Intro to Macroeconomics Take-home Test 2 Fall 2013

Due Nov 7 2013 in Class

Name__________________________________Section______
True/False 25%
Indicate whether the statement is true or false.
____ 1 Colle!e tuition costs have risen "aster than #rices in !eneral "rom 1$7% to 2000
____ 2 &ll increases that take #lace in the level o" human ca#ital take #lace in schools
____ 3 & nation's ca#ital consists mainl( o" stocks) *on+s) an+ other "inancial assets
____ , -hen the econom( +evotes more o" its resources to investment !oo+s) it must +evote "e.er resources to
consumer !oo+s
____ / In the 0nite+ States) the .a!e rates "or hi!h school !ra+uates are !ro.in! "aster than the .a!e rates "or
colle!e !ra+uates
____ 1 Investment s#en+in!) ca#ital "ormation) an+ ra#i+ technolo!ical #ro!ress are +irectl( relate+
____ 7 Forei!n +irect investment !enerall( lea+s to technolo!ical a+vancements in #oorer countries
____ % 2overnment #urchases are inclu+e+ in national #ro+uct
____ $ &n economic *oom in one countr( usuall( causes a recession in other countries
____ 10 I" the econom( is su""erin! a recession) inventories are #ro*a*l( "allin!
____ 11 -hen income rises) total e3#en+itures remain constant
____ 12 -hen 2D4 +ecreases) consum#tion s#en+in! increases
____ 13 &n e3#en+iture sche+ule sho.s the relationshi# *et.een 2D4 an+ total out#ut
____ 1, 5eaka!es "rom the circular "lo. inclu+e savin! an+ im#orts
____ 1/ 5eaka!es are o""set *( investment an+ !overnment s#en+in! in the circular "lo. mo+el
____ 11 67uili*rium is the #oint .here total s#en+in! e7uals total out#ut) or 2D4
____ 17 Total e3#en+itures can *e .ritten as C 8 I 8 2 8 9: - IM;
____ 1% & !iven income-e3#en+iture +ia!ram al.a(s assumes a varia*le #rice level
____ 1$ The a!!re!ate +eman+ curve has an u#.ar+ slo#e +ue to the #ositive relationshi# *et.een the #rice level an+
a!!re!ate 7uantit( +eman+e+
____ 20 & chan!e in the #rice level .ill cause a shi"t in the e3#en+iture sche+ule
____ 21 The e7uili*rium level o" 2D4 is al.a(s accom#anie+ *( "ull em#lo(ment an+ sta*le #rices
____ 22 Inventor( re+uctions cause+ *( stron! +eman+ are si!nals to retailers to or+er more #ro+ucts
____ 23 In a ca#italist market econom() recessions an+ in"lation can occur *ecause o" coor+ination "ailures
____ 2, The late 1$$0s can *e accuratel( +escri*e+ as a +eca+e o" sta!"lation
____ 2/ In#ut #rices are "i3e+ "or a #erio+ o" time an+ this causes "irms to increase #ro+uction as #rices increase
____ 21 The a!!re!ate su##l( curve slo#es u#.ar+ *ecause as #rice rises the 7uantit( o" out#ut su##lie+ rises
____ 27 I" the sellin! #rice "alls an+ in#ut costs are "i3e+) #ro"it mar!ins .ill increase
____ 2% & #rice level lo.er than e7uili*rium .ill cause 7uantit( su##lie+ to e3cee+ 7uantit( +eman+e+
____ 2$ In"lation re+uces the multi#lier e""ect *( re+ucin! consumers' .ealth an+ #urchasin! #o.er
____ 30 &n in"lationar( !a# e3ists .hen consumers an+ *usinesses are +eman+in! more out#ut than the econom( is
ca#a*le o" #ro+ucin! at "ull em#lo(ment
____ 31 <ver time) a!!re!ate +eman+ an+ a!!re!ate su##l( !ro. *( the same amount
____ 32 2overnment s#en+in! in"luences s#en+in! in+irectl(
____ 33 2overnment #urchases an+ income ta3es have the same e""ect on the multi#lier
____ 3, Trans"er #a(ments e3actl( re#lace the income lost *ecause o" ta3es
____ 3/ &n increase in income ta3es .as #art o" 4resi+ent 2eor!e - =ush's #lan in 2001 to increase a!!re!ate
+eman+
Multiple Choice 25%
Identify the choice that best completes the statement or answers the question.
