ECON 102 Chapter Notes -Nominal Interest Rate, Potential Output
ECON 102 Full Course Notes
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| Q1. The total resource cost of goods and services produced by the U. S. economy is known as a. real GDP b. personal income c. national wealth d. national income Q2. The difference between GDP and final sales equals a. depreciation b. exports c. imports d. net inventory change Q3. Current disposable income can be adjusted for price changes and population changes to yield real per capita disposable income. a. true b. false Q4. If a lawn service mows your grass, it is included in the GDP. a. true b. false Q5. In national income accounting, grain fed to a hog at a commercial hog farm is considered a(n) a. final good b. intermediate good c. consumer good d. capital consumption allowance Q6. Imports constitute a minus figure in national income accounting. a. true b. false Q7. The total value added in the production of a final good a. exceeds the price of the final good b. equals the price of the final good c. exceeds the total payments made to owners of productive resources used in the production d. both (b) and (c) Q8. The GDP is reported on a monthly basis by the Department of Commerce. a. true b. false Q9. Transfer payments are added to NI in the process of determining personal income. a. true b. false Q10. U.S. gross domestic product is converted to U.S. gross national product by a. adding the value of output produced by U.S.-owned resources in foreign countries b. subtracting the value of output produced by U.S.-owned resources in foreign countries c. subtracting the value of output produced in the United States by foreign-owned resources d. both (a) and (c) Q11. Final sales are always larger than the GDP. a. true b. false Q12. Because of the value of things produced inside households, (building your own desk, mowing your own lawn, etc.) a. the GDP value is automatically adjusted upward to reflect this b. the GDP value is automatically adjusted downward to reflect this c. Official GDP is surely smaller than true total output d. Official GDP is surely larger than true total output Q13. A government surplus may trigger a decline in the money supply. a. true b. false Q14. Real wages are determined by multiplying money wages by the CPI. a. true b. false Q15. The more volatile the inflation rate, the weaker the money supply as a standard of deferred payment. a. true b. false Q16. An increase in the money supply always causes an increase in the price level. a. true b. false Q17. Your nominal wages rose during the same period from $200 a week to $260. By how much did your real income rise? a. 30 percent b. 16.7 percent c. 8.33 percent d. 12 percent Q18. In the past 10 years or so, average real wages of U.S. workers in nonagricultural industries have a. increased about 40 percent b. increased slightly c. remained about the same d. declined Q19. If a new cash deposit creates excess reserves of $5,000 and the required reserve ratio is 10 percent, the banking system can increase the money supply by a maximum of a. $50,000 b. $500 c. $5,000 d. $4,500 Q20. The effect of a change in the money supply on economic activity may be offset by a change in velocity. a. true b. false Q21. The current base period for the CPI is a. 1967 b. 1977 c. 1982–1984 d. 1990 Q22. In the circular flow, an increase in the money supply tends to result when a. planned I equals planned S b. planned I is less than planned S c. planned I is greater than planned S d. there is a surplus government budget Q23. COLA is a form of indexation. a. true b. false Q24. The total checkable deposits a bank may have can be determined by dividing its reserves by the reserve requirement. a. true b. false Q25. The Financial Services Modernization Act a. reinforced the Glass Steagall Act b. prevented mergers of banks c. eliminated barriers between banks, brokerage houses, and insurance companies d. eliminated all banking regulations Q26. Each Federal Reserve Bank has its own board of directors. a. true b. false Q27. The most frequently used tool of U.S. monetary policy is a. the discount rate b. the reserve requirement c. open-market operations d. moral suasion Q28. When the Fed conducts open-market operations, it primarily uses a. Treasury bills b. long-term U.S. government bonds c. bonds of publicly traded corporations d. overnight loans of major banks Q29. The Board of Governors of the Federal Reserve System has a. 6 members b. 7 members c. 1 member from each Federal Reserve Bank d. 20 members Q30. If the Fed desires to increase checkable deposits, it may lower the reserve requirement. a. true b. false Q31. The interest rate at which banks borrow excess reserves from each other is known as the a. prime rate b. federal funds rate c. discount rate d. T-bill rate Q32. If member banks need to borrow reserves, they must do so through the discount window. a. true b. false Q33. The Fed Chairman appears before Congress semi-annually to present the Monetary Policy Report. a. true b. false Q34. In terms of the total number of payments, which of the following comprises the largest