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Fiscal policy

1. Fiscal policy refers to:

A. the control of interest rates.
B. the control of government spending and taxations.
C. the control of the quantity of money.
D. the control of interest rates and of government spending.

2. Controlling interest rates is an example of:
A. fiscal policy.
B. tax policy.
C. monetary policy.
D. exchange rate policy.

3. John Maynard Keynes believed that the:
A. government should actively try to mitigate the effects of recessions by using fiscal and monetary policies.
B. government should not interfere with the economy and should let the economy self correct.
C. government should only intervene when there is a boom but let the recession run its course.
D. government should not use fiscal and monetary policies, as these policies have long term adverse effect on the economy.

4. Inflation:
A. is defined as a movement of the economy towards economic growth.
B. can be thought of as an increase in a nation’s standard of living.
C. is a sustained fall in the overall level of prices.
D. is an increase in the overall level of prices.

5. If wages grew at a 5% rate last year and average prices grew at a 3% rate, then the average worker is:
A. better off.
B. worse off.
C. no better or worse off.
D. unaffected.

6. If a country sold more goods and services to the rest of the world than they purchased from the other countries, then the country has a:
A. trade deficit.
B. budget deficit.
C. trade surplus.
D. budget surplus.
7. Monetary policy involves:
A. changes in government spending.
B. changes in government tax receipts.
C. changes in the quantity of money.
D. changes in tax rates.

8. A business cycle is:
A. a very deep and prolonged economic downturn.
B. a period in which output and employment are rising.
C. a period in which output and employment are falling.
D. a short-run alternation between economic upturns and downturns.

9. An expansion is a period in which:
A. output declines.
B. the price level falls.
C. output rises.
D. unemployment rises.

10. Inflation affects people adversely because:
A. nominal income falls during inflation.
B. purchasing power tends to increase during inflation
C. budget deficit increases during inflation.
D. inflation causes money to lose its value over time if the overall price level is rising.

11. A trade surplus occurs:
A. during economic contractions only.
B. when the value of goods and services a country imports exceeds the value of goods and services it exports.
C. when the value of goods and services a country imports is less than the value of goods and services it exports.
D. when unemployment is rising

12. Goods and services that are produced in a foreign country but consumed domestically are called:
A. exports.
B. imports.
C. investment goods.
D. consumer durables.

13. (Table: Calculating GDP) Using the information in the table provided, which of the following is the correct calculation for GDP in 2008?

Table: Calculating GDP

A. $47,475
B. $12,200
C. $21,485
D. $34,085

14. (Table: GDP) The GDP for 2007, was:
Table: GDP

A. $94 billion.
B. $188 billion.
C. $168 billion.
D. $139 billion.

15. Which of the following best represents the equation for GDP?
A. GDP = C+ I + G – X + IM
B. GDP = C + I + G + X – IM
C. GDP = C + I + G + Taxes – Value Added
D. GDP = C + I + G + Taxes + X + IM

16. Which of the following would NOT be a part of GDP?
A. used car sales.
B. new residential construction
C. a new truck purchased by a building contractor
D. telephone service purchased for a home

17. Which of the following is NOT included in investment spending in the national income accounts?
A. new residential construction
B. the purchase of machinery and other productive physical capital
C. the purchase of stocks and bonds by a business
D. spending on inventories

18. Gross Domestic Product (GDP) is:
A. the total dollar value of all transactions in the economy in a year.
B. the total value of all final goods and services produced in the economy in a year.
C. the total value of all final goods and services produced by Americans at home and abroad in a year.
D. the total dollar value of all goods produced in the economy in a year.

19. Real GDP is nominal GDP adjusted for:
A. double counting.
B. changes in prices.
C. population.
D. imports

20. Suppose that nominal GDP is $1000 in 2006 and nominal GDP is $1500 in 2007. If the overall price level ____ between 2006 and 2007, we could say that real GDP _____.
A. increased by 50%; stayed constant.
B. increased by less than 50%; decreased.
C. increased by more than 50%; increased.
D. increased by 50%; increased.

21. Inflation is when there is:
A. a rising aggregate price level.
B. an expansion of output.
C. a rise in wages.
D. a rise in the unemployment rate.

22. (Table: The Consumer Price Index) The approximate rate of inflation in Year 3 is _____ percent.

A. 5
B. 10
C. 19
D. 20

23. An example of investment spending would be:
A. purchase of a bond.
B. purchase of a loaf of bread.
C. purchase of a new productive machine.
D. all of the above.

