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EC 202 > Exam 2 - Practice Problems & Notes > Flashcards

Exam 2 - Practice Problems & Notes Flashcards

1
Q

1) In the expansion phase of a business cycle
A) the inflation rate decreases, but productive capacity increases. B) employment and output increase.
C) the inflation rate and productive capacity decrease.
D) employment increases, but output decreases.

A

B. Employment and output increase

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2
Q

During a severe recession, we would expect output to fall the most in
A) agriculture.
B) the construction industry. C) the clothing industry.
D) the health care industry.

A

The construction industry

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3
Q

Full-time homemakers and retirees are classified in the BLS data as
A) employed.
B) part of the labor force. C) not in the labor force. D) unemployed.

A

Not in the labor force

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4
Q

The unemployment rate in an economy is 7.5%. The total population of the economy is 250 million and the size of the civilian labor force is 180 million. The number of employed workers in this economy is
A) 15.7 million. B) 166.5 million. C) 174.6 million. D) 13.5 million.

A

B. 166.5 million

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5
Q

At the economy’s natural rate of unemployment
A) only frictional unemployment exists.
B) the economy achieves its potential output.
C) only structural unemployment exists.
D) there is only a relatively small amount of cyclical unemployment.

A

B. The economy achieves its potential output

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6
Q

If the Consumer Price Index was 170 in one year and 180 in the next year, then the rate of inflation is approximately
A) 5.9%. B) 7.2%. C) 6.3%. D) 5.5%.

A

A. 5.9%

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7
Q

For a person to keep his real income steady at a certain level from one year to the next, his nominal income must
A) rise if the price index falls.
B) rise as fast as the price index.
C) fall if the price index rises.
D) stay the same as the price index rises.

A

B. Rise as fast as the price index

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8
Q

An MPC value of less than 1.0 indicates that as income increases consumption
A) also increases, and at the same rate as the increase in income. B) also increases, though not as much as income.
C) also increases, and by more than the increase in income.
D) will go in the opposite direction and decrease.

A

B. Also increases, though not as much as income

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9
Q

If, in an economy, a $200 billion increase in consumption spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the marginal propensity to consume and the multiplier are, respectively
A) 0.2 and 1.25. B) 0.8 and 5.0.C) 0.4 and 1.67. D) 0.4 and 2.5.

A

B. 0.8 and 5.0

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10
Q

The short term fluctuations experienced in an economy due to changes in levels of economic activity

A

The Business Cycle

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11
Q

4 phases of the Business Cycle

A

Peak
Recession
Trough
Expansion

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12
Q

Highest point of business cycle

A

peak

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13
Q

Downward sloping line of business cycle

A

Recession

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14
Q

Lowest point before going back up

A

Trough

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15
Q

From lowest to growing again

A

Expansion

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16
Q

The labor force does not include individuals who (4):

A
  • Are under the age of 16
  • Are institutionalized
  • Have been out of work for less than a week
  • Have not actively sought employment for the past 4 weeks
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17
Q

The number of people in the economy that hold a full or part time job

A

Employed

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18
Q

The number of people in the economy who have not had a job for at least a week but have actively searched for employment in the past 4 weeks

A

Unemployed

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19
Q

The skills that some workers have to offer simply don’t match the skills needed by the firms in the economy

A

Structural unemployment

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20
Q

Unemployment that results from fluctuations in the business cycle

A

Cyclical unemployment

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21
Q

Workers searching and waiting for jobs

A

Frictional unemployment

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22
Q

Unemployment rate formula

A

(Unemployment/Labor Force) x 100

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23
Q

Natural rate of unemployment formula

A

((Number of frictionally unemployed + number of structurally unemployed)/Labor Force) x 100

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24
Q

An economy that is operating at its natural rate of unemployment

A

Fully Employed Economy

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25
Q

Labor Force Participation Rate Formula

A

(Labor Force/Population over the age of 16) x 100

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26
Q

When unemployment rate decreases…

A

labor market improves

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27
Q

Workers dropping out of labor force can..

