Chapter 12 Macro Review Questions, Economics Homework, Macro Test 2, ch 17, Chapter 17 Macroeconomics - Long / Short Run Phillips Curve, ECO 2013 Chapter 26 Homework, Macroeconomics-Ch 25-27, Chapter 12 Review - Econ 110, Chapter 10: (Economic Growth...

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If the tax multiplier is -1.5 and $200 billion tax increase is implemented, what is the change in GDP , holding everything else constant? (Assume the price level stays constant)

A $300 billion decrease in GDP

Movement along the aggregate demand curve is caused by?

A change in price level

________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending

A decrease; an increase

Income Approach

A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services.

Expenditure Approach

A method of computing GDP that measures the total amount spent on all final goods and services during a given period.

Production Approach

A method of computing GDP that measures total retail value of the final goods/services produced in a nation in a given year.

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations?

A movement along the LR Phillips Curve

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations ?

A movement from point A to point C

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations

A movement from point A to point C. (up the LRPC) increasing inflation and unemployment remains the same

If actual inflation is less than expected inflation, which of the following will be true? A) Real wages will fall. B) The Phillips curve will be a vertical line. C) Real wages will rise. D) The unemployment rate will fall.

A or D

What is a banking panic?

A situation in which many banks experience runs at the same time.

Which of the following would be considered a fiscal policy action?

A tax cut is designed to stimulate spending during a recession

Which of the following would be considered an active fiscal policy?

A tax cut is designed to stimulate spending passed during a recession.

16-1. Suppose the economy is in a recession and expasionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

16-1. Suppose the economy is in the short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

A to E

7) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from

A) 23.3 years to 17.5 years

10.3 The Business Cycle 21) Which of the following explains the cause of the change in the unemployment rate at the end of a recession?

A) Firms are hesitant to rehire laid off workers, as they continue to operate below capacity

8) Countries with high rates of economic growth tend to have

A) a labor force that is more productive

18) Which of the following will increase investment spending in the economy, holding everything else constant?

A) an increase in the federal government surplus

14) Financial securities that represent promises to repay a fixed amount of funds are known as

A) bonds

26) The period of expansion ends with a __________ and the period of recession ends with a __________.

A) business cycle peak; business cycle trough

19) Borrowers are __________ of loanable funds, and lenders are ________ of loanable funds.

A) demanders; suppliers

25) From 1991 until 2001, the United States was in a period of

A) expansion

4) Since 1900, real GDP per capita has __________ and this measure __________ the actual growth in standards of living in the United States over this time.

A) increased; understates

10.2 Saving, Investment, and the Financial System 11) A firm can fund an expansion of its operations by

A) issuing bonds

Consider the choices below. All of these except one truly represent the record of productivity growth in the United States from 1800 to the present. Find the one that does not belong.

A. GDP per capita fell rapidly between 1900 and 1950.

Which of the following best explains how and why the economy will adjust back to long-run equilibrium?

Aggregate demand will increase, restoring the original equilibrium price and quantity

Macro Equilibrium

Aggregate expenditure = GDP

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?

Aggregate expenditure is equal to GDP.

The multiplier effect is only a consideration for increases in government purchases. True or False

False

What is the general relationship between the business cycle and unemployment and inflation?

B. During an expansion, unemployment falls and inflation increases.

Which of the following describes a liability on the Federal Reserve's balance sheet?

Federal Reserve notes

Expansionary monetary policy refers to the ___ to increase real GDP.

Federal Reserve's increasing the money supply and decreasing interest rates

As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment?

Federal funds rate

Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

In the long run, aggregate supply is vertical

Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

In the long run, aggregate supply is vertical.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

"Fannie Mae" and "Freddie Mac"

Suppose saving is $1,400 when income is $10,000 and the MPC equals 0.8. When income increases to $12,000, saving is

$1,800.

Potential GDP equals $100 billion. The economy is currently producing GDP 1 which is equal to $90 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP

$2 billion

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is aggregate expenditure?

$25 million

In real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita? A. 4.7 B. 10.5 C. 15 D. 21

4.7

If Country A's real GDP grows at a rate of 14 percent per year, about how many years will it take for Country A's real GDP to double? A) 30 B) 10 C) 5 D) 14 E) 7

If the consumption function is defined as C=7,250+0.8Y,what is the value of the multiplier

What is the stable unemployment rate?

In reality, the SRAS is

Upward sloping

When is it considered "good policy" for the government to run a budget deficit?

When borrowing is used for long-lived capital goods.

What are the impact of a change in the money supply on interest rate?

When the Fed increases the money supply, the short-term interest rate must fall until it reaches a level at which firms and households are willing to hold the extra money.

What is a procyclical policy?

When the Fed recognizes a recession too late and tries to implement an expansionary monetary policy but instead causes inflation.

According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following?

a decrease in the unemployment rate to 3.0%

accumulating debt poses a problem for the US federal government because

a large debt to GDP ratio causes crowding out

In a business cycle, the high point of economic activity is called

a peak

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent trade-off between unemployment and inflation

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent trade-off between unemployment and inflation.

In a business cycle, the period between the high point of economic activity and the following low point is called

a recession

The theory that, in the long run, fiscal policy is self-destructive is defined as:

crowding out

what constitutes M1?

currency (paper money and coins), checking account, and travelers checks

what are the 5 most important variables in consumption spending

current disposable income, household wealth, expected future income, price level, and interest rate

The most important determinant of consumption spending is

current personal disposable income.

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease

during the recession phase of the business cycle, production, employment, and income ___________ increase/ decrease

decrease

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending.

An unplanned increase in inventories results from

actual investment that is greater than planned investment.

An unplanned decrease in inventories results in

actual investment that is less than planned investment.

If actual inflation is higher than expected inflation, the

actual real wage is less than the expected real wage: unemployment falls

If actual inflation is higher than expected inflation, the

actual real wage is less than the expected real wage: unemployment falls.

If actual inflation is higher than expected inflation, the wages...

actual real wage is less than the expected real wage: unemployment falls.

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially

decrease M1 and not change M2

If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will

decrease consumption by $7,500.

A decrease in Social Security payments will

decrease consumption spending.

to combat a recession with discretionary fiscal policy congress and the president may

decrease taxes to increase consumer disposable income

In the figure (15.2), a movement from point A to point B would be caused by

an increase in the interest rate

Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

an increase in the marginal income tax rate

In the figure (15.4), the movement from point A to point B in the money market would be caused by

an increase in the price level

* In the figure (15.6), suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market purchase of Treasury bills

In the figure (15.7), suppose the economy is initially at point A. The movement of the economy to point as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market sale of Treasury bills

In the figure (15.3), the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that that the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers

Equilibrium GDP is equal to

autonomous expenditure times the multiplier.

balls

In 1913, Congress established the Federal Reserve system with the intention of putting an end to

bank panics

congress in 1913 established the Federal Reserves system with the intention of putting an end to

bank panics

If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

be below potential GDP

if policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

be below potential GDP

Suppose real GDP is $14 trillion and potential real GDP is $14 trillion. An increase in government purchases of $400 billion would cause real GDP to ____ potential real GDP (assuming a constant price level).

be more than

When the Fed embarked on a policy known as quantitive easing, they

bought longer-term securities than are usually bought in open market operations

What are the three expansionary fiscal policy actions?

decrease taxes, increase purchases, increase transfer payments

In the aggregate expenditure model, ________ has both an autonomous component and an induced component

consumption spending

Aggregate expenditure, or the total amount of spending in the economy, equals

consumption spending plus planned investment spending plus government purchases plus net exports.

In an open economy, expansionary monetary policy will cause

consumption, investment, and net exports to rise

Suppose the Fed purchases Treasury Securities. Interest rates in the United States will ____ and the U.S. dollar will ____ against foreign currencies?

decrease; depreciate

A(n) ____ in private expenditures as a result of a(n) _____ in government purchases is called crowding out

decrease; increase

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to _____ and investment to _____.

decrease; increase

The five most important variables that determine the level of consumption are

disposable income, wealth, expected future income, price level, and interest rate

What is the rule of 70?

divide 70 by the real GDP growth rate to find the number of year for an economy to double in size

Assume that Intel sells $1 billion of computer chips to Dell, Inc., for use in Dell's personal computers. This transaction

does not affect aggregate expenditure because computer chips are an intermediate good, and including the value of the computer chip would be double counting.

A nation's annual growth rate of real GDP per person is 2 percent. Its standard of living will A) double in 10 years. B) double in 50 years. C) fall because of its population growth. D) double in 35 years. E) not change because its population is growing.

double in 35 years.

During the twentieth century, the largest budge deficits as a percentage of GDP occured

during World Wars I and II

The ratio of the increase in ________ to the increase in ________ is called the multiplier

equilibrium real GDP; autonomous expenditure

The ratio of the increase in ________ to the increase in ________ is called the multiplier.

equilibrium real GDP; autonomous expenditure

The government purchases multiplier equals change in (blank) divided by the change in (blank)

equilibrium real GDP; government purchases

The tax multiplier equals the change in (blank) divided by the change in (blank)

equilibrium real GDP; taxes

The tax multiplier equals the change in ___ divided by the change in ___.

equilibrium real GDP; taxes

difference between household survey and establishment survey

establishment surveys are monthly surveys to businesses, household surveys are

Which of the following is a true statement?

excess reserves = actual reserves - required reserves

suppose you deposit $2000 into Bank of America and that the required reserve ratio is .1. How does this affect the bank's balance sheet

excess reserves rise by $1800

what are the 4 functions of money

exchange, unit of account, store value, and deffered payment

which of the following is not a tool the Fed uses to manage the money supply (what are the tools)

expanding and contracting the money supply, setting the discount rate, open market operations

During a(n) ________ many firms experience increased profits, which increases ________ and investment spending

expansion; cash flow

CPI (Consumer Price Index) formula

expenditures in the current year/expenditure in the base ear X100

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.

fall, increase

Refer to the Article Summary. When Fed Chair Janet Yellen announced that a rate increase would be warranted by the end of the year, she was referring to the

federal funds rate

* The Taylor rule helps explain the relationship between the Fed's _____ and ____.

federal funds target; economic conditions

Fiscal policy refers to

federal taxes and purchases that are intended to achieve macroeconomics policy objectives

If people assume that future rates of inflation will ___, they are said to have adaptive expectations.

follow the pattern of inflation rates in the past

Consumer spending ________ and investment spending ________.

follows a smooth trend; is more volatile and subject to fluctuations

A barter economy is an economy where

goods and services are exchanged for other goods and services

Inventories refer to

goods that have been produced but not yet sold

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand

If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

government purchases

Congress and the president carry out fiscal policy through changes in

government purchases and taxes

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? If the Fed's policy is successful, what is the effect on the following indicators?

he Fed will pursue a contractionary monetary policy. Actual real GDP: decreases Potential real GDP: does not change Price level: decreases Unemployment: increases

Which of the following is an objective of fiscal policy

high rates of economic growth

Crowding out, following an increase in government spending, results form (the exchange rate is the foreign exchange price of the domestic currency)

higher interest rates and a lower exchange rate

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investments

*Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ___ and real GDP to be ____

higher; higher

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)

higher;higher

Refer to the Article Summary. The increase in consumer spending discussed in the article summary was due in part to an improving housing market. This reason for the increase in consumer spending is most closely related to which of the following variables that determine the level of consumption?

household wealth

In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports? Because they help us understand

how the level of aggregate expenditure and GDP are determined in the economy. how macroeconomic equilibrium is determined in the aggregate expenditure model. the relationship between aggregate expenditure and real GDP.

