Macro Exam 3 Practice patrickd

The self-correcting tendency of the economy means that falling inflation eventually eliminates: A. expansionary gaps. B. recessionary gaps. C. exogenous spending. D. unemployment.

...

If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential?

5%

Opportunity cost may be defined as the: A. Goods or services that are forgone in order to obtain something else. B. Dollar prices paid for final goods and services. C. Dollar cost of producing a particular product. D. Difference between wholesale and retail prices.

A. Goods or services that are forgone in order to obtain something else.

A trade deficit occurs when: a. exports exceeds imports b. imports exceed exports c. tariffs exceed quotas d. quotas exceed tariffs e. taxes exceed government spending

B. imports exceed exports

Which of the following would cause both an increase in the average price level and an increase in real output? a. a decrease in the production costs b. a tax hike c. a decrease in government spending d. an increase in transfer payments

D

Which of the following is not an automatic stabilizer? A) Income taxes. B) Unemployment benefits. C) Welfare payments. D) Defense spending.

D) Defense spending.

The fundamental problem of economics is:

The scarcity of resources relative to human wants

If the MPC for an economy is .80, a $4 billion increase in taxes will ultimately cause consumption to decrease by: a. $3.2 billion b. $16 billion c. $36 billion d. 40 billion

a. $3.2 billion

In macroland potential output equals $100 billion and the natural rate of unemployment is 5%. If the actual unemployment rate is 3 percent, then the output gap equals: a. -$4 billion b. -$2 billion c. -$1 billion d. $2 billion e. $4 billion

a. -$4 billion

A trade surplus occurs when: a. exports exceed imports b. imports exceed exports c. tarriffs exceed quotas d. quotas exceed tariffs

a. exports exceed imports

When cash or coins are initially deposited into a bank: a. the composition of the money supply changes, but the size of the money supply does not change b. both the composition and the size of the money supply change c. neither the composition nor the size of the money supply changes d. the composition of teh money supply does not change, but the size of the money supply does change.

a. the composition of the money supply changes, but the size of the money supply does not change

Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines are called:

automatic stabilizers

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ______ in short-run equilibrium output. a. a $1 billion increase b. a greater than $1 billion increase c. no change d. a $1 billion decrease e. more than a $1 billion decrease

b. a greater than $1 billion increase

Diversification is the practice of spreading one's wealth over a variety of different financial investments in order to: a. increase risk b. decrease risk c. increase returns d. decrease returns e. match maturities

b. decrease risk

The objective of stabilization policies is to: a. affect aggregate supply b. eliminate output gaps c. increase potential GDP d. keep inflation constant e. cause business cycles

b. eliminate output gaps

Crowding out is most likely to occur when the federal government: a. runs a surplus and pays off part of the debt b. runs a deficit and sell bonds to make up the difference c. runs a deficit and raises taxes to generate more revenue d. has a balanced budget and refinances a portion of the debt that matures

b. runs a deficit and sell bonds to make up the difference

When money serves as a mechanism for transforming current income into future purchases it is functioning as a: a. Standard of account b. store of value c. medium of exchange d. standard of value

b. store of value

If actual GDP equals potential GDP, then: a. the actual unemployment rate is greater than the natural rate of unemployment b. the actual unemployment rate equals the natural rate of unemployment c. the actual unemployment rate is less than the natural rate of unemployment. d. there is a recessionary gap e. there is an expansionary gap

b. the actual unemployment rate equals the natural rate of unemployment

The vertical intercept of the consumption function equals ____ and the slope equals _____. a. the mpc; the exogenous component of consumption b. the exogenous component of consumption; the mpc c. the unplanned component of consumption; the planned component of consumption d. the planned component of consumption; the unplanned component of consumption e. planned aggregate spending; the multiplier

b. the exogenous component of consumption; the mpc

If the US has a 300 billion net capital inflow, then there must be a: a. trade surplus of 300 billion b. trade deficit of 300 billion c. no trade surplus or trade deficit d. net capital outflow of 600 billion e. trade surplus of 600 billion

b. trade deficit of 300 billion

In contrast to structural deficit, the cyclical deficit reflects: a. Changes in discretionary fiscal policy b. Fiscal-policy decisions c. Fluctuations in economic activity d. Changes in the "full-employment" deficit

c. Fluctuations in economic activity

If the marginal propensity to consume equals 0.65, then a $100 increase in after-tax disposable income leads to a ______ increase in consumption.

