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From combination of goods or services lies outside the production possibilities curvetrue 1. If a certain combination of goods or services lies outside.

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Presentation on theme: "From combination of goods or services lies outside the production possibilities curvetrue 1. If a certain combination of goods or services lies outside."— Presentation transcript:

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3 combination of goods or services lies outside the production possibilities curvetrue 1. If a certain combination of goods or services lies outside the production possibilities curve of an economy, which of the following is true. (a) Effective trade barriers have reduced foreign imports into the economy. (b) New technology is being used in production. (c) Resources are not available to achieve that combination of goods/services. (d) resources are not being used efficiently to achieve that combination of goods or services. (e) Resources are being used at a more rapid rate then they were in the past. gain from unanticipated inflation 2. Which of the following groups would most likely gain from unanticipated inflation? (a) Landlords who own apartments in cities with rent controls. (b) Individuals who have fixed retirement incomes. (c) Individuals who earn high incomes (d) Individuals who have borrowed money at fixed interest rates (e) Banks that have loaned all excess reserves at a fixed interest rate. equilibrium interest rate quantity of money 3. With a constant money supply, if the demand for money decreases, the equilibrium interest rate and quantity of money will change in which of the following ways? Interest RateQuantity of Money (a) IncreaseDecrease (b) IncreaseNot change (c) DecreaseDecrease (d) DecreaseIncrease (e) DecreaseNot change Borrowers borrowed dear money & paid back cheaper money.

4 Real GDP Real GDP cause income and employment to change 4. According to the graph above, an increase in AS will most likely cause income and employment to change in which of the following ways? Employment Income Employment (a) Decrease Decrease (b) Decrease Increase (c) No change Increase (d) Increase Decrease (e) Increase Increase $2 per one pound to $3 per one pound 5. If the exchange rate between the U.S. dollar and the British pound changed from $2 per one pound to $3 per one pound, and domestic prices in both countries stayed the same, then the U.S. dollar would (a) depreciate, making U.S. imports from Britain more expensive (b) depreciate, making U.S. imports from Britain cheaper (c) appreciate, making U.S. imports from Britain more expensive (d) appreciate, making U.S. imports from Britain cheaper (e) purchase 3 times more British goods than before the change occurredAD AS PL AS PL 1 PL 2 Y1Y1Y1Y1 Y2Y2Y2Y2 E1E1E1E1 E2E2E2E2

5 cause employment to increase and the interest rate to decrease 6. If an economy is operating with significant unemployment, an increase in which of the following will most likely cause employment to increase and the interest rate to decrease? (a) Purchases of government bonds by the central bank (b) Transfer payments (c) Reserve requirements (d) Government expenditures (e) Investment in basic infrastructure promote economic growth 7. An increase in which of the following is most likely to promote economic growth? (a) Consumption spending(d) The trade deficit (b) Investment tax credits(e) Real interest rates (c) The natural rate of unemployment appropriate fiscal policyrecession 8. An appropriate fiscal policy to combat a recession would be to increase which of the following? (a) Interest rates(d) Government spending (b) The money supply(e) The sale of government bonds (c) Taxes opportunity cost 9. The concept of opportunity cost would no longer be relevant if (a) poverty in an economy no longer existed (b) the supply of all resources were unlimited (c) resources were allocated efficiently (d) real wages were flexible (e) all current incomes were invested in technological research Fed buying bonds means bigger supply of money and lower interest rates. The lower interest rates lead to more consumption and investment and increase employment. Economic growth is increased with more real capital equipment to produce things. Investment tax credits result in more real capital equipment.

