Released Exam 2005

Question 3

Types of unemployment (1) • Unemployment related to the process of changing Frictional jobs, which may involve a period out of work. Improve by: increasing flow of information — job centres • The category of unemployed whose number Cyclical varies according to the business or economic cycle. Demand-deficient / Keynesian AS Macro Economics March 2014 NB: Not just in a recession (e.g. in a boom, bankruptcy lawyers have no business\!)

Types of unemployment (2) Structural Hidden AS Macro Economics March 2014 • When there is a mis-match between the skills of those unemployed and the skills that new jobs require. Improve by: supply-side policies such as retraining • Unemployment which is known to exist but is not included in the official government figures Especially amongst illegal immigrants — evaluation on official figures

Types of unemployment (3) Classical / The more they push wages up, depending on the elasticity of labour supply and demand, the more unemployment Seasonal AS Macro Economics March 2014 • This type of unemployment occurs when trade unions bargain for higher wages, which leads to fall in the demand for labour. • A type of unemployment that occurs due to the seasonal nature of the job is known as seasonal unemployment. E.g. tourism tutor2u

Question 18

Unemployment rate = \# of unemployed people total labor force

Question 19

  • Classical economists vs. Keynesian economists

    Classical Economics The market is perfect and self- sustaining Government intervention can only be a detriment to the economy The market automatically adjusts to "booms" and busts Supply = Demand David Ricardo Historical Perspective:Classical economics came of age during and after industrialization. Say's Law: Supply Creates its own demand. The economy is stimulated when more goods are produced.

    Keynesian Economics The market is imperfect and not self- sustaining Equilibrium may include unemployment, negative growth Consumer income stimulates demand, which causes economic growth. When economic growth is lacking, the government should John Maynard Keynes stimulate demand. Historical Background: The Great Depression

    Keynes Must pull economy out of bust (short term focus) People have chaotic 'animal spirit' The economy can be steered A 'circular flow of income' exists Economic regulation is good Bail-outs good The short run is most important Pro-Government Govenrment acts in best interest of public Savings should be spent now Kept bad businesses afloat to protect jobs Economy can settle at sub-optimal level without help Respect for human suffering and job protection Hayek Must avoid boom-bust cycles (long term focus) People are rational The economy must consist of free market forces Markets are not easily predictable Economic regulation is bad Bail-outs bad The long run is most important Anti-Government (causes malinvestment) People act in their own best interest Savings should be hoarded for future (classical view) Liquidation of bad businesses necessary Economy will settle at optimal level unhindered Respect for entrepreneurship and economic stability

Question 22

![Appreciation/Depreciation N [14-191 14. If the dollar depreciates relative to the peso, the peso will (appreciate/depreciate) relative to the dollar. 15. Appreciation of the dollar will tend to (increase/decrease) American imports & (increase/decrease) American exports 16. The yen price of the dollar has decreased from AM X Y150=$I to YIOO=$I, which means the dolla (apprec/gugs), which (incr/decr) our imports from Japan 17. Depreciation of the euro will (increase/decrease) European exports & (increase/decrease) their imports. 18. If Mexico decides to increase their investments in the U.S., the peso Will (appreciate/depreciate) whi would (increase/decrease) [Mexico's imports U.S. exports to Mexico. 19. If the exchange rate changes so that more Japanes yen are required to buy a dollar then the yen will (appreciate/depreciate) and Americans will purchase (more/less) Japanese goods. Rat" Rate 1 of Dollars Y 120 Y 100 # Of Dollars ](./media/image172.png)

Question 26

  • Stagflation is often caused by a SUPPLY side shock.

    Stagflation is often caused by a supply side shock. For example, rising commodity prices, such as oil prices, will cause a rise in business costs (transport more expensive) and short run aggregate supply will shift to the left. This causes a higher inflation rate and lower GDP. NOV 28, 2012 Stagflation I Economics Help www.economicshelp.org/blog/glossary/stagnation/

Question 32

The international sector. The international sector includes exports (X), which add to to the value of aggregate demand, and are an injection into the circular flow of income, and imports (M), which reduce aggregate demand, and are a withdrawal from the circular flow. International sector of the economy - Economics Online www.economicsonline.co.uk/Managing\_the\_economy/The\_international\_sector.html

Withdrawal Imports Households Spending Firms Saving Goods & Investment Taxation Financial Sector Government Spending Public Sector Trade Sector Exports Injection