A

influence employment data

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28
Q

A general increase in the price of goods and services

A

Inflation

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29
Q

2 Causes of inflation:

A
  • Economy-wide changes in demand for or supply of goods and services
  • Changes in the money supply
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30
Q

Why do we care about inflation? (3)

A
  • Changing inflation can make it difficult to plan
  • Purchasing power of money decreases with inflation
  • Retirees have fixed incomes
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31
Q

Very high, increasing rate of inflation, makes money worthless

A

Hyperinflation

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32
Q

An economic indicator used to measure over time the average price of a market basket of goods and services purchased by the typical consumer

A

Consumer Price Index

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33
Q

Steps to calculating CPI (4):

A
  • Identify the basket of goods and services purchased by the typical consumer
  • Collect the prices of the basket over a specific time period
  • Calculate the market value of the basket for each time period
  • Divide the market value for the time period by the market value of a base time period and multiply by 100
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34
Q

CPI Formula 1 and 2

A

(Market Basket Value1/Market Basket Value1) x 100

(Market Basket Value 2/Market Basket Value 1) x 100

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35
Q

The actual number of dollars received in exchange for the different resources available in the economy

A

Nominal Income

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36
Q

Represents the amount of goods and services that you can purchase with nominal income

A

Real Income

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37
Q

Real Income Formula

A

Nominal Income/CPI (Hundredths)

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38
Q

In regards to factories…

If expenditures rise…
If expenditures fall…

A

Rise: Factories hire more workers and produce more output

Fall: Factories idle or reduce workers and produce less output

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39
Q

Solution for Great Depression

A

Increase Expenditures

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40
Q

Aggregate Expenditures

A

Y = C + I + G + NX

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41
Q

If any aggregate expenditures spending increases..

A

aggregate expenditures will also increase

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42
Q

An increase in aggregate expenditures will lead to..

A

an increase in real GDP

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43
Q

ayment to agents that lend or save money, expressed as percentage of money lent or saved

A

Interest Rate

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44
Q

Interest rate when expected rate of inflation is zero

A

Real Interest Rate

45
Q

Real interest rate is equal to..

A

nominal rate minus inflation rate

46
Q

n anticipated increase in profit resulting from additional investment; expressed as a percentage of the monetary cost of the additional investment

A

Expected Rate of Return

47
Q

Firms will invest when…

A

Expected rate of return is greater than real interest rate

48
Q

Consumption changes as

A

Real GDP changes

49
Q

Gross investment, government purchases, and net exports..

A

remain constant as real GDP changes

50
Q

he concept that an additional dollar of expenditures will result in the creation of more than one dollar’s worth of real GDP

A

The Multiplier Effect

51
Q

Expenditure Multiplier =

ChangeY=

A

MultiplierE = (1/(1-MPC))

ChangeY = MultiplierE x Change in Expenditures

52
Q

What does the tax multiplier tell us?

A

How much output will eventually change for any initial change in taxes

53
Q

The tax multiplier is directly related to..

A

marginal propensity to consume

As income decreases some consumption and some savings will be lost

54
Q

Tax Multiplier =

A

(-MPC/(1-MPC))

55
Q

The difference, or gap, between expenditure when real GDP is below the full employment level and the level of expenditure at full employment real GDP

A

Recessionary Gap

56
Q

The difference, or gap, between expenditure when real GDP is above the full-employment level and the level of expenditure at full-employment real GDP

A

Inflationary Gap

57
Q

The AD curve shows the relationship between the..

A

total amount of goods and services demanded and the overall price level

58
Q

At a lower price level the amount of goods and services demanded ___

A

increases

59
Q

There is a ___ relationship between the price ___ and ____

A

negative
level
aggregate demand

60
Q

When the price level rises, the real value of people’s nominal assets (like money) falls, reducing the real value of their nominal wealth

A

Real balance

61
Q

Higher interest rates mean (2)

A

less consumption and investment spending

62
Q

Foreign Purchases: If the price level for a country rises, domestically-produced goods become _____ relative to foreign goods

A

more expensive

63
Q

As imports rise and exports fall, net exports will

A

fall

64
Q

Determinants of Aggregate demand (2)

A

Taxes

Consumer and investment spending

65
Q

Represents the aggregate quantity of real GDP supplied in an economy at various price levels, all else held constant

