Econ2 Final

All of the following are components of aggregate expenditure except:
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Terms in this set (160)
All of the following are components of aggregate expenditure except:
B. actual investment spending
If inventories decline by more than analysts predict they will decline, this implies that:
C. actual investment spending was less than planned investment spending
Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred?
D. There was an unplanned increase in inventories equal to $2 million.
If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?
B. Inventories will rise, and GDP and employment will decline.
Consumption spending is $5 million, planned investment spending is $8 million, actual investment spending is $8 million, government purchases are $10 million, and net export spending is $2 million. Based on this information, which of the following is true?
wrong D. Aggregate expenditure is greater than GDP.
________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending.
A. An increase; an increase
Decreases in the price level will:
raise consumption because real wealth increases
MPC
marginal propensity to consume
Change in Consumer Spending/Change in income
Consumption:1200;2100;3000
Disposable Income:3000;4000;5000
MPC=900/1000=0.9
If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will:
B. decrease consumption by $7,500
Investment spending ________ during a recession, and ________ during an expansion.
B. declines; increases
U.S. net export spending rises whenthe growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.Which of the following will reduce consumer expenditures?B. a decrease in expected future incomeWhich of the following will increase aggregate expenditure in the United States? AE = C + I + G + NX.D. an increase in government purchases AE=aggregate expenditure C=consumption I=investment G=government spending NX=net exportsAt point L in the figure above, which of the following is true? (Angled line is actual)A. Actual inventories are greater than planned inventories.Refer to the figure above. If the economy is at point L, what will happen?D. Inventories have risen above their desired level, and firms decrease production.Refer to the figure above. If the U.S. economy is currently at point N, which of the following could cause it to move to point K?C. Households expect future income to decline.Refer to the figure above. Suppose that government spending increases, shifting up the aggregate expenditure line. GDP increases from GDP1 to GDP2, and this amount is $200 billion. If the MPC is 0.8, then what is the distance between N and L or by how much did government spending change?200 x 0.8 = 160 MPS=200-160=40 B. $40 billionRefer to the figure above. Potential GDP equals $500 billion. The economy is currently producing GDP1 which is equal to $450 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP?500 x 0.8 = 400 MPS=500-400=100 450 x 0.8 =360 MPS=450-360=90 MPS Diff=100-90=10 C. $10 billionWhich of the following is a true statement about the multiplier?D. The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate.Which of the following correctly describes how an increase in the price level affects consumption spending?A. An increase in the price level lowers real wealth, which causes consumption to decrease.IMPORTANT An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.D. decrease; a higher price level reduces consumption, investment, and net exports.Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?C. They will shift the aggregate demand curve to the right.If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?A. This will shift the aggregate demand curve to the right. (Other countries can purchase U.S. goods)How do lower taxes affect aggregate demand?D. They increase disposable income, consumption, and aggregate demand.Refer to the figure above. Ceteris paribus, an increase in households' expectations of their future income would be represented by a movement from:A. AD1 to AD2Last week, 13 Mexican pesos could purchase one U.S. dollar. This week, it takes 11 Mexican pesos to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Mexico and ________ U.S. aggregate demand.D. increase; increaseIf stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home countries:B. the long-run aggregate supply curve will shift to the leftSuppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result:A. the long-run aggregate supply curve will shift to the rightThe short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.D. positive; final goods and services; inputsRefer to the figure above. Ceteris paribus, an increase in the expected price of an important natural resource would be represented by a movement from:B. SRAS2 to SRAS1Studies have shown that:A. firms are reluctant to cut nominal wages during recessions but instead freeze workers' nominal wages and allow inflation to gradually reduce real wagesHurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result, this should:A. shift the short-run aggregate supply curve to the leftAn increase in aggregate demand results in a(n) ________ in the ________.D. expansion; short runAn increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.C. real GDP; the price levelWhen the aggregate demand curve and the short-run aggregate supply curve intersect:D. the economy is in short-run macroeconomic equilibrium.Refer to the figure above. Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?C. CWhen the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run.B. rises; risesWhy does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand?B. Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.Refer to the figure above. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?C. 2.7% 11.8-11=0.8 (0.8 x 100)/11=7.27 12.1-11=1.1 (1.1 x 100)/11=10 10-7.27=2.7Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise?D. AD shifted to the right by more than SRAS.The major shortcoming of a barter economy is:B. the requirement of a double coincidence of wantsFiat money has:D. little to no intrinsic value and is authorized by the central bank or governmental body.By making exchange ________, money allows for ________ and higher ________.C. easier; specialization; productivityA farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?D. store of valueThe largest proportion of M1 is made up of:D. checking account deposits.The M2 measure of the money supply equals:C. M1 plus savings account balances plus small-denomination time deposits plus noninstitutional money market fund sharesYou earn $500 a month, currently have $200 in currency, $100 in your checking account, $2,000 in your savings accounts, $3,000 worth of illiquid assets and $1,000 of debt. You have:m=200+100 ai=500x12 w=((2000+3000)-1000)+(200+100) B. money = $300, annual income = $6,000, and wealth = $4,300Bank reserves includevault cash and deposits with the Federal Reserve.Kristy deposits $10000 into checking account. Required reserve ratio is %20. Refer to the scenario above. As a result of Kristy's deposit, Bank A's reserves immediately increase by:C. $10,000Kristy deposits $10000 into checking account. Required reserve ratio is %20. Refer to the scenario above. As a result of Kristy's deposit, Bank A's required reserves increase by:A. $2,000Banks can continue to make loans until their:B. actual reserves equal their required reservesThe more excess reserves banks choose to keep,the smaller the deposit multiplierWhich of the following is not a function of the Federal Reserve System, or the Fed?B. insuring deposits in the banking systemThe Federal Open Market Committee consists of the seven members of the ________, the president of the Federal Reserve Bank of New York, and ________.D. Federal Reserve's Board of Governors; four presidents from the other 11 Federal Reserve banksThe purchase of Treasury securities by the Federal Reserve will, in general:A. increase the quantity of reserves held by banksSuppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 12 percent, then the bank will now have excess reserves of:C. -$2,000One way investment banks differ from commercial banks is that investment banks:D. do not take in deposits.A decrease in the discount rate ________ bank reserves and ________ the money supply if banks respond appropriately to the change in the rate.B. increases; increasesUsing the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be: MV=PT5+10-4=11 C. 11 percentAccording to the quantity theory of money, deflation will occur if the:A. money supply grows at a slower rate than real GDPMonetary policy refers to the actions the Federal Reserve takes to manage:A. the money supply and interest rates to pursue its economic objectivesAn increase in the interest rate:C. increases the opportunity cost of holding moneyWhich of the following would cause the money demand curve to shift to the left?A. an open market purchase of Treasury securities by the Federal ReserveUsing the money demand and money supply model, an open market sale of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to:D. increase.Which of the following will lead to a decrease in the equilibrium interest rate in the economy?A. a decrease in GDPThe Fed can increase the federal funds rate by:D. selling Treasury bills, which decreases bank reserves.An increase in interest rates:C. decreases investment spending on machinery, equipment and factories, consumption spending on durable goods, and net exportsFrom an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely:D. decrease interest rates.Refer to the figure above. Suppose the economy is in short-run equilibrium above potential GDP, the unemployment rate is very low, and wages and prices are rising. Using the static AD-AS model in the figure above, the correct Fed policy for this situation would be depicted as a movement from:C. C to BWhich of the following is true about the Federal Reserve and its ability to prevent recessions? The Federal Reserve:A. cannot realistically fine tune the economy, but seeks to keep recessions shorter and milder than they would otherwise beIf money demand is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will:D. change very little and investment and consumer spending will change very little.Refer to the figure above. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely:C. decrease interest ratesRefer to the figure above. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B:E. incomes and profits are rising.With a monetary growth rule as proposed by the monetarists, during a recession the rate of growth of the money supply would:C. not changeThe supporters of a monetary growth rule believe that active monetary policy:A. destabilizes the economy, increasing the number of recessions and their severityMost economists believe that the best monetary policy target is:B. an interest rateThe Federal Reserve cannot target both the money supply and the interest rate because it does not control:A. money demandWhen housing prices fell as they did beginning in 2006 following the housing market bubble, most banks and other lenders ________ the requirement for borrowers, making it ________ for potential home buyers to obtain mortgages.C. tightened; harderWhile many analysts defended the actions taken by the Fed and the Treasury to respond to the financial crisis in 2008, others were critical of these actions. The critics were concerned that by not allowing large firms to fail:B. there is an increased likelihood that other firms will engage in risky behavior in the future with the expectation that they will also not be allowed to failAlthough the Federal Reserve had traditionally made discount loans only to ________, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.D. commercial banksAutomatic stabilizers refer to:A. government spending and taxes that automatically increase or decrease along with the business cycleFederal government expenditures, as a percentage of GDP:E. rose from 1950 to 1991, fell from 1992 to 2001, and have risen from 2001 to the present.Government transfer payments include which of the following?D. Social Security and Medicare programsRefer to the figure above. Suppose the economy is in a recession and expansionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from:C. A to BAn increase in individual income taxes ________ disposable income, which ________ consumption spending.D. decreases; decreasesTo combat a recession with discretionary fiscal policy, Congress and the president should:C. decrease taxes to increase consumer disposable incomeRefer to the figure above. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and no fiscal or monetary policy is pursued, then at point B:idkC. there is pressure on wages and prices to riseIf real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy?D. an increase in taxesRefer to the figure above. In the graph above, the shift from AD1 to AD2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B ________ $50 billion.A. would be greater thanSuppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant?E. a decrease of less than $80 billionThe tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the:B. decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goodsA cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.C. increasing; increasingThe Federal Reserve plays a larger role than Congress and the president in stabilizing the economy because:D. the Federal Reserve can more quickly change monetary policy than the president and the Congress can change fiscal policy.The crowding out of private spending by government spending will be greater the:B. more sensitive consumption, investment, and net exports are to changes in interest ratesIn the long run, most economists agree that a permanent increase in government spending leads to:D. a decrease in private spending by the same amount that government spending increased.During 1970-1997, the U.S. federal government was:B. in deficit every yearThe federal government debt equals:A. the total value of U.S. Treasury bonds outstandingAccumulating debt poses a problem for the U.S. federal government because:D. a large debt-to-GDP ratio causes crowding out.Economists who believe the supply-side effects of tax cuts are small essentially believe that:B. tax cuts mainly affect aggregate demandReducing the marginal tax rate on income willA. reduce the tax wedge faced by workers and increase labor supplied B. increase the after-tax return on saving, and encourage saving C. raise the return to entrepreneurship and encourage the opening of new businesses D. All of the above are correct.Refer to the figure above. Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point B in the long run?E. No policy will move the economy to point B in the long run.Refer to the figure above. What should the Federal Reserve do if it wants to move from point A to point C in the short-run Phillips curve depicted in the figure above?A. buy treasury billsIn the long run, the Phillips curve is a ________ at ________.C. vertical line; the natural rate of unemploymentGretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur?B. Gretchen's real wage will rise.If actual inflation is less than expected inflation, actual real wages will be ________ expected real wages and unemployment will ________.A. greater than; riseIf the Phillips curve represents a "________ relationship," then the trade-off between unemployment and inflation is permanent.C. structuralRefer to the figure above. Suppose the economy is at point B in the figure above. Which of the following is true?D. The expected rate of inflation is 3%.Refer to the figure above. Suppose the economy is at point C in the figure above. If workers adjust their expectations of inflation, which of the following will be true?A. The short-run Phillips curve will shift to the left.An increase in the expected inflation rate will:D. shift the short-run Phillips curve to the right.What impact does monetary policy have on the long-run Phillips curve?B. Monetary policy has no impact on the long-run Phillips curve.In the long run, the Federal Reserve can control which of the following?C. the inflation rateRefer to the figure above. The shifts shown in the short-run and long-run Phillips curves between period 1 and period 2 could be explained by:A. an increase in the natural rate of unemployment from 5.5 to 6.8 percentIf actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage?C. The actual real wage will be lower than the expected real wage.If firms and workers have rational expectations, including knowledge of the policy being used by the Federal Reserve, the short-run Phillips curve will be:B. verticalIf wages and prices adjust slowly, we would expect expansionary monetary policy to be:A. more likely to affect the unemployment rateAccording to real business cycle models:D. the economy is normally at potential GDP.A falling price level is called ________ and a fall in the rate of inflation is called ________.C. deflation; disinflationIn order to change inflationary expectations in 1979, the Fed's monetary policy under Paul Volcker's leadership resulted in ________ and ________.A. disinflation; high unemploymentRefer to the figure above. A supply shock, such as rising oil prices, would be depicted as a movement from:E. A to D to C.If the economy experiences a negative supply shock, which of the following will be true?C. Inflation will rise, and real GDP will fall.Suppose China decides to sell a vast majority of their large holdings of U.S. Treasury bonds. If you are thinking of refinancing your house, how would China's action affect your decision to refinance?D. You would want to refinance as soon as possible as interest rates should rise.The current account does not include which of the following?C. U.S. holdings of foreign assetsBased on the following information, what is the balance on the financial account? Exports of goods and services = $5 billion Imports of goods and services = $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in the United States = $4 billion Increase in U.S. holdings of assets in foreign countries = -$1 billionCurrent Account Formula = (X-M)+NI+NT A. $3 billionWhich of the following is an example of foreign direct investment in China?C. The U.S. company Wal-Mart buys a warehouse in Shanghai.If the current account is in deficit and the capital account is zero, then:B. the financial account must be in surplusNet foreign investment minus net foreign portfolio investment is equal to:A. net foreign direct investmentYou're traveling in Ireland and are thinking about buying a new digital camera. You've decided you'd be willing to pay $125 for a new camera, but cameras in Ireland are all priced in euros. If the exchange rate is 0.85 euros per dollar, what's the highest price in euros you'd be willing to pay for a camera?(85x125)/100 B. 106.25 eurosIf the dollar appreciates against the Mexican peso:A. U.S. exports to Mexico become more expensiveCurrency traders expect the value of the dollar to fall. What effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market?C. Demand for dollars will decrease, and supply of dollars will increase.Refer to the figure above. Currency speculators believe that the value of the euro will increase relative to the dollar. Assuming all else remains constant, how would this be represented?A. Supply would increase, demand would decrease and the economy moves from C to B to A.Which of the following would cause the dollar to appreciate?D. an increase in the demand for dollarsHow will contractionary monetary policy in Japan affect the demand and supply of the yen in the foreign exchange market?C. The demand for the yen will increase, and the supply of the yen will fall.Assuming the United States is the "domestic" country, if the real exchange rate between the United States and France increases from 1.5 to 1.8:B. the prices of U.S. goods and services have increased by 20% relative to France.Assuming no change in the nominal exchange rate, how will a decrease in the price level in the United States relative to France affect the real exchange rate between the two countries? (Assume the United States is the "domestic" country.)A. The real exchange rate