Principles of Macroeconomics - Final Exam

The fact that many stores in the United States now accept credit cards has

decreased the demand for money

A decrease in the demand for money would result from:

a decrease in the price level

If inflation increases from 2% to 5%, the money demand curve will:

Shift to the right

The Federal Reserve affects interest rates by:

open market operations that shift the money supply curve.

If the Federal Reserve wants to lower the interest rate, it will:

increase the money supply.

If the target rate of interest is higher than the current equilibrium interest rate, the Federal Reserve will:

sell Treasury bills in the open market, decrease the supply of money, and raise the interest rate to the target rate.

A rise in interest rates due to a decrease in the money supply will _______ AD.

Reduce

To close a recessionary gap using monetary policy, the Federal Reserve should ________ the money supply to ________ investment and consumer spending and shift the aggregate demand curve to the ________.

increase; increase; right

What is the goal of expansionary monetary policy, and how does it work in the short run? Explain all the steps in the process. Start with the initial action by the Fed and end with the change to AD.

The goal of expansionary monetary policy is to increase spending. To do this the Fed wants to increase the money supply. So, they set a lower target for the fed funds int. rate and to achieve this target, they start buying bonds which will get more cash into the banking system. When banks have more cash, they then make more loans. Thus, businesses will take out more loans from banks at the more attractive lower interest rate and investment spending will increase. This increased investment spending becomes someone's income who then increase consumption spending. Both this increase in I and C increase AD (spending).

When a person makes price comparisons among products, money is being used as a(n):

unit of account.

When we purchase a meal, money is playing the role of:

medium of exchange.

Which of the following is considered to be money?

checking account deposits

Money whose value derives entirely from its official status as a means of exchange is known as:

fiat money.

Which of the following financial assets belongs to M2 but not to M1?

a savings account

Probably the most important feature of deposit insurance is that it:

protects the economy against bank runs.

To _______ the money supply, the Federal Reserve could ________.

increase; conduct open-market purchases

Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank alone can increase loans by:

$400

. If it looks like a bank won't meet the Federal Reserve Bank's reserve requirement, normally it will first turn to the:

other member banks and borrow money at the federal funds rate.

If the Federal Reserve conducts an open-market purchase:

bank reserves increase and the money supply increases.

When the Federal Reserve decreases bank's reserves through an open-market operation:

the monetary base decreases, loans decrease, and the money supply decreases

Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as _____.

$90; $1,000

Using gold or silver as an example, what is the difference between commodity money and commodity-backed money?

Gold can be used as commodity money, meaning that actual pieces of gold could be used to obtain goods and services. Gold has also been used as commodity-backed money meaning paper money or coins could be used for goods or services, but that you could trade in the paper money for gold.

Which of the following is a government transfer?

Social Security payments to retired auto workers

Which of the following is NOT an example of government purchases of goods and services?

a surgeon's bill reimbursed under the Medicare program

Consumer spending will fall if

the government raises tax rates.

Suppose the economy is in a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to:

decrease taxes.

If the current level of real GDP lies above potential GDP, then an appropriate fiscal policy would be to _____, which will shift the AD curve to the _____.

decrease government purchases; left.

Using the accompanying figure, which of the following would be the appropriate response of the government upon viewing the state of the economy?

Expand aggregate demand by cutting taxes to close the recessionary gap.

A reduction in government transfers ________, therefore shifting the aggregate demand curve to the ________.

decreases disposable income and consumption; left

To close a recessionary gap by employing fiscal policy, the government could:

lower the corporate income tax rate.

If the marginal propensity to consume is 0.9, then the tax multiplier will be:

less than 10.

If the MPC is 0.8 and government transfers decrease by $50 million, then equilibrium GDP will decrease by:

$200 million.

Automatic stabilizers are government spending and taxation changes that:

cause fiscal policy to be expansionary when the economy contracts.

The national debt _______ in years in which the federal government incurs a _______.

rises; deficit

Implicit liabilities refer to the promises made by the government, such as:

Social Security and Medicare payments.

. Suppose that real GDP is $1,500 and potential GDP is $1,200, while the marginal propensity to consume is 0.8. If the government is going to engage in government spending and impose no taxes, what specific fiscal policy action should policy makers take? (Answer is $ amount.)