6 appreciation of the U.S. dollar 10. An appreciation of the U.S. dollar on the foreign exchange market could be caused by a decrease in which of the following? (a) U.S. interest rates (b) The U.S. consumer price index (c) Demand for the dollar by U.S. residents (d) Exports from the U.S. (e) The tariff on goods imported into the U.S. economic growth has occurred 11. Which of the following would indicate that economic growth has occurred? (a) The production possibilities curve shifts to the left. (b) The long-run aggregate supply curve shifts to the right. (c) The AD curve shifts to the right. (d) The Phillips curve becomes flatter. (e) Business cycles no longer exist. Federal Reserve engages in open market operations to reduce inflation 12. Which of the following is most likely to occur if the Federal Reserve engages in open market operations to reduce inflation? (a) A decrease in interest rates (b) A decrease in reserves in the banking system (c) A decrease in the government deficit (d) An increase in the money supply (e) An increase in exports Lower prices increase demand for U.S. exports and appreciate the dollar. Economic growth means more real capital. More land, labor, and capital shift out the PPC and LRAS curve. The Fed would sell bonds to the banks, resulting in a smaller MS, or decrease in reserves in the banking system.

7 Fed action can shift the AD curve to the left 13. Which Fed action can shift the AD curve to the left? (a) Lowering the federal funds rate (b) Lowering income taxes (c) Lowering reserve requirements (d) Raising the discount rate (e) Raising government spending on national defense Crowding out 14. Crowding out refers to the decrease in (a) national output caused by higher taxes (b) domestic production caused by increased imports (c) private investment due to increased borrowing by the government (d) employment caused by higher inflation (e) exports caused by an appreciating currency of a country real interest rate in the U.S. increases 15. If the real interest rate in the U.S. increases relative to that of the rest of the world, capital should flow (a) into the U.S. and the dollar will depreciate (b) into the U.S. and the dollar will appreciate (c) out of the U.S. and the dollar will depreciate (d) out of the U.S. and the dollar will appreciate (e) out of the U.S. and the value of the dollar will not change Higher U.S. interest rates attract more demand for our financial capital [CDs and bonds] & financial flows of foreign money will flow in to the U.S. to purchase these.

8 following policy choicesrepresents a combination of fiscal and monetary policies designed to bring the economy out of a recession 16. Which of the following policy choices represents a combination of fiscal and monetary policies designed to bring the economy out of a recession? (a) Decreasing both taxes and the money supply (b) Increasing both taxes and the money supply (c) Increasing government spending and decreasing the federal funds rate (d) Increasing both taxes and the discount rate (e) Engaging in deficit spending and government bond sales counted as unemployed 17. Which of the following will be counted as unemployed by the U.S. Bureau of Labor Statistics? (a) Persons who quit their previous jobs to stay at home to care for sick parents (b) Persons who were laid off from their previous jobs and have not applied for a job in two years (c) Persons who were fired from their previous jobs and are actively applying for work (d) Persons who have given up looking for jobs after long searches (e) Persons who quit their previous jobs to start their own business contractionary monetary policy 18. Which of the following would occur if the Fed implemented contractionary monetary policy? (a) Interest rates increase, investment & consumption spending decrease, AD decreases, and output and prices decrease. (b) Interest rates increase, investment & consumption spending decrease, AD increases, & output and prices decrease. (c) Interest rates increase, investment and consumption spending increase, AD decreases, & output and prices decrease. (d) Interest rates decrease, investment and consumption spending decrease, AD decrease, & output and prices decline. (e) Interest rates decrease, investment and consumption spending decrease, AD decreases, & output and prices increase.

9 autonomous consumption is $400MPC is Suppose that autonomous consumption is $400 and that the MPC is 0.8. disposable income increases by $1,200consumption spending disposable income increases by $1,200, consumption spending will increase by (a) $1,600(d) $960 (b) $1,360(e) $400 (c) $1,200 wages are completely flexible changes in output and real wages 20. In an economy in which all prices, including wages are completely flexible, an increase in labor productivity will result in which of the following changes in output and real wages? OutputReal Wages (a) IncreaseIncrease (b) IncreaseDecrease (c) DecreaseNo change (d) DecreaseIncrease (e) DecreaseDecrease price level increases by 10% must increase by 10% for real output to remain constant 21. When the average price level increases by 10% in a given year, which of the following must increase by 10% for real output to remain constant? (a) Real national income (b) Nominal national income (c) The international value of the currency (d) Real interest rates (e) Nominal interest rate With an MPC of 0.8, the change in income of $1,200 will result in 80% of it being consumed. 80% of $1,200 is $960. The increase in productivity will shift the SRAS curve to the right which would increase output. The increase in SRAS would also lower PL which would increase the real value of the dollar, causing an increase in real wages.