____ 31 In !eneral) as the amount o" la*or in#ut increases) the amount o" out#ut
a increases
* +ecreases
c remains constant
+ increases onl( i" the ca#ital stock also increases
____ 37 Com#are+ to .orkers in richer countries) .orkers in +evelo#in! countries have
a lo.er #ro+uctivit( an+ lo.er .a!es
* hi!her #ro+uctivit( an+ hi!her .a!es
c hi!her #ro+uctivit( *ut lo.er .a!es
+ the same #ro+uctivit( *ut lo.er .a!es
____ 3% <n-the->o* trainin! is the one area o" e+ucation in the 0nite+ States most in"luence+ *( the
a *usiness sector
* !overnment sector
c househol+ sector
+ "orei!n sector
____ 3$ ?i!her rates o" investment s#en+in! contri*ute most to hi!her levels o"
a #olitical #ro!ress
* consum#tion s#en+in!
c technolo!ical #ro!ress
+ !overnment +evelo#ment
____ ,0 2overnments can a""ect the level o" a!!re!ate +eman+ in a +irect .a( *( chan!in!
a !overnment s#en+in!
* e3#orts
c ta3es
+ trans"er #a(ments
____ ,1 -hich o" the "ollo.in! is consi+ere+ to *e an investment in economists@ #oint o" vie.A
a Serena *u(s *on+s issue+ *( Citi*ank
* Bohn constructs a ne. house
c Cenus invests hun+re+ thousan+ +ollars in =ear Stearns stock
+ &llen sells the ol+ truck he use+ "or trans#ortin! !oo+s
____ ,2 -hich o" the "ollo.in! .oul+ *e a++e+ to 0S national incomeA
a an &merican consumer *u(in! French .ine
* an &merican *usiness sellin! aircra"t to =ritish &ir.a(s
c a S.e+ish "irm sellin! mo*ile #hones to &mericans
+ a French "irm *u(in! a S.e+ish cellular #hone
____ ,3 I" #ersonal ta3es are increase+ *( D10 *illion) .e can e3#ect that consumers .ill re+uce
a s#en+in! *( D10 *illion
* s#en+in! *( more than D10 *illion
c s#en+in! *( less than D10 *illion
+ savin! *( D10 *illion
e savin! *( more than D10 *illion
____ ,, In 1$13) !overnment economists assume+ that the M4C "or the 0nite+ States .as a##ro3imatel( 0$0 I"
ta3es .ere cut *( D$ *illion) then consumer e3#en+itures .oul+ *e e3#ecte+ to
a +ecrease *( D$0 *illion
* increase *( D$0 *illion
c +ecrease *( D%1 *illion
+ increase *( D%1 *illion
____ ,/ & movement u#.ar+ alon! the consum#tion "unction can *e cause+ onl( *( a9n;
a increase in +is#osa*le income
* +ecrease in +is#osa*le income
c +ecrease in the #rice level
+ increase in the #rice level
____ ,1 Su##ose the stock market rises) causin! a ra#i+ increase in consumers' .ealth This .oul+ lea+ to
a a +o.n.ar+ movement alon! the consum#tion "unction
* a +o.n.ar+ shi"t o" the consum#tion "unction
c an u#.ar+ movement alon! the consum#tion "unction
+ an u#.ar+ shi"t o" the consum#tion "unction
____ ,7 The lar!est income com#onent in the national income accounts is
a .a!es
* rents
c cor#orate #ro"its
+ interest
____ ,% The e3#en+iture sche+ule .ill shi"t u#.ar+ .hen
a net e3#orts +ecrease
* net e3#orts increase
c total im#orts increase
+ total e3#orts +ecrease
____ ,$ The #rice level e""ects consumer s#en+in! throu!h chan!es in real
a +is#osa*le income
* interest rates
c .ealth
+ 2D4
____ /0 The recessionar( !a# is the
a amount o" unem#lo(ment com#ensation re7uire+ +urin! a recession
* *u+!et +e"icit encountere+ +urin! a recession
