If GDP is above potential output, then we expect to see
A) increasing wages, causing the short-run aggregate supply curve to shift up.
B) increasing wages, causing the short-run aggregate supply curve to shift down.
C) falling wages, causing the short-run aggregate supply curve to shift up.
D) falling wages, causing the short-run aggregate supply curve to shift down.
Consider an aggregate demand / aggregate supply diagram. The intersection of the
vertical aggregate supply curve and the aggregate demand curve determines the
A) short-run levels of prices and output.
B) short-run and long-run levels of prices and output.
C) long-run levels of prices and output.
D) short-run level of output and the long-run level of prices.
The inside lag associated with economic policy represents:
A) the time that is necessary to recognize and implement policy.
B) the time needed for the Federal Reserve Board to meet.
C) the time that it takes for the economy to adjust to the new conditions after a new
policy is introduced.
D) the time that it takes for households and firms to recognize the existence of a boom
or bust.
Recall Application 3, “Debt Forgiveness?” to answer the following questions:
According to the Application, a home is underwater when:
A) the value of the home is greater than the value of the mortgage.
B) the value of the home is less than the value of the mortgage.
C) the value of the mortgage is greater than the value of the income of the homeowner.
D) the income of the homeowner is zero.
The real-nominal principle can be stated as
A) production generates income.
B) only final goods and services should be counted in GDP.
C) what matters to people is the purchasing power of money or income.
D) only the manufacture of real goods is production.
Recall the Application about the causes of oil price increases to answer the following
question(s). Economist Lutz Kilian examined the importance of supply disruptions to
the U.S. oil market by constructing measures of supply disruptions in oil producing
countries based on a detailed examination of prior trends in demand and specifications
in oil contracts.According to this Application, oil price increases may be caused by
A) decreases in world demand.
B) increases in world supply.
C) speculation in oil markets.
D) price ceilings in oil markets.
If both government spending and taxes increase by an equal amount at the same time,
GDP will:
A) increase.
B) remain the same.
C) decrease.
D) None of the above are true, it is impossible to say.
When comparing the measure of goods and services of one country to that of another,
economists generally compare
A) the real GDP.
B) the real GDP per capita.
C) the real GDP and net exports.
D) the real GDP and the labor force.
If Bob feels better off after getting a 5 percent nominal wage increase even though the
price level also went up by 5 percent. In this scenario, Bob falls victim to:
A) money illusion.
B) nominal confusion.
C) money hallucination.
D) purchasing power craziness.
If you expect that the inflation rate is 5 percent and the actual inflation rate turned out to
be exactly 5 percent, then:
A) lenders gain.
B) borrowers gain.
C) both the borrowers and lenders gain.
D) neither borrowers nor lenders gain.
The government deficit is equal to
A) new borrowing from the public minus new money created.
B) new borrowing from the public plus new money created.
C) new money created minus new borrowing from the public.
D) new borrowing from the public divided by new money created.
Additional Application COPING WITH A STOCK MARKET CRASH: BLACK
MONDAY, 1987 How did the Fed successfully respond to the major stock market crash
in 1987? On October 19, 1987, known as “Black Monday,” the Dow Jones index of the
stock market fell a dramatic 22.6 percent in one day. Similar declines were felt in other
indexes and stock markets around the world. These
declines shocked both businesses and investors. In just 24 hours, many people and firms
found themselves much less wealthy. The public began to worry that banks and other
financial institutions—to protect their own
loans and investments—would call in borrowers’ existing loans and stop making new
ones. A sharp drop in available credit could, conceivably, plunge the economy into a
deep recession. Alan Greenspan had just become chairman of the Federal Reserve that
year. As a sophisticated economist with historical knowledge of prior financial crises,
he recognized the seriousness of the situation. He quickly issued
a public statement in which he said that the Federal Reserve stood ready to provide
liquidity to the economy and the financial system. Banks were told that the Fed would
let them borrow liberally. In fact, the Fed provided liquidity to such an extent that
interest rates even fell. As a result of Greenspan’s action, “Black Monday” did not cause
a recession in the United States. The dramatic drop in stock values on October 19, 1987,
known as “Black Monday,” was potentially catastrophic for the economy because:
A) the value of the U.S. dollar was likely to fall too and that would create a massive
trade deficit.
B) the federal government found itself on the brink of default, so ruining millions of
public debt holders.
C) the Fed could not execute any open market operations and the required reserve ratio
had been set too low by the previous administration.
D) banks and financial institutions might have called in existing loans and stop making
new ones.
Assume that an economy is represented by the following: (a)
Calculate the equilibrium level of output.
(b) Based on your analysis in Part (a), calculate the levels of consumption and saving
that occur when the economy is in equilibrium.
(c) Now suppose planned investment rises by 100. Calculate the new equilibrium level
of income. Given your answer, what is the size of the multiplier?
(d) What is the size of the tax multiplier for this economy?
Customer service representatives who have lost their jobs as a result of call centers
being outsourced to India are an example of
A) structural unemployment.
B) cyclical unemployment.
C) frictional unemployment.
D) voluntary unemployment.
Which of the following is an example of the use of activist Keynesian fiscal policy in
recent times?
A) In 2001, George W. Bush led the effort for a tax cut to provide stimulus to a sluggish
economy.
B) In 1994, the Japanese government formulated a plan to increase spending and cut
taxes in order to help their ailing economy.
C) In the late 1990s the Chinese government increased spending to prevent severe
economic activity.
D) All of the above are examples of activist Keynesian fiscal policy.
Import bans, import quotas, voluntary export restraints, and tariffs on goods all:
A) increase equilibrium quantity and prices.
B) decrease equilibrium quantity and prices.
C) increase equilibrium quantities, but decrease prices.
D) decrease equilibrium quantities, but increase prices.
Economics is best defined as the study of:
A) financial decision-making.
B) how consumers make purchasing decisions.
C) choices made by people faced with scarcity.
D) inflation, unemployment, and economic growth.
Full-employment output is also called
A) natural output.
B) national output.
C) potential output.
D) target output.
Recall the Application about the level of real wages for laborers in England from 1350
to 1550 to answer the following question(s). In 1348, the bubonic plague, also known as
the Black Death, arrived in England from Asia and caused a long decline in total
population through the 1450s.
According to this Application, the decline in population caused by the Black Death
resulted in ________ real wages and ________ total output.
A) higher; less
B) higher; more
C) lower; less
D) lower; more