ECON102 Lecture Notes - Lecture 8: Shortage, Excess Supply, Gdp Deflator
ECON102 Full Course Notes
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You hear on the nightly news that the president has vowed to decrease the nation's debt. Both the government and private citizens will have to buckle down and learn to do without, he says.
In order to reduce its debt, a nation must:
| A. | run lower deficits. |
| B. | decrease tax rates. |
| C. | run lower surpluses. |
| D. | increase in government spending. |
Debt reduction will result in:
| A. | more public works projects, higher transfer payments, and more money available for households to spend. |
| B. | fewer public works projects, higher transfer payments, and more money available for households to spend. |
| C. | more public works projects, lower transfer payments, and less money available for households to spend. |
| D. | fewer public works projects, lower transfer payments, and less money available for households to spend. |
A friend of yours looks at the state of the U.S. debt in 2011 and tells you, Since the debt is so high, we must be running an incredibly large deficit every year. Your friend's analysis is:
| A. | not valid, because the debt is always changing even when deficits are the same. |
| B. | not valid, because the debt can be high even when the deficit for an individual year is small. |
| C. | valid, because the debt is always changing even when deficits are the same. |
| D. | valid, because the public debt is the sum of all deficits and surpluses run by the government over time and can be high even when the deficit for an individual year is small. |
Assume that the government in some nations intended to respond to low employment via fiscal policy.
a. What type of policy would this require?
| A. | A contractionary fiscal policy designed to decrease the aggregate demand curve. |
| B. | An expansionary fiscal policy designed to decrease the aggregate demand curve. |
| C. | An expansionary fiscal policy designed to increase the aggregate demand curve. |
| D. | A contractionary fiscal policy designed to increase the aggregate demand curve. |
b. Assume that this policy ended up having an undesirable outcome. How could this happen in terms of formulation and implementation lags?
| A. | This could happen if the implementation lag exceeded the formulation lag. |
| B. | This could happen if the formulation lag exceeded the implementation lag. |
| C. | This could happen if the formulation lag and the implementation lag exceeded the expansion. |
| D. | This could happen if the formulation lag and the implementation lag exceeded the recession. |
Econo Nation started 2008 with no national budget debt or surplus. By the end of 2008, it had a budget surplus of $286 million; in 2009, it had a budget deficit of $-425 million; in 2010, it had a budget surplus of $100 million, and the amount of its budget deficit or surplus in 2011 is unknown. If at the end of 2011 Econo Nation's national debt totalled $52 million, determine the deficit or surplus in 2011.
Instructions: Enter your answer as a whole number and include a negative sign if there is a deficit.
| Period | Deficit (-) or surplus (+) |
| Beginning of 2008 | $0 |
| End of 2008 | $286 million |
| 2009 | $-425 million |
| 2010 | $100 million |
| End of 2011 | _______ million |
TRUE / FALSE
1. True False In the aggregate expenditures model presented in the textbook,
investment is assumed to rise with increases in real GDP and fall with decreases in real GDP.
2. True False When C + Ig = GDP in a private closed economy, S = Ig and there are no unplanned changes in inventories.
3. True False The risk-free interest rate is the rate on long-term U.S. government bonds.
4. True False Bond prices and interest rates are directly or positively related.
5. True False The public debt is the accumulation of all deficits and surpluses that have occurred through time.
6. True False The M2 money supply may be larger or smaller than the M1 money supply depending on the size of small-denominated time deposit balances and Money Market Mutual Fund balances held by individuals.
7. True False Excess reserves are the amount by which required reserves exceed actual reserves.
8. True False The public debt is held as Treasury bills, Treasury notes, Treasury bonds, and U.S. savings bonds.
9. True False The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve.
10. True False Investment is highly stable; it increases over time at a very steady rate.
MULTIPLE CHOICE
11. A recessionary expenditure gap is:
A. the amount by which the full-employment GDP exceeds the level of aggregate expenditures.
B. the amount by which equilibrium GDP falls short of the full-employment GDP.
C. the amount by which investment exceeds saving at the full-employment GDP.
D. the amount by which aggregate expenditures exceed the full-employment level of GDP.
12. The multiplier effect indicates that:
A. a decline in the interest rate will cause a proportionately larger increase in investment.
B. a change in spending will change aggregate income by a larger amount.
C. a change in spending will increase aggregate income by the same amount.
D. an increase in total income will generate a larger change in aggregate expenditures.
13. Which one of the following is true about the U.S. Federal Reserve System?
- There are 12 regional Federal Reserve Banks.
