Economics Quiz: The Great Depression and Fiscal Policies
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Questions and Answers

What contributed to the prolonged and severe nature of the Great Depression?

  • Low unemployment rates maintained throughout the period
  • A decrease in consumer sentiment and spending
  • The government raised taxes and restricted the money supply (correct)
  • Increased government spending and reduced tax rates

    • Which policy position aligns with classical economic theory?

  • The government should allow the economy to self-correct without interference (correct)
  • The government should intervene during periods of rising aggregate demand
  • The government should frequently adjust taxes to stabilize the economy
  • The government should constantly control trade barriers

    • What viewpoint would a Keynesian economist likely support?

  • Savings is the key to increasing economic stability
  • Government should minimize intervention in economic affairs
  • Short-term economic fluctuations warrant more focus than long-term growth (correct)
  • The economy is generally stable and achieves full employment

    • What characterizes transfer payments in relation to the U.S. federal budget?

    <p>They signify an increasing burden on the budget over time</p> Signup and view all the answers

    How is the U.S. income tax system best described?

    <p>It is a progressive tax system that imposes higher rates on the wealthy</p> Signup and view all the answers

    What typically distinguishes the average tax rate from the marginal tax rate?

    <p>The average tax rate generally falls below the marginal tax rate</p> Signup and view all the answers

    What term describes the process when borrowers go directly to savers for funds?

    <p>Direct finance</p> Signup and view all the answers

    What is the main reason for the U.S. government to intervene in economic conditions?

    <p>To prevent extreme fluctuations in employment levels</p> Signup and view all the answers

    If Jamarcus issued a one-year bond with a face value of $6,000 and an interest rate of 10%, what would be the initial price if you wanted to buy it?

    <p>$5,454.54</p> Signup and view all the answers

    What would occur in the bond market if the default risk for company X decreases?

    <p>Increased demand for bonds</p> Signup and view all the answers

    Which statement accurately describes the general trend in housing prices leading up to the economic downturn?

    <p>There was a significant increase in housing prices</p> Signup and view all the answers

    What would happen to the home mortgage market if the U.S. government made it more difficult to issue mortgages?

    <p>Decreased availability of mortgages</p> Signup and view all the answers

    Long-run per capita world income growth became notable around what year?

    <p>1800</p> Signup and view all the answers

    What was the average income of U.S. citizens in 1800?

    <p>$2,000</p> Signup and view all the answers

    Which factor would most likely lead to an increase in long-run economic growth?

    <p>Resources and technology</p> Signup and view all the answers

    An advance in technology allows a firm to produce __________ output with __________ resources.

    <p>more; the same</p> Signup and view all the answers

    In the Solow growth model, the production function is given by q = f(human capital, physical capital). Which statement is true?

    <p>Labor is represented by the human capital variable.</p> Signup and view all the answers

    If country X has a higher growth rate of real investment than country Y, what can be expected regarding GDP growth rates?

    <p>A higher growth rate of real GDP.</p> Signup and view all the answers

    As the amount of physical capital increases, the output produced is likely to:

    <p>Increase at a diminishing rate.</p> Signup and view all the answers

    For countries to converge at the same level of GDP per capita as predicted by the Solow growth model, what must be true?

    <p>They must all have identical production functions.</p> Signup and view all the answers

    Which of the following is not an example of institutions?

    <p>Incentives.</p> Signup and view all the answers

    After a country has experienced civil war and achieved a stable government, what outcome is likely observed?

    <p>An increase in physical capital and an upward shift of the production function.</p> Signup and view all the answers

    More capital typically means that the owners of a company:

    <p>Reap all of the benefits of labor.</p> Signup and view all the answers

    What is the effect of a simultaneous increase in both the demand and supply of loanable funds?

    <p>Equilibrium quantity of loanable funds is indeterminate</p> Signup and view all the answers

    How does a fixed nominal interest rate of 4% interact with 3% inflation for the first three years?

    <p>Real rate of interest is less than nominal rate</p> Signup and view all the answers

    What happens to loanable funds if household wealth falls but government deficits decrease?

    <p>Equilibrium quantity of loanable funds is indeterminate</p> Signup and view all the answers

    What is the expected effect on savings as income and wealth rise?

    <p>Savings increase since some wealth will be saved</p> Signup and view all the answers

    What occurs to the quantity supplied of loanable funds during an increase in supply while demand decreases?

    <p>Quantity supplied increases, demand decreases</p> Signup and view all the answers

    How would real interest rates behave during three years of inflation at 3% followed by two years of deflation at 3%?

    <p>Real rates fluctuate based on inflation and deflation</p> Signup and view all the answers

    If both household wealth and government deficits rise, what can be said about the equilibrium of loanable funds?

    <p>Equilibrium outcomes cannot be predicted</p> Signup and view all the answers

    What is the implication of having an increase in the supply of loanable funds while demand decreases?