24-28 Use this scenario to answer questions 24-27.
Scenario: Real GDP
Suppose that an economy produces just two goods: golf balls and pizzas. In Year 1 an economy produces 100 golf balls that sell for $3 each and 75 pizzas that sell for $8 each. The next year the economy produces 110 golf balls that sell for $3.25 each and 80 pizzas that sell for $9 each.

24. The value of nominal GDP in Years 1 and 2 respectively is:
A. $900; $1,077.50.
B. $900; $990.
C. $180,000; $257,400.
D. $1,000; $1,005.

25. (Scenario: Real GDP) Using Year 1 as the base year, real GDP in Year 2 is:
A. 900.
B. 970.
C. 1,000.
D. 1,077.50

26. (Scenario: Real GDP) The growth rate of nominal GDP from Year 1 to Year 2 is:
A. 10%.
B. 7.8%
C. 19.7%
D. 8.8%

27. Using Year 1 as the base year, the growth rate of real GDP from Year 1 to Year 2 is:
A. 10%.
B. 7.8%
C. 19.7%
D. 8.8%

28. If the CPI is 120 in Year 1 and 150 in Year 2, then the rate of inflation from Year 1 to Year 2 is _____.
A. 10%
B. 20%
C. 25%
D. 50%

29. (Table: CPI II) Calculate by how much the prices changed between 2007 and 2008.

A. prices fell by 4%.
B. prices increased by 5%.
C. prices fell by 5%.
D. prices increased by 4%

30. In the consumer price index of the United States:
A. the current cost of a basket of goods is compared to the base-period cost of the same basket of goods.
B. calculation of the base-period index is always equal to 100.
C. the base period is 1982–1984.
D. the current cost of a basket of goods is compared to the base-period cost of the same basket of goods, the calculation of the base-period index is always equal to 100, and the base period is 1982-1984.

31. Calculating GDP via the factor payments approach would include payments such as:
A. wages, interest payments, rent and profits.
B. taxes, wages, interest payments and rents.
C. rents, profits, value added adjustments, and taxes.
D. consumption, investment and government.

32. Employment is:
A. the total labor force.
B. the total population of working age.
C. the total number of people actively working.
D. the total number of people not unemployed.

33. Unemployment is:
A. the percent of the labor force that is unemployed.
B. the number of people unemployed.
C. the ratio of the labor force to the number of people unemployed.
D. the average length of time someone is unemployed.

34. If a country has a working-age population of 200 million, 135 million people with jobs, and 15 million people unemployed and seeking employment, then its unemployment rate is:
A. 4%.
B. 7.5%
C. 10%
D.67.5%

35. The labor force is considered to be:
A. all those employed.
B. those who are employed plus those who are unemployed.
C. the population of the nation.
D. those not frictionally unemployed plus all others employed.

36. (Table: Unemployment and Employment Data) According to the accompanying table, the unemployment rate for this economy is:

A. 2.9%
B. 4.8%
C. 5.0%
D. 5.3%

37. The official unemployment rate ignores:
A. people with professional jobs.
B. people who work on commission.
C. discouraged workers who have given up looking for a job.
D. people with professional jobs, people who work on commission and discouraged workers who have given up looking for a job.
38. For most of U.S. modern economic history, when the unemployment rate is _____, real GDP is _____
A. falling; rising.
B. falling; falling.
C. rising; unchanged.
D. rising; rising.

39. Structural unemployment is:
A. unemployment that results when there are more people seeking jobs than there are jobs available at the current wage rate.
B. unemployment experienced by those entering the labor force for the first time.
C. zero when the economy is in full employment.
D. caused by short run economic fluctuations.

40. Frictional unemployment exists because of all of the following except:
A. new jobs are continuously being created.
B. some old jobs are always being destroyed.
C. new workers are always entering the labor market.
D. the minimum wage.

41. The labor demand curve is negatively sloped because:
A. more people are willing to work at lower wages than at higher wages.
B. more people are willing to work at higher wages than at lower wages.
C. employers are willing to hire more people at lower wages.
D. employers are willing to hire more people at higher wages.

42. The labor supply curve is positively sloped because:
A. more people are willing to work at lower wages than at higher wages.
B. more people are willing to work at higher wages than at lower wages.
C. employers are willing to hire more people at lower wages.
D. employers are willing to hire more people at higher wages.

