CH.10

The present value of $110 payment in one year, given the annual 10% interest rate is:

$11

An American soldier uses her income to purchase a $100 MP3 player made in China by a Chinese firm and $200 for fruit and vegetables from a local farmers market. As a result, U.S. GDP increases by

$200 due to an increase Consumption Spending

Suppose you will receive $500 at some point in the future. If the annual interest rate is 7.5 percent, then the present value of the $500 is:

$348.28 if the $500 is to be received in 5 years and $242.60 to be received in 10 years.

If you put $500 into a bank account today. Interest is paid annually and the annual interest rate is 8 percent. The future value of the $500 after 2 years is:

$583.20

Suppose banks are issuing personal loans at 9%. If expected inflation is 3%, then the nominal interest rate is _____ and the real interest rate is _____.

9%; 6%

Which of the following institutions issues bonds?

Foreign governments, government agencies, and corporations.

Suppose that a bank wishes to make a 5% real interest rate on a one-year loan but expects inflation over the course of the loan to be roughly 3%. Which of the following is TRUE?

If the bank charges 8% and the inflation rate is less than 3%, then the bank will have earned a higher rate of real interest than expected.

A little inflation is not always bad because

It reduces unemployment

Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a :

Shift to the left

Investment spending in macroeconomics refers to:

adding to physical capital

An increase in aggregate demand will generate_ in real GDP and_ in the price level in the short run.

an increase; and increase

One reason financial institutions become very large is to:

decrease transaction costs.

The Great Depression was cause by _ shocks, and the stagflation of the 1970s was caused by _ shocks

demand; supply

The demand curve for loanable funds slopes:

downward, because demand is lower when the price to borrow money is higher

A recession can be fixed by_ wages that shift to the _

falling; <I>LRAS</I> curve rightward

Aggregate demand will shift to the right if:

government purchases increase

A positive demand shock leads to:

higher prices and higher employment

The shot-run aggregate supply curve is positively sloped because:

higher prices lead to higher profit and higher output

Imagine that someone offers you $100 today or $200 in ten years. You would prefer to take the $100 today if the interest rate is:

highest rate (8%)

Jackie, a Canadian citizen, works only in the United States. The value of the output she produces is

included in U.S. GDP, but it is not included in U.S. GNP

Stagflation is a combination of_ unemployment and _ inflation.

increasing; increasing

A change in _ would cause a shift in the short-run aggregate supply curve.

input prices

potential output:

is the level of output that the economy would produce if all the prices, including nominal wages, were fully flexible.

The short-run aggregate supply curve will shift to the:

left if nominal wages increase

A bank makes a loan for one year. The nominal annual interest rate is 7.5%. The real rate is 4%. Over the course of the year, overall prices increase by 4%. This rate of inflation hurt the _____ because the actual rate of inflation was _____ than the anticipated rate.

lender; higher

Suppose that Jim just got a $20,000 loan from his credit union to buy a car. The loan is a _ for Jim and a _ for the credit union.

liability; financial asset

The aggregate supply curve shows the relationship between the aggregate price level and the aggregate:

output supplied

An amount that would equal a particular future value if deposited today at the prevailing interest rate is the:

present value

The aggregate demand curve shows the relationship between the aggregate price level and the aggregate:

quantity of output demanded by households, businesses, the government, and the rest of the world.

Unanticipated inflation

reduces the value of money.

A negative short-run supply shock_ aggregate output and _ the aggregate price level.

reduces; increases

In the long run, as the economy returns to equilibrium, an increase in aggregate demand will trigger a change in the SRAS and that will cause the price level to _ and potential output to _.

rise; remain stable

If there is an expansion, nominal wages_, and the _ curve shifts_ until the economy reaches long-run equilibrium

rise; short-run aggregate supply; left

National savings is the sum of private savings and:

the budget balance

The short-run aggregate supply curve illustrates:

the positive relationship between the aggregate price level and aggregate output supplied