Principles of Macroeconomics - Fall 2007, Exam 2

1. In the Third Quarter of 2007, real GDP:

1. Contracted for the second quarter in a row, and the U.S. economy is now in a recession.
2. Increased at a rate consistent with a Goldilocks economy. **
3. Grew at a rate that has significantly increased inflation, causing the Fed to raise the federal funds rate.
4. Grew at a rate that has significantly decreased the unemployment rate below 4%.

2. Based on the August trade numbers presented in class, we can conclude that:

1. The U.S. is a net exporter of oil.
2. Oil consumption is not included in net export data.
3. The U.S. is a net importer of oil. **

3. Based on the August trade numbers presented in class, we can conclude that:

1. The U.S. had a decrease in exports due to the recent depreciation of the dollar.
2. The U.S. had an increase in exports due to slower economic growth in Europe and Asia.
3. The U.S. had a decrease in imports due to the recent depreciation of the dollar. **
4. The U.S. had an increase in imports due to slower domestic economic growth.

4. Based on average incomes of native-born workers and immigrant workers, we can conclude:

1. That immigrants into the US face severe discrimination as their average wage is less than 50% that of native-born workers.
2. Immigrants are able to find employment opportunities similar to native-born workers as the average wage for both groups is fairly close. **
3. The average wage for Mexican immigrants is close to the average wage for native-born workers.
4. Since immigration laws favor the highly skilled, the average wage for immigrants exceeds the average wage for native-born workers.

5. According to George Borjas:

1. Immigration has substantially increased the national unemployment rate.
2. Immigration decreases the incentive to work for native-born workers and as a result of immigration, the national labor supply has decreased.
3. Immigration laws should be revised to take in fewer unskilled immigrants and more skilled immigrants. **
4. The majority of immigrants are unskilled Canadians who take jobs from unskilled native-born Americans.

6. At the present time which of the following is not accurate according to George Borjas:

1. Recently, a greater proportion of immigrants are unskilled and this hurts native-born high school dropouts more that any other skill level of native-born workers.
2. Immigrants increase the supply of labor, which for a given demand, will lower the wage rate.
3. The primary benefits of immigration are realized by employers.
4. While unskilled native-born workers suffer from lower wages due to unskilled immigrants, immigration has no effect on wages for skilled workers. **

7. Regarding immigration, David Card makes all of the following arguments except:

1. Overall, immigration has increased the pace of outsourcing of domestic jobs to foreign markets. **
2. There are demand-compensating effects of immigration where immigrants increase the demand for goods and services.
3. Unskilled immigrants fill many jobs that native-born workers do not want.
4. In urban areas, the supply of unskilled workers is less today than in 1980.

8. George Borjas and David Card would agree that:

1. 300 million Americans are enough – seal the borders.
2. The number of immigrants from Mexico should be substantially reduced.
3. Low-skilled immigrants pay enough taxes to cover all of their expenses of residing in the U.S.
4. Legal immigration should be allowed to continue. **

9. Assume that the economy is at equilibrium where the Aggregate Demand (AD) curve intersects the Aggregate Supply (AS) to the left of the full employment rate of unemployment (Y_f). In this case, we would expect:

a. Congress to raise taxes.

b. The Federal Reserve to lower interest rates. **

c. The Federal Reserve to raise interest rates.

d. The Federal Reserve to maintain constant interest rates.

10. In Year = 0, assume that the economy is at equilibrium where the Aggregate Demand (AD) curve intersects the Aggregate Supply (AS) to the left of the full employment rate of unemployment (Y_f).Annual supply side growth is equal to 3% and Aggregate Demand (AD) growth is equal to 5%. After the year, the AD curve still intersects the Aggregate Supply (AS) to the left of Y_f. In this case, we would expect:

a. The unemployment rate and inflation rate to rise.

b. The unemployment rate to fall and inflation rate to remain constant. **

c. The unemployment rate to remain constant and inflation rate to rise.

d. The unemployment rate to fall and inflation rate to rise.

11. In Year = 2, assume that the economy is at equilibrium where the Aggregate Demand (AD) curve intersects the Aggregate Supply (AS) to the right of the full employment rate of unemployment (Y_f). In this case, we would expect:

a. The unemployment rate to fall and inflation rate to remain constant.

b. The unemployment rate and inflation rate to rise.

c. The unemployment rate and inflation rate to fall.

d. The unemployment rate to remain constant and inflation rate to rise. **

12. In Year = 4, assume that the economy is at equilibrium where the Aggregate Demand (AD) curve intersects the Aggregate Supply (AS) at the full employment rate of unemployment (Y_f). Annual supply side growth is equal to 3% and Aggregate Demand (AD) growth is equal to 3%. In this case, we would expect:

a. The unemployment rate and inflation rate to remain constant. **

b. The unemployment rate and inflation rate to rise.

c. The unemployment rate and inflation rate to fall.

d. The unemployment rate to remain constant and inflation rate to increase.

