Question 1

Spending on capital goods that cannot be easily moved,adjusted,or reversed is called:

Accepted Answer

A)  irreversible investment. 
B)  fixed investment. 
C)  bunched investment. 
D)  intertemporal investment. 
A)  irreversible investment. 
B)  fixed investment. 
C)  bunched investment. 
D)  intertemporal investment.

Question 2

Many investments involve _____,which are a characteristic of irreversible investments.

Accepted Answer

A)  fixed costs 
B)  opportunity costs 
C)  operating costs 
D)  sunk costs 
A)  fixed costs 
B)  opportunity costs 
C)  operating costs 
D)  sunk costs

Question 3

For a given negative economic shock,a country with more collateral will:

Accepted Answer

A)  have a smaller negative effect on its aggregate demand. 
B)  have a larger negative effect on its aggregate demand. 
C)  take a longer time to affect its aggregate demand. 
D)  more easily confine the shock to the financial sector. 
A)  have a smaller negative effect on its aggregate demand. 
B)  have a larger negative effect on its aggregate demand. 
C)  take a longer time to affect its aggregate demand. 
D)  more easily confine the shock to the financial sector.

Question 4

A valuable asset pledged to a lender as security for a loan is called:

Accepted Answer

A)  net worth. 
B)  capital. 
C)  wealth. 
D)  collateral. 
A)  net worth. 
B)  capital. 
C)  wealth. 
D)  collateral.

Question 5

Labor adjustment costs result in:

Accepted Answer

A)  higher unemployment. 
B)  more workers going back to college. 
C)  higher consumption. 
D)  more investment. 
A)  higher unemployment. 
B)  more workers going back to college. 
C)  higher consumption. 
D)  more investment.

Question 6

Which statement explains how real shocks and aggregate demand shocks can reinforce and amplify one another?

Accepted Answer

A)  During a boom,higher wealth and lower risk lead to lower consumer spending but higher business investment. 
B)  During a boom,higher wealth and greater risk lead to higher consumer spending but lower business investment. 
C)  During a recession,lower wealth and lower risk lead to lower consumer spending but higher business investment. 
D)  During a recession,lower wealth and greater risk lead to lower consumer spending and less business investment. 
A)  During a boom,higher wealth and lower risk lead to lower consumer spending but higher business investment. 
B)  During a boom,higher wealth and greater risk lead to higher consumer spending but lower business investment. 
C)  During a recession,lower wealth and lower risk lead to lower consumer spending but higher business investment. 
D)  During a recession,lower wealth and greater risk lead to lower consumer spending and less business investment.

Question 7

When a drought (negative rainfall shock)occurs,farmers tend to put in less effort than they did before to till their farms because:

Accepted Answer

A)  agricultural output falls and even though farmers put in the same level of effort,the effort per hour falls. 
B)  extra hours of labor and capital usage do not yield much extra output. 
C)  people work hardest when their hard work yields lower returns. 
D)  they switch to crops that use less water. 
A)  agricultural output falls and even though farmers put in the same level of effort,the effort per hour falls. 
B)  extra hours of labor and capital usage do not yield much extra output. 
C)  people work hardest when their hard work yields lower returns. 
D)  they switch to crops that use less water.

Question 8

A collateral shock is:

Accepted Answer

A)  one shock causing another shock. 
B)  a requirement to pledge an asset to secure a loan. 
C)  a reduction in the value of collateral. 
D)  an increase in the value of collateral. 
A)  one shock causing another shock. 
B)  a requirement to pledge an asset to secure a loan. 
C)  a reduction in the value of collateral. 
D)  an increase in the value of collateral.

Question 9

Every night,resources at your school-classrooms,desks,etc.-are unemployed.This is an example of:

Accepted Answer

A)  labor adjustment costs. 
B)  irreversible investment. 
C)  collateral damage. 
D)  time bunching. 
A)  labor adjustment costs. 
B)  irreversible investment. 
C)  collateral damage. 
D)  time bunching.

Question 10

Explain what shocks can be found in the AD-AS model.Why do these shocks not disappear immediately but rather tend to spread across sectors of an economy?

Accepted Answer

In the AD and SRAS model,shocks are rapi

Question 11

The allocation of consumption,work,and leisure across time to maximize well-being is called:

Accepted Answer

A)  intertemporal substitution. 
B)  labor adjustment cost. 
C)  time bunching 
D)  collateral damage. 
A)  intertemporal substitution. 
B)  labor adjustment cost. 
C)  time bunching 
D)  collateral damage.

Question 12

A negative shock to aggregate demand will lead to a higher unemployment rate if:

Accepted Answer

A)  time bunching in economic activity is lower. 
B)  intertemporal substitution in labor supply is lower. 
C)  investments are more easily reversible. 
D)  labor adjustment costs are higher. 
A)  time bunching in economic activity is lower. 
B)  intertemporal substitution in labor supply is lower. 
C)  investments are more easily reversible. 
D)  labor adjustment costs are higher.

Question 13

When the value of a house is less than the amount owed on the house,the borrower:

Accepted Answer

A)  has negative equity in the house. 
B)  is underwater. 
C)  must pay any remaining loan balance when the house is sold. 
D)  has negative equity,is underwater,and must pay any remaining loan balance when the house is sold. 
A)  has negative equity in the house. 
B)  is underwater. 
C)  must pay any remaining loan balance when the house is sold. 
D)  has negative equity,is underwater,and must pay any remaining loan balance when the house is sold.

