B5-2 Flashcards
From the following information, calculate the GDP for country Y. $ Bn
Consumer spending on durable and non-durable goods and services $ 468
Exports 134
Imports 82
Income of proprietors 64
Employee wages 382
Government purchases of goods and services 121
Capital consumption allowance 96
Gross private domestic investment 112
a.
$542bn
b.
$1,083bn
c.
$649bn
d.
$753bn
Choice “d” is correct. Information is provided relating to the calculation of GDP under both the expenditure method and the income method, but complete information is only available for calculation under the expenditure method. Therefore, the income method information is unnecessary and should be ignored. Under the expenditure method, GDP will be 468 + (134 - 82) + 121 + 112 = $753.
Choices “b”, “c”, and “a” are incorrect, per the above explanation.
Assume the following data for the U.S. economy in a recent year:
Personal consumption expenditures
$ 5,015 billion
Exports
$ 106 billion
Government purchases of goods/services
$ 1,040 billion
M1
$ 262 billion
Imports
$ 183 billion
Gross private domestic investment
$ 975 billion
Open market purchases by Federal Reserve
$ 5 billion
Based on this information, which of the following was the U.S. GDP for the year in question?
a.
$7,215 billion.
b.
$6,958 billion.
c.
$6,953 billion.
d.
$6,691 billion.
Choice “c” is correct. GDP = G + I + C + E (Exports - Imports)
$ 1,040 billion
+
975 billion
+
5,015 billion
+
106 billion
−
183 billion
$ 6,953 billion
Which of the following is most likely to cause an increase in the amount of frictional unemployment in an economy?
a.
An increase in the average age of the work force.
b.
A reduction in the average age of the work force.
c.
A downturn in aggregate business activity.
d.
An invention that renders an industry obsolete.
Choice “b” is correct. Younger workers tend to move between jobs more frequently.
Choice “d” is incorrect. This would lead to structural unemployment.
Choice “c” is incorrect. This would lead to cyclical unemployment.
Choice “a” is incorrect. Older workers tend to be voluntarily between jobs less frequently than younger workers.
What type of unemployment is shown when individuals do not have the qualifications or skills necessary to fill available jobs?
a.
Frictional.
b.
Structural.
c.
Cyclical.
d.
Natural.
Choice “b” is correct. Structural unemployment occurs when the jobs available do not match the skills of the unemployed individuals or when the individuals do not live where jobs are available with their skills.
Choice “a” is incorrect. Frictional unemployment exists when workers are in the process of changing jobs or are temporarily laid off from their jobs.
Choice “d” is incorrect. The natural unemployment rate is the sum of frictional, structural, and seasonal unemployment or the unemployment rate that exists when the economy reaches its potential output level.
Choice “c” is incorrect. Cyclical unemployment is due to a downturn (recession) in the economy which leads to a decline in real GDP and higher unemployment.
When a worker quits work to stay at home with the children, it is an example of:
a.
Frictional unemployment.
b.
Structural unemployment.
c.
Cyclical unemployment.
d.
Not counted in unemployment figures.
Choice “d” is correct. Unemployment only tallies workers actively seeking employment; it does not count retirees or stay-at-home parents.
Choice “a” is incorrect. Frictional unemployment describes workers who leave work voluntarily to seek a better position.
Choice “b” is incorrect. Structural unemployment describes workers whose skills are no longer needed.
Choice “c” is incorrect. Cyclical unemployment describes workers unemployed due to the business cycle.
Which of the following statements regarding inflation is correct?
a.
Cost-push inflation can be caused by a decrease in nominal wages.
b.
Companies and individuals with fixed interest debt will be at a disadvantage during periods of inflation.
c.
Individuals holding monetary assets will be at a disadvantage during periods of inflation.
d.
Demand-pull inflation can be caused by tax increases.
Choice ‘‘c’’ is correct. In periods of inflation, holding net monetary assets will cause an individual to lose purchasing power, and, thus, be at a disadvantage.
Choice ‘‘d’’ is incorrect. Demand-pull inflation can be caused by tax decreases, not increases.
