ECON EXAM REVISED Flashcards
1
Q
Chuck offers $370,000 for a house. The seller turns down the offer but says she will sell the house for $390,000. However, Chuck refuses to pay the higher price. If Chuck is following the economic decision rule, the marginal benefit of the house to:
a. Chuck must be less than $390,000.
b. Chuck must be greater than $390,000.
c. the seller must be greater than $390,000.
d. the seller must be less than $370,000.
A
a. Chuck must be less than $390,000.
2
Q
Any economic system:
a. can eliminate scarcity.
b. addresses the questions what is produced, how it is produced, and for whom it is produced.
c. provides all the goods people want and desire.
d. provides equal distribution of well-being among its participants.
A
b. addresses the questions what is produced, how it is produced, and for whom it is produced.
3
Q
A group of undergraduates has raised and spent $5 million developing a business thus far. Another $1 million has to be spent to finish the business. Once the business is fully developed, the group could sell the business for $3 million. Should these students proceed with the business?
A. Yes, they stand to gain $2 million dollars
b. Yes, they can build a 6-million-dollar business for just $1 million.
c. No, this is already a lost venture. There is no point in “doubling down”.
d. No, they will lose 3 million dollars if they keep going.
A
A. Yes, they stand to gain $2 million dollars
4
Q
In a market economy, ownership of the means of production resides with:
a. The Government
b. Businesses
c. Households
d. Land and labor are owned by households, but businesses own capital.
A
c. Households
5
Q
Which of the following is an example of a normative statement?
A. Persistent unemployment leads to higher rates of substance abuse and self-harm.
b. The unemployment rate is 3.6%.
c. Regular attendance at churches (and other religious institutions) is correlated with lower rates of suicide.
d. The government should focus on policies that lower the unemployment rate.
A
d. The government should focus on policies that lower the unemployment rate.
6
Q
- In socialism:
a. Economic forces do not operate.
b. Individuals are encouraged to act for their own benefit.
c. Government planning, rather than the market, is relied upon to coordinate economic activity.
d. Distribution is determined by the individual’s ability.
A
c. Government planning, rather than the market, is relied upon to coordinate economic activity.
7
Q
- Which of the following is not counted in GDP?
a. Rent for an apartment
b. The imputed value an owner-occupied house provides, equivalent to rent not paid.
c. Money spent to hire a plumber to fix a bathroom.
d. The imputed value of a homeowner fixing their own bathroom, equivalent to labor costs not paid.
A
d. The imputed value of a homeowner fixing their own bathroom, equivalent to labor costs not paid.
8
Q
- Suppose a business makes 50 rocking chairs, but only sells 25. The rest are put in inventory to be sold next year. In which category of GDP are those unsold chairs counted this year?
a. Consumption
b. Investment
c. None, the chairs were not sold so they are not counted.
d. Positively in consumption but negatively in investment, which cancels out to zero.
A
b. Investment
9
Q
In 2018, an economy experienced consumption spending of $5 trillion, investments of $3trillion, government spending of $1 trillion, imports of $3 trillion, and exports of $4trillion. What is the economy’s GDP in 2018?
a. $9 trillion
b. $10 trillion
c. $12 trillion
d. $16 trillion
A
b. $10 trillion
10
Q
A US household purchases a washing machine built in Japan. How will this be counted in the components of GDP?
a. Not at all, since the washing machine was not produced in the US.
b. Positively in consumption
c. Negatively in net exports
d. Both b and c.
A
d. Both b and c.
11
Q
- Which of the following correctly captures the relationship between inflation and borrowing/lending?
A. When inflation is high and predictable, lenders benefit more than borrowers.
b. When inflation is low and predictable, lenders benefit more than borrowers.
c. When inflation is volatile, lenders benefit more than borrowers.
d. When inflation is volatile, bother borrowers and lenders are worse off.
A
d. When inflation is volatile, bother borrowers and lenders are worse off.
12
Q
A country has a population of 187 million. 151 million are civilian, adult and institutionalized. If 100 million are employed and 6 million of the people who are not employed are looking for work, what is the unemployment rate?
A. 3.2%
b. 4%
c. 5.7%
d. 6%
A
c. 5.7%
13
Q
How large is the labor force of Grand Fenwick?
a. 3900
b. 4000
c. 6400
d. 7000
A
b. 4000
14
Q
What is the unemployment rate for Grand Fenwick?
A. 2.50%
b. 2.56%
c. 3.33%
d. 3.45%
A
A. 2.50%
15
Q
How many people would be considered “marginally attached”?
a. 100
b. 300
c. No more than 500
d. Not enough information
A
d. Not enough information
16
Q
- How are marginally attached and discouraged workers related?
