Ag Econ 1042
Second Exam, 140 points
March 17, 2011
Name ________KEY________________________
11 a.m. Section
True/False – one point each
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Bonds are borrowing that the buyers treat as an investment.
The index of leading indicators measures economic growth.
Real GDP increases when consumption and investment increase.
Increases in commodity prices impact poor countries more because purchases in
those countries spend more income on physical goods.
Resources are mostly under used during a recession and the trough that follows.
A change in the price level changes the quantity of real GDP demanded.
An increase in technology increases aggregate supply.
An increase in the price level leads to a decrease in the quantity of real GDP
demanded.
A drop in the U.S. price level relative to the rest of the world will increase the
demand for our products in other countries.
Real GDP will increase if both the AD and AS curves shift to the right.
An increase in the amount of human capital increases potential GDP.
Unemployment increases when the government decreases its expenditures,
ceteris paribus.
An increase in aggregate demand (AD) tends to put upward pressure on prices.
Human capital refers to the accumulated knowledge and skills of human beings.
An important condition required for economic growth is economic freedom.
A key reason why some nations show little or no growth is a lack of incentives
to undertake actions toward growth.
The catastrophes in Japan will reduce its GDP and may reduce AS in the U.S.
Leakages are basically lost expenditures.
Property rights can apply to physical, financial and intellectual property.
The current chairman of the Federal Reserve is Ben Bernanke.
Crowding out is when there is too much private investment.
As the interest rate increases, the opportunity cost of holding money increases
and the quantity of money demanded decreases.
The size of a multiplier depends on the rate of leakages.
The price level does not affect the level of real GDP demanded.
A tax cut will decrease aggregate demand and shift the AD curve to the left.
A recession in the rest of the world means that U.S. exports would increase.
When disposable income increases, consumption expenditure does not change.
Social Security only makes payments to retired workers and no one else.
A decrease in input costs for items like fuel or labor will decrease supply.
Producer surplus is the benefit gained by producers in excess of supply.
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Multiple choice – two points each
__D___ 31. The intention of fiscal policy is to
a) Stabilize the business cycle
b) Reduce unemployment and inflation
c) Promote economic growth
d) All of the above
e) None of the above
__D___ 32. A phase of the business cycle characterized by a general period of declining
economic activity is
a) Confusion
b) Expansion
c) Inflation
d) None of the above
__D___ 33. The following are all final goods except
a) Bread eaten at lunch
b) Pencils used by students
c) Nike shoes used by an athlete
d) Flour used by a baker
e) All of the above
__C___ 34. The largest component of GDP is
a) Investment
b) Government expenditures
c) Consumer expenditures
d) Net exports
e) All are about equal
__C___ 35. Which of the following is not part of expansionary fiscal policy?
a) Tax reduction
b) Unemployment insurance
c) Deficit reduction
d) Increased government spending
e) All of the above
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The following questions are valued at five points each
36. If a multiplier is 2 and the consumption rate is 90%, what is the rate of leakages?
0.4 or 40% or 2 = ______1_________
.1 + Leakage
37. Name four acceptable ways to help fix the Social Security program.
1. raise cap on tax
2. increase tax rate
3. increase retirement age
4. reduce benefits; reduce benefits for wealthy; reduce cola; invest in higher returning
investments; other incentives for saving
38. What happens to the size of the expenditure multiplier if savings increase?
It is reduced
39. If we try to lower inflation in the short run, what will happen to unemployment?
Increase
40. Why do oil companies make more money when oil prices increase when this is not generally
true for price change at family restaurants?
Demand is inelastic
41. Why is being on the demand curve the optimal choice for consumers?
Lowest opportunity cost
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42. Diagram the result in an industry where workers get raises but are not more productive.
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S1
S
P1
P0
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Q1
Q0
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43. An increase in overall price level or prices in general is called what?
Inflation
44. Diagram what happens in the market for meat as emerging market countries grow. Show
final consumer and producer surplus.
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S
CS
P1
P0
PS
D
0
Q0 Q1
D1
Q
45. When is the best time to increase government spending if maintaining economic growth is
our goal?
During or near a recession (or contraction)
46. What do we call the changes in GDP or economic activity over time?
Business cycle
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47. On one graph show why commodity prices (like corn, wheat, copper, steel) have risen lately.
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S1
S
P1
P0
D1
D
0
Q0 Q1
Q
48. If the government wants to reduce government debt it needs at least two of three things to
occur. Name the three things.
1. Increase taxes
2. Reduce spending
3. Economic growth
49. If demand for money is inelastic then the impact of interest rate change on consumption is
likely to be __small______________________.
50. Increases in aggregate demand (AD) can have
a) What benefit?
rGDP ↑ or economic growth
b) What opportunity cost?
PL ↑ or inflation
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51. Diagram what has happened to the Japanese economy recently.
AS1
PL
AS
PL1
PL0
AD1
Q1
Q0
AD
rGDP
The following questions are valued at 10 points each
52. Debt and deficit basics:
a) How will reducing taxes directly influence government debt?
Increase debt
b) Could cutting discretionary spending lead to reducing the federal deficit?
Yes
c) We would expect federal deficits to increase when there is a _recession
(contraction)__________.
d) Does a U.S. government deficit ever make sense?
Yes
e) U.S. government debt increases due to an annual __deficits_____________________.
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53. Oil (and energy in general) is important to production and consumption.
a) Diagram the changes occurring in the current oil market. Don’t forget the impact of
China and India.
S1
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S
P1
P0
D1
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Q0 Q1
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b) Given the above, diagram the impact on the macroeconomy.
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AS1
AS
PL1
PL0
AD
Q1
Q0
rGDP
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