Eco 372

Eco/372 Final Exam
ECO/372 Final Exam Study Guide
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1. What is the name of the market where businesses sell products to households and government institutions?
Goods market
Explanation: The goods market is term that refers to the primary market where businesses interact with end users of products.
2. How would you describe Real Gross Domestic Product (GDP)?
The market value of all final goods and services produced in an economy or country
Explanation: Real GDP will be stated in the currency used during that year. It only includes final goods and services.
3. Who is included in underemployment figures?
People who are working part time or not actively working a fulltime job
Explanation: Underemployment figures show us the number of people whose skills are not being fully utilized.
4. The Bureau of Economic Analysis in the United States is responsible for what?
Calculating United States gross domestic product (GDP)
Explanation: The primary function of the Bureau of Economic Analysis is to produce reports related to economic activity, such as GDP.
5. The Federal Reserve is responsible for setting the…
Federal funds rate
Explanation: The federal funds rate is the interest rate at which the US government can borrow money from the fed.
6. Let’s say the government created a 10% income tax surcharge. What changes will occur in the AS/AD model?
Shifted the AD curve to the left
Explanation: An income tax on the people would cause aggregate demand to shift to the left because people would have less income to spend on consumer goods.
7. Where does the largest source of household income originate from in the US?
Wages and salaries
Explanation: The majority of people earn a living by working for an employer, while a minority of the population earns money from entrepreneurial endeavors.
8. Imagine a country were to increase aggregate expenditures by 20. What will happen to the AD Curve?
Shift right by more than 20
Explanation: As the country spends more, it will create income that will be redistributed through wage income and cause demand to increase.
9. What is the main function of aggregate demand management policies?
To control aggregate levels of spending within the economy
Explanation: Government policies are often needed to ensure that aggregate spending is correlating effectively with actual demand.
10. Imagine a world where consumer spending is declining. If output is equivalent to potential output, which policy would be ideal according to the AS/AD model
An increase in government spending
Explanation: If output is already at its max potential, the next best option will be an increase in government spending.
11. What to John Maynard Keynes say about market economies?
“They might recover slowly after they experience a significant decline in aggregate demand”
Explanation: The recovery of demand is often much slower than the initial decline of demand. For example, stock markets crash rapidly and take many years to fully recover.
12. Based on laissez-faire policy, what is the best way to fix unemployment?
Destroy labor unions and repeal government policies that make real wages excessively high
Explanation: Laissez-faire policy believes that the invisible hand of the market be the most efficient way to reach full employment.
13. Based on the AS/AD model, expansionary monetary policy will have the largest impact on price level when what occurs?
Increases in both nominal and real income
Explanation: Higher incomes will be one of the results that occur from a greater money supply.
14. What is true about the federal funds rate?
Will sometimes be set to zero
Explanation: During an economic crisis the fed may set the rate to zero to provide the government with necessary funding.
15. If the Federal Reserve wants to increase the federal funds rate from 1% to 1.25%, what monetary policy tool will be used to achieve the increase?
The discount rate
Explanation: The discount rate is changed on a regular basis and has a major impact on the health of the overall economy.
16. What will banks do if the Federal Reserve increases the required reserves for financial institutions?
Lend less and decrease the money supply
Explanation: A higher reserve rate will make less money available to borrowers, such as homebuyers and small businesses.
17. Let’s say the money multiplier is equal to 3 and the Fed decided to change the rate by 1 point. This will cause banks to change their reserves by a total of 300. How can the Fed go about increasing the money supply by 2700?
Reduce the discount rate by 3 percentage points
Explanation: It’s simple math really… 3 x 300 = 900. The 900 is then factored with the multiplier of 3 to get a net increase of 2700 in the money supply.
18 What would happen if the Fed reduced its reserve requirement from 6.5% percent to 5% for financial institutions?
Increase the money multiplier. Increase the money supply
Explanation: Banks with a lower reserve requirement will be eager to lend that money to new borrowers to earn additional interest income.
19. Countries can run a trade deficit when they can do the following:
Borrow from or sell assets to foreigners
Explanation: Just think China. We are borrowing tons of money from China, but selling them almost zero US made products, and running a massive trade deficit.
20. What does a weak US dollar do to the economy?
Raises inflation rates and expands the economy
Explanation: A weak dollar can expand the economy by allowing us to import goods a low cost.
21. In the short run, a trade deficit can be a good thing. What is a trade deficit a bad idea in the long-run?
The country be forced to sell all its financial assets to foreign countries
Explanation: Trade deficits are not sustainable over the long term and will eventually lead to financial collapse.
22. When a country runs a trade deficit, an expansionary monetary policy will most likely do the following:
Decrease exchange rates. Increase the trade deficit
Explanation: The local currency will be devalued as a result of expanding the money supply.
23. What does the balance of trade measure?
Difference in monetary value of imports and exports
Explanation: The dollar value of imports an exports is considered a balance of trade.
24. How does a country run a trade deficit?
Borrowing from foreign nations or selling assets to them.
Explanation: See question #19.
25. Expansionary fiscal policy will result in the following outcomes:
Raise income. Increase imports. Increase the trade deficit
Explanation: Expanding the money supply will cause people to have higher incomes and demand more consumer goods, thus increasing the trade deficit.
26. Describe the net effect of expansionary fiscal policy on a trade deficit:
Income and price effects create similar outcomes, thus causing the trade deficit to increase
Explanation: See question #22
27. If US currency interest rates decrease against Mexican interest rates and Mexican inflation decreases relative to the US, then the
Dollar will lose value in terms of Pesos
Explanation: This same principle can be applied to other currencies, such as the Japanese Yen.
28. What is the expected result of expansionary monetary policy?
Lower US interest rates. Decrease US exchange rates.
Explanation: Expanding the money supply will devalue the currency.
29. The US sets limits on Italian automobile imports. Limits on the amount of items that can be imported is called what?
Quota
Explanation: A quota simply sets a maximum limit on certain imports to protect domestic producers.
30. Duties charged by the government on imported goods, such as canned pickles would be considered what?
Tariff
Explanation: A tariff is a fee or tax on an imported goo