Eco
Using this equation, the dollar cost to Sam of buying a tire from Mexico is
$115.50 dollar cost= 1500 X 0.077
now suppose the economy slows down, causing the actual inflation rate to decrease to 1.5 percent and the economy to fall 2 percent below trend GDP. in this case, the Fed will seek to set the federal funds rate at
0.00 percent 2.5+1.5(1.5-2.5)+0.5(-2)
If 3.14 (pie) denotes the rate of inflation and i denotes the nominal rate of interest, then the amount a borrower repays in a year on a one-dollar loan is ________, and the inflation-adjusted purchasing power of the original borrowed dollar is
1+i ; 1+ 3.14 (pie)
By how much would current GDP change in response to each of the following transactions? 1. Pepperidge Farm buys $250,000 worth of flour to make bread 2. A homemaker buys a $3 loaf of bread at the grocery store to prepare sandwiches for her family. 3. general motors issues $150 million worth of new stock through Goldman Sachs, which is paid a 20 percent commission.
1. does not change 2. rise by $3 3. rise by $30 million
the core ingredients of contractionary monetary policy are shown below. these events impact the real economy and occur as shown by the sequence. for each of the events described below, insert the number (1-4) to give each event its correct position in the sequence.
1. short-term interest rates rise and credit access contracts 2. long-term interest rates rise 3. demand for goods and services decreases 4. labor demands shifts left
this implies that if the money supply grows by 10 percent, then nominal GDP need to grow by
10 percent
suppose the fed commits itself to the use of the Taylor rule to set the federal funds rate. Federal funds rate=long-run target+1.5(inflation rate-inflation target)+0.5(output gap) suppose the fed has set the long-run target for the federal funds rate at 2.5 percent and its target for inflation at 2.5 percent. if the economy is currently hitting the fed's inflation target and GDP exactly equals the trend GDP then the Fed will set the federal funds rate at
2.5 percent 2.5+1.5(2.5-2.5)+0.5(0)
How does a fixed exchange rate differ from a managed exchange rate?
A fixed exchange rate is set at a long-run value determined by the government, while a managed exchange rate can vary day to day depending on government actions.
suppose that country A has higher real income per capita than country B. Explain why this does not imply that most citizens of country A have higher real income than most citizens of country B.
A high degree of income inequality in country A may result in most of its citizens having incomes below the average income of country B.
How does a flexible exchange rate differ from a managed exchange rate?
A managed exchange rate involves government intervention, while a flexible exchange rate does not.
How does comparative advantage in trade differ from absolute advantage?
Absolute advantage looks at the number of goods or services that a producer can make, whereas comparative advantage looks at the opportunity cost of the goods or services that a producer can make
in a competitive labor market, people's wages are equal to their personal contribution or value added. Assume that two goods can be produced in an economy, food and housing. The table below gives the production capabilities of Amit and Susan. Amit: food (1200 units/year), housing (70 units/year) Susan: food (1800 units/year), housing (350 units/year) if the value added from producing a unit of food is $20 and the value added from producing a unit of housing is $20, what will be the yearly salaries for Amit and Susan?
Amit: food (24000), housing (1400) Susan: food (36000), housing (7000) in this case, Amit and Susan will produce food. Since the economy needs both food and housing, this cannot be an equilibrium. (multiply each by 20)
What are the disadvantages of using Big Macs to measure purchasing power parity?
Big Macs represent only a very small fraction of people's consumption The Big Mac index simply compares a bundle of only one good.
suppose that the united states and Chile are the only two countries in the world, and that labor is the only production input. In the United States, a worker can produce 16 bushels of corn or 13 barrels of oil per day. In Chile, a worker can produce 23 bushels of corn or 18 barrels of oil per day.
Chile has the absolute advantage in the production of oil, and Chile has the absolute advantage in the production of corn.
if there are two countries, A and B, and they are capable of producing two goods, pizza and beer, which of the following is true with regards to absolute advantage
Country A could have an absolute advantage in the production of pizza and in the production of beer neither country could have an absolute advantage in the production of pizza or int he production of beer.
Sam owns a tire shop. He needs to decide whether to stock tires from a firm in Mexico that sells tires at a price of 1,500 pesos per tire or from a U.S. firm that sells tires for $106 per tire. Assume the peso-dollar exchange rate is 13 ( this means 13 pesos can be purchased with $1.) which of the following equations should Sam use to convert the peso cost of tires to U.S. dollars?
Dollar cost = Peso cost X Dollars/ Peso
what market forces might cause the labor demand curve to shift back to the right?
Excess inventory has been sold off technological advances encourage firms to expand their activities the banking system recuperates and businesses are again able to use credit to finance their activities
as the choice and consequence box on "too big to fail notes, ban regulators worry about the prospect of the failure of large financial institutions, dubbed "systemically important financial institutions" (SIFIs)
Financial intermediation would likely be impared, with negative consequences for the economy's performance.
Which of the following will be considered a final good in the calculation of U.S GDP?
Foot massages at spas in California defense equipment purchased by the federal government.
GDP is estimated using expenditure-based accounting by using the equation
GDP=C+I+G+X-M
Suppose that there are only 2 small countries in the world: Ascot, with population of 36,400 people, and Delwich, with a population of 26,000 people. Ascot's GDP is equal to $140 million while Delwich's GDP is $210 million. Delwich's GNP has been estimated to be equal to $250 million. The revenue earned by firms that operate in Delwich but are headquartered in Ascot is equal to $80 million.
Given the data above, Ascot's GNP is $100 million In Ascot, the per capita GDP is $3,846 In Delwich, the per capita GNP is $9,615
the old soviet union devoted enormous resources exclusively to increasing its physical capital stock, and yet eventually the increase in the country's real GDP came to an end. based on