10 price of a good is less than the equilibrium 22. Which of the following will occur in a competitive market when the price of a good is less than the equilibrium? (a) Price will decrease to eliminate the surplus and restore equilibrium. (b) Price will decrease to eliminate the shortage and restore equilibrium. (c) Price will increase to eliminate the surplus and restore equilibrium. (d) Price will increase to eliminate the shortage and restore equilibrium. (e) Price will remain constant, because supply will increase to eliminate the shortage. short-run Phillips 23. A short-run Phillips curve shows an inverse relationship between (a) interest rates and borrowing(d) prices & QD (b) inflation & unemployment(e) inputs & outputs (c) income and consumption cause an increase in GDPin the short run 24. Which of the following can be expected to cause an increase in GDP in the short run? (a) An increase in the tax rate (b) An increase in the interest rate (c) Equal increases in both imports and exports (d) Equal increases in both taxes and government expenditures (e) Equal decreases in both investment and government expenditures federal government reduces its budget deficit 25. If the federal government reduces its budget deficit when the economy is close to full employment, which of the following will most likely result? (a) Inflation will increase. (b) Tax revenues will increase. (c) Interest rates will decrease. (d) Unemployment will decrease. (E) The international value of the dollar will increase. The balanced budget multiplier is in effect here where the increase in G is stronger than the increase in T due to a larger multiplier. Reducing the deficit means less borrowing and less demand in the LFM, which would lower interest rates.

11 cause the U.S. dollar to depreciate 26. Which of the following will cause the U.S. dollar to depreciate relative to the Euro? (a) An increase in household income in the U.S. (b) An increase in interest rates in the U.S. (c) An increase in household income in Europe (d) A decrease in interest rates in Europe (e) A decrease in price level in the U.S. Stagflation 27. Stagflation is most likely to be caused by (a) an increase in AD(d) a decrease in AS (b) a decrease in AD(e) a large increase in the MS (c) an increase in AS nominal interest rate is 10%.inflation rate is 5%, real interest rate 28. Assume that the nominal interest rate is 10%. If the expected inflation rate is 5%, the real interest rate is (a) 0.5% (b) 2% (c) 5% (d) 10% (e) 15% increase in the U.S. GDP 29. Which of the following will lead to an increase in the U.S. GDP? (a) More individuals prepare their own personal income tax forms. (b) Some citizens begin working abroad as computer programmers. (c) The government prohibits the sale of alcoholic beverages (d) Foreign companies build new assembly plants in the U.S. (e) Long-run AS curve to shift to the left (f) Long-run AS curve to the right Increasing HH income in the U.S. results in more demand for foreign goods which appreciates that currency and depreciates the dollar.

12 advance in technology 30. An advance in technology will cause the a. AD curve to shift to the right b. AD curve to shift to the left c. Short-run AS curve to shift to the left d. Long run AS curve to shift to the left e. Long-run AS curve to shift to the right Fed buys $400 billion worth of government securities from the Public 31. Suppose that the Fed buys $400 billion worth of government securities from the Public. With a RR of 20%, the maximum increase in the money supply is a. $1,600 billion b. $1,800 billion c. $2,000 billion d. $2,200 billion e. $2,400 billion The $400 is new money in the banking system. The M M of 5 will increase MS to $2,000. [5 x $400 = $2,000.