A. If a worker is marginally attached, then they must be discouraged.
b. If a worker is discouraged, then they must be marginally attached.
c. Both (a) and (b)
d. No worker can be both marginally attached and discouraged.
A
b. If a worker is discouraged, then they must be marginally attached.
17
Q
- What is the price of money?
a. The interest rate
b. Money is used to price other things; it prices things so it cannot be priced.
c. One divided by the price level
d. Time
A
a. The interest rate
18
Q
If your nominal wage goes up by 3% and prices go up by 8%, by how much did your real income change?
a. -5%
b. 5%
c. 3%
d. Not enough information
A
a. -5%
19
Q
If you deposit $5,000 cash into your savings account, and the bank holds the cash in reserves, what happens to M1?
a. It decreases by $5,000
b. Nothing
c. It increases by $5,000
d. It depends on the reserve ratio
A
b. Nothing
20
Q
Continuing from {20}; suppose the bank keeps 10% of your deposit in reserve and lends out the other 90% which is then held in cash. How much has M1 changed as a result of your deposit and the bank’s lending?
a. M1 has not changed.
b. M1 has increased by $4,500
c. M1 has increased by $5,000
d. M1 has increased by $45,000
A
b. M1 has increased by $4,500
21
Q
Continuing from {20, 21}; suppose the money loaned out by your bank is deposited another banks and reloaned out again and again ad infinitum. Each time banks hold 10% of the deposits in reserve. How much has M1 changed as a result of your deposit and there lending process?
a. M1 has not changed.
b. M1 has increased by $5,000
c. M1 has increased by $45,000
d. M1 has increased by $50,000
A
c. M1 has increased by $45,000
22
Q
In the Supply and Demand model, what happens when there is an increase in supply and a decrease in demand?
a. Price and quantity increase
b. Price decreases and quantity increases
c. Price may increase or decrease, quantity decreases
d. Price decrease, quantity may increase of decrease
A
d. Price decrease, quantity may increase of decrease
23
Q
When the price of apples falls, what should happen to the demand for apples?
a. It will decrease
b. It will not change
c. It will increase
d. Any of the above could happen
A
b. It will not change
24
Q
Which of the following is necessary in order for the competitive equilibrium in the supply and demand model to be efficient?
a. Firms have the freedom to charge whatever price they want, and know that there will be some customers willing to buy at any finite price.
b. Buyers must have identical incomes.
c. All parties act with the general welfare in mind, not just self-interest.
d. Buyers and sellers are price takers
A
d. Buyers and sellers are price takers
25
Saul worked as a criminal lawyer in Albuquerque for several years before he suddenly decided to move to Nebraska and find a job that was inconspicuous. He has submitted several applications and is waiting to hear back from those businesses, who really better call him. What is Saul?
a. Cyclically unemployed
b. Institutionally unemployed
c. Structurally unemployed
d. Frictionally unemployed
d. Frictionally unemployed
26
Over time, Saul finds himself unable to stand working at anything other than his old legal profession and quits his job at Cinnabon. He is looking for a job as a lawyer, but can’t find a law office that will hire him due to his past disagreements with bar associations. How do economists describe this misalignment between Saul’s abilities and desires and prospective employers’ needs?
a. Cyclical unemployment
b. Institutional unemployment
c. Structural unemployment
d. Frictional unemployment
c. Structural unemployment
27
29. Suppose the interest rate you can freely borrow or save at is 5%. Given the choice between receiving $950 today or $1000 one year from now, which should you pick?
A. The options are equivalent
b. Take the money today
c. Take the money in a year
d. Not enough information
c. Take the money in a year
28
Raising tax rates will have what effect on tax revenue?
a. Decrease
b. Not change
c. Increased.
d. Any of the above could happen
d. Any of the above could happen
29
How did I say workers respond to a real pay cut?
a. They will often begrudgingly accept it.
b. They will often quit or strike.
c. Workers will borrow money (or decrease savings)
d. B or C could both be true, but not A.
a. They will often begrudgingly accept it.
30
Sally lost her job almost a year ago and looked for a new one for several months before deciding to become a homemaker. How would economists describe Sally right now?
a. Unemployed
b. Discouraged
c. Marginally Attached
d. More than one of the above.
c. Marginally Attached
31
What effect will Sally's decision to become a homemaker have on GDP? (Assuming she otherwise would have found a job)
a. GDP will be higher
b. GDP will be lower
c. GDP will be unchanged
d. Sally's decision has no direct effect on GDP.
b. GDP will be lower
32
What effect will Sally's decision to be a homemaker have on national income? (Assumes she would otherwise have found a job.)
a. National income will be higher.
b. National income will be lower.
c. National income will be unchanged.
d. Any of the above are possible
b. National income will be lower.
