Quizzes 1-5
2013 2013 2018 2018 Product Quantity Price Quantity Price Camera. 100 $10 120 $12 Legal Serv. 50 $15 45 $20 Books. 200 $40 210 $45 A very simple economy produces three goods: cameras, legal services, and books. The quantities produced and their corresponding prices for 2013 and 2018 are shown in the table above. What is real GDP in 2018, using 2013 as the base year?
$10,275
The CPI in 1990 was 131, and the CPI in 2010 was 218. If you earned a salary of $40,000 in 1990, what would be the salary with equivalent purchasing power or real value in 2010?
$66,565
In a closed economy, public saving plus private saving is equal to
investment
A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, then, according to purchasing power parity,
the dollar is undervalued.
Briefly explain why free capital mobility can make it unsustainable for a country's government to have both a fixed exchange rate and the ability to engage in monetary policy during recession or expansion. (3.5) Why would restricting the movement of capital allow the country to have both a fixed exchange rate and monetary policy autonomy? (3.5)
(answering second part first): If a country's government wants to have both a fixed exchange rate and the ability to engage in monetary policy (i.e., monetary autonomy), then they would be choosing Option C of the policy trilemma. If a country's government wants to prevent the ability to move capital in and out, foreigners will not be able to put their funds in that country. If these foreigners can't save their money or have free mobility of their money, then they won't transfer their money into foreign currency. It follows then that the country could manage its exchange rate and have monetary autonomy without any other pressures. Free capital mobility can make it unsustainable for a country's government to have both a fixed exchange rate and the ability to engage in monetary policy. This is because foreigners would look to move funds out of the country looking for higher returns and thus, transferring that country's domestic currency into foreign currency. This would decrease the exchange rate and would cause the domestic currency to depreciate. The central bank might need to intervene then and use its foreign currency reserves to increase the exchange rate. But, there are only a finite amount of foreign currency reserves. Score: 5.5/7
If you borrowed $1,000 at a 5% interest rate last year and the CPI increased from 201 to 208 from last year to this year, what is the real interest rate that you will pay this year?
1.5%
Base Year (2013) 2018 Product Quantity Price Price Soda 100 $0.50 $0.75 Hambrgrs 200 $2.00 $2.50 CDs 10 $20.00 $21.00 Assume the market basket for the consumer price index has three products—soda, hamburgers, and CDs—with the following values in 2013 and 2018 for price and quantity: The Consumer Price Index for 2018 equals
121
If the number of individuals employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the labor force participation rate is
80%
Based on the following information, what is the balance on the current account? Exports of goods and services = $5 billion Imports of goods and services = $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in the United States = $4 billion Increase in U.S. holdings of assets in foreign countries = $1 billion A. -$2 billion B. $1 billion C. $3 billion D. $4 billion
A. -$2 billion
Which of the following is an example of a worker experiencing frictional unemployment? A. A worker quits his job at the U.S. Post Office but is still looking through other job openings. B. A computer programmer loses her job because it is outsourced to India. C. An employee is laid off because the economy is suffering a recession. D. A United Airlines pilot loses her job because of a lack of demand for air travel.
A. A worker quits his job at the U.S. Post Office but is still looking through other job openings.
Which of the following will shift the aggregate demand curve to the left, all else equal? A. An increase in interest rates B. An increase in disposable income C. An increase in expected profits for firms D. An increase in net exports
A. An increase in interest rates
If China has a current account surplus with the United States, then which of the following must be true about China's balance of payments with the United States (assuming the balance on the capital account is zero)? A. China must have a financial account deficit. B. China's balance of trade must be in deficit. C. China's net exports must be negative. D. China's balance of payments must be in deficit.
A. China must have a financial account deficit.
In the figure above, given the economy is at point A in year 1, how will the unemployment rate in year 2 compare to the unemployment rate in year 1? A. It will be greater than the rate in year 1. B. It will be less than the rate in year 1. C. It will be the same as the rate in year 1. D. There is not enough information to answer the question.
