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ECON 202 Midterm 2

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created 2 years ago by Kerissa_Sheley
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chapters: 9,10,11,12,13,14

updated 2 years ago by Kerissa_Sheley

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1

Business cycles are:

economic fluctuations, movements of GDP away from potential output, and periods in which real GDP grows too slow or too fast.

2

In macroeconomics short run:

prices do not fully adjust to changes in demand.

3

A period when economic growth is negative for at least six months is called a:

recession

4

The date at which a recession ends is:

a trough

5

The date at which a recession stars is:

a peak

6

Which of the following economic measures is/are procyclical?

investment spending, consumption, and price of stocks

7

Which of the following economic measures is countercyclical?

unemployment

8

Real business cycle theory emphasizes the role of:

technology shocks as a cause of economic fluctuations

9

Suppose consumer tastes and preferences shift from desire to ski to snowboarding. If skis and snowboards are produced by different firms, then firms that produce snowboards will:

experience a rise in prices, inducing them to increase production and the number of workers

10

Which of the following is a problem with the price system that can lead to a break down in the coordination of economic activity.

prices can be slow to adjust

11

Prices for industrial commodities such as steel rods or machine tools are

custom and sticky prices

12

If prices are sticky

economic activity will not be coordinated efficiently

13

Workers often have --- contracts and so their wages are ---

long-term, sticky

14

The short run in macroeconomics is the period in which

prices do not change (or at least do not change much) and demand determines output

15

Keynesian economics means that

demand determines output in the short run

16

Aggregate demand refers to the relationship between

the price level and the quantity of real GDP demanded

17

Which of the following does NOT shift the aggregate demand curve

decrease in price level

18

Which of the following cause an increase in aggregate demand?

an increase of GDP in a foreign country

19

Which of the following would cause a decrease in aggregate demand?

a fall in investor confidence

20

Assuming long-run classical aggregate supply curve, a decrease in the money supply results in --- in output and --- in prices

no change, a decrease

21

Assuming long-run aggregate supply curve, an increase in Japanese GDP results in --- in output and --- in prices

no change, an increase

22

Which of the following factors influence the position of the long-run classical aggregate demand curve?

the level of employment output

23

Assuming short-run Keynesian aggregate supply curve, an increase in government spending results in --- in output and --- in prices

an increase, a slight increase

24

Which of the following curves reflects the idea that in the short-run, prices are sticky and firms adjust production to meet demand?

the Keynesian aggregate supple curve

25

Assuming short-run Keynesian aggregate supply curve, an increase in the money supply results in --- in output and --- in prices

an increase, a slight increase

26

Assuming short-run Keynesian aggregate supply curve, a decrease in German GDP results in --- in output and --- in prices

a decrease, a slight decrease

27

The level of output determined by the intersection of the short-run Keynesian aggregate supply curve and the aggregate demand curve:

may be above, below, or equal to full employment output.

28

Assuming short-run Keynesian aggregate supply curve, a massive crop failure results in --- in output and --- in prices

a decrease, and increase

29
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Using fig. 9.2 and economy-wide decrease in manufacturing costs is represented by a movement from points:

B to D

30

Expansionary policies are policies that

aim to increase level of GDP

31

Stabilization policies are

policies taken to move the economy closer to potential output

32

Automatic stabilizers

work without the need doe decisions from Congress or the White House

33

Increases in government spending and/or decreases in taxes will --- aggregate demand

increase

34

If the government wants to reduce unemployment, government spending should be __________ and/or taxes should be __________.

increased, decreased

35

he basic idea of the fiscal multiplier is that an initial increase in government spending will have a:

more than proportional impact on aggregate demand

36

Congress and the President typically use what kind of spending to conduct fiscal policies that affect the economy?

discretionary spending

37

Who sets the rules for "entitlements" when spending is authorized under this category?

the Congress when it appropriates spending

38

What is the largest single component of federal revenue?

individual income taxes

39

The largest category of discretionary federal spending is:

funding for the Defense Dept.

