Exam 2

Short-run economic fluctuations are

movements of output away from potential output

Output levels below potential output are associated with \_________________ while output levels the exceed potential output can generate \_______________

recessions, inflation

If the economy begins in a long-run equilibrium when a negative aggregate demand shock hits, the economy will initially go to a \______________ equilibrium in a \____________ period

short-run, recessionary

John Maynard Keynes described the economy's protracted recovery from the Great Depression as due, at least in part, to

sluggish price adjustment

Keynesian economics advocates the use of monetary or fiscal policy in response to a recessionary period because

when prices are sticky, the economy's self-adjustment mechanism will be slow

Wages tend to be downward rigid because

-firms tend to prefer to keep worker morale high to maintain productivity

- firms tend to believe that productivity will be higher if costs are cut by laying off some workers rather than lowering wages across the board

-Many employees have either explicit or implicit wage contracts

In response to a shock,

some firms will find it profitable to change prices, but other firms may find it more profitable not to change prices.

Suppose that inflation unexpectedly declines. Who benefits from the change?

those who have lent money while inflation expectations were higher

The \_________________ means that a higher price level leads to lower real wealth.

wealth effect

Aggregate supply curves are \________________________ for low levels of output, and \____________________________ for high levels of output.

relatively flat; relatively steep

Aggregate demand curves slope downwards for each of the following reasons EXCEPT

The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods.

Whether the economy is in a recession is illustrated in the AD/AS model by how close the \_____________________ is to the potential GDP line.

equilibrium

Which of the following must be present in order for the aggregate supply curve to form an upward slope?

fixed cost of inputs combined with rising prices for outputs

What term is used to describe the maximum quantity that an economy can produce, in the context of its existing inputs, market and legal institutions?

potential GDP

The term "full employment GDP" is synonymous with which of the following?

potential GDP

In an AD/AS model:

real GDP is shown on the horizontal axis.

When the economy of a country is operating close to its full capacity:

cyclical unemployment is close to zero.

The economy is in a recession and the government wants to increase output. If the multiplier equals 3 and the government increases spending by 250, how much will output increase by?

750

Refer to the graph shown below. At point A:

the economy has full employment.

The Keynesian economic framework is based on an assumption that:

prices and wages are sticky and do not adjust rapidly.

In macroeconomics, what name is given to the costs of changing prices that businesses must consider?

menu costs

In a Keynesian cross diagram, what name is given to the distance between an output level that is below potential GDP and the level of potential GDP?

recessionary gap

Which of the following will cause the multiplier to be smaller and cause changes in investor confidence to have a smaller effect in an economy?

bigger leakages

Keynesian economics focuses on explaining why recessions and depressions occur, as well as offering a \______________________ for minimizing their effects.

policy prescription

The equilibrium quantity of labor and the equilibrium wage level decrease when:

labor demand shifts to the left, if wages are flexible.

On Friday, February 24, which inflation report was released?

PCE reporting inflation data for January

The Friday, February 24th inflation report, showed an unexpected \___________

small increase in the inflation rate

On February 22, the minutes from the Federal Reserve's last meeting were released. The minutes indicated that all participants \_________

believed that further interest rates increases are needed

A routine task is

a task that can relatively easily be performed by a machine or computer

The note states that automation likely reduced production worker jobs in factories and office-based clerical work. Many workers who could have been employed in those areas instead found work in which of the following types of occupations.

low wage service

The increase in "low-wage service" jobs refers to personal service occupations. Which of the following occupations is NOT a personal service occupation.

a computer software engineer

This report explains that exposure to automation varies by geography, occupation, and demography. While estimates of task displacement are not precise, this report projects which of the following

- 25% of all jobs will experience "high exposure" to automation

- 49% of the task content performed by workers without a bachelor's degree could be displaced by automation

- younger workers have a higher exposure risk than older workers

This report explains that while automation displaces some tasks/jobs (e.g. clerical and production work), automation has also done which of the following

created new jobs that are complementary to the new technology/machines

Which of the following is terms the "new automation" in this report:

artificial intelligence and advanced robotics

This report suggests that the "new automation" could be different because it has the potential to do which of the following:

displace a larger range of tasks including those done by highly trained professionals

Monetary policy DIRECTLY affects which interest rate?

federal funds interest rate

The Federal Reserve follows a dual mandate when conducting monetary policy. The two economic variables referred to in the dual mandate are:

prices and employment

At full employment, the unemployment rate is

at the natural rate of unemployment

If a person is unemployed because they have just graduated college and are in the process of searching for full-time employment, that person's unemployment is categorized as

frictional

If a person is unemployed because the skills they have are outdated and employers are looking for workers with other skills, that person's unemployment is categorized as

structural

The only type of unemployment that can be affected by monetary policy is

cyclical

If the Federal Reserve thought inflation was too high, the appropriate monetary policy action would be to

raise interest rates

Fiscal policy is

The government's decisions on spending and taxation

Fiscal policy creates a multiplier effect because

Government spending and tax changes will generate additional changes in consumer spending, creating more jobs, production and even more ripples of additional spending

A $50 billion increase in government spending will increase overall spending more than a $50 billion tax cut because

The initial spending change is larger for the $50 billion government spending change

If the Federal Reserve wanted to raise interest rates, it could do which of the following two actions?

