Liberty University ECON 214 exam 2 complete solutions correct answers A+ work

Liberty University ECON 214 exam 2 complete solutions correct answers A+ work

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Question 1 Beginning in the late 1970s, economic reform in China allowed farmers, for the first time, to keep a portion of their crops and to sell them to others. Previously, all food was collectively farmed and shared. How did this basic reform improve China’s economic growth?

Question 2 When considering the magnitude of the Great Depression in comparison to other recessions, the Great Depression:

Question 3 Keynesian economists believe that the economy is unstable and tends toward cyclical unemployment because:

Question 4 Which of the following would have caused aggregate demand to decrease during the Great Depression?

Question 5 The wealth effect is best described as resulting from:

Question 6 Which of the following would cause an upward movement along the aggregate demand curve?

Question 7 A(n) _____________ in the amount of resources will tend to _____________ economic growth.

Question 8 In 2007, per capita real gross domestic product (GDP) in Brazil was $9,893.92. By 2008, it had increased to $10,525.58. At what rate did Brazil’s economy grow in that time?

Question 9 In 2011, per capita real gross domestic product (GDP) in Mexico was roughly $10,100. If Mexico experienced economic growth of 4.8% in 2012, per capita real GDP would increase to:

Question 10 When decision makers have time to fully adjust to changes in the overall price level, we refer to this as:

Question 11 The Great Depression lasted longer and was deeper than the average recession, in part, because:

Question 12 The Great Recession lasted from _________ to _________.

Question 13 An increase in expected future prices causes:

Question 14 When a change in the price level leads to a change in saving, this is known as the:

Question 15 When saving declines, the quantity of investment will __________, and therefore aggregate demand will __________.

Question 16 Consider the wealth effect, interest rate effect, and international trade effect. Of these, the __________ effect is the most significant and the __________ effect is the least significant.

Question 17 Keynesian economists believe that prolonged recessions are possible because:

Question 18 Refer to the following figure to answer the questions that follow Based on the figure, a decrease in _________ could cause the economy to move from point A to point B.

Question 19 Suppose a prolonged war in a country destroys 30% of the capital stock. In the long run, the price level will _________ as _________.

Question 20 Average income in Western Europe in 1600 was roughly $1,400 per year, while in Latin America, it was less than half that. Which of the following best explains this difference in average income?

Question 21 Suppose the government permanently reduces spending in an effort to reduce the budget deficit. In the new long­run equilibrium, output will __________ and the price level will __________.

Question 22 Average world income began to increase rapidly during:

Question 23 The island of Hispaniola, located in the Caribbean, is divided roughly in half by the two countries that occupy it. The western half is the country of Haiti, and the eastern half is the country of the Dominican Republic. In 2011, per capita real gross domestic product (GDP) in Haiti was roughly $740. In the Dominican Republic, it was almost $9,300. What most likely explains this difference?

Question 24 You read in the paper that there has been a significant increase in the consumer confidence index. Having taken an economics class, you predict that spending in the economy will __________ and aggregate demand will __________.

Question 25 Why do institutions such as private property rights promote economic growth?

Question 26 Refer to the following figure to answer the questions that follow. Based on the figure, which of the following would cause the aggregate demand curve to shift from AD2 to AD1?

Question 27 Lauren owns a bakery. She wants to increase her daily production of baked goods, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the physical capital resource at her bakery?

Question 28 Business­cycle theory focuses on time horizons of less than:

Question 29 During the Great Recession, the U.S. aggregate demand curve shifted to the left, in part, because:

Question 30 If your income increases at a rate of 2% per year, how long will it take to double your income?

Question 31 From 2006 to 2010, per capita real gross domestic product (GDP) in Poland grew an average of 4.71% per year. At that rate, according to the Rule of 70, in roughly how many years will the Polish economy double in size?

Question 32 In regard to the macroeconomy, it is believed by classical economists that:

Question 33 Perfect summer weather increases farm output by 30%. In the short run, this can be expected to __________ the price level and __________ real wealth.

Question 34 When the U.S. aggregate demand curve shifted to the left during the Great Depression:

Question 35 In 2000, annual real per capita gross domestic product (GDP) in Western Europe was around ___________, whereas in India, it was around ___________.

Question 36 Use the following graph to answer the questions that follow. The graph depicts an economy where aggregate demand and long­run aggregate supply (LRAS) have decreased, with no change in short­run aggregate supply (SRAS). The graph accurately summarizes what happened during the Great Recession, because during that time, the price level _________ and real gross domestic product (GDP) _________.