Very high rates of inflation are called

hyperinflation

If real GDP grows at a faster rate than does population, then the standard of living, as measured by real GDP per person, A) improves. B) cannot be measured. C) remains the same. D) worsens. E) either improves, worsens, or stays the same, depending on the size of the population and the actual level of real GDP.

improves

What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that

in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.

National saving equals

income - consumption - government spending

During the expansion phase of the business cycle, production, employment, and income ________ increase / decrease

increase

Falling interest rates can

increase a firm's stock price, which causes firms to issue more stock shares, and thus increase funds for investments

If the reduction in inventories was unplanned, then future production would be expected to

increase as inventories are replenished.

Refer to Figure 16-4. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?

increase government spending

Refer to Figure 16-5. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use to move the economy to point C?

increase government spending

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy?

increase in inflation

Refer to Figure 16-7. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use

increase income taxes

* Lowering the interest rate

increase investment projects by firms

lowering the interest rate will

increase investment projects by firms

* A Canadian oil company hires geological survey services form the United State. If all else remains equal, this will

increase net exports

lowering the discount rate will

increase reserves, encourage banks to make more loans, and increase the money supply

Refer to Figure 16-6. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP?

increase taxes

* If New Yorkers decrease their purchases of French champagne, assuming all else remains constant, this will _____ of the United States

increase the balance of trade

Increases in the price level

increase the quantity of money needed for buying and selling

Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to _____. I.e., the dollar ____ in value against the yen.

increase; appreciates

In international exchange markets, a rise in interest rates in the United States will cause the demand for dollars to ____ and the supply of dollars to _____

increase; decrease

suppose the government wants to maintain a balanced budget. to achieve this goal, when the economy falls into recession govern,met would need to _________ taxes, which would cause aggregate demand to _________

increase; decrease

Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

increase; increase

If the Fed pursues an expansionary monetary policy, investment in the United States will ________ and net exports will ________.

increase; increase

Tax reduction and simplification should ____ long - run aggregate supply and ____ aggregate demand

increase; increase

tax reduction and simplification should _______ long run aggregate supply and _______ aggregate demand

increase; increase

A country will likely experience an increase in poverty if A) its real GDP per person growth rate increases over time. B) its inflation rate decreases or slows over time. C) it does not receive foreign aid. D) its population decreases over time. E) its real GDP growth rate decreases or slows over time.

its real GDP growth rate decreases or slows over time.

labor force participation rate

labor force/adult population x 100

In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate "would have been stronger if it hadn't been for companies drawing down inventories." Source: Justin Lahart, "Consumers Priming U.S. Pump," Wall Street Journal, July 30, 2015. If companies are "drawing down inventories," aggregate expenditure is likely to have been

larger than GDP

Which of the following would NOT be considered an automatic stabilizer

legislation increasing funding for job retraining passed during a recession

When the Federal Reserve provides liquidity to banks by lending to them, it is acting as a

lender of last resort

Rising prices erode the value of money as ____ and as a ____

medium of exchange; store of value

Rising prices erode the value of money as a ___ and as a ___.

medium of exchange; store of value

Which of the following is included in M2 but not M1?

money market deposit accounts in bank

Technological change is _____________ for economic growth than additional capital

more important

It is ____ difficult to effectively time fiscal policy than monetary because ____.

more; fiscal policy takes longer to implement

it is ________ difficult to reflectively time fiscal police than monetary policy because

more;fiscal policy takes longer to implement

An increase in the real interest rate will

most likely lower consumers' purchases of durable goods.

Refer to the Article Summary. The increase in consumer spending discussed in the article summary was due in part to lower debt payments which have resulted in an increase in disposable income. The increase in consumption resulting from

movement up along

If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 million, then the economy

must be blow potential real GDP

Disposable income is defined as

national income + transfers - taxes.

disposable income formula

national income - net taxes

Into which category of aggregate expenditures LOADING... would the following transaction fall? A consumer in Japan orders a computer online from Dell.

net export expenditure

If net exports are negative,

net foreign investments are also negative

If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially

not change M1 and not change M2

if you transfer all of your currency to your checking account, initially M1 will ______ and m2 will _________

not change; not change

What can the Federal Reserve do to increase the natural rate of unemployment?

nothing

Unemoloyment rate

number of unemployed/labor force X 100

The Rule of 70 can be used to calculate the A) economic growth rate per month. B) 70 percent level of the economic growth rate. C) number of years it would take for the level of any variable to double. D) population growth rate per year. E) economic growth rate per year.

number of years it would take for the level of any variable to double.

nuts

What are the policy tools the Fed uses to control the money supply?

open market operations, discount policy, and reserve requirements

Money serves as a standard of deferred payment when

payments agreed to today but can be payed in future in terms of money

On the 45 -degree line diagram, for points that lie below the 45-degree line,

planned aggregate expenditure is less than GDP.

On the 45-degree line diagram, for points that lie below the 45-degree line

planned aggregate expenditure is less than GDP.

Assume that inventories declined by more than analysts predicted. This implies that

planned aggregate expenditure was greater than real GDP.

The per-worker production function has a _______ slope, indicating that increases in capital per hour worked _______ real GDP.

positive increase

The _________________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

the money market is concerned with _____________ and the loanable funds market model is concerned with ___________

short-term nominal interest rates; long term real interest rates

Economic growth will

slow down or stop if more capital per hour is used because of diminishing returns to capital

if during a deposit expansion, not all money gets redeposited into the banking system and some leaks out as currency, then the real world multiplier is

smaller than 1/RR

the real world money multiplier is

smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash

A decline in demand does not always lead to an increase in firms' holdings of inventories because

sometimes the decline is anticipated and inventories can be adjusted.

Actual investment spending does not include

spending on consumer durable goods.

The majority of dollars spent by government prior to the Great Depression was spending at the ____ level. In the post World War II period, two - thirds to three quarters of all dollars spent by government in the United States are spend at the ____ level.

state and local; federal

The slope of the consumption function is equal to

the change in consumption divided by the change in disposable income.

The MPS is

the change in saving divided by the change in income.

When the United States sends money to the Philippines to help typhoon survivors, the transaction is recorded in

the current account

If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

the economy is in a recession.

Why doesn't the fed have both a money supply target and an interest rate target?

the fed does not control money demand

if the fed lowers its target for the federal funds rate, this indicates that

the fed is pursuing n expansionary monetary policy

When we say that the Federal Reserve has lowered the interest rate, we mean that it has lowered its target for

the federal funds rate

which of the following is responsible for managing the money supply in the US

the federal open market committee

U.S. net export spending falls when

the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.

U.S. net export spending rises when

the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.

The quantity theory of money implies that the price level will be stable (no definition or deflation) when the growth rate of the money supply equals

the growth rate of real GDP

the quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals

the growth rate of real GDP

If government spending and the price level increase, then

the interest rate increases, consumption declines, and investment spending declines

The federal funds rate is

the interest rate that banks charge each other for overnight loans.

The use of fiscal policy to stabilize the economy is limited because

the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way

Potential real GDP is

the level of GDP attained when all firms are producing at capacity

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure.

If the price level decreases,

the money demand curve shifts to the left

If real GDP increases,

the money demand curve shifts to the right

The Fed's two main monetary policy targets are

the money supply and interest rate

* Monetary policy refers to the actions the Federal Reserve takes to manage

the money supply and interest rates to purpose its economic purposes

monetary policy refers to the actions the federal reserve takes to manage

the money supply and interest rates to pursue its economic objectives

According to the quantity theory of money, inflation is caused by

the money supply is growing faster than real GDP

When the Federal Reserve decreases the required reserve ratio

the money supply will increase

If the Fed pursues expansionary monetary policy then

the money supply will increase, interest rates will fall, and the real GDP will rise

Crowding out will be greater

the more sensitive investment spending is to changes in the interest rate

If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then

the multiplier is 10.

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then

the multiplier is 8.

All of the following are true statements about the multiplier except

the multiplier is a value between zero and one.

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

What relationship is shown by the aggregate supply curve?

the price level and the quantity of real GDP supplied by firms.

the two key factors that cause labor productivity to increase over time are:

the quantity of capital per hour worked and the level of technology

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending

this may benefit the economy in the long run, but could be counterproductive in the short run

When Congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors.

At macroeconomic equilibrium,

total spending equals total production.

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.

total spending; real GDP; the price level

Macroeconomic equilibrium occurs where

total spending, or aggregate expenditure, equals total production, or GDP.

The largest and fastest-growing category of federal government expenditures is

transfer payments

Friedman defined the "natural rate of unemployment" as the

unemployment rate that exists when the economy produces potential GDP.

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

The statement "This Dell laptop costs $2500 illustrates which function of money

unit of account

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.

Which of the following leads to an increase in real GDP?

a decrease in interest rates

U.S. real net exports are typically

A. negative, and usually rise in recessions and fall in expansions.

MPC+MPS=

* If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would be to increase by _____ to restore the economy to potential real GDP

$250 billion

If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by _____ to restore the economy to potential real GDP

$250 billion

if the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then the government purchases would need to increase by __________ to restore the economy to potential real GDP

$250 billion

$27 million

Equations for C,I,G,and NX are given below. If the equilibrium level of GDP is $32,000, what will the new equilibrium level of GDP be if government spending increases to 2,500? C=5,000+(MPC)Y I=1,500 G=2,000 NX=-500

$34,000

If the consumption function is defined asC = 5,500 + 0.9Y, what is the autonomous level of consumption expenditure?

