ECON 102 Spring 2006 Dr. Ebru Guven Solakoglu Fatih University STUDY QUESTIONS 1. 2. 3. 4. 5. 6. 7. If 200 million people have a job, 20 million people are looking for a job, and 100 million people don’t have jobs and aren’t looking for a job, what is the rate of unemployment? In recent decades, women have worked more hours in paid jobs and fewer hours in unpaid housework. a. How would this increase in work hours affect GDP? b. Explain the paradox, “ When a person marries his or her gardener, GDP goes down.” What are the problems with the GDP calculation? What are the factors that are not included in calculation and how do they affect the GDP measure? (overestimate, underestimate) Explain why it must be always true that MPC + MPS = 1. If consumption is $3,500 billion, investment is $800 billion, government spending is $900 billion, exports are $50 billion, and aggregate expenditure is $5,150 billion, what is the amount of imports? Suppose that nominal GDP increased last year, and suppose that the price level increased as well. Can we determine what happened to real GDP during the year? If yes, what happened? Fill in the blanks with the following words; -- frictional ; structural ; cyclical --- increase ; decrease When the economy enters a recessionary period, it is most likely that ________________unemployment will __________________. 8. Does GDP measure happiness or welfare? Explain. 9. What are the types of unemployment? Explain all of them and give examples. 10. What is the difference between how nominal GDP and real GDP are calculated? Why is real GDP a better measure of an economy’s output? 11. Is full employment easy to achieve? Explain. 12. What is the labor force status of each of the following? (employed/unemployed/in the labor force, not in the labor force) a. A teenager who sends resumes in searching for a first job. b. An autoworker who has been laid off and would like to work but has given up hope of finding work. c. A retired person who moved to Izmir and answers advertisements for the parttime positions d. A parent who works part-time, wants a full time job, but does not have time to look. e. A teacher who has a job but is too ill to work 13. What is the labor force status of each of the following? (employed/unemployed/in the labor force, not in the labor force) a. A teenager who sends resumes in searching for a first job. b. An autoworker who has been laid off and would like to work but has given up hope of finding work. c. A retired person who moved to Izmir and answers advertisements for the parttime positions d. A parent who works part-time, wants a full time job, but does not have time to look. e. A teacher who has a job but is too ill to work 14. The FED increases real interest rates and the value of the dollar. Analyze using both aggregate demand and aggregate supply. (20 pts) 15. Potential real GDP is $4 trillion while the equilibrium real GDP is $3 trillion. What will be the effect on the economy of an increase in government spending? (10pts) 16. Changes in input prices and change in the productivity or quantity of inputs lead aggregate supply curve to shift. Between these factors which one also leads potential real GDP to change? Why? (10pts) 17. What would be the difference between a recession caused by a decrease in aggregate demand versus a decrease in aggregate supply? (10 pts) 18. Count three factors that will lead aggregate demand to increase. (10 pts) 19. What happens when economy is overheated? (10pts) 20. Explain the idea of the multiplier. Give an example at the local level. (10pts) 21. The multiplier formula of 1/MPS suggests a large value for the multiplier. Would you expect the actual (observed) multiplier value be the same? (10 pts) 22. In an economy with no government sector and no international trade, if the marginal propensity to consume is 0.9, the multiplier is ________. (10 pts) 23. Assume a MPC represents the marginal re-spending rate of added income and the MPS is 0.25. What will be the impact on real GDP if planned investments decrease by $250 billion? (10pts) 24. If the marginal propensity to consume is 0.9, and a decline in household wealth reduces aggregate purchases by $75 billion; equilibrium real GDP will decrease by _______billion. (10 pts) 25. Fill in the blanks with the following words; (10pts) -- supply ; demand ; rightward ; leftward; increase ; decrease A decrease in input prices shifts the aggregate _____________ curve ___________, causing real GDP to ___________ and the price level to ___________. An increase in aggregate demand shifts the aggregate demand curve to the _________, causing real GDP to __________ and the price level to __________. 26. Fill in the blanks with the following words; (10 pts) -- increase ; decrease If domestic consumers increase their demand for imports, aggregate demand will _________, causing real GDP to _________. An increase in the price level, as measured by an index will result in a(n) ______________in aggregate supply. 27. What are the functions of money? How does hyperinflation affect those functions? 28. If interest rates fall from 7.5% to 4%, what will be the effect on the quantity of money demanded? 29. GDP is increasing rapidly while the stock of money is held constant. What will be the effect on the demand for money and the interest rate? 30. There is a 5% increase in the money stock. How will that impact interest rates, the quantity of money demanded, and inflation? 31. Is the actual (observed) money multiplier more or less than the reserve multiplier? Why? 32. Bank X has a required reserve ratio of 0.2, total reserves are $70 million, and deposits are $200 million. How much in excess reserves do they have? How much could the money supply increase? 33. As the economy moves into an expansionary phase the demand for money is likely to decrease. 34. Federal reserve purchases of securities from banks ________(increase/decrease) the money stock, and sales of securities to banks __________(increase/decrease) the money stock. 35. What are the tools of monetary control by the Federal Reserve System? 36. What are the goals of monetary policy? Do they conflict? Explain… 37. What policy should the FED take if it believes aggregate demand is increasing too rapidly? Explain. 38. Suppose that the Federal Reserve System sold $5 billion in government bonds to the public. In turn the public withdrew fund from its checking accounts to pay for the bonds. What would be the result in bank reserves? (10 pts) 39. An oil price shock results in a sharp increase in the price level. Other things being equal, the effect will be to increase the demand for money. 40. An increase in the stock of money creates a ______________(shortage/surplus) of money at the current interest rate. This in turn ________(decreases/increases) the supply of loanable funds, which, given the demand for loanable funds, causes the market rate of interest to _____________(increase/decrease). 41. If the demand for money decreases, interest rates will __________and real GDP will _________. (increase/decrease) 42. During a recovery we observe (5pts) interest rates tend to _______________(increase/decrease) banks hold _______(more/less) ER _________(more/less) money creation ____________(increase/decrease) in aggregate demand can _______________(increase/decrease) the inflation. 43. How does expansionary monetary policy affect investment? How does it affect macroeconomic equilibrium? 44. How does contarctionary monetary policy affect investment? How does it affect macroeconomic equilibrium? 45. How does expansionary fiscal policy affect investment? How does it affect macroeconomic equilibrium? 46. How does contractionary fiscal policy affect investment? How does it affect macroeconomic equilibrium? 47. What are the goals of fiscal policy? Are there any complications? What are the instruments of fiscal policy? 48. Why could a fiscal policy action meant to stabilize the economy actually destabilize the economy? 49. Explain IS - LM model. 50. What is Fisher hypothesis? 51. Explain the differences between short run and long run Philips curves.