d. $65

If total reserves for a bank are 12,000, excess reserves are $2,000, and demand deposits are 100,000, then the money multiplier must be: a. 5 b. 15 c. 20 d. 10

d. 10

If aggregate demand increases by the amount of recessionary GDP gap and aggregate supply is upward sloping: a. the economy will move to full employment b. an inflationary GDP gap will develop c. an AD surplus will occur d. A recessionary GDP gap will still exist

d. A recessionary GDP gap will still exist

A tax cut: a. directly decreases the disposable income of consumers b. indirectly increases the disposable income of consumers c. shifts the AD curve to the left d. Contains less fiscal stimulus than an increase in government spending of the same size.

d. Contains less fiscal stimulus than an increase in government spending of the same size.

According to Okun's Law, when cyclical unemployment decreases by one percentage point, the recessionary gap _____ by _____ percentage point(s), measured in relation to potential output. a. increases; one b. increases; two c. decreases; one d. decreases; two e. decreases; three

d. decreases; two

Which of the following is an argument against balancing the federal budget? a. an increase in government spending and taxes by the same amount does not affect income b. doing so may prevent the government from paying off its debts c. the federal government spends and interferes with the economy too much d. doing so may prevent the government from pulling the economy out of recession

d. doing so may prevent the government from pulling the economy out of recession

In an open economy, domestic investment equals: a. net capital inflows b. net capital outflows c. domestic saving d. domestic saving plus net capital inflows e. domestic saving plus net capital outflows

d. domestic saving plus net capital inflows

Government policy actions intended to increase planned spending and output are called ____ policies. a. aggregate b. monetary c. fiscal d. expansionary e. recessionary

d. expansionary

Firms that extend credit to borrowers using funds from savers are called: a. bond dealers b. stock brokers c. central banks d. financial intermediaries e. credit funders

d. financial intermediaries

When real output decreases, planned aggregate expenditures increase because: a. autonomous expenditures increase b. autonomous expenditures decrease c. induced expenditures increase d. induced expenditures decrease e. unplanned expenditures decrease

d. induced expenditures decrease

In the short run with predetermined prices, when output is less than planned aggregate expenditure: a. potential output is greater than short-run equilibrium output. b. potential output is less than short-run equilibrium output c. potential output equals short-run equilibrium output d. planned investment is greater than actual investment e. planned investment is less than actual investment

d. planned investment is greater than actual investment

Financial systems in market economics improve the allocation of saving in each of the following ways EXCEPT by: a. Providing information about which potential use of funds will be most productive. b. helping savers to share the risk of individual investment projects. c. evaluating the potential productivity of alternative capital investments. d. making savings available to risky but potentially profitable projects. e. allowing political favoritism to determine which projects are funded.

e. allowing political favoritism to determine which projects are funded.

When a US company purchases a lumber mill in Bosnia, from the US perspective this is a(n): a. import b. export c. trade balance d. capital inflow e. capital outflow

e. capital outflow

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars, government purchases must be: a. increased by $10 billion b. decreased by $10 billion c. increased by more than $10 billion. d. increased by less than $10 billion e. decreased by less than $10 billion

e. decreased by less than $10 billion

In an open economy, the domestic real interest rate is determined by 3 things.

e. domestic saving, domestic investment, and net capital inflows.

In the Keynesian model, a 5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output. a. a 5 bill increase b. a greater thatn 5 bil increase c. no change d. a 5 bil decrease e. more than a 5 bil decrease

e. more than a 5 bil decrease

In an open economy, a decrease in national saving _______ the equilibrium domestic real interest rate and the quantity of net capital inflows _______ and the quantity of domestic investment _______. Increase vs decrease

increases; increases; decreases

83. The U.S. government incurred a national debt for the first time during: A) World War II. C) The Revolutionary War. B) Ronald Reagan's presidency. D) The Great Depression.

revolutionary war

Potential output is?

the amount of output produced when resources are used at normal rates

When the interest rate on newly issued bonds decreases, the price of existing bonds: A. increases B. decreases C. increases only if the coupon rate is below the new rate D. may either increase or decrease E. does not change

A. increases

An income transfer can best be defined as: A) A payment received for which no current goods or services are exchanged. B) Those expenditures which make up discretionary fiscal spending. C) Those payments which result in "crowding out" of discretionary fiscal spending. D) The excess of tax revenues over federal spending when a budget surplus occurs.

