Chapter 6: Introduction to Macroeconomics

Output that has been produced but not yet sold is called what?

Inventory

Flexible prices are prices that....

adjust freely through the forces of supply and demand

Rising inventories usually indicate:

an unexpectedly slowing economy

The prices of many goods are ________, or slow to change.

inflexible

GDP per capita means GDP:

per person

If output prices were fully _________________, output would remain constant and unemployment levels would not change.

inflexible

The short run in macroeconomics is the period in which....

input prices do not change at all or very much

If demand is unexpectedly low, the _________ of goods will increase.

inventory

Before the 1700's, output per person did not increase because the ____________________ increased by a similar amount as the output of goods and services.

population

Unlike nominal GDP. real GDP is adjusted for ___________ level changes.

price

If prices are fully flexible, there will be no short-run fluctuations, which means output will ___________ and unemployment will _________ because quantity demanded will always equal quantity supplied.

remain constant not change

A well-functioning financial system properly directs _________ into the most productive possible investments.

savings

One way that the government can encourage economic growth is by encouraging:

savings and investment

An unanticipated event that changes the demand or supply of goods and services either positively or negatively is called an economic ________

shock

Nominal GDP is:

the current market prices in the year in which goods and services were produced multiplied by current total output.

True or False: short-run fluctuations in output and unemployment are the result of things not going according to plan?

true

Which of the following are factors that increase short-run price stickiness?

1) Firms' fear of price wars 2) Consumers preferring stable and predictable prices

What are the reasons that the Industrial Revolution is important to modern economic growth (i.e. an increase in output per person)?

1) Introduction of automation made production more efficient 2) Introduction of factory production led to increased rates of output 3) Increases in research and development led to more technology and innovation

The important questions about government policy that are clarified by macroeconomic models are?

1) Is there a trade-off between lower rates of unemployment and higher rates of inflation? 2) can governments reduce the severity of recessions by smoothing out short-run fluctuations? 3) are some government policy tools more effective than others? 4) can governments promote long-run economic growth?

Which of the following are true of the short run?

1) Prices are inflexible 2) The economy does not respond to a demand shock through changes in prices

What are the main statistics used by economists to assess the health of the economy?

1) Real Gross Domestic Product 2) Unemployment 3) Inflation

Which of the following would contribute to a negative supply shock? 1) An increase in government spending 2) A surprise increase in the money supply 3) An increase in the price level 4) A sharp increase in the price of oil

A sharp increase in the price of oil

Which of the following are examples of financial investment?

Bonds and Stocks

The term economic investment refers to what?

Creating capital goods that have costs today but provide benefits in the future.

The end result of a sudden jump in inflation is a ___________ in the purchasing power of people's savings.

Decrease

If prices are inflexible and there is an unexpected decline in demand that lasts for any length of time, what will firms eventually have to do?

Decrease production

Most short-run fluctuations are the result of what type of shocks?

Demand

________ shocks are unexpected changes in the consumption of goods and services. ________ shocks are unexpected changes in the production of goods and services.

Demand Supply

What will lead to better living standards and economic growth?

Economic Investment and Savings

_________ about the future are particularly important for firms to consider as they have a large effect on economic growth.

Expectations

Price stickiness moderates over time because:

Firms that choose a fixed-price policy in the short run do not have to stick with that policy in the long run.

________ prices react within seconds to changing supply and demand while sticky prices sometimes take months to change.

Flexible

A positive demand shock leads to what?

Higher prices and higher employment

________ are the principal source of savings.

Households

Because output prices are ________, the economy is forced to respond in the short run to demand shocks primarily through changes in output and employment.

Inflexible

_________ prices are prices and wages that change very little in the short run.

Inflexible

Decisions about savings and investments are complicated because the amount of economic ________ is ultimately limited by the amount of __________.

Investment Savings

Actions by businesses today that incur current costs provide benefits in the future are called what?

Investments

If demand is unexpectedly high for a prolonged period of time, what will happen to unemployment?

It will fall

The distinction between an increase in output versus an increase in output per person can be made when discussing

Modern economic growth

Financial intermediaries are:

Organizations that receive funds from savers and then channel those funds to investors.

Modern economic growth is best measured as an increase in what?

Output per person

Modern economic growth is best measured as an increase in:

Output per person

A(n) ________ demand shock refers to a situation in which demand turns out to be higher than expected. A(n) ________ demand shock refers to a situation in which demand turns out to be lower than expected.

Positive Negative

Purchasing ____________ ___________ adjust for the fact that prices are much lower in some countries than others.

Power parity

In the short-run, the ___________ of many goods and services are sticky or inflexible and unable to rapidly change.

Prices

_______ GDP or adjusted GDP is an important measure of output because it allows valid comparisons between different years.

Real

The measure of the market value of all final goods and services produced in a given year, adjusted for price changes, is what?

Real GDP

How does real gross domestic product (GDP) differ from nominal GDP?

Real GDP controls for price changes while nominal GDP does not.

Suppose the demand for cars rises and prices are flexible. Firms that produce cars will experience?

Rising prices, an increase in production and an increase in employment.

Which of the following helps to explain how unexpected changes in demand lead to fluctuations in GDP and employment?

Sticky prices

Which model assumes perfectly inflexible prices and wages?

The aggregate expenditures model

If a country has a growth rate of approximately 2% compounded each year, it will take:

about 35 years for its output to double

Nominal GDP is calculated by multiplying ______________ market prices by currently produced quantities.

current

Inventories are useful because they can:

increase or decrease in periods when demand is unexpectedly high or low.

If a family's income does not increase as fast as the prices of the goods and services that it consumes, its standard of living will decline. This scenario describes the problems with:

inflation

Inflation occurs when there is what?

A rising aggregate price level