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1)
If the USD were to depreciate, then all else held constant
a)
the US economy would experience deflation
b)
the US economy would experience an acceleration in inflation
c)
the US economy would experience a deceleration in inflation
d)
the US inflation rate would remain unaffected
The exchange rate acts as a translation mechanism of foreign prices into domestic prices.
Dollar depreciation causes an increase in the prices of foreign goods imported into the
US, thus creating inflationary pressure, all else held constant.
2)
In the second half of the 1990’s the US economy experienced very low
inflation rates. This was in part due to
a)
a depreciating US dollar
b)
increasing property values
c)
stock market boom
d)
influx of foreign investment and dollar appreciation
Just look at the answer to the previous question. Note, the influx of foreign investment
simply increases the demand for the domestic currency (in this case the USD).
3)
Which of the following statements is incorrect?
a)
the US economy is an example of a mixed economic system where
socialism is mixed with capitalism
b)
the economies of Western Europe tend to have more elements of
socialism than the economy of the US
c)
the economies of Eastern Europe have undergone a transition from a
command economy to a market economy in the 1990’s
d)
none of the above statements are incorrect
Statements a-c are all correct, hence the answer is d
4)
If a nation has been a net recipient of (direct) foreign investment in the past
then it is more likely to have
a)
a GDP that exceeds its GNP
b)
a GNP that exceeds its GDP
c)
a GNP that is equal to its GDP
d)
none of the above
This typically applies to developing economies, Mexico after the ratification of the
NAFTA treaty acts as an example of this. Being a net recipient of foreign investment
simply means that the nation owns fewer productive resources overseas than foreigners
own in the domestic economy. The presence of foreign productive capital raises the
domestic output (GDP), while some proceeds from that output (distribution to capital
owners) are paid to foreign capital owners, hence the GNP is reduced.
For the following transactions state whether the transaction will be counted in the US
GDP (A), the US GNP (B), in both, the GDP and GNP (C), is part of neither the GDP or
the GNP computation (D)
5)
Purchase of stock in a US company by an American investor
D – this is merely a transfer in the ownership of an asset.
6)
Purchase of a new car, manufactured in the US by a Japanese owned firm
(like Nissan) by a US consumer
A – under the GDP measure the entire market value of the car will be counted. Under the
GNP measure the market value of the car net of the income distribution to the Japanese
capital owners will count.
7)
Purchase of a T-shirt by an American consumer. Assume that the T-shirt is
manufactured in China.
D – GDP tracks domestic production, GNP tracks production produced by factors of
production owned by the nation. This T-shirt doesn’t fall into either category.
In reality the accounting will take the following form. The purchase of the T-shirt by the
US consumer will enter into the Consumption spending component of the GDP
(increasing the GDP by the market value of the T-shirt, the price at which it was sold),
while the value of the T-shirt (the import price of it) will be subtracted as imports,
canceling each other.
8)
Dividend payment received by a US shareholder from a Russian firm
B – to the GDP it has no relationship whatsoever, as the production of output is done in
Russia not in the US. However, the dividend received by a US investor represents the
payment for a factor of production owned by a resident of the US and hence will count in
the US GNP.
9)
Purchase of Good Year tires (made in the US) by Ford Inc.
D – these tires are counted as intermediate good, and their value will be included in the
market value of the final product (Ford cars), hence the transaction between Ford and
Good Year should not enter the GDP
For each of the following state whether it is expected to cause (all else held constant): 1)
an appreciation of the USD (A); 2) depreciation of the USD (B); 3) no effect on the value
of the USD (C)
10)
an increase in the US trade deficit
B – on the net that contributes to sale of the USD
11)
an increase in spending my US consumers/firms on foreign goods
B – an increase in spending on foreign goods will lead to an increase in the demand for
foreign currencies, i.e. sale of the USD. So, the supply of the USD will increase causing a
depreciation of the USD, all else held constant.
12)
investment by foreigners into the US financial markets
A – this will increase the demand for the USD, as foreign investors will have to first
obtain the USD before they can purchase US financial assets.
13)
purchases by US mutual funds of foreign government bonds
B – the reversal of the previous question. If US investors want to purchase foreign
financial assets they first have to sell the US dollar for foreign currencies. This will
increase the supply of the USD in the Forex market.
14)
an increase in the US inflation rate (above the rate of inflation in other major
economies)
B – Based on relative purchasing price parity, this should cause the depreciation of
the USD. The reasoning behind this is simple: US higher US inflation, relative to
inflation rates in other economies will make prices on US made products higher
relative to the prices of foreign made products. This will reduce US exports to other
economies, while at the same time increase foreign imports into the US, which will in
turn reduce the demand for the USD and increase the supply of the USD in the Forex
market, causing the depreciation.