A. It will be greater than the rate in year 1.
If the Federal Reserve is using monetary policy to reduce an inflationary gap and decrease the price level, what is likely to happen in the foreign exchange market and to the relative value of the dollar? A. The demand for the dollar will increase and the relative value of the dollar will increase. B. The demand for the dollar will decrease and the relative value of the dollar will increase. C. The demand for the dollar will increase and the relative value of the dollar will decrease. D. The demand for the dollar will decrease and the relative value of the dollar will decrease.
A. The demand for the dollar will increase and the relative value of the dollar will increase.
Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred? A. There was an unplanned increase in inventories equal to $2 million. B. There was no unplanned change in inventories. C. There was an unplanned decrease in inventories equal to $2 million. D. There was an unplanned decrease in inventories equal to $19 million.
A. There was an unplanned increase in inventories equal to $2 million.
Under which of the following circumstances would private saving be positive in a closed economy? A. Y = $10 trillion, C = $5 trillion, TR = $2 trillion, G = $2 trillion, public saving = $1 trillion B. Y = $9 trillion, C = $5 trillion, TR = $1 trillion, G = $1 trillion, public saving = $3 trillion C. Y = $8 trillion, C = $2 trillion, TR = $4 trillion, G = $2 trillion, public saving = $4 trillion D. Y = $6 trillion, C = $2 trillion, TR = $8 trillion, G = $3 trillion, public saving = $1 trillion
A. Y = $10 trillion, C = $5 trillion, TR = $2 trillion, G = $2 trillion, public saving = $1 trillion
Using the money market model, which of the following will lead to a decrease in the equilibrium interest rate in the economy? A. a decrease in the price level B. a sale of Treasury securities by the Federal Reserve C. an increase in GDP D. an increase in the reserve requirement
A. a decrease in the price level
Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories actually grew by only $400,000. This implies that A. aggregate expenditure that year was greater than GDP that year. B. there was an unplanned increase in inventories that year. C. there was a planned increase in inventories that year. D. aggregate expenditure that year was equal to GDP that year.
A. aggregate expenditure that year was greater than GDP that year.
When actual inflation is less than what borrowers and lenders expected inflation to be A. borrowers are worse off than expected and lenders are better off. B. borrowers are better off than expected and lenders are worse off. C. borrowers and lenders both are better off than expected. D. borrowers and lenders both are worse off than expected.
A. borrowers are worse off than expected and lenders are better off.
Suppose the majority of the shares of British Airways stock were sold to a firm in the United States. Assuming all else remains constant, this will A. decrease the balance of the U.S. financial account. B. decrease foreign direct investment into the United States. C. decrease the balance of the U.S. current account. D. create a capital inflow into the United States.
A. decrease the balance of the U.S. financial account.
In the dynamic aggregate demand and aggregate supply model, if AD shifts further than LRAS/SRAS over time, then A. inflation occurs. B. deflation occurs. C. stagflation occurs. D. disinflation occurs.
A. inflation occurs.
Suppose the required reserve ratio is 20 percent. If banks are conservative and choose not to loan out all of their excess reserves, the real-world deposit multiplier would be A. less than 5. B. equal to 5. C. greater than 5. D. equal to 20.
A. less than 5.
Suppose that real GDP is $12.1 trillion, potential real GDP is $12.6 trillion, and fiscal policy multipliers are all greater than one in magnitude. If they wanted to move the economy back to potential real GDP, Congress should A. lower taxes by an amount less than $500 billion. B. raise government purchases by $500 billion. C. raise government purchases by more than $500 billion. D. lower taxes by $500 billion.
A. lower taxes by an amount less than $500 billion.
An appreciating yen makes Japanese products A. more expensive for foreign consumers. B. less expensive for foreign consumers. C. more expensive for Japanese consumers. D. more expensive for both foreign consumers and Japanese consumers.
A. more expensive for foreign consumers.
Workers expect inflation to rise from 3% to 5% next year. As a result, this should A. shift the short-run aggregate supply curve to the left. B. shift the short-run aggregate supply curve to the right. C. move the economy up along a stationary short-run aggregate supply curve. D. move the economy down along a stationary short-run aggregate supply curve.
