ECON 131 Midterm 2 HW Questions – Flashcards
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Goods and services are produced in one country that are then sold in another country are called ______. a. exports b. trade-able items c. surplus items d. economic stimulants
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a. exports
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The term ______ describes circumstances where a country's exports exceed its imports. a. trade deficit b. trade imbalance c. trade surplus d. trade balance
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c. trade surplus
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A country's current account balance refers to a broad measure of the balance of trade that includes: a. merchandise, services, and foreign capital investments. b. goods, foreign capital investments, exported domestic services. c. goods and services, international flows of income, and foreign aid. d. merchandise, foreign aid and imported domestic services.
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c. goods and services, international flows of income, and foreign aid.
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If exports and imports: a. are imbalanced, then a trade surplus exists b. are imbalanced, then a trade deficit exists c. are equal, then trade is balanced d. are equal, then the economy is unhealthy
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c. are equal, then trade is balanced
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From a macroeconomic perspective, if GDP economic indicators show a decline of 10% or more in a single year, then which of the following outcomes is most likely to result? a. deep economic depression b. influx of foreign capital c. lessening of foreign aid d. merchandise trade surplus
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a. deep economic depression
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What is the most common method of measuring flows of trade? a. amount of physical items transported between countries b. amount of manufactured items transported by truck c. comparing annual amounts of goods and services exchanged between countries d. comparing exports of goods, services, and financial capital between countries
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d. comparing exports of goods, services, and financial capital between countries
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At the outset of the 21st century, most global trade took the form of: a. services, rather than goods b. goods, rather than services c. equal trade in goods and services d. trade surpluses in thee service sector
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b. goods, rather than services
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From a macroeconomic perspective, an economic transaction in the form of a financial investment is synonymous with which of the following? a. a productive economic asset b. trade resulting from unilateral transfers c. trade in the financial capital market d. a stream of payments leaving the country
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c. trade in the financial capital market
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To a macroeconomist, a trade deficit is synonymous with which of the following? a. outflow of financial capital b. outflow of goods and services c. inflow of financial capital d. inflow of goods and services
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c. inflow of financial capital
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Which of the following represent the national savings and investment identity - Supply of financial capital = Demand for financial capital - expressed in algebraic terms? a. (M-X) = I - S - (T-G) b. S + (M-X) = I + (G-T) c. X - M = S + (G-T) - I d. I - S - (T-G) = (M - X)
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b. S + (M-X) = I + (G-T)
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The statement that GDP = C + I + G + X - M is an identity, because _______. a. trade surpluses can be either good or bad b. trade deficits can be either good or bad c. it is true according to the definition of GDP d. each trade is conducted on a voluntary basis
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c. it is true according to the definition of GDP
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Which of the following represents a financial inflow into the U.S. economy? a. South Korea car imports b. Canadian investors buying real estate in Arizona c. foreign aid from the U.S. to Haiti d. oil imports from Iraq
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b. Canadian investors buying real estate in Arizona
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Which of the following represents a financial outflow from the U.s. economy? a. U.S. computer exports to Poland b. returns paid on U.S. financial investment in Hong Kong c. U.S. investors buying foreign assets in Germany d. British investors buying real-estate in Kentucky
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c. U.S. investors buying foreign assets in Germany
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From a macroeconomic perspective, a payment made by a foreign firm to a U.S. investor looks just like an: a. import of a service b. import of a good c. export of a service d. export of a good
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c. export of a service
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Which of the following will strongly influence a nation's level of trade? a. A size of its economy, its geographic location, and its history of trade b. size of its government, its history of trade, and its geographic location c. government trade policy, its history of trade, and the size of its economy d. ratio of exports to GDP, balance of trade, and government trade policy
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a. A size of its economy, its geographic location, and its history of trade
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Define the terms "merchandise trade balance" and "current account balance."
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Merchandise trade balance is the balance of trade when only looking at goods and not services. Current account balance is a broad measure of the balance of trade that includes trade in goods and services, international flows on income, and foreign aid.
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Does a trade surplus mean an overall inflow or an overall outflow of financial capital to an economy?
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A trade surplus is an overall outflow of financial investment capital. This is because of domestic investors putting their funds abroad.
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Write down the national savings and investment identity.
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Supply of Financial Capital = Demand for Financial Capital The supply of financial capital includes savings by individual and firms and the inflow of financial capital from foreign investors or trade deficit. The demand for financial capital includes the private investment sector and government borrowing.
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Suppose domestic investment increases, and there is no change in the amount of domestic private and public saving. Using the national savings and investment identity, show what happens to the size of the trade deficit.
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If you were to re-arrange the identity, it would look like: Trade deficit = domestic investment - private domestic savings - Government savings. Therefore, if the domestic investment increases and the domestic private and public savings, then the overall trade deficit will increase. As the investment increases and everything else stays the same, the number will just get bigger, so therefore the trade deficit will increase.
