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macroeconomics

Questions and Answers of Macroeconomics

If total spending is just sufficient to purchase an economy’s output, then the economy is:a. in equilibrium.b. in recession.c. in debt.d. in expansion.
True or False. If spending exceeds output, real GDP will decline as firms cut back on production.
If inventories unexpectedly rise, then production _________ sales and firms will respond by ________ output.a. trails; expandingb. trails; reducingc. exceeds; expandingd. exceeds; reducing
If the multiplier is 5 and investment increases by $3 billion, equilibrium real GDP will increase by:a. $2 billion.c. $8 billion.b. $3 billion.d. $15 billion.e. none of the above.
A depression abroad will tend to ________ our exports, which in turn will _______ net exports, which in turn will _______ equilibrium real GDP.a. reduce; reduce; reduceb. increase; increase;
The economy’s current level of equilibrium GDP is $780 billion.The full-employment level of GDP is $800 billion. The multiplier is 4. Given those facts, we know that _______ the economy faces
If an economy has an inflationary expenditure gap, the government could attempt to bring the economy back toward the full-employment level of GDP _________ by taxes or ________ government
What were the monetary and fiscal policy responses to the Great Recession? What were some of the reasons suggested for why those policy responses didn’t seem to have as large an effect as
Which of the following help to explain why the aggregate demand curve slopes downward?a. When the domestic price level rises, our goods and services become more expensive to foreigners.b. When
Which of the following will shift the aggregate demand curve to the left?a. The government reduces personal income taxes.b. Interest rates rise.c. The government raises corporate profit taxes.d.
Label each of the following descriptions as being either an immediate-short-run aggregate supply curve, a short-run aggregate supply curve, or a long-run aggregate supply curve.b. A vertical line.c.
Which of the following will shift the aggregate supply curve to the right?a. A new networking technology increases productivity all over the economy.b. The price of oil rises substantially.c.
At the current price level, producers supply $375 billion of final goods and services while consumers purchase $355 billion of final goods and services. The price level is:a. above equilibrium.b. at
True or False. Decreases in AD normally lead to decreases in both output and the price level.
True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility.
What are government’s fiscal policy options for ending severe demand-pull inflation?
Which of the following would help a government reduce an inflationary output gap?a. Raising taxes.b. Lowering taxes.c. Increasing government spending.d. Decreasing government spending.
The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine
During the recession of 2007–2009, the U.S. federal government’s tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax
Last year, while a hypothetical economy was in a recession, government spending was $595 billion, and government revenue was $505 billion. Economists estimate that if the economy had been at its
Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag.a. To fight a recession, Congress has passed a bill to increase infrastructure
In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50
What do economists mean when they say that the Federal Reserve Banks are central banks, quasi-public banks, and bankers’banks?
How did the Wall Street Reform and Consumer Protection Act of 2010 try to address some of the problems that helped cause the financial crisis of 2007–2008?
Why are federal prosecutors reluctant to bring major charges against large financial firms? What was the main regulatory action of the Glass-Steagall law? Why might having many smaller financial
The three functions of money are:a. liquidity, store of value, and gifting.b. medium of exchange, unit of account, and liquidity.c. liquidity, unit of account, and gifting.d. medium of exchange, unit
Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits,$200 million of savings deposits, $40 million of small-denominated time deposits,
Recall the formula that states that $V = 1/P, where V is the value of the dollar and P is the price level. If the price level falls from 1 to 0.75, what will happen to the value of the dollar?a. It
Which group votes on the open-market operations that are used to control the U.S. money supply and interest rates?a. Federal Reserve Systemb. the 12 Federal Reserve Banksc. Board of Governors of the
An important reason why members of the Federal Reserve’s Board of Governors are each given extremely long, 14-year terms is to:a. insulate members from political pressures that could result in
Which of the following is not a function of the Fed?a. Setting reserve requirements for banks.b. Advising Congress on fiscal policy.c. Regulating the supply of money.d. Serving as a lender of last
James borrows $300,000 for a home from Bank A. Bank A resells the right to collect on that loan to Bank B. Bank B securitizes that loan with hundreds of others and sells the resulting security to a
City Bank is considering making a $50 million loan to a company named SheetOil that wants to commercialize a process for turning used blankets, pillowcases, and sheets into oil. This company’s
Does leverage increase the total size of the gain or loss from an investment, or just the percentage rate of return on the part of the investment amount that was not borrowed? How would lowering
A goldsmith has $2 million of gold in his vaults. He issues$5 million in gold receipts. His gold holdings are what fraction of the paper money (gold receipts) he has issued?a. 1/10b. 1/5c. 2/5d. 5/5
A commercial bank has $100 million in checkable-deposit liabilities and $12 million in actual reserves. The required reserve ratio is 10 percent. How big are the bank’s excess reserves?a. $100
The actual reason that banks must hold required reserves is:a. to enhance liquidity and deter bank runs.b. to help fund the Federal Deposit Insurance Corporation, which insures bank deposits.c. to
A single commercial bank in a multibank banking system can lend only an amount equal to its initial preloan ______________.a. total reservesb. excess reservesc. total depositsd. excess deposits
The two conflicting goals facing commercial banks are:a. profit and liquidity.b. profit and loss.c. deposits and withdrawals.d. assets and liabilities.
