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EC3003 EXAM 2 CHAPTERS 5, 6, 9

Terms in this set (77)

An "open" economy is one in which:
there is trade in goods and services with the rest of the world.
Net exports equal GDP minus domestic spending on:
all goods and services.
If domestic spending exceeds output, we ______ the difference—net exports are ______.
import; negative
In a small open economy, if exports equal $20 billion, imports equal $30 billion, and domestic national saving equals $25 billion, then net capital outflow equals:
-$10 billion.
In a small open economy, if domestic saving equals $50 billion and domestic investment equals $50 billion, then there is ______ and net capital outflow equals ______.
balanced trade; $0
In a small open economy, if domestic investment exceeds domestic saving, then the extra investment will be financed by:
borrowing from abroad.
The world interest rate:
is the interest rate prevailing in world financial markets.
A "small" economy is one in which the:
domestic interest rate equals the world interest rate.
Building an economic model based on the assumption of a small open economy is useful because:
this simplifying assumption can assist our understanding and intuition of open economy macroeconomics.
In a small open economy, if the world real interest rate is above the rate at which national saving equals domestic investment, then there will be a trade ______ and ______ net capital outflow.
surplus; positive
An increase in the trade surplus of a small open economy could be the result of:
an increase in the world interest rate.
Holding other factors constant, legislation to cut taxes in an open economy will:
reduce national saving and lead to a trade deficit.
Starting from a small open economy with balanced trade, if large foreign countries increase their domestic government purchases, this policy will tend to increase:
exports by the small open economy.
The nominal exchange rate (indirect quote) between the U.S. dollar and the Japanese yen is the:
number of yen you can get for one dollar.
The real exchange rate:
is equal to the nominal exchange rate multiplied by the domestic price level divided by the foreign price level.
If the real exchange rate is high, foreign goods:
are relatively cheap and domestic goods are relatively expensive.
If 5 Swiss francs trade for $1, the U.S. price level equals $1 per good, and the Swiss price level equals 2 francs per good, then the real exchange rate between Swiss goods and U.S. goods is ______ Swiss goods per U.S. good.
2.5
When the real exchange rate rises:
exports will decrease and imports will increase.
If a graph is drawn with net exports on the horizontal axis and the real exchange rate on the vertical axis, then the real exchange rate is determined by the intersection of the ______ net-exports schedule and the ______ line representing saving minus investment.
downward-sloping; vertical
In a small open economy, when the government reduces national saving, the equilibrium real exchange rate:
rises and net exports fall.
In a small open economy with perfect capital mobility, a reduction in the government's budget deficit ______ net exports and the real exchange rate ______.
increases; depreciates
In a small open economy, when foreign governments reduce national saving in their countries, the equilibrium real exchange rate:
falls and net exports rise.
If the information technology boom increases investment demand in a small open economy, then net exports ______ and the real exchange rate ______.
decrease; appreciates
In a small open economy, if the government adopts a policy that lowers imports, then that policy:
raises the real exchange rate and does not change net exports.
An effective policy to reduce a trade deficit in a small open economy would be to:
increase taxes.
The percentage change in the nominal exchange rate equals the percentage change in the real exchange rate plus the:
foreign inflation rate minus the domestic inflation rate.
One consequence of high inflation is a(n):
depreciating nominal exchange rate.
If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:
yen will appreciate by 3 percent against the dollar.
If the nominal exchange rate falls 10 percent, the domestic price level rises 4 percent, and the foreign price level rises 6 percent, the real exchange rate will fall:
12 percent.
The currencies of countries with high inflation rates relative to the United States have tended to ______, and the currencies of countries with low inflation rates relative to the United States have tended to ______.
depreciate; appreciate
The idea that the amount of any currency that can buy a particular good in one country should be able to buy (after being exchanged for the local currency) the same quantity of the same good anywhere in the world is called:
purchasing-power parity.
According to purchasing power-parity, if the dollar price of oil is higher in New York than in London, arbitrageurs will _____ oil in New York and _____ oil in London to drive _____ the price of oil in New York.
sell; buy; down
If purchasing-power parity held, if a Big Mac costs $2 in the United States, and if 10 Mexican pesos trade for $1 dollar, then a Big Mac in Cancun, Mexico, should cost:
20 pesos.
In a large but open economy, when a fiscal expansion takes place, the interest rate goes up and some investment is crowded out, and the expansion also causes a trade:
deficit and a rise in the real exchange rate.
In a small open economy, if consumer confidence falls and consumers decide to save more, then the real exchange rate:
falls and net exports rise.
Assume that a small open economy gets involved in a global war, in which its government purchases increase and the rest of the world's government purchases also increase. Then, for the small country, net exports:
may increase or decrease.
Assume that some large foreign countries decide to subsidize investment by instituting an investment tax credit. Then a small country's real exchange rate:
will fall and its net exports will rise.
will fall and its net exports will rise.
traveling in Chile is more expensive now than it was ten years ago.