Question 37 An institutional breakdown in U.S. financial markets would tend to cause:

Question 38 When computing economic growth, changes in nominal gross domestic product (GDP) must be adjusted to reflect changes in the price level because:

Question 39 In 1950, residents in Liberia were wealthier than those in Taiwan. Today, per capita gross domestic product (GDP) in Taiwan is more than 20 times that of Liberia. Which of the following best explains why Taiwan is now so much wealthier than Liberia?

Question 40 In 2010, per capita real gross domestic product (GDP) in Germany was $40,197.67. By 2011, it had increased to $43,741.55. At what rate did Germany’s economy grow in that time?

Question 1

As a result of several factors, aggregate demand decreased during the Great Depression. One factor would be:

Question 2

Suppose the majority of students who are graduating in May from a large university have found jobs and signed employment contracts by February. Starting in February, these students are likely to __________ spending and __________ saving.

Question 3

The Great Recession began in __________ and lasted for __________.

Question 4

An economy has experienced a rightward shift of its longrun aggregate supply curve and is now producing on that new longrun aggregate supply curve. It is reasonable to expect that:

Question 5

Aggregate demand is determined by adding up the spending of:

Question 6

Access to lifesaving medicine is very limited in parts of Africa; as a result, over 10% of children do not reach the age of five. What effect would an increase in medical aid to African children have on overall economic growth for the continent?

Question 7

The Great Depression lasted longer and was deeper than the average recession, in part, because:

Question 8

Steve owns a bike shop. He wants to increase the number of bikes he sells each month, so he knows he needs to acquire more resources. Which of the following actions would represent an increase in the human capital resource at his bike shop?

9 According to the textbook, which of the following countries is not considered a “wealthy nation”?

Question 10

During the Great Recession, aggregate demand ________ and longrun aggregate supply ________.

Question 11

Refer to the following figure to answer the questions that follow.

Based on the figure, if the economy is currently at point B, then in the long run, we can expect we will move to:

Question 12

Input prices are _________ in the short run and _________ in the long run.

Question 13

During the Great Depression, aggregate demand in the U.S. economy decreased. As a result, the price level _________ and real gross domestic product (GDP) _________.

Question 14

The Great Recession lasted longer and was deeper than the average recession, in part, because:

Question 15

A supply shock causes a shift in:

Question 16

Real per capita gross domestic product (GDP) is defined as:

Question 17

During the Great Depression, there was a financial crisis and a stock market crash, both of which:

Question 18

When an economy experiences economic growth:

Question 19

Use the following graph to answer the questions that follow. The graph depicts an economy where aggregate demand has decreased. Note that longrun aggregate supply remains changed.

The graph shows a decrease in the price level due to a decrease in aggregate demand. Real gross domestic product (GDP), however, does not change. If this were an accurate description of how an economy responds during a recession, which of the following would be an appropriate government response to a decrease in aggregate demand?

Question 20

An increase in the price level that reduces the real value of wealth is likely to __________ consumption and __________ saving.

Question 21

If prompted to describe fundamental beliefs about the economy, a Keynesian economist would state that:

Question 22

A decrease in U.S. housing prices would tend to cause:

Question 23

The island of Hispaniola, located in the Caribbean, is divided roughly in half by the two countries that occupy it. The western half is the country of Haiti, and the eastern half is the country of the Dominican Republic. In 2011, per capita real gross domestic product (GDP) in Haiti was roughly $740. In the Dominican Republic, it was almost $9,300. What most likely explains this difference?

Question 24

Perfect summer weather increases farm output by 30%. In the short run, this can be expected to __________ the price level and __________ real wealth.

Question 25

During the Great Depression, the U.S. aggregate demand curve shifted to the left, in part, because:

Question 26

During the Great Depression, aggregate demand in the U.S. economy decreased. As a result, the unemployment rate _________ and real gross domestic product (GDP) _________.

Question 27

One of the most basic reasons why Taiwan is so much wealthier than Liberia is that Taiwan has:

Question 28

When financial markets went into a crisis during the Great Recession, it caused longrun aggregate supply to decrease because:

Question 29

In 1998, per capita real gross domestic product (GDP) in Thailand was $4,444.19. By 1999, it had increased to $4,695.22. At what rate did Thailand’s economy grow in that time?

Question 30 The value of one’s accumulated assets is best defined as:

Question 31

_________ would decrease shortrun aggregate supply.

Question 32

Beginning in the late 1970s, economic reform in China allowed farmers, for the first time, to keep a portion of their crops and to sell them to others. Previously, all food was collectively farmed and shared. How did this basic reform improve China’s economic growth?

Question 33

When stock prices declined during the Great Depression, it caused aggregate demand to decrease because:

Question 34

An increase in aggregate demand is beneficial in the short run because __________, but harmful in the long run because __________.

