macro final exam ECO2013 - Assignment Essays

question

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ______ inflation as a result of ______ bias.

answer

overstate; quality adjustment

question

If workers and employers agree to a three-year wage contract under the expectation of 3 percent inflation, and inflation turns out to be 5 percent, then:

answer

workers lose and employers gain.

question

Product improvements make it difficult for the statisticians who construct the CPI to distinguish between ______ changes and ______ changes.

answer

price; quality

question

If the bank agrees to make a loan at a 7 percent interest rate and the inflation rate is 3 percent, then 4 percent is the ______ rate.

answer

real interest

question

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ______ inflation as a result of ______ bias.

answer

overstate; substitution

question

If all prices, including the price of beef, increase by 3 percent, then the relative price of beef has ______ and inflation _____.

answer

remained constant; has occurred

question

If workers and employers agree to a three-year wage contract under the expectation of 5 percent inflation, and inflation turns out to be 3 percent, then:

answer

workers lose and employers gain.

question

______ is an increase in the price level, while ______ is an increase in the price of one good in comparison to other goods and services.

answer

Inflation; a relative price increase

question

Suppose workers and employers agree to a three-year wage contract under the expectation of 3 percent inflation, but inflation turns out to be 1 percent. In this case, ______ lost purchasing power, and ______ gained purchasing power.

answer

workers; employers

question

The CPI in year one equaled 1.45. The CPI in year two equaled 1.51. The rate of inflation between years one and two was ______ percent.

answer

4.1

question

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7 percent and inflation turns out to be 10 percent over the life of the loan, then the borrower ______ and the lender ______.

answer

gains; loses

question

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2015 equals:

answer

1.20

question

Making more frequent, but smaller cash withdrawals from banks ______ the inflation losses from holding cash and ______ the shoe leather costs of inflation.

answer

reduces; increases

question

An inflation rate of over 500 percent per year would be classified as:

answer

hyperinflation

question

Suppose the CPI does indeed overstate the inflation rate. When the CPI increases by 5 percent and household incomes increase by 5 percent, we should conclude that real incomes of households have:

answer

stayed constant

question

The basic Keynesian model is built on the key assumption that:

answer

firms meet the demand for their products at preset prices.

question

The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____.

answer

businesses and households; downward

question

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes:

answer

production levels to meet the demand.

question

In the short run, with predetermined prices, when output is greater than planned aggregate expenditures:

answer

planned investment is less than actual investment.

question

For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):

answer

expansionary output gap.

question

The vertical intercept of the consumption function equals ______ and the slope equals _____.

answer

autonomous consumption; the mpc

question

In the short run, with predetermined prices, when output is greater than planned aggregate expenditure, firms will:

answer

reduce production

question

A decrease in stock prices alters the consumption function by:

answer

decreasing the vertical intercept.

question

The slope of the consumption function:

answer

equals the marginal propensity to consume.

question

to close a recessionary gap, the Federal Reserve must ______ real interest rates by ______ the money supply.

answer

decrease; increasing

question

The money demand curve relates ______ to the ________.

answer

the aggregate quantity of money demanded; nominal interest rate

question

The Fed lowers the discount rate and increases discount lending.

answer

Nominal interest rates will decrease

question

The Fed increases the reserve requirement for commercial banks.

answer

Nominal interest rates will increase

question

The Fed conducts open market sales of government bonds to the public.

answer

Nominal interest rates will increase

question

The fed decreases the reserve requirement for commercial banks.

answer

Nominal interest rates will decrease

question

Federal Reserve actions that increase nominal interest rates and decrease the money supply:

answer

close an expansionary gap.

question

The benefit of holding money is _______, while the opportunity cost of holding money is _______.

answer

its usefulness in carrying out transactions; the nominal interest rate

question

In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______.

answer

decrease; decreases; decreases

question

According to the Taylor rule, the Federal Reserve ____ the real interest rate as the output gap increases and ____ the real interest rate as the inflation rate increases.

answer

lowers; raises

question

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ______, assuming that the public does not wish to change the amount of currency it holds.

answer

increase to 4,667 econs

question

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. When the inflation rate is zero, then the real interest rate will be:

answer

set to equal 2 percent.

question

If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

answer

recessionary; reduce

question

The money demand curve will shift to the right if:

answer

the price level increases.

question

The self-correcting property of the economy means that output gaps are eventually eliminated by:

answer

increasing or decreasing inflation.

question

Starting from long-run equilibrium at point C, a tax increase that decreases aggregate demand from AD1 to AD will lead to a short-run equilibrium at point ___ and eventually to a long-run equilibrium at point ____, if left to self-correcting tendencies.

answer

D; B

question

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output.

answer

increase; decrease

question

When the economy is in short-run equilibrium, there will be ______ output gap.

answer

...

question

A large increase in oil prices is an example of:

answer

either a recessionary or an expansionary

question

When the economy is in short-run equilibrium, there will be ______ output gap.

answer

either a recessionary or an expansionary

question

A large increase in oil prices is an example of:

answer

an adverse inflation shock.