    <p>Interest rates will definitely fall</p> Signup and view all the answers

    What is the real interest rate if a bank extends a loan at 3% and the inflation rate is 2%?

    <p>1%</p> Signup and view all the answers

    What factor explains why the Federal Reserve does not fully control the money supply?

    <p>Private individuals and banks can influence the money supply through the money multiplier.</p> Signup and view all the answers

    In a scenario of expected expansionary monetary policy, what is likely to happen to the price level in an economy at full-employment equilibrium?

    <p>Increase from P1 to P2 initially and then rise to P3.</p> Signup and view all the answers

    If Amy and Jim produce the goods where each has a comparative advantage, what will their total output be?

    <p>10,000 pounds of cheese and 30 houses.</p> Signup and view all the answers

    What is Rosa’s opportunity cost of producing one football?

    <p>1 1/2 basketballs.</p> Signup and view all the answers

    If Jim produces 10 houses, how many pounds of cheese will he be able to produce?

    <p>0 pounds.</p> Signup and view all the answers

    What would happen to Rosa's total output if she decides to focus solely on basketballs instead of dividing her time?

    <p>Her total output would only consist of basketballs.</p> Signup and view all the answers

    How does Dirk's capacity for producing footballs compare to his basketball production?

    <p>He has a higher opportunity cost for footballs.</p> Signup and view all the answers

    Which action would not lead to a decrease in the supply of money in a fiat money economy?

    <p>Sell existing treasury securities</p> Signup and view all the answers

    What is the value of M2 that is not part of M1?

    <p>$345,000,000</p> Signup and view all the answers

    How do a checking account and a car loan appear on a bank's balance sheet?

    <p>Checking account is an asset, car loan is a liability</p> Signup and view all the answers

    How is Tom Goldman's deposit of $1,000 cash recorded on the bank's balance sheet?

    <p>Money supply will rise by $1,000 because money is now in the banking system</p> Signup and view all the answers

    Which action would the Federal Reserve take to increase the money supply?

    <p>Conduct an open market purchase of U.S. Treasury securities</p> Signup and view all the answers

    What is one capability of central banks regarding monetary policy?

    <p>Reduce interest rates</p> Signup and view all the answers

    Which of the following strategies will likely discourage banks from lending money?

    <p>Increase the discount rate</p> Signup and view all the answers

    Linking the value of money to which of the following is most likely to induce scarcity?

    <p>A rare earth metal</p> Signup and view all the answers

    Study Notes

    Practice Final - Multiple Choice Questions

    • Question 1: The country's long-run average growth rate is 3%. How many quarters were spent in recession? The answer is three.

    • Question 2: Which of the following is a service? The correct answer is visiting a doctor or eating at a restaurant; a trip to the store to buy a T-shirt was not a service.

    • Question 3: Joe sells a house he's owned for 10 years. He gets $50,000 more than his original purchase price. Joe pays his real estate agent a 5% commission. This transaction increases GDP by $50,000, not any other answer.

    • Question 4: Bob wins the lottery. This is included in the category of consumption for GDP.

    • Question 5: Real GDP can be calculated as (nominal GDP / the GDP deflator) x 100.

    • Question 7: The unemployment rate in the given economy is 7.8%.

    • Question 8: Since 1948, the percentage of women participating in the labor force has increased.

    • Question 9: Housing is the largest percentage category in the consumer price index (CPI).

    • Question 10: The value of the CPI in 2004, is 92.3.

    • Question 11: In Bovania, if milk prices rise by 7% and other goods prices fall by 4%, the consumer price index (CPI) in Bovania is greater than the previous year.

    • Question 12: Deflation is the same as disinflation, meaning the rate of inflation has fallen.

    • Question 13: The interest rate is the price of loanable funds.

    • Question 14: Every dollar borrowed requires a dollar to be saved, and represents a piece of capital, not anything else.

    • Question 15: If interest rates rise, holding all else constant, it causes a decrease in the demand for loanable funds.

    • Question 16: If your nominal rate of interest is 4%, and in the first 3 years the inflation is 3% and for the last 2 years the deflation is 3% your real rate of interest was larger than your nominal rate only for the first 3 years.

    • Question 17: If household wealth falls and gov't deficits are fewer this means the new equilibrium quantity of loanable funds would decrease, but one cannot determine if the equilibrium interest rate would be higher or lower than the original rate.

    • Question 18: As income and wealth rises, people typically save more, since not all of the increase will need to be spent.

    • Question 19: A cut in corporate tax rates, leading to more optimistic business owners and managers, would cause a shift from Line 2 to Line 3 on the loanable funds graph.

    • Question 20: When borrowers go directly to savers for funds, it is called direct finance.

    • Question 21: The initial price of Jamarcus's bond would be $6,000, given the facts about the face value and interest rate.

    • Question 22: When default risk decreases for a company's bonds, the supply curve shifts to the right.