Question 35

Aggregate demand is about _________ and aggregate supply is about _________.

Question 36

An example of physical capital is:

Question 37

In 2000, annual real per capita gross domestic product (GDP) in the United States was around ___________, whereas in China, it was around ___________.

Question 38

From 2006 to 2010, per capita real gross domestic product (GDP) in Ethiopia grew an average of 7.99% per year. At that rate, according to the Rule of 70, in roughly how many years will the Ethiopian economy double in size?

Question 39

Between 2006 and 2010, per capita real gross domestic product (GDP) in China grew at an average rate of 10.62% per year. In contrast, its economy only grew by an average rate of 0.25% from 1961 to 1965. Which of the following factors would have contributed most to this rapid escalation in growth?

Question 40

Between 2006 and 2010, per capita real gross domestic product (GDP) in India grew at an average rate of 7.11% per year. Which of the following factors would have contributed most to this rapid escalation in growth?

Question 1 From 2009 to 2010 per capita real gross domestic product (GDP) in the United States grew by 1.8%. At that rate, according to the Rule of 70, in roughly how many years will per capita real GDP double?

Question 2 How many recessions have there been in the United States since 1982?

Question 3 When U.S. aggregate demand and long­run aggregate supply decreased during the Great Recession:

Question 4 Refer to the following figure to answer the questions that follow. Based on the figure, starting at point A, if there is an increase in government spending, then in the short run we would move to point __________ and in the long run to point __________.

Question 5 The long­run aggregate supply curve is:

Question 6 From 2006 to 2010, per capita real gross domestic product (GDP) in Poland grew an average of 4.71% per year. At that rate, according to the Rule of 70, in roughly how many years will the Polish economy double in size?

Question 7 An increase in the general price level will lead to:

Question 8 Keynesian economists believe that government intervention in the economy is necessary because:

Question 9 Which of the following would cause an upward movement along the aggregate demand curve?

Question 10 One of the reasons why the Great Depression was so severe is that:

Question 11 Use the following graph to answer the questions that follow. The graph depicts an economy where aggregate demand and long­run aggregate supply (LRAS) have decreased, with no change in short­run aggregate supply (SRAS). The graph accurately summarizes what happened during the Great Recession, because during that time, the price level _________ and real gross domestic product (GDP) _________.

Question 12 The economy is in short­run equilibrium when:

Question 13 James has worked for the same company his entire life. His current income is $100,000 per year. When he was originally hired, he made $50,000 per year. The company has given James a consistent raise of 2% every year. How long has James been with the company?

Question 14 Krista owns a hair salon. She wants to increase the number of clients she serves each month, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the human capital resource at her hair salon?

Question 15 The Great Depression is characterized by a decrease in aggregate demand. Of the following factors, which would have caused aggregate demand to decrease?

Question 16 According to classical economists, changes in aggregate demand have little effect on the overall economy, and therefore:

Question 17 A(n) _____________ in capital goods should ____________ worker productivity.

Question 18 During the Great Depression, the U.S. aggregate demand curve shifted to the left, in part, because:

Question 19 Suppose an economy has a law that requires all wages to be adjusted quarterly to reflect changes in the general price level. This means wages either increase or decrease depending on the percent change in the general price level. In this economy:

Question 20 If asked about the basic functioning of the economy, a Keynesian economist would state that:

Question 21 When inflation pushes up prices in the economy, input prices are _________ and revenues _________ in the short run.

Question 22 Refer to the following figure to answer the questions that follow. Based on the figure, which of the following would cause the short­run aggregate supply curve to shift from SRAS1 to SRAS2?

Question 23 From 2006 to 2010, per capita real gross domestic product (GDP) in Japan grew an average of 0.46% per year. At that rate, according to the Rule of 70, in roughly how many years will the Japanese economy double in size?

Question 24 Suppose there is a surge in stock market values. In the short run, we would expect the price level to __________ and the unemployment rate to __________.

Question 25 Suppose a hurricane destroys 20% of the capital stock in a country. In the long run, output will _________ and the price level will _________.

Question 26 In 2009, per capita real gross domestic product (GDP) in Croatia was $10,059.68. By 2010, it had increased to $10,257.71. At what rate did Croatia’s economy grow in that time?

Question 27 Steve owns a bike shop. He wants to increase the number of bikes he sells each week, and he wants to use a technological advance to do so. _______________ would represent a technological advance at his bike shop.

Question 28 Which of the following economic statements would a Keynesian economist tend to support?

Question 29 Which of the following best summarizes the main causes of the Great Recession?