question

Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n) _____ gap in the short run and _____ output and _____ inflation in the long run.

answer

expansionary; lower; higher

question

If policymakers attempt to offset an adverse inflation shock with monetary _____, the resulting long-run equilibrium will be at _____ inflation rate compared to allowing the self-correcting mechanism return the economy to potential output.

answer

easing; a higher

question

to achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

answer

decrease.

question

Starting from long-run equilibrium, an increase in autonomous investment results in ____ output in the short run and _____ output in the long run.

answer

higher; potential

question

When there is an expansionary gap, inflation will ______, in response to which the Federal Reserve will ____ real interest rates, and output will _____.

answer

increase; raise; decline

question

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

answer

small; low

question

A low rate of expected inflation tends to lead to a ___ rate of actual inflation and a high rate of expected inflation tends to lead to a ____ rate of actual inflation.

answer

low; high

question

The economy pictured in the given figure has a(n) ____ gap with a short-run equilibrium combination of inflation and output indicated by point ___.

answer

expansionary; A

question

If households and firms expect higher rates of inflation, the ______ curve will shift _____.

answer

SRAS; upward

question

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ______ equilibrium.

answer

long-run

question

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

answer

higher; lower

question

A government policy of providing free public education is an example of a policy to promote economic growth by:

answer

increasing human capital.

question

Each of the following statements describes how the political and legal environment encourages productivity except:

answer

Pay rates determined by a governmental planning agency provide workers with incentives to work hard.

question

Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productively as possible and illustrates the:

answer

principle of increasing opportunity costs.

question

The fact that a higher standard of living tomorrow can only be achieved by sacrificing consumption today is an example of the:

answer

scarcity principle.

question

An example of a government policy to increase physical capital formation is:

answer

the construction of an interstate highway system.

question

Providing a fixed number of workers with additional capital will ______ average labor productivity at a(n) ______ rate.

answer

increase; decreasing

question

When new technologies are applied to the production and distribution of goods and services:

answer

diminishing returns to capital still hold.

question

The implementation of new production methods by managers, such as the "just-in-time" inventory system, increases:

answer

average labor productivity.

question

Getting a college degree is an example of investing in:

answer

human capital.

question

A government policy that allows retirement savings to accumulate tax-free is an example of a policy to promote economic growth by:

answer

increasing physical capital.

question

Alpha has $40,000 of capital per worker, while Beta has $5,000 of capital per worker. In all other respects, the two countries are the same. According to the principle of diminishing returns to capital, an additional unit of capital will increase output ______ in Alpha compared to Beta, holding other factors constant.

answer

less

question

Government support of basic research by funding scientists through the National Science Foundation is an example of a government policy to promote economic growth by:

answer

improving technology.

question

The construction of the interstate highway system in the United States is an example of a government policy to promote economic growth by:

answer

increasing physical capital.

1 of 69

question

answer

overstate; quality adjustment

question

If workers and employers agree to a three-year wage contract under the expectation of 3 percent inflation, and inflation turns out to be 5 percent, then:

answer

workers lose and employers gain.

question

Product improvements make it difficult for the statisticians who construct the CPI to distinguish between ______ changes and ______ changes.

answer

price; quality

question

If the bank agrees to make a loan at a 7 percent interest rate and the inflation rate is 3 percent, then 4 percent is the ______ rate.

answer

real interest

question

answer

overstate; substitution

question

If all prices, including the price of beef, increase by 3 percent, then the relative price of beef has ______ and inflation _____.

answer

remained constant; has occurred

question

If workers and employers agree to a three-year wage contract under the expectation of 5 percent inflation, and inflation turns out to be 3 percent, then:

answer

workers lose and employers gain.

question

______ is an increase in the price level, while ______ is an increase in the price of one good in comparison to other goods and services.

answer

Inflation; a relative price increase

question

answer

workers; employers

question

The CPI in year one equaled 1.45. The CPI in year two equaled 1.51. The rate of inflation between years one and two was ______ percent.

answer

4.1

question

answer

gains; loses

question

answer

1.20

question

Making more frequent, but smaller cash withdrawals from banks ______ the inflation losses from holding cash and ______ the shoe leather costs of inflation.

answer

reduces; increases

question

An inflation rate of over 500 percent per year would be classified as:

answer

hyperinflation

question

Suppose the CPI does indeed overstate the inflation rate. When the CPI increases by 5 percent and household incomes increase by 5 percent, we should conclude that real incomes of households have:

answer

stayed constant

question

The basic Keynesian model is built on the key assumption that:

answer

firms meet the demand for their products at preset prices.

question

The bursting of the housing bubble in 2006 caused ______ to cut back on their spending, thereby shifting the PAE line _____.

answer

businesses and households; downward

question

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes:

answer

production levels to meet the demand.

question

In the short run, with predetermined prices, when output is greater than planned aggregate expenditures:

answer

planned investment is less than actual investment.

question

For an economy starting at potential output, an increase in autonomous expenditure in the short run results in a(n):

answer

expansionary output gap.

