ECO 221 Test #3 Intro to Macroeconomics Test 3 Fall 2016

True/False 40%Indicate whether the statement is true or false.____1.The counterpart to the unsold output of firms is the lack of jobs for workers willing to work.____2.When spending falls short of output, additional inventories are created.____3.Producers will change their prices when GDP is at the equilibrium level.____4.The expenditure schedule includes the consumption function.____5.When GDP decreases, consumption spending increases.____6.An expenditure schedule shows the relationship between GDP and total output.____7.Leakages from the circular flow include saving and imports.____8.Injections include saving and taxes.____9.Equilibrium is the point where total spending equals total output, or GDP.____10.A change in the price level will cause a shift in the expenditure schedule.____11.A decrease in the price level causes a lower equilibrium quantity demanded.____12.The equilibrium level of GDP is always accompanied by full employment and stable prices.____13.In a capitalist market economy, recessions and inflation can occur because of coordination failures.____14.Demand-side changes explain everything about stagflation.____15.An increase in the price level causes the aggregate supply curve to shift to another supply schedule.____16.A change in the aggregate price level moves the economy along a given aggregate supply curve.____17.Profit per unit can be expressed as price – cost per unit.____18.An improvement in productivity will usually increase profits.____19.Inflation reduces the multiplier effect by reducing consumers’ wealth and purchasing power.____20.A recessionary gap exists when aggregate demand is above the full employment level of output.____21.Recessionary gaps are associated with output below potential and high unemployment rates.____22.When equilibrium GDP is below potential GDP, jobs are plentiful and unemployment is low.____23.In our modern economy, the adjustment process necessary to eliminate a recessionary gap is very rapid.____24.Economists do not agree on why wages are more rigid now than they were before World War II.____25.When taxes are decreased, disposable income increases even though GDP is unchanged.____26.The multiplier is increased when income taxes are included.____27.In 2006 and 2007 the U.S. faced an inflationary gap which would suggest the use of restrictive fiscal policy.____28.Liberals tend to favor increasing taxes as the method of counteracting inflation.____29.The fiscal policy planner’s job is made easier because full-employment GDP can be accurately measured.____30.According to supply siders, tax cuts should increase aggregate supply.____31.Modern paper money is fiat money because it is backed only by the faith the holder has in the government that issued it.____32.On the Micronesian island of Yap, it is easier to make purchases with stone wheel currency than it is to make purchases with paper currency including the U.S. dollar.____33.E-cash cards are considered a major portion of the modern money supply.____34.Systemic risks would be most prevalent at larger banks like Bank of America and Citibank.____35.The central bank in the United States is known as the Federal Reserve System.____36.The United States was among the first of the modern industrial nations to establish a central banking system.____37.An increase in the average price level will lead to a decrease in the demand for reserves.____38.As interest rates rise, banks seek to decrease their loans and, thereby, shrink the money supply.____39.The Fed has control over bank reserves and complete control over the money supply.____40.The rate of interest that the Fed charges banks on loans is called the reserve rate.Multiple Choice 30%Identify the choice that best completes the statement or answers the question.____41.The expenditure schedule will shift upward whena…. exports decrease.b…. exports imports exports decrease.____42.A higher price level would mean ____ for a person who has a bank deposit of $2 increase in real incomeb.a decrease in real wealthc.a decrease in nominal increase in nominal income____43.If the price level rises, the effect on the expenditure schedule and equilibrium real GDP is toa.increase both.b.decrease both.c.shift the expenditure schedule upward and decrease equilibrium real GDP.d.shift the expenditure schedule downward and increase equilibrium real GDP.____44….ing the standard 45-degree line diagram, how does an increase in investment spending effect the expenditure schedule?a.It shifts the expenditure schedule downward.b.It shifts the expenditure schedule upward.c.It increases the slope of the expenditure schedule.d.It decreases the slope of the expenditure schedule.____45.Government stabilization policya.cannot influence investment spending.b.can stimulate aggregate demand and thereby induce businesses to invest, but the amount is not totally predictable.c.can stimulate aggregate demand, but investment spending will not be affected.d.can stimulate aggregate demand, but only in the long run.____46.The effect throughout the entire economy of one individual’s increase in spending will bea.less than the individual’s spending.b.equal to the individual’s spending.c.greater than the individual’s spending.d.offset by another individual’s saving.