Question 14

If labor adjustment costs are higher for a negative real shock,then we can expect to see a:

Accepted Answer

A)  larger increase in the real GDP growth rate. 
B)  smaller increase in the real GDP growth rate. 
C)  larger decrease in the real GDP growth rate. 
D)  smaller decrease in the real GDP growth rate. 
A)  larger increase in the real GDP growth rate. 
B)  smaller increase in the real GDP growth rate. 
C)  larger decrease in the real GDP growth rate. 
D)  smaller decrease in the real GDP growth rate.

Question 15

Figure: AS/AD Adjustment   ` Beginning at Point W in the figure,suppose the government engages in a large increase in government expenditure.If workers react by displaying intertemporal substitution and enter the workforce,the economy should move to Point _____ in the short run.

Accepted Answer

A)  V 
B)  X 
C)  Y 
D)  Z 
A)  V 
B)  X 
C)  Y 
D)  Z

Question 16

Suppose a restaurant moves to another city and its manager asks the restaurant's two cooks to move there as well.Cook A is single and has no children to support.Cook B has a family with five children in grades K-8.Which of the following is the most likely outcome?

Accepted Answer

A)  Cook A is more likely to move because of a lower labor adjustment cost. 
B)  Cook B is more likely to move because of a lower labor adjustment cost. 
C)  Cook A is more likely to move because of a higher labor adjustment cost. 
D)  Cook B is more likely to move because of a higher labor adjustment cost. 
A)  Cook A is more likely to move because of a lower labor adjustment cost. 
B)  Cook B is more likely to move because of a lower labor adjustment cost. 
C)  Cook A is more likely to move because of a higher labor adjustment cost. 
D)  Cook B is more likely to move because of a higher labor adjustment cost.

Question 17

Because of uncertainty,it takes less time for an entrepreneur to make an investment decision that involves more sunk cost.

Accepted Answer

A) True 
 B)False

Question 18

Which ranking of quarters,from the highest GDP growth rate to the lowest,is correct?

Accepted Answer

A)  first,third,fourth,and second 
B)  third,fourth,second,and first 
C)  fourth,second,third,and first 
D)  second,fourth,first,and third 
A)  first,third,fourth,and second 
B)  third,fourth,second,and first 
C)  fourth,second,third,and first 
D)  second,fourth,first,and third

Question 19

Because of transmission mechanisms,a real shock takes a shorter time to affect real GDP growth.

Accepted Answer

A) True 
 B)False

Question 20

The larger a given sector's contribution to a country's GDP is,the larger the impact of a shock to that sector on GDP is.

Accepted Answer

A) True 
 B)False

Exam 14: Transmission and Amplification Mechanisms

Spending on capital goods that cannot be easily moved,adjusted,or reversed is called:

Many investments involve _____,which are a characteristic of irreversible investments.

For a given negative economic shock,a country with more collateral will:

A valuable asset pledged to a lender as security for a loan is called:

Labor adjustment costs result in:

Which statement explains how real shocks and aggregate demand shocks can reinforce and amplify one another?

When a drought (negative rainfall shock)occurs,farmers tend to put in less effort than they did before to till their farms because:

A collateral shock is:

Every night,resources at your school-classrooms,desks,etc.-are unemployed.This is an example of:

Explain what shocks can be found in the AD-AS model.Why do these shocks not disappear immediately but rather tend to spread across sectors of an economy?

The allocation of consumption,work,and leisure across time to maximize well-being is called:

A negative shock to aggregate demand will lead to a higher unemployment rate if:

When the value of a house is less than the amount owed on the house,the borrower:

If labor adjustment costs are higher for a negative real shock,then we can expect to see a:

Figure: AS/AD Adjustment ` Beginning at Point W in the figure,suppose the government engages in a large increase in government expenditure.If workers react by displaying intertemporal substitution and enter the workforce,the economy should move to Point _____ in the short run.

Suppose a restaurant moves to another city and its manager asks the restaurant's two cooks to move there as well.Cook A is single and has no children to support.Cook B has a family with five children in grades K-8.Which of the following is the most likely outcome?

Because of uncertainty,it takes less time for an entrepreneur to make an investment decision that involves more sunk cost.

Which ranking of quarters,from the highest GDP growth rate to the lowest,is correct?

Because of transmission mechanisms,a real shock takes a shorter time to affect real GDP growth.

The larger a given sector's contribution to a country's GDP is,the larger the impact of a shock to that sector on GDP is.

The Big Ideas

The Power of Trade

Supply and Demand

Equilibrium- How Supply and Demand

Price Ceilings and Floors

GDP and the Measurement of Progress

The Wealth of Nations and Economic Growth

Growth,capital Accumulation

Saving,investment,and the Financial System

Stock Markets and Personal Finance

Unemployment and Labor Force Participation

Inflation and the Quantity Theory of Money

Business Fluctuations

The Federal Reserve System

Monetary Policy

The Federal Budget- Taxes and Spending

Fiscal Policy

International Trade

International Finance

Political Economy and Public Choice

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