13 32. Before specialization & trade, the domestic 1 ton of grain in opportunity cost of producing 1 ton of grain in Alpha and in Beta is which of the following Alpha and in Beta is which of the following? AlphaBeta a. 1 ton of steel1 ton of steel b. 1 ton of steel2 tons of steel c. 2 tons of steel1 ton of steel d. 1 ton of steel0.5 tons of steel e tons of steel1.5 tons of steel Grain in tons Beta Alpha comparative 33. The theory of comparative advantageAlpha advantage implies that Alpha would find it advantageous to a. export grain and import steel b. export steel and import grain c. export both grain and steel and import nothing d. import both grain and steel and export nothing e. trade 1 ton of grain for 0.5 ton of steel 34. At what real exchange ratio, also terms of trade referred to as the terms of trade, between grain (G) and steel (S) would both Alpha and Beta find it mutually advantageous to specialize and trade. a. 1 G = 3.0 S b. 1 G = 1.5 S c. 1 G = 1.0 S d. 1 G = 0.5 S e. There is no real exchange ratio that would enable both countries to benefit, since Alpha has an absolute advantage in both goods. Steel in tons For questions Betas DCC 1 G = 2 S 1/2 G = 1 S Alphas DCC 1 G = 1 S Terms of Trade 1 G = 1.5 S

14 Real GDP Real GDP graph abovelong-run equilibrium 35. According to the graph above, which of the following is true about the long-run equilibrium of the economy depicted? a. The economy is in long-run equilibrium. b. The AD curve will shift to the left to restore long-run equilibrium. c. The long-run AS curve will shift to the right to restore long-run equilibrium. d. Without a fiscal policy stimulus, the economy will remain in a recession. e. As wages increase, the SRAS curve will shift to left to restore long-run equilibrium. increase in personal income taxescause AD and AS to change in which of the following ways in the short run 36. An increase in personal income taxes will most likely cause AD and AS to change in which of the following ways in the short run? Aggregate DemandAggregate Supply a. Not changeDecrease b. Not changeIncrease c. DecreaseNot change d. DecreaseIncrease e. IncreaseNot changeADSRAS PL SRAS LRAS YFYFYFYF An increase in personal income taxes will make consumers poorer which makes them cut back on consumption, which decreases AD. Personal income taxes are not a determinant of the AS curve but a change in business taxes would be.

15 workers lost their jobs because of a recession 37. Which type of unemployment would increase if workers lost their jobs because of a recession? a. Cyclical b. Frictional c. Seasonal d. Search e. Structural marginal propensity to consume 38. Which of the following is true about the marginal propensity to consume? a. It is the percentage of total income that is spent on consumption. b. It determines the size of the simple spending multiplier. c. It increases as incomes increase because increases in income cause people to spend more. d. It is the same as the m oney multiplier. e. It is equal to the average propensity to consume for people with low incomes. below the full-employment level appropriate monetary policy 39. When an economy is operating below the full-employment level of output, an appropriate monetary policy would be to increase which of the following? a. The discount rate b. The required reserve ratio c. The international value of the dollar d. Open market purchases of government bonds e. Government expenditure on goods and services

16 at full employmentmaintain the price level but want to encourage greater investment combinations of monetary and fiscal policies 40. Assume that the economy is at full employment. Policymakers wish to maintain the price level but want to encourage greater investment. Which of the following combinations of monetary and fiscal policies would best achieve this goal? Monetary PolicyFiscal Policy a. No changeContractionary b. ExpansionaryNo change c. ExpansionaryContractionary d. Expansionary Expansionary e. ContractionaryExpansionary spendingwas equal to 103% of a countrys GDP 41. In one year, spending on consumption, investment, and government purchases was equal to 103% of a countrys GDP. This would be possible only if a. the money supply increased b. net exports were positive c. net exports were negative d. the government ran a budget surplus e. the government had a balanced budget Expansionary monetary policy would result in lower interest rates, causing more investment in real capital. To keep prices from going up, policymakers could cut G or raise taxes [contractionary] to prevent this. We consumed more imports than we sold exports, which would make our spending greater than our GDP.

17 decrease production costsAS curveprice levelreal output 42. When firms restructure their operations to decrease production costs, the AS curve, the price level, and real output will change in which of the following ways? AS CurvePrice Level Real Output a. Shift to the leftIncreaseIncrease b. Shift to the leftIncreaseNo change c. Shift to the rightIncreaseIncrease d. Shift to the rightDecreaseIncrease e. Shift to the rightDecreaseDecrease output that is less than full- employmentno fiscal or monetary policy interventions changes in output and the price level 43. An economy is in a short-run equilibrium at a level of output that is less than full- employment output. If there were no fiscal or monetary policy interventions, which of the following changes in output and the price level would occur in the long run? OutputPrice Level Output Price Level a. Increase Decrease b. Increase Increase c. Decrease Decrease d. Decrease Increase e. No change No change Lower production costs means more profits and a shift of the AS curve to the right. That results in lower PL and an increase in real output. With no intervention in this recession, the surpluses would result in lower prices. Workers would then accept lower wages. As more are hired back, output would increase.