Suppose that the banking system in Canada has a required reserve ratio of 10 percent while the banking system in the United States has a required reserve ratio of 20 percent. In which country would
Suppose that the Fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be
Suppose that last year $30 billion in new loans were extended by banks while $50 billion in old loans were paid off by borrowers.What happened to the money supply?a. Increased.b. Decreased.c. Stayed
What are the two parts of the Fed’s dual mandate? How does the dual mandate relate to the bullseye chart? Which quadrants of the bullseye chart give conflicting signals to the Fed and what is the
Does the Taylor Rule put a higher weight on resolving the unemployment gap or the inflation gap? Explain.
What component of aggregate demand is influenced by technological change? What about for aggregate supply? How would improvements in productivity affect investment spending? Other things equal, how
When bond prices go up, interest rates go .a. upb. downc. nowhere
A commercial bank sells a Treasury bond to the Federal Reserve for $100,000. The money supply:a. increases by $100,000.b. decreases by $100,000.c. is unaffected by the transaction.
A bank currently has $100,000 in checkable deposits and$15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has in money-creating potential. If the reserve ratio is 14 percent,
A bank borrows $100,000 from the Fed, leaving a $100,000 Treasury bond on deposit with the Fed to serve as collateral for the loan. The discount rate that applies to the loan is 4 percent, and the
Which of the following Fed actions will increase bank lending?Select one or more answers from the choices shown.a. The Fed raises the discount rate from 5 percent to 6 percent.b. The Fed raises the
The Taylor Rule puts as much weight on closing the unemployment gap as it does on closing the inflation gap.a. justb. twicec. halfd. ten times
In 2009, the inflation rate reached negative 0.4 percent while the unemployment rate hit 10 percent. If the target inflation rate was 2 percent and the full-employment rate of unemployment was 5
True or False. A liquidity trap occurs when expansionary monetary policy fails to work because an increase in bank reserves by the Fed does not lead to an increase in bank lending.
True or False. In the United States, monetary policy has two key advantages over fiscal policy: (1) isolation from political pressure and (2) speed and flexibility.
In 1980, the U.S. inflation rate was 13.5 percent and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full employment rate of
Suppose that actual inflation is 3 percentage points, the Fed’s inflation target is 2 percentage points, and unemployment is 1 percent below the Fed’s unemployment target. According to the Taylor
What is compound interest? How does it relate to the formula Xt = (1 + i)tX0? What is present value? How does it relate to the formula Xt/(1 + i)t = X0?
What are mutual funds? What different types of mutual funds are there? And why do you think they are so popular with investors?
Identify each of the following investments as either an economic investment or a financial investment.a. A company builds a new factory.b. A pension plan buys some Google stock.c. A mining company
It is a fact that (1 + 0.12)3 = 1.40. Knowing that to be true, what is the present value of $140 received in three years if the annual interest rate is 12 percent?a. $1.40b. $12c. $100d. $112
Asset X is expected to deliver 3 future payments. They have present values of, respectively, $1,000, $2,000, and $7,000.Asset Y is expected to deliver 10 future payments, each having a present value
Tammy can buy an asset this year for $1,000. She is expecting to sell it next year for $1,050. What is the asset’s anticipated percentage rate of return?a. 0 percentb. 5 percentc. 10 percentd. 15
Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good;the other does well when the weather is bad. Sammy’s portfolio indicates
An investment has a 50 percent chance of generating a 10 percent return and a 50 percent chance of generating a 16 percent return. What is the investment’s average expected rate of return?a. 10
If an investment has 35 percent more nondiversifiable risk than the market portfolio, its beta will be:a. 35b. 1.35c. 0.35
The interest rate on short-term U.S. government bonds is 4 percent.The risk premium for any asset with a beta = 1.0 is 6 percent.What is the average expected rate of return on the market portfolio?a.