40

In a situation where the government is operating on a budget surplus, it can reduce its overall debt by _________.

buying back bonds it has sold to the public

41

If the budget were balanced and the economy entered a period of recession, what kind of budget would likely result?

deficit budget

42

Budget deficits tend to be procyclical for all the following reasons except:

the selling of government securities to pay for the deficit spurs private investment spending

43

Although running a budget deficit during a recession should not be a source of concern, running a budget deficit when there is no recession is a bad policy due to:

crowding out

44

According to Keynes, in the short-run the level of output is determined by

the demand for goods and services

45

In the Keynesian cross model, the 45 degree diagonal line represents the

set of points where output = demand

46

In a simple demand-side model with only consumers and firms, each of which demands a fixes amount of goods, equilibrium occurs where the C+I line

crosses the 45 degree line

47

If the demand for goods and services is less than output, then there will be

an increase in inventories (excess inventory)

48

If firms experience an unplanned increase in inventories, they are likely to

decrease production

49
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In fig. 10.1 if y0 is the level of output, unplanned inventories will

decrease, because demand exceeds output

50

If the consumption function is C=50+.75y then the marginal propensity to consume is:

.75

51

If the consumption function is C=50+.75y, then the level of autonomous consumption is

50

52

The slope of the consumption function is = to

the marginal propensity to consume

53
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Decrease in consumer confidence shifts the consumption function in fig. 10.2 from

C2 to C1

54

A change in the MPC can occur as a result of

consumers' perceptions of change in their incomes and changes in tax rates

55
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In figure 10.1, if y2 is the level of output, firms will --- production

decrese

56
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In fig. 10.3, a decrease in the marginal propensity to save is represented by a change in the consumption function from

C1 to C2

MPC= 1-MPS, so when MPS is smaller the slope is steeper

57

Let C =100 + 0.6y and I = 150. Then the equilibrium level of income y* is

625

y* = (Ca + I)/(1-b)

58

Let C =100 + 0.6y and I = 150. At the equilibrium level of income y*, the level of savings is

150, S=I

59

In the simple Keynesian cross model with no government or foreign sectors, the value of the multiplier is defined as

1/(1-MPC)

60

Let C =25 + 0.75y and I = 50. Assume no government or foreign sectors. If investment increases by 150, then the value of the multiplier is

4

61

The multiplier --- as the MPC increases

increases

62

The multiplier --- as autonomous consumption increases

is constant

63

The following questions are based upon the Keynesian model below.

C = 50 + 0.8(y -T)

I = 200

G = 150

T = 100

What is the equilibrium level of output

1600, Demand is C +G + I and y* = 320/.2

64

The following questions are based upon the Keynesian model below.

C = 50 + 0.8(y -T)

I = 200

G = 150

T = 100

What is the value of the government spending multiplier?

5, 1/(1-MPC) = 1/.2

65

The following questions are based upon the Keynesian model below.

C = 50 + 0.8(y -T)

I = 200

G = 150

T = 100

If taxes decrease by 50, then the change in output is

200, y* = 360/.2

66

Suppose the MPC for the US is 0.7. If the policy makers wish to increase GDP by $50 billion, how much does government spending have to increase to meet this target?

$15 million

multiplier = 1/(1-.7) = 3.3

change in y* divided by ? is equal to 3.3 and solve

67
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Refer to fig. 10.4. Which diagram illustrates the effect if an increase in the income tax rate?

A

68
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Refer to fig. 10.4. Which diagram illustrates the effect if an increase in government spending?

D

69

Which of the following is an example od an automatic stabilizer?

more unemployment benefits are paid during a recession

70

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

What is the marginal propensity to consume?

0.25, 1-MPC = MPS

71

A decrease in the level of imports --- the demand for goods and services produced in the US

increases

72

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

What is the value of the government spending multiplier?

2.86, 1/[1-(.75-1)], 1/[1-(b-m)]

73

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

What is the equilibrium level of output?

1000

y* = (Ca - bT + I + G +X)/ 1(b-m)

74

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

If the exports increase by 100 (X=175), what is the new equilibrium level of output?

1286

y* = (Ca - bT + I + G +X)/ 1(b-m)

75

The following questions are based upon the Keynesian model below.

C = 100 + 0.75(y -T)

I = 100

G = 150

T = 100

X = 75

M = 0.10y

If the marginal propensity to import increases to 0.2 (M = 0.20) what is the new level of equilibrium output?

777.78

y* = (Ca - bT + I + G +X)/ 1(b-m)

76

The interest rates quoted in the market are

nominal interest rates

77

Which of the following equations is correct?

real interest rate = nominal interest rate - inflation

78

Financial intermediaries are

firms that receive funds from savers and channel them to investors

79

Financial intermediaries

reduce the risks associated with investment

80

Firms are likely to --- investment spending when they believe that growth in real GDP will ---

increase, increase

accelerator theory

81

The model in which downturn in real GDP leads to a sharp fall in investment, which further reduces GDP through the multiplier, is known as the --- model

multiplier-accelerator

82

the interest rate on a loan will be --- as its risk --- and its maturity ---

higher, increases, lengthens

83

Compared to a 30 yr. US Treasury, the interest rate on a 30 year fixed mortgage will be --- because it is a loan with ---

higher, more risk

84

If the nominal interest rate is 8% and the inflation rate is 5% then the real rate of interest is

