilibrium level of real GDP in the aggregate expenditures model shown in this figure is: Correct! $1,600. $800. $1,000. $3,200.

$1,600.

GDP is $12 trillion this year in a closed economy (M-X = 0). Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion and government transfers are zero. How much is investment spending? $2.5 trillion $3 trillion Correct Answer $2 trillion $3.5 trillion

$2 trillion $3.5 trillion

Reference: Ref 11(26)-13 Figure: Aggregate Expenditures Curve I (Figure: Aggregate Expenditures Curve I) Use Figure: Aggregate Expenditures Curve I. Suppose that the consumption function in this economy rises by $100. The result will be a _____ increase in the equilibrium level of real GDP. Correct! $200 $800 $100 $1,600

$200

Your textbook costs $90, and you can resell it in one year for $45. If the annual interest rate is 10%, then the present value of the textbook's resale value (to the nearest dollar) is: $45. $90. Correct! $41. $37.

$41.

Suppose that the marginal propensity to consume is 0.8 and investment spending increases by $100 billion. The increase in real GDP is: $125 billion, composed of $100 billion in investment spending and $25 billion in consumption. Correct! $500 billion, composed of $100 billion in investment spending and $400 billion in consumption. $80 billion, composed of $100 billion in investment spending and a decrease in consumption of $20 billion. $100 billion, the same amount as investment spending.

$500 billion, composed of $100 billion in investment spending and $400 billion in consumption.

Reference: Ref 11(26)-9 Figure: Aggregate Expenditures I (Figure: Aggregate Expenditures I) Use Figure: Aggregate Expenditures I. The equilibrium real GDP is: $300 billion. $625 billion. $700 billion. Correct Answer $500 billion.

$500 billion.

Reference: Ref 11(26)-3 Figure: Consumption and Disposable Personal Income (Figure: Consumption and Disposable Personal Income) Use Figure: Consumption and Disposable Personal Income. When disposable personal income is $1,200 billion, consumption is _____ billion. Correct $800! $2,000 $600 $1,200

$800!

You have an opportunity to pay $1,000 today and receive $1,200 a year from now. If the annual interest rate is 20%, the difference between the present value of the benefit and your investment is: Correct! 0. $440. $200. $166.

0.

Reference: Ref 11(26)-13 Figure: Aggregate Expenditures Curve I (Figure: Aggregate Expenditures Curve I) Use Figure: Aggregate Expenditures Curve I. The slope of the aggregate expenditures curve in this figure is: Correct! 0.5. 1.0. 45 degrees. 0.25.

0.5.

Reference: Ref 11(26)-3 Figure: Consumption and Disposable Personal Income (Figure: Consumption and Disposable Personal Income) Use Figure: Consumption and Disposable Personal Income. The slope of the consumption function is: 0.67. 0.60. 0.25. Correct! 0.50.

0.50.

A typical family in the United States in 1900 had a purchasing power equal to _____% of the real U.S. GDP per capita in 2015. 12 1 70 136

12

Reference: Ref 11(26)-13 Figure: Aggregate Expenditures Curve I (Figure: Aggregate Expenditures Curve I) Use Figure: Aggregate Expenditures Curve I. The multiplier in the aggregate expenditures model shown in this figure is: 5. 3. Correct! 2. 1.

2.

Suppose that South Korea is growing at 7% per year and is producing real GDP per capita of about $28,000, while Norway is growing at 3.5% per year and is producing real GDP per capita of $56,000. If all else stays equal, the real GDP per capita for these two countries will converge in _____ years. 4 10 40 Correct! 20

20

Reference: Ref 9(24)-4 Figure: Productivity (Figure: Productivity) Use Figure: Productivity. An increase in physical capital per worker with everything else remaining unchanged is shown on the diagram as a movement from: A to C. B to C. B to A. Correct! A to B.

A to B.

Figure: The MultiplierReference: Ref 12(27)-2 Figure: The Multiplier(Figure: The Multiplier) Refer to Figure: The Multiplier. If this economy is at Y1 and investment spending increases: a downward movement along the AD1 will take place, reflecting a decrease in the price level. AD1 will shift to the left, reflecting a multiplied decrease in real GDP at every price level. an upward movement along the AD1 will take place, reflecting an increase in the price level. Correct! AD1 will shift to the right, reflecting a multiplied increase in real GDP at every price level.