____47.A decrease in autonomous consumption would have the same effect on the expenditures schedule as a(n)a.decrease in investment.b.increase in government purchases.c.increase in net exports.d.decrease in taxes____48.Aggregate supply is defined much the economy can produce at zero amount of output the economy will produce at full employment.c.the relationship between the expenditures schedule and the leakages schedule.d.the relationship between the price level and the quantity of real GDP supplied.Table 10-1Aggregate QuantityAggregate QuantityDemandedSuppliedPrice(billions)(billions)Level$3500$290065 3400 300075 3350 315090 3250 3250110 3100 3400130____49.In Table 10-1, if full employment occurs at $3,100 billion, thena.the economy experiences a recessionary gap of $150 billion.b.the economy experiences a recessionary gap of $300 billion.c.the economy experiences an inflationary gap of $150 billion.d.the economy experiences an inflationary gap of $300 billion.____50.A recession can be expected to reduce inflation in the economy if the recession is caused by a(n)a.increase in aggregate demand.b.increase in aggregate supply.c.decrease in aggregate demand.d.decrease in aggregate supply.____51.When economists refer to the economy’s self-correcting mechanism, they are referring to the fact that thea.economy will react automatically to a recessionary gap through inflation.b.economy will react automatically to an inflationary gap through deflation.c.economy will react automatically to an inflationary gap through inflation.d.simple multiplier is greater than the complex multiplier.____52.In contrast to changes in government spending, tax changes affect the same a greater amount.d.indirectly.____53.When government spending is added to the basic macroeconomic model, the multiplier for G higher than the multiplier for autonomous lower than the multiplier for autonomous equal to the multiplier for autonomous spending.d.have no relationship to the autonomous spending multiplier.____54.If personal income taxes are increased, disposable income and consumptiona.increase.b.stay the same.c.decrease.d.change in an unpredictable direction.____55.A change in a fixed tax will cause the consumption schedule toa.become steeper.b.become flatter.c.shift in a parallel manner.d.remain fixed as the economy moves along the schedule.____56.Government transfer payments act as automatic stabilizers because as labor income decreases, transfer paymentsa.decrease as well.b.remain the government increase.____57.If Congress votes to increase government purchases and at the same time decrease personal income taxes, theya.have decided to balance the federal budget.b.have voted for the proper policy to counteract a recessionary gap.c.have voted for the proper policy to counteract an inflationary gap.d.are trying to achieve a federal budget surplus.____58.One of the practical issues in the choice of government spending or taxes to change aggregate demand is how large aa.change in demand we deficit we want.c.budget deficit we want.d.government sector we want.____59.The Reagan tax cuts of the 1980sa.had not impact on the budget deficit.b.decreased the budget deficit.c.increased the budget deficit.d.initially decreased the deficit but later increased it.____60.Most economists seem to agree that cutting taxesa.on saving has more impact than cutting taxes to increase stimulate investment is more effective than cutting taxes to stimulate increase work is more effective than cutting taxes to stimulate increase work incentives is more effective than cutting taxes on saving.Table 11-1Y =C + I + GC =500 + .8(Y ? T)I =300G =700T =.25Y____61.Refer to Table 11-1. What is the level of tax revenues in this model?a.1,000b.950c.945.5d.937.5e.437.5____62.In a market system, the most dangerous types of bankruptcies involvea.industrial monopolies.b.multinational firms.c.employment institutions.____63.Paper money has been in use since thea.Roman Empire.b.eleventh century in China.c.Civil War in the United States.d.development of money-center banking in nineteenth-century London.____64.Technically, the Federal Reserve district banks are corporations whose stockholders are thea.state governments in each district.b.citizens of the United States.c.Departments of Treasury and Commerce.d.member banks.____65.The actual control of the Federal Reserve System resides in thea.Congress of the United States.b.member banks.c.Senate Banking Committee.d.Board of Governors.____66.The monetary policies carried out by the Feda.must be ratified by Congress.b.must be consistent with fiscal policies passed by Congress.c.are sometimes inconsistent with fiscal policy.d.must be approved by the president.____67.The Federal Reserve System was the request of farmers to keep down interest rates.b.because Americans believe in centralization of authority.c.after four severe bank panics between 1873 and part of the Treasury Department.____68.The tool most frequently relied on by the Fed isa.interest rate changes.b.changing the money multiplier.c.changing the discount market operations.e.changing the reserve ratio.____69.If the Fed’s open market operations expand the money supply, one can expecta.a decrease in excess prices to rise.c.interest rates to market sales of T-bills.____70.Which of the following will lower interest rates in the short run? increase in reserve market sales by the Fedc.a decrease in real increase in the price levelEssay 30% please Type your answers1.What is a multiplier? How does the multiplier effect occur?2.What is a barter system? What are the drawbacks of this system?3.Why is the Fed Reserve chairman considered by many to be the most powerful person in the economic world?4.Explain how interest rates and bond prices are related to one another. Why is this important for monetary policy?5.How does an open market purchase by the Fed affect the level of bank reserves and the interest rate? Illustrate the interest rate effect by drawing the appropriate graph.6.Explain the relationship between interest rates and (1) investments in housing, and (2) business investments.

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