Principles of Macroeconomics
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
Which of the following is an example of an expansionary fiscal policy?
A decrease in taxes.
One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal
A decrease in the money supply and an increase in the interest rate.
Suppose the economy is initially in long-run equilibrium. The Fed decides to increase the required reserve ratioincrease the required reserve ratio. In the short-run, this contractionary monetary policy will cause:
A shift from AD 2AD2 to AD 1AD1 and a movement to point D, with a lower price level and lower output.
Suppose the economy is initially in long-run equilibrium. The government enacts a policy to increase government spending. In the short-run, this expansionary fiscal policy will cause:
A shift from AD 1 to AD 2 and a movement to point B, with a higher price level and higher output.
As of April 2017, which of the following demographic groups has the highest unemployment rate?
African Americans
Real GDP per capita LOADING... is often used as a measure of general well-being. While increases in real GDP often do lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being?
All of the above.
The introduction of Fannie Mae and Freddie Mac into the mortgage-backed securities market by the government
All of the above.
All of the following are arguments against an explicit inflation targeting rule for monetary policy except
An explicit target is easier to understand by households and firms which makes monetary policy more transparent
indicate whether each of the following is a final good, an intermediate good, or neither.
Coffee beans purchased by a coffee shop Intermediate good One share of Google stock Neither A new pick-up truck purchased by a consumer Final good A new home purchased by a family Final good
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
The figure shows the values of the components of GDP for the year 2016. Based on the data shown, which of the following statements regarding the components of GDP is false?
Consumer spending on services is less than the sum of spending on durable and nondurable goods.
What are the four major categories of expenditure?
Consumption, investment, government purchases, and net exports.
is unemployment caused by a recession.
Cyclical unemployment
Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck mechanic?
Cyclically unemployed
According to Costco's CEO, Jim Sinegal: "Paying good wages and keeping your people working for you is good business...Imagine that you have 120,000 loyal ambassadors out there who are constantly saying good things about Costco. It has to be a significant advantage for you." Sources: Alan B. Goldberg and Bill Ritter, "Costco CEO Finds Pro-Worker Means Profitability," ABCnews.com, Aug. 2, 2006; Lori Montgomery, "Maverick CEO Joins Push to Increase Minimum Wage," Washington Post, Jan. 30, 2007. What is Costco's CEO referring to?
Efficiency wages
Why did the Fed help JP Morgan Chase buy Bear Stearns?
Failure of Bear Stearns would lead to a larger investment bank failure. Commercial banks would be reluctant to lend to investment banks.
Consider the following statement: "In the dynamic AD and AS model, contractionary monetary policy causes the price level to fall." The statement is
False. Contractionary policy causes the price level to rise by less than it would have without the policy
Why is GDP an imperfect measurement of total production in the economy?
GDP does not include household production or production from the underground economy.
National income is
GDP minus depreciation.
Suppose an economy is given by the following: Population = 229 million Labor force = 157 million The number of people employed = 149.2 million The number of people unemployed = 7.8 million
Given the information above, the unemployment rate is 5%.
The term "crowding out" refers to a situation where:
Government spending increases interest rates and decreases private investment.
The table and figure show GDP measured in terms of the total income received by households. Use the table and figure to help determine which of the following statements about the division of income is false.
Gross domestic income is measured precisely.
Identify whether the following topics belong in microeconomics or macroeconomics:
How does the price of corn change if the price of wheat increase? Microeconomics Identify the best measurement of total output in the US economy. Macroeconomics How will an increase in government spending impact the inflation rate? Macroeconomics The most efficient market structure is perfect competition. Microeconomics
Which of the following is not a cost created by high inflation?
Inflation causes the real wage to fall which means that firms have to pay more for workers.
The Federal Reserve cannot affect real GDPreal GDP directly; therefore, the Fed typically uses the following as its policy target
Interest rates.
How do investment banks differ from commercial banks
Investment banks generally do not lend to households. Your answer is correct. B. Investment banks do not take deposits.
The BLS uses the establishment survey LOADING... to collect information on employment in the economy. Indicate one drawback of the establishment survey compared to the current population survey and indicate one advantage.