$5,500

With a required reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase checking account deposits in the entire banking system of

$50,000

Given the equations forC,I, G, andNX below, what is the equilibrium level of GDP?

$79,000

Inflation Rate=

(Current deflator value- Previous deflator value)/Previous value))*100

GDP deflator =

(Nominal GDP/Real GDP) x 100

Employment to Population Ratio Formula

(employment/working age population) x 100

How do investment banks differ from commercial banks?

- investment banks do not take deposits - investment banks generally do not lend to households

If a country experiences a real GDP growth rate of 1 percent and population growth of 2 percent, then the growth rate of real GDP per person is A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent. E) -1 percent.

-1 percent

How do investment banks differ from commercial banks?

.Investment banks do not take deposits, Investment banks generally do not lend to households.

Given the consumption schedule in the table above, the marginal propensity to save is

0.1

Table 12-3 Consumption (dollars) *Disposable Income (dollars)* $1,200 *$3,000* 2,100 *4,000* 3,000 *5,000* Refer to Table 12-3. Given the consumption schedule in the table above, the marginal propensity to save is

0.1.

If national income increases by $20 million and consumption increases by $5 million, the marginal propensity to consume is

0.25

U.S. real GDP in 2007 was $13.25 trillion and U.S. real GDP in 2008 was $13.31 trillion. What was the economic growth rate of the United States during this period? A) $1.8 trillion B) 0.45 percent C) 18 percent D) 6.9 percent E) -1.36 percent

0.45 percent

Equations forC,I, G, andNX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume?

0.8

If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is

0.80

Given the equations for C,I,G,and NX below, what is the marginal propensity to consume? C=2,000+0.9Y I=2,500 G=3,000 NX=400

0.9

If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is

0.9.

Suppose a transaction changes a bank's balance sheet as indicated in the following T - account, and the required reserve ratio is 10 percent ________________________ Assets | Liabilities | Reserves +2000 | Deposits +2000 ------------------------------------------ As a result of the transaction, the bank can make a maximum loan of

1,800

MPC +MPS =

What causes shifts in the aggregate demand curve?

1. Changes in government policies 2. Expectations of households and firms. 3. Changes in foreign variables

Why does the short-run aggregate supply curve slope upward?

1. Contracts keep wages "sticky." 2. Firms are slow to adjust wages in an attempt to maximize profits. 3. Menu costs keep prices "sticky."

Borrowers are ____ of loanable funds, and lenders are _____ or loanable funds? Demanders or Suppliers

1. Demanders 2. Suppliers

What causes an inverse effect (or downward sloping) aggregate demand curve?

1. Wealth effect 2. Interest rate effect 3. International-trade effect

3 ways to measure GDP

1. expenditure approach 2. income approach 3. value-added (production) approach

If real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? A) -1.5 percent B) 1.5 percent C) 2.1 percent D) $0.2 trillion E) 15.0 percent

1.5 percent

How to calculate value of the multiplier?

1/(1-MCP)

What is the multiplier formula?

1/(1-MPC)

multiplier formula

1/(1-MPC)

A general formula for the multiplier is

1/MPS

the formula for simple deposit multiplier is

1/RR or ratio of deposits by amount of new reserves

If the consumption function is defined as C=5,500+0.9Y,what is the multiplier

If the consumption function is defined asC = 5,500 + 0.9Y, what is the value of the multiplier?

Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are out of the labor force. Calculate the unemployment rate.

10%

Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2.If the MPC is 0.9, then what is the change in GDP?

100 million

* Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account ______________________ Assets | Liabilities | Reserves +1000 | Deposits +1000 -------------------------------------- At this point, what percentage of the new deposits does Well Fargo hold in reserves?

100 percent

What years did the rate of real GDP per hour worked slow in the United States?

1974-1995 and 2006-2016

The National Restaurant Association states that the restaurant industry has economic effect of more than $1.7 trillion annually in the United States, with every dollar spent in restaurants generating an estimated total of $2.05 in spending in the economy. This indicates that the spending multiplier for the restaurant industry is equal to

2.05

If an economy growing at a rate of 2.5% per year, for long will it take to double?

28 years

If an economy's growth rate of real GDP is 3 percent per year and the growth rate of the population is 2.5 percent per year, the growth rate of real GDP per person is A) [(2.5 - 3) ÷ 3] × 100 = 16.6 percent per year. B) 3 - 2.5 = 0.5 percent per year. C) 2.5 - 3 = -0.5 percent per year. D) 3 + 2.5 = 5.5 percent per year. E) [(3 - 2.5) ÷ 2.5] × 100 = 20 percent per year.

3 - 2.5 = 0.5 percent per year.

If it took 20 years for real GDP to double, what was the growth rate of real GDP? A) 3.0 percent B) 5 percent C) 3.5 percent D) 4 percent E) 4.5 percent

3.5 percent

According to the Taylor rule, what is the federal funds target rate under the following conditions? ≻Equilibrium real federal funds rate equals 3% ≻Target rate of inflation equals 3% ≻Current inflation rate equals 2% ≻Real GDP is 2% below potential real GDP

3.5% The Taylor Rule is: fft = π + ff*r + ½(π gap) + ½(Y gap) where fft = federal funds target π = inflation ff*r = the real equilibrium fed funds rate π gap = inflation gap (π - π target) Y gap = output gap (actual output [e.g. GDP] − output potential) so if you plug everything in you get: fft = 2+3+0.5(2-3)+0.5(-2)=5-0.5-1=3.5%

If the marginal propensity to consume equals 0.90, the tax rate equals 0.20, what is the value of the government purchases multiplier?

3.57

Real GDP per capita in the United States, as mentioned in the chapter, grew from about $5,600 in 1900 to about $43,700 in 2008, which represents an annual growth rate of 1.9 percent. if the United States continues to grow at this rate, how long will it take for real GDP per capita to double?

36.84 years

If the # of unemployed works is 19 million, the # in the working-age population is 500 million, and the unemployment rate is 5%, how many workers are in the labor force?

380 million

according to the quantity theory, if the money supply grows at 6%, real GDP grows at 2% and the velocity of money is constant, then the inflation rate will be

Number of years it takes to double standard of living=

70/growth rate of gdp

Real GDP per capita

= output per person = average consumption = standard of living = Real GDP/Population

A good measure of the standard of living is A) real GDP per capita. B) total nominal GDP. C) nominal GDP per capita. D) total real GDP

According to the short-run Phillips curve, the unemployment rate and the inflation rate are A) negatively related. B) unaffected by monetary policy. C) unrelated. D) positively related.

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) more than $200 billion. B) less than $200 billion. C) $200 billion. D) None of the above are correct. This policy shifts the long-run aggregate supply curve.

As the economy nears the end of a recession, which of the following do we typically see? A) increased spending on capital goods by firms B) further decreases in consumer spending C) increasing interest rates D) all of the above

If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true? A) Public saving is $100 million. B) The budget deficit is $500 mill ion. C) Public saving is $500 million. D) The budget deficit is $100 million

If labor productivity growth slows down in a country, this will A) slow down the increase in real GDP per capita. B) slow down the increase in nominal GDP. C) accelerate the increase in nominal GDP. D) accelerate the increase in real GDP per capita

If, in an economy experiencing inflation, the government decided to tax real interest income rather than nominal interest income, this change would cause the real interest rate to ________ and the equilibrium quantity of loanable funds to ________. A) fall; rise B) rise; rise C) fall; fall D) rise; fall

The curve showing the short-run relationship between the unemployment rate and the inflation rate is called A) the Phillips curve. B) the monetary policy curve. C) the Sargent curve. D) the unemployment curve.

The demand for durable goods A) declines by a greater percentage than does GDP during a recession. B) rises by a greater percentage than does GDP during a recession. C) declines by a smaller percentage than does GDP during a recession D) has decreased over time

The period between a business cycle peak and a business cycle trough is called A) recession. B) diffusion. C) recalculation. D) expansion

What can the Federal Reserve do to reduce the natural rate of unemployment? A) nothing B) follow contractionary monetary policy that will increase inflation C) follow expansionary monetary policy that will increase inflation D) follow expansionary monetary policy that will reduce inflation

What two factors are the keys to determining labor productivity? A) technology and the quantity of capital per hour worked B) the business cycle and the growth rate of real GDP C) the growth rate of real GDP and the interest rate D) the average level of education of the workforce and the price level

When the economy enters a recessionary phase of the business cycle, unemployment tends to A) increase. B) be unchanged. C) decrease. D) change in the same direction as the rate of inflation.

Which of the following is an example of human capital? A) a college education B) a software program C) a computer D) a factory building

Which of the following is most liquid? A) a dollar bill B) a government bond C) a mutual fund share D) a corporate bond

Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy? A) growth in capital per hour accompanied by technological change B) a shift of workers in the economy from the agricultural sector to the non-agricultural sector C) increases in labor force participation rates as workers who are out of the labor force pursue rising wages D) an influx of immigrant labor into an economy without any accompanying technological change

Y = $12 trillion C = $8 trillion I = $2 trillion G = $2 trillion TR = $2 trillion T = $3 trillion Based on the information above, what is the level of private saving in the economy? A) $3 trillion B) $4 trillion C) $5 trillion D) $8 trillion

20) The demand for loanable funds is downward sloping because the __________ the interest rate, the __________ the number of profitable investment projects a firm can undertake, and the __________ the quantity demanded of loanable funds.

A) lower; greater; greater

5) Since 1900, real GDP in the United States has grown

A) more rapidly than the population

3) A good measure of the standard of living is

A) real GDP per capita

Which of the following factors brought on the recession of 2007-2009?

A. A rapid increase in the price of oil. B. The end of the housing bubble. C. The financial crisis.

According to the dynamic AD-AS model, what is the most common cause of inflation?

A. AD increases by more than LRAS. B. Total spending increases faster than total production.

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?

A. AE = C + I + G + NX

What is the Fed doing to increase the credibility of its policies?

A. Announcing the federal funds target rate. B. Whenever a change in policy is announced, the change actually takes place.

Firms that act as financial intermediaries match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provide to savers and lenders? (Mark all that apply.)

A. Collects and communicates information about borrowers to savers B. Allows savers to spread their money among many financial investments. C. Provides an easy method of exchanging a financial security for money.

We can use the diagram to compare movements in real consumption between 1979 and 2017.

A. Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions.

Why might the unemployment rate continue to rise during the early stages of a recovery?

A. Employment growth may be slow relative to the growth in the labor force. C. Some firms continue to operate well below their capacity even after a recession has ended.

According to many economists and policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?

