Understanding the Impact of Transactions on U.S. GDP: An Analysis of Alternatives, Lecture notes of Economics

Download Understanding the Impact of Transactions on U.S. GDP: An Analysis of Alternatives and more Lecture notes Economics in PDF only on Docsity! 1 Economics 1021, Section 1 Prof. Steve Fazzari Pretest Spring, 2013 Due In Class: Wednesday, January 23 Name (Print Clearly!) _________________________________________ Please select a five-digit number that will be your personal course ID number this semester. You will use this ID number to access your course scores and final course grade from the class web site. Please make a record of the number you write below so that it will be available to you later in the semester Five-Digit Course ID Number: ____ ____ ____ ____ ____ This pretest exercise is designed to assess students’ knowledge of the content of Econ 1021 prior to their completion of the course. The comparison of scores for the whole class on the pretest and the actual multiple choice questions on the course exams gives a measure of the amount of learning that takes place over the semester. Please provide an answer to all of the questions on the following pages. Write the letter of the alternative that best answers the question in the blank. Recognize that you are not expected to know the answers to these questions at this time. You will likely be guessing. Do not refer to other materials, especially the online course notes, to answer these questions. Such an effort to learn is admirable, but it would defeat the purpose of this assignment. Nonetheless, to make this a useful tool, you should make a good attempt to choose the correct answer, based on what you know prior to the class. To make the exercise replicate an actual exam setting as well as possible, answer all questions in one sitting, not to exceed 45 minutes in length. (Note: questions marked with ** are based on material largely covered in the first two classes. There is no need to look up answers for these questions, but you may find them familiar.) Thanks for taking the time to help the Economics Department assessment effort. All students who turn in this assignment in class Wednesday, January 23 will receive 5 extra points toward their course score. 2 ____ 1**. Which of the following alternatives describes a transaction that adds directly to U.S. GDP (A) A U.S. auto company decides to buy tires to put on its new cars from a U.S. supplier rather than a foreign supplier. (B) A homeowner decides to remodel her own basement and purchases materials from a local building supply store. (C) A Mexican company located just south of the Texas border buys electric power from a U.S. utility. (D) All of the above. ____2**. Which statement below is normative? (A) The Great Recession is the deepest U.S. economic crisis since the Great Depression (B) If job growth does not accelerate soon, the recovery from the Great Recession will likely be labeled as “jobless.” (C) The drop in employment at the beginning of the Great Recession was similar to the drop at the beginning of the Great Depression. (D) It was necessary for the government to stimulate the U.S. economy in 2009 because of the unusual severity of the Great Recession. ____ 3**. Which alternative below best explains why the value of intermediate goods is excluded from GDP? (A) Intermediate goods do not add directly to the social welfare created by production. (B) If the value of intermediate were included, some production would be counted multiple times. (C) Intermediate goods go into inventories and therefore are part of investment already. (D) Intermediate goods are primarily imports and therefore are not produced within a country’s borders. ____ 4. Suppose the government undertakes a wasteful “pork barrel” project that no citizen would be willing to pay for based on the true social value of the project. Which alternative below best describes the effect of the project on measured GDP? (A) Because the project ultimately creates inflation, it raises nominal GDP, but not real GDP. (B) GDP rises by an amount equal to the cost of the project. (C) The project has no effect on GDP because it does not add to social welfare. (D) The project has no effect on GDP because it is not a final good or service. ____ 5. Which of the following statements best describes a widely held concern about the recovery from the deep recession that took place between late 2007 and the summer of 2009? (A) Although the economy has recovered for over a year, a “double dip” recession has already begun. (B) The economy may grow so quickly in 2011 that inflation will accelerate sharply. (C) Unemployment will remain unacceptably high for several years. (D) Although nominal GDP is growing, the more measure of social welfare, real GDP, is falling. ____ 6. Which of the following scenarios, by itself, leads