43-47 Use the following graph for question 43-47, where labor supply is equal to labor force and labor demand is equal to employment:

 

43. (Figure: Labor Market) The equilibrium wage rate is:
A.16
B.14
C.15
D.17

44. At the equilibrium wage rate the size of the labor force is:
A. 80,000
B. 110,000
C. 100,000
D. 90,000
45. (Figure: Labor Market) At an efficiency wage of $16, what is the size of the labor force?
A. 80,000
B. 110,000
C. 100,000
D. 90,000

46. (Figure: Labor Market) If firms decide to pay an efficiency wage of $16, what will be the level of employment = labor demand?
A. 80,000
B. 110,000
C. 100,000
D. 90,000

47. (Figure: Labor Market) At an efficiency wage of $16, what is the unemployment rate?
A.10%.
B. 20%
C. 27%
D. 30%

48-49Use this scenario to answer questions 49–50.
Scenario: Employment in Youville
The country of Youville is made up of 10,000 people. Of this population, 1,000 residents are below the age of 16 and 2,000 have given up looking for work. Currently, 500 people are unemployed but are actively looking for work; 2,500 work part time, and the remaining number are fully employed.

48. (Scenario: Employment in Youville) What is the unemployment rate in Youville?
A.7.14%
B. 4.25%
C.11.11%
D. 2%.

49. (Scenario: Employment in Youville) Suppose the number of workers who had given up looking for work start looking for work. What happens to the unemployment rate?
A. The unemployment rate will increase.
B. The unemployment rate will decrease.
C. The unemployment rate is unaffected by this change.
D. It is uncertain what will happen to the unemployment rate.

50. The presence of discouraged workers causes the:
A. actual unemployment rate to increase when the workers are not included in the unemployment calculation.
B. actual unemployment rate to understate the true level of unemployment
C. actual unemployment rate to overstate the true level of unemployment.
D. natural rate of unemployment to increase.

51. The sum of frictional and structural unemployment make up the:
A. actual unemployment level.
B. cyclical amount of unemployment.
C. natural rate of unemployment.
D. amount of unemployment in an economy during a recession.

52. Alex expects the inflation rate to be 4%. If Alex borrows money at a nominal interest rate of 5%, his real interest rate is:
A. 9%
B. 0.8%
C. 1%
D. 5%

53. Which of the following is true?
A. Unexpected inflation benefits lenders and hurts borrowers.
B. Unexpected inflation benefits borrowers and hurts lenders.
C. Unexpected inflation benefits borrowers but does not affect lenders.
D. Unexpected deflation benefits lenders but does not affect borrowers.

54. Which of the following annual rates of inflation would be called hyperinflation?
A. 5%
B. 10%
C. 25%
D. 1,000%

55. When there is deflation in the economy:
A. the general price level falls.
B. the general price level increases.
C. the interest rate rises.
D. the general price level becomes negative.

56. Suppose the real interest rate is 2.1% and the nominal interest rate is 5.4%. Then the inflation rate is:
A. 7.5%
B. 3.3%
C. -3.3%
D. 2.1%
57. Factors which influence productivity and therefore growth are:
A. physical and human capital per worker and technological advances.
B. government independence.
C. more government intervention in the market place.
D. increased consumption and less investment spending.

58. Investment spending refers to:
A. buying stocks.
B. buying newly issued shares of stock.
C. adding to physical capital.
D. adding to one’s retirement account.
59-62. Use this scenario to answer questions 59-62.
Scenario: Closed Economy S = I
In a closed economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion.

59. How much is private saving?
A. $4 trillion.
B. $2.5 trillion.
C. $3.5 trillion.
D. -0.5 trillion.
60. What is the government budget balance?
A. a surplus of $1.5 trillion.
B. a deficit of $1.5 trillion.
C. a surplus of $0.5 trillion.
D. a deficit of $0.5 trillion.

61. How much is national saving?
A. $3.5 trillion.
B. $3 trillion.
C. $2.5 trillion.
D. $ 2 trillion.

62. How much is investment spending?
A. $3.5 trillion.
B. $3 trillion.
C. $2.5 trillion.
D. $ 2 trillion.
63. National savings is the sum of private savings and:
A. private consumption.
B. government tax revenue.
C. the budget balance.
D. trade surplus.
64. The savings-investment spending identity says that savings and investment spending are:
A. always equal because private savings match government savings.
B. equal as long as there is no trade surplus or deficit.
C. always equal for the economy as a whole.
D. equal as long as there is not government budget deficit or surplus.