18 Mexico increases its MS Mexicos inflation ratevalue of the Mexican peso 44. Assume that the world operates under a flexible exchange rate system. If the central bank of Mexico increases its MS but other countries do not change theirs, Mexicos inflation rate and the international value of the Mexican peso will most likely change in which of the following ways? International Inflation RateValue of the Peso Inflation Rate Value of the Peso a. Increase Appreciate b. IncreaseDepreciate c. IncreaseNo change d. DecreaseAppreciate e. DecreaseDepreciate Fed decreases the federal funds rate 45. The Fed decreases the federal funds rate by a. decreasing the reserve requirement b. decreasing the discount rate c. increasing the discount rate d. selling government bonds on the open market e. buying government bonds on the open market An increase in Mexicos MS means more pesos chasing the same goods as before, bringing on higher prices. This would decrease demand for Mexicos exports, depreciating the peso. The Fed targets the Fed Funds Rate by buying & selling bonds. Buying bonds means biggerBuying bonds means bigger supply of money and lower Fed Funds Rate.

19 Labor Market Data for Country X (in millions of persons) Population – 180; Employed – 94; Population – 180; Employed – 94; Unemployed – 6; Not in Labor Force – 80 Unemployed – 6; Not in Labor Force – 80 unemployment rate for Country X 46. Based on the information above, what is the unemployment rate for Country X? a. 3.3% b. 4.0% c. 6.0% d. 6.38% e. 7.5% decreases taxes decreases the discount rate 47.Suppose that the government decreases taxes and at the same time the central bank decreases the discount rate. The combined actions will result in a. an increase in unemployment and a decrease in the interest rate b. an increase in unemployment and an increase in the interest rate c. an increase in the real GDP and a decrease in the interest rate d. an increase in the real GDP and an increase in the interest rate e. an increase in the real GDP and an indeterminant change in the interest rate 6/100 x 100 = 6% Decreasing taxes would increase C, increase AD and real GDP. Assuming a balanced budget before the decrease in T means the G would have to borrow, pushing up interest rates. Decreasing the discount rate would also lead to more real GDP but would result in a lower interest rate. With interest rates moving in opposite directions with the two policies, this make them indeterminate.

20 MPC is equal to 0.75$ In a closed economy with only lump-sum taxation, if the MPC is equal to 0.75, a $70 billion increase in government spendingmaximum increase billion increase in government spending could cause a maximum increase in output of a. $52.5 billion b. $70 billion c. $122.5 billion d. $210 billion e. $280 billion NOT a function of fiat money 49. Which of the following is NOT a function of fiat money? a. A standard of deferred paymentd. A store of value b. A unit of accounte. A medium of exchange c. A source of intrinsic value 4 x $70 = $280

21 demand-pull inflation 50. When an economy is at full employment, which of the following will most likely create demand-pull inflation in the short run? a. An increase in the discount rated. A decrease in government spending b. An increase in personal income taxese. A decrease in the money supply c. A decrease in the real interest rate rational expectationsannounced expansion in the money supply nominal and real gross domestic products 51. Under rational expectations an announced expansion in the money supply will change nominal and real gross domestic products (GDP) in which of the following ways? Nominal GDPReal GDP a. IncreaseIncrease b. IncreaseDecrease c. IncreaseNo change d. No changeDecrease e. No changeNo change decrease in labor productivity 52. A decrease in labor productivity will shift the a. AD curve to the right b. AD curve to the left c. LRAS curve to the right d. SRAS curve to the right e. SRAS curve to the left RATEX implies that people expect more inflation with the increase in the MS. They Will negotiate higher raises with this in mind. Business profits will not increase so no more workers will be hired. So real GDP would not change, just nominal GDP. Productivity is an AS Shifter so a decrease in labor productivity results in having to hire more workers and cutting corporate profits, therefore shifting the SRAS curve to the left.

