Study Session 4 Sample Questions. Investment Tools Economics: Macroeconomic Analysis

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1 1 Study Session 4 Sample questions Investment Tools P1A. Taking the Nation s Economic Pulse 1. Use the following information to answer Questions 1 and 2 Consider the following data: $ Personal consumption Durable goods 567 Nondurable goods Services 197 Gross Private Investment Fixed investment 986 Inventories Government consumption and gross investment Federal State and local Net exports 567 Employee compensation 930 Proprietors income Rents Corporate profits 828 Interest income Indirect business taxes Depreciation Net income from foreigners The GDP using the expenditure approach is: A. $ B. $ C. $ D. $40 020

2 2 A. The GDP using the expenditure approach Personal consumption Durable goods 567 Nondurable goods Services 197 Gross Private Investment Fixed investment 986 Inventories Government consumption and gross investment Federal State and local Net exports (567) GDP $ Study Session 4, Taking the Nation s Economic Pulse, Los P1.A, a 2. The GDP using the resource-cost-income approach is: A. $ B. $ C. $ D. $ A.

3 3 The GDP using the resource-cost-income approach Employee compensation 930 Proprietors income Rents Corporate profits 828 Interest income Indirect business taxes Depreciation Net income from foreigners GDP $ Study Session 4, Taking the Nation s Economic Pulse, Los P1.A, a P1B. Economic Fluctuations, Unemployment, and Inflation 1. A business peak is present when: A. most businesses are operating at capacity level and real GDP is growing rapidly B. most businesses are operating at capacity level and real GDP is decreasing rapidly C. most businesses are operating at below capacity level and real GDP is growing rapidly D. most businesses are operating at capacity level and real GDP is growing rapidly D.

4 4 Business peak A business peak is present when most businesses are operating at capacity level and real GDP is growing rapidly. Study Session, Economic Fluctuations, Unemployment, and Inflation, Los P1.B, a 2. Which of the following are problems in measuring unemployment? I. In order to be classified as unemployed, one must be looking for a job II. People may be busy but their activities are outside the market labor force III. Unemployed workers who are seeking work are included in the labor force along with employed workers A. I only B. II only C. III only D. all of the above D. Problems in measuring unemployment Problems in measuring unemployment include: in order to be classified as unemployed, one must be looking for a job people may be busy but their activities are outside the market labor force unemployed workers who are seeking work are included in the labor force along with employed workers

5 5 Study Session, Economic Fluctuations, Unemployment, and Inflation, Los P1.B, b P1C. Working with our Basic Aggregate Demand / Aggregate Supply Model 1. A lower price level will have the following impact on the aggregate demand curve: I. it will increase the purchasing power of the fixed quantity of money II. it will reduce the demand for money and lower the real interest rate III. it will make domestically produced goods less expensive relative to foreign goods Which statement is TRUE? A. I only B. II only C. III only D. all of the above D. The aggregate demand curve A lower price level will have the following impact on the aggregate demand curve. it will increase the purchasing power of the fixed quantity of money it will reduce the demand for money and lower the real interest rate it will make domestically produced goods less expensive relative to foreign goods

6 6 Study Session 4, Working with our Basic Aggregate Demand / Aggregate Supply Model, Los P1.C, a 2. The short run aggregate supply curve indicates: A. the relationship between the price level and quantity of output after decision makers have had sufficient time to adjust their prior commitments where possible in the light of any unexpected changes in market prices B. the relationship between the price level and quantity of output before decision makers have had sufficient time to adjust their prior commitments where possible in the light of any unexpected changes in market prices C. the various quantities of goods and services that domestic firms will demand in response to changing demand conditions that alter the level of prices in the goods and services market D. the various quantities of goods and services that domestic firms will supply in response to changing demand conditions that alter the level of prices in the goods and services market D. The short run aggregate supply curve The short run aggregate supply curve indicates the various quantities of goods and services that domestic firms will supply in response to changing demand conditions that alter the level of prices in the goods and services market

7 7 Study Session 4, Working with our Basic Aggregate Demand / Aggregate Supply Model, Los P1.C, a P1D. Keynesian Foundations of Modern Macroeconomics 1. The Keynesian model assumes that: A. there is a negative relationship between consumption and income B. there is an inverse relationship between consumption and income C. there is a positive relationship between consumption and income D. there is no relationship between consumption and income C. The Keynesian model The Keynesian model assumes that there is a positive relationship between consumption and income. Study Session 4, Keynesian Foundations of Modern Macroeconomics, Los P1.D, a 2. Your income increases by $300 and you increase your current consumption by $200. Your marginal propensity to consume is equal to: A B. 1 C. -1 D. 0.67

8 8 D. Calculating marginal propensity to consume MPC = Additional consumption Additional income = 200/300 = 0.67 Study Session 4, Keynesian Foundations of Modern Macroeconomics, Los 1.D, d 1A Learning Outcomes - Fiscal Policy 1. Discretionary fiscal policy can be defined as: A. a situation in which total government spending exceeds total government revenue during a specific time period, usually one year B. a change in laws or appropriation levels that alters government revenues and/or expenditures C. a situation in which total government spending is less than total government revenue during a time period, usually one year. D. an increase in government expenditures and/or a reduction in tax rates such as that the expected size of the budget deficit expands B. Discretionary Fiscal Policy Discretionary fiscal policy can be defined as a change in laws or appropriation levels that alters government revenues and/or expenditures.