A. Following the Taylor rule. B. Following a rules strategy. C. Following a discretion strategy. D. All of the above.

Why do economic growth rates matter?

A. High levels of sustained economic growth reduce infant mortality. B. When a country sustains high growth rates, life expectancy at birth increases. C. High growth rates coincide with improved living standards.

Which of the following does NOT lead to long-run economic growth?

A. Increase in average wages

Which of the following will increase planned investment spending on the part of firms?

A. Increased optimism about future demand for its product B. A lower real interest rate

The figure to the right illustrates the relationship between weak and strong rule-of-law LOADING... countries and economic growth. In addition to a country's failure to enforce rule-of-law, what else explains why more low-income countries do NOT experience rapid growth as the catch-up line predicts?

A. Lengthy civil wars B. Shortage of childhood vaccinations C. Inability to borrow money needed for investment

The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as

A. MPC = 1minusMPS. B. MPS = 1minusMPC. C. MPC + MPS = 1. D. All of the above.

New growth theory suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge capital?

A. Public education B. Subsidies C. Patents

Indicate which of the following is correct about the multiplier effect.

A. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. B. The larger the MPC, the more additional consumption that occurs. C. A decrease in autonomous spending decreases real GDP by a multiple of the change. D. All of the above.

Paul Volcker is credited largely with which of the following?

A. The "Volcker disinflation." B. Fighting inflation by reducing the growth of the money supply.

Which of the following is NOT included in the calculation of total government purchases?

A. Unemployment insurance benefits paid for by the federal government (Transfer Payments)

In the aggregate expenditure model, when is planned investment greater than actual investment?

A. When there is an unplanned decrease in inventories.

Which of the following is usually the cause of stagflation?

A. a supply shock as a result of an unexpected increase in the price of a natural resource

The long-run aggregate supply curve is vertical because in the long run

A. changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.

The short-run aggregate supply curve slopes upward because of all of the following reasons

A. in the short run, as prices of final goods and services increase, input prices react more slowly. B. in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. C. in the short run, prices of final goods and services adjust slowly due to the existence of menu costs.

We say that the economy as a whole is in macroeconomic equilibrium if

A. total spending equals GDP. B. aggregate expenditure equals GDP. C. total spending equals total production. D. aggregate expenditure equals total production. E. all of the above.

The government policy that does not increase economic growth is

A. foreign trade policy that favors imposing a high tariff on imported high-tech goods.

Aggregate Expenditure Model

AE= C+I+G+NX

The formula for aggregate expenditure is

AE=C+I+G+NX

Which of the following statements is correct? A. Actual investment will equal planned investment only when inventories rise. B. Actual investment and planned investment are always the same thing. C. Actual investment will equal planned investment only when there is no unplanned change in inventories. D. Actual investment equals planned investment only when inventories decline.

Actual investment will equal planned investment only when there is no unplanned change in inventories.

Which of the following leads to an increase real GDP?

a decrease in interest rates

From July 2017 to October 2017, business inventories increased by $ 15 billion. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need?

Aggregate expenditure was less than GDP in this quarter

If firms find that consumers are purchasing more than expected, which of the following would you expect?

Aggregate expenditure will likely be greater than GDP.

Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,

All are correct. Government transfer payments will be rising and tax receipts will be falling, this will result in a current budget deficit, and the cyclically adjusted budget will be balanced.

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

All are correct. Raise interest rates and reduce consumer expenditures on automobiles and new houses, make domestic business less competitive in international markets as the dollar appreciates in value, and reduce investment in new capital.

If net exports are equal to net foreign investment,

All are true. The current account balance is equal to the negative of the financial account balance, the balance of payment is zero, and net capital inflows are equal to imports minus exports.

what constitutes M2?

All of M1 in addition to savings account, time deposits, money market, and noninstitutional money

In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?

All of the Above -Initially, firms hold more money than they want relative to other financial assets. -Increased demand for Treasury securities drives down their interest rate. -Increased demand for Treasury securities drives up their prices.

Which of the following is a function that money serves? (store of value, unit of account, medium of exchange, or all of the above)

All of the above

Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy?

All. Private investment, consumption, and net exports

Which of the following transactions would be included in Germany's current account?

An American citizen purchases a new Volkswagen made in Germany

Which of the following would decrease net exports in the United States?

An American party planner purchases 350 piñatas from Mexico

How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade?

An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade

GDP is

An indicator of economic performance

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model What would be the Fed's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06? That is, what step will the Fed likely take to control inflation in the second period?

An open market sale of government securities.

What is the Fed doing to increase the credibility of its policies?

Announcing the federal funds target rate. Whenever a change in policy is announced, the change actually takes place.

The economic definition of money is:

Any asset that people are generally willing to accept in exchange for goods and services

A shift in the aggregate demand curve is caused by?

Any factor other than price change like... 1. Increases in labor and in the capital stock. 2. Technology 3. Expected changes in the future price level 4. Adjustments to past errors in expected price level 5. Unexpected change in the price of an important natural resource

________ consumption is consumption that does not depend upon the level of GDP.

Autonomous

According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labor in the economy D) Both A and C are correct answers.

Deflation refers to A) a decrease in the rate of inflation. B) a falling price level. C) Both A and B are correct. D) None of the above are correct.

How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy? A) Private saving will increase by the amount of increase in the budget surplus. B) Private saving will decrease by less than the amount of increase in the budget surplus. C) Private saving will decrease by the amount of increase in the budget surplus. D) Private saving will be unaffected by the increase in the budget surplus

If rational workers and firms know that the Federal Reserve is following an expansionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; decreases B) increase; remains unchanged C) increase; increases D) decrease; decreases

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Fed's policies will be deflationary. B) The Fed's policies will be inflationary. C) The Fed will reduce the natural rate of unemployment. D) The rate of inflation will fall as the Fed tries to reduce the unemployment rate.

If the Federal Reserve chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see? A) a decrease in the long-run aggregate supply curve B) a downward shift of the short-run Phillips curve C) a reduction in the unemployment rate D) Both A and B are correct answers.

If the federal government's expenditures are less than its tax revenues, then A) a budget deficit results. B) a budget surplus results. C) the budget is balanced. D) No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays.

If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from A) 23.3 years to 20.6 years. B) 23.3 years to 17.5 years. C) 11.2 years to 10.8 years. D) 28.0 years to 21.0 years

If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be A) increased as aggregate real income and output rise in the long run. B) less than it would be without the supply-side effects. C) unaffected by shifting long-run aggregate supply curve. D) dependent upon the impact of this tax change on consumer disposable income.

In a closed economy, private saving is equal to which of the following? A) Y-C-T B) Y+TR-C-T C) Y-G-T D) Y-G-T+TR

In a closed economy, which of the following components of GDP is not included? A) consumption B) net exports C) investment D) government spending

In a closed economy, which of the following equations reflects investment? A) Y-T+TR B) Y-C-G C) Y-C-T D) C+G-T

Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) decrease; decrease further B) increase; decrease C) increase; increase further D) decrease; increase

Matt's real wage in 2005 is $26.80. If the price level is 104, what is Matt's nominal wage? A) $30.80 B) $27.87 C) $26.80 D) $25.77

The effect of a recession on a company like Boeing Aircraft is such that A) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. B) sales decline more sharply for Boeing as compared to firms that do not produce durable goods. C) the decline in sales is more short lived as compared to firms that do not produce durable goods. D) profits fall less sharply as compared to firms that do not produce durable goods.

The federal budget deficit acts as an automatic stabilizer because A) Medicaid payments increase during expansionary periods. B) government tax revenues decrease during a recession. C) food stamp payments increase during expansionary periods. D) unemployment insurance payments decrease during a recession.

The federal government debt equals A) government spending minus tax revenues. B) the total value of U.S. Treasury bonds outstanding. C) the accumulation of past budget deficits. D) tax revenues minus government spending.

The only people without jobs at the natural rate of unemployment are the A) cyclically and structurally unemployed B) structurally and frictionally unemployed C) structurally, frictionally, and cyclically unemployed D) frictionally and cyclically unemployed

The period of expansion ends with a ________ and the period of recession ends with a ________. A) business cycle peak; business cycle peak B) business cycle peak; business cycle trough C) business cycle trough; business cycle trough D) business cycle trough; business cycle peak

The response of investment spending to an increase in the government budget deficit is called A) private dissaving. B) crowding out. C) expansionary investment. D) income minus net taxes

Under which of the following circumstances would the government be running a deficit? 19) ______ A) G = $7 trillion T= $7 trillion TR = $0 B) G = $5 trillion T = $5 trillion TR = $1 trillion C)G = $7 trillion T = $10 trillion TR = $3 trillion D) G = $5 trillion T = $7 trillion TR= $1 trillion

When the government runs a budget deficit, we would expect to see that A) public saving is positive. B) investment will fall. C) private saving will fall. D)G+ TR <T

Which of the following could increase unemployment and inflation simultaneously? A) a decrease in the real wage B) an increase in oil prices C) contractionary monetary policy D) expansionary monetary policy

Which of the following explains the cause of the change in the unemployment rate at the end of a recession? A) Firms rapidly hire new workers at the first sign of on an increase in demand for their goods. B) Firms are hesitant to rehire laid off workers as they continue to operate below capacity. C) Discouraged workers return to the labor force and this makes the unemployment rate fall. D) Discouraged workers leave the labor force and this makes the unemployment rate rise

Which of the following would you expect to increase the equilibrium interest rate? A) a change from an income tax to a consumption tax B) an increase in the budget deficit C) a decrease in the profitability of investment projects firms are considering D) an increase in the percentage of income after net taxes that households save

Year |Potential Real GDP |Real GDP |Price Level 2011 | $14 trillion |$14 trill | 150 2012 | 14.5 trillion |14.2 trill | 152 Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2011 and in 2012 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2012, they should A) increase the level of interest rates. B) decrease income taxes. C) decrease government purchases. D) decrease the money supply.

Refer to Figure 16-1. An increase in taxes would be depicted as a movement from (blank), using the static AD-AS model in the figure above

B to A

30) The demand for durable goods

B) declines by a greater percentage than does GDP during a recession

2) Technological advances generally result in

B) increased life expectancy

29) As the economy nears the end of a recession, which of the following do we typically see?

B) increased spending on capital goods by firms

23) During the recession phase of the business cycle,

B) interest rates are usually falling

10) The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as

B) labor productivity

10.1 Long-Run Economic Growth 1) Which of the following statements describes the experiences of the Whirlpool Corporation since it was established in 1911?