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Explain the relationship between a current account deficit and the flow of funds.
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A current account deficit is when the country is a net borrower from abroad. This can be referred to as the inflow of our financial capital. This inflow is paired with an outflow to create a flow of funds from a home country to a foreign country.
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The maximum quantity that an economy can produce, given its existing levels of labor, physical capital, technology, and institutions, is called: a. real GDP b. potential GDP c. aggregate supply d. aggregate demand
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b. potential GDP
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In macroeconomics, _______ denotes the relationship between the total quantity of goods and services and the price level for output. a. macroeconomic equilibrium b. aggregate supply (AS) c. aggregate demand (AD) d. potential GDP
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c. aggregate demand (AD)
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________ results when an economy experiences high unemployment and high inflation at the same time a. Stagflation b. Deflation c. Reflation d. Recession
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a. Stagflation
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Say's Law argues that a given ______ must create an equivalent _______ somewhere else in the economy. a. potential GDP; value of supply b. total quantity of goods; price level for output c. natural rate of unemployment; full employment GDP d. value of supply; value of demand
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d. value of supply; value of demand
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When the economy of a country is operating close to its full capacity: a. the unemployment rate is greater than the natural rate of unemployment b. cyclical unemployment is close to zero c. unemployment is close to zero d. the unemployment rate is less than the natural rate of unemployment
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b. cyclical unemployment is close to zero
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Economic production has fallen to less than full potential due to inadequate incentives for firms to produce. The duration of this economic condition will likely be: a. indefinite b. unknown c. long-term d. short-term
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d. short-term
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If the price level of what firms produce is rising across an economy, but the costs of production are constant, then: a. the maximum potential GDP will be exceeded b. increase in quantity produced won't be large c. a majority of industries will start running into limits d. higher profits will induce expanded production
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d. higher profits will induce expanded production
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In an AD/AS model, the point where the economy has excess capacity is called the: a. Keynesian zone of the AS curve b. intermediate zone of the AS curve c. neoclassical zone of the AS curve d. crossing point of the potential GDP line
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a. Keynesian zone of the AS curve
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Which of the following must be present in order for the aggregate supply curve to form an upward slope? a. the lure of higher profits to induce continued production b. fixed cost of inputs combined with rising prices for outputs c. rise in aggregate quantity of supplied goods and services d. constant price level for intermediate goods and services
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b. fixed cost of inputs combined with rising prices for outputs
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Why is productivity growth considered to be the most important factor in the AD/AS model? a. if shifts the AD curve in the long-term b. it shifts the AD curve in the short-term c. it shifts the AS curve in the short-term d. it shifts the AS curve in the long-term
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d. it shifts the AS curve in the long-term
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As the aggregate price level in an economy rises, ______. a. interest rates increase b. consumer demand increases c. exports decrease d. investment increases
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a. interest rates increase
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Whether the economy is in a recession is illustrated in the AD/AS model by how close the _____ is to the potential GDP line. a. AS curve b. AD curve c. equilibrium d. AS and AD curve
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c. equilibrium
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The _______ means that a higher price level leads to lower real wealth. a. employment effect b. interest rate effect c. wealth effect d. foreign price effect
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c. Wealth effect
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The ______ holds that a rise in price level will make domestic goods relatively more expensive, ______ exports and _______ imports. a. interest rate effect; encouraging; discouraging b. employment effect; discouraging; encouraging c. wealth effect; encouraging; discouraging d. foreign price effect; discouraging; encouraging
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d. foreign price effect; discouraging; encouraging
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Melanie decided to save 20% of her annual earnings for 10 years so she would have a down payment for a house. After 5 years, what change in the economy would cause an increase in the purchasing power of the funds she has managed to save? a. recession b. depression c. deflation d. stagflation
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c. deflation
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Does Keynes' law apply more accurately in the long run or the short run?
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Keynes' law applies more accurately to the short run
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What are the components of the aggregate demand (AD) curve?
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Consumption, investment, net exports, and government spending
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How would an increase in wealth affect the aggregate demand curve? Explain.
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A higher price level leads to lower real wealth, which is the definition of wealth effect. Lower real wealth less to decreased aggregate demand. That means AD curve shifts to the left.
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Briefly explain why the SRAS curve is initially horizontal in the Keynesian model.
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Since the economy is producing an output far below potential GDP, it is easy to increase production in response to a small price change
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Describe the mechanism by which supply creates its own demand.
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In order to supply goods, suppliers must employ workers, whose incomes increase as aa result of their labor. They use this additional income to demand goods of an equivalent value to those they supply.