Choice ‘‘a’’ is incorrect. Cost-push inflation can be caused by an increase in nominal wages, not a decrease.
Choice ‘‘b’’ is incorrect. Owing fixed interest debt is an advantage in periods of inflation.
The CPI jumps from 131 in year 1 to 136.5 in year 2. What is annual inflation rate?
a.
3%
b.
13.8%
c.
1.38%
d.
4.2%
Choice “d” is correct. The inflation rate is measured as:
Inflation Rate = (CPI this - CPI last / CPI last ) X 100
= ( 136.5 - 131 / 131) X 100 = 4.2%
During a period of high inflation, which of the following groups in society would be most likely to gain?
a.
Those with a fixed amount of debt.
b.
Workers under contract without a cost of living adjustment.
c.
Those with a fixed income.
d.
Those holding a large amount of money.
Choice “a” is correct. During a period of high inflation, those with a fixed amount of debt will repay their debt with inflated dollars and are thus likely to gain.
Choice “c” is incorrect. Those with a fixed income will see the purchasing power of their income erode and are thus likely to be hurt.
Choice “d” is incorrect. Those holding a large amount of money will see the purchasing power of their money erode and are thus likely to be hurt.
Choice “b” is incorrect. Cost of living adjustments take inflation into account, but fixed wage contracts with no cost of living adjustments have less earnings power.
The following information is available for economic activity for Year 1:
(In billions)
Financial transactions
$ 60
Second-hand sales
50
Consumption by households
40
Investment by businesses
30
Government purchases of goods and services
20
Net exports
10
What amount is the gross domestic product for year 1?
a.
$160 billion.
b.
$90 billion.
c.
$210 billion.
d.
$100 billion.
Choice “d” is correct. Gross Domestic Product, using the expenditure approach, is computed as follows:
Government spending
$ 20
Investment (by private industry)
30
Consumer spending
40
Exports (net)
10
Gross Domestic Product
$ 100
Choices “c”, “a”, and “b” are incorrect based on the above calculation.
An increase in the money supply leads to:
a.
An increase in interest rates, a decrease in investment and a decrease in aggregate demand.
b.
An increase in the money supply has no effect on interest rates or investment.
c.
A decline in interest rates, an increase in investment and an increase in aggregate demand.
d.
A decline in interest rates, a decrease in investment and an increase in aggregate demand.
Choice “c” is correct. Expansionary monetary policy results when the Fed increases the money supply. Expansionary monetary policy affects the economy through the following chain of events: (1) an increase in the money supply causes interest rates to fall, (2) falling interest rates stimulate the desired levels of firm investment and household consumption, (3) increases in desired investment and consumption cause an increase in aggregate demand, and (4) aggregate demand shifts to the right causing real GDP and the price level to rise.
Choice “d” is incorrect. An increase in the money supply causes investment to increase, not decrease.
Choice “a” is incorrect. An increase in the money supply causes interest rates to decrease, not increase, investment to increase, not decrease and aggregate demand to increase, not decrease.
Choice “b” is incorrect per above explanation.
Which of the following economic terms describes a general decline in prices for goods and services?
a.
Recession.
b.
Inflation.
c.
Deflation.
d.
Expansion.
Choice “c” is correct. Deflation is defined as a sustained decrease in the general prices of goods and services. It occurs when prices on average are falling over time. Most economists believe deflation is a much bigger economic problem than inflation.
Choice “d” is incorrect. Expansion describes the composition of business cycles.
Choice “b” is incorrect. Inflation is defined as a sustained increase in the general prices of goods and services. It occurs when prices on average are increasing over time.
Choice “a” is incorrect. Recession describes a business cycle.
Under the expenditure approach, GDP can be calculated as the sum of:
a.
Consumption, money supply, government purchases, and exports.
b.
Consumption, investment, government purchases, and net exports.
c.
Consumption, investment, transfer payments, and imports.
d.
Consumption, investment, government purchases, and foreign exchange.
Choice “b” is correct. Under the expenditure approach, GDP is calculated as the sum of the following items summarized in the mnemonic GICE:
Government purchases
Investment expenditures
Consumption expenditures
Net Exports
Choice “a” is incorrect. The expenditure approach does not include money supply.
