Econ 2 Mr. Mitton Final Exam – Fall 2018 1. Which of the following is a macroeconomic question? a. How many textbooks should be published by a publisher? b. How much should English majors earn after college? c. How do members of a household decide whether to clean their own house or hire someone else to do it? d. What is the rate of unemployment? e. What is the price of a new 40-inch television? 2. Central banks can use monetary policy to: a. turn prices from inflexible to flexible. b. force private banks to lend out reserves. c. make it easier for people and businesses to borrow. d. mint new currency. e. rewrite the government budget. 3. For nearly four decades, the United States has had a: a. current account balance. b. current account surplus. c. current account deficit. d. ban on imports. e. ban on exports. 4. In general, a nation can enjoy a higher standard of living by ___________ than by being self-sufficient. a. specializing and trading b. avoiding trade with other nations c. increasing its versatility d. taxing imported goods e. producing on the PPF curve 5. When stock prices declined during the Great Recession, it caused aggregate demand to decrease because: a. households became more optimistic and increased consumer spending. b. the government raised taxes and decreased spending. c. firms’ net worth decreased, leading to an increase in investment spending. d. household wealth decreased, leading to a decline in consumer spending. e. the government refused to allow the money supply to increase. 6. What function of money is highlighted when I am depositing a portion of my paycheck into my savings account to pay for my child’s future education? a. fiat money b. medium of exchange c. unit of account d. store of value e. commodity money 7. The purchase of U.S. Treasury securities by the Federal Reserve: a. will have no effect on the money supply. b. will decrease the money supply. c. will increase the money supply. d. will decrease the reserves at banks. e. will increase the amount of U.S. Treasury securities held at banks. 8. The argument that calls for the trade protection of only newly developing industries is known as the ______________ argument. a. autarky b. infant industry c. developing nation d. predatory dumping e. learning by doing 9. The figure above is known as the Laffer curve. Which point(s) is the optimal tax rate for economic growth? a. only A b. only B c. only C d. some point between A and B e. the Laffer curve doesn’t tell us about economic growth 10. The root cause of cyclical unemployment is: a. unemployment insurance. b. labor market regulations. c. delays in matching available workers with open jobs. d. downturns in the business cycle. e. changes in the industrial makeup of the economy. 11. An example of a direct negative incentive is: a. providing a commission for sales. b. awarding a promotion for hard work. c. threatening to fire those who do not perform well. d. providing an orientation for new employees. e. providing generous benefits and pay for employees. 12. Why does the federal debt historically tend to increase during periods of recession? a. Economic activity decreases, which decreases revenues and increases outlays. b. Economic activity decreases, which decreases revenues and decreases outlays. c. Economic activity increases, which increases revenues and increases outlays. d. Economic activity increases, which increases revenues and decreases outlays. e. Economic activity increases, which decreases revenues and increases outlays. 13. Which of the following economic statements would a classical economist tend to support? a. The short run deserves more focus than the long run. b. The market tends toward stability and full employment. c. Savings is a drain on aggregate demand and can reduce economic growth. d. Government intervention is often necessary to stimulate or moderate economic performance. e. Prices tend to be rigid and inflexible. 14. Countercyclical fiscal policy: a. is fiscal policy that seeks to counteract business-cycle fluctuations. b. only includes expansionary fiscal policy. c. only includes contractionary fiscal policy. d. attempts to counteract pro-cyclical fiscal policy. e. is no longer used by the government. 15. Liberia, a very poor nation in West Africa, is relatively abundant in resources such as mahogany and rubber tree forests, iron-ore deposits, and diamonds. If Liberia is so rich in valuable resources, why is it still so impoverished? a. Liberians are content with a low standard of living. b. Natural resources are not as important as other types of resources. c. Taxes in Liberia are too high and discourage investment. d. The population of Liberia is too small to use those resources. e. Liberia lacks the institutions necessary to make productive use of those resources. 