13. Assume that by 2010, the inflation rate is above 10%. Based on this information, we would expect that in 2010:

1. The Federal Reserve to lower interest rates to stimulate the growth rate of aggregate demand.
2. The Federal Reserve to lower interest rates to reduce the growth rate of aggregate demand.
3. The Federal Reserve to raise interest rates to reduce the growth rate of aggregate demand. **
4. The Federal Reserve to raise interest rates to stimulate the growth rate of aggregate demand.

14. How would the Fed use open market operations (OMO) to increase interest rates:

a. The Fed reduces the discount rate.

b. The Fed sells bonds to banks. **

c. The Fed sells gold certificates.

d. The Fed buys bonds from banks.

15. A restrictive monetary policy by the Fed should lead to:

a. An increase in the monetary base, an increase in the money supply, and a decrease in the Fed Funds rate.

b. An increase in the monetary base, a decrease in the money supply, and an increase in the Fed Funds rate.

c. A decrease in the monetary base, a decrease in the money supply, and an increase in the Fed Funds rate. **

d. A decrease in the monetary base, a decrease in the money supply, and a decrease in the Fed Funds rate.

16. A restrictive monetary policy by the Fed should lead to:

a. An increase in investment and an increase in aggregate demand.

b. A decrease in investment and a decrease in aggregate demand. **

c. A decrease in investment and an increase in aggregate demand.

d. Leave investment unchanged but decrease aggregate demand.

17. Assume that the money multiplier equals 2.5 and if the Fed buys $1 million in bonds from a bank, the monetary base will:

a. Increase by $1 million. **

b. Increase by $2.5 million.

c. Decrease by $1 million.

d. Decrease by $2.5 million.

18. If an individual bank receives $1,000,000 in new deposits and the required reserve ratio is 10 percent, the bank must keep the following amount of required reserves with the Fed?

a. $100,000 **

b. $900,000.

c. $1,000,000

d. $0

19. In a perfect world, the Federal Reserve would:

1. Have the unemployment and inflation rates at zero and aggregate demand growth will equal the growth rate of aggregate supply.
2. Have the economy at full employment and aggregate demand growth will equal the growth rate of aggregate supply. **
3. Have the economy at full employment and aggregate demand exceeds the growth rate of aggregate supply.
4. Have the economy below full employment and aggregate demand growth will exceed the growth rate of aggregate supply.

20. Which of the following economic statistics would lead the Fed to raise interest rates:

a. The annual inflation rate remains unchanged at 1.5%.

b. The unemployment rate increases to 6%.

c. The rate of gain in worker productivity doubles.

d. The monthly CPI increases by 1% for three consecutive months. **

21. According to Federal Reserve Chairman, Ben Bernanke:

1. The next decade will see a steady decline in global savings. The result will be a shortage of loanable funds, higher interest rates and a global recession.
2. A global savings glut is partially due to decreased consumption and increased savings by U.S. citizens. The result is that the U.S. has become a net lender to the rest of the world.
3. The surplus of global savings has flowed into the U.S. economy due to the ample investment opportunities and relatively high return on savings in the U.S. **
4. The single reason for the global savings glut is the lack of consumption opportunities in European countries.

22. Between January 2004 and 2006, the federal funds interest rate increased from 1% to 5%. As a result.

1. The 10-year Treasury rate also increased by 4%.
2. The 10-year Treasury rate decreased by 4%.
3. The 20-year Treasury rate remained about constant. **
4. The 20-year Treasury rate increased by 3%.

23. Between January 2001 and January 2003, the federal funds interest rate decreased from 6% to 1.25%. As a result.

1. Despite a decrease in the 10-year Treasury rate, business investment failed to respond due to weak consumer demand. **
2. The 10-year Treasury rate also decreased by 5% resulting in a significant increase in business investment.
3. The 10-year Treasury rate remained relatively constant, but there was still a significant increase in business investment due to strong consumer demand.
4. The 10-year Treasury rate decreased by 3% resulting in a significant increase in employment and a declining unemployment rate.

24. As a result of the Great Depression of the 1930s

a. Say's Law was developed to show the benefits of increased production.

b. Adam Smith advocated waiting it out and letting markets do their thing.

c. Keynes advocated the use of active government policy to create jobs when the private sector would not.**

d. Russia turned to a communist system to improve the condition of the working poor.