Question 36

36. According to the theory of rational expectations, a fully anticipated expansionary monetary policy will (A) increase potential output B increase unem 10 ment (C) have no impact on real output promote t e p ucuon o consumer goods over capital goods (E) result in deflation

![The rational expectations theory is an economic idea that the people make choices based on their rational outlook, available information and past experiences. The theory suggests that the current expectations in the economy are equivalent to what people think the future state of the economy will become. Rational Expectations Theory

  • Investopedia www.investopedia.com/terms/r/rationaltheoryofexpectations.asp ](./media/image177.png)

    Rational Expectation Theory • Rational expectations theory is based on three assumptions Individuals and firms learn through experience to anticipate the consequences of changes in monetary and fiscal policy They act instantaneously to protect their economic interest thus nullifying the intended effects All resource and product markets are purely competitive

Question 42

  • Current account deficit = Capital account surplus

  • Capital account surplus = Current account deficit

Question 44

(46%) 48. Assume that the government implements a deficit-reduction policy that results in changes in aggregate income and output. Then the Fed engages in monetary policy actions that reverse the changes in income and output caused by fiscal policy action. Which of the following sets of changes in taxes, government spending, the RR, and the discount rate is most consistent with these policies? Taxes a. Increase b. Increase Government Spending Increase Decrease Required Reserve Ratio Discount Rate Decrease Decrease Increase No chanqe The G would increase T and decr G to reduce the deficit which would reduce AD. To reverse this & incr AD, the Fed would decr the RR & NC the DR to lower the I.R. \[decreasing the Discount Rate would have been better but is not a choice here\]

Question 46

prime rate noun NORTH AMERICAN the lowest rate of interest at which money may be borrowed commercially. Translations, word origin, and more definitions

Question 47

47. Which of the following best explains why transfer payments are not included in the calculation Of gross domestic product? (A) Transfer payments are used to pay for inter- mediate goods, and intermediate goods are excluded from gross domestic product. (B) Transfer payments are a government expenditure, and government expenditures are excluded from domestic uct. (C) Recipients of transfer payments have not produced or supplied goods and services in exchange for these payments. men o trans er paymen are usu y children, and income earned by children is excluded in gross domestic product. (E) Recipients of transfer payments are some- times not citizens of the United States.

What are excluded in GDP? Example of Intermediate Goods: . Intermediate Bricks and cement used in the construction of house Steel used in production of cars Wood used in furniture like sofa, dining table and so on. Glass used for making spectacles Vegetables used by restaurant owner Gold and silver used for making ornaments Cotton used for making

What are excluded in GDP? . Intermediate goods . Transfer payments GRANTS SOCIAL SECURITY SYSTEM LOANS Examples of certain transfer payments include • welfare (financial aid) • social security • government making subsidies for certain businesses (firms) Global fuel subsidies

What are excluded in GDP?

What are excluded in GDP? . Intermediate good . Transfer payments . Home Production . Pollution/ nvironmental amage

What are excluded in GDP? . Intermediate goods . Transfer payments . Home Production . Pollution/environm ental damage Illegal Goods x Fake / Counterfeit Products Smuggled Goods

Question 51

51. An increase in which of the following will lead to lower inflation and lower unemployment? (A) Exports (C) Labor productivity overnment spen Ing (E) The international value of domestic currency

Question 52

52. An unanticipated decrease in aggregate demand when the economy is in equilibrium will result in (A) a decrease in voluntary unemployrnent (B) a decrease in the natural rate of unemployment a decrease in a ate su I (D) an increase in unplanned inventories an Increase In rate 01 anon

EQUILIBRIUM EXPENDITURE 1.When aggregate planned expenditure exceeds real GDP, an unplanned decrease in inventories occurs. 2.When aggregate planned expenditure is less than real GDP, an unplanned increase in inventories occurs. 3.When aggregate planned expenditure equals real GDP, there are no unplanned inventories and real GDP remains at equilibrium expenditure Dr. Mazharul Islam 14

Rea I awegate expenditures, AE (trillions Of Lars) An in @ 2006 Prentice Hall Business Publishing FIGURE 11 -10 Macroeconomic Equilibrium An Real GOP, r (trillions Of dollars) Economics R Glenn Hubbard, Anthony Patrick O'Brien

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