16. Why is a government budget surplus not necessarily a good thing? a. Saving money is not something a government should do. b. It demonstrates a society that is too weak to stand up to the government. c. It means the government thinks a recession is coming, so it is storing funds for the crisis. d. The surplus money is divided among members of Congress, as a reward for managing the economy well. e. It means tax rates may be too high. 17. Long-run aggregate supply shifts are caused by: a. changes in consumption, investment, government spending, and net exports. b. temporary changes in input prices. c. changes in expected future price levels. d. changes in resources, technology, and institutions. e. changes in consumption, investment, government spending, net exports, resources, technology, and institutions. 18. In the US, M1 includes currency as well as: a. certificates of deposit. b. money market mutual funds. c. checkable deposits. d. bond holdings. e. gold holdings. 19. If government revenues in 2000 were $2.0 trillion and government outlays were $1.8 trillion, this means that: a. the federal debt was unaffected in that year. b. the federal debt increased $200 billion. c. the federal budget deficit was $200 billion. d. the federal budget surplus was $200 billion. e. the federal budget was balanced. 20. In the short run, some prices are inflexible. Most often, the prices that are inflexible (also known as 'sticky') are: a. output prices. b. energy rates. c. food prices. d. product prices. e. wages for workers. 21. In Las Vegas, the cost of living index is 110, and in San Francisco, it is 170. You work in Las Vegas currently and your salary is $57,000. You are offered a promotion and pay raise of $70,000 to move to San Francisco. If you take the promotion: a. your nominal wage and your real wage have increased. b. your nominal wage increased but your real wage has decreased. c. your nominal wage decreased but your real wage has increased. d. both your nominal and real wage have decreased. e. your real wage remained constant even though your nominal wage rose. 22. The unemployment rate is: a. the percentage of the population that is unemployed. b. the percentage of the adult population that is unemployed. c. the percentage of the labor force that is unemployed. d. the percentage of the adult population that is in the labor force. e. the percentage of the labor force that is employed. 23. Typically, savers in the loanable funds market are the _________, and borrowers are _________. a. government and households; foreign entities and firms b. government and foreign entities; households and firms c. foreign firms and households; foreign banks and domestic firms d. households and foreign entities; firms and the (U.S.) government e. large firms and households; small firms and micro-capital organizations 24. Which of the following is a normative statement? a. You should wear a helmet when cycling. b. The sky is blue. c. A bicycle has two wheels. d. A unicycle has five wheels. e. Electricity follows the path of least resistance. 25. To determine a value for GDP, you would: a. add up the quantities of the final goods and services produced. b. add up the dollar value of the final goods and services produced. c. add up the dollar value of the final goods and services produced minus the dollar value of the intermediate goods and services produced. d. add up the dollar value of all goods and services produced. e. add up the quantities of all goods and services produced. 26. New computer technologies can be expected to: a. increase long-run aggregate supply. b. increase the price level. c. increase the unemployment rate. d. decrease aggregate demand. e. decrease aggregate supply. 27. Are demographics an important factor when planning the federal budget? a. No, because government spending and taxation policies do not discriminate based on any demographic factors. b. No, because demographics do not change much from year to year. c. No, because federal budgets do not change much from year to year. d. Yes, because government benefits are allocated solely based on demographic factors. e. Yes, because many government benefits are received by the fast-growing elderly population, causing implications for future levels of taxation and government benefits for everyone. 28. Which of the following statements is true about bonds? a. Bonds are ownership shares in a firm. b. The dollar price and interest rate of a bond have an inverse relationship. c. A bond’s dollar price is calculated as growth rate. d. Bonds can never default. e. The dollar price and interest rate of a bond have a positive relationship. 