Question 30 The price index used to illustrate the aggregate demand curve is the:

Question 31 An increase in ________________ would lead to an increase in long­run economic growth.

Question 32 Use the following graph to answer the questions that follow. This graph depicts an economy where aggregate demand has decreased, with no change in either short­run aggregate supply (SRAS) or long­run aggregate supply (LRAS). Which of the following would have caused aggregate demand to decrease in the graph, such as occurred during the Great Depression?

Question 33 Per capita real gross domestic product (GDP) is higher in the United States than in Mexico. Based on that, we could predict the United States to have a higher rate of ___________ and a lower rate of ___________.

Question 34 Residents of poor countries tend to have higher rates of infant mortality because:

Question 35 From 2006 to 2010, per capita real gross domestic product (GDP) in China grew an average of 10.62% per year. At that rate, according to the Rule of 70, in roughly how many years will Chinese per capita real GDP double in size, beginning in 2006?

Question 36 During the Great Recession, U.S. household wealth declined, leading to a decrease in aggregate demand. Which pair of factors contributed to this decline in wealth?

Question 37 Which of the following would have caused aggregate demand to decrease during the Great Depression?

Question 38 Residents of poor countries tend to have fewer automobiles per capita because:

Question 39 Which of the following factors is negatively correlated with economic growth?

Question 40 When an economy experiences economic growth:

Question 1 Suppose a change in health care laws increases the cost of hiring an employee. We can expect output in the short run to __________ and output in the long run to __________.

Question 2 In 1350, average world income was roughly:

Question 3 When firms invest less because people are saving less, it is called the:

Question 4 From 2006 to 2010, per capita real gross domestic product (GDP) in Egypt grew an average of 4.8% per year. At that rate, according to the Rule of 70, in roughly how many years will the Egyptian economy double in size?

Question 5 From 2006 to 2010, per capita real gross domestic product (GDP) in China grew an average of 10.62% per year. At that rate, according to the Rule of 70, in roughly how many years will Chinese per capita real GDP double in size, beginning in 2006?

Question 6 Competitive markets contribute significantly to economic growth because:

Question 7 If the current short­run equilibrium level of output is greater than full employment output, we can then expect that in the long run:

Question 8 During the Great Recession, long­run aggregate supply decreased. This was caused by __________.

Question 9 When an economy experiences economic growth:

Question 10 Suppose housing values fall during a recession. In the short run:

Question 11 When considering the basic operations of the macroeconomy, Keynesian economists argue that:

Question 12 Suppose a country’s population is growing due to immigration. In the long run, output will _________ due to _________.

Question 13 During the Great Recession, ___________ caused aggregate demand to decrease.

Question 14 The Great Recession was similar to other recessions since World War II in that:

Question 15 Refer to the following figure to answer the questions that follow. Based on the figure, if the economy is at point F, then in the long run, we can expect:

Question 16 When 9,000 banks failed during the Great Depression, it caused aggregate demand to decrease because:

Question 17 A supply shock causes a shift in:

Question 18 In 1800, the average income of U.S. citizens was roughly:

Question 19 A decrease in aggregate demand is harmful in the short run because __________, but beneficial in the long run because __________.

Question 20 As a result of several factors, aggregate demand decreased during the Great Depression. One factor would be:

Question 21 When U.S. housing prices declined prior to and during the Great Recession, it caused aggregate demand to decrease because:

Question 22 If the price level rises by 10%, then all else being equal, the long­run quantity of aggregate supply will:

Question 23 Access to lifesaving medicine is very limited in parts of Africa; as a result, over 10% of children do not reach the age of five. What effect would an increase in medical aid to African children have on overall economic growth for the continent?

Question 24 Suppose a prolonged war in a country destroys 30% of the capital stock. In the long run, the price level will _________ as _________.

Question 25 In 2009, per capita real gross domestic product (GDP) in Croatia was $10,059.68. By 2010, it had increased to $10,257.71. At what rate did Croatia’s economy grow in that time?

Question 26 During the Great Recession, there was a financial crisis, a stock market crash, and a collapse in housing prices, all of which:

Question 27 Which of the following is an example of an institution that promotes economic growth?

Question 28 Suppose a hurricane destroys 20% of the capital stock in a country. In the long run, output will _________ and the price level will _________.

Question 29 The Great Recession was similar to other recessions since World War II in that:

Question 30 Suppose people are worried about losing their jobs. In the short run, this will:

Question 31 During the Great Depression, thousands of U.S. banks failed. As a result:

Question 32 Refer to the following figure to answer the questions that follow. Based on the figure, if the economy starts at point A and ends up at point E, then in the short run, there was:

Question 33 Residents of wealthy countries tend to have longer life expectancies because:

Question 34 Which of the following best summarizes the main causes of the Great Recession?