Choice “c” is incorrect. The expenditure approach does not include transfer payments.
Choice “d” is incorrect. The expenditure approach does not include foreign exchange.
The inflation rate measures:
a.
The rate at which nominal GDP increases.
b.
How the price of a particular good changes over time.
c.
How nominal interest rate changes over time.
d.
The rate at which the overall price level increases.
Choice “d” is correct. The inflation rate measures the rate of increase in the overall price level in the economy.
Choice “a” is incorrect. The inflation rate is associated with price level changes not changes in the nominal value of output.
Choice “b” is incorrect. Inflation refers to a sustained increase in the overall price level. Not the price of a particular good.
Choice “c” is incorrect. The inflation rate is associated with price level changes not interest rate changes.
The discount rate set by the Federal Reserve is the:
a.
Ratio of a bank’s reserves to its demand deposits.
b.
Rate that commercial banks charge for loans to the general public.
c.
Rate that the central bank charges for loans to commercial banks.
d.
Rate that commercial banks charge for loans to each other.
Choice “c” is correct. The discount rate refers to the rate established by the Federal Reserve for short-term (often overnight) loans it makes to member banks.
Choice “d” is incorrect. The discount rate is the rate the Federal Reserve charges, not commercial banks.
Choice “b” is incorrect. The discount rate is the rate the Federal Reserve charges, not commercial banks.
Choice “a” is incorrect. This would be the bank’s reserve ratio - not the discount rate.
Assume an economy is at the peak of the business cycle. Which of the following policy combinations is the most effective way to dampen the economy and prevent inflation?
a.
Reduce government spending, increase taxes, increase money supply, and increase interest rates.
b.
Increase government spending, reduce taxes, increase money supply, and reduce interest rates.
c.
Reduce government spending, reduce taxes, reduce money supply, and reduce interest rates.
d.
Reduce government spending, increase taxes, reduce money supply, and increase interest rates.
Choice “d” is correct. The economy can be dampened by reducing government spending and by increasing taxes (thus giving consumers less money to spend), both of which are fiscal policy. The economy can also be dampened by reducing the money supply (thus effectively increasing prices) and increasing interest rates (thus giving consumers less money to spend because they are spending more money on interest), both of which are monetary policy.
Choice “b” is incorrect. All of these policies would stimulate the economy further.
Choice “a” is incorrect. Increasing money supply will stimulate the economy, not dampen it.
Choice “c” is incorrect. Reducing both taxes and interest rates will stimulate the economy, not dampen it.
Which of the following types of unemployment typically results from technological advances?
a.
Short-term.
b.
Cyclical.
c.
Structural.
d.
Frictional.
Choice “c” is correct. Technological advances would likely result in structural unemployment. Structural unemployment is characterized by available jobs that do not match the skill sets of the workforce. Technological advances could create jobs that simultaneously make the skills of the workforce obsolete.
Choice “b” is incorrect. Cyclical unemployment results from declining GDP and would not likely be created by technological advances.
Choice “d” is incorrect. Frictional unemployment is normal unemployment resulting from workers routinely changing jobs. Frictional unemployment would likely not result from technological advances.
Choice “a” is incorrect. Short term unemployment is a broad description that relates to the duration of an unemployment condition. The duration of unemployment can be caused by any number of factors, however, structural influences such as technological advancement that require workforce retraining would likely not be short term.
Which of the following would lead to a reduction in inflation?
a.
Decreasing aggregate demand and decreasing aggregate supply.
b.
Decreasing aggregate demand and increasing aggregate supply.
c.
Increasing aggregate demand and decreasing aggregate supply.
d.
Increasing aggregate demand and increasing aggregate supply.
Choice “b” is correct. Decreasing aggregate demand and increasing aggregate supply will reduce the inflationary pressures.
Choice “d” is incorrect. Increasing aggregate demand causes the price level to rise.
Choice “a” is incorrect. Decreasing aggregate supply causes the price level to rise.
Choice “c” is incorrect. Both of these would cause the price level to rise.