A) A payment received for which no current goods or services are exchanged.

The crowding out effect refers to a decrease in: A) Consumption or investment as a result of an increase in government borrowing. B) Investment resulting from an increase in consumption and a decrease in savings. C) Government spending resulting from a decrease in taxes. D) Consumption resulting from an increase in investment.

A) Consumption or investment as a result of an increase in government borrowing.

The government establishes the rules of the game for economic transactions in order to: A. Legitimatize and enforce contracts. B. Discourage the production of capital. C. Discourage the ownership of property. D. Encourage spillover costs

A. Legitimatize and enforce contracts.

Given an economy that is experiencing high unemployment, the amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is: A. The AD shortfall. B. The AD excess. C. The recessionary GDP gap. D. The inflationary GDP gap

A. The AD shortfall.

A banking panic is an episode in which: A. depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system. B. commercial banks, fearing Federal Reserve sanctions, unwillingly participate in open-market operations. C. commercial banks, concerned about high interest rates, rush to borrow at the Federal Reserve discount rate. D. depositors, afraid of increasing interest rates, attempt to engage in discount-window borrowing at the Federal Reserve.

A. depositors, spurred by news or rumors of possible bankruptcy of one bank, rush to withdraw deposits from the banking system.

When the interest rate on newly issued bonds increases, the price of existing bonds: A. increases B. decreases C. increases only if the coupon rate is below the new rate D. may either increase or decrease E. does not change

B

Automatic stabilizers tend to stabilize the level of economic activity because they: A) Are changed quickly by Congress. B) Increase the size of the multiplier. C) Increase spending during recessions and reduce spending during inflationary periods. D) Control the rate of change in prices.

C) Increase spending during recessions and reduce spending during inflationary periods.

Which of the following is not an automatic stabilizer? A) Unemployment compensation. C) Social security benefits. B) Income taxes. D) Welfare payments.

C) Social security benefits.

The current chairman of the Federal Reserve is: A. Alan Greenspan. B. George W. Bush. C. Ben Bernanke. D. Nancy Pelosi.

C. Ben Bernanke

When a Peruvian buys a US government bond, from the perspective of Peru, this is a(n): A. import B. export C. trade balance D. capital inflow E. capital outflow

E. capital outflow

An economy with a trade surplus must also have: a. a trade deficit b. a budget surplus c. a budget deficit d. positive net capital inflows e. positive net capital outflows

E. positive net capital outflows

The doctrine of laissez faire is based on the belief that: a. Markets are likely to do a better job of allocating resources than government directives. b. Government directives are likely to do a better job of allocating resources than markets. c. Government failure does not exist. d. Markets result in an unfair distribution of income.

a. Markets are likely to do a better job of allocating resources than government directives.

One drawback in using fiscal policy as a stabilization tool is that fiscal policy: a. affects potential output as well as planned aggregate expenditure. b. effects are frequently offset by automatic stabilizers c. is too flexible to use to close output gaps d. is not useful for dealing with prolonged episodes of recession e. does not affect planned aggregate expenditure.

a. affects potential output as well as planned aggregate expenditure.

The two parts of the Keynesian consumption function are consumption that depends on ____ and consumption that depends on _____. a. disposable income; factors other than disposable income b. planned spending; unplanned spending c. real income; nominal income d. money; wealth e. potential output; actual output

a. disposable income; factors other than disposable income

For an economy starting from potential output, an increase in autonomous expenditure in the short run results in a(n): a. expansionary output gap b. recessionary output gap c. increase in potential output d. decrease in potential output e. increase in cyclical unemployment

a. expansionary output gap

If short-run equilibrium equals 20,000 and potential output (Y*) equals 15,000, then this economy has a(n) _____ gap that can be closed by _______. a. expansionary; increasing taxes b. expansionary; increasing transfer payments c. expansionary; increasing government purchases d. recessionary; increasing government purchases e. recessionary; increasing taxes