33
Odysseus has been out of the country for several years fighting a war. Upon his return, rather than find a job or starting a business, he begins cleaning up his house. While he was out of the country, he was not counted in any labor statistics. How will his arrival affect the unemployment rate? (Assume no one dies as a result of the housecleaning.)
a. It will increase
b. It will not change
c. It will decrease
d. Not enough information
b. It will not change
34
Odysseus has been out of the country for several years fighting a war. Upon his return, rather than find a job or starting a business, he begins cleaning up his house. While he was out of the country, he was not counted in any labor statistics. How will his arrival affect the labor force participation rate? (Assume nobody1 dies as a result of the housecleaning.)
a. It will increase
b. It will not change
c. It will decrease
d. Not enough information
c. It will decrease
35
If a household is receiving more total utility from home production than from leisure, what should they do?
a. Spend more time on leisure
b. Spend more time of home production
c. Spend more time on leisure only if some time is already being spent on leisure.
d. Not enough information
d. Not enough information
36
When the government taxes a labor market, what happens?
a. Workers end up paying all of the tax, since firms just take it out of their wages.
b. Firms end up paying all of the tax, since they are the ones directly sending in the money.
c. Only one side, workers or firms, will lose, but it is impossible to tell which without more information.
d. Both workers and firms lose, and it doesn't matter who has to send the government the money.
d. Both workers and firms lose, and it doesn't matter who has to send the government the money.
37
The federal income tax system in the US is:
a. Progressive
b. Regressive
c. Neither a nor b
d. Both a and b
a. Progressive
38
Suppose you receive $400,000 in an inheritance from a long-lost great uncle. What will happen to your marginal utility from working?
A. It will increase
b. It will not change
c. It will decrease
d. Not enough information
c. It will decrease
39
According to the Economic Decision Rule, you should keep doing an activity until:
a. The total cost is just equal to the total benefit
b. The marginal cost is just equal to the marginal benefit
c. The average cost is equal to the average benefit
d. The marginal cost is equal to the average benefit.
b. The marginal cost is just equal to the marginal benefit
40
A government requiring firms to pay for health insurance for full time workers is an example of which kind of system?
a. Traditional
b. Mercantilist
c. Centrally Planned
d. Market
c. Centrally Planned
41
Quantum Computing Incorporated had a recent breakthrough in generating entanglement. As a result, people expect their profits to go up substantially over the next few years and find the stock more appealing. Seeing the opportunity for growth, the board decides to sell many of the shares held by the firm in order to raise money. What is likely to happen to the equilibrium price and quantity of outstanding shares?
A. Price and quantity increase
b. Price increases, quantity may increase or decrease
c. Quantity increases, price may increase or decrease
d. Price decreases, quantity increases.
c. Quantity increases, price may increase or decrease
42
I and my neighbor own and live in our own houses. If we decided to move and rent out our houses to one another at the market rate in our area, what effect would that have on GDP?
a. None, because the value of imputed rent was included before the change
b. None, because the rent payment you make to one another cancel out.
c. GDP would decrease by the amount of the total rent payments
d. GDP would increase by the amount of the total rent payments
a. None, because the value of imputed rent was included before the change
43
James used to work in a downtown peach cannery, but he decided to move out into the country. He applied for some jobs in the new area, and even has several interviews scheduled. What is James?
a. Cyclically unemployed
b. Institutionally unemployed
c. Structurally unemployed
d. Frictionally unemployed
d. Frictionally unemployed
44
Suppose nominal GDP is lower than real GDP, what can we conclude?
a. Inflation is positive
b. Inflation is negative (deflation)
c. Inflation is constant
d. Not enough information
d. Not enough information
45
Which of the following did I say was the most significant cost of volatile inflation?
a. Menu costs
b. Price illusion
c. Shoe-leather costs
d. Risk to borrowers and lenders
d. Risk to borrowers and lenders
46
Of the economic growth models covered in class, which is most like the logistic model of biological growth?
a. Malthusian
b. Solow
c. Romer
d. Pinkerton
a. Malthusian
47
A pattern of population growth due to technological advancement followed by a partial population collapse due to population having surpassed the land's carrying capacity is known as a.