15)
It is an established fact that in developed economies, such as that of the US,
more of domestic activities (household activities, such as cooking,
housework…) are being observed in the market place, and hence are being
accounted for in the GDP. This is due to …
a)
the fact that in developed economies labor force participation rates
tend to be lower
b)
the fact that in developed economies the opportunity cost of time
tends to be higher
c)
none of the above
In fact, statement A would have made sense had it ended with the word HIGHER, not
LOWER. In the US the opportunity cost of not working is relatively high, causing higher
labor force participation. This high opportunity cost of your time induces you to use
outside resources more in your domestic activities.
16)
If you look around yourself right now you will notice that you are surrounded
by relatively young people, of course excluding the instructor. Is this purely
coincidental or may this be a characteristic of human behavior that can be
explained by economic theory? From the list of the arguments listed below
select a possible explanation to this observation.
a)
the explicit costs of attending the class are higher for older students, as
the wage rate tends to increase with age, due to experience
b)
the expected benefit from education declines with age. After all,
the older an individual gets the fewer years that individual is
expected to spend in the labor force
c)
with age comes wisdom, and hence older workers do not require an
education
d)
choices A and B are both correct
e)
None of the above
Note, statement A would have been correct had it used IMPLICIT costs rather than
EXPLICIT costs. Explicit costs are synonymous to accounting costs, i.e. tuition,
textbook, parking, gasoline… Implicit costs include the costs of “owner-supplied” inputs,
in this case your time. If we assume that with age your market wage rate increases (due to
experience and tenure) then more older individuals will find it more expensive to spend
time in the classroom. Clearly B is the correct choice, as the benefit of education can be
measured in increased earnings, which are a function of the number of years the
individual intends to spend working. With age that number is decreasing.
17)
Which of the following statements is incorrect?
a)
currency depreciation will lead to inflationary pressure
b)
if an economy experiences inflation above the level of inflation in the
economies of its trading partners, its currency should depreciate
c)
inflation will cause an increase in nominal interest rates
d)
unanticipated inflation (rise in inflation) can cause redistribution
of wealth from borrowers to lenders
e)
none of the above
18)
In order to adequately compare the standards of living across countries one
must compare the following measure, (converted into the same currency for
comparison purposes):
a)
GNP per capita levels
b)
Real GNP per capita levels
c)
GNP per capita based on purchasing price parity
d)
GDP per capita
Out of the list of measures here the GNP comes closest to national income. But the
standard of living incorporates two factors: income and prices. Best way to think of the
standard of living as simply the measure of what you can purchase, which is income
divided by price. Prices vary from country to country. In some countries 1000 dollars
buys very little: USA, Japan, Western Europe…. In some, 1000 dollars can be considered
as a fortune: Tajikistan, Afghanistan… In order to adequately compare standards of
living one must account for the price differences, Purchasing Price Parity method does
exactly that.
19)
During the 1990’s the US dollar was appreciating. Two important effects were
observed: one, there was a continuous growing trade deficit, and two, there
was a substantial inflow of foreign investment into the US. In the context of
demand supply framework we can explain this behavior of the dollar as
follows:
a)
b)
c)
d)
e)
both, the demand and the supply of the US dollar grew, but the
growth in demand outpaced the growth in supply
both, the demand and the supply of the US dollar grew, but the growth
in supply outpaced the growth in demand
the demand for the US dollar grew while the supply of the US dollar
declined
the demand for the US dollar decrease, while the supply was on the
rise
both, the demand and the supply of the US dollar remained unchanged
20)
In order to be counted as unemployed in the US one must meet the following:
a)
be registered with a state labor department
b)
collect unemployment compensation
c)
simply have no job and be actively looking for work
d)
none of the above
This is simply definition. You are unemployed if you are a part of our active labor supply
but you have no job. To be part of the active labor supply you must either be employed,
or in the case of unemployed, be actively looking for work.
21)
Recently the price of gasoline has increased substantially. Yet, the traffic on
Atlanta roads has not eased at all. Based on this observation you could argue
that the demand for gasoline is
a)
vertical
b)
horizontal
c)
upward sloped
The lack of decline in traffic illustrates that the level of quantity demanded remains
roughly unchanged. This can only be true if the demand is not price sensitive: vertical, or
nearly vertical.
True/False statements:
22)
TRUE
23)
Macroeconomics concentrates its analysis on the economy as a whole
If the US economy were to experience a recession, then that recession would
spread into the economy of Mexico, a major US trading partner, since the US
consumers will buy fewer normal goods, including goods manufactured in
Mexico, and hence Mexican exports to the US will decline.
TRUE
24)
Recession is an economy wide problem, and hence all businesses will be
adversely affected by a recession.
FALSE: Demand for inferior goods will actually increase
25)
TRUE
Immigration of low-skilled labor can lead to a widening gap in income
inequality