B) long-run growth interrupted by periods of business cycle recession

24) The period between a business cycle peak and a business cycle trough is called

B) recession

12) Liquidity refers to

B) the ease with which a financial security can be traded for cash

The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic growth, the economic growth model focuses on the causes of increases in long-run labor productivity. What are the key factors that determine labor productivity?

B. Quantity of capital per hour worked C. Technological change

The financial system-either financial markets or financial intermediaries-provides savers and borrowers with

B. The financial system provides liquidity to savers by giving them the opportunity to buy and sell their financial securities. C. The financial system provides savers with facts and information about borrowers and about expected returns on their financial investments. D. The financial system provides risk sharing to savers by giving them the opportunity to diversify their funds among different investment choices.

Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason?

B. The formula ignores the impact of an increase in GDP on consumption.

Indicate the two main objections to the idea that the short-run Phillips curve is vertical.

B. Workers and firms might not have rational expectations. Your answer is correct. C. Contracts with workers keep wages sticky.

Aggregate demand (AD) is comprised of expenditure components that include:

B. government spending, consumption, investment, and net exports.

Potential GDP

B. increases over time as technological change occurs. C. increases over time as the labor force grows.

The aggregate demand curve shows the relationship between

B. the price level and the quantity of real GDP demanded by households, firms, and the government.

Which of the following does NOT lead to long-run economic growth A. Improved labor productivity B. Increase in average wages C. Increase in the capital stock D. Technological change

B. Increase in average wages

What can low-income countries do in order to increase the amount of loanable funds available to firms for investment projects such as new factories or improved technology?

B. Provide savings incentives

Using GDP per capita in 2016 (measured in U.S. dollars, corrected for differences across countries in the cost of living), identify which one of the following statements is true?

B. Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.

Technological change is more important to long-run economic growth than changes in capital. The easiest way for firms to gain access to new technology is through

B. foreign direct investment

Developing countries have benefited from globalization, because globalization can do all of the following except

B. impose trade barriers and tariffs on imported goods so as to protect domestic industries.

Consider the figures below and determine which is the best description of what causes the shift from AD 1 to AD 2

Both A and B Example A shows a contractionary monetary policy. The price level and real GDP both fall. Example B shows an expansionary monetary policy. The price level and real GDP both rise

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?

Business investment projects Consumption of durable goods The value of the dollar

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.)

Business investment projects Consumption of durable goods The value of the dollar

* In figure (15.10), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Buy treasury bills

How does the Federal Open Market Committee increase and decrease money supply?

By buying and selling U.S. Treasury securities

A(n) ________ in private expenditures as a result of a(n) ________ in government purchases is called crowding out. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease

According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%? A) less than 1 year B) 5 years C) 14 years D) 35 years

Automatic stabilizers refer to A) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. B) the money supply and interest rates that automatically increase or decrease along with the business cycle. C) government spending and taxes that automatically increase or decrease along with the business cycle. D) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

During a recession, spending on ________ tends to fall more dramatically than spending on ________. A) food; cars B) necessities; luxuries C) durable goods; nondurable goods D) nondurable goods; durable goods

Expansionary fiscal policy actions ________ savings public, _________ the supply of loanable funds, and ______ the real interest rate. A) increase, increase, decrease B) decrease, increase, decrease C) decrease, decrease, increase D) increase, increase, increase

Fiscal policy refers to changes in A) federal taxes and purchases that are intended to fund the war on terrorism. B) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

If consumers decide to be more frugal and save more out of their income, then this will cause A) a movement to the right along the supply curve for loanable funds. B) a movement to the left along the supply curve for loanable funds. C) a shift in the supply curve for loanable funds to the right. D) a shift in the supply curve for loanable funds to the left.

If real GDP in a small country in 2010 is $8 billion and real GDP in the same country in 2011 is $8.3 billion, the growth rate of real GDP between 2010 and 2011 A) is 3.0%. B) is 3.6%. C) is 3.75%. D) cannot be determined from the information given

If real GDP per capita measured in 2000 dollars was $6,000 in 1950 and $48,000 in 2010, we would say that in the year 2010, the average American could buy ________ times as many goods and services as the average American in 1950. A) 1/8 B) 4 C) 8 D) 12

In a closed economy public saving plus private saving is equal to A) taxes minus transfers. B) the budget deficit. C) investment. D) the budget surplus

Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long -run economic growth in the economy. A) increases; increases B) decreases; increases C) decreases; decreases D) increases; decreases

Liquidity refers to A) the number of shares of stock a corporation issues. B) the number of times a dollar changes hands in the creation of GDP in an economy. C) the ease with which a financial security can be traded for cash. D) the ease with a stock can be traded for a bond.

Potential GDP refers to A) the extent to which real GDP is above or below nominal GDP. B) the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within any given year. C) the level of GDP attained when all firms are producing at capacity. D) the level of GDP attained by the country with the highest growth in real GDP in a given year.

Purchases of which of the following goods would be dramatically reduced during a recession? A) tomatoes B)ink pens C) refrigerators D) gasoline

Technological advances generally result in A) increased average number of hours worked per day. B) increased infant mortality rates. C) increased life expectancy. D) decreased incomes

The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by the same amount as B) sometimes by more than and other times by less than C) by more than D) by less than

The natural rate of unemployment equals A) structural plus frictional plus cyclical unemployment. B) the rate of unemployment we observe in any given period of measurement. C) structural plus frictional unemployment. D) the rate of structural unemployment.

There is a government budget surplus if A) G > TR B) G > T C) T - TR > G D) TR < T

Which of the following increases labor productivity? A) decreases in the availability of computers and factory buildings B) a decline in the health of the population C) inventions of new machinery, equipment, or software D) an increase in the aggregate hours of work

Which of the following is a government expenditure, but is not a government purchase? A) The Federal government pays to support research on Aids. B) The federal government pays the salary of an FBI agent. C) The federal government pays out an unemployment insurance claim. D) The federal government buys a Humvee.

16-1. Suppose the economy is in a short0run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using static AD-AS model in the figure above, this would be depicted as a movement from

C to B

16-1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a move from (blank) using the static AD-AS mode

C to B

9) According to the "Rule of 70," how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?

C) 14 years

6) If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2013, we would say that in the year 2013, the average American could buy __________ times as many goods and services as the average American in 1950.

C) 8

16) In a closed economy, which of the following components of GDP is not included?

C) net exports

28) As the economy nears the end of an expansion, which of the following do we typically see?

C) rising interest rates

27) What is the name of the organization that defines business cycle peaks and troughs in the United States?

C) the National Bureau of Economic Research

Formula for Planned Aggregate Expenditures

C+I+G+NX

The equation for aggregate demand is...

C+I+G+Nx

Why should government policymakers be worried about a housing bubble?

C. A housing bubble would deflate housing prices, which would decrease household wealth, which would decrease aggregate demand, which could cause a recession.

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?

C. Inventories decrease, GDP increases, and employment increases.

Which one of the following is not true when the economy is in macroeconomic equilibrium?

C. When the economy is at long-run equilibrium, firms will have excess capacity.

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes

C. a recession in the short run and a decline in the price level in the long run.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.

C. an increase; an increase

"Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else."

C. incorrect. The supply of loanable funds is determined by household saving.

To have growth without inflation, which of the following must be true?

C. AD, SRAS, and LRAS must increase by the same amount.

Strong rule-of-law countries grow more rapidly than weak rule-of-law countries. What factor will most likely improve economic growth in weak rule-of-law countries?

C. Political reform

Which of the following is most likely to lead to sustained economic growth: A. Increases in human capital B. Increases in labor force C. Technological change D. Increases in the capital stock

C. Technological change

The following shows the effect of the business cycle on the inflation rate and the unemployment rate: A. The unemployment rate increases and the inflation rate increases during expansion B. The unemployment rate increases and the inflation rate falls during expansions C. The unemployment rate increases and the inflation rate falls during recessions D. The unemployment rate falls and the inflation rate falls during recessions

C. The unemployment rate increases and the inflation rate falls during recessions

The slope of the consumption function is equal to

Change in consumption / change in disposable income

Marginal Prosperity to Consume (MPC)

Change in consumption/ change in disposable income

Which of the following will not have an effect on the long−run Phillips curve?

Changes in monetary policy.

What causes demand curve to shift?

Changes in real GDP or price level. Increase in real GDP and price level means buying and selling increases demand for money, shift to the right.

Why did the Fed help JP Morgan Chase buy Bear Stearns?

Commercial banks would be reluctant to lend to investment banks. Failure of Bear Stearns would lead to a larger investment bank failure. A and C only

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation.

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation.

Fiscal policy is determined by

Congress and the president

Which of the following is considered contractionary fiscal policy

Congress increases the income tax rate

If the U.S. economy is currently at point K,which of the following could cause it to move to point N

Congress passes investment tax incentives.

The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is

Constant

National income =

Consumption + Saving +Taxes

Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the first quarter of 2017?

Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007-2009 recession.

Globalization entails all of the following except:

Cultural exchange between nations.

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase

Current income

The growth in U.S. real government purchases

D. tends to be positive, but has fallen in recessions and in response to concerns about the size of budget deficits.

Monetary policy is defined as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; monetary policy B) discretionary fiscal policy; conscious fiscal policy C) automatic stabilizers; discretionary fiscal policy D) discretionary fiscal policy; automatic stabilizers

Actual real GDP will be above potential GDP if A) firms are producing at capacity. B) firms are producing below capacity. C) inflation is rising. D) firms are producing above capacity

All other factors held constant, increased growth in aggregate demand will A) move the economy to a higher point on the short-run Phillips curve. B) increase inflation. C) reduce unemployment. D) All of the above are correct.

Contractionary monetary policy will result in A) reduced rates of inflation. B) a decrease in aggregate demand. C) higher interest rates. D) All of the above are correct.

Countries with high rates of economic growth tend to have A) low rates of technological advancement. B) a declining incidence of business cycle fluctuations. C) a lower life expectancy at birth. D) a labor force that is more productive

Crowding out will be greater A) the less sensitive consumption spending is to changes in the interest rate. B) the further equilibrium GDP is below potential GDP. C) if the economy is in recession, rather than at full employment. D) the more sensitive investment spending is to changes in the interest rate.

During the expansion phase of the business cycle, which of the following eventually increases? A) employment B) income C) production D) all of the above

Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) interest rates; money supply B) taxes; the money supply C) taxes; interest rates D) taxes; expenditures

How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax? A) The equilibrium quantity of loanable funds would be unaffected. B) The equilibrium quantity of loanable funds may rise or fall based on whether household saving increases or decreases as a result of the change from an income tax to a consumption tax. C) The equilibrium quantity of loanable funds would fall. D) The equilibrium quantity of loanable funds would rise

If the economy experiences a negative supply shock, which of the following will be true? A) Inflation will fall, and real GDP will fall. B) Inflation will fall, and real GDP will rise. C) Inflation will rise, and real GDP will rise. D) Inflation will rise, and real GDP will fall.