A Demographic Cycle
b. A Malthusian Cycle
c. A Lockean Cycle
d. A Poverty Cycle
b. A Malthusian Cycle
48
Which modern researcher most closely reflects Malthus’ views?
a. Simon
b. Ehrlich
c. Solow
d. Romer
b. Ehrlich
49
According to the environmental Kuznets Curve, as nations experience economic growth:
a. Environmental quality worsens as resources are consumed and land is used for growth.
b. Environmental quality improves as wealthy individuals are willing to make larger sacrifices to improve the environment.
c. Environmental quality increases, but only in countries with inclusive institutions.
d. (a) for poor countries, but (b) for rich countries.
d. (a) for poor countries, but (b) for rich countries.
50
Which of the following is not one of the Kaldor facts?
a. Population grows steadily over time
b. Capital per worker grows steadily over time
c. Output per worker grows steadily over time
d. The ratio of capital to output has been steady over time
a. Population grows steadily over time
51
Which of Kaldor's Stylized Facts appears in retrospect to have the weakest evidence?
a. The labor and capital shares of income have been steady.
b. The rate of profit on capital has been steady
c. There is considerable variation in rates of growth across countries
d. Human capital has been steadily increasing
b. The rate of profit on capital has been steady
52
According to Jones and Romer’s new growth facts, in the last 50yrs international trade:
a. Has decreased
b. Has remained about the same
c. Has increased
d. Jones and Romer didn’t say anything about this.
c. Has increased
53
In the Solow model, a decrease in capital per worker will lead to:
a. An increase in output per worker
b. A decrease in output per worker
c. An increase or decrease in output per worker
d. An increase in output per worker, only if capital is above the steady state level
b. A decrease in output per worker
54
Which of the following is a stock variable?
a. Capital per worker
b. Net investment
c. Gross investment
d. The production function
a. Capital per worker
55
In the Solow model, endogenous growth comes from:
a. Human capital accumulation
b. Physical capital accumulation
c. Ideas
d. Both (a) and (b)
b. Physical capital accumulation
56
In the Lucas model, endogenous growth comes from:
a. Human capital accumulation
b. Physical capital accumulation
c. Ideas
d. Both (a) and (b)
d. Both (a) and (b)
57
In the Romer model, endogenous growth comes from:
a. Human capital accumulation
b. Physical capital accumulation
c. Ideas
d. Both (a) and (b)
c. Ideas
58
A lower rate of capital depreciation will lead to:
a. A lower steady state level of output
b. A lower steady state level of capital
c. A higher steady state level of output
d. Both (a) and (b)
c. A higher steady state level of output
59
A lower savings rate will definitely lead to
a. Lower steady state output, thus less consumption
b. A higher portion of income used for consumption, thus more consumption
c. Lower gross investment
d. Any of the above might be true, but none must be true
c. Lower gross investment
60
Suppose the Solow model is accurate and that a country is at its steady state. There is an increase in technology. What happens to output per worker?
a. Output per worker does not initially change, but slowly increases over time.
b. Output per worker does not initially change, but slowly decreases over time.
c. Output per worker initially increases, then slowly increases more over time.
d. Output per worker initially increases, then slowly decreases over time.
c. Output per worker initially increases, then slowly increases more over time.
61
Suppose the Solow model is accurate and that a country is at its steady state. There is an increase in technology. What happens to capital per worker?
a. Capital per worker does not initially change, but slowly increases over time.
b. Capital per worker does not initially change, but slowly decreases over time.
c. Capital per worker initially increases, then slowly increases more over time.
d. Capital per worker initially increases, then slowly decreases over time.
a. Capital per worker does not initially change, but slowly increases over time.
62
According to the Solow model (extended to include population growth), high population growth leads to:
a. Higher rates of economic growth
b. Lower rates of economic growth
c. No effect on economic growth
d. Solow makes no predictions about this
b. Lower rates of economic growth
63
Suppose a country has per capita income of $120k and $400k worth of capital per person. Assume no population growth or technological development. If people save 10% of their income and the capital depreciation rate is 2.5%, what can we say about the prospects of growth for this economy?
a. Incomes are likely to increase over time.
b. Incomes are likely to decrease over time.
c. This economy is currently in its steady state.
d. Not enough information.
a. Incomes are likely to increase over time.
64
The Solow residual:
a. Increases with population
b. Is the exogenous variation in economic growth across countries and over time.
c. Was almost entirely eliminated by Lucas’ use of human capital formation
d. Is the same as net investment. It is the remaining new capital produced after subtracting off what is lost to depreciation.
b. Is the exogenous variation in economic growth across countries and over time.