question

The vertical intercept of the consumption function equals ______ and the slope equals _____.

answer

autonomous consumption; the mpc

question

In the short run, with predetermined prices, when output is greater than planned aggregate expenditure, firms will:

answer

reduce production

question

A decrease in stock prices alters the consumption function by:

answer

decreasing the vertical intercept.

question

The slope of the consumption function:

answer

equals the marginal propensity to consume.

question

to close a recessionary gap, the Federal Reserve must ______ real interest rates by ______ the money supply.

answer

decrease; increasing

question

The money demand curve relates ______ to the ________.

answer

the aggregate quantity of money demanded; nominal interest rate

question

The Fed lowers the discount rate and increases discount lending.

answer

Nominal interest rates will decrease

question

The Fed increases the reserve requirement for commercial banks.

answer

Nominal interest rates will increase

question

The Fed conducts open market sales of government bonds to the public.

answer

Nominal interest rates will increase

question

The fed decreases the reserve requirement for commercial banks.

answer

Nominal interest rates will decrease

question

Federal Reserve actions that increase nominal interest rates and decrease the money supply:

answer

close an expansionary gap.

question

The benefit of holding money is _______, while the opportunity cost of holding money is _______.

answer

its usefulness in carrying out transactions; the nominal interest rate

question

In the short-run, if the Federal Reserve increases interest rates, then consumption and investment ______, planned aggregate expenditure ______, and short-run equilibrium output _______.

answer

decrease; decreases; decreases

question

According to the Taylor rule, the Federal Reserve ____ the real interest rate as the output gap increases and ____ the real interest rate as the inflation rate increases.

answer

lowers; raises

question

answer

increase to 4,667 econs

question

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. When the inflation rate is zero, then the real interest rate will be:

answer

set to equal 2 percent.

question

If potential output equals 4,000 and short-run equilibrium output equals 3,500, there is a ______ gap and the Federal Reserve must ______ real interest rates in order to close the gap.

answer

recessionary; reduce

question

The money demand curve will shift to the right if:

answer

the price level increases.

question

The self-correcting property of the economy means that output gaps are eventually eliminated by:

answer

increasing or decreasing inflation.

question

answer

D; B

question

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output.

answer

increase; decrease

question

When the economy is in short-run equilibrium, there will be ______ output gap.

answer

...

question

A large increase in oil prices is an example of:

answer

either a recessionary or an expansionary

question

When the economy is in short-run equilibrium, there will be ______ output gap.

answer

either a recessionary or an expansionary

question

A large increase in oil prices is an example of:

answer

an adverse inflation shock.

question

Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n) _____ gap in the short run and _____ output and _____ inflation in the long run.

answer

expansionary; lower; higher

question

answer

easing; a higher

question

to achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

answer

decrease.

question

Starting from long-run equilibrium, an increase in autonomous investment results in ____ output in the short run and _____ output in the long run.

answer

higher; potential

question

When there is an expansionary gap, inflation will ______, in response to which the Federal Reserve will ____ real interest rates, and output will _____.

answer

increase; raise; decline

question

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

answer

small; low

question

A low rate of expected inflation tends to lead to a ___ rate of actual inflation and a high rate of expected inflation tends to lead to a ____ rate of actual inflation.

answer

low; high

question

The economy pictured in the given figure has a(n) ____ gap with a short-run equilibrium combination of inflation and output indicated by point ___.

answer

expansionary; A

question

If households and firms expect higher rates of inflation, the ______ curve will shift _____.

answer

SRAS; upward

question

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ______ equilibrium.

answer

long-run

question

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

answer

higher; lower

question

A government policy of providing free public education is an example of a policy to promote economic growth by:

answer

increasing human capital.

question

Each of the following statements describes how the political and legal environment encourages productivity except:

answer

Pay rates determined by a governmental planning agency provide workers with incentives to work hard.

question

Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productively as possible and illustrates the:

answer

principle of increasing opportunity costs.

question

The fact that a higher standard of living tomorrow can only be achieved by sacrificing consumption today is an example of the:

answer

scarcity principle.

question

An example of a government policy to increase physical capital formation is:

answer

the construction of an interstate highway system.

question

Providing a fixed number of workers with additional capital will ______ average labor productivity at a(n) ______ rate.

answer

increase; decreasing

question

When new technologies are applied to the production and distribution of goods and services:

answer

diminishing returns to capital still hold.

question

The implementation of new production methods by managers, such as the "just-in-time" inventory system, increases:

answer

average labor productivity.

question

Getting a college degree is an example of investing in:

answer

human capital.

question

A government policy that allows retirement savings to accumulate tax-free is an example of a policy to promote economic growth by:

answer

increasing physical capital.

question

answer

less

question

Government support of basic research by funding scientists through the National Science Foundation is an example of a government policy to promote economic growth by:

answer

improving technology.

question

The construction of the interstate highway system in the United States is an example of a government policy to promote economic growth by:

answer

increasing physical capital.

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