A. shift the short-run aggregate supply curve to the left.
An increase in the government budget surplus will shift the ______ curve for loanable funds to the _______ and the equilibrium interest rate will _______. A. supply; right; decrease B. supply; left; increase C. demand; right; increase D. demand; left; decrease
A. supply; right; decrease
If the exchange rate changes from $2.00 = £1 to $2.01 = £1 then A. the dollar has depreciated. B. the dollar has appreciated. C. the British pound has depreciated. D. the British pound has stayed constant in value.
A. the dollar has depreciated.
The long-run aggregate supply curve will shift to the right if A. the economy experiences technological change. B. there is a decrease in population. C. the economy experiences high levels of inflation. D. net exports decrease.
A. the economy experiences technological change.
Mike has been out of work for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job A. the unemployment rate increased. B. the labor force participation rate decreased. C. the unemployment rate decreased. D. the working-age population increased.
A. the unemployment rate increased.
If the dollar depreciates, how would we expect aggregate demand in the United States to be affected, all else equal?
Aggregate demand will shift to the right as exports increase.
Suppose the per-worker production function in the figure above represents the production function for the U.S. economy. If the United States decided to double its support of university research, this would likely cause a movement from
B to C
Which of the following would increase the value of the dollar relative to other foreign currencies in the long run? A. An increase in inflation in the United States relative to other countries B. An increase in the demand for American goods relative to goods from other countries C. A decrease in U.S. tariffs on foreign goods D. An increase in the supply of dollars in the foreign exchange market
B. An increase in the demand for American goods relative to goods from other countries
A country in which a significant fraction of domestic production is created by factories and facilities that are owned by foreign firms is most likely a country where A. GNP is much larger than GDP. B. GDP is much larger than GNP. C. GDP is equal to GNP. D. GNP is not comparable to GDP.
B. GDP is much larger than GNP.
Consider two countries, Alpha and Beta. In Alpha, real GDP per capita is $6,000. In Beta, real GDP per capita is $9,000. Based on the economic growth model, what would you predict about the growth rates in real GDP per capita across these two countries? A. The growth rate of real GDP per capita will be lower in Alpha than it is in Beta. B. The growth rate of real GDP per capita will be higher in Alpha than it is in Beta. C. The growth rate of real GDP per capita in Alpha and Beta will be the same. D. The economic growth model makes no predictions regarding differences in growth rates of real GDP per capita across the two countries.
B. The growth rate of real GDP per capita will be higher in Alpha than it is in Beta.
Contractionary monetary policy by the Federal Reserve results in A. an increase in the money supply, an increase in interest rates, and an increase in real GDP. B. a decrease in the money supply, an increase in interest rates, and a decrease in real GDP. C. an increase in the money supply, a decrease in interest rates, and an increase in real GDP. D. a decrease in the money supply, a decrease in interest rates, and a decrease in real GDP.
B. a decrease in the money supply, an increase in interest rates, and a decrease in real GDP.
The statement, "My iPhone is worth $700" represents money's function as A. a medium of exchange. B. a unit of account. C. a store of value. D. a standard of deferred payment.
B. a unit of account.
In the dynamic AD/AS model in the figure above, if the economy is at point A in year 1 and is expected to move to point B in year 2, the Federal Reserve would most likely A. increase interest rates. B. decrease interest rates. C. not change interest rates. D. decrease the inflation rate.
B. decrease interest rates.
Which of the following would you expect to increase the equilibrium interest rate in the economy, all else equal? A. an increase in the percentage of income after taxes that households save B. households believe that the economy will undergo an expansion and begin spending more on large purchases like houses and cars C. a decrease in the profitability of investment projects that firms are considering D. the government begins running a budget surplus
B. households believe that the economy will undergo an expansion and begin spending more on large purchases like houses and cars
If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 billion, then the economy currently A. must be at potential real GDP. B. must be below potential real GDP. C. must be above potential real GDP. D. could be below or above potential real GDP.