c amount o" !overnment s#en+in! nee+e+ to en+ a recession
+ +istance *et.een the e7uili*rium level o" out#ut an+ the "ull em#lo(ment level o" out#ut
____ /1 & recessionar( !a# e3ists .hen the e7uili*rium level o" 2D4
a "alls short o" #otential 2D4
* e7uals #otential 2D4
c e3cee+s #otential 2D4
+ causes inventor( levels to "all
Table 9-1
<ut#ut Consum#tion Investment Net 63#orts
1000 %00 /00 100
1/00 1200 /00 100
2000 1100 /00 100
2/00 2000 /00 100
3000 2,00 /00 100
3/00 2%00 /00 100
,000 3200 /00 100
____ /2 In Ta*le $-1) inventories .ill *e increasin! as lon! as out#ut is a*ove
a 1)000
* 1)/00
c 2)000
+ 3)000
____ /3 I" the multi#lier is , an+ real 2D4 increases *( D/20 *illion) the increase in investment s#en+in! must have
*een
a D110 *illion
* D120 *illion
c D130 *illion
+ D1,0 *illion
____ /, In the stan+ar+ ,/-+e!ree line e3#en+iture mo+el) the C 8 I line an+ the C line are #arallel *ecause)
a all I is assume+ to *e autonomous
* all I is assume+ to *e in+uce+
c consum#tion +e#en+s on +is#osa*le income
+ I rises .ith 2D4 at the same rate as C
____ // The slo#e o" the a!!re!ate su##l( curve is
a #er"ectl( vertical
* #er"ectl( horiEontal
c u#.ar+
+ +o.n.ar+
____ /1 The <46C #ro+uction cuts o" 1$$$-2000 increase+ ener!( #rices an+ cause+ the a!!re!ate su##l( curve to
a shi"t out.ar+
* shi"t in.ar+
c *ecome "latter
+ *ecome stee#er
____ /7 In res#onse to the +eman+s o" environmentalists) lar!e sections o" tim*erlan+s are #ut o"" limits to lo!!in!
-hat e""ect .ill this have on the a!!re!ate su##l( curveA
a Shi"t it out.ar+
* Shi"t it in.ar+
c Move the econom( u# alon! the curve
+ Move the econom( +o.n alon! the curve
____ /% &s lon! as the a!!re!ate su##l( curve is u#.ar+ slo#in!) an increase in a!!re!ate +eman+ .ill increase
a real .ealth
* #rice levels
c unem#lo(ment
+ net e3#orts
____ /$ ?o. is it #ossi*le "or the econom( to have a +e"lationar( !a#A
a 67uili*rium is at a 2D4 level *elo. "ull em#lo(ment
* 67uili*rium is at a 2D4 level e7ual to "ull em#lo(ment
c 67uili*rium is at a 2D4 level a*ove "ull em#lo(ment
+ 2D4 is risin! at "ull em#lo(ment
e 2D4 is "allin! at "ull em#lo(ment
____ 10 I" the #rice level +oes not "all or onl( "alls ver( slo.l() then the result .ill *e a #rolon!e+ #erio+ o"
a in"lation .henever su##l( increases
* #ro+uction *elo. #otential 2D4
c #ro+uction a*ove #otential 2D4
+ ra#i+ #rice increases .hen +eman+ chan!es
____ 11 &n e7uili*rium #oint *e(on+ a #otential 2D4 is terme+ as
a +e"lationar( !a#
* recessionar( !a#
c in"lationar( !a#
+ acceleration !a#
____ 12 &n in"lationar( !a# .ill e3ist .hen
a a!!re!ate +eman+ !ro.s more slo.l( than a!!re!ate su##l(
* there is +o.n.ar+ #ressure on #rices
c e3#en+itures are not e7ual to a!!re!ate +eman+
+ e7uili*rium 2D4 is !reater than "ull em#lo(ment 2D4
____ 13 & #erio+ o" sta!"lation is the normal result o" a #erio+ o"
a e3cess a!!re!ate su##l(
* +e"icient a!!re!ate +eman+
c e3cess a!!re!ate +eman+
+ hi!h unem#lo(ment rates
____ 1, Fiscal #olic( consists o"
a ta3es an+ interest rates
* !overnment #urchases an+ +e"ense s#en+in!
c the mone( su##l( an+ ta3es
+ ta3es an+ !overnment s#en+in!