AD1 will shift to the right, reflecting a multiplied increase in real GDP at every price level.

One advantage of bonds over loans is that: bonds are illiquid. each bond is specifically tailored to meet the needs of the borrower so that no two bonds are alike. Correct Answer bonds are more standardized than are loans. bond holders do not face default risk.

Answer bonds are more standardized than are loans.

Reference: Ref 10(25)-4 Figure: Loanable Funds (Figure: Loanable Funds) Use Figure: Loanable Funds. Which scenario might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150 billion? The federal government has a budget surplus, rather than a budget deficit. Correct! Businesses become more optimistic about the return on investment spending. Consumption as a fraction of disposable income increases. There is an increase in capital inflows from other nations.

Businesses become more optimistic about the return on investment spending.

Reference: Ref 10(25)-4 Figure: Loanable Funds (Figure: Loanable Funds) Use Figure: Loanable Funds. Which scenario might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $75 billion? The federal government runs a budget deficit, rather than a surplus. The government eliminates taxes on income from interest earned. Correct! Capital inflows from foreign citizens decline. Profit expectations for business investments become less optimistic.

Capital inflows from foreign citizens decline.

Diminishing returns to physical capital implies that, when the human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to _____ productivity. a larger increase in a decrease in negative smaller increase in

Correct! a smaller increase in

Reference: Ref 10(25)-4 Figure: Loanable Funds (Figure: Loanable Funds) Use Figure: Loanable Funds. Which scenario might produce a new equilibrium interest rate of 4% and a new equilibrium quantity of loanable funds of $75 billion? The federal government runs a budget deficit, rather than a surplus. Capital inflows from foreign citizens decline. The government eliminates taxes on income from interest earned. Correct! Profit expectations for business investments become less optimistic.

Profit expectations for business investments become less optimistic.

According to Thomas Malthus's work, which statement is TRUE? Technology could be counted on to increase output per worker. Correct! The amount of land per worker will eventually decline. The amount of capital per worker will rise. As population grows, so will output per worker.

The amount of land per worker will eventually decline.

A downward shift in the consumption function can be caused by: an increase in the marginal propensity to consume. Correct! a decline in consumer wealth. an increase in the wealth of households. expectations of higher incomes.

a decline in consumer wealth.

GDP is $12 trillion this year in a closed economy(M-X = 0). Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion and government transfers are zero. What is the government budget balance? a deficit of $0.5 trillion Correct! a deficit of $1.5 trillion a surplus of $0.5 trillion a surplus of $1.5 trillion

a deficit of $1.5 trillion

Figure: The MultiplierReference: Ref 12(27)-2 Figure: The Multiplier(Figure: The Multiplier) Refer to Figure: The Multiplier. If this economy is at Y1 and the price level decreases: AD1 will shift to the left, reflecting a multiplied decrease in real GDP at every price level. Correct! a downward movement along the AD1 will take place, reflecting a decrease in the price level. AD1 will shift to the right, reflecting a multiplied increase in real GDP at every price level. an upward movement along the AD1 will take place, reflecting an increase in the price level.

a downward movement along the AD1 will take place, reflecting a decrease in the price level.

A negative demand shock can cause: an inflationary gap. crowding out. Correct! a recessionary gap. a liquidity trap.

a recessionary gap.

Figure: Policy AlternativesReference: Ref 12(27)-9 Figure: Policy Alternatives(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a), it is in: simultaneous short-run and long-run equilibrium. Correct! a recessionary gap. an inflationary gap. full employment.

a recessionary gap.

The interest rate effect of a change in the aggregate price level causes the: short-run aggregate supply curve to be positively sloped. long-run aggregate supply curve to be vertical. aggregate demand curve to be positively sloped. Correct! aggregate demand curve to be negatively sloped.

aggregate demand curve to be negatively sloped.

If unplanned inventory investment is positive, probably: Correct! aggregate expenditures on goods and services are less than forecast. the economy is growing rapidly. the stock of inventories is declining. the economy is doing the same, since inventory changes do not affect the economy.

aggregate expenditures on goods and services are less than forecast.

If real GDP grows at an average rate of 3% per year, it will double in _____ years. approximately 36 less than 10 approximately 17 approximately 23

approximately 23

From the standpoint of economic growth, banks are important to: keep interest rates low. fight inflation. channel investment into savings. Correct! channel savings into investment.

channel savings into investment.