share? a. cash b. personal checks c. debit cards d. credit cards Q35. By buying government securities, the Federal Open Market Committee adds to member banks' reserves. a. true b. false Q36. More than 50 percent of commercial banks in the United States belong to the Federal Reserve System. a. true b. false Q37. The Federal Reserve System is built around a. 4 regional banks b. 6 regional banks c. 12 district banks d. 1 bank with several branches Q38. The time lags lead monetarists to contend that monetary policy is counterproductive. a. true b. false Q39. The marginal propensity to consume is a. the fraction of an increase in income that would be spent on consumer goods b. the additional desire people have for consumer goods c. the fraction of a person's total income normally spent for consumer goods d. the change in consumption resulting from a $1 change in the price level Q40. The consumption function shows a. how fast the economy is consuming its capital b. that the amount of national income determines the rate at which the economy consumes its resources c. that households' incomes determine how much the households will spend for consumer goods d. the rate at which people actually use up their consumer goods Q41. In the simple Keynesian model, if output exceeds aggregate expenditures, a. there will be no response from businesses b. inventories will decrease and businesses will increase output c. inventories will increase and businesses will increase output d. inventories will increase and businesses will decrease output Q42. If planned construction investment increases by $30 billion and the MPC is two-thirds, total output will increase by a. $30 billion b. $20 billion c. $45 billion d. $90 billion Q43. "A given change in business investment will cause a larger change in equilibrium output." This statement describes an important Keynesian concept called the a. multiplier effect b. marginal propensity to consume c. marginal propensity to invest d. consumption function Q44. In the multiplier formula, 1/MPS equals the multiplier. a. true b. false Q45. The classical economists held that chronic unemployment was likely. a. true b. false Q46. As income increases, the absolute level of planned consumption will increase. a. true b. false Q47. The new classical school contends that government fiscal policy is better than monetary policy in controlling inflation. a. true b. false Q48. Higher price levels are associated with lower aggregate expenditure at every level of income. a. true b. false Q49. Any time that planned leakages exceed planned injections, the economy will expand. a. true b. false Q50. According to the Keynesian model, increased foreign spending for U.S. goods is likely to a. reduce total employment in the United States b. increase total employment in the foreign country c. reduce total output in the United States d. increase total output in the United States |
1.Ceteris paribus, if the U.S. federal government reduces its budget deficit which of the following will be observed?
Answer
| a. | The aggregate demand curve will shift to the right. | |
| b. | The economy will always approach potential GDP. | |
| c. | The marginal propensity to consume will increase. | |
| d. | The average price level will increase. | |
| e. | The aggregate demand curve will shift to the left. |
2. If the government wants to close a GDP gap, it can:
Answer
| a. | lower government spending on social security. | |
| b. | adopt contractionary fiscal policies to control inflation. | |
| c. | increase its budget deficit. | |
| d. | repay its borrowings. | |
| e. | raise both direct and indirect tax rates. |
3. Suppose the short-run equilibrium level of income exceeds the full employment level of income and there is high inflation. Hence, the government decides to implement a fiscal policy that will act to reduce national output and price level. This can be accomplished by:
Answer
| a. | lowering average tax rates such that aggregate supply is increased. | |
| b. | increasing government spending such that aggregate expenditures are increased. | |
| c. | increasing transfer payments such that aggregate expenditures decline. | |
| d. | raising taxes and government spending by the same amount such that aggregate supply is decreased and aggregate demand is increased. | |
| e. | decreasing government spending such that aggregate demand is reduced. |
4. A drop in investment spending caused by increased government budget deficits is referred to as:
Answer
| a. | the multiplier effect. | |
| b. | crowding out. | |
| c. | an expansionary gap. | |
| d. | the paradox of thrift. | |
| e. | the Ricardian equivalence. |
5. Discretionary fiscal policy is best defined as:
Answer
| a. | the deliberate manipulation of the money supply to expand the economy. | |
| b. | the deliberate change in tax laws and government spending to change equilibrium income. | |
| c. | the policy action taken by the Congress to reduce the federal budget deficit. | |
| d. | the arbitrary fluctuation in tax laws and budget requirements. | |
| e. | the automatic change in certain fiscal instruments when real GDP changes. |