29. A friend tells you that the federal debt is $20.2 trillion dollars, and that the US needs to begin immediately to reduce this debt. You reply that focusing on a big number doesn’t tell us much about the matter and instead a more useful measure is: a. Per-capita state debt b. the amount of debt paying over 6% interest c. the debt-to-GDP ratio d. the number of years it would take Warren Buffet to pay off the debt e. the federal debt denominated in euros, not dollars 30. The headline unemployment rate is low, and the news shows good job opportunities for American workers. Some people do not feel that this news matches their reality. An additional unemployment measure, sometimes referred to as the “u-6” rate, adds what additional information about the labor force? a. Workers who are self-employed b. workers who are not legally authorized to work in the US c. workers who are part-time but would like to be full-time, and workers that have given up looking for a job d. workers who speak more than one language e. workers who non-citizens, but authorized to work in the US 31. Which of the following is a former chair of the Federal Reserve Board of Governors? a. David Thuelis d. Nigel Workman c. Richard Thaler d. Ben Bernanke e. Timothy Geithner 32. You run for Congress and are elected because you promised to reduce the burden of social security on the federal budget. To do this, you will need to: a. reduce current and future contribution rates b. allow beneficiaries to receive benefits earlier c. increase benefits to current and future recipients d. increase current and future contribution rates while keeping benefits the same e. penalize beneficiaries who wait until age 70 to claim their benefits 33. Which of the following economic statements would a Keynesian economist tend to disagree with? a. Savings is crucial to economic growth because it leads to investment in productive capital. b. Government intervention is often necessary to stimulate or moderate economic performance. c. Aggregate demand is the most important side of the economy. d. Savings is a drain on aggregate demand and can reduce economic growth. e. The short run is far more important than the long run. 34. Unemployment rises and real gross domestic product (GDP) growth slows during the: a. expansion phase of a business cycle. b. recession phase of a business cycle. c. entire business cycle. d. recovery phase of a business cycle. e. short-run phase of a business cycle. 35. If the U.S. dollar appreciates in the foreign exchange market, U.S. exports will be ____ and U.S. imports will be ____. a. relatively less expensive; relatively less expensive b. relatively less expensive; relatively more expensive c. relatively more expensive; relatively less expensive d. relatively more expensive; relatively more expensive e. unaffected; relatively less expensive 36. Assume the US population is 300 million, 75 million are too young to work, 141 million are working and 9 million are unemployed and looking for work, what is the unemployment rate? a. 4% b. 6% c. 6.4% d. 12% e. 16% Figure 1 Price Level LRAS AS AD 800 1150 Real GDP/Income (Y) (Billions of Dollars) 37. Refer to Figure 1. The economy is currently operating at $800 billion. Suppose the federal government increases purchases. As a result, the: a. b. c. d. e. aggregate demand shifts right causing unemployment and real GDP to fall. aggregate supply shifts right causing unemployment to rise and real GDP to rise. aggregate demand shifts right causing unemployment to fall and real GDP to rise. aggregate supply shifts left causing unemployment to rise and real GDP to fall. aggregate demand shifts left, causing the price level to fall and real GDP to rise END SCANTRON QUESTIONS Written portion: 1. How do you expect that what you have learned this semester will impact your life? OR What is something you have learned that you expect will be useful to you during your life? (Full credit for completion) 2) Choose a prompt from the following list. Please describe two economic policy solutions to address the matter (one of them needs to impact the underlying demand and demand curve and the other needs to address the underlying supply and supply curve). You may use words and graphs to support your claims. [More words does not necessarily mean better; more accurate language is better 😊 ] Option 1) Carbon emissions Option 2) Rising housing costs Option 3) Rising health care costs ESSAY PORTION: 5 FOUNDATIONS OF ECONOMICS • Incentives • Opportunity Cost o Positive o Definition: the next best alternative foregone o Negative o This is the cost of the “choice”; what you give up is the o Direct vs. Indirect cost of the choice ▪ Unintended consequences • Marginal thinking o People respond in predictable ways o Most decisions are incremental, not “all or nothing” • Trade-offs o What is the additional ___(joy, satisfaction, profit, cost, o Scarcity: all resources are limited; there are unlimited benefit, grade improvement, etc.)__of one more unit wants of __(fun time, study, work, quantity, donut, etc.)__ . o Because of this, all resources have multiple uses This applies to everything from eating at a buffet to ▪ i.e., water can be used to drink, wash, grow making an investment in a new product line food, generate power, water golf courses • Voluntary trade creates value and lawns, for artwork (fountains and so o Trade allows us to specialize in what we are best at forth), and recreation (water parks, and trade our excess for a total gain. Through lake/river sports, etc.) voluntary trade, all parties can be made better off; not ▪ We have to consider each trade-off when all parties benefit equally from trade we determine how to use a resource and then make a choice BASIC MODELS • Circular flow model: What does it describe? Why is it useful (What principles/concepts