    • Question 23: If the U.S. government begins monitoring lending practices, making it more difficult to issue mortgages, the supply of mortgages shifts to the left.

    • Question 24: Long-run per capita world income growth was basically flat until around the early 1800s.

    • Question 25: In 1800, the average income of U.S. citizens was roughly $1,750.

    • Question 26: More consumer spending and borrowing would increase long-run economic growth.

    • Question 27: Capital resources lead to worker productivity because workers have better tools and equipment.

    • Question 28: Technology advances can allow firms to produce more output with the same resources.

    • Question 29: In the Solow model, labor is represented by human capital itself.

    • Question 30: A country experiencing a higher growth rate of real investment is likely to experience a higher growth rate of real GDP as well.

    • Question 31: As physical capital increases, the output produced will increase at a diminishing rate.

    • Question 32: If all countries are going to converge, they must all have identical production functions.

    • Question 33: Stable money and prices is an example of an institution.

    • Question 34: A country experiencing five years of civil war, followed by a stable government, will likely experience an increase in physical capital, and an upward shift of the production function.

    • Question 35: A country lowering trade barriers and promoting monetary/price stability leads GDP to double compared to if there were no reforms.

    • Question 36: Increases in the price level would cause a fall in the quantity of aggregate demand, due to the interest rate effect.

    • Question 37: When median home prices rise, the value of real wealth and aggregate demand increases.

    • Question 38: If large emerging economies grow rapidly, aggregate demand for the U.S. is expected to increase.

    • Question 39: The slope of the short-run aggregate supply curve is explained by sticky input prices and flexible output prices.

    • Question 40: If computer technology leads to productivity increases output will increase and price levels will decrease.

    • Question 41: If healthcare costs increases, output in the short run will decrease, whereas long-run output will increase.

    • Question 42: During the Great Recession, a massive stock market decline played a role in the leftward shift of aggregate demand.

    • Question 43: The Great Depression was prolonged due to the government's restrictions on trade and tight monetary policy that restricted the money supply.

    • Question 44: A classical economist would typically support the idea that the government should allow the economy to adjust on its own without intervention.

    • Question 45: A Keynesian economist would tend to support government intervention especially in the short run.

    • Question 46: Transfer payments represent a growing share of U.S. federal outlays and can affect the government budget deficit.

    • Question 47: The United States has a progressive income tax system, where higher earners pay a higher percentage of their income in taxes.

    • Question 48: Typically, the average tax rate is below the marginal tax rate, because the marginal tax rate applies to only the last dollars earned.

    • Question 49: Using the money supply to manage the economy is called monetary policy.

    • Question 50: Expansionary fiscal policy involves increasing government spending, decreasing taxes, or both, to encourage economic growth.

    • Question 51: To return to long-run equilibrium, the marginal propensity to consume would need to be 0.75.

    • Question 52: An example of an automatic stabilizer is unemployment compensation, because it increases during recessions.

    • Question 53: An illustration of the relationship between tax rates and tax revenues is called the Laffer Curve.

    • Question 54: Money does not function as an item to barter.

    • Question 55: If someone uses their credit card to buy a TV the most immediate effect is an increase in M1.

    • Question 56: The Federal Reserve increasing the discount rate would decrease money supply.

    • Question 57: The value of M2, not in M1, is $903,000,000.

    • Question 58: The checking account is a bank liability, while the car loan is an asset.

    • Question 59: Recording a deposit of $1,000 in cash from Tom, in this case the money suppply would rise by 1,000.

    • Question 60: Increasing the money supply would reduce the discount rate.

    • Question 61: Central banks use monetary policy to influence economic activity by controlling interest rates.

    • Question 62: If a bank charges 3% and the inflation is 2% then the real interest rate is 1%

    • Question 63: The actions of private individuals and banks can impact the money supply through actions like borrowing and lending or changing the money multiplier.

    • Question 64: If monetary policy is fully expected, expansionary monetary policy will initially cause an increase in the price level from P1 to P2.

    • Question 65: If Amy and Jim produce the good for which each has a comparative advantage, combined output equals 10,000 pounds of cheese and 30 houses.

    • Question 66: Rosa's opportunity cost of one football is 3 basketballs.

    • Question 67: A limit on the amount of oil imported from Saudi Arabia is a quota, a nontariff trade barrier.

    • Question 68: The infant industry argument supports trade protection of newly developing industries.

    • Question 69: From January 1 to March 1, the US dollar depreciated against the British pound.

    • Question 70: If the theory of purchasing power parity holds, an Egyptian tapestry costing 15,000 Egyptian pounds would cost roughly $ 2,100 in the United States.

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    Description

    Test your knowledge on the causes and characteristics of the Great Depression, as well as various economic theories such as Keynesian and classical economics. Explore important concepts like transfer payments, income tax systems, and the bond market. This quiz will challenge your understanding of U.S. economic policies and their implications.

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