B. The head of the U.S. Treasury also chairs the Federal Reserve Board.
C. There are 14 members of the Federal Reserve Board.
D. The Open Market Committee is smaller in size than the Federal Reserve Board.
14. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is:
A. 18 percent.
B. 24 percent.
C. 12 percent.
D. 6 percent.
15.
Refer to the above diagram for a private closed economy. The equilibrium level of GDP is:
A. $400.
B. $300.
C. $200.
D. $100.
16. Which of the following represents the most expansionary fiscal policy?
A. a $10 billion tax cut
B. a $10 billion increase in government spending
C. a $10 billion tax increase
D. a $10 billion decrease in government spending
17.
Refer to the above table. The economy shown is a:
A. private economy.
B. private open economy.
C. mixed closed economy.
D. mixed open economy.
18. Currency held in the vault of First National Bank is:
A. counted as part of M1.
B. counted as part of M2, but not M1.
C. only counted as part of M1 if it was deposited into a checking account.
D. not counted as part of the money supply.
19. If the dollar appreciates relative to foreign currencies, we would expect:
A. the multiplier to decrease.
B. the country's exports and imports to both fall.
C. the country's net exports to rise.
D. the country's net exports to fall.
20. The most important determinant of consumption and saving is the:
A. level of bank credit.
B. level of income.
C. interest rate.
D. price level.
21. The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to:
A. the reciprocal of the required reserve ratio.
B. 1 minus the required reserve ratio.
C. the reciprocal of the income velocity of money.
D. 1/MPS.
22. Which one of the following would not shift the aggregate demand curve?
A. a change in the price level
B. depreciation of the international value of the dollar
C. a decline in the interest rate at each possible price level
D. an increase in personal income tax rate
23. The cyclically-adjusted budget tells us:
A. that in a full-employment economy the Federal budget should be in balance.
B. that tax revenues should vary inversely with GDP.
C. what the size of the Federal budget deficit or surplus would be if the economy was at full
employment.
D. the actual budget deficit or surplus realized in any given year.
24. The aggregate supply curve:
A. is explained by the interest rate, real-balances, and foreign purchases effects.
B. gets steeper as the economy moves from the top of the curve to the bottom of the curve.
C. shows the various amounts of real output that businesses will produce at each price level.
D. is downsloping because real purchasing power increases as the price level falls.
25.
Refer to the above diagram. If the equilibrium price level is P1, then:
A. aggregate demand is AD2.
B. the equilibrium output level is Q3.
C. the equilibrium output level is Q2.
D. producers will supply output level Q1
26. Discretionary fiscal policy refers to:
A. any change in government spending or taxes that destabilizes the economy.
B. the authority that the President has to change personal income tax rates.
C. intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
D. the changes in taxes and transfers that occur as GDP changes.
27.
Refer to the above diagram. Which tax system has the most built-in stability?
A. T4
B. T3
C. T2
D. T1
28.
| Refer to the given graph. A shift of the consumption schedule from C1 to C2 might be caused by a(n):
|
29. When a bank loan is repaid the supply of money:
A. is constant, but its composition will have changed.
B. is decreased.
C. is increased.
D. may either increase or decrease.
30. The Federal budget deficit is found by:
A. subtracting government tax revenues plus government borrowing from government spending in a particular year.
B. subtracting government tax revenues from government spending in a particular year.
C. cumulating the differences between government spending and tax revenues over all years since the nation's founding.
D. subtracting government revenues from the noninvestment-type government spending in a particular year.
31.
Refer to the above information. Money supply M1 for this economy is:
A. $ 60.
B. $ 70.
C. $ 130.
D. $ 140.
32. Which of the following statements is true as a result of Federal Reserve efforts to rescue the financial industry from the financial crisis of 2007 and 2008?
- From February 2008, to May 2009, the Fed oversaw the consolidation of 20 major financial institutions into fewer than a dozen.