does it explain?) Can you put it in a picture? What are the components? o 2 flows: flow of goods and resources, flow of money/income o 2 agents: households and firms o 2 markets: market for goods and services, market for factors of production • Production Possibilities Frontier or Curve (PPF, PPC): What does it describe? Why is it useful (What principles/concepts does it explain?) Can you put it in a picture? What are the components? • Supply and demand (below) SUPPLY AND DEMAND o Understand equilibrium: Be able to define equilibrium, identify and represent on a graph, and discuss what conditions cause disequilibrium (price floors and ceilings) and what the disequilibrium effects of those disruptions are (surplus and shortage respectively) o Understand supply/demand: Know the determinants of demand (income, population or # of buyers, preferences, prices of related goods, expectations about future prices) and supply (cost of inputs, population or # of sellers, technology, weather shocks, and expectations about future prices, consumer behavior, economic growth and/or tax policy) o Be able to show the effect on EQ PRICE, EQ QUANTITY as a result of 1-curve shifts, 2-curve shifts ▪ One curve shifts: D, D, S, S Two curve shifts: D S, D S, D S, D S Total surplus, consumer surplus, producer surplus → be able to show on graph and or describe What is deadweight loss and what can cause it? ▪ o o GDP Gross domestic product: the market value of all finals goods and services produced within an economy for a specified time period (usually a year) GDP = C + I + G + NX | What are the rough percentages for each share in the US? Why do we care about GDP? How is it useful? Nominal vs. real GDP | GDP growth → what does it tell us? What doesn’t it tell us? | Per capita GDP → GDP/population, basically the average standard of living UNEMPLOYMENT What is unemployment? How do we calculate it? | unemployment rate = [# of workers looking for work but unable to find work] / [# of workers in the labor force, meaning all workers who are employed or seeking employment] Structural vs. Frictional vs. Cyclical → What are each of these, why do we care, what does it matter? Which of these two are ‘normal’ even in a booming economy? INFLATION General rise in the price level → increase in the prices of most goods/services in the economy | Bureau of Labor Statistics (BLS) tracks a basket of goods and services that approximates the expenses a typical household faces; this basket has changed over time and is updated as peoples’ preferences and habits collectively change | can be hard to measure → quality changes, etc. Some inflation is good (1-3% generally); deflation and very high inflation are bad for economy Inflation erodes purchasing power, reduces real GDP, real per-capita GDP Besides the official measure, there is the billion prices index, a private sector alternative that measures prices of goods and ends of tracking very closely with the official inflation measure LOANABLE FUNDS MARKET Price of money = interest Apply supply/demand market to funds market in US Who represents the demand-side in the loanable funds market? Borrowers, including consumers, but firms and governments are the BIG borrowers from this market Who represents the supply-side in the loanable funds market? Savers, consumers, excess cash reserves of firms and the Federal Reserve Nominal interest rate: what you see | real interest rate = nominal interest rate – inflation rate | even if the nominal rate is positive, if inflation is high or the nominal rate close to zero, the real rate could be negative FINANCE AND SECURITIES Direct financing - when firms or governments borrow directly from those with funds, done via stocks and bonds primarily Indirect financing – when an institution (think a conventional bank or credit-union) works as a ‘middle-man’, holding deposits for those with money (you, me, and even businesses) and lending a portion of those deposits to borrowers (you, me and businesses). What is the role of finance in an economy? How does finance affect real productivity and economic growth What are some of the instruments of financing: securities (bonds, stocks, mortgage-backed securities, etc.) Stocks - part-ownership of a company; businesses ‘go public’ to create stock, where investors buy the part-ownership in a company and this provides direct funding for the company to expand, etc. Majority of stocks traded are on secondary market, or a trading of existing shares. Some stocks provide regular income payments (usually small, 1-2% of the stock value) to stockholders called ‘dividends’. Bonds – an IOU with terms; bonds represent loan chunks to an issuer. Bonds mature or are paid back at the end of a set term. Coupon bonds provide an interest payment on a schedule, over the life of the bond. Zero coupon bonds are sold at a discount relative to the final value and provide no interest payment. If there is strong demand for a bond, the price will rise but the interest rate offered falls (bond prices and interest rates are inversely related) When the government ‘borrows’ money, it does so by issuing (selling) new bonds. The U.S. Treasury department is the one that creates these bonds. When the Federal Reserve ‘prints’ more money, it does so by buying bonds in the secondary (think used or existing bonds) market, increasing the amount of money circulating between banks and financial institutions. ECONOMIC GROWTH AND THE WEALTH OF NATIONS Why does economic growth matter? Think impact of economic growth over time – standards of living in US and other countries. Rewatch the video in the last lecture about 200 countries over 200 years in 2 minutes. Are we talking about nominal or real economic growth? Do we care more about GDP or per-capita GDP growth? (per capita!) What factors are necessary for or improve economic growth? • Resources o Land, natural resources, labor or human resources (human capital), and capital (everything from roads to factories, from computers to cars to tools) • Technology o Knowledge available for use in production; makes us more productive; how have computers made more work possible? What about improvements in agriculture that raise crop yields, etc. etc. • Institutions o Political stability and rule of law o Private property rights (ownership and protection of that ownership) o Stable money and prices (universally accepted currency and low inflation 1-3%) o Competitive markets o Efficient taxes o International trade o Flow of funds across borders (working financial systems) AGGREGATE DEMAND-AGGREGATE SUPPLY MODEL What is aggregate demand? FACTORS THAT SHIFT AGGREGATE DEMAND: Wealth, wealth effect –changes in real wealth, expected income and expected price levels; interest rate, international trade, increased consumer confidence, increased capital productivity What is aggregate supply? FACTORS THAT SHIFT AGGREGATE SUPPLY (varies depending on the time horizon) LRAS shifts: changes in resources, changes in technology, changes in institutions SRAS shifts: sticky resource prices, menu costs, money illusion, temporary supply shocks, changes in expected future prices, adjustments to past errors in price level expectations Know how to graph AD-AS model (AD, SRAS, LRAS, vertical axis: price level, horizontal axis: real GDP, unemployment) BASIC FEATURES OF THE GREAT DEPRESSION AND THE GREAT RECESSION Be familiar with the numbers/facts on GDP, unemployment, duration, and price level for each Know how to represent what occurred in each of these using the AD-AS model (Great Depression: massive shift to the left for AD | Great Recession: shift to the left in LRAS, shift to left in AD) What policies would have been the best response to Great Depression & Great Recession according to the AD-AS model? What are the major differences between the Classical view and the Keynesian view? FEDERAL BUDGETS Understand key terms: deficit, surplus, debt, taxing, spending, revenue (from taxes), expenditure (saving), discretionary spending vs. non-discretionary spending Understand the role and impact of social security and Medicare on Federal budgets Understand how demographics are increasing the impact of social security and Medicare on Federal budgets Understand how the US government ‘borrows’ money to finance its deficits FISCAL POLICY MONETARY POLICY Understand what fiscal policy is in principle, and how to represent it in the Understand the function of money according to economists: medium of AD-AS model exchange, unit of account, store of value and why is each important Fiscal policy is carried out in two major ways: spending by the government, Know who the current fed chair is and previous 3 fed chairs were. and taxing by the government What is the goal of monetary policy generally and what are the mandates of Understand counter-cyclical fiscal policy…what it its goal? Be able to give one the Fed? or two examples Understand M1 and M2, fractional reserve banking and how it increases the What is marginal propensity to consume? Know the simple formula for the money supply fiscal multiplier Know the formula for the simple money multiplier What does shovel-ready mean and why does that matter to fiscal policy? Understand that the Fed sets monetary policy and what tools it uses Why does fiscal policy not work perfectly? INTERNATIONAL TRADE AND FINANCE How does international trade affect the economy? What are the trends in international trade over the past 40 years? Why do countries trade? (basic theory, be able to identify or represent in a simple graph or express in short answer) Be familiar with what a trade agreement is and a couple of examples of existing trade agreements What is a tariff, what is a quota, and why do countries use them? What is an exchange rate? Why do we need to exchange currencies in order to have trade? What is the effect of a currency appreciation/depreciation against other currencies? Understand the idea of purchasing power parity. Be able to give one reason why a negative trade balance isn’t automatically a ‘bad’ thing Why/how does trade affect different groups differently?—meaning, who wins and loses in trade?
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