I have a test that I need help with which will have questions from the following topicsmacroeconomic perspective GT chapter 19economic growth GT chapter 20unemployment GT chapter 21inflation GT chapter 22aggregate demand and supply GT chapter 24the Keynesian perspective GT chapter 25the neoclassical prespective GT chapter 26money and banking GT chapter 27monetary policy and regulation GT chapter 28Government budget and fiscal policy
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Study Guide for Final Exam
Multiple choice questions (1 point each):
1. What is the formula for calculating for GDP?
a. Private Consumption + Investment + Government spending + (exports – imports)
b. private consumption + gross investment + government investment + government spending +
(exports – imports).
c. private consumption + gross investment + government investment + government spending +
exports
d. private consumption + government investment + government spending + (exports –
imports)
2. What is the definition of a business cycle?
a. The movement of the economy from peak to trough and trough to peak
b. The cyclical unemployment of those in the labor force
c. The movement of investment to businesses that prosper during peak times
d. The best peak business times during a business season
3. What is a factor that has positive growth in Labor productivity?
a. An increase in employment
b. An increase in wages
c. An increase into training of employees
4. Who out of these people are unemployed?
a.
b.
c.
d.
A fisherman who is not looking for a job and is fishing as a hobby
A student who is studying hard and hasn’t looked for a job in the last four weeks
A high school graduate who got fired and is now sending applications currently
None of the above
5. What is inflation?
a. A general increase in the price of goods causing the devaluing of the purchasing power
of currency
b. The over printing of money causing the devalue of money
c. The fall in the price of goods, causing more money to be saved as consumers can spend
less to purchase the same goods
d. The increase in value of money due to lowering of the price of goods
1
6.
Little Timmy spent $20 in total to run his lemonade stand in 2004, but now he spends $30 in
2005 to keep running his stand. What is the annual rate of inflation ceteris paribus?
a. 25%
b. 50%
c. 75%
d. 150%
7. What is a basket of goods
a. A basket of goods refers to the average cost of production of all goods produced in a
country and is used to track the increase in cost of production of goods in a country.
b. A basket of goods refers to the average price of all agricultural goods produced by a
country
c. A basket of goods refers to a fixed set of consumer products and services valued on an
annual basis
8. What does Say’s law say about demand?
a. Supply and demand are directly proportional.
b. Supply creates its own demand.
c. Demand creates its own supply.
d. Demand and supply increase together.
9. What would lead to a decrease in aggregate demand?
a. Decrease in taxes
b. Increasing government spending
c. Relative price increase
d. Rise in the expected rate of return
10. What is Aggregate Demand?
a. Total capital spent on a given good in a year.
b. Average estimate of purchased goods of a certain type.
c. Relationship between total spending on domestic goods and services and the price level
for output.
d. None of the above.
11. What are the two building blocks of the neoclassical perspective?
a. The size of the economy is determined by how high the wages are and prices will not
adjust in a flexible manner.
b. The size of an economy is determined by potential GDP, and wages and prices will
adjust in a flexible manner so that the economy will adjust back to potential GDP.
2
c. The only thing that matters is that supply determines GDP and thus the size of the
economy.
d. The size of an economy is determined by potential GDP and wages and prices will only
adjust in a flexible manner in the short run.
12. If aggregate demand is shifted to the right, would long run aggregate supply permanently be
affected?
a. Yes, it would shift to the left.
b. Yes, it would shift to the right.
c. No, it would remain where it originally was.
13. Using the money multiplier formula, what would the total change in M1 money supply be if a
bank’s reserve requirement is 20% and excess requirement is $5 million?
a. $25 million
b. $10 million
c. $1 million
d. $6 million
e. $50 million
14. Why was the cowrie shell a successful currency?
a. The shells were durable enough to survive a century and still be shoveled in bulk
b. The shells could be traded by quantity, weight, or volume for precise value
c. Shell collection was tightly regulated and they were impossible to counterfeit
d. All of the above
e. None of the above / Some other reason
15. Effective monetary policy affects the economy almost immediately, making sweeping changes in
days to weeks.
a. False
b. True
16. What is the difference between M1 and M2?
a. M1 is cash and checks while M2 is savings and time deposits
b. M1 is less “liquid” than M2
c. M1 has to do with loans while M2 deals with taxes
17. What does the central bank not do?
a. Promote stability of the financial system
b. Provide banking services to the federal government
c. Perform fiscal policy
3
Short Answer Questions
1. What is the formula for Real GDP?
Real GDP = Nominal GDP/(Price index/100)
2. Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?