3%

85

If you have $200 to invest at a nominal interest rate of 8% and the inflation rate is 3%, then the real return on your investment is

$10. .05 x 200

86

If you have $300 and the inflation rate is 6%, in order to earn a real return of $18 on your investment, the nominal interest rate must be

12%, 18/300 = 6 +6 = 12

87

Expected real interest rates are the

interest rates quoted in the market minus the expected inflation rate

88

If the nominal interest rate is 7%, the expected real interest rate is 3%, and the inflation rate for the past year was 3%, then the expected inflation rate is --- the past inflation rate

greater than, nom. - expected is greater than 3 (past year's rate)

89
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Referring to table 11.2, if the nominal interest rate is 9% and there is no inflation, which investment should be undertaken?

investment E

90

Referring to table 11.2, if the nominal interest rate is 3% and there is no inflation, which investment should be undertaken?

investments E, B, C, and A

91
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Table 11.3 represents all the investments available to the economy, the nominal interest rate is 10 % and there is no inflation, what will(should) be the level of investment in the economy?

$100

92

As the real interest rate ---, the real investment spending ---

increases, decreases and decrease, increases

inverse relationship

93
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Referring to fig. 11.1, if the real interest rate is 5% then the level of investment is

$40 billion

94

The neoclassical theory of investment

emphasizes the role of real interest rates and taxes

95

The Q-theory of investment

links investment spending to stock prices

96

Financial intermediaries are institutions that facilitate the movement of funds from savers to investors because they

reduce costs of negotiating transactions, monitor investments, reduce risks, and provide liquidity

97

Financial intermediaries reduce risk by

investing in a large number of projects with independent return, and expertise

98

Insurance companies can reduce risk by accepting premiums from:

many people to insure against independent events

99

In the US, runs on banks are prevented by

the government guarantees banks' accounts up t0 $100,000

100

The supply of money in the economy is determined primarily by

the banking system and the actions of the Federal Reserve

101

In the --- increases in the supply of money will ---

short run, raise total demand and output and long run, lead to higher prices

102

Money is

anything that is regularly used in economic transactions or exchanges

103

Barter transactions will occur only when

there exists a double coincidence of wants

104

Money solves the dilemma of a double coincidence of wants by serving as a

medium of exchange

105

When money is used to express the value of goods and services it is functioning as a

unit of account

106

As inflation rates increase, money becomes less useful as a

store of value

107

Suppose after a semester ends, you take a trip to an island. Upon arriving you make a stop at a market and notice everyone is carrying around jars of small turtles. You also notice the person in line in front of you just paid for a bottle of rum with 6 turtles, and someone else a straw hat with 2 turtles. You can conclude that

the little turtles are serving the function of money

108

Checking account balances are included in

both M1 and M2

109

Which of the following is not included in M1?

savings accounts

110

Checking accounts that pay interest are included in the

"other checkable deposits" part of M1

111

Which of the following is included in M2?

savings accounts

112

Which of the following appears in M2 and not M1?

money market mutual funds

113

Economists keep an eye on both M2 and M1 because

it is not clear how citizens use money market accounts

114

From the point of view of a commercial bank, a --- is a(n) ---

loan, asset and deposit, liability

115

Given the following information:

Assets $2,500

Liabilities $2,100

A bank's net worth is

$400

116

Which of the following is a bank liability?

demand deposit balances

117

The fraction of deposits that banks are required by law to hold and not lend out are called

required reserves

118

Suppose that while vacationing in Monaco, you won 25,000 French fans which is = to $5,000. When you return to the US you deposit $5,000 into your checking account. The effect (assuming the required reserve ratio is 20%) is

to increase your bank's liabilities by $5,000, increase your bank's excess reserves by $4,000, lead to a multiple expansion in the money supply(checking account balances) by $25,000, and increase your bank's required reserves by $1,000.

119

Meg digs out $100 from under her bed and deposits it into a bank. As a result of this single transaction, M1 has

not changed, because the money was already in circulation even if she didn't know it

120

Given the information about Acme Bank

Bank Deposits $30,000

Loans $20,000

Reserves $5,000

Reserve Requirement 10%

Acme bank is holding --- in excess reserves

$2,000

121

Suppose a bank has $200,000 in deposits, a required reserve ratio of 5%, and a bank reserve of $12,000. The bank can make new loans in the amount of

$2,000

122

Suppose a bank has $2 million in deposits, a required reserve ration of 15%, and bank reserves of $320,000. The bank can make new loans in the amount of

none of the listed answers, $20,000 is the correct amount

123

Suppose Barry deposits $10, 000 in his bank. If the reserve ratio is 20%, this will lead to an increase of --- in his checking account balances

$50,000 because $10,000/ 0.2

124

Suppose Kirk deposits $5,000 in his bank. If the reserve requirement is 25%, this will lead to an increase of --- in M1

$15,000, because $5,000/0.25 = $20,000 - $5,000

125

If the banking system has a required reserve ratio of 5%, then the money multiplier will be

20

126

A bank may make loans until its

excess reserves are exhausted

127

The money multiplier tends to be greater when

banks hold few excess reserves

128

The money multiplier is smaller when

bank customers prefer to hold a bigger amount of their money as cash and banks prefer to lend out 95% of their excess reserves instead of 100%

129

Which of the following is responsible for buying government securities in order to influence monetary policies?