Question 35 Use the following graph to answer the questions that follow. The graph depicts an economy where aggregate demand and long­run aggregate supply (LRAS) have decreased, with no change in short­run aggregate supply (SRAS). During the Great Recession, real gross domestic product (GDP) decreased yet the aggregate price level remained largely unchanged, as depicted in the graph. Unemployment increased to above­normal levels. Which of following best explains why this happened?

Question 36 When computing economic growth, changes in nominal gross domestic product (GDP) must be adjusted to reflect changes in the price level because:

Question 37 Classical economists believe that savings is crucial for economic growth because:

Question 38 Higher rates of economic growth are negatively correlated with:

Question 39 Menu costs help to explain:

Question 40 Suppose advances in computer technology lead to a surge in worker productivity. In the long run, output will _________ and the price level will _________.

1. Annual real per capita gross domestic product (GDP) in China was roughly $5,200 in 2000. If it grew by 10% the following year, by 2001 the annual real per capita GDP would be:

a. $520.

b. $5,720.

c. $5,252.

d. $10,520.

e. $6,125.

2. In 2005, per capita real gross domestic product (GDP) in Angola was $3,328.10. By 2006, it had increased to $4,034.31. At what rate did Angola’s economy grow in that time?

a. 8.20%

b. 21.22%

c. 17.51%

d. 7.06%

e. 10.12%

3. From 2011 to 2012, U.S. real GDP increased by 2.2% and the U.S. population grew by 1%. Therefore, per capita real GDP in the United States increased by:

a. 2.8%.

b. 1.2%.

c. 3.8%.

d. 1.8%.

e. 5.4%.

4. Lauren owns a bakery. She wants to increase her daily production of baked goods, so she knows she needs to acquire more resources. Which of the following actions would represent an increase in the physical capital resource at her bakery?

a. moving into a larger space

b. increasing employee training

c. hiring more employees

d. buying better‐quality ingredients

e. hiring an accountant to handle payroll

5. “Living standards” refer to the well‐being of the residents of a country. Generally speaking, higher economic growth leads to higher living standards. But higher living standards today can further contribute to economic growth in the future. Which of the following aspects of higher living standards would contribute most to future economic growth?

a. access to more and better consumer goods

b. improved education for young people

c. greater access to the Internet

d. more cell phones per person

e. more automobiles per person

6. Steve owns a bike shop. He wants to increase the number of bikes he sells each week, and he wants to use a technological advance to do so. _______________ would represent a technological advance at his bike shop.

a. Increasing the number of bikes he holds in inventory

b. Utilizing an online ordering system that allows him to sell bikes across the country

c. Increasing the number of employees

d. Better training for his staff

e. Increasing his inventory of helmets and accessories that he sells

7. In 1950, Brazil’s economy was roughly the same size as Nicaragua’s. Today, Brazil’s economy is almost five times as large as Nicaragua’s. Which of the following, if true, would best explain Brazil’s economy grew faster than Nicaragua’s?

a. Nicaragua was too reliant on foreign aid, whereas Brazil was far more economically independent.

b. Brazil greatly limited international trade, whereas Nicaragua opened its borders to imports and exports.

c. Brazil supported institutions like property rights, which tend to foster growth, whereas Nicaragua did not.

d. Brazil’s economy was largely agricultural, whereas Nicaragua’s was industrial.

e. Nicaragua had excessively high tax rates, but Brazil kept its taxes low and competitive.

8. Which of the following explains why a stable money and price policy fosters economic growth?

a. If prices are expected to rise, consumers save too much of their money.

b. If prices are expected to rise, firms wait until the prices rise before they invest.

c. If there is a lot of price instability, consumers tend to smooth consumption.

d. If there is a lot of price instability, firms are able to sell less of their product.

e. If there is a lot of price instability, firms invest less.

9. A restaurant’s production function would show the relationship between:

a. the number of workers hired and the number of meals served.

b. the number of workers hired and the level of profit.

c. the level of profit and the number of meals served.

d. the level of profit and the cost of producing the meals.

e. the number of workers hired and the cost of producing the meals.

10. If this country experiences an epidemic that reduces human capital, then:

a. the production function will shift upward.

b. the production function will shift downward.

c. there will be an upward movement along the production function.

d. there will be a downward movement along the production function.

e. there will be no effect on the production function.

11. The Solow growth theory focuses on:

a. human capital, because education is known to increase economic growth.

b. human capital, because human capital exhibits diminishing marginal returns.

c. human capital, because one of the biggest differences between poor nations and wealthy nations is the amount of their human capital.

d. physical capital, because physical capital exhibits diminishing marginal returns.

e. physical capital, because one of the biggest differences between poor nations and wealthy nations is the amount of their physical capital.