A

Aggregate Supply

66
Q

The higher the overall price level, the ____

A

more output the economy produces

67
Q

The lower the overall price level, the _____

A

less output the economy produces

68
Q

Determinants of Aggregate Supply (3)

A

Productivity
Resource Prices
Social Institutions

69
Q

An increase in the cost of resources, ____ aggregate ____ supplied at a given price level

A

decreases

quantity

70
Q

Rules or regulations that make it more expensive to produce output will ____

A

decrease aggregate supply

71
Q

If output is below the full-employment level, input prices will ____, which shifts the aggregate supply to the ____

A

decrease

right

72
Q

If output is above the full-employment level, input prices will ____, which shifts the aggregate supply to the ____

A

increase

left

73
Q

Price up and supply down

A

Cost-push

74
Q

Price up and demand up

A

Demand-pull

75
Q

Inflation that occurs when an economy experiences both rising unemployment (a stagnating economy) and rising prices (inflation).

A

Stagflation

76
Q

Expansionary fiscal policy ___ government purchases and ____ taxes

A

increases

decreases

77
Q

Expansionary fiscal policy expands output by _____ government purchases, which _____ aggregate demand

A

increasing

increases

78
Q

Contractionary fiscal policy contracts output by ____ government purchases which ____ aggregate demand

A

decreasing

decreases

79
Q

The concept that an additional dollar of expenditures will result in the creation of more than one dollar’s worth of real GDP

A

Multiplier effect

80
Q

Expansionary fiscal policy ____ taxes, which ____ consumption and thereby ___ aggregate demand

A

decreases
increases
increases

81
Q

Contractionary fiscal policy ____ taxes, which _____ consumption and thereby ____ aggregate demand

A

increases
decreases
decreases

82
Q

When a shock to aggregate demand or aggregate supply occurs, what all adjust to help the economy move back to full employment? (3)

A

tax revenue
government spending
prices

83
Q

During GDP growth, taxation ____ and government purchases ____

A

increases

decrease

84
Q

During GDP reduction, taxation _____

A

decreases

85
Q

When a recession starts, we don’t know it immediately

A

Recognition lag

86
Q

The government cannot quickly determine the appropriate policy

A

Legislative lag

87
Q

The decided-upon policy is not immediately effective

A

Implementation lag

88
Q

Current tax reform is to ____ economic growth and ____ wages

A

increase

increase

89
Q

Any item that both buyers and sellers generally accept in exchange for goods and services

A

Money

90
Q

Three functions of money

A

Unit of account
Medium of Exchange
Store of value

91
Q

Consists of the most liquid assets

A

M1

92
Q

Broader measure of the money supply, which includes less liquid assets

A

M2

93
Q

The degree which an asset can be readily converted into currency

A

Liquidity

94
Q

What is included in M1? (4)

A
  • Demand deposits (checkable deposits and checking accounts)
  • Travelers checks
  • Other checkable deposits
  • Actual currency
95
Q

What is included in M2? (4)

A
  • M1
  • Savings deposits
  • Small denomination time deposits
  • Retail money funds
96
Q

The actions of a country’s central bank to influence the supply of money and credit in the economy

A

Monetary Policy

97
Q

The buying or selling of government securities in the open market to change the money supply

A

Open Market operations

98
Q

The interest rate at which banks can borrow money directly from the Federal Reserve

A

Discount Rate

99
Q

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve

A

Reserve Requirement

100
Q

A banking system in which banks have to keep only a fraction of checkable deposits on hand and available for withdrawal

A

Fractional Reserve banking

101
Q

Required reserves =

A

Deposits x rr

102
Q

The amount of reserves that a bank can lend out to earn interest; equal to total reserves minus required reserves

A

Excess Reserves

103
Q

Excess reserves =

A

Total reserves - required reserves

104
Q

An increase in reserves in the banking system will lead to a ___ in the money supply

A

increase

105
Q

With more reserves on hand, banks will have additional ____ and will make more ___

A

excess reserves

loans

106
Q

When banks make more loans, they ____

A

create more money

107
Q

Change in money supply =

A

(1/rr) x Change in reserves

108
Q

Money is often held for two reasons:

A
  • Transaction demand

- Asset demand

EC 202 (4 decks)

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