will fall.Suppose that domestic investment in Japan is 20.2% of GDP, and Japanese national savings is 24% of GDP. What is Japan's foreign investment as a percentage of GDP?B. 3.8%If we take into account transfer payments (TR) when we derive the saving and investment relationship, the saving and investment equation becomes:A. S = I + NX - TRWhat impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar? (Assume the exchange rate is stated in terms of foreign currency per U.S. dollar.)C. Interest rates and exchange rates decrease.How does a decrease in the federal budget deficit affect the demand for dollars and the supply of dollars on the foreign exchange market?A. The demand for dollars falls, and the supply of dollars rises.If the Fed is using policy to combat inflation, what is likely to happen in the foreign exchange market and to the foreign exchange value of the dollar?D. The demand for the dollar will increase and the foreign exchange value of the dollar will rise.Following a tax cut by government, domestic investment will ________ and net exports will ________.C. decrease; decreaseChina's exchange rate system from 1994 through 2005 is an example of:C. a fixed exchange rate systemSuppose an economy's exchange rate system is the gold standard and vast tracks of gold are discovered, as is what happened in the United States in 1849. If the economy is at full employment, what should this discovery do?A. It should raise the money supply and cause inflation.When the value of a currency is determined ________, the exchange rate system is defined as managed float.B. mostly by supply and demand, but with occasional government interventionThe United States abandoned the ________ because the government wanted to rapidly expand the money supply in response to the Great Depression.D. gold standardAriel is a Canadian citizen who works in Montreal, Canada and owns a winter home in Palm Beach, Florida. When Ariel spends the winters in Palm Beach, an increase in the value of the Canadian dollar relative to the U.S. dollar shouldC. help Ariel as each Canadian dollar of her salary is now worth more U.S. dollars.What factors are not important in determining exchange rate fluctuations in the long run?A. speculating in currency marketsWhich of the following is most important in explaining exchange rate fluctuations in the short run?C. interest ratesRefer to the figure above. Italians cut back on smoking and cut their demand for American cigarettes in half. Assuming all else remains constant, this would be represented as a movement from:A. A to DIf relative purchasing power between the United States and Argentina is 3.22 pesos per dollar, under which circumstances would we say that the dollar is "overvalued"?A. if the actual exchange rate between the dollar and the Argentinean peso is 4 pesos per dollarSuppose the GDP deflator in the United States is 125 and the GDP deflator in Japan is 100. Also assume the United States has trade barriers on Japanese goods in the form of quotas. What does this imply about the exchange rate of yen per dollar under the theory of purchasing power parity in the long run?C. The exchange rate of yen per dollar will be less than 0.8.If the U.S. government places tariffs on imports from countries that have been accused of deliberately undervaluing their currencies, the price of these imports will ________ and the demand for the undervalued currency will ________.B. rise; fallRefer to the figure above. Which of the following would cause the change depicted in the figure above?D. Tainted cat food from China causes U.S. consumers to decrease their preferences for Chinese goods relative to U.S. goods.What explains the appreciation of the Japanese yen relative to the U.S. dollar from 1970 to the early 1990s?B. Japanese productivity rose faster than U.S. productivity.Should European nations which are not currently using the euro choose to adopt the euro as their currency, these countries would risk giving up the ability to use ________ to stabilize their economies in the event of a recession.C. expansionary monetary policyA currency pegged at a value below the market equilibrium exchange rate isA. undervalued.Refer to the figure above. If the Thai government pegs its currency to the dollar at a value above $.03/baht, we would say the currency isC. overvalued.All else being equal, if the rate of growth in productivity in Spain is greater than the rate of growth in productivity in the United States, the euroD. will increase in value relative to the U.S. dollar.Pegging a country's exchange rate to the dollar can be advantageous in all of the following situations exceptC. if a country wishes to conduct independent monetary policy.Refer to the figure above. The equilibrium exchange rate is at A, $1.25/euro. Suppose the European Central Bank pegs its currency at $1.00/euro. At the pegged exchange rate,idk3. there is a shortage of euro equal to 200 million.If interest rates in the United States rise,:A. the value of the dollar will rise as foreign investors sell their U.S. investments