to a decline in the measured unemployment rate? (A) An individual who had not looked for a job for 6 months is encouraged by good economic news to start applying for jobs again. (B) A worker retires from firm X and leaves the labor force. The next day, a replacement worker is hired who had applied to firm X for a job two weeks earlier. (C) Unusually severe winter weather prevents construction workers from working as many hours as they would in a typical year. (D) A college graduate starts looking for work (but does not find a job) in the same month as a long-term unemployed worker becomes discouraged and stops applying for jobs. 5 ____ 19. Which of the following alternatives is not a practical challenge of using monetary policy to respond to insufficient aggregate demand? (A) Uncertainty about what the target level of output should be. (B) A long lag between identifying an AD problem and implementing stimulative policy. (C) Estimating how much interest rates must fall to reach target output. (D) Lags between policy implementation and the convergence of output to the new equilibrium level. ____ 20. Which of the following statements about U.S. federal government spending and taxation is most likely to be false? (A) Major percentage reductions in U.S. spending on foreign aid and business regulation will lead to a substantial percentage reduction in total federal spending. (B) The federal deficit increased dramatically in the Great Recession of 2008 and 2009 in large part because a slow economy reduced income growth. (C) Transfer payments constitute a large and growing share of federal spending. (D) Federal spending on goods and services fell as a share of output in recent decades. ____ 21. Which of the following aspects of modern monetary policy can be explicitly attributed to inflation targeting rather than more general monetary policy pursued for macroeconomic stabilization? (A) Monetary policy stimulates demand by reducing the federal funds interest rate. (B) Monetary policy transparency helps anchor inflation expectations (C) Stimulative monetary policy causes higher inflation in the long run. (D) An increase in bank reserves through Fed open market purchases drives up inflation immediately. ____ 22. Which of the following statements accurately describes the dilemma for the “new consensus” macroeconomic model if the federal funds interest rate hits the “zero bound?” (A) Monetary policy, as described by the Taylor Rule, can no longer effectively boost aggregate demand. (B) Further easing of monetary policy will produce inflation only, with no effect on output and employment. (C) Inflation will quickly fall to zero and the economy may fall into a damaging deflation. (D) Banks will no longer accept reserve payments from the Fed in return for valuable assets like U.S. Treasury bonds. ____ 23. For a developed country operating with modern technology, which of the following alternatives most likely describes the long-run source of rising labor productivity and improving living standards? (A) Higher investment that raises the capital stock. (B) Improvements in technology. (C) Effective monetary policy following the Taylor rule. (D) Long-term increases in consumer spending that encourage firms to raise production. ____ 24. Suppose the Fed wants to reduce the threat of inflation. Which of the following statements best describes the policy action the Fed would take? (A) Open market purchase of government bonds to raise the federal funds interest rate. (B) Open market purchase of government bonds to lower the federal funds interest rate. (C) Open market sale of government bonds to raise the federal funds interest rate. (D) Open market sale of government bonds to lower the federal funds interest rate. 6 ____ 25. Which statement below best describes the historical link between inflation and the state of the overall U.S. economy? (A) When the economy weakens inflation usually rises creating “stagflation” as in the 1970s. (B) Inflation usually declines when the economy weakens, but there has been little acceleration of inflation in strong economic conditions over recent decades. (C) Inflation has been more or less constant regardless of the state of the U.S. economy for the past 30 years. (D) Inflation accelerates when the Fed attempts to stimulate a weak overall economy. ____ 26. Which of the following alternatives occur when a crazy fraternity boy dressed like a cow runs into a large macroeconomics lecture? (A) Students encourage the silliness by nudging the instructors to go along with the joke. (B) A somewhat flustered professor consumes a drink he doesn’t really like. (C) The class breaks into the most rousing applause in the professor’s multi-decade teaching career. (D) All of the above. (Yes, folks, this really happened in the spring of 2011 and the question appeared on the third exam!)