Final Exam Practice

Frictional unemployment is to ________ as structural unemployment is to ________.

• search; mismatch

• temperature; rigidity

• job training; output gap

• all of the above

A good reason for policy makers to pursue a goal of stabilizing economic activity is that

• high unemployment is always accompanied by high variability of unemployment

• in a stable economy, there is little or no frictional unemployment

• in a stable economy, there is little or no structural inflation

• none of the above

Shocks to the macroeconomy will cause a change in the equilibrium real interest rate, except ________.

• permanent supply shocks

• aggregate demand shocks

• temporary supply shocks

• all of the above

The Relationship Between Stabilizing Inflation and Stabilizing Economic Activity

 

The equilibrium real interest rate is the rate ________.

• at which the output gap is zero

• at which the inflation rate is low

• controlled by the central bank

• all of the above

If higher inflation ensues from a temporary negative supply shock, and in response, the central bank raises interest rates, then the resulting decrease in AD will return inflation back to its original level ________.

• and no further action will be required by the central bank

• but the ensuing positive output gap will lead to higher inflation once again so further interest rate increases will be required by the central bank to return inflation back to its long run level

• but the ensuing negative output gap will lead to short-run increases in AS and the central bank will have to "undo" its original interest rate hike in order to return inflation back to its target rate

The marginal propensity to consume describes ________.

• the tendency to consume fringe, or unusual items

• the impact of a change in spending on income

• the impact on consumption resulting from a change in income

Autonomous consumption is 700 and the marginal propensity to consume is 0.6. Calculate the average propensity to save when disposable income is (a) 10,000, (b) 12,000, and (c) 15,000.

If high incomes inspire more saving than low incomes ________.

• the average propensity to consume falls as income rises

• the marginal propensity to consume rises as income rises

• autonomous consumption falls as income rises

• the average propensity to consume rises as wealth rises

An economy has a fixed price level, no imports, and no income taxes. MPC is 0.80, and real GDP is $250 billion. Businesses increase investment by $5 billion.

a.      Calculate the multiplier and the change in real GDP

b. Calculate the new real GDP and explain why real GDP increases by more than $5 billion.