a. expansionary; increasing taxes

If firms sell more output than expected, planned investment: a. is greater than actual investment b. is less than actual investment c. equals actual investment d. equals zero e. equals aggregate demand

a. is greater than actual investment

Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint? a. less government expenditure and higher taxes b. more government expenditure and lower taxes c. more government expenditure and higher taxes d. less government expenditure and lower taxes

a. less government expenditure and higher taxes

The principal amount of a bond is the amount: a. originally lent b. of interest agreed upon when the bond was originally issued c. paid to the bondholders is entitled to when the bond matures d. of interest the bondholder is entitled to when the bond matures e. the bondholder receives even if the borrower defaults on the loan.

a. originally lent

The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for: a. price-level changes b. multiplier effects c. fiscal stimulus d. feedback effects

a. price-level changes

In the short run with predetermined prices, when output is less than planned aggregate expenditure firms will: a. reduce production b. increase production c. increase planned aggregate expenditure d. decrease planned aggregate expenditure e. reduce potential output

b. increase production

Much of each year's federal budget is considered "uncontrollable" because: a. it must be spend for purchases as opposed to transfer payments b. most of the current revenues and expenditures are the result of decisions made in prior years c. Government spending is so large that it's out of control d. it is determined by decision-makers who do not have the power to change spending and taxes.

b. most of the current revenues and expenditures are the result of decisions made in prior years

Market oriented financial systems in countries such as the US improve the allocation of savings by: a. eliminating risk and raising interest rates for savers b. providing information to savers and helping savers share risks c. centralizing decision making and lowering costs for borrowers d. maximizing allocations to risky projects and allowing noneconomic conditions to influence decisions e. raising interest rates and helping savers assume risk

b. providing information to savers and helping savers share risks

For an economy starting from potential output, a decrease in planned investment in the short run results in a(n): a. expansionary output gap b. recessionary output gap c. increase in potential output d. decrease in potential output e. decrease in cyclical unemployment

b. recessionary output gap

If domestic saving is less than domestic investment, then a country will have a _______ and ______ net capital inflows. a. trade deficit; negative b. trade deficit; positive c. trade balance; zero d. trade surplus; negative e. trade surplus; positive

b. trade deficit; positive

Given a required reserve ratio .25, what is the maximum amount that the money supply can increase in response to a 200 million increase in excess reserves for the whole banking system? a. 200 million b. 250 million c. 800 million d. 500 million

c. 800 million

Suppose University Bank has zero excess reserves. If the required reserve ratio decreases, the: a. Money multiplier will decrease b. Bank will not have enough required reserves c. Bank will be able to make more loans d. Bank's assets will increase

c. Bank will be able to make more loans

If the multiplier is 5 and a change in government spending leads to an $800 million decrease in aggregate demand, we can conclude that: a. taxes increased by $500 million b. taxes decreased by $140 million c. Government spending decreased by $160 million d. Government spending decreased by $100 million

c. Government spending decreased by $160 million

A legal promise to repay a debt is called: a. equity b. stock c. a bond d. a dividend e. the principal amount

c. a bond

Assume the economy is operating below full employment. Which of the following policy actions will allow aggregate spending to increase but will not increase the size of the government in the process? a. Decrease government spending by more than an increase in taxes b. increase government spending and taxes by the same amount c. decrease tax rates and leave government spending unchanged d. increase government spending and leave tax rates unchanged

c. decrease tax rates and leave government spending unchanged

when government directives do not produce better economic outcomes, which of the following has occurred? a. scarcity b. macroeconomic failure c. government failure d. market failure

c. government failure

When real output increases, planned aggregate expenditures increase because: a. autonomous expenditures increase b. autonomous expenditures decrease c. induced expenditures increase d. induced expenditures decrease e. unplanned expenditures decrease

c. induced expenditures increase

The current price of a stock increases when: a. expected future dividends decrease b. the expected future price of stock decreases c. interest rates decrease d. the perceived riskiness of the stock increases e. the risk premium increases