The Federal Reserve

130

An open market purchase occurs when

the Federal Reserve purchases Treasury Bonds

131

An open market sale by the Fed

decreases the total amount of reserves in the banking system

132

If the Fed sells $7.5 million of US bonds and the reserve requirement is 25%, M1 will eventually

none of the listed answers, it will decrease by $30 million

133

If the Fed by $60,000 of US bonds and the reserve requirement is 10%, M1 will eventually

increase by $600,000

134

Changing the reserve requirement will

disrupt the banking system

135

In the federal funds market --- will barrow or lend reserves to ---

a bank, another bank

136

An increase in the discount rate

increases the cost of reserves borrowed fro the Fed

137

A decrease in the discount rate will

increase the money supply

138

In practice, the Federal Reserve keeps the discount rate close to the --- rate in order to avoid large swings in borrowed reserves by banks

federal funds

139

members of the Federal Reserve Board of Governors are

appointed to 14 yr. terms, confirmed by the Senate, members of the Federal Open Market Committee, and serve in Washington DC

140

Which of the following is responsible for decisions on monetary policy?

The Federal Open Market Committee

141

The Federal Open Market Committee is composes of

the members of the Board of Governors and all the Presidents of the 12 Federal Reserve banks

142

The president of the --- Federal reserve Bank is always a member of the FOMC

New York

143

In the short run when prices don't have enough time to change, the Federal reserve

can influence the level of interest rates in the economy

144

Generally when the Federal Reserve lowers interest rate, investment spending --- and GDP ---

increases, increases (Law of Demand)

145

Decreased investment spending in the economy would be a possible result of

an open market sale of bonds

146

The transactions demand for money comes mostly from the fact that

money makes it easier to make purchases

147

The opportunity cost of holding money is

the return that could have been earned from holding wealth in other assets

148

An increase in interest rates leads to

a leftward movement up along the demand for money curve

149

The demand for money curve has shifted left. This may be the result of

a decrease ub the level of prices and a decrease in real GDP

150

Speculative demand for money is the demand for money that arises

because money is less risky than other assets

151

The demand for money in practice is the sum of

transactions, liquidity, and speculative demands

152

The --- determines the supply of money

Federal reserve

153

If the quantity of money demanded = the quantity of money supplied then the

interest rate will be in equilibrium

154

If the Federal Reserve conducts an open market sale then the

interest rate will increase

155

Based on the model of the money market, when prices in the economy increase, the equilibrium interest rate should

increase

156

Based on the model of the money market, when real income decreases, the equilibrium interest rate should

decrease

157

Based on the model of the money market, when the risk associated with holding other assets increases, the equilibrium interest rate should

increase

158

If a bond were to pay off one yr. from now for $200 and the interest rate is 10%, that is the price of the bond (rounded)?

$182, 200/ (1+0.1)

159

Ifa bond were to pay off one yr. later for $200 and was purchases for 4182, what is the interest rate

10%

160

An open market purchase by the Fed

increases investment and output

161

Actions by the Federal reserve to influence the level of GDP are known as

monetary policy

162

An increase in the reserve requirement

increases interest rates and decreases output

163

A decrease in the money supply and increase in GDP are consistent with

none of the listed answers,

An increase in the money supply should increase output

164

An increase in the money supply and a decrease in GDP are consistent with

none of the listed answers

165

If the Fed wished to decrease inflation, it could

increase in the reserve requirement or conduct an open market sale

166

The exchange rate is

the rate at which one currency trades for another currency

167

Higher US interest rates cause the value of the dollar to

rise, making US goods relatively more expensive on world markets

168

An open market purchase by the Fed causes the value of the dollar to

fall, increasing net exports

169

The depreciation of the dollar will make US goods --- to foreigners and make exports --- for US residents

cheaper, more expensive

170

Policies taken to move the economy closer to potential output are called

stabilization policies

171

An outside lag is

the period of time it takes for policies to work

172

Outside lags are usually

longer for monetary policy than fiscal policy


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