It is based on company payroll and not on unverifiable answers. Your answer is correct.C. It does not include information about self-employed people.
Since 1948, which of the following best describes the trend in the labor force participation rate LOADING...?
It is decreasing for men and increasing for women.
Suppose the fixed interest rate on a loan is 5.75% and the rate of inflation is expected to be 4.25%. The real interest rate is 1.5%. Suppose now that instead of 4.25%, the inflation rate unexpectedly reaches 5.5%. Who gains and who loses from this unanticipated inflation?
Lenders lose from a lower real interest rate. Borrowers gain from a lower real interest rate.
A policy of decreasing the marginal income tax rate to increase labor supply is intended to result in:
Long run supply side effects.
Which of the following is NOT a monetary policy LOADING... goal of the Federal Reserve bank (the Fed)?
Low prices
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
Which of the following statements about prices and inflation is not correct?
Prices generally increase at the same rate across most periods of time.
If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?
Procyclical policy
Which of the following can give an early warning of future increases in the price level?
Producer price index
Which of the following would be included in the gross national product (GNP) of the United States?
Production from a U.S. firm that operates in Mexico.
Suppose the base year is 2001. Looking at GDP data from the United States from 2001 to the present, what would be true of the relationship between nominal GDP and real GDP LOADING...?
RGDP < NGDP because prices are rising.
Which of the following is not an issue with using active monetary policy to reduce business cycles?
Real GDP and employment changes from monetary policy actions can move in a countercyclical manner
What effect do labor unions LOADING... have on the unemployment rate?
Since few non-government workers are unionized, there is no significant effect on the unemployment rate.
How does the U.S. economy create and destroy millions of jobs each year?
Some businesses are expanding, while others are contracting. In the market system, new firms are constantly entering and exiting various industries.
Which of the following statements about the consumption component of GDP is not correct?
Spending on services is smaller than the amount of consumption spending on durable and nondurable goods. Your answer is correct.
Suppose that Sally J. Society recently lost her job as an underwater welder. In looking for a new job, she discovers that the only available jobs are for economists and that there are no openings for underwater welders because the trade is now obsolete. If Sally J. Society decides to return to school to earn an Economics degree, what is the best classification of her unemployment status?
Structurally unemployed
The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them.
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
The federal funds rate
The Federal Reserve has multiple economic goals for monetary policy to achieve, However, it can be difficult to manage all of the goals at once. Which of the following is not true regarding the multiple goals of the Fed?
The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money. Your answer is correct.
is the percentage of the working-age population in the labor force.
The labor force participation rate 61.8%
Why might increasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation
The legislative process experiences longer delays than monetary policy.
Which of the following is not a viable monetary policy target for the Fed?
The money demand.
What are the Fed's main monetary policy targets?
The money supply and interest rates
Which of the following are examples of discretionary fiscal policy
The president and Congress reduce tax rates to increase the amount of investment spending. Your answer is correct.B. The government provides stimulus funds to repair roads and bridges to increase spending in the economy. F. Congress provides a tax rebate to encourage additional spending in order to reduce the unemployment rate.
How do unemployment insurance payments LOADING... in the United States and social insurance programs in other countries increase the unemployment rate?
They decrease the opportunity cost of job search.
Fiscal policy refers to:
The government's use of taxes and expenditures to achieve macroeconomic policy objectives.
ndicate whether the following statement is true or false and why. "A wage rising slower than the rate of inflation is actually falling."
True. If wages are increasing slower than the average price of goods and services, purchasing power falls.
What are the four categories of income?
Wages, Interest, Rent, and Profit.
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
Which of the following equations sums up the components of Gross Domestic Product (GDP)?
Y=C+I+G+NX
A recession occurs when an economy experiences a period in which there is
a decrease in total production
Even perfectly anticipated inflation imposes costs. Why?
all of the above
How does a budget deficit LOADING... act as an automatic stabilizer and reduce the severity of a recession?
all of the above
In the figure to the right, when the money supply increased from MS 1MS1 to MS 2MS2, the equilibrium interest rate fell from 4% to 3%. Why?
all of the above
Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?
all of the above
When the economy is at full employment,
all of the above
Which of the following causes changes in the CPI to overstate the true inflation rate?
all of the above
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?
all of the above
What are the gains to be had from simplifying the tax code?
all of the done
When actual GDP is below potential GDP the budget deficit increases because of:
an increase in transfer payments and a decrease in tax revenues.