25. An expansionary fiscal policy is consistent with:

1. A decrease in taxes and an increase in government spending with the goal of slowing down the growth rate of aggregate demand.
2. An increase in taxes and a decrease in government spending with the goal of slowing down the growth rate of aggregate demand.
3. An increase in taxes and a increase in government spending with the goal of speeding up the growth rate of aggregate demand.
4. A decrease in taxes and an increase in government spending with the goal of speeding up the growth rate of aggregate demand. **

26. Recent fiscal policy shows that:

1. The Bush tax cuts were designed to have a more positive impact on GDP growth than a reduction in the payroll tax rate.
2. As President Bush has shown, tax cuts and government spending increases will have a positive effect on GDP growth, and will eliminate the budget deficits within the next two years.
3. Recent federal budget deficits have resulted in a capital account surplus and also helped to reduce the current account deficit.
4. Dollar for dollar, an increase in government spending will result in a greater increase in GDP than an equivalent dollar tax cut. **

27. The federal income tax is:

1. A flat tax since the tax rate remains constant regardless of the income level.
2. A progressive tax since the marginal tax rate increases along with income. **
3. A regressive tax as the tax rate remains constant until an income threshold is reached and then the rate falls to zero.
4. A progressive tax since the tax rate remains a constant proportional to the income level.

28. A cap of $97,500 in taxable income is applied to the:

1. Payroll Tax. **
2. Federal Income Tax.
3. Estate Tax.
4. Federal Sales Tax.

29. If there is an increase in the federal budget deficit, which of the following is not correct:

a. Market interest rates will decrease. **

b. There will be an increase in private savings.

c. Part of the deficit will be financed by foreign savings.

4. Total national savings will decline.

30. Crowding out is consistent with all of the following except:

1. Increases in government spending that increases the federal budget deficit.
2. A decrease in private sector investment.
3. An increase in national savings. **
4. An increase in market interest rates.

31. Which of the following is not true when the federal budget deficit increases by $100 billion:

1. There will be an increase in private sector savings.
2. There will be an increase in foreign savings.
3. There will be an increase in interest rates.
4. There will be an increase in business investment. **

32. Since the surplus dollars collected by the Social Security Trust Fund are being spent today, which of the following is not a long term solution to the potential fiscal problem:

1. Raise the retirement age above 65.
2. Lower the Payroll Tax cap below the current level. **
3. Increase the number of workers in the future who pay the Payroll Tax.
4. Balance the current budget.

33. By limiting his tax cuts to the Federal Income Tax, President Bush:

1. Maintained the fiscal separation between Income and Payroll taxes, leaving Payroll Tax revenues available exclusively for the Social Security Trust Fund.
2. Made sure the majority of benefits of his tax cuts went to middle class Americans.
3. Made sure the majority of benefits of his tax cuts went to upper-income Americans. **
4. Desired to minimize the effect of his tax cuts on federal tax revenues to avoid budget deficits.

34. You are a college student who is not working or looking for work. You are:

a. Unemployed.

b. Not part of the labor force. **

c. Considered in the labor force but not employed.

d. Not described by any of the above.

35. The full employment rate of unemployment is:

a. The rate of unemployment that exists during recessions.

b. Consistent with the existence of frictional and structural unemployment. **

c. Equal to the sum of frictional and cyclical unemployment.

d. Equal to zero

36. Which of the following is not true?

a. An unemployed leather maker is most likely to be considered to be structurally unemployed.

b. Cyclical unemployment is unemployment that is in excess of that associated with the full employment of employment.

c. A real estate agent who leaves a job in Texas and searches for a similar, higher paying job in California is considered to by cyclically unemployed. **

d. A new college graduate looking for his or her first professional job may experience frictional unemployment.

37. Unemployment linked to recessions is called ________ unemployment.

a. Frictional

b. Structural

c. Cyclical **

d. Full

38. In 1996, the government changed welfare laws to give welfare recipients a maximum of two years of welfare benefits, but also, education and training to improve individual skills. This policy helped to reduce what type of unemployment:

1. Frictional.
2. Structural. **
3. Seasonal.
4. Cyclical.

39. Assume that in July roughly 8 million people in the United States were seeking jobs but had not found them. By August, 2 million of these people gave up their job searches and stopped looking for work. What will happen to the unemployment rate, all other things unchanged?

a. It decreases. **

b. It increases.

c. Nothing happens to the unemployment rate, because these people weren't working before and they aren't working now.

d. It stops.

40. Over the past decade, the full employment rate of unemployment has:

a. Has fallen to between 4% and 5%. **

b. Been rising in response to increasingly generous welfare benefits.

c. Has remained constant as migration into the country has equally migration out of the country.

d. Has decreased as many people looking for work have given up and are now considered discouraged.