The present value of a future payment _____ if the _____. increases; future payment decreases Correct Answer decreases; interest rate increases decreases; interest rate decreases increases; stock market falls

decreases; interest rate increases

The convergence hypothesis says that: aggregate production functions in different countries will all be the same in the long run. Correct! differences in real GDP per capita among countries tend to narrow over time. differences in real GDP per capita do not have much effect on living standards in the long run. differences in real GDP per capita among countries tend to increase over time.

differences in real GDP per capita among countries tend to narrow over time.

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _____ and potential output to _____. fall; decrease rise; increase rise; remain stable Correct Answer fall; remain stable

fall; remain stable

The three consequences of the decline in demand during the Great Depression were _____ prices, _____ output, and a surge in unemployment. falling; increasing Correct! falling; declining rising; declining rising; increasing

falling; declining

If the rate of a return on an investment is (return on project - cost of project) / cost of project * 100, then a business will want a loan when: Correct! interest rate < (return on project - cost of project) / cost of project * 100. rate of return < interest rate. rate of return - interest rate < 0. rate of return > (cost of project - interest rate) / interest rate * 100.

interest rate < (return on project - cost of project) / cost of project * 100.

Figure: Inflationary and Recessionary GapsReference: Ref 12(27)-7 Figure: Inflationary and Recessionary Gaps(Figure: Inflationary and Recessionary Gaps) Refer to Figure: Inflationary and Recessionary Gaps. Yp in panel (b): indicates a decrease in aggregate demand. Correct! is potential output. indicates a recessionary gap. is associated with considerable unemployment.

is potential output.

Potential output: Correct! is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible. is greater in periods of expansion than in recessions. depends on the level of consumer confidence. varies with the price level.

is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible.

Reference: Ref 10(25)-12 Figure: Crowding Out (Figure: Crowding Out) Use Figure: Crowding Out. The supply of loanable funds curve SLF1 shifts to SLF2. This shift implies that: Correct! private savings has increased. private savings has decreased. national investment has decreased. national savings has decreased.

private savings has increased.

Someone who has to decide whether to receive $100 now or $100 one year from now will probably choose _____ since there is a(n) _____ in waiting to use the money. now; benefit Correct! now; opportunity cost one year from now; opportunity cost one year from now; benefit

now; opportunity cost

The BEST available measure of the standard of living in a country is: nominal GDP per capita. real GDP per capita. the growth rate of productivity. the unemployment rate.

real GDP per capita.

Stabilization policies have: only worked for those unemployed. Correct Answer reduced economic fluctuations by neutralizing the effects of demand shocks. not reduced the effects of business cycles caused by either demand shocks. always lowered the government deficits and debt.

reduced economic fluctuations by neutralizing the effects of demand shocks.

Financial markets make borrowing large amounts of money easier because they simplify negotiation between borrowers and lenders. This example illustrates: providing liquidity. acting as a lender of last resort. reducing risk. Correct! reducing transaction costs.

reducing transaction costs.

If all prices, including the nominal wage rate, double in the long run, then aggregate output supplied will: double. fall. rise. Correct! remain unchanged.

remain unchanged.

An increase in the minimum wage would likely: Correct Answer shift the short-run aggregate supply curve to the left. cause a movement up the short-run aggregate supply curve from left to right. cause a movement down the short-run aggregate supply curve from right to left. shift the short-run aggregate supply curve to the right.

shift the short-run aggregate supply curve to the left.

Economists view _____ as investment spending. bonds Correct! spending on physical capital mutual fund investing stocks

spending on physical capital

In the short run, wages and some prices are considered to be: unpredictable. extremely flexible. Correct! sticky. irrelevant.

sticky.

Reference: Ref 11(26)-13 Figure: Aggregate Expenditures Curve I (Figure: Aggregate Expenditures Curve I) Use Figure: Aggregate Expenditures Curve I. Suppose that the consumption function in this economy rises by $100. The result would be a shift in the aggregate expenditures curve: downward by $200. Correct Answer upward by $100. upward by $200. upward by $100 times the multiplier.

upward by $100.

The short-run aggregate supply curve is positively sloped because: workers care about nominal wages, not real wages. of diminishing returns to labor. business people are subject to money illusion. Correct! wages are sticky.

wages are sticky.