Principles of Macroeconomics - Fall 2008, Exam 2

Correct Answer is followed by a **

1. From the Third Quarter 2008 report, real GDP showed that:

1. Despite an increase in consumption, there was a decrease in real GDP.
2. Both real GDP and consumption declined. **
3. Both real GDP and consumption increased.
4. There was a decrease in consumption and there was an increase in real GDP.

2. In October, the Federal Reserve:

1. Increased the federal funds interest rate.
2. Decreased the federal funds interest rate. **
3. Decreased the federal funds interest rate but increased long term interest rates.
4. Increased the federal funds interest rate but decreased long term interest rates.

3. Which of the following is not true with the U.S. auto industry:

1. Chrysler is owned by Cerberus Capital Management.
2. GM proposes to merge with Chrysler so that GM can pay back recent loans made by the federal government to GM. **
3. GM is looking from additional loans from the federal government to help finance a merger with Chrysler.
4. If GM goes bankrupt, the company pensions will be taken over by the PBGC – a federal government agency.

4. As a result of the September jobs report:

1. There was an outward shift in the demand for labor curve, an inward shift in the supply of labor curve and a higher wage rate.
2. There was an outward shift in the demand for labor curve, an outward shift in the supply of labor curve and a lower wage rate.
3. There was an inward shift in the demand for labor curve, an outward shift in the supply of labor curve and a lower wage rate. **
4. There was an inward shift in the demand for labor curve, an outward shift in the supply of labor curve and a higher wage rate.

5. 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.

6. 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.

7. 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 relatively constant and inflation rate to rise. **

8. 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.

9. Assume that by 2012, the inflation rate is above 10%. Based on this information, we would expect that in 2012:

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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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

15. If the Federal Reserve were to lower the reserve requirement from 10% to 8%:

1. The lower tax rate would increase after-tax disposable income and thus consumer spending.
2. Banks would benefit from the lower interest rate that the Fed charges on required reserves.
3. Banks would increase their sales of stocks to the Federal Reserve to make the change take effect.
4. The increase in excess reserves would give banks more money to loan out. **

16. 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.

17. 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%.

18. 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.

19. 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.

20. 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. **

21. 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. **

22. 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.

23. A cap of $102,000 in taxable income is applied to the:

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

24. 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.

25. 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.

26. 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. **

27. Since the year 2000:

a. Total national income has increased and the distribution of the gains has been fairly equal across all income groups.

b. Total national income has increased and the middle class have realized most of the gain in real income.

c. Total national income has increased and the wealthy have realized most of the gain in real income. **

d. Total national income has remained relatively constant, and the wealthy have taken a larger share of the income available.

28. At the present time, the highest federal income tax bracket is 35%. Assume that the top rate is raised to 39% for individuals with an annual taxable income over $250,000. In practice this means:

a. The individuals earning over $250,000 annually will pay a 39% rate on all income earned.

b. With the progressive federal income tax, only income of $250,000 and above will be taxed at the highest rate. **

c. Due to the income cap, only income up to $500,000 is taxed at the highest rate, any additional income is tax free.

d. All income up to $250,000 is taxed at a 12.4% rate and 39% for income of $250,000 and above.

29. 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.

30. 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.

31. 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

32. 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 be cyclically unemployed. **

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

33. Unemployment linked to recessions is called ________ unemployment.

a. Frictional

b. Structural

c. Cyclical **

d. Full

34. 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.

35. 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.

36. A potential way to improve the use of GDP to measure gains in a nation’s wealth would be to include in the calculation of GDP (beyond what is currently included):

a. Consumer spending on visits to the doctor.

b. The purchase of capital by firms.

c. Government spending on education.

d. Increases in the education level of the average citizen. **