65
What “scale effect” was initially seen as a major flaw in Romer’s model?
a. His model suggests that large countries should grow faster than small countries, which does not happen.
b. His model suggests that large countries should grow slower than small countries, which does not happen.
c. His model suggests that rich countries should grow faster than poor countries, which does not happen.
d. His model suggests that rich countries should grow slower than poor countries, which does not happen.
a. His model suggests that large countries should grow faster than small countries, which does not happen.
66
How did Michael Kramer address that flaw in Romer’s model?
a. He argued that ideas cross borders, so the scale effect is global.
b. He argued that ideas cross borders, so the scale effect does not exist.
c. He argued that some capital can cross borders, so capital goods like tractors and computers will be sent to the countries where they will earn the highest return.
d. He argued that people and food cross borders, so countries’ food consumption and food production do not have to be equal.
a. He argued that ideas cross borders, so the scale effect is global.
67
Which of the following is an example of an inclusive institution?
a. A law requiring all new discoveries be immediately publicly shared so that anyone can benefit, not just those who can afford to fund research.
b. Government funded R&D grants allocated primarily to those universities which have a pattern of hiring former government employees.
c. A system where judges can prevent landlords from evicting delinquent tenants as long as the social contributions of those tenants are significant enough.
d. Temporary monopoly rights in the form of a patent or copyright.
d. Temporary monopoly rights in the form of a patent or copyright.
68
Suppose world leaders believe that Malthusian and Solow models are accurate and complete descriptions of economic growth. What will policy makers likely choose to do in regards to population growth?
a. They will discourage population growth.
b. They will encourage population growth.
c. There is no clear policy prescription for population growth.
d. If the economy is below the steady state, they will encourage population growth; if it is above the steady state, they will discourage population growth.
a. They will discourage population growth.
69
Suppose world leaders believe that Malthusian and Solow models are accurate and complete descriptions of economic growth.
Now suppose that those world leaders are wrong, and that Romer and Kramer’s models are a better explanation of economic growth. What will be the effect of those leaders ’erroneous decisions on growth?
a. Economic growth per capita will be faster, but overall economic growth will be slower
b. Economic growth per capita will be slower, but overall economic growth will be faster
c. Economic growth both per capita and overall will be slower
d. Economic growth both per capita and overall will be faster
c. Economic growth both per capita and overall will be slower
70
Which of the following is not an example of a pro-growth government institution?
a. Stable prices
b. Low taxes
c. Decentralization
d. International Trade Barriers
d. International Trade Barriers
71
31. Countries and regions colonized by Europeans which were poorer and less urban are today generally richer than those that were richer and more urban. This “reversal of fortunes” can be attributed to:
a. Inclusive institutions being set up in population-sparse colonies to attract European settlers.
b. Extractive institutions being set up in densely populated regions because there was sufficient labor to be used by the colonizers.
c. Europeans being unable to set up inclusive institution in places where extractive institutions were already strongly entrenched.
d. All of the above.
d. All of the above.
72
If a foreign worker in the US sends $1000 to his family abroad, what effect will this have on the Balance of Payments?
a. This will not be counted because no good or service crossed the border, no assets changed ownership, and no factors of production were traded.
b. This will count positively in the balance of payments.
c. This will count negatively in the balance of payments.
d. Not enough information.
c. This will count negatively in the balance of payments.
73
Remittances, money sent by non-citizen residents of a country back to family in their home country, are part of which account?
a. Balance of Trade
b. Current Account
c. Financial Account
d. More than one or none of the above are true.
b. Current Account
74
Suppose incomes in many foreign countries begins to rise suddenly, what is likely to happen to US net exports and the US dollar?
a. Net exports will fall and the dollar will depreciate.
b. Net exports will rise and the dollar will depreciate.
c. Net exports will fall and the dollar will appreciate.
d. Net exports will rise and the dollar will appreciate.
d. Net exports will rise and the dollar will appreciate.
75
Suppose incomes in the US begin to rise suddenly due to lower costs of producing non-tradeable goods, what is likely to happen to US net exports and the US dollar?
a. Net exports will fall and the dollar will depreciate.
b. Net exports will rise and the dollar will depreciate.
c. Net exports will fall and the dollar will appreciate.
d. Net exports will rise and the dollar will appreciate.
a. Net exports will fall and the dollar will depreciate.
76
A trade deficit:
a. Is always bad.
b. Is always good.
c. Is never really good or bad.
d. Is a lot like borrowing on a national scale.
d. Is a lot like borrowing on a national scale.
77
Which of the following is not an argument we covered for restricting international trade?
a. Shipping costs
b. National security
c. Specific factors
d. Distributional effects
a. Shipping costs
78
What happens when a country imposes a tariff? Assume other countries do not raise tariffs in response.