65-68 Use the following figure to solve questions 65-68:
Figure: Loanable Funds
65. The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $150?
A. Consumers have increased consumption as a fraction of disposable income.
B. Businesses have become more optimistic about the return on investment spending.
C. The federal government has a budget surplus rather than a budget deficit.
D. There has been an increase in capital inflows from other nations.

66. The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 5% and a new equilibrium quantity of loanable funds of $150?
A. Consumers have increased consumption as a fraction of disposable income.
B. Businesses have become more optimistic about the return on investment spending.
C. The federal government has a budget surplus rather than a budget deficit.
D. There has been an increase in capital inflows from other nations.

67. The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 8% and a new equilibrium quantity of loanable funds of $75?
A. Capital inflows from foreign citizens are declining.
B. The federal government is running a budget deficit rather than a surplus.
C. Profit expectations are less optimistic for business investments.
D. The government has eliminated taxes on income from interest earned.

68. The accompanying graph shows the market for loanable funds in equilibrium. Which of the following might produce a new equilibrium interest rate of 4% and a new equilibrium quantity of loanable funds of $75?
A. Profit expectations are less optimistic for business investments.
B. Capital inflows from foreign citizens are declining.
C. The federal government is running a budget deficit rather than a surplus.
D. The government has eliminated taxes on income from interest earned.

69. Governments can engage in saving when:
A. taxes are less than expenditures.
B. taxes are greater than expenditures.
C. the government borrows to finance its expenditures.
D. the president insists that Congress balance the budget.

70. The Fisher Effect states that:
A. the nominal rate of interest is unaffected by the change in expected inflation.
B. the nominal rate of interest is unaffected by the change in unexpected inflation.
C. the expected real rate of interest is unaffected by the change in expected inflation.
D. the expected real rate of interest increases by one percentage point for each percentage change in expected inflation.

71. Suppose the lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate is equal to:
A. 3%.
B. 9%.
C. 12%.
D. 6%

72. The term “liquidity” means:
A. that the asset is used in a barter exchange.
B. that the asset is used as the medium of exchange.
C. that the asset is readily convertible to cash.
D. that the market interest rate is too low.

Quantitative Problems:

1 – Consider an economy that produces and consumes bread and automobiles. Sales and price data for these products for two different years are shown below:

Year 2000 Year 2010
Price of an automobile $50 000 $60 000
Price of a loaf of bread $10 $20
Number of automobiles produced 100 cars 120 cars
Number of loaves of bread produced 500 000 loaves 400 000 loaves

a) What is the nominal GDP in 2000 and 2010?
b) Using the year 2000 as the base year, calculate the real GDP in 2010.
c) What is the GDP deflator in 2010?
d) What is the inflation rate between 2000 and 2010?

2 –
“President Bush is again urging that the tax cuts enacted in 2001 and 2003 be made
permanent… The President and members of the Administration argue that the tax cuts have produced a robust economic expansion and should therefore be made permanent for the sake of the economy…However, making the tax cuts permanent without paying for them would dramatically increase deficits and debt in future decades…” (Center for Budget and Policy Priorities, 2007)

Using our theoretical model, explain the effects of permanent tax cuts on the following variables. Explain your reasoning fully in order to get full credits.

a) Public saving
b) Private saving
c) National saving
d) Investment

3 – Consider an economy described by the following equations:
Y = C + I + G
Y = 5,000
G = 1,000
T = 1,000
C = 250 + 0.75 (Y – T)
I = 1,000 – 50 r

a) In this economy, compute private saving, public saving, and national saving.
b) Find the equilibrium interest rate.
c) Now suppose that G rises to 1,250. Compute private saving, public saving, and national income.
d) Find the new equilibrium interest rate.

4 – In the country of Wiknam, the velocity of money is constant. Real GDP grows by 6 percent per year, the money stock grows by 11 percent per year, and the nominal interest rate is 9 percent. What is the real interest rate?
5-Suppose V is constant, M is growing 5% per year, Y is growing 2% per year,
and r = 4.
a. Solve for i.
b. If the Fed increases the money growth rate by 4 percentage points per year, find Di.
c. Suppose the growth rate of Y falls to 2%per year. What will happen to p ?
What must the Fed do if it wishes to keep p constant?

 

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