12. Consider the following table, which shows the total number of customers served per hour as the number of cash registers is increased. The marginal product of the fourth cash register is:

a. 6.

b. 10.

c. 12.

d. 32.

e. 50.

Use the following production function to answer the next question.

13. This production function exhibits diminishing returns to capital for:

a. all units of capital after the first.

b. no units of capital.

c. all units of capital after the second.

d. all units of capital after the third.

e. all units of capital except the sixth

14. If an economy is in the steady state, then:

a. net investment is zero.

b. depreciation is zero.

c. investment is zero.

d. the marginal product of capital is zero.

e. there are no diminishing returns.

15. The production function for an economy is 􀜻 􀵌 􀜣√􀜭􀜮, with all symbols defined as in the class: Y is output, A accounts for technological change, K is capital input, L is labor input. Initially, A=2, K=12, L=35. At this initial state, the Marginal Product of Capital is approximately:

a. 0.

b. 1.67.

c. 40.99.

d. 42.66.

e. there is not enough Information to answer this question.

16. Consider the United States growth rates since 1820. They show that

a. The United States is slowly approaching a steady state.

b. The United States was in a steady state in the early 19th century, but left it long ago.

c. The United States was not in a steady state early on, but now it is in a steady state.

d. The United States was never in a steady state at any point of its history.

e. None of the above.

Use the following graph to answer the next question.

17. Suppose that the level of capital is 100,000, the depreciation rate is 5%, and investment is equal to 5,000. In this case, you would expect that:

a. real gross domestic product (GDP) will increase.

b. real GDP will decrease.

c. real GDP will remain unchanged.

d. the steady state value of capital will increase.

e. the steady state value of capital will decrease.

18. When a country adopts a more efficient tax system, it is likely to:

a. have no effect on the production function.

b. shift the production function upward.

c. shift the production function downward.

d. have no impact on technological innovation.

e. have no impact on physical capital.

19. The interest rate effect results from people:

a. saving less when the price level rises.

b. consuming more when the price level rises.

c. spending more when the interest rate rises.

d. feeling more wealthy when the price level rises.

e. spending more when the price level falls.

20. When saving declines, the quantity of investment will __________, and therefore aggregate demand will __________.

a. increase; increase

b. decrease; decrease

c. decrease; increase

d. increase; decrease

e. remain unchanged; decrease

21. If people expect higher income in the future, then spending today __________ and aggregate demand __________.

a. increases; is unaffected

b. increases; increases

c. increases; decreases

d. decreases; decreases

e. is unaffected; is unaffected

22. You read a study that predicts that rising oil prices projected for this summer are certain to fuel inflation. Having taken an economics class, due to this expected change in prices, you predict that spending today will _________ and aggregate demand today will _________.

a. be unaffected; be unaffected

b. increase; increase

c. decrease; decrease

d. decrease; increase

e. increase; decrease

23. Which of the following would cause an increase in long‐run aggregate supply?

a. The price level increases.

b. The price level decreases.

c. Firms and workers expect the price level to fall.

d. Firms and workers expect the price level to rise.

e. The stock of capital increases.

24. All else being equal, an increase in _________ would shift the long‐run aggregate supply curve to the left

a. the unemployment rate

b. the inflation rate

c. economic growth

d. government spending

e. the rate at which capital depreciates

The following figure, which was discussed in class, depicts the percentage of workers whose wages have not changed in the previous year. Recall that the shaded areas mark the recessions. Use the figure to answer the next question.

25. This figure…

a. shows that wages are less sticky during recessions than during expansions.

b. shows that wages are sticky, because the percentage of people whose wages doesn't change is generally low.

c. shows that wages are sticky, because the percentage of people whose wages doesn't change first increases then decreases during expansions.

d. shows that wages are sticky, because the percentage of people whose wages doesn't change increases during recessions.

e. doesn't show any thing in particular about wage stickiness.

26. If inflation turns out to be higher than expected, this will:

a. shift long‐run aggregate supply to the right.

b. shift long‐run aggregate supply to the left.

c. shift short‐run aggregate supply to the left.

d. shift short‐run aggregate supply to the right.

e. have no effect on aggregate supply.

The following figure depicts different possible curves for the United States. Refer to the figure to answer the next two questions.

27. Beginning in the equilibrium point i (marked with a circle), where would the economy move to in the short‐run if the value of the dollar increased?

a. Point f.

b. Point g.

c. Point h.

d. Point j.

e. Point l.