B. must be below potential real GDP.
If wildfires in California destroy power lines and cause the price of electricity to suddenly increase, we would expect that the equilibrium price level will ________ and the unemployment rate will ________ in the short run. A. rise; fall B. rise; rise C. fall; fall D. fall; rise
B. rise; rise
People who lost their job as hand-drawn animators because of the increasing popularity of computer-generated 3D animation and the resulting movie industry's shift from hand-drawn to 3D animation are examples of persons who are suffering A. frictional unemployment. B. structural unemployment. C. cyclical unemployment. D. seasonal unemployment.
B. structural unemployment.
The advice to "retrain" would be most appropriate for which of the following types of unemployment? A. frictional unemployment. B. structural unemployment. C. cyclical unemployment. D. core unemployment.
B. structural unemployment.
Which of the following is most likely to be able to sustain long-run economic growth in an economy? A. increases in the labor force participation rate B. technological change C. increases in capital per hour worked D. accumulations of economic resources
B. technological change
If there is a change in the ability of a firm to produce a given level of output with a given level of inputs, we say there is A. human capital investment. B. technological change. C. a decrease in labor productivity. D. a movement along a given per-worker production function.
B. technological change.
An increase in ________ shifts the production function ________, and makes it possible to produce a higher level of GDP with ________ capital per hour worked. A. technology; down; the same amount of B. technology; up; the same amount of C. consumption; up; a lesser amount D. labor productivity; down; the same amount of
B. technology; up; the same amount of
Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full-time college students. This would likely cause A. the unemployment rate to decrease. B. the labor force participation rate to decrease. C. the number of discouraged workers to increase. D. no change in the unemployment rate.
B. the labor force participation rate to decrease.
When an economy faces diminishing returns A. the slope of the per-worker production function becomes steeper as capital per hour worked increases. B. the slope of the per-worker production function becomes flatter as capital per hour worked increases. C. the per-worker production function shifts to the left. D. the per-worker production function shifts to the right.
B. the slope of the per-worker production function becomes flatter as capital per hour worked increases.
If the required reserve ratio is 10 percent, then, assuming the simple deposit multiplier is accurate, an increase in bank reserves of $1,000 can increase checking account deposits (including the original deposit) in the banking system as a whole up to A. $100. B. $1,000. C. $10,000. D. $100,000.
C. $10,000.
In the figure above, potential GDP equals $100 billion. The economy is currently producing GDP1 which is equal to $90 billion. If the MPC is 0.8, then by how much must autonomous spending change for the economy to move to potential GDP? A. -$18 billion B. -$2 billion C. $2 billion D. $18 billion
C. $2 billion
Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be A. 19 percent. B. 15 percent. C. 11 percent. D. 6 percent.
C. 11 percent.
Which of the following is likely to occur as a result of an unplanned decrease in inventories? A. Firms will decrease production orders, decreasing GDP B. Firms will decrease production orders, but GDP will not be impacted C. Firms will increase production orders, increasing GDP D. Firms will not change their production activities
C. Firms will increase production orders, increasing GDP
In the figure above, if the economy is at point L, what will happen? A. Inventories have fallen below their desired level, and firms will decrease production. B. Inventories have fallen below their desired level, and firms will increase production. C. Inventories have risen above their desired level, and firms will decrease production. D. Inventories have risen above their desired level, and firms will increase production.
C. Inventories have risen above their desired level, and firms will decrease production.
In which of the following situations would the Federal Reserve likely conduct contractionary monetary policy? A. The Federal Reserve believes that aggregate demand is growing too slow relative to long-run aggregate supply. B. The Federal Reserve thinks that cyclical unemployment will start to increase. C. The Federal Reserve is concerned that aggregate demand will increase much faster than long-run aggregate supply. D. The Federal Reserve is worried that there will be deflation.
C. The Federal Reserve is concerned that aggregate demand will increase much faster than long-run aggregate supply.
An example of a final good would be A. the soy milk sold to Starbucks. B. the whipped cream sold to Starbucks. C. a soy latte sold by Starbucks to a student. D. the coffee beans sold to Starbucks.