3. To what sorts of customers would an insurance company offer a policy with a high premium?
4. Explain what the Housing Bubble and Housing Burst was.
5. Explain Keynes’ Law and say whether is applies to the long or short run.
6. Draw an AD/AS diagram with the economy at full employment. Then suppose the government
decreases taxes. Show what would happen if the government did this.
7. What does Price Stickiness have to do with the Great Recession?
8. What is the “coordination argument”?
9. What is the “expenditure multiplier”? Write the formula:
10. What are the three traditional tools to implement monetary policy in the economy?
11. What is the total change in the M1 money supply if the reserve requirement is 10% and the
excess reserves are 25 million?
4
Study Guide for Final Exam
Multiple choice questions (1 point each):
1. What is the formula for calculating for GDP?
a. Private Consumption + Investment + Government spending + (exports – imports)
b. private consumption + gross investment + government investment + government spending +
(exports – imports).
c. private consumption + gross investment + government investment + government spending +
exports
d. private consumption + government investment + government spending + (exports –
imports)
2. What is the definition of a business cycle?
a. The movement of the economy from peak to trough and trough to peak
b. The cyclical unemployment of those in the labor force
c. The movement of investment to businesses that prosper during peak times
d. The best peak business times during a business season
3. What is a factor that has positive growth in Labor productivity?
a. An increase in employment
b. An increase in wages
c. An increase into training of employees
4. Who out of these people are unemployed?
a.
b.
c.
d.
A fisherman who is not looking for a job and is fishing as a hobby
A student who is studying hard and hasn’t looked for a job in the last four weeks
A high school graduate who got fired and is now sending applications currently
None of the above
5. What is inflation?
a. A general increase in the price of goods causing the devaluing of the purchasing power
of currency
b. The over printing of money causing the devalue of money
c. The fall in the price of goods, causing more money to be saved as consumers can spend
less to purchase the same goods
d. The increase in value of money due to lowering of the price of goods
1
6.
Little Timmy spent $20 in total to run his lemonade stand in 2004, but now he spends $30 in
2005 to keep running his stand. What is the annual rate of inflation ceteris paribus?
a. 25%
b. 50%
c. 75%
d. 150%
7. What is a basket of goods
a. A basket of goods refers to the average cost of production of all goods produced in a
country and is used to track the increase in cost of production of goods in a country.
b. A basket of goods refers to the average price of all agricultural goods produced by a
country
c. A basket of goods refers to a fixed set of consumer products and services valued on an
annual basis
8. What does Say’s law say about demand?
a. Supply and demand are directly proportional.
b. Supply creates its own demand.
c. Demand creates its own supply.
d. Demand and supply increase together.
9. What would lead to a decrease in aggregate demand?
a. Decrease in taxes
b. Increasing government spending
c. Relative price increase
d. Rise in the expected rate of return
10. What is Aggregate Demand?
a. Total capital spent on a given good in a year.
b. Average estimate of purchased goods of a certain type.
c. Relationship between total spending on domestic goods and services and the price
level for output.
d. None of the above.
11. What are the two building blocks of the neoclassical perspective?
a. The size of the economy is determined by how high the wages are and prices will not
adjust in a flexible manner.
b. The size of an economy is determined by potential GDP, and wages and prices will
adjust in a flexible manner so that the economy will adjust back to potential GDP.
2
c. The only thing that matters is that supply determines GDP and thus the size of the
economy.
d. The size of an economy is determined by potential GDP and wages and prices will only
adjust in a flexible manner in the short run.