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Consumption, investment, government spending, exports, and imports are: a. all complementary elements of a market-orientated economy. b. some of the opposing elects found in a market-orientated economy c. all components of aggregate demand d. some of the building blocks of Keynesian analysis
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c. all components of aggregate demand
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In the Keynesian framework, most short-run fluctuations in GDP are due to: a. changes in aggregate demand b. changes in the natural rate of unemployment c. changes in potential GDP d. changes in the unemployment insurance system
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a. changes in aggregate demand
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_______ will not cause a shift of the AS curve in a Keynesian framework. a. Prices of inputs b. Changes in input prices c. Changes in output prices d. Changes in inputs
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c. Changes in output prices
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According to the Keynesian framework, _______ may cause a recession, but not inflation. a. a major trading partner's economic slowdown b. a decrease in interest rates c. an increase in domestic investment d. a decrease in major trading partner's export prices
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a. a major trading partner's economic slowdown
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According to the Keynesian framework, which of the following will not help a country to get out of a recession, but may help that country reduce inflation? a. an increase in military spending b. a decrease in military spending c. increase in spending by the government on health care d. decrease in federal government taxation of personal income
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b. a decrease in military spending
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When an economy is experiencing higher real interest rates, business firms will most likely be discouraged from investing in: a. mechanical devices b. specialized services c. computer or other technologies d. tangible and/or intangible capital
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d. tangible and/or intangible capital
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If a Philips curve shows that unemployment is high and inflation is low in the economy, then that economy: a. is producing at its potential GDP b. is producing at a point where output is more than potential GDP c. is producing at a point where output is less than potential GDP d. is producing at its equilibrium point
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c. is producing at a point where output is less than potential GDP
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Which of the following is a building block of neoclassical economics? a. the size of the economy is determined by real GDP b. sticky wages and prices c. menu costs d. wages and prices will adjust in a flexible manner
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d. wages and prices will adjust in a flexible manner
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What can cause a recessionary gap? a. An increase in consumption b. A decline in investment c. A decline in imports d. An increase in exports
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b. A decline in investment
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A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of: a. cyclical unemployment b. real unemployment c. aggregate demand d. inflationary pressures
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c. aggregate demand
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Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in: a. a rise in level of output b. an increase in price level c. downward pressure on the price level d. pressure for a lower level of inflation
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b. an increase in price level
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The theory of _______ holds that people will use all information available to them to form the most accurate possible expectations about the future. a. adaptive expectations b. rational expectations c. Keynesian economics d. Neoclassical economics
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b. rational expectations
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In order to shift the vertical supply curve to the left, which of the following would have to occur? a. increase in productivity b. breakdown of key market institutions c. expansion of potential GDP d. flexible wage and price adjustments
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b. breakdown of key market institutions
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Which of the following does not determine consumption expenditure? a. Disposable income b. Wealth or credit c. Expected future come d. Unexpected inflation
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d. Unexpected inflation
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In which of the following situations does investment spending increase? a. A rise in interest rates b. A decrease in interest rates c. Government proposes to increase taxes on capital d. A recession
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b. A decrease in interest rates
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From a Keynesian point of view, which is more likely to cause a recession: aggregate demand or aggregate supply. Why?
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Aggregate demand is more likely to cause a recession. This is because the aggregate demand curve is affected by consumption, investment, government spending, and exports and imports. Thus, if businesses were to stop expanding, or investing, aggregate demand will fall, therefore resulting in a recession. Another example would be a decrease in consumption, and this could be due to a lack of confidence from consumers.
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Why do sticky wages and prices increase the impact of an economic downturn on unemployment and recession?
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Because of the concept of sticky wages and prices, price level of goods and wages stay the same in the event of a recession. Therefore, many of the employers cannot afford to employ people at that level, and many employees are laid off.
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What is the Keynesian prescription for recession? For inflation?
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The Keynesian prescription for recession would be for the government to take action to shift the aggregate demand curve to the right. For example, initiate tax cuts for consumers. Another way to shift the aggregate demand curve would be to have businesses stimulate consumption and investment. The Keynesian prescription for inflation would be for the government to take action to shift the aggregate demand curve to the left. For example, increase taxes so that consumers will be inclined to decrease their consumption. Another way would be to cut government spending.
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Suppose after five years of sluggish growth, the economy of the European Union picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?
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If the European Union picks up speed, this would lead to an increase in demand for U.S. exports, thus reducing the U.S. trade deficit. An increase in demand for U.S. exports would cause a shift in the aggregate demand curve to the right, thus an increase in GDP would take place. This increase in GDP would mean that we are closer to Potential GDP, meaning that there would be an increase in employment.
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If aggregate supply is vertical, what role does aggregate demand play in determining output? In determining the price level?
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If aggregate supply is vertical, aggregate demand does not affect the quantity of output. However, aggregate demand does affect the price level if aggregate supply is vertical. Shifts in the aggregate demand curve will move the equilibrium point along the vertical aggregate supply curve, thus only changing the price level.