-$300 = (1/1 - 0.8) * Initial change Initial change = -$300/5 = -$60. They should decrease government spending by $60.

An example of an automatic stabilizer that works when the economy contracts is:

a rise in government transfers as more people receive unemployment insurance benefits.

According to the wealth effect, when prices decrease, the purchasing power of assets:

increases and consumer spending increases.

According to the interest rate effect, an increase in the price level causes people to:

increase their money holdings, which increases interest rates and decreases investment spending.

Suppose that the stock market crashes. Which of the following is most likely to occur?

the aggregate demand curve shifts to the left

Which of the following factors cannot shift the aggregate demand curve?

changes in the price level

The aggregate demand curve would shift to the left for all the following reasons EXCEPT:

lower labor productivity.

If the Fed decreases the quantity of money in circulation:

interest rates increase, investment decreases, and the aggregate demand curve shifts to the left.

Which of the following would likely cause the short-run aggregate supply curve to shift to the left?

an increase in the price of imported oil

A rise in labor productivity will most likely result in:

an increase in aggregate supply.

The long-run aggregate supply curve is vertical because in the long run:

all prices are flexible.

Inflationary and recessionary gaps are closed by self-correcting adjustments that shift:

the SRAS curve.

A recessionary gap is when:

aggregate output is below potential output

The short-run equilibrium at Y2 and P2:

results in an inflationary gap.

(Figure: An Increase in Aggregate Demand) Because of the pressures existing at the short-run equilibrium at Y2 and P2:

the SRAS curve will shift to the left.

If the economy is in a recessionary gap, then:

nominal wages will fall and SRAS will shift to the right until the economy is at full employment.

If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium?

Nominal wages rise, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium.

Suppose the marginal propensity to consume is equal to 0.9 and investment spending increases by $50 billion. Assuming no taxes and no trade, by how much will real GDP change?

$500 billion increase

An increase in the MPC

increases the multiplier.

(Figure: Consumption and Real GDP) The slope of the consumption function is called the:

marginal propensity to consume

(Figure: Consumption and Real GDP) The marginal propensity to consume in this example is:

0.5

(Table: Individual and Aggregate Consumption Functions) Which of the following represents Fred's individual consumption function?

C = 100 + 0.7YD.

(Table: Individual and Aggregate Consumption Functions) The marginal propensity to consume in the aggregate consumption function is: (Hint: the aggregate will be the average of the 3 consumers)

0.8

An increase in the wealth of households, all other things unchanged, will result in _______ the aggregate consumption function.

an upward shift in

If overall inventories rise in a month because of unplanned inventory investment, one can conclude that:

the economy is slowing down

Which of the following will cause a decrease in unplanned inventory investment?

an unexpected increase in consumer spending

If GDP is greater than planned aggregate spending, then:

GDP will fall.

(Figure: Aggregate Expenditures and Real GDP) At a real GDP of $9,000 billion:

planned investment spending is less than overall investment spending.

(Figure: Aggregate Expenditures and Real GDP) If the level of real GDP equals $9,000 billion and there are no changes in the consumption function or in planned investment, then real GDP will ________in the next period.

fall

(Table: Disposable Income and Spending) Using the accompanying table, calculate the marginal propensity to consume (MPC). Use this MPC to compute the spending multiplier.

MPC = (50 - 10)/(50-0) = .8 Multiplier = 1/(1-MPC) = 1/(1-.8) = 1/.2 = 5

(Table: Disposable Income and Spending) Use the data in the accompanying table to develop a linear equation of the consumption function. Use this consumption function to forecast the amount of consumption spending that would occur if disposable income were equal to $500.

C = $10 + .8 * (YD)

C = $10 + .8*($500) = $410

. (Table: Real GDP) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP is equal to disposable income (YD). The data in the accompanying table show consumption spending (C) and planned investment (Iplanned). a. What is the MPC in this economy?

MPC = (500 - 100)/(500-0) = .8

At what level of real GDP will the economy find its income-expenditure equilibrium? Graph the AE curve and the 45 degree line.

Find where GDP and AE planned are equal to find equilibrium. This occurs where AE planned = C + I planned = 2900 + 600 = 3500 and Real GDP = 3500.

The government saves when it:

has a budget surplus

In an open economy, total investment spending is equal to:

national savings plus net capital inflow.