12. If aggregate demand is shifted to the right, would long run aggregate supply permanently be
affected?
a. Yes, it would shift to the left.
b. Yes, it would shift to the right.
c. No, it would remain where it originally was.
13. Using the money multiplier formula, what would the total change in M1 money supply be if a
bank’s reserve requirement is 20% and excess requirement is $5 million? (Ch. 27)
a. $25 million
b. $10 million
c. $1 million
d. $6 million
e. $50 million
14. Why was the cowrie shell a successful currency?
a. The shells were durable enough to survive a century and still be shoveled in bulk
b. The shells could be traded by quantity, weight, or volume for precise value
c. Shell collection was tightly regulated and they were impossible to counterfeit
d. All of the above
e. None of the above / Some other reason
15. Effective monetary policy affects the economy almost immediately, making sweeping changes in
days to weeks.
a. False
b. True
16. What is the difference between M1 and M2?
a. M1 is cash and checks while M2 is savings and time deposits
b. M1 is less “liquid” than M2
c. M1 has to do with loans while M2 deals with taxes
17. What does the central bank not do?
a. Promote stability of the financial system
b. Provide banking services to the federal government
c. Perform fiscal policy
3
Short Answer Questions
1. What is the formula for Real GDP?
Real GDP = Nominal GDP/(Price index/100)
2. Why do you suppose that U.S. GDP is so much higher today than 50 or 100 years ago?30 pts
Over the long term, U.S. real GDP have increased dramatically. At the same time, GDP has not increased
the same amount each year. The speeding up and slowing down of GDP growth represents the business
cycle. When GDP declines significantly, a recession occurs. A longer and deeper decline is a depression.
Recessions begin at the peak of the business cycle and end at the trough.
3. To what sorts of customers would an insurance company offer a policy with a high premium?
The insurance company would offer higher premiums to customers who are at a higher risk of using the
health insurance.
4. Explain what the Housing Bubble and Housing Burst was
Between 1990 and 2006 the housing market continued to grow steadily causing many people to be able
to purchase a home, and many loans being given out to purchase these homes, however many of these
loans were too easily given out and starting in 2005 the number of late payments began to rapidly rise,
and an oversupply of new housing became apparent, and by 2006 the housing market crashed, causing a
massive devalue of homes.
5. Explain Keynes’ Law and say whether is applies to the long or short run. (4 points)
Keynes’ Law states that during economic downturn a government should increase its spending, and in
economic booms a government should decrease its spending, and it deals in the short terms because it
is reactive to what is currently the state of the economy, not what it will be in the future.
6. Draw an AD/AS diagram with the economy at full employment. Then suppose the government
decreases taxes. Show what would happen if the government did this.
References
4
7. What does Price Stickiness have to do with the Great Recession?
Even after the Great Recession, the stickiness of wages (tendency for wages to resist a change) made it
difficult for the economy to restore to its prime status of full employment and potential GDP, dooming
the recovery to be slow and tortuous.
8. What is the “coordination argument”?
The coordination argument points out that, even if most people would be willing—at least
hypothetically—to see a decline in their own wages in bad economic times as long as everyone else also
experienced such a decline, a market-oriented economy has no obvious way to implement a plan of
coordinated wage reductions.
9. What is the “expenditure multiplier”? Write the formula:
The expenditure multiplier is the idea that not only does spending affect the equilibrium level of GDP,
but that spending is powerful. More precisely, it means that a change in spending causes a more than
proportionate change in GDP: Δ Y/Δ Spending > 1
10. What are the three traditional tools to implement monetary policy in the economy?
To implement monetary policy, the Fed has three different tools. The first is open market operations,
where they buy or sell U.S. Treasury bonds to try to affect the quantity of bank reserves and the level of
interest rates. Changing the reserve is the second tool, which tells banks how much they need to hold in
reserves and that cannot be lent out. Changing the discount rate is the third tool, which is the rate that
the Fed charges banks to borrow loans.
11. What is the total change in the M1 money supply if the reserve requirement is 10% and the
excess reserves are 25 million?
1/.10 x $25 million = $250 million All information was used from Principles of Economics textbook at
Professor Mishra’s lecture slides.
5
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