28. Beginning in the equilibrium point i (marked with a circle), where would the economy move to in the long‐run if the rule of law improves?

a. Point b.

b. Point h.

c. Point l.

d. Point o.

e. Point p.

29. Suppose a hurricane destroys 20% of the capital stock in a country. In the long run, output will _________ and the price level will _________.

a. decrease; decrease

b. decrease; increase

c. decrease; remain unchanged

d. remain unchanged; remain unchanged

e. remain unchanged; increase

30. An increase in long‐run aggregate supply can be expected to _________ the price level and _________ the natural rate of unemployment.

a. have no effect on; have no effect on

b. have no effect on; increase

c. decrease; decrease

d. decrease; have no effect on

e. increase; have no effect on

31. During the Great Recession, there was a financial crisis, a stock market crash, and a collapse in housing prices, all of which:

a. contributed to a very long and deep recession.

b. helped the U.S. economy perform better than the economies of other countries.

c. kept unemployment from rising above the historical average.

d. resulted in a very short and mild recession.

e. prevented the United States from experiencing a decline in real gross domestic product

(GDP).

32. The Great Recession was similar to other recessions since World War II in that:

a. the rate of unemployment increased and then decreased at a later time.

b. the rate of inflation was extremely high.

c. real gross domestic product (GDP) rapidly increased and then leveled off.

d. the rate of economic growth was unchanged.

e. the rate of unemployment decreased and then increased at a later time.

33. One of the reasons why the Great Depression was so severe is that:

a. stock prices increased during the Great Depression.

b. the U.S. government increased taxes.

c. the U.S. government allowed the money supply to increase.

d. the unemployment rate decreased.

e. expected income increased.

34. Classical economists believe that the economy is stable and tends toward full employment because:

a. the government plays an active role in managing the economy.

b. savings is a drain on demand and must be limited.

c. the short run is more important than the long run, and economic policy only works in the short run.

d. prices are flexible and allow the economy to quickly return to full employment.

e. prices are sticky and will not prevent the economy from adjusting to full employment.

35. Keynesian economists believe that:

a. the market tends toward stability and full employment.

b. the economy needs help in moving back to full employment.

c. savings is crucial to growth.

d. prices are flexible.

e. the long run is more important than the short run.

Identify the choice that best completes the statement or answers the question.

____ 1. Which combination of events could have caused the equilibrium interest rate to rise and the equilibrium quantity of loanable funds (both borrowed and lent) to fall?

a. A baby boom begins, and investor confidence falls.

b. A baby boom begins, and investor confidence rises.

c. People have lower time preferences, and governments run larger deficits.

d. People have lower time preferences, and capital is more productive.

e. A baby boom begins, and people have higher time preferences.

____ 2. If foreign entities save more and businesses become more optimistic about the future, we would correctly say that:

a. the new equilibrium quantity of loanable funds would decrease, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

b. the new equilibrium quantity of loanable funds would increase, but we would be unable to tell if the new equilibrium interest rate would be higher or lower than the original.

c. the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be higher than the original.

d. the new equilibrium quantity of loanable funds would be indeterminate, but we would be certain the new equilibrium interest rate would be less than the original.

e. based on this information and because both changes would affect the demand for loanable funds in the opposite way, we would be unable to say anything about the relationship of the new equilibrium interest rate and quantity to the original interest rate and quantity.

____ 3. The demand and supply of loanable funds decrease simultaneously. This would cause:

a. the equilibrium quantity of loanable funds to decrease and the equilibrium interest rate to increase.

b. the equilibrium quantity of loanable funds to decrease, but the effect on the equilibrium interest rate would be uncertain.

c. the equilibrium quantity of loanable funds to increase, but the effect on the equilibrium interest rate would be uncertain.

d. the equilibrium interest rate to increase, but the new equilibrium quantity would be uncertain.

e. the equilibrium interest rate to decrease, but the new equilibrium quantity would be uncertain.

____ 4. If interest rates rise:

a. firms are willing to borrow more money because their rates of return have increased.

b. households are willing to borrow more money because their rates of return have increased.

c. firms are willing to borrow less money because their cost of borrowing has increased.

d. foreign entities are willing to borrow more money because their rates of return have increased.

e. it must mean that inflation has decreased because nominal rates have increased.

____ 5. If life expectancy falls due to AIDS and other diseases, we would expect:

a. time preference to fall and savings to increase.

b. time preference to rise and savings to increase.

c. time preference to fall and savings to decrease.

d. time preference to rise and savings to decrease.

e. interest rates to fall to zero.