A. It makes consumers worse off.
b. It makes consumers worse off only if the country is a significant importer of the good.
c. It makes consumers worse off only if the country is relatively small importer of the good
d. It does not hurt consumers, because the tariff is paid by the foreign firms
A. It makes consumers worse off.
79
What happens when a country imposes a tariff? Assume other countries do not raise tariffs in response.
a. It can cause a net increase in value to the country.
b. It can cause a net increase in value to the country only if the country is a significant importer of the good.
c. It can cause a net increase in value to the country only if the country is relatively small importer of the good.
d. It causes a net decrease in value to the country.
a. It can cause a net increase in value to the country.
80
What is the smallest category (in absolute dollar terms) in the balance of payments for the US?
a. Balance of Trade
b. Current Account
c. Financial Account
d. None of the above
b. Current Account
81
During a recession, unemployment tends to ______ and real GDP tends to _______.
a. Increase, increase
b. Increase, decrease
c. Decrease, increase
d. Decrease, decrease
b. Increase, decrease
82
Your friend says, “they yield curve has been inverted for months, which means that We are about to enter a recession”. How should you respond?
a. Yield curve inversions have nothing to do with recessions.
b. Yes. A recession is definitely about to occur.
c. Maybe, but recessions are notoriously unpredictable.
d. No. We can be almost certain that a recession will not begin in the next 6 months because unemployment is currently low.
c. Maybe, but recessions are notoriously unpredictable.
83
During a recession, the price level:
a. Always falls
b. Usually falls
c. Usually rises
d. Always rises
b. Usually falls
84
The slope of the short run aggregate supply curve:
a. Increases as prices get higher
b. Decreases as prices get higher
c. Is constant
d. Increases first, then decreases
a. Increases as prices get higher
85
In the aggregate demand-aggregate supply model, the short run equilibrium occurs:
a. Where aggregate demand and short run aggregate supply cross
b. Where aggregate demand and long run aggregate supply cross
c. Where short run aggregate supply and long run aggregate supply cross
d. Where aggregate demand, short run aggregate supply, and long run aggregate supply cross
a. Where aggregate demand and short run aggregate supply cross
86
6. Suppose businesses expect that a fall in productivity will cause an economic downturn next year. What effect will this have in the AD-AS model today?
a. Aggregate demand will decrease, casing output to fall and prices to rise.
b. Aggregate demand will decrease, casing output and prices to fall.
c. Aggregate supply will decrease, casing output to fall and prices to rise.
d. Aggregate supply will decrease, casing output and prices to fall.
b. Aggregate demand will decrease, casing output and prices to fall.
87
Continuing from the previous question, suppose those businesses expectations were in error and the full employment output has not changed. What will happen in the AD-ASmodel over time?
a. Aggregate demand will increase, causing output to return to normal and prices to rise back their original level
b. Aggregate demand will increase, causing output to return to normal and prices to rise above their original level.
c. Aggregate supply will increase, causing output to return to normal and prices to fall back to their original level.
d. Aggregate supply will increase, causing output to return to normal and prices to fall below their original level.
d. Aggregate supply will increase, causing output to return to normal and prices to fall below their original level.
88
In the aggregate demand-aggregate supply model, the long-run equilibrium occurs:
a. Where aggregate demand and short run aggregate supply cross
b. Where aggregate demand and long run aggregate supply cross
c. Where short run aggregate supply and long run aggregate supply cross
d. Where aggregate demand, short run aggregate supply, and long run aggregate supply cross
d. Where aggregate demand, short run aggregate supply, and long run aggregate supply cross
89
Aggregate demand is ____________ sloped in the short-run and _________ sloped in the long-run.
a. Positively; positively
b. Negatively; positively
c. Positively; negatively
d. Negatively; negatively
d. Negatively; negatively
90
assume the economy was initially in full employment equilibrium and use the following scenario: Suppose households are troubled by political news and conclude that bad economic times are coming. Consumer sentiment falls. Which curve shifts which way?
a. Aggregate demand shifts left
b. Aggregate demand shifts right
c. Aggregate supply shifts left
d. Aggregate supply shifts right
a. Aggregate demand shifts left
91
assume the economy was initially in full employment equilibrium and use the following scenario: Suppose households are troubled by political news and conclude that bad economic times are coming. Consumer sentiment falls. What happens to the price level and output in the short run?
a. Output falls and prices rise
b. Output and prices fall
c. Output rises and prices fall
d. Output and prices rise
b. Output and prices fall
92
assume the economy was initially in full employment equilibrium and use the following scenario: Suppose households are troubled by political news and conclude that bad economic times are coming. Consumer sentiment falls. Over time, what shift will occur if there is no government intervention?
a. Aggregate demand shifts left
b. Aggregate demand shifts right
c. Short run aggregate supply shifts left
d. Short run aggregate supply shifts right
d. Short run aggregate supply shifts right
93
Now, suppose the government responds to this scenario by engaging in expansionary fiscal policy rather than waiting for those long run results you described in (12). From a saltwater perspective, what will be the long-run result of this policy?
a. Output and prices will return to their original level.
b. Output will return to its original level, but prices will be higher.
c. Output will only partially recover, and prices will be higher.
d. Prices will return to their original level, but output will be lower.
a. Output and prices will return to their original level.
