Released Exam 2010

Question 25

  • Leakage and injections of the circular flow

    Imports Injections and Leakages from the Circular Flow Injections Government Spending Investment Exports Lea kages Savings Taxation Imports Equilibrium when injections = leakages Expo rts Rest of the World Households Purchases of goods and services Gover nment Wages, dividends, interest, profits and rent Pm by tes fa Fir ms

Question 29

  • Employed

    • people currently holding a job in the economy (either full-time or part-time)

  • Unemployed

    • people who are actively looking for work but have not found a job

  • Labor Force

    • sum of employed and unemployed

Question 30

30. If an effective price floor is removed from a market for a good, then the price and quantity of the good sold will change in which of the following ways? B) (E) Price Increase Increase Decrease ecrease No change Quantity Increase Decrease Increase ecrease Increase

Effect of a Price Floor V:srket Quantity Demanded Excess Supply öi.3\!k21: Quantity Quantity Clemend Quantity Supplied

Question 34

2) Suppose the FED is committed to keeping the nominal interest rate fixed. To maintain the interest rate target in the face of äTéiFäfiiöfiäö7fiGäfi6Ticy, the 32\>0 FED can do which of the following? a) incre e prime rate ncrease the discount rate c) • crease the federal funds rate d) e gage in open-market purchases Mngage in open-market sales o)

Question 36

  • Current account vs. Capital account

    The current account records exports and imports of goods and services as well as unilateral • transfers whereas the capital account records transactions of purchase and sale of foreign assets and liabilities during a particular year. The current account considers goods and services currently being produced. The credit and debit of foreign exchange due to these transactions are also recorded in the balance of current account. The capital account is concerned with payments of debts and claims, regardless of the time period. The balance of capital account includes all items reflecting changes in stocks. The balance of payments contains two accounts: current and capital. The current account deals with short-term transactions known as actual transactions as they have a real impact on income, output and employment levels of a country through the movement of goods and services in the economy. It is comprised of visible trade (export and import of goods), invisible trade (export and import of services), unilateral transfers and investment income (income from factors such as land or foreign shares). The resulting balance of the current account is approximated as the sum total of balance of trade. The capital account is a record of the inflows and outflows of capital that directly affect a country's foreign assets and liabilities. It is concerned with all international trade transactions between citizens of a given country and citizens in other countries. The components of the capital account include foreign investment and loans, banking capital and other forms of capital, as well as monetary movements or changes in foreign exchange reserve. The capital account flow reflects factors such as commercial borrowings, banking, investments, loans and capital. In economic terms, the current account deals with receipt and payment in cash as well as non- capital items, and the capital account reflects sources and utilization of capital. The sum of the current account and capital account as reflected in the balance of payments will always be zero; any surplus or deficit in the current account is matched and cancelled out by an equal surplus or deficit in the capital account.

Question 41

41. If the economy was in a severe recession, the most expansionary fiscal policy would be to (A) decrease both personal income taxes and government spending by equal amounts (B) decrease both the reserve requirement and government spending by the same proportion (C) decrease personal income taxes and increase overnments ndin b ual amounts (D) increase the money supply and increase government spending by the same proportion Increase socra security taxes an Increase government spending by equal amounts

Question 43

  • Bond Prices and Nominal Interest Rates go the opposite direction

    Bond Price will interest rate • Monetary policy: Fed buys bonds - price rises - interest rates fall - spending rises - t GDP Fed sells bonds - price falls - interest rates rise - spending falls - Inflation

Question 45

Supply and Demand and Exchange Rates • If Americans want to buy foreign goods/services then they need the currency that the people in the foreign country use from day to day. • If Foreigners want to buy American made goods/services, then they need the currency that people in the U.S. use from day to day. — This currency exchange MUST be made somewhere along the process of trade\!\! Currency (money) is a commodity just like any other good/service — its value is determined by the forces of supply and demand — we can't escape it\!\!

The Demand and Supply Line-ups in Foreign Exchange Markets Demand for the U.S. Dollar Comes from... A U.S. exporting firm that earned foreign currency and is trying to pay U.S. -based expenses Foreign tourists visiting the United States Foreign investors who wish to make direct investments in the U.S. economy Foreign investors who wish to make portfolio investments in the U.S. economy Supply of the U.S. Dollar Comes from... A foreign firm that has sold imported goods in the United States, earned U.S. dollars, and is trying to pay expenses incurred in its home country U.S. tourists leaving to visit other countries U.S. investors who want to make foreign direct investments in other countries U.S. investors who want to make portfolio investments in other countries

Question 49

49. Which of the following best describes human capital? (A) The number of workers in the labor force (B) The physical capital used by workers c a ci ow d wor e D) The training and education of workers e spen Ing y usrness or wor er recruitment

human the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country. Translations, word origin, and more definitions

Human Capital Knowledge Creativity Creativity Wisdom Judgment Abilities Skills Education Training Experience

Question 53

Full Employment Aggregate Supply Aggregate Demand GROSS DOMESTIC PRODUCT 60. The economy of a country is currently in equilibrium at point A in the diagram above. If the government does nothing and wages are flexible, which of the following will most likely occur in the long run? (A) Falling wages will shift the aggregate demand curve to the right, producing full employment. (B) Rising wages will shift the aggregate demand curve to the right, producing full employment. (C) The economy will remain at point A. (D) Rising wages will shift the aggregate supply curve to the right, producing full em 10 ment. (E) Falling wages will shift the aggregate supply curve to the right, producing full employment.

  • Short-Run to Long-Run: Y1 > YP

  • Initial equilibrium is E1. Eventually, low unemployment will cause nominal wages to rise and leads to a leftward shift of the SRAS curve, so the new equilibrium is at E2

    Aggregate price IRAS SRAS2 El SRASI A rise in nominal wages shifts SuS leftward. AD Real GDP

  • Short-Run to Long-Run: Y1 < YP

  • Initial equilibrium is E1. Eventually, high unemployment will cause nominal wages to fall and leads to a rightward shift of the SRAS curve, so the new equilibrium is at E2

    Aggregate price level PI IRAS SRASI SRAS2 A fall in nominal wages shifts SRAS rightward. AD Real GDP

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