If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money? A) 1 year and 3 months B) 2 years and 6 months C) 8 years D) 8 years and 9 months

In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is A) upward sloping. B) horizontal. C) vertical. D) downward sloping.

In conducting monetary policy, how has the Federal Reserve enhanced its credibility? A) by revealing the Fed's target for the federal funds rate B) by following through with changes it has announced C) by making the minutes of the open market committee meetings public D) All of the above have enhanced the Federal Reserve's credibility in conducting monetary policy.

Monetary policy can A) shift both the short-run and long-run trade-offs between inflation and unemployment if changes in policy are credible. B) shift the long-run trade-off between inflation and unemployment through changes in cyclical unemployment. C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation and unemployment. D) shift the short-run trade-off between inflation and unemployment if it affects expected inflation.

Since 1900, real GDP per capita has ________ and this measure ________ the actual growth in standards of living in the United States over this time. A) increased; overstates B)decreased; overstates C) decreased; understates D) increased; understate

What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at a trough in a business cycle B) any unemployment rate that is above the inflation rate C) an unemployment rate of 0% D) the unemployment rate that exists when the economy is at potential GDP

17) If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true?

D) Public saving is $100 million

13) Which of the following is most liquid?

D) a dollar bill

22) During he expansion phase of the business cycle, which of the following eventually increases?

D) all of the above

15) One difference between stocks and bonds is that

D) stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond

What is the key idea in the aggregate expenditure macroeconomic model?

D. in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.

The short run aggregate supply curve shows the relationship in the short run between

D. the price level and the quantity of real GDP supplied by firms.

Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is

D. different, because consumers can substitute between individual products.

Suppose two countries, Country A and Country B, have a similar real GDP per capita. Country A has an average economic growth rate of 2% and Country B has an average economic growth rate of 3.3%. In the long run, what can we predict about living standards in the two countries?

D. Country B's living standards will increase much more rapidly in the long run.

Consider the figure to the right. Which of the following is responsible for the upward shifts in the per-worker production function?

D. Technological change

Have poor countries been catching up to rich countries?

D. There has been catch-up by some poor but industrialized countries.

A country's rate of economic growth is important because

D. an economy that grows too slowly fails to raise the living standards of its citizens.

Some economies are able to maintain high growth rates despite diminishing returns to capital by using

D. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns.

The financial system of a country is important for long-run economic growth because

D. firms need the financial system to acquire funds from households.

By improving health and education, developing countries can generate economic growth, and increase incomes. This will help combat the prevalence of educated people leaving their home countries for opportunities elsewhere. That is, it will combat

D. the brain drain.

An increase in the U.S. price level relative to other countries' price levels, the growth rate of U.S. GDP relative to other countries', the exchange rate between the dollar and other currencies will do what to net exports?

Decrease

During the recession phase of the business cycle, production, employment, and income

Decrease

How does the fed conduct expansionary monetary policy?

Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities

How would the Fed enact an expansionary monetary policy?

Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities and vice versa

What is contractionary monetary policy?

Decrease in price level and real GDP.

* From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

Decrease interest rate

How does the fed conduct expansionary fiscal policy?

Decrease taxes Increase government spending

In the figure to the right, the opportunity cost of holding money ___________ when moving from Point A to Point B on the money demand curve.

Decreases

rule of 70

Doubling time (in years) = 70/(percentage growth rate).

The short−run Phillips curve is

Downward sloping

Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?

Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $133.33 billion increase in GDP B) a $30 billion increase in GDP C) a $133.33 billion decrease in GDP D) a $300 billion increase in GDP E) a $300 billion decrease in GDP

The labor force is the sum of

Employed and unemployed workers

Refer to figure 17-1. Suppose the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true?

Equilibrium GDP at point C must be above potential GDP

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD2(policy) and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators?

Expansionary monetary policy Actual real GDP: increases Potential real GDP: does not change Price level: increases Unemployment: decreases

The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: Potential real GDP: Price level: Unemployment:

Expansionary monetary policy Increases Does not change Increases Decreases

What are the four main determinants of investment?

Expectations of future profitability, interest rates, taxes and cash flow.

Net Exports =

Exports - Imports

Why did the Fed help JP Morgan Chase buy Bear Stearns?

Failure of Bear Stearns would lead to a larger investment bank failure, Commercial banks would be reluctant to lend to investment banks.

In a small economy in 2011, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year

Firm investment in inventories was greater than anticipated in 2011.

In a small economy in 2013, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was greater than anticipated in 2013.

According to many economists and policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?

Following a discretion strategy. Following the Taylor rule. Following a rules strategy.

The key idea of the aggregate expenditure model is that in any particular year, the level of ________ is determined mainly by the level of aggregate expenditure.

GDP

If planned aggregate expenditure is less than total production,

GDP will decrease.

If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur

GDP will fall.

What is the difference between federal government purchases (spending) and federal government expenditures?

Government purchases are included in government expenditures.

Each year that the federal government runs a deficit, the federal debt

Grows

What is the goal of fiscal policy?

High employment, price stability, high growth rates

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:

High unemployment.

closed economy

I=Y-C-G

* If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?

If the required reserve ratio is 10 percent, then a bank must hold 10 percent of its deposits as reserves. Therefore required reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 or $4,000). This is the maximum that the bank can loan out.

During the expansion phase of the business cycle, production, employment, and income

Increase

How does the fed conduct contractionary monetary policy?

Increase discount rate, increase in reserve requirement and conduct open market purchase of government securities

What is expansionary monetary policy?

Increase in price level and real GDP.

In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1MD1 to MD 2MD2 (Point A to Point C)?

Increase in real GDP or increase in the price level

In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS 2?

Increase interest rates Open market sale of government securities Contractionary policy

Decreases in price level, household wealth, expected future income, current disposable income, and interest rates do what to consumption?

Increase, decrease, decrease, decrease, increase

In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?

Increased demand for Treasury securities drives up their prices. Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives down their interest rate.

What is crowding out?

Increased government spending leads to borrowing more which means interest rates go up and this leads to a decrease in investment when an increase in government spending decreases a component of GDP (most likely investment)

How does the fed conduct contractionary fiscal policy?

Increasing taxes on individuals and businesses Decreasing government spending on goods and services

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be

Inflation

Refer to figure 17-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur?

Inflation will accelerate in the long run

What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar?

Interest rates and exchange rates decrease

If the economy is at point L,what will happen

Inventories have risen above their desired level, and firms decrease production.

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The curve, shown at the right, indicates what type of relationship between the two variables?

Inverse relationship

How do investment banks differ from commercial banks?

Investment banks do not take deposits. Investment banks generally do not lend to households.

How does a decrease in government spending affect the aggregate expenditure line?

It shifts the aggregate expenditure line downward.

What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

When SRAS 1 shifts to SRAS 2 the price level increases and the level of real GDP falls. What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

According to the figure above, at what point is aggregate expenditure greater than GDP?

As a result, when AD shifts to the right, in reality the change in real GDP will be ________ it would be if the price level were constant.

Less than

Which of the following is NOT a monetary policy LOADING... goal of the Federal Reserve bank (the Fed)?

Low prices

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?

Low prices

The quantity equation states that

M(money supply) x V(velocity of money) = P(price level) x Y(real output)

The narrowest official definition of the money supply is

Suppose you decide to withraw $100 in currency from your checking account.?

M1 remains unchanged

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then

MPC is 0.8

The industrial revolution

Marked the beginning of significant economic growth in the world

According to the multiplier effect, an initial decrease in government purchases decreases real GDP by ___________ the initial decrease in government purchases.

More than

________ usually increase(s) when the U.S. economy is in a recession and decrease(s) when the U.S. economy is expanding

Net Exports

If inflation in the United States is higher than inflation in other countries, what will be the effect on net exports for the United States

Net exports will decrease as U.S. exports decrease.

Do price changes affect long run GDP?

Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

Where is long-run macroeconomic equilibrium?

Occurs at a point where the AD curve and the SRAS curve intersect at a point on the LRAS curve

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)

Open market purchase of government securities

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)

Open market purchase of government securities

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?

Open market purchase of government securities.

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD2(policy) and reach equilibrium (point C) in the second period?

Open market purchase of government securities.

In the long run, increases in government purchases result in

Partial crowding out

Economic Growth =

Percent change in GDP = [(GDP(year2) - GDP(year1)) / GDP(year1)] x 100

Inflation Rate =

Percent change in price level = [(Price Level(year2) - Price Level (year1)) / Price Level (year1)] x 100

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Potential GDP is forecasted to be higher than equilibrium GDP

What is the goal of monetary policy?

Price stability, full employment, and economic growth

What are the monetary goals of the Fed?

Price stability, high employment, economic growth, stable financial markets

Market Value =

Price x Quantity

Real GDP =

Prices(base year) x Quantity(current year)

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy?

Procyclical policy

GNP counts

Production by American firms no matter where they are located. Doesn't include foreign companies on American soil

Suppose congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?

Real equilibrium GDP will rise

How would an increase in interest rates affect investment?

Real investment spending declines.

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be

Recession

What are the short-run and long-run effects of a decrease in aggregate demand?

Recession in the short-run. A decrease in price level in the long-run. SRAS curve shifts to the right as workers adjust to lower price level. The new long-run equilibrium is at AD1 and SRAS1

What are the gains to be had from simplifying the tax code?

Resources from the tax preparation industry freed up for other endeavors. Increased efficiency of households and firms. Greater clarity of the decisions made by households and firms.

Profit =

Revenue-Cost

Usually at the beginning of a recession, inventories ______ remain unchanged, but at the beginning of an expansion, inventories ________

Rise Fall

total savings equation

S= S private +S public

Suppose over time firms begin to expect higher inflation in the future.

SRPC shifts to the right

Suppose the inflation rate has been at 5 percent for several years. The Fed decides to increase the discount rate which will reduce aggregate demand and reduce the expected inflation rate.

SRPC shifts to the right

Value Added =

Sales Price - cost of intermediate goods

*In figure (15.11), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Sell treasury bills

Which of the following contribute(s) to shorter recessions, longer expansions, and less severe fluctuations in real GDP?

Service based economy, fiscal policy, unemployment insurance

Which interest rate is most relevant?