Suppose that an SML indicates that assets with a beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average
If the Fed increases interest rates, the SML will shift _______ and asset prices will _______.a. down; riseb. down; fallc. up; rised. up; fall
Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be
Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are
Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation.a. Real GDP is below the full-employment level and prices have risen recently.b. Real
Aggregate supply shocks can cause _______ inflation rates that are accompanied by _______ unemployment rates.a. higher; higherb. higher; lowerc. lower; higherd. lower; lower
Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of
Suppose that firms were expecting inflation to be 3 percent, but it actually turned out to be 7 percent. Other things equal, firm profits will be:a. smaller than expected.b. larger than expected.
Compare and contrast the market monetarist 5-percent target for nominal GDP growth with the older, simpler monetary rule advocated by Milton Friedman.
If prices are sticky and the number of dollars of gross investment unexpectedly increases, the _________ curve will shift _________.a. AD; rightb. AD; leftc. AS; rightd. AS; left
Suppose that the money supply is $1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be:a. $1 trillion.b. $4 trillion.c. $5 trillion.d. $8 trillion.
If the money supply fell by 10 percent, a monetarist would expect nominal GDP to __________.a. riseb. fallc. stay the same
An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusts back to producing at full employment, the price
Quantitatively, how important is international trade to the United States relative to the importance of trade to other nations? What country is the United States’ most important trading partner,
In 2018, manufacturing workers in the United States earned average compensation of $21.86 per hour. That same year, manufacturing workers in Mexico earned average compensation of$3.20 per hour. How
Suppose that the opportunity-cost ratio for fish and lumber is 1F ≡ 1L in Canada but 2F ≡ 1L in Iceland. Then ______ should specialize in producing fish while should specialize in producing
Suppose that the opportunity-cost ratio for watches and cheese is 1C ≡ 1W in Switzerland but 1C ≡ 4W in Japan. At which of the following international exchange ratios (terms of trade) will
True or False. If a country is open to international trade, the domestic price of a product can differ from the international price of that product.
“Exports pay for imports. Yet in 2018 the nations of the world exported about $891 billion more of goods and services to the United States than they imported from the United States.” Resolve the
Is it accurate to think of a fixed exchange rate as a simultaneous price ceiling and price floor? Explain.
If a country such as Greece that has joined the European Monetary Union can no longer use an independent monetary policy to offset a recession, what sorts of fiscal policy initiatives might it
Suppose that a country has a trade surplus of $50 billion, a balance on the capital account of $10 billion, and a balance on the current account of −$200 billion. The balance on the capital and
Suppose that the Fed is fixing the dollar-pound exchange rate at$2.50 = £1. If the Fed’s reserve of pounds falls by £500 million, by how much would the supply of dollars increase, all other
If the economy booms in the United States while going into recession in other countries, the U.S. trade deficit will tend to.a. increaseb. decreasec. remain the same
Alpha’s balance-of-payments data for 2020 are shown below. All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on current
China had a $49.1 billion overall current account surplus in 2018. Assuming that China’s net debt forgiveness was zero in 2018 (its capital account balance was zero), by how much did Chinese
Return to problem 3 and assume that the exchange rate is fixed at 110. In year 1, what is the minimum initial size of the U.S. reserve of loonies such that the United States can maintain the peg
Explain the differences among microcredit, conditional cash transfers, and unconditional cash transfers.Then explain how effective each policy has been.
A DVC’s population is growing 2 percent per year and its output is growing 3 percent per year. If the government wants to improve living standards over the coming decades, which of the following
Starbucks has $1 billion to invest. It can either purchase a rival coffee shop chain or build additional Starbucks shops. If Starbucks chooses to purchase the rival chain, what does that say about
Indicate whether each of the following statements applies to microeconomics or macroeconomics:a. The unemployment rate in the United States was 3.7 percent in December 2018.b. A U.S. software firm
Pham can work as many or as few hours as she wants at the college bookstore for $12 per hour. But due to her hectic schedule, she has just 15 hours per week that she can spend working at either the
Because investment and capital goods are paid for with savings, higher savings rates reflect a decision to consume fewer goods in the present so as to invest in more goods for the future.Households
What is an inverse relationship? How does it graph? What is a direct relationship? How does it graph?

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