If the nominal interest rates in the United States and Canada are 8 percent and 12 percent, respectively, the real interest rates are the same, and the real exchange rate is fixed, then the market's expectation about the number of Canadian dollars to be received for a U.S. dollar a year from now will be that it will:
increase by 4 percent.
The macroeconomic problem that affects individuals most directly and severely is:
unemployment.
The natural rate of unemployment is:
the average rate of unemployment around which the economy fluctuates.
In the model of the steady-state unemployment rate with a fixed labor force, the rate of job finding equals the percentage of the ______ who find a job each month, while the rate of job separation equals the percentage of the ______ who lose their job each month.
unemployed; employed
If the steady-state rate of unemployment equals 0.10 and the fraction of employed workers who lose their jobs each month (the rate of job separation) is 0.02, then the fraction of unemployed workers who find jobs each month (the rate of job findings) must be:
0.18.
In a steady state:
the number of people finding jobs equals the number of people losing jobs.
Any policy aimed at lowering the natural rate of unemployment must either ______ the rate of job separation or ______ the rate of job finding.
reduce; increase
Unemployment caused by the time it takes workers to search for a job is called ______ unemployment.
frictional
All of the following are reasons for frictional unemployment except:
unemployed workers accept the first job offer that they receive.
The unemployment insurance system may be desirable because unemployment insurance:
induces workers to reject unattractive job offers.
Wage rigidity:
prevents labor demand and labor supply from reaching the equilibrium level.
The unemployment resulting when real wages are held above equilibrium is called ______ unemployment, while the unemployment that occurs as workers search for a job that best suits their skills is called ______ unemployment.
structural; frictional
All of the following are causes of structural unemployment except:
unemployment insurance.
Efficiency-wage theories suggest that a firm may pay workers more than the market-clearing wage for all of the following reasons except to:
reduce the firm's wage bill.
Chapter 9 Questions being here: Short-run fluctuations in output and employment are called:
business cycles.
Okun's law is the ______ relationship between real GDP and the ______.
negative; unemployment rate
Most economists believe that prices are:
flexible in the long run but many are sticky in the short run.
A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:
in the long run but lead to unemployment in the short run.
A difference between the economic long run and the short run is that:
demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
Along an aggregate demand curve, which of the following are held constant?
the money supply and velocity
The aggregate demand curve tells us possible:
combinations of P and Y for a given value of M.
When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
greater; outward
Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.
neither the quantity of output nor the price level
A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.
prices; output
In the long run, the level of output is determined by the:
amounts of capital and labor and the available technology.
If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
prices but not level of output.
The natural level of output is:
the level of output at which the unemployment rate is at its natural level.
In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:
aggregate demand equals short-run aggregate supply.
The short run refers to a period:
during which prices are sticky and unemployment may occur.
If the short-run aggregate supply curve is horizontal, then a change in the money supply will change ______ in the short run and change ______ in the long run.
only output; only prices
If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run, prices will ______ and output will ______.
decrease; increase
Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run, prices ______ and output returns to its original level.
output decreases and prices are unchanged; fall
Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:
output will rise in the short run and prices will rise in the long run.
If the short-run aggregate supply curve is horizontal, and if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:
output and employment will decrease in the short run.
A favorable supply shock occurs when:
an oil cartel breaks up and oil prices fall.
In the short run, an adverse supply shock causes:
prices to rise and output to fall.
Stagflation occurs when prices ______ and output ______.
rise; falls
The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.
higher; lower
Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:
increasing the money supply, but at the cost of permanently higher prices.
Verified questions
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The three sales projections below have been made by Country Textiles, which has fixed operating costs of $300,000 and variable operating costs equal to 40% of sales. $$ \begin{array}{rc} {\text { Sales }} & \text { Probability } \\ \hline \$ 600,000 & 0.30 \\ 900,000 & 0.40 \\ 1,200,000 & 0.30 \end{array} $$ The company wants to examine five different capital structures with debt ratios of 0%, 15%, 30%, 45%, and 60%. The $1 million in total assets of the company are taken to be constant. The company's book value for its common stock is$25 per share, and its tax rate is 40%. The five capital structures under consideration have been examined using the supplementary information listed below. $$ \begin{array}{ccc} \begin{array}{c} \text { Capital structure } \\ \text { debt ratio } \end{array} & \begin{array}{c} \text { Before-tax } \\ \text { cost of debt, } r_d \end{array} & \begin{array}{c} \text { Required } \\ \text { return, } r_s \end{array} \\ \hline 0 \% & 0.0 \% & 10.0 \% \\ 15 & 8.0 & 10.5 \\ 30 & 10.0 & 11.6 \\ 45 & 13.0 & 14.0 \\ 60 & 17.0 & 20.0 \end{array} $$ Determine the amount of EBIT that corresponds to each of the three levels of sales.
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The following situations involve some form of discrimination. For each, decide whether the discrimination is reasonable and should be permitted or is unreasonable and should be prohibited. Explain your reasons. A business refuses to hire a man with good typing skills for a secretarial position.
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For the Gas prices of the earlier exercise, What is the lag2 version of the prices?
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How did Mohandas Gandhi use nonviolent resistance to oppose British rule?
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