c. interest rates decrease

One drawback in using fiscal policy as a stabilization tool is that fiscal policy: a. does not affect potential output in addition to planned aggregate expenditure b. effects are frequently offset by auto stabilizers c. is not always flexible enough to use to close output gaps d. is not useful for dealing with prolonged episodes of recession e. does not affect planned aggregate expenditure

c. is not always flexible enough to use to close output gaps

A recessionary gap occurs when actual output is ____ potential output. a. equal to b. greater than c. less than d. growing at the same rates e. growing more rapidly than

c. less than

The difference between the economy's potential output and its actual output at a point in time is called the: a. budget deficit b. trade deficit c. output gap d. full-employment rate e. cyclical peak

c. output gap

Consumption, planned investment, government purchases, and net exports are four components of: a. value added b. potential output c. planned aggregate expenditure d. planned aggregate supply e. economic productivity

c. planned aggregate expenditure

the "real burden" of the debt is directly related to: a. the relationship between the Treasury and the Federal Reserve System b. the difference between internally held debt and externally held debt c. the idea of opportunity cost d. how transfers redistribute income

c. the idea of opportunity cost

Initially a bank has a required reserve ratio of 10 percent and no excess reserves. If $1000 is deposited into the bank, then ceteris paribus: a. total reserves will increase by 900 b. this bank can increase its loans by 1000 c. this bank can increase its loans by 900 d. required reserves will increase by 1000

c. this bank can increase its loans by 900

All of the following are characteristics of short-term economic fluctuations except: a. expansions and recessions are felt throughout the economy. b. expansions and recessions are irregular in length and severity c. unemployment falls sharply during recessions d. durable-goods industries are more sensitive to short-term fluctuations than service and non-durable industries. e. recessions tend to be followed by a decline in inflation.

c. unemployment falls sharply during recessions

Recession in the United States typically are: a. limited to a few industries b. limited to specific regions of the country. c. widely felt outside the United States. d. six months in duration e. confined to the domestic economy.

c. widely felt outside the United States.

The amount of output produced when resources are used at normal rates is called: a. a recessionary gap b. an expansion c. an output gap d. potential output e. a boom

d. potential output

If potential output equals $5 billion and actual output equals $4.5 billion, then this economy has a(n): a. budget deficit b. trade deficit c. expansionary gap d. recessionary gap e. value-added gap

d. recessionary gap

The major reason why budget deficits were reduced during the 1990s and why there was a budget surplus in 1998-2000 is because of: a. President Clinton's deficit reduction policies b. the significant reductions in federal spending c. structural surpluses during the period d. the growth of the US economy

d. the growth of the US economy

The natural unemployment rate is equivalent to all of the following EXCEPT the unemployment rate when: a. cyclical unemployment is zero b. there is only frictional and structural unemployment. c. there is no output gap d. the unemployment rate is zero e. neither an expansionary nor recessionary gap exists

d. the unemployment rate is zero

If domestic saving is greater than domestic investment, then a country will have a _______ and ______ net capital inflows. a. trade deficit; negative b. trade deficit; positive c. trade balance; zero d. trade surplus; negative e. trade surplus; positive

d. trade surplus; negative

Stock prices decrease when expected future dividends ______, interest rates ______, and/or the risk premium ____.

decrease, increase, increases

In an open economy, a decrease in the perceived riskiness of domestic assets by foreigners, arising, for example, from an increase in political stability, leads to a(n) ______ in the equilibrium domestic real interest rates and to a(n) ______ in the quantity of domestic investment. increase, decrease, no change

decrease; increase

Automatic stabilizers are provisions in the law that imply automatic ______ in government spending or _______ in taxes when real output increases. i. increases ii. decreases iii. no change

decreases; increases

Claims to partial ownership of a firm are called: a. bonds b. dividends c. capital gains d. principal e. stock

e. stock

The natural rate of unemployment is the unemployment rate when there is only: a. structural unemployment b. frictional unemployment c. cyclical unemployment d. structural and cyclical unemployment e. structural and frictional unemployment

e. structural and frictional unemployment

Economic activity moves from a trough into a period of ______ until it reaches a ______ and then into a period of ______. i. expansion vs recessions ii. peak vs trough iii. recession vs expansion

expansion; peak; recession