C. a soy latte sold by Starbucks to a student.
The movement from A to B to C illustrates A. an improvement in technology. B. a decline in capital per worker. C. diminishing returns to capital. D. diminishing returns to labor.
C. diminishing returns to capital.
Suppose the government wants to maintain a balanced budget every year. To achieve this goal, the government would need to ________ taxes when the economy falls into recession, which would cause aggregate demand to ________. A. decrease; decrease B. decrease; increase C. increase; decrease D. increase; increase
C. increase; decrease
If the quantity of goods and serviced produced in the economy decreases, A. it may be possible for real GDP to increase. B. real GDP would certainly increase. C. it may be possible for nominal GDP to increase. D. nominal GDP would certainly increase.
C. it may be possible for nominal GDP to increase.
According to the quantity theory of money, deflation will occur if the A. money supply is less than real GDP. B. money supply is more than real GDP. C. money supply grows at a slower rate than real GDP. D. money supply grows at a faster rate than real GDP.
C. money supply grows at a slower rate than real GDP.
The Federal Reserve can attempt to increase the federal funds rate by A. selling Treasury securities, which increases bank reserves. B. buying Treasury securities, which increases bank reserves. C. selling Treasury securities, which decreases bank reserves. D. buying Treasury securities, which decreases bank reserves.
C. selling Treasury securities, which decreases bank reserves.
When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behavior is called A. outlet bias. B. increase in quality bias. C. substitution bias. D. discrimination bias.
C. substitution bias.
If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then A. the MPC is 0.5. B. the MPC is 0.75. C. the MPC is 0.8. D. the MPC is 0.9.
C. the MPC is 0.8.
In the figure above, suppose that the level of GDP associated with point N is potential GDP. If the U.S. economy is currently at point K, then A. firms are operating above capacity. B. the economy is at full employment. C. the economy is in recession. D. the level of unemployment is equal to the natural rat
C. the economy is in recession.
In the figure above, suppose that planned investment spending increases by $10 million, shifting up the aggregate expenditure function and causing GDP to increase from GDP1 to GDP2. If the MPC is 0.9, then, according to our model, what was the corresponding change in GDP from GDP1 to GDP2? A. $9 million B. $10 million C. $90 million D. $100 million
D. $100 million
Consider the market for U.S. dollars in exchange for Japanese yen shown above. Which of the following events could have caused the changes shown in the graph? A. An increase in U.S. real income B. Speculators expect the dollar to depreciate in value in the near future. C. An economic expansion in the United States. D. A decrease in Japanese interest rates.
D. A decrease in Japanese interest rates.
Which of the following is one explanation as to why the aggregate demand curve slopes downward? A. Decreases in the price level raise the interest rate and increase consumption spending. B. Decreases in the price level raise the interest rate and increase investment spending. C. Decreases in the U.S. price level relative to the price level in other countries lower net exports. D. Decreases in the price level raise real wealth and increase consumption spending.
D. Decreases in the price level raise real wealth and increase consumption spending.
Which of the following is consistent with the graph depicted above? A. Businesses believe that the economy will undergo an expansion. B. The government runs a budget surplus. C. Investment spending declines due to crowding out. D. New regulations decrease the profitability of new investment.
D. New regulations decrease the profitability of new investment.
You earned $30,000 in 2009, and your salary rose to $80,000 in 2018. If the CPI rose from 82 to 202 between 2009 and 2018, which of the following is true? A. There was deflation between 2009 and 2018. B. The real value of your salary fell between 2009 and 2018. C. The real value of your salary remained constant between 2009 and 2018. D. The real value of your salary increased between 2009 and 2018.
D. The real value of your salary increased between 2009 and 2018.
Which of the following would cause the money demand curve to shift to the left? A. an open market purchase of Treasury securities by the Federal Reserve B. an increase in the interest rate C. an increase in the price level D. a decrease in real GDP
D. a decrease in real GDP
To increase the money supply, the Federal Reserve could A. raise the discount rate. B. decrease income taxes. C. raise the required reserve ratio. D. conduct an open market purchase of Treasury securities.