22 -20 % $10 $8 Y R Y R Y* Y I Y R Y R Y* Y I SRAS 1 SRAS 2 AD 1 AD 2 LRAS AD decreasesreal GDP and the price level will change 53. In the long run, if AD decreases, real GDP and the price level will change in which of the following ways? Real GDPPrice Level Real GDP Price Level a. Decrease Decrease b. Decrease Increase c. No change Decrease d. Increase Decrease e. No change Increase RR is 10%.Emilia deposits the $100 bill increase in the total money supply 54. Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal RR is 10%. If Emilia deposits the $100 bill she received as a graduation gift from her grandfather into her checking account, the maximum increase in the total money supply will be a. $10 b. $100 c. $900 d. $1,000 e. $1,100 The decrease in AD resulted in surpluses & caused prices to drop. Workers would now accept lower wage increases which moved the SRAS curve right, increasing real GDP. Remember that currency is also MS. So, the $100 bill was MS when this began. When little Emilia deposited the $100, the composition of the MS didnt increase. It just changed from currency to DD. Now, with the RR at 10%, $90 was loaned by the first bank and with a M M of 10, the MS increased by $900 more as the TMS eventually became $10,000.

23 inflation increases imports and exports 55. Assuming fixed exchange rates, if Mexicos rate of inflation increases relative to its trading partners, Mexicos imports and exports will most likely change in which of the following ways? Imports Exports a. Decrease Decrease b. Decrease Increase c. Increase Decrease d. Increase Increase e. No change No change household purchasescounted as part of gross private investmentGDP 56. Which of the following household purchases will be counted as part of gross private investment in a countrys GDP? a. Government bonds b. Shares of a company stock c. Corporate bonds d. A new car for personal use e. A newly constructed home The first three are purely financial transactions. The purchase of the new car would be counted as consumption, not investment. A higher price level in Mexico will decrease demand for their products, depreciating the peso. However, the increase in the peso currency price relative to other countries makes their goods cheaper so their imports increase while their exports decrease as they have to pay more pesos.

24 increase in AD 57. An increase in AD will cause which of the following? a. A movement along a given short-run Phillips curve b. The long-run Phillips curve to become horizontal c. The short-run Phillips curve to shift to the left d. The long-run Phillips curve to shift to the right d. The long-run Phillips curve to shift to the left cause the short-run AS curve to shift to the right 58. Which of the following would cause the short-run AS curve to shift to the right? a. An increase in the wage rate b. An increase in the interest rate c. An increase in the natural rate of unemployment d. A decrease in the capital stock e. A decrease in the expected price level If PL is expected to decrease, then workers will not demand as large of wage increases as in the past. With lower resource cost [wages] anticipated, firms will hire more workers and SRAS will shift to the right. An increase in AD would move cause a movement up and to the left on the SRPC. Shifts of the SRPC are caused by supply shocks, which we didnt have here.

25 decrease in business taxes 59. A decrease in business taxes would lead to an increase in national income by increasing which of the following? a. The money supply b. Unemployment c. AD only d. AS only e. Both AD and AS increase in government budget deficit 60. In an open economy, an increase in government budget deficit tends to cause the international value of a countrys currency and its trade deficit to change in which of the following ways? V alue of C urrency Trade Deficit a. AppreciateBecome smaller b. AppreciateBecome larger c. DepreciateBecome smaller d. DepreciateBecome larger e. Not changeNot change Business taxes are determinants of both AD and AS. The decrease in business taxes means they have more profits and will invest more, increasing AD. As far as the legal-institutional environment with the government, it is more favorably so that will result in an increase in AS. The budget deficit means the government is borrowing more, which pushes up the interest rate. The higher interest rate attracts more foreign investors, increasing demand for the dollar and appreciating the dollar. The stronger dollar makes our exports more expensive and imports cheaper, therefore increasing the trade deficit.

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