- conduct an open market sale of bonds

- increase the interest rate paid on reserves

increase the interest rate paid on reserves

the short-term rate that banks charge each other for overnight loans

Expansionary monetary policy is designed to

increase aggregate demand, increase output, and decrease unemployment

If the economy goes into a recession, fiscal policy can be used to diminish the severity of the recession. Which of the following pairs of fiscal policy actions are BOTH consistent with the use of fiscal policy to reduce the severity of the recession.

increase government purchases; decrease taxes

The tax multiplier is always \_____ the spending multiplier.

less than

If government purchases increase by $100 billion when the MPC \= .8, what is the impact on AD?

AD increases by $500 billion

If taxes increase by $100 billion while at the same time government purchases increase by $100, the impact of this balanced budget on spending is

+ $100 billion

A \______________________ is created each time the federal government spends more than it collects in taxes in a given year.

budget deficit

A \__________________________ policy will cause a greater share of income to be collected from those with high incomes than from those with lower incomes.

progressive tax

If government tax policy requires Jane to pay $25,000 in taxes on annual income of $200,000 and Mary to pay $10,000 in tax on annual income of $100,000, then the tax policy is:

progressive.

The current chair of the Federal Reserve's Federal Open Market Committee (FOMC) is

Jerome Powell

The Federal Reserve is a system of \_____ districts as well as \__________

12; the Board of Governors

Which of the following is NOT a function of the Federal Reserve?

create legislation to govern financial activity

Since 1990, the U.S. government has run a budget \_______ in all but a few years in the late 1990s and early 2000s

deficit

If the state of Washington's government collects $75 billion in tax revenues in 2013 and total spending in the same year is $74.8 billion, the result will be a:

budget surplus.

Which two major U.S. economic downturns were associated with financial crises and bank-runs

Great Recession (2007-2009)

Great Depression (1929-1932)

One way that the SVB (Silicon Valley Bank) failure is different from the two episodes above because

SVB depositors are a niche cross-section

On Thursday, March 9th, depositors withdrew $4.2 billion \_________ from SVB.

Per hour

When interest rates rise,

bond prices fall

Most of SVB's depositors were

corporations with accounts in excess of $250,000

SVP depositors initially began to withdraw money because

many depositors were associated with venture capital (start-up) funding, which began to dry up

To accomodate withdraws, SVB was forced to liquidate their bond holding (mostly government bonds), but those bonds had decreased in value over the last year because of

rising interest rates

As SVB's depositors heard about the decline in the value of SVB's bond holdings, this triggered

a run on SVB deposits

On Friday, March 10th, the jobs report for February was released. The jobs report showed that \________ were created in February and the unemployment rate for February was \______.

311,000; 3.6%

In recent months, including February, wage growth has

slowed

The unemployment rate increased in February relative to January, yet the employment level rose. This occurred because

labor force participation rose

Which of the following is not a component of spending

personal taxes

Which of the following items is NOT an examples of investment spending

A household purchases 1000 shares of Google stock

If the value of the stock market rises, this is a change in \________ which would cause \_________

wealth, consumption to increase

Which of the following determinants of investment spending is NOT negatively related to investment spending

capital productivity

If the value of the U.S. dollar appreciates against the currencies of our major trading partners, we would expect

U.S. imports to increase

U.S. exports to decrease

U.S. net exports to decrease

An increase in capital productivity

Is a positive aggregate demand (AD) shock and will shift the AD curve to the right

If the MPC is equal to three-fifths, then if income increases by $100

Consumption will increase by $60

Suppose that government purchases increase by $100 billion and that the MPC is equal to three-fifths. In the THIRD round of the spending multiplier process, consumption increases by

$36 billion

Suppose that government spending increases by $200 billion and the MPC \= .8. What happens to total spending as a result of the increase in G and the multiplier effect?

increases by $1000 billion

Suppose that government spending increases by $100 billion and that the MPC is equal to three-fifths. How much will total spending change as a result of the government purchases and all of the subsequent rounds of the multiplier process?

$250 billion

​If the MPC changed from 0.8 to 0.6, then the spending multiplier would change from

​5 to 2.5

1/(1-MPC)

Which of the following items is NOT a reason that the AD curve is downward sloping?

the tax effect

Changes in the price level of the different components of aggregate demand are reflected in the AD/ASAD/AS macroeconomic model by a \________________________.

downward sloping AD curve

Aggregate demand curves slope downwards for each of the following reasons EXCEPT

The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other goods.

When the price level rises, what happens to interest rates?

rise

As the aggregate price level in an economy decreases,

imports decrease.

When interest rates increase, spending declines. When interest rates increase because the price level has increased, this generates a \_____________. When interest rates increase because of other factors such as monetary policy, this generates a \________.

movement along the AD curve, shift of the AD curve

When household wealth decreases, spending declines. When wealth declines because the price level has increased, this generates a \_____________. When wealth declines because of other factors such as a decline in stock market values or housing price declines, this generates a \________.

movement along the AD curve, shift of the AD curve

When consumers feel more confident about the economy and their own incomes, this will cause \__________ and \_________.

consumption to increase, AD curve to shift to the right

When personal income taxes increase, this will cause \______ and \________

consumption to decrease, the AD curve to shift to the left