Macroeconomics Final Exam

True

Property rights promote economic growth by incentivizing investment into human or physical capital and technology

False

Real shocks (supply shocks) are always negative

True

According to the Economic Freedom of the World Index, the most free countries tend to have the highest GDP per capita

True

There is no perfect indicator to predict a future recession

False

Economic growth always increases inequality

True

Technological progress increases growth by increasing the productivity of capital and workers

False

25% of the world's population, 400 million people, live in a country with an annual GDP per capita of $2,300 or less

True

Economic recessions are defined by a decrease in economic activity

False

The Solow model predicts that lower investment rates lead to higher GDP per capita

False

The marginal product of capital is increasing

True

Supply-side economics argues that lowering taxes can stimulate economic growth by encouraging saving, investment, and productivity

False

Supply-side policies suggest that higher marginal tax rates always lead to increased government tax revenue.

False

Thomas Jefferson implemented the first tax cut in United States history when he repealed all external taxes

True

The main source of revenue for the Federal government is the income tax

True

Social security pays benefits to retirees who have contributed to the system, their survivors, and disabled workers

True

Redistribution from high-income earners to low-income earners can increase aggregate demand if low-income earners have a larger propensity to consume than high-income earners

True

The Employment Act of 1946 enshrined into law the responsibility of government to promote maximum employment

True

John Maynard Keynes argued that the problem facing the economy in the 1930s was not a lack of supply, but a problem of effective demand

False

Hansen and the American followers of Keynes argued that a temporary increase in government spending was enough to get the economy out of the recession

True

Automatic stabilizers increase demand without legislating changes in spending or taxes

True

In 2024, there were around 168 million people in the U.S. labor force

True

When calculating real GDP, we use constant dollars to avoid measuring an increase of prices

False

Core inflation or underlying inflation is a measure of the CPI with the housing and food categories removed

False

GDP is adjusted to take the distribution of income into account.

True

The share of people employed in private manufacturing industries in the United States has been significantly declining in the past ten years

False

If the price of gas goes up, this necessarily means that inflation is going up

True

A 17-year old student who does not have a job, is looking for work and available to work, but is still in school, is not considered unemployed

True

The rent that homeowners could receive by renting their house is counted in GDP

False

Money illusion means that people mistake changes in real prices for changes in nominal prices

False

Cyclical unemployment is related to labor market regulations

Consumption (C)

What is the largest component of GDP when we use the expenditure approach?

Real GDP

When we use the prices of one year to measure GDP during different years, we call the resulting number:

The Producer Price Index

Which of the following price indexes do not measure consumer prices?

Housing

The largest type of expenditures included in the CPI is:

The number of unemployed people divided by the labor force

The unemployment rate is defined as:

The Consumer Price Index

What price index do we use to adjust most contracts and benefits to inflation?

The ratio of the labor force to the adult civilian noninstitutional population

The labor force participation rate is equal to

66%

There are twelve people: six have jobs, two are unemployed, one is in prison, one is a child under sixteen, one is a full-time student at the university, and one is retired. The unemployment rate is:

3.0%

According to the latest news release by the Bureau of Labor Statistics, in January 2025 the all items Consumer Price Index increased over the last 12 months by:

7 years

How many years would it approximately take for an economy to double in size if growing at 10% per year?

Investment = Depreciation

At the steady state of the Solow model:

Institutions

The economic freedom of the world index measures:

Human capital, Physical capital, Technical knowledge

Factors of production include:

Rises

After a negative real shock, the price level:

Negative real shock

In the 1970s, the US had slow GDP growth and high inflation. Which kind of shock best fits these facts?

Real GDP

Recessions correspond to decline in:

A drought stifles crop growth for the season

Which of the following is an example of a negative real shock to an economy?

At the steady state

A country has a capital stock of 900 and a production function such that Y = 3K, saves 10% of its income, and 1% of its capital stock is depreciating. This country is:

K^ss = 3600

Assume that the same country becomes more productive with Y = 6K. What is the steady-state level of capital?

0.5%

Okun's law shows that a decrease by 1 percentage point in GDP growth increases unemployment by 0.5 percentage point. If growth drops from 3.3% to 2.3%, how much does unemployment increase?

2

Given a propensity to consume equal to 0.5, how large is the multiplier?

Inflation will rise

If the multiplier is larger than expected, what is likely to happen to inflation?

1935

Social security was created in:

Increase with lifetime earnings, but replace a smaller share of the income of high earners compared to low earners

Social security benefits:

$22,500

Imagine an income tax system with four brackets: between $0 and $10,000, the tax rate is 10%, between $10,000 and $40,000, the tax rate is 12%, between $40,000 and $85,000, the tax rate is 22%, and above $85,000, the tax rate is 32%. What is the tax due by someone earning $110,000?

$42,500

Using the same tax system as above, what is the tax due by someone earning $172,500?

$4,375,000

Dlanor Nagaer is elected president of the country of Detinu Setats, and decides that the best way to promote growth in the economy is to cut taxes and transform the progressive income tax system into a flat tax system. The population is such that 100 citizens make $110,000, and 50 citizens make $172,500. Under the previous system (see question 1), how much was government revenue?

$3,925,000

President Nagaer pushes through Congress a flat tax of 20% to replace the old income tax system. Assuming the same population, how much revenue does this tax system generate?

49% and 44%

How much of the tax was paid by high-income earners under the first system, and how much under the new system?