B. From March 2008, to February 2009, the Fed experienced a 50 percent decline in the value of assets held.
C. From February 2008, to March 2009, Fed assets more than doubled to nearly $2 trillion.
D. From February 2008, to March 2009, Fed lending caused the U.S. public debt to rise by over $1 trillion.
33. Which of the following is the basic economic policy function of the Federal Reserve Banks?
- holding the deposits or reserves of commercial banks
B. acting as fiscal agents for the Federal government
C. controlling the supply of money
D. the collection or clearing of checks among commercial banks
34. In a fractional reserve banking system:
A. bank panics cannot occur.
B. the monetary system must be backed by gold.
C. banks can create money through the lending process.
D. the Federal Reserve has no control over the amount of money in circulation.
| 35. |
|
36. Assume the Continental National Bank's balance statement is as follows:
Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 was drawn and cleared against it?
A. $ 3,000
B. $ 24,000
C. $ 6,000
D. $ 16,000
37. Answer the question on the basis of the following table for a commercial bank or thrift:
Refer to the above table. When the legal reserve ratio is 25 percent, the excess reserves of this single bank are:
A. $0.
B. $1,000.
C. $5,000.
D. $30,000.
38. Which of the following is a tool of monetary policy?
A. open market operations
B. changes in banking laws
C. changes in tax rates
D. changes in government spending
39. An increase in nominal GDP increases the demand for money because:
A. interest rates will rise.
B. more money is needed to finance a larger volume of transactions.
C. bond prices will fall.
D. the opportunity cost of holding money will decline.
40. Answer the next question on the basis of the following table:
At equilibrium in the above market for money, the total amount of money demanded is:
A. $500.
B. $480.
C. $460.
D. $440.
41. For most financial assets investors must be compensated for:
A. non-diversifiable and diversifiable risk.
B. diversifiable risk and time preference.
C. non-diversifiable risk and time preference.
D. non-diversifiable and diversifiable risk, and time preference.
42. Reserves must be deposited in the Federal Reserve Banks by:
A. only commercial banks which are members of the Federal Reserve System.
B. all depository institutions, that is, all commercial banks and thrift institutions.
C. state chartered commercial banks only.
D. federally chartered commercial banks only.
43.
|
Refer to the diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE1to AE2 would:
|
44. The discount rate is the interest:
A. rate at which the central banks lend to the U.S. Treasury.
B. rate at which the Federal Reserve Banks lend to commercial banks.
C. yield on long-term government bonds.
D. rate at which commercial banks lend to the public.
45. What concept describes how quickly an investment increases in value when interest is paid not only on the original amount invested, but also on the accumulated interest payments?
A. present value
B. future value
C. compound interest
D. real rate of interest
46. The aggregate demand curve:
A. is upsloping because a higher price level is necessary to make production profitable as production costs rise.
B. is downsloping because production costs decline as real output increases.
C. shows the amount of expenditures required to induce the production of each possible level of real output.
D. shows the amount of real output that will be purchased at each possible price level.
47. The Security Market Line depicts the relationship between the:
A. average expected rate of return on stocks and the average expected rate of return on bonds.
B. average expected rate of return of a financial asset and the discount rate.
C. risk level of a financial asset and the prime interest rate.
D. average expected rate of return and risk level of a financial asset.
48. Arbitrage causes all financial assets:
A. of the same risk level to have the same price.
B. to have the same expected rate of return.
C. to have the same beta.
D. of the same risk level to have the same average expected rate of return.
| 49. |
|
50. Given the expected rate of return on all possible investment opportunities in the economy:
A. an increase in the real rate of interest will reduce the level of investment.
B. a decrease in the real rate of interest will reduce the level of investment.
C. a change in the real interest rate will have no impact on the level of investment.
D. an increase in the real interest rate will increase the level of investment.
END OF THE EXAM
Question 3
According to Joseph Schumpeter, the theory of creative destruction describes a process by which
| A | some new products unleash a gale of destruction that drive other new products out of the market. | |
| B | new products unleash a gale of destruction that drives old products out of the market. | |
| C | new products are created by the destruction of capital. | |
| D | the creation of new products never involves the destruction of old products. |
Question 4
Which of the following countries had the highest GDP per capita in 2012?
| A Qatar | ||
| B | United States | |
| C | Japan | |
| D | Norway |
Question 5
________ save a ________ of their income. This ________ capital in their economy and raises economic growth.
| A | Developing countries; large proportion; decreases | |
| B | Developing countries; small proportion; increases | |
| C | High-income countries; large proportion; increases | |
| D | High-income countries; small proportion; increases |
Question 6
The demand for loanable funds is determined by the willingness of ________ to borrow money to engage in new investment projects.
