ECON2010 test 2 study guide

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1 ECON2010 test 2 study guide 1) In a closed economy public saving plus private saving is equal to a The budget deficit b The budget surplus c Taxes minus transfers d Investment 2) Which of the following is one explanation as to why the aggregate demand curve slopes downward? a Decreases in the price level raise the interest rate and increase consumption spending. b Decreases in the price level raise the interest rate and increase investment spending. c Decreases in the price level raise real wealth and increase consumption spending. d Decrease in the U.S. price level relative to the price level in other countries lower net exports. 3) The automatic mechanism the price level in the case of and the price level in the case of. a lowers; recession; raises; expansion b raises; expansion; lowers; recession c raises; recession; lowers; expansion d lowers; expansion; lowers; recession 4) A decrease in the price level in the U.S. will have what effect on the aggregate expenditure line? a Aggregate expenditure will shift downward. b Aggregate expenditure will become steeper. c Aggregate expenditure will shift upward. d Aggregate expenditure will not be affected by an increase in the price level in the U.S. 5) An unplanned increase in inventories results from a Actual investment that is greater than planned investment b An increase in planned investment c A decrease in planned investment d Actual investment that is less than planned investment 6) Under which of the following circumstances would private saving be positive in a closed economy? a Y= $10 trillion; C= $5 trillion; TR= $2 trillion; G= $2 trillion; public saving= $1 b Y= $6 trillion; C= $2 trillion; TR= $8 trillion; G= $3 trillion; public saving= $1

2 c Y= $8 trillion; C= $2 trillion; TR= $4 trillion; G= $2 trillion; public saving= $4 d Y= $9 trillion; C= $5 trillion; TR= $1 trillion; G= $1 trillion; public saving= $3 7) In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS: a Disinflation occurs. b Inflation occurs. c Stagflation occurs. d Deflation occurs. 8) Which of the following will not occur as the result of a decrease in the net taxes? a Decreased household saving b A shift to the left of the supply curve for loanable funds c Decreased government savings d All of the above 9) Suppose there has been an increase in investment. As a result, real GDP will in the short run, and in the long run. a Decrease; decrease further b Increase; increase further c Increase; decrease to its initial level d Decrease; increase to its value 10) How will an increase in the government budget surplus as a result of lower government spending (with no change in taxes) affect total saving in the economy? a Total saving will decrease by the amount of increase in the budget surplus b Total saving will decrease by less than the amount of increase in the budget surplus c Total saving will increase by the amount of increase in the budget surplus d Total saving will be unaffected by the increase in the budget surplus 11) During a recession, spending on tends to fall more dramatically than spending on. a N=Necessities; luxuries. b Food; cars c Nondurable goods; durable goods d Durable goods; Nondurable goods. 12) Knowledgeable capital is a Rival b Nonrival c Nonexcludable

3 d Both B and C 13) Given the equations for C, I, G, and NX below, what is the equilibrium level of GDP? C= 2, Y / I= 2,500 / G= 3,000 / NX= 400 a $4,333 b $7,100 c $8,778 d $79,000 14) When the government runs a budget deficit, we would expect to see that a G+TR<T b Investment will fall c Private saving will fall d Public saving is positive 15) If the marginal propensity to save is 0.25, the a $10,000 decrease in disposable income will a Increase consumption by $2,500 b Decrease consumption by $2,500 c Increase consumption by $7,500 d Decrease consumption by $7,500 16) If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is: a 1.20 b 0.80 c 0.70 d ) Consumption spending is $22 million, planned investment spending is $7million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true? a Aggregate expenditure is less than GDP b There was an unplanned change in inventories c Aggregate expenditure is greater than GDP d Aggregate expenditure is equal to GDP 18) If real GDP per capital in Ireland is estimated to be $7,400 in 2010, what will real GDP per capita be in 2015 if real GDP per capita grows at an annual rate of 2.8%? a $7,607 b $8.496 c $9,472 d $20,720 19) Which of the following will shift the aggregate demand curve to the right, ceteris paribus? a An increase in interest rates b A decrease in expected profits for firms c An increase in net exports d A decrease in disposable income 20) U.S. net export spending rises when

4 a The value of the U.S. dollar increases relative to other currencies b The growth rate of U.S. GDP is slower than the growth rate of GDP in other countries c The inflation rate is higher in the U.S. relative to other countries d The price level in the U. S. rises relative to the price level in other countries. 21) Consider the following data for a closed economy. Based on the information, what is the level of public saving? Y= $12 trillion / C= $8 trillion / I= $2 trillion / G= $2 trillion / TR= $2 trillion / T= $3 a $0 b $1 trillion c $2 trillion d Negative $1 trillion (deficit) 22) Suppose the economy is at short run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP? a Output will decrease b Unemployment will rise c Short run aggregate supply will shift to the right d Prices will increase 23) Workers expect inflation to rise from 3% to 5% next year. As a result, this should: a Move the economy up along a stationary short run aggregate supply curve b Shift the short run aggregate supply curve to the right c Move the economy down along a stationary short run aggregate supply curve d Shift the short run aggregate supply curve to the left 24) If planned aggregate expenditure is less than total production, a The economy is in equilibrium b GDP will decrease c Firms will experience an unplanned decrease in inventories d Actual inventories will equal planned inventories 25) A decrease in aggregate demand in he economy will have what effect on macroeconomic equilibrium in the long run? a The price level will rise, and the level of GDP will be unaffected b The price level will rise and the level of GDP will fall c The price level will fall, and the level of GDP will be unaffected d The price level will fall and the level of GDP will fall 26) If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve? a This will shift the aggregate demand curve to the right

5 b This will move the economy up along a stationary aggregate demand curve c This will shift the aggregate demand curve to the left d This will move the economy down along a stationary aggregate demand curve 27) Why does the short run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand? a Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices b Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices c Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices d Workers and firms adjust their expectations of wages and prices upward and they accept lower wages ad prices 28) Which of the following would you expect to increase the equilibrium interest rate? a A change from income tax to consumption tax b An increase in the budget deficit c A decrease in the profitability of investment projects firms are considering d An increase in the percentage of income after net taxes that households save 29) If the consumption function is defined ad C= 7, Y, what is the value of the multiplier? a 0.2 b 0.8 c 1.25 d 5 Ch. 10 class questions 1) if a country s real GDP is rising by 3% per year while its population is rising at 5% per year, which of the following is true? A Growth in nominal GDP is less than the growth of the population B Growth in nominal GDP outweighs growth in the population C The country s standard of living is rising D The country s standard of living is falling 2) In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million, assuming no technological change and no change in the hours of work. A GDP would increase further by more than $1 million B GDP would increase further by exactly $4 million C GDP would increase further by exactly $1 million D GDP would increase further, but by less than $1 million

6 3) Knowledge capital is nonrival in the sense that A two people can use the same knowledge to develop and produce a product 4) Which of the following is true regarding the productivity slowdown in the US during the mid 1970s? A High oil prices raised the cost of doing business for markets worldwide, and reduced output worldwide as well. 5) The term brain drain refers to A Highly educated individuals who leave developing countries for high income countries. 6) All of the following policies are ways for a country to promote long run economic growth except: B Imposing stricter regulations to limit foreign direct investment