Released Exam 2012

Question 9

  • The official unemployment rate understates the unemployment level in the economy because the official unemployment rate ignores underemployed and discouraged workers

Question 12

A (high i-rate, low quantity demanded) B (low i-rate, greater quantity demanded) Money demand Quantity of money

Question 28

  • Technology in output per worker

    F(K/N, ly F(K/N, 1) Capital per worker, KIN

Question 30

Aggregate price level 1. An initial positive demand shock... RAS P3 P2 PI Potential —Yl output ADI 3. ...until an eventual rise in nominal wages in the long run reduces short-run aggregate supply and moves the economy back to potential output. SRAS2 susl 2. ...increases the aggregate price level and aggregate output and reduces unemployment in the short run... Real GDP Inflationary gap

![Aggregate price level 2. ...reduces the aggregate price level and aggregate output and leads to higher unemployment in the short run...

  1. An initial negative demand shock... IRAS ADI AD2 Potential output SRASI SRAS2 3. ...until an eventual fall in nominal wages in the long run increases short-run aggregate supply and moves the economy back to potential output. Real GDP Recessionary gap ](./media/image30.png)

Question 32

exports GDP consumption investment government expenditure imports net expons

Question 33

Which of the following best explains the increase in national income that results from equal increases in government spending and taxes? (A) Consumers do not reduce their spending by the full amount of the tax increase.

Question 34

  • Unanticipated inflation increases the economic well-being of net debtors

Question 35

  • Inflationary expectations --> inflation --> unemployment

    Inflation Rate NAIRU or Long-Run Phillips Curve o New Short-R un Phillips Curve Initial Short-Run Phillips Curve Unemployment Rate

Question 37

  • Wage-Price Spiral: Combination of "cost-push" and "demand-pull" inflation leads to a wage-price spiral

  • When there is too much money chasing too few goods, the price of products will tend to increase which leads to "demand-pull" inflation

  • When workers demand higher wages as a result of inflated prices, prices of products consequently go up as well, leading to this "wage-price" spiral

  • Increased price of products leads to higher wages leads to increased price of products and so on

  • Keynesians tend to favor this model of how inflation works and that they prices are sticky downward or downward inflexible

    Higher Prices Increased demand of goods Rising Cost of Living Indexati on of wages Higher wages

Question 38

A budget deficit implies lower taxes and increased G, this will increase AD and this may cause higher Real GDP and inflation. If the govt sells more bonds this is likely to cause interest rates to increase. This is because they will need to increase interest rates in order to attract investors to buy the extra debt. Economic Effects of a Budget Deficit I Economics Help www.economicshelp.org/macroeconomics/fiscal-policy/effects-budget-deficit/

Increased Government Budget Deficit: Crowding Out LFI LFO Government borrows more, reducing savings available for private uses. Loanable Funds

Question 40

Fractional-reserve banking is the practice whereby a bank accepts deposits, makes loans or investments, and holds reserves equal to a fraction of its deposit liabilities. Reserves are held as currency in the bank, or as balances in the bank's accounts at the central bank. Fractional-reserve banking - Wikipedia https://en.wikipedia.org/wiki/Fractional-reserve\_banking ""im•iiiil

THE BASIC FRACTIONAL RESERVE BANKING CYCLE 1. DEPOSIT $1,000 $900 2. LOAN $100 TO LOAN $900 3. SPEND $900 RINSE & REPEAT FROM STEP 1... $810 TO LOAN $810 RINSE & REPEAT FROM STEP 1... AT THIS POINT THERE IS $1,900 IN THE SYSTEM. THE BANK HAS $100. AT THIS POINT THERE IS $2,710 IN THE SYSTEM. THE BANK HAS $190. AT THIS POINT THERE IS $3,439 IN THE SYSTEM. THE BANK HAS $271. HTTP://CYNIC.ME

Question 49

Govemment Policy Monetary Interest Money Supply Rates Tax Fiscal Spend

Question 50

![Exhibit 5: Production (and Consumption) Possibilities Frontiers with Trade (a} United States U.S. preferred combination 400 300 200 100 0 100 200 300 400 Clothing 400 300 200 100 (b) [zodia Izodian preferred combination 1 0 100 200300400 Clothing + The U.S. consumption possibilities frontier stops at 400 million units Of clothing because that is the most that Izodians can produce *With production and specialization, the U.S. produces 600 units Of food, consumes 400 units, and exchanges the rest for 200 million units of Izodian clothing. *Izodians produce 400 units of clothing, wear 200 million units, and exchange the rest for 200 million units of U.S. food ](./media/image234.png)

Question 54

  • An increase in the labor force would LEAST likely increase labor productivity.

Question 59

  • Advocates of a monetary rule recommend increasing the money supply at a rate that is equal to the rate of increase in long-run real GDP

Question 60

  • Most economists believe that in the long-run, there is no trade-off between unemployment and inflation

  • To avoid accelerating inflation overtime, the unemployment rate must be high enough that the actual rate of inflation matches the expected rate of inflation

  • The unemployment rate at which inflation does not change over time is known as the nonaccelerating inflation rate of unemployment, or NAIRU

  • The Long-Run Phillips Curve (LRPC) is the relationship between unemployment and inflation after expectations of unemployment have had time to adjust over time

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