94
Now, suppose the government responds to this scenario by engaging in expansionary fiscal policy rather than waiting for those long run results you described in (12). From a freshwater perspective, what will be the long-run result of this policy?
a. Output and prices will return to their original level.
b. Output will increase, but not all the way to its original level, but prices will be higher.
c. Output will return to its original level, but prices will be lower.
d. Prices will return to their original level, but output will be higher
b. Output will increase, but not all the way to its original level, but prices will be higher.
95
Suppose the marginal propensity to consume is 0.6 and the government decides to increase spending on infrastructure by $30 billion. If the saltwater school is correct, but how much will GDP increase in the short run?
a. Less than $30 billion.
b. $30 billion
c. $45 billion
d. $75 billion
a. Less than $30 billion.
96
Suppose the marginal propensity to consume is 0.6 and the government decides to send out $30 billion in stimulus checks. If the saltwater school is correct, but how much will GDP increase in the short run?
a. Less than $30 billion
b. $30 billion
c. $45 billion
d. $75 billion
c. $45 billion
97
The United States debt:
a. Is large and has grown under every president since Coolidge
b. Is partially owed to the US government itself.
c. Is mostly owed to other countries and foreign investors.
d. Two of the above.
d. Two of the above.
98
Which of the following is a criticism of countercyclical fiscal policy made by the freshwater school?
a. Contractionary policy is almost never used in democracies.
b. Ricardian Equivalence
c. Policy Lags make it destabilizing
d. All of the above.
d. All of the above.
99
19. Why does the aggregate demand curve naturally adjust to bring the economy back to long run equilibrium?
a. Households adjust their expectations about the price level
b. Firms adjust their expectations about the price level.
c. Both a and b
d. It does not.
d. It does not.
100
Contractionary monetary policy ___________ interest rates, usually by _________ assets such as treasury bonds.
a. Lowers, selling
b. Lowers, buying
c. Raises, selling
d. Raises, buying
c. Raises, selling
101
The Federal Reserve is a government agency, like the Department of Justice.
a. Yes, the Fed is a part of the executive branch.
b. Yes, Fed employees are government employees.
c. No, the Fed is totally independent from the government. It is an organization runby the major banks.
d. No, the Fed is a private organization. However, it is chartered by the Federal government and run by political appointees.
d. No, the Fed is a private organization. However, it is chartered by the Federal government and run by political appointees.
102
The Federal Reserve System was set up to be a ______________ and politically______________ institution.
a. large; well connected
b. all powerful; neutral
c. decentralized; independent
d. wealthy; adversarial
c. decentralized; independent
103
Which of these is no longer a tool used by the Federal Reserve?
a. Open market operations
b. Interest payments on reserves
c. Reserve requirements
d. Discount policy
c. Reserve requirements
104
What effect did the Fed’s recent raising short-term interest rates have on the market value of long-term bonds, such as those held by the now-defunct Silicon Valley Bank?
a. The higher short-term rates made the bonds worth less
b. The higher short-term rates made the bonds worth more.
c. The higher short-term rates had no effect on the bond prices.
d. It may have increased or decreased them, but we can’t know
b. The higher short-term rates made the bonds worth more.
105
How effective is discount policy?
a. Not very, banks almost never want to take loans from the Fed because it sends a bad signal.
b. Very, banks regularly borrow from the Fed in order to satisfy reserve requirements.
c. Not very, since the discount rate is only available to small banks.
d. Very, since the discount rate allows banks to reduce their tax liability on cash held in reserve.
a. Not very, banks almost never want to take loans from the Fed because it sends a bad signal.