6. Which of the following can be considered as an automatic stabilizer in the economy?
Answer
| a. | Money supply | |
| b. | Disposable income | |
| c. | Real exchange rate | |
| d. | Real interest rate | |
| e. | Unemployment insurance |
7. Which of the following is true about automatic stabilizers?
Answer
| a. | When income rises, automatic stabilizers increase/boost spending. | |
| b. | Automatic stabilizers are a part of discretionary fiscal policy. | |
| c. | An automatic stabilizer is any program that responds to fluctuations in the business cycle in a way that moderates the effects of those fluctuations. | |
| d. | Any kind of trade policy adopted by the government will be considered as an automatic stabilizer. | |
| e. | The interest rate is an example of an automatic stabilizer. |
8. Increased budget deficits
Answer
| a. | can cause interest rates to increase and hence decrease net exports | |
| b. | have no effect on net exports | |
| c. | can cause interest rates to decrease and hence increase net exports | |
| d. | never impose additional interest costs on the government |
9. The Ricadian Equivalence implies that when financing additional government expenditures
Answer
| a. | there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will decrease either way. | |
| b. | there is no difference between increasing current taxes or borrowing now and increasing taxes in the future because consumption will increase either way. | |
| c. | increasing borrowing is the best option | |
| d. | increasing current taxes is the best option |
10. Assuming no effects on aggregate supply, if the government increases government spending and decreases taxes in an attempt to prevent a possible recession, aggregate demand will shift to the ____, the price level will either remain constant or ____, and the level of real GDP will ____.
Answer
| a. | right; decrease; increase | |
| b. | right; decrease; decrease | |
| c. | left; decrease; decrease | |
| d. | left; increase; increase | |
| e. | right; increase; increase |
11. For a hypothetical economy, the MPS is 0.08 and the MPI is 0.17. If government spending increases by $35 and taxes increase by $35, what will be the net effect on equilibrium income?
Answer
| a. | A decrease of $35 | |
| b. | An increase of $105 | |
| c. | An increase of $35 | |
| d. | A decrease of $105 | |
| e. | A decrease of $15 |
1.
12.12. The term fiscal policy refers to
Answer
| a. | the adjustment of the GDP for inflation. | |
| b. | the purchase and sale of U.S. government securities to regulate the money supply. | |
| c. | the use of government spending and taxation to influence the level of economic growth and inflation. | |
| d. | the use of fines to penalize unfair business practices. | |
| e. | a policy action by Congress to overrule unpopular budget cuts by the president. |
13. If aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve, then, other things equal, an increase in government spending will
Answer
| a. | raise the price level and leave real GDP unchanged. | |
| b. | raise real GDP by the amount indicated by the government spending multiplier and leave the price level unchanged. | |
| c. | raise both real GDP and the price level by a multiple of the initial spending increase. | |
| d. | have no effect on real GDP or on the price level, because all private investment will be crowded out. | |
| e. | lower real GDP by an amount equal to the spending increase and reduce inflation. |
14. Which of the following is not a means to finance government spending?
Answer
| a. | Government subsidies | |
| b. | Government debt | |
| c. | Capital gains taxes | |
| d. | Personal income taxes | |
| e. | Money creation |
15. An automatic stabilizer is
Answer
| a. | a change in government spending aimed at achieving a policy goal. | |
| b. | an element of fiscal policy that automatically changes in value as real GDP changes. | |
| c. | an element of monetary policy that automatically changes in value as real GDP changes. | |
| d. | a decrease in tax rates as the economy moves into a recession. | |
| e. | a deliberate change in taxation aimed at increasing real GDP. |
16. Budget deficits tend to grow during recessions because
Answer
| a. | real GDP growth is zero, which causes neither tax receipts nor government expenditures to grow. | |
| b. | real GDP growth is positive, which reduces both tax receipts and transfer payments. | |
| c. | real GDP growth is negative, which reduces transfer payments in relation to tax receipts. | |
| d. | real GDP growth is negative, which reduces tax receipts in relation to government expenditures. | |
| e. | real GDP growth is positive, which increases tax receipts in relation to government expenditures. |