Short-term nominal interest rate because it is most affected by changes in money supply.

frictional unemployment

Short-term unemployment where people in the labour force are between jobs.

Each year that the federal government runs a surplus, the federal debt

Shrinks

The higher the tax rate, the __________ the multiplier effect.

Smaller

A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?

Store of value

Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called

Supply-side economics

Public Savings Formula

T-G-TR

S public equation

T-G-TR

S public=

T-G-TR

IF... actual inflation is greater than expected inflation, actual inflation is less than expected inflation,

THEN.... the actual real wage is less than the expected real wage, the unemployment rate falls. the actual real wage is greater than the expected real wage, the unemployment rate rises.

Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors

The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?

The Fed can only soften the magnitude of recessions, not eliminate them

Can the Fed, therefore, eliminate recessions?

The Fed can only soften the magnitude of recessions, not eliminate them.

Which of the following characterizes the Fed's ability to prevent recessions?

The Fed is able to keep recessions shorter and milder than it would be otherwise be

In which of these following situations would the Fed conduct contractionary monetary policy?

The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?

The Fed lent investment banks Treasury securities in exchange for mortgage - backed securities

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.

Which of the following accurately describes expansionary monetary policy?

The Federal Reserve causes an increase in the money supply.

Which of the following accurately describes a recent change in the Federal Reserve's balance sheet?

The Federal Reserve has more loans to financial markets and institutions on the assets side of its balance sheet.

Which of the following accurately describes contractionary monetary policy?

The Federal Reserve increases interest rates.

Given that the Phillips curve is derived from the aggregate demand and aggregate supply model, why use the Phillips curve?

The answer is that while the aggregate demand and aggregate supply model shows the price level , the Phillips curve explicitly shows the inflation rate . Further, the aggregate demand and aggregate supply model explicitly shows changes in the level of real GDP , while the Phillips curve explicitly shows the unemployment rate

Which of the following does the aggregate expenditure macroeconomic model seek to explain?

The business cycle

If weak aggregate demand is pushing the economy into recession, which of the following must be true?

The economy is at an equilibrium that is not on the long-run Phillips curve

If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

The economy is in a recession

Refer to figure 17-2. Suppose the economy is at point B in the figure above. Which of the following is true?

The expected rate of inflation is 3%.

As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?

The federal funds rate

Which interest rate does the Fed target?

The federal funds rate

Which of the following would be classified as fiscal policy

The federal government cuts taxes to stimulate the economy

Which of the following is a true statement about the multiplier?

The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate.

Which one of the following is not a determinant of consumption spending?

The growth rate in the United States relative to the growth rates in other countries

The federal funds rate is what?

The interest rate banks charge each other for overnight loans

What is the federal funds rate?

The interest rate banks charge each other for overnight loans

What is the discount rate?

The minimum interest rate set by the Federal Reserve for lending to other banks.

What are the Fed's main monetary policy targets?

The money supply and interest rates

In the figure to the right, at what point is the inflation rate stable? That is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment ?

The moral of the vertical long-run inflation rate is that in the long run, there is no trade-off between the unemployment rate and the inflation rate. The inflation rate is stable only if the unemployment rate equals the natural rate of unemployment (point C). It is often called the nonaccelerating inflation rate of unemployment: the unemployment rate at which the inflation rate has no tendency to increase or decrease. If the unemployment rate is below the natural rate (point A), the inflation rate increases, and, eventually, the Phillips curve shifts up. If the unemployment rate is above the natural rate (point B), the inflation rate decreases, and, eventually, the Phillips curve shifts down.

All of the following are true statements about the multiplier except

The multiplier makes the economy less sensitive to changes in autonomous expenditure.

Which of the following is a true statement about the multiplier?

The multiplier rises as the MPC rises

How does moving up and down the demand curve affect the opportunity cost of holding money?

The opportunity cost is the interest rate. Interest rate decreases, so does opportunity cost

The labor force participation rate I defined as what?

The percentage of the working-age population in the labor force

ow does the quantity theory provide an explanation about the cause of inflation?

The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.

What is affected by changes in interest rates and, as a result, impacts aggregate demand?

The value of the dollar, Business investment projects, Consumption of durable goods

Consumption is $5million, planned investment spending is $8 million, government purchases is $10 million, and net exports are equal to $2 million. If GDP during the same time period equals to $27 million, what unplanned changes in inventories occurred?

There was an unplanned increase in inventories

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred

There was an unplanned increase in inventories equal to $2 million.

Use the following information to draw a graph showing the short-run and long-run Phillips curves Natural rate of unemployment = 5 percent Current rate of unemployment = 4 percent Expected inflation rate = 4 percent Current inflation rate = 6 percent

The short-run and long-run Phillips curves intersect at the point where the inflation rate is 4 percent and the unemployment rate is 5 percent.

Suppose that the expected inflation rate increases from 4 percent to 6 percent. What will happen to the short-run Phillips curve?

The short-run trade-off between uemployment and inflation will be worse than before as the economy moves to a higher short-run Phillips curve

This chapter argues that if the price level increases, over time, the average wage should increase by the same amount.

This is true because workers and firms are most concerned with the real wage.

In the figure to the right, expected inflation is initially at 1.5%. When expected inflation increases to 4.5%, which of the following will occur?

To have 3.5% unemployment rate, inflation would be 7.5%. B. Unemployment reaches the natural rate of 5%. C. At the natural rate of unemployment, inflation is 4.5%. D. All of the above.

GDP Formula

Y = C + I + G

Private Savings Formula

Y+TR-C-T

S private equation

Y+TR-C-T

S private=

Y+TR-C-T

S=I=

Y-C-G

relationship between gross domestic product

Y=C+I+G+NX

The growth rate of real GDP equals A) [(real GDP in previous year - real GDP in current year) ÷ real GDP in previous year] × 100. B) (real GDP in current year - real GDP in previous year) × 100. C) [(real GDP in current year - real GDP in previous year) ÷ real GDP in current year] × 100. D) [(employment in the current year - employment in previous year)/employment in previous year] × 100. E) [(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.

[(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.

Which of the following are goals to monetary policy? ([A]price stability, economic growth, and maximizing the value of the dollar relative to other currencies; [B]price stability, maximizing the value of the dollar relative to other currencies, and high employment; [C] price stability, money growth, and high employment; [D] maximizing the value of the dollar relative to other currencies, economic growth, and high employment)

[C] price stability, money growth, and high employment

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant?

a $300 billion decrease in GDP

If the federal government's expenditures are less than its tax revenues, then

a budget surplus results

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING... If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06, we would expect the Federal Reserve Bank to pursue ___________ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators?

a contractionary Actual real GDP decreases Potential real GDP does not change Price level decreases Unemployment increases

The international-trade effect refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports.

Which of the following will decrease aggregate expenditure in the United States?

a decrease in government purchases

Refer to Figure 16-2. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

a decrease in income taxes

The short-run Phillips curve exhibits ________________________________________ , whereas the long-run Phillips curve shows __________________________________________

a trade-off between inflation and unemployment no trade-off between inflation and unemployment

In a business cycle, the low point of economic activity is called

a trough

If actual inflation is higher than expected inflation, If actual inflation is less than expected inflation,

actual real wages in the economy will be lower than expected real wages. As a result, many firms will hire more workers than they had planned. Unemployment falls. actual real wages in the economy will be higher than expected real wages. As a result, many firms will hire fewer workers than they had planned. Unemployment rises.

According to Lucas and Sargent, workers and firms have rational expectations, and therefore if the Fed pursues an expansionary monetary policy:

agents will immediately adjust their expectations of inflation up.

If the Fed pursues expansionary monetary policy,

aggregate demand will rise(shift to the right), and the price level will rise

Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that

aggregate expenditure that year was equal to GDP that year.

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that

aggregate expenditure that year was less than GDP that year.

If firms sell exactly what they expected to sell, all of the following will be trueexcept

aggregate expenditure will be greater than GDP.

A decrease in consumer confidence can put your job at risk if

aggregate expenditures fall.

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ___ through changing ___.

aggregate supply; taxes

Alan Greenspan

agreed with Paul Volcker about the importance of keeping inflation low.

In a business cycle, the period between the low point of economic activity and the following high point is called

an expansion

If Lucas and Sargent were right,

an expansionary monetary policy would not work if people had rational expectations, since they will use all available information including knowledge of the effects of the Fed's monetary policy.

Which of the following will raise consumer expenditures?

an increase in expected future income

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

an increase in government purchases

Which of the following would cause a decrease in real GDP and, if large enough, a recession?

an increase in interest rates that causes aggregate demand to fall

Which of the following scenarios would lead to a reduction in real GDP and may even cause a recession?

an increase in oil prices that causes short run aggregate supply to fall

an equal increase in government purchases and taxes sill cause

an increase in real GDP

If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy

an increase in taxes

Which of the following is not an example of monetary policy?

an increase in taxes

If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see?

an increase in the exchange rate

Tax cuts on business income increase aggregate demand by increasing

business investment spending

Tax increases on business income decrease aggregate demand by decreasing

business investment spending

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to

buy U.S treasure securities form the public

* The primary tool the Federal Reserve uses to increase the money supply is

buying U.S. Treasury securities

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it _____ U.S. Treasury securities.

buys, sells

The aggregate demand curve will shift to the left (blank) the initial decrease in government purchases

by more than

Expansionary fiscal policy

can be effective in the short run

change in national income formula

change in consumption + change in saving + change in taxes

the government purchases multiplier is defined as

change in equilibrium real GDP/change in government purchases

The multiplier is calculated as the

change in real GDP/ change in autonomous expenditure.

Inventory Investment =

change in value of all firms' inventories = (Number of items produced - number of items sold) x Sales price

If money demanded is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will

change very little and investment and consumer spending will change very little

The _______ school of economics states that leaving the economy alone will keep it stable.

classical

Although the Federal Reserve had traditionally made discount loans only to _____, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.

commercial banks

Which of the following best explains the difference between commodity money and fiat money?

commodity money is a good used as money where flat money is just money through central bank

national income formula

consumption + savings +taxes

An economic expansion tends to cause the federal budget deficit to ___ because tax revenues ___ and government spending on transfer payments ___.

decrease; rise; falls

In the figure to the right, the opportunity cost LOADING... of holding money ___________ when moving from Point A to Point B on the money demand curve.

decreases

decreasing government spending _________ the price level and ________________ equilibrium real GDP

decreases; decreases

The portion of ___ that a bank does not loan out or spend on securities is known as ____

deposits; reserves

The portion of ______ that a bank does not alone out or spend on securities is knows as

deposits; reserves

According to an article in the Wall Street Journal, in late 2014, the Japanese economy experienced a large increase in business inventories. The article noted, "The large buildup of inventories is a reflection that the ... drop in demand was bigger than expected." Source: Eleanor Warnock, "Rising Inventories Hamper Japan Recovery," Wall Street Journal, September 30, 2014. Because the Japanese firms didn't expect the drop in demand, they

did not reduce their inventories.