9 9 Study Session 4, 2003, Fiscal Policy, LOS 1A,c 2. The major advantage of automatic stabilizers is that: A. they institute crowding out policy without the delays associated with policy changes that require legislative action B. they institute countercyclical fiscal policy without the delays associated with policy changes that require legislative action C. they institute cyclical fiscal policy without the delays associated with policy changes that require l legislative action D. they institute recessionary fiscal policy without the delays associated with policy changes that require legislative action B. Automatic stabilizers The major advantage of automatic stabilizers is that: they institute countercyclical fiscal policy without the delays associated with policy changes that require legislative action. Study Session 4, 2003, Fiscal Policy, LOS 1A,e

10 10 3. Based on research that has been done regarding the relationship between deficits and interest rates it can be concluded that: A. year-to-year data indicate a strong relationship between budget deficits and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model B. year-to-year data indicate a loose relationship between budget surpluses and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model C. year-to-year data indicate a loose relationship between budget deficits and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model D. year-to-year data indicate a loose relationship between budget deficits and interest rates but over a more lengthy period, persistently large budget deficits do lead to lower interest rates as implied by the crowding-out model C. The relationship between deficits and interest rates Based on research that has been done regarding the relationship between deficits and interest rates it can be concluded that year-to-year data indicate a loose relationship between budget deficits and interest rates but over a more lengthy period, persistently large budget deficits do lead to higher interest rates as implied by the crowding-out model. Study Session 4, 2003, Fiscal Policy, LOS 1A,g

11 11 1B. Money and the Banking System 1. Medium of exchange can be defined as: A. an asset that will allow people to transfer purchasing power form one period to the next. B. an asset that can be easily and quickly converted to purchasing power without loss of value C. an asset that is used to buy and sell goods or services D. the unit of measurement used by people to post prices and keep track of revenues and costs C. Medium of exchange Medium of exchange can be defined as an asset that is used to buy and sell goods or services Study Session 4, Money and the Banking System, Los 1.B, a 2. An asset that will allow people to transfer purchasing power from one period to the next is known as a: A. liquid asset B. unit of account C. store of value D. medium of exchange C.

12 12 Store of value An asset that will allow people to transfer purchasing power from one period to the next is known as a store of value. Study Session 4, Money and the Banking System, Los 1.B, a 3. A central bank can control the money of stock by: I. establishing reserve requirements for depository institutions II. buying and selling government securities in the open market III. setting the interest rate at which it will loan funds to commercial banks and other depository institutions Which of the following is FALSE? A. I only B. II only C. III only D. none D. Central bank A central bank can control the money of stock by: establishing reserve requirements for depository institutions buying and selling government securities in the open market setting the interest rate at which it will loan funds to commercial banks and other depository institutions

13 13 Study Session 4, Money and the Banking System, Los 1.B, b 1C. Modern Macroeconomics: Monetary Policy 1. When real interest rates fall as a result of an unexpected expansionary monetary policy of government: A. aggregate demand decreases leading to both an increase in current output and higher prices in the short run B. aggregate demand increases leading to both an increase in current output and higher prices in the short run C. aggregate demand increases leading to both a decrease in current output and higher prices in the short run D. aggregate demand increases leading to both an increase in current output and higher prices in the long run B. Unexpected expansionary monetary policy When real interest rates fall as a result of an unexpected expansionary monetary policy of government, aggregate demand increases leading to both an increase in current output and higher prices in the short run. Modern Macroeconomics: Monetary Policy, Los 1.C, b

14 14 2. Consider the following statements: Aggregate demand increases when the Fed increases bond purchases unexpectedly. The factors that contribute to the increase in aggregate demand are: I. The lower real interest rate will make current investment and consumption cheaper relative to future spending II. The lower interest rate may also lead to an outflow of capital, which will cause the dollar to depreciate and thereby stimulate the net export component of aggregate demand III. The lower interest rates will tend to increase asset prices, which will also stimulate current demand Which of the following factors is true? A. I only B. II only C. III only D. all of the above D. Factors that contribute to an increase in aggregate demand Aggregate demand increases when the Fed increases bond purchases unexpectedly. The factors that contribute to the increase in aggregate demand are: The lower real interest rate will make current investment and consumption cheaper relative to future spending The lower interest rate may also lead to an outflow of capital, which will cause the dollar to depreciate and thereby stimulate the net export component of aggregate demand The lower interest rates will tend to increase asset prices, which will also stimulate current demand

15 15 Modern Macroeconomics: Monetary Policy, Los 1.C, b 1D. Stabilization Policy, Output, and Employment 1. According to the adaptive expectations hypothesis: A. decision makers weigh all available evidence, including information concerning the probable effects of current and future economic policy, when they form their expectations about future economic events B. decision makers will quickly anticipate the inflationary impact of a demand-stimulus policy. C. any systematic policy will be rendered ineffective once decision makers figure out the policy pattern and adjust their decision making in light of its expected effects D. decision makers believe that the best indicator of the future is what has happened in the recent past D. The adaptive expectations hypothesis According to the adaptive expectations hypothesis decision makers believe that the best indicator of the future is what has happened in the recent past. Stabilization Policy, Output, and Employment, Los 1.D, d

16 16 2. The hypothesis that economic decision makers weigh all available evidence, including information concerning the probable effects of current and future economic policy, when they form their expectations about future economic events is known as: A. adaptive expectations hypothesis B. rational expectations hypothesis C. the Emerging Consensus View D. comparative advantage B. Rational expectations hypothesis The hypothesis that economic decision makers weigh all available evidence, including information concerning the probable effects of current and future economic policy, when they form their expectations about future economic events is known as rational expectations hypothesis. Stabilization Policy, Output, and Employment, Los 1.D, d