D. conduct an open market purchase of Treasury securities.
From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and short-run aggregate supply, then Congress and the president would most likely _______ if they want real GDP to equal potential real GDP A. increase the required reserve ratio and decrease government spending. B. decrease government spending. C. decrease interest rates. D. decrease taxes.
D. decrease taxes.
If the Federal Reserve performs an open market selling of Treasury securities, this will ________ inflation and ________ real GDP in the short run. A. decrease; increase B. increase; decrease C. increase; increase D. decrease; decrease
D. decrease; decrease
Which of the following would most likely induce the Federal Reserve to conduct expansionary monetary policy? A significant decrease in A. oil prices. B. business taxes. C. income tax rates. D. investment spending.
D. investment spending.
If the economy adjusts through an automatic mechanism, an increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run. A. the price level; real GDP B. real GDP; real GDP C. the price level; the price level D. real GDP; the price level
D. real GDP; the price level
Explain both what is meant by the word "convergence" in relation to economic growth and why the economic growth model that we studied in class implies that we would expect convergence to occur. (3.5) Do we actually see convergence occurring across countries in the world? List and briefly describe at least two reasons why convergence may not hold in reality. (3.5)
During the lecture videos, we debated whether or not poor countries will have fast economic growth, compared to wealthy countries. The reasoning that poor countries could experience economic growth faster than rich countries is the idea of convergence. Specifically, we looked at if this convergence is true in terms of GDP per capita and the corresponding growth rates of each country. After studying some data and graphs, the lectures illustrated that convergence isn't a guarantee. In other words, in some countries, convergence happens, but in other countries, it doesn't. Some countries are able to experience such economic growth but others experience gaps. We talked about a handful of factors that could explain why some poor countries fail to experience convergence and economic growth (e.g., lack of enforcement when it comes to the rule of law) and why some rich countries aren't much better off. Two specific reasons why convergence may not hold in reality are wars and revolutions, and poor public education. To create economic growth and experience convergence, looking to the economic growth model is important as it helps explain how to achieve growth (e.g., an increase in technology). Score: 3.75/7
Is frictional unemployment necessarily a bad thing? Is structural unemployment necessarily a bad thing? Why or why not? Explain your reasoning.
Frictional unemployment is not necessarily a bad thing. If a worker doesn't like their job or doesn't think the job is a good fit, it's okay. If we look at the bigger picture, ultimately, we want people to find and work jobs that best match their skills and knowledge. If we live in an economy where people are working jobs that they're not good at, production levels could falter. Structural unemployment could provide difficulties as it's a persistent struggle for workers to find jobs that they are skilled at. So, while frictional unemployment is more long-term, structural unemployment could be more dangerous as it's a long-term issue. Score: 2.5/3.5
The populations of Japan and South Korea are aging quickly resulting in larger age dependency ratios - defined as the number of retired individuals relative to the number of working individuals in the country. Supposing that retirees do not earn any new income in retirement, how would you expect having a greater proportion of the population in retirement to affect supply and demand in the market for loanable funds? Would demand or supply shift, or neither? Why or why not? If there is a shift, is it to the left or the right? (3.5) What would happen to the equilibrium interest rate and the quantity of loanable funds exchanged as a result? (3.5)
Having a greater proportion of the population in retirement would affect the market for loanable funds. The people who have now retired are no longer bringing in an income and hence have less money to save. There could be a change in the willingness of households to save. In other words, there would be less incentive for the retirees to save. Supply would shift to the left. The equilibrium interest rate would increase and the quantity of loanable funds exchanged would decrease.
Based on what we covered in lecture, explain the reasoning why firms on their own without any government policies are unlikely to engage in the amount of research and development that would be optimal for the economy as a whole.
If the government provided subsidies or created policies protecting people or organizations, there might be more people willing to engage in research and development. Most firms, organizations, and individuals are probably scared to engage in R&D to the nature of people's free riding. In other words, if someone does all of the initial research and it's not protected by policies, someone else can come and steal that research and use it for their gain as well. As we learned in the lectures, someone would only want to engage in R&D if there's an incentive. Even though R&D would benefit the public good and add to knowledge/human capital, people are hesitant to engage in R&D due to the inherent nature of competition in the economy.