A
| A | government | |
| B | households | |
| C | banks | |
| D | firms |
Question 7
The U.S. economy has been more stable since 1950.
True
False
Question 8
When the economy reaches a trough in a business cycle, which of the following will occur?
| A | Income, production, and employment will continue to fall. | |
| B | Income, production, and employment will begin to rise. | |
| C | Income and production will rise, but employment will continue to fall. | |
| D | Employment rises, but income and production will continue to fall. |
Question 9
In a closed economy, what is the relationship between saving and investment?
| A | Saving is greater than investment. | |
| B | Investment is greater than saving. | |
| C | Investment is equal to saving. | |
| D | Investment may be greater or smaller than saving. |
Question 10
The per-worker production function shows the relationship between ________ per hour worked and ________ per hour worked, holding ________ constant.
| A | labor; real GDP; technology | |
| B | capital; real GDP; technology | |
| C | labor; capital; real GDP | |
| D | capital; labor; real GDP |
Question 11
New growth theory states that increases in ________ capital will result in ________ at the ________ level.
| A | knowledge; increasing returns to scale; firm | |
| B | physical; decreasing returns to scale; firm | |
| C | knowledge; decreasing returns to scale; economy | |
| D | knowledge; increasing returns to scale; economy |
Question 12
Which of the following is not a reason why the Industrial Revolution occurred when and where it did?
| A | The British government was committed to upholding private property rights. | |
| B | The British government was able to eliminate arbitrary increases in taxes. | |
| C | The British government was able to more easily seize wealth. | |
| D | Institutional changes by the British government helped protect wealth. |
Question 13
Growth in real GDP per capita for the world economy was greatest during
| A | the seventeenth century. | |
| B | the eighteenth century. | |
| C | the nineteenth century. | |
| D | the twentieth century. |
Question 14
Which of the following is a normative statement about economic growth?
| A | Economic growth is associated with higher labor productivity growth. | |
| B | Economic growth increases GDP per capita. | |
| C | Economic growth hurts developing countries. | |
| D | Foreign direct investment stimulates economic growth. |
Question 15
The effect of a recession on a company like Whirlpool Corporation is such that
| A | sales decline more sharply for Whirlpool as compared to firms that do not produce durable goods. | |
| B | profits fall less sharply as compared to firms that do not produce durable goods. | |
| C | the decline in sales is more short-lived as compared to firms that do not produce durable goods. | |
| D | there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. |
Question 16
For the recessions in the United States since the 1950s,
| A | cyclical unemployment has been non-existent. | |
| B | unemployment rises on average by about 1.2 percentage points 12 months after a recession begins. | |
| C | unemployment falls on average by 2 percentage points 12 months after a recession begins. | |
| D | unemployment rises on average about 5 percentage points 12 months after a recession begins. |
Question 17
You are an economic advisor to the president. You are asked to recommend a policy to promote long-term economic growth in the economy. Which of the following policies would you choose?
| A | a reduction in sales taxes | |
| B | an investment tax credit | |
| C | a reduction in taxes on luxury yachts | |
| D | All of these |
Question 18
In comparison to a government that runs a balanced budget, when the government runs a budget deficit,
| A | the equilibrium interest rate will fall. | |
| B | business investment will fall. | |
| C | household savings will fall. | |
| D | None of these |
Question 19
If labor productivity growth slows down in a country, this means that the growth rate in ________ has declined.
| A | labor force participation | |
| B | the quantity of goods or services that can be produced by one hour of work | |
| C | the working-age population | |
| D | nominal GDP |
Question 20
Policies to promote growth by increasing saving and investment work through
| A | decreasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. | |
| B | increasing the supply of loanable funds, increasing the interest rate, raising the level of investment in physical capital. | |
| C | increasing the supply of loanable funds, lowering the interest rate, lowering the level of investment in physical capital. | |
| D | increasing the supply of loanable funds, lowering the interest rate, raising the level of investment in physical capital. |