106
Compare three policy tools: federal spending, tax-rebate stimulus checks, and expansionary monetary policy. Rank them from fastest to slowest for their full effect:
a. federal spending, tax-rebate stimulus checks, then expansionary monetary policy
b. tax-rebate stimulus checks, federal spending, then expansionary monetary policy
c. tax-rebate stimulus checks, expansionary monetary policy, then federal spending
d. expansionary monetary policy, tax-rebate stimulus checks, then federal spending
b. tax-rebate stimulus checks, federal spending, then expansionary monetary policy
107
How can the Federal Reserve lower inflation?
a. Set lower interest rates
b. Set higher interest rates
c. Engage in open market purchases
d. Engage in open market sales
d. Engage in open market sales
108
When the Fed buys bonds, what should we expect to happen in the aggregate supply-aggregate demand model?
a. Short run aggregate supply shifts out
b. Long run aggregate supply shifts out
c. Aggregate demand shifts in
d. Aggregate demand shifts out
d. Aggregate demand shifts out
109
What is the primary long-run effect of expansionary monetary policy?
a. inflation
b. Deflation
c. Higher unemployment
d. Lower unemployment
a. inflation
110
According to the quantity theory of money:
a. M/V=PQ
b. V/M=PQ
c. MP=QV
d. MV=PQ
d. MV=PQ
111
Which of these is a reason why the Fed doesn’t target 0% inflation?
a. Inflation is good for banks, because it reduces the real value of deposits, which are a liability.
b. Inflation is good for economic growth, since the money investors in new capital have to pay back isn’t worth as much.
c. If inflation were 0%, then people wouldn’t realize that inflation mattered so the would think the Fed isn’t doing anything important.
d. When inflation is 0%, it is very hard for the Fed to cut interest rates. Higher interest rates allow for policy space.
d. When inflation is 0%, it is very hard for the Fed to cut interest rates. Higher interest rates allow for policy space.
112
Quantitative Easing:
a. Refers to loosening regulations on banks to encourage them to lend more money in an effort to stimulate the economy.
b. Has been attempted by the European Central Bank but never by the Federal Reserve.
c. Refers to the Fed reducing the size of the monetary base.
d. Refers to open market purchases with expanded scope and scale
d. Refers to open market purchases with expanded scope and scale
113
Which of these is not an argument for discretionary policy?
a. Monetary policy should be unaffected by changes in Fed leadership
b. Recessions are not alike
c. Future circumstances cannot be addressed by a rule
d. Policy makers need flexibility to respond as conditions warrant
d. Policy makers need flexibility to respond as conditions warrant
114
When the Fed sells bonds, what should we expect to happen in the aggregate supply-aggregate demand model?
a. Short run aggregate supply shifts out
b. Long run aggregate supply shifts out
c. Aggregate demand shifts in
d. Aggregate demand shifts out
c. Aggregate demand shifts in
115
Suppose nominal GDP is $100 billion, inflation is 2.5%, and the velocity of money is 2. How large is the money supply?
a. $20 billion
b. $40 billion
c. $50 billion
d. $200 billion
c. $50 billion
116
The chairman of the Board of Governors of the Federal Reserve:
a. Has no real power, this office is mostly ceremonial.
b. Is named Janet Yellen.
c. Is a political appointee.
d. Is elected by the rest of the Board of Governors.
c. Is a political appointee.
117
Suppose the Fed decides to respond to high inflation by selling bonds, but that inflation is naturally falling by the time the Feds actions affect the economy. What will happen?
a. Inflation will shoot up
b. Deflation may occur
c. The Fed’s policy will end up having no effect
d. The president may fire the Chairman of the Board of Governors.
b. Deflation may occur
118
How can the Federal Reserve increase inflation?
a. Set lower interest rates
b. Set higher interest rates
c. Engage in open market purchases
d. Engage in open market sales
c. Engage in open market purchases
119
Which of these is not a property of recessions?
Unpredictability
Persistence
Regularity
Co-movement
Regularity
119
Quantitative Tightening:
a. Refers to tightening regulations on banks to encourage them to lend more money in an effort to stimulate the economy.
b. Has been attempted by the European Central Bank but never by the Federal Reserve.
c. Refers to the Fed increasing the size of the monetary base.
d. Refers to open market sales with expanded scope and scale.
d. Refers to open market sales with expanded scope and scale.
120
The Phillips curve shows a _________ relationship between __________ and __________.
Negative, unemployment, inflation
Negative, GDP, inflation
Positive, unemployment, inflation
Positive, GDP, inflation
Negative, unemployment, inflation
121
Recessions involve a rise in unemployment. When does unemployment usually peak?
- Just before the recession officially begins.
- Just after the recession begins.
- About the midpoint of the recession
- Exactly at the midpoint of the recession, by definition.
- In the back half of the recession.
- At the end of a recession, and sometimes just after it has ended.
- At the end of a recession, and sometimes just after it has ended.