____ 6. If the demographics of a nation change and the average age of the nation is approaching middle age, we would expect:

a. savings to increase.

b. savings to decrease.

c. borrowing to decline.

d. consumption variation to increase.

e. savings as a percentage of income to fall.

____ 7. One could correctly argue that higher capital productivity:

a. would increase the value of capital and the supply of loanable funds.

b. would reduce the value of capital and the supply of loanable funds.

c. would only affect interest rates in the long run.

d. would increase the value of capital and the demand for loanable funds.

e. would reduce the value of capital and the demand for loanable funds.

Consider the following scenario when answering the questions that follow:

Your friend Carson is starting a new photography business that specializes in photographs of Central Park in New York City. Because his business is new and risky, he is unable to obtain a loan from the local bank. On June 21, 2013, you agree to pay a price of $4,000 for a bond from Carson. You will receive $5,000 in return on June 21, 2014.

____ 8. The face value of the bond mentioned in the scenario is equal to:

a. $9,000.

b. $1,000.

c. $4,000.

d. $5,000.

e. $20,000.

____ 9. The interest rate of the bond mentioned in the scenario is equal to:

a. 80%.

b. 20%.

c. 25%.

d. 10%.

e. 5%.

____ 10. If the dollar price of a bond is $7,500 and the face value of the bond is $8,000, the interest rate is equal to:

a. 7%.

b. 6.67%.

c. 6.25%.

d. 14%.

e. 5%.

____ 11. Consider a supply and demand model of bonds for company X. Which of the following would you expect to happen if the default risk decreases for company X?

a. The demand curve will shift to the right, causing the price of the bond to rise.

b. The demand curve will shift to the left, causing the price of the bond to rise.

c. The supply curve will shift to the right, causing the price of the bond to fall.

d. The demand curve will shift the left, causing the price of the bond to fall.

e. The supply curve will shift to the left, causing the price of the bond to rise.

____ 12. Your friend Jamarcus is an award-winning chef. Jamarcus wants to start his own restaurant in Denver but is unable to obtain a loan from his local bank. Jamarcus has decided to issue a one-year bond with a face value of $6,000 and an interest rate of 10%. If you wanted to buy this bond, what would be the initial price?

a. $6,600.00.

b. $5,500.50.

c. $6,000.00.

d. $5,000.00.

e. $5,454.54.

____ 13. Approximately how much of U.S. federal debt was held by foreigners?

a. 90%

b. 6%

c. 32%

d. 17%

e. 55%

____ 14. What would you expect to happen to the supply and demand model for Treasury securities if a new law makes it easier for foreign investment in the United States?

a. The demand curve shifts to the right, causing the price of Treasury securities to increase.

b. The demand and supply curves shift to the right, causing the price of Treasury securities to increase.

c. The demand and supply curves shift to the left, causing the price of Treasury securities to decrease.

d. The demand curve shifts to the right, causing the price of Treasury securities to decrease.

e. The supply curve shifts to the left, causing the price of Treasury securities to increase.

____ 15. Access to lifesaving medicine is very limited in parts of Africa; as a result, over 10% of children do not reach the age of five. What effect would an increase in medical aid to African children have on overall economic growth for the continent?

a. Economic growth would not be affected; medical aid does not contribute to gross domestic product (GDP).

b. Economic growth would decrease because there would be more people to feed but no additional resources.

c. Economic growth would not be affected because children do not contribute to economic growth.

d. Economic growth would increase because the health and productivity of the future labor supply would increase.

e. Economic growth would increase because more children would survive, which represents a technological advance.

____ 16. When computing economic growth, changes in nominal gross domestic product (GDP) must be adjusted to reflect population growth because:

a. holding real GDP constant, an increase in the population actually lowers average standards of living.

b. an increase in population will tend to reduce nominal GDP.

c. changes in population tend to have no effect on standards of living.

d. holding real GDP constant, an increase in the population actually raises average standards of living.

e. an increase in the population will tend to decrease average prices.

____ 17. Between 2006 and 2010, per capita real gross domestic product (GDP) in India grew at an average rate of 7.11% per year. Which of the following factors would have contributed most to this rapid escalation in growth?

a. advances in technology

b. increases in government regulations

c. decrease in education standards

d. a significant increase in taxes

e. restrictions on immigration

____ 18. Per capita real gross domestic product (GDP) is higher in the United States than in Mexico. Based on that, we could predict the United States to have a higher rate of ___________ and a lower rate of ___________.

a. infant mortality; life expectancy

b. Internet users; automobile ownership

c. educational achievement; physicians per capita

d. Internet users; infant mortality

e. cellular phone use; personal computer use

____ 19. The two factors that must be subtracted from the percent change in nominal gross domestic product (GDP) to yield the