Suppose that the United States economy is producing at its long-run equilibrium but then the price of steel as an input to production suddenly increases. As a result of this change, what would happen to the curves in the AD/AS model? (3.5) Would the equilibrium price level increase, decrease, or remain the same? What about equilibrium real GDP? (3.5) How might the economy return to its level of potential real GDP over time (without government policy)? (3.5)
If the price of steel, as an input to production, suddenly increases, the SRAS curve would shift to the left. SRAS shifts when there are changes to a firm's costs and, more specifically, the firm's cost of production. As a result, there will be a new short-run macroeconomic equilibrium where the price level would increase. This is because firms will be facing higher costs and won't be willing to supply the same amount of goods unless the price of the outputs is higher. This increase in the price of an input to production would, thus, create a supply shock. Equilibrium real GDP would decrease as the SRAS curve is moving to the left. With that being said, changes in real GDP changes also depend on whether or not the firm supplies the same amount of goods as before. If the firm receives higher prices, they may be more willing to supply the same amount. As a result of the supply shock, unemployment would increase. Over time, workers will accept lower wages as it's better than no wages. Firms will accept lower prices, as it's better than no sales. These falling wages and prices will push the SRAS curve back towards the original equilibrium point.
In 1946, Congress passed the National School Lunch Act which required milk to be a part of school lunches. As a result of the increased demand, the average price per gallon of milk increased from 63 cents in 1945 to 83 cents in 1950. Current CPI is 251, and CPI in 1950 was 24. If the average price per gallon of milk today is $3.30, what would today's average price per gallon of milk cost in 1950 dollars after adjusting for inflation? (3.5) Is the real cost of a gallon of milk today higher or lower than in 1950 following the National School Lunch Act? (3.5)
In 1950 dollars, it would cost $0.32 I got this by dividing the (Old Year CPI/New Year CPI) and multiplied it by $3.30. Today's cost of milk is $3.30 but in 1950 dollars, it's $0.32. Back in 1945, it cost 63 cents. This illustrates that the real cost of milk decreased long-term (it is lower).
Briefly explain why the existence of sticky wages implies that the short-run aggregate supply curve is upward sloping. (3.5)
In the short run, wages and output prices do not adjust that quickly (i.e., they are sticky) - especially when you're comparing those prices to other prices firms are facing. Firms also have to predict prices ahead of time, leading to differences compared to the actual price level. As a result, wages, for example, might not adjust that fast to the actual price level. Firms will then be more willing to supply more or less depending on if the actual price level was more or less favorable than the firm planned. When wages are sticky and the price level increases, firms may hire more workers and increase production. Similarly, if prices in the actual economy increased and the firm's prices are sticky, their price will become competitive since it's lower than other firms. As a result, the firm will produce and sell more. Since real GDP is increasing as the price is increasing, SRAS will be upward-sloping. Score: 1.75/3.5
1) Suppose that the U.S. economy experienced the following levels of potential real GDP, real GDP, and the price level in 2018 and 2019: Year Potential Real GDP Real GDP Price Level 2018. $18.5 trillion $18.5 trillion 142 2019. 19.0 trillion 19.4 trillion 150 If the U.S. Congress and the President agreed to act in order to make the economy's short-run equilibrium real GDP equal to the economy's potential real GDP in 2019, would Congress and the President be deciding to engage in expansionary or contractionary fiscal policy? (3.5) What are two different fiscal policy actions that Congress and the President could perform to achieve their goal? (3.5)
Real GDP in 2019 is more than potential real GDP. Because of this, Congress and the President will need to engage in contractionary fiscal policy. Doing so would decrease the aggregate demand line back to its potential level of real GDP. In other words - and as we learned in our lectures - contractionary fiscal policy can decrease real GDP to potential real GDP when the economy is in a state of expansion. To achieve their goals, Congress and the President could decrease government purchases or increase taxes. Both will have the desired result (i.e., decreasing aggregate demand). These fiscal policies will also decrease real GDP and the equilibrium price level, as shown in the lecture and reading graphs.