Net capital inflow is equal to:

the total inflow of foreign funds minus the total outflow of domestic funds.

Assume that I = Sprivate + Sgovernment + (IM - X). Furthermore, let's say that imports are equal to exports. Given this situation, which of the following is true?

Private savings plus government saving are equal to investment.

A relatively low saving rate affects productivity growth by:

depriving investment spending of the funds needed to increase the physical capital.

If private savings increase:

the supply of loanable funds will increase, interest rates will decrease, and the amount of borrowing will increase.

A business will want to borrow to undertake an investment project when the rate of return on that project is:

higher than the interest rate.

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds.

upward; savers; decreasing

(Figure: The Market for Loanable Funds II) If the interest rate is higher than ______ in this loanable funds market, the quantity supplied of loanable funds will _______ the quantity of loanable funds demanded.

8%; be greater than

(Figure: The Market for Loanable Funds II) An increase in government borrowing will shift the demand for loanable funds to the:

right and increase the interest rate.

(Figure: The Market for Loanable Funds II) An increase in savings by the private sector will shift the supply of loanable funds to the:

right and decrease the interest rate.

(Figure: The Market for Loanable Funds II) Other things being equal, an increase in taxes on savings and investment income will:

shift supply to the left and increase the interest rate.

Crowding out is a phenomenon:

where an increase in the government's budget deficit causes overall investment spending to fall.

Labor productivity growth can be attributed to:

improvement in technological process.

The most important driver for economic growth appears to be:

technological progress.

Which of the following will NOT increase the productivity of labor?

an increase in the size of the labor force

Workers today are more productive than workers in the past because:

workers now have more physical capital embodying better technology to work with.

Diminishing returns to physical capital means that when the amount of human capital per worker and the state of technology are held fixed, each increase in the amount of physical capital per worker leads to:

a smaller increase in the marginal product of labor.

In the long run, an increase in saving will generally:

increase the rate of economic growth.

Economies with higher growth rates tend to be those that have:

a stable government that protects property rights.

(Figure: Productivity) An improvement in technology with everything else remaining unchanged is shown on the diagram as:

a movement from B to C.

(Figure: Productivity) An increase in physical capital per worker with everything else remaining unchanged is shown on the diagram as:

a movement from A to B.

When tracking economic growth, why do economists prefer real GDP per capita over: a. real GDP?

It accounts for population size and gives a rough measure for the income of an average person in the country.

When tracking economic growth, why do economists prefer real GDP per capita over: nominal GDP per capita?

It accounts for inflation so that comparisons can be made over time

Many impoverished nations struggle with diseases like malaria. How would a reduction or the elimination of malaria contribute to long-run economic growth?

First, population would be larger and thus more workers can produce more. It is also likely that the workers would be more productive as well.

Country A and B have both have a Real per capita GDP of $100 today. For the next 70 years Country A has a 2% growth rate and Country B has a 5% growth rate. At the end of 70 years, what is the gap in Real per capita GDP between the two countries?

$400 (doubles twice) vs. $3200 (doubles 5 times), so the gap is $2800

(Table: Dexter's Employment Statistics) The accompanying table describes the labor market status for the residents of Dexter. Use these data to complete the following computations. a. What is the size of the labor force in Dexter?

7000 + 900 = 7900

(Table: Dexter's Employment Statistics) The accompanying table describes the labor market status for the residents of Dexter. Use these data to complete the following computations.What is the labor force participation rate in Dexter?

7900 / 9600 = .823 = 82.3%

(Table: Dexter's Employment Statistics) The accompanying table describes the labor market status for the residents of Dexter. Use these data to complete the following computations. a. What is the unemployment rate?

900 / 7900 = .114 = 11.4%

. (Table: Dexter's Employment Statistics) The accompanying table describes the labor market status for the residents of Dexter. Use these data to complete the following computations.If we include the discouraged workers, what is the unemployment rate?

1400 / 8400 = .167 = 16.7%

If a labor market is in equilibrium at a wage where the quantity of labor demanded equals the quantity of labor supplied, how can there still be unemployment in the labor market?

Search for jobs, which means frictional unemployment

Minimum wages and efficiency wages are both above the equilibrium market wage. Briefly describe each type of wage. Do they have similar results in the labor market?

They both create structural unemployment, too few jobs with a surplus of workers