Which of the following individuals would be most hurt by an unanticipated increase in inflation?
a.
A saver whose savings was placed in a variable rate savings account.
b.
A borrower whose debt has a fixed interest rate.
c.
A union worker whose contract includes a provision for regular cost-of-living adjustments.
d.
A retiree living on a fixed income.
Choice “d” is correct. Inflation is the sustained increase in the general price of goods and services. A retiree living on a fixed income would be most hurt by an unanticipated increase in inflation because the retiree’s income would not increase to offset the negative effects of the inflation.
Choice “b” is incorrect. A borrower whose debt has a fixed interest rate would benefit from inflation because the borrower would be paying back the debt in cheaper dollars.
Choice “c” is incorrect. A union worker whose contract includes a provision for regular cost-of-living adjustments theoretically would have cost of living increases to offset the effects of the inflation. There would be a lag since the cost-of-living adjustments would be after-the-fact, but at least there would be some protection.
Choice “a” is incorrect. A saver whose savings were placed in a variable rate savings account would have the same kind of protection as the union worker (in choice “c”, above). The interest rate on the savings accounts would theoretically increase with the inflation. Again, there would probably be a lag, but at least there would be some protection.
Which of the following statements regarding increases in price levels is most true? A period of inflation:
a.
Enhances the positive relationship between the price level and the purchasing power of money.
b.
Increases the price level, which benefits those who are entitled to receive specific amounts of money.
c.
Harms anyone who has an obligation to pay a specific amount and benefits anyone who is entitled to receive a specific amount.
d.
Increases the price level, which is negatively related to the purchasing power of money.
Choice “d” is correct. A period of inflation increases the price level, which is inversely related to the purchasing power of money (inflation erodes the value of money).
Choice “b” is incorrect. When price levels increase, those with fixed amounts of money are hurt.
Choice “a” is incorrect. The relationship between price levels and the purchasing power of money is negative, or inverse.
Choice “c” is incorrect. Inflation helps anyone with a fixed obligation since the debt can be repaid in inflated dollars. Those receiving a specific fixed amount are harmed.
To address the problem of a recession, the Federal Reserve Bank most likely would take which of the following actions?
a.
Lower the discount rate it charges to banks for loans.
b.
Sell U.S. government bonds in open-market transactions.
c.
Increase the federal funds rate charged by banks when they borrow from one another.
d.
Increase the level of funds a bank is legally required to hold in reserve.
Choice “a” is correct. During a recession, real GDP has fallen and unemployment has risen. To stimulate the economy, the Federal Reserve can lower the discount rate. This causes the money supply to increase, which, in turn, causes aggregate demand to shift right. As a result, real GDP would increase and unemployment would decrease.
Choice “b” is incorrect. If the Federal Reserve sells U.S. government bonds in the open market, the money supply will decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.
Choice “c” is incorrect. Increasing the federal funds rate would increase interest rates. Higher interest rates cause the aggregate demand curve to shift left. As a result, real GDP would decrease and unemployment would increase.
Choice “d” is incorrect. An increase in the required reserve ratio causes the money supply to decrease. This causes aggregate demand to shift left. As a result, real GDP would decrease and unemployment would increase.
If the Federal Reserve wanted to implement an expansionary monetary policy, which one of the following actions would the Federal Reserve take?
a.
Raise the reserve requirement and the discount rate.
b.
Raise the discount rate and sell U.S. government securities.
c.
Lower the discount rate and raise the reserve requirement.
d.
Purchase additional U.S. government securities and lower the discount rate.
Choice “d” is correct. Federal Reserve Bank purchases of government securities increase the money supply (putting money into circulation), and lowering the discount rate encourages borrowing by member banks and increases the money supply. Hence, these measures would help implement an expansionary monetary policy.
Choice “a” is incorrect. Raising the reserve requirement and the discount rate would have the opposite effect of decreasing the money supply.
Choice “b” is incorrect. Raising the discount rate and selling government securities would reduce the money supply.
Choice “c” is incorrect. Raising the reserve requirement would decrease the money supply, but lowering the discount rate would increase the money supply.