Government spending and taxes that increase or decrease without any actions taken by the government are referred to as
automatic stabilizers.
Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called
automatic stabilizers.
When the Federal Open Market Committee (FOMC) decides to increase the money supply, it U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it U.S. Treasury securities.
buys Sells
An increase in the money supply in the U.S. will no
cause the value of investing in U.S. financial assets to become more desirable to foreign investors
In the long run, increases in government purchases result in
complete crowding out.
What index is used to measure the average prices paid by a typical family? An average of the prices of the goods and services purchased by a typical family is the:
consumer price index (CPI). 7.73%
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income.
As output (GDP) is increasing, the amount of cyclical unemployment would
decrease
The dynamic aggregate demand and aggregate supply model allows for a more realistic examination of monetary policy over the basic aggregate supply and aggregate demand model by allowing the economy in the dynamic model to
experience continuous inflation and experience long-run economic growth.
The multiplier effect is only a consideration for increases in government purchases.
false
Inventories are part of investment and therefore included in GDP because
firms produce goods, however sometimes the goods may be unsold at the time GDP is computed.
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
frictionally unemployed
Wages earned by households make up 50% of the total income earned in the U.S. economy.
greater than
When examining the circular-flow diagram,
households can use some of their income to purchase goods from foreigners as imports.
The BLS surveys 30,000 households on their spending habits. The results are used to construct a market basket of goods and services purchased by the typical urban family of four. The chart on the right shows these goods and services grouped into eight broad categories for December 2016. The percentages represent the expenditure shares of the categories within the market basket. Which of the following categories make up about three-quarters of the market basket?
housing, transportation, and food
If the government increases expenditure without raising taxes, this will
increase the budget deficit and require the government to borrow additional funds. cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector.
When the Fed uses monetary policy targets, they cannot use both a money supply target and an interest rate target at the same time because
interest rates are determined by money supply and money demand but the Fed does not control money demand.
The federal funds rate
is the rate that banks charge each other for short-term loans of excess reserves
If prices rise over time, then real GDP will be
larger than nominal GDP in years before the base year.
Personal income is
national income minus retained corporate earnings plus government transfer payments and interest on government bonds.
One major component of GDP that can be negative is
net exports
Which of the following formulas does the Bureau of Labor Statistics use to calculate the unemployment rate?
number of unemployed/number in labor force X100
Unemployment rates are
ower for college graduates than for people without a high school degree, and vary greatly among ethnic groups.
Disposable personal income is
personal income minus personal taxes.
When compared to the Great Depression, the typical length of unemployment in the modern (post-Great Depression-era) U.S. economy is
relatively brief.
is considered the most relevant interest rate when conducting monetary policy
short-term nominal interest rate
The higher the tax rate, the the multiplier effect.
smaller
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called
supply-side economics.
Why do economists believe that setting a goal of zero percent unemployment is not feasible or desirable? Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because
the economy needs some short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets.
The cyclically adjusted budget deficit is the deficit in the federal government's budget if:
the economy were at potential GDP.
Gross Domestic Product (GDP) is
the market value of all final goods and services produced in a country during a period of time.
The business cycle exists because
total production experiences periods of increases and periods of decreases.
The circular-flow diagram shows that ________ should equal ________. The circular-flow diagram shows that all sources of income are owned by
total expenditure; total income households.
Transfer payments are not included in GDP calculations because
transfer payments are simply transfers of income from one group to another and not a purchase of a new good or service.
When the economy is experiencing a recession automatic stabilizers will cause:
transfer payments to increase and tax revenues to decrease.
The largest component of gross domestic income LOADING... is
wages.
What is the relationship between the unemployment rate and enacting or increasing a minimum wage? When a minimum wage is enacted or increased across a country, the unemployment rate
will increase some but the impacts will be much larger for some groups of workers.
Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?
$70,288