* Active changes in tax and spending by government intended to smooth out the business cycle are called ____, and changes in taxes and spending that occur passively over the business cycle are called _____.

discretionary fiscal policy; automatic stabilizers

active changes in tax and spending by government intended to smooth out the business cycle are called ____________, and changes in taxes and spending that occur passively over with the business cycle are called _____________

discretionary fiscal policy; automatic stabilizers

A rise in stock prices and housing prices

increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

A rise in stock prices and housing prices

increases household wealth which increases consumption which leads to UPWARD shift of the consumption function.

Potential GDP...

increases over time as the labor force grows, and increases over time as technological change occurs

an increase in real GDP

increases the buying and selling of goods and increases the demand for money as a medium of exchange

A decrease in individual income taxes ________ disposable income, which ________ consumption spending.

increases; increases

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.

increasing; increasing

GDP Deflator

indicates the average price level on all goods and services

The multiplier effect refers to the series of

induced increases in consumption spending that result from an initial increase in autonomous expenditures

According to the real business cycle models,

inflation can change due to movements in the money supply, however, fluctuations in real GDP are mainly explained by changes in the level of technology.

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then

inflation will be higher than if the Fed had not acted.

What is a monetary policy target used by the Fed?

interest rate and money supply

Refer to Figure 18-1. Which of the following events below cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?

interest rates rise in England

The prime rate

is the basis of the interest rate on many other types of loans

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves.

A countercyclical policy is one that

is used to attempt to stabilize the economy.

The Fed uses policy targets of interest rate and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by

less than $500 billion

suppose real GDP 13 trillion with potential real GDP 13.5 trillion and that the congress and the president plan to use fiscal policy to restore the economy to potential real GDP. assuming a constant price level,t he congress and the president would need to decrease taxes by

less than 500 billion

less than it would be without the supply - side effects

The Taylor rule predicted a federal funds rate which was ___ that set when Paul Volcker was chairman of the Fed, and a rate which was ___ that set when Arthur Burns chaired the Fed.

less than; greater than

The economic growth model predicts that the

level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.

low, high

Those who are constantly unemployed accept _______ pay rates.

lower

Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should

lower government purchases by an amount less than $200 billion

In figure (15.8), if the economy in Year 1 is at point A and expected to Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

lower interest rates

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)

lower;lower

When aggregate expenditure = GDP,

macroeconomic equilibrium occurs.

When aggregate expenditure=GDP

macroeconomic equilibrium occurs.

The Federal Reserve may try to lower the federal funds rate to

make people more willing to borrow

The dynamic AD-AS model assumes

potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.

The aggravated demand curve shows the relationship between what?

price level and quantity of real GDP demanded by households, firms, and the government

The Federal Reserve System's four monetary policy goals are

price stability, high employment, economic growth, and stability of financial markets and institutions

What are the goals of monetary policy?

price stability, high employment, finaincial markets, economic growth

money serves as a unit of account when

prices of goods and services are stated in terms of money

Crowding out refers to a decline in (blank) as a result of an increase in (blank)

private expenditures; government purchases

If the Federal Reserve raises or lowers interest rates too late, it could result in a ___ policy that destabilizes the economy.

procyclical

These carmakers are likely to react to the increase in inventories by

producing fewer cars in the future

* A federal budget deficit _____ interest rates, which ____ exchange rates (foreign currency per domestic currency), and _____ the balance of trade

raises; raises; reduces

When individuals use all available information about an economic variable to make a decision, expectations are

rational

Economic growth is a sustained expansion of production possibilities, as measured by the increase in ________ over time. A) inflation B) employment C) population D) the price level E) real GDP

real GDP

unplanned change in inventories

real GDP (Y) - planned aggregate expenditures (AE)

Refer to Table 15-3. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2015 and in 2015 if the Federal Reserve does not sue monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, which of the following will be higher than if the Fed had taken no action?

real GDP and the inflation rate

Refer to Table 16-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?

real GDP and the inflation rate

Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

real GDP increased

Growth in the standard of living is measured by the increase in A) employment. B) the Rule of 70. C) real GDP. D) consumption. E) real GDP per person.

real GDP per person

Suppose India wants to measure how much the standard of living has changed over the last decade. Which piece of data should India use? A) inflation B) real GDP C) real GDP per person D) population E) wages

real GDP per person

Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models

Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models.

If an output gap exists, a _______ exists.

recession

If the Fed raises the interest rate, this will ____ inflation and ___ real GDP in the short run.

reduce; lower

Economists during the early 1960s thought of the Phillips curve as a "policy menu" because they thought that the Phillips curve

represented a structural relationship in the economy that would not change as a result of policy changes. They were not correct to think of the Phillips curve as a "policy menu."

Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?

reserve requirements

The Fed seeks to promote stability of financial markets because

resources are lost when there is not an efficient matching of savers and borrowers

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.

rise fall

According to Milton Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to

rise above or fall below the natural rate.

Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets.

rise; appreciate

During recessions, government expenditure automatically

rises because of programs such as unemployment insurance and medicaid

If tax reduction and simplification are effective, then

saving and investment in new capital will increase

M2 includes M1 plus

savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non institutional money market fund shares

* M2 includes M1 plus

savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non-institutional money market fund shares

Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2014 and 2015 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2015, it should

sell Treasury securities

* If the Federal Open Market Committee wants to decrease the money supply through open market operations it will

sell U.S. Treasury securities

if the FOMC wants to decrease the money supply through open market operations it will

sell US treasury securities

Refer to figure 17-1. What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?

sell treasury bills

suppose the Fed decreases the money supply. in response households and firms will ____________ short term assets and this will drive ___________ interest rates

sell; up

the fed can increase the federal funds rate by

selling treasury bills which decreases bank reserves

Which of the following is not a major function of the Federal Reserve System? (lender of last resort, clearing checks between banks, controlling the money supply, or setting interests rates)

setting income tax rates

* Expansionary fiscal policy will

shift the aggregate demand curve to the right

As expectations of inflation increase, the short-run Phillips curve will

shift to the right

The aggregate expenditure model focuses on the ________ relationship between real spending and ________

short-run; real GDP

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression.

The federal funds rate is very important for the Feds monetary policy because..

the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then

the MPC is 0.75.

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then

the MPC is 0.8

If, in the long run, real GDP returns to its potential level, then in the long run

the Phillips curve is vertical

If, in the long run, real GDP returns to its potential level, then in the long run,

the Phillips curve is vertical.

If, in the long run, real GDP returns to its potential level, then in the long run,

the Phillips curve is vertical.

The short-run trade-off between the rate of inflation and the unemployment rate is best represented by:

the Phillips curve.

Suppose that the inflation rate is increasing each year for a number of years, then

the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have rational expectations, then they will use all the available information to forecast future inflation.

If inflation increases beyond expectations of inflation,

the real wage paid by employers and received by workers will decrease.

The Phillips curve exhibits

the relationship between the unemployment and the inflation rates.

When the Federal Reserve purchases Treasury securities in the open market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

If Country A's real GDP per person is growing at 6 percent and Country B's real GDP per person is growing at 3 percent, then A) the standard of living is growing more rapidly in Country A. B) the standard of living is higher in Country B. C) the standard of living is higher in Country A. D) We cannot say whose standard of living is growing more rapidly without knowing the population growth rate. E) We cannot say whose standard of living is growing more rapidly without knowing the growth rate of real GDP.

the standard of living is growing more rapidly in Country A.

In the Expenditure Approach Real GDP equals

the sum of Consumption, Investment, Government Spending, and Net Exports: Y = C + I + G + NX

Which of the following is an example of discretionary fiscal policy?

the tax cuts passed by Congress in 2001 to combat the recession

If the long-run aggregate supply curve is vertical,

the trade-off between unemployment and inflation cannot be permanent

* The quantity theory of money assumes that

the velocity of money is constant

An article in the Wall Street Journal stated that in China, "carmakers continue to grapple with ... rising inventories." Source: Colum Murphy, "China's Automobile Sales to Slow Further in 2015," Wall Street Journal, January 12, 2015. Carmakers in China might find that their inventories are rising unexpectedly because

their sales are lower than expected

Robert Lucas and Thomas Sargent argued that

there might not be a trade-off between unemployment and inflation in the short run, and the short-run Phillips curve would be vertical.

Which of the following summarizes the President's and Congress' role in conducting monetary policy

they are not involved in monetary policy

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending

they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession.

Milton Friedman argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation, since

the long-run Phillips curve is vertical, there is no trade-off between unemployment and inflation in the long run.

If the Fed wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should

use expansionary monetary policy.

Commodity money is a good

used as money that also has value independent of its use of money

A bank holds its reserves as ___ and ___

vault cash; deposits at the Federal Reserve

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation

The federal funds rate is the interest rate charged

when one bank lends money to another bank

Assuming people have rational expectations,

when the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP.

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption.

how do banks "create money"

when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

In the aggregate expenditure model, when is planned investment greater than actual investment?

when there is an unplaned DECREASE in inventories

Cutting taxes

will raise disposable income and raise spending

* By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ____ and "Alt-A" borrowers _____.

with flawed credit histories; who did not document their incomes

Figure 6-4. In the graph above, the shift AD 1 to AD 2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B (blank) $50 billion

would be greater than

Tax cuts on business income (blank) aggregate

would increase

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

"Fannie Mae" and "Freddie Mac"

Why do poorer countries grow faster than richer countries on catch-up lines?

The lower the initial level of real GDP per capita, the higher the rate of growth in real GDP per capita. (By adding the same amount of new technology for example)

Does government spending ever reduce private spending?

Yes, due to crowding out.

If expected inflation is higher than actual inflation, actual real wages in the economy will turn out to be _________ than expected real wages; consequently, firms will hire _________ workers than they had planned.

Chapter 12 Macro Review Questions, Economics Homework, Macro Test 2, ch 17, Chapter 17 Macroeconomics - Long / Short Run Phillips Curve, ECO 2013 Chapter 26 Homework, Macroeconomics-Ch 25-27, Chapter 12 Review - Econ 110, Chapter 10: (Economic Growth...

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