____ 1/ & chan!e in a "i3e+ ta3 .ill cause the consum#tion sche+ule to
a *ecome stee#er
* *ecome "latter
c shi"t in a #arallel manner
+ remain "i3e+ as the econom( moves alon! the sche+ule
Figure 1
____ 11 In Fi!ure 1) to achieve e7uili*rium at #otential 2D4 the !overnment coul+
a increase ta3es
* +ecrease trans"er #a(ments
c increase !overnment #urchases
+ None o" the a*ove is correct
____ 17 The central i+ea o" su##l(-si+e ta3 cuts is that certain t(#es o" ta3 cuts .ill increase
a a!!re!ate +eman+
* a!!re!ate su##l(
c the su##l( o" im#orts
+ the su##l( o" mone(
____ 1% Fe+eral *u+!et +e"icits are o"ten increase+ *( su##l(-si+e #olicies *ecause o" their reliance on
a income ta3 cuts
* income ta3 increases
c increase+ !overnment s#en+in!
+ +ecrease+ !overnment s#en+in!
____ 1$ Su##l(-si+e ta3 cuts are more likel( to have the inten+e+ *ene"icial e""ect on
a *u+!et +e"icits
* consumer s#en+in!
c investment s#en+in!
+ net e3#orts
Table 1
F G C 8 I 8 2
C G /00 8 %9F - T;
I G 300
2 G 700
T G 2/F
____ 70 He"er to Ta*le 1 -hat is the level o" ta3 revenues in this mo+elA
a 1)000
* $/0
c $,//
+ $37/
e ,37/
Study Guide for ssay !uestio" a"d #ocabularies to be tested i" class$ 25%
1 Dra. a #ro+uction "unction an+ illustrate the e""ects o" ca#ital investment an+ technolo!ical im#rovement on
la*or #ro+uctivit(
2 -hat is conver!ence h(#othesisA -h( shoul+ .e e3#ect conver!ence in the lo! runA
3 Discuss that "actors that hel# e3#lain the ra#i+ #ro+uctivit( !ro.th in the 0nite+ States a"ter 1$$/
, -hat is the mar!inal #ro#ensit( to consume 9M4C; an+ .h( is it im#ortant in #re+ictin! consumer *ehaviorA
/ 63#lain .h( national income an+ +omestic #ro+uct must *e e7ual
1 -h( is investment s#en+in! a hi!hl( volatile com#onentA
7 Su##ose the econom( is su""erin! in a recessionar( #erio+ Firms are "acin! increasin! inventories an+
in+ivi+ual consumers are increasin! their savin! to #re#are "or har+ times ahea+ -hat is likel( to ha##en to
the econom( an+ can it correct itsel" an+ !ro. to.ar+ "ull em#lo(ment in the short runA
% -hat is a multi#lierA ?o. +oes the multi#lier e""ect occurA
$ -hat is the a!!re!ate su##l( curveA -hat +oes it re#resentA Dra. the a##ro#riate !ra#h to illustrate (our
ans.er =e sure an+ la*el all a3es an+ curves
10 0sin! a!!re!ate +eman+ an+ a!!re!ate su##l( anal(sis) e3#lain the ha##( coinci+ence o" *oth lo. in"lation
an+ +ecreasin! unem#lo(ment in the 0nite+ States +urin! the Iroarin! ninetiesI
11 63#lain ho. a IconservativeI an+ a Ili*eralI mi!ht +i""er in the t(#es o" #olicies the( a+vocate counteractin!
a recessionar( !a#
12 -hat are the #olicies usuall( a+vocate+ *( su##l( si+e economistsA ?o. +o the( >usti"( these #ro#osalsA
Defne the following Economics terms: 25%
1. Human capital 2. Investment 3.Capital formation 4.
Property rights
5. Consumer expenditures .Investment spending !."ational income
#.$ransfer payments
%. &xpenditure schedule 1'.(aving schedule 11.&)uili*rium +,P
12.-ea.ages schedule
13. In/ections schedule 14.0iscal policy 15.$ransfer payments
1.(upply1side tax cuts