Use your knowledge of the unemployment rate and labor force participation rate to calculate the missing values in the table of data collected for November 2009 in the United States. Working-age population, employment, unemployment, and labor force are all measured in thousands of persons. Working-age population 235,900 Employment Unemployment Unemployment rate 9.4% Labor force Labor force participation rate 65.5%
The labor force is 154, 515 (rounded) The amount of unemployment is 14, 524.41 The amount of employment is 139,991 (rounded)
2017 2018 Nominal GDP $10,000 $12,000 Real GDP 9,500 10,500 Given the information above, what can we say has happened in the economy from 2017 to 2018?
The price level has risen.
What is human capital?
the accumulated knowledge and skills that workers acquire from education, training, and their life experiences
Suppose that the U.S. economy experienced the following levels of potential real GDP, real GDP, and price level in 2018 and 2019: Year Potential Real GDP Real GDP Price Level 2018 $18.5 trillion $18.5 trillion 142 2019 $19.0 trillion $18.7 trillion 146 a. If the Federal Reserve decided to act in order to make the economy's 2019 short-run equilibrium real GDP equal to the economy's potential real GDP, would the Federal Reserve be deciding to engage in expansionary or contractionary monetary policy? (3) Describe how the Federal Reserve would enact this type of monetary policy via either the method of open market operations or changing reserve requirements (choose one). (3) Briefly explain how the method you described would impact the money supply and why. (3) What will happen to the interest rate in the economy as a result? (3) b. State whether each of the following are higher or lower with monetary policy than they would be if the Federal Reserve had not taken any policy action: (1.5 each) (i) Real GDP in 2019 (ii) Potential real GDP in 2019 (iii) The rate of inflation from 2018 to 2019 (iv) The unemployment rate in 2019 c. Discuss what we mean by the lag in monetary policy and why it might make it difficult for the Federal Reserve to achieve potential real GDP in 2019 through monetary policy. (3)
a) If the Federal Reserve decided to act to make the economy's real GDP equal to the economy's potential real GDP, the Federal Reserve would be engaging in expansionary monetary policy. This is because the real GDP in 2019 is less than the potential real GDP in 2019. With the policy, Aggregate demand would reach the level of potential real GDP. The Federal Reserve could use open market operations as that allows the FR to increase or decrease the amount of bank reserves in the economy, and thus will impact the money supply. by directly affecting the bank reserves available, the Federal Reserve will be able to hit its target, otherwise known as its federal funds rate. Since they can have control more on interest rates, the money supply will be affected. With expansionary monetary policy, the Federal Reserve's goal would be to increase the money supply and decrease the interest rate. b) With this monetary policy, Real GDP will be higher. Potential GDP would stay the same. The inflation rate will rise. The unemployment rate would decrease. c) There is a lag in monetary policy because effects from changes in the economy, like the interest rate or aggregate demand, don't happen overnight. They take time. Since there is this lag, the Federal Reserve is forced to forecast before making monetary policies. Since their predictions could be inaccurate, and there is this inherent lag between a policy being enacted and the impact it actually has, monetary policy could make recessions or expansions worse or better they would have been with no policy. Score: 19/21
In 2016, the value of the U.S. dollar increased relative to the currencies of most of its major trading partners. Generally speaking, we would expect that this increase in the value of the U.S. dollar would ________ sales for foreign companies that export to the United States and ________ sales for U.S. companies that export to other countries.
increase; decrease
When the government runs a budget deficit, we would expect to see that
investment will fall
Suppose that the Malaysian central bank wants to maintain a fixed exchange rate for its currency (the ringgit) relative to the dollar, but currency traders have begun to suspect that the ringgit would depreciate without central bank intervention. To try and take advantage of this prediction, currency traders would transfer _____ into ______. To maintain the fixed exchange rate, the Malaysian central bank will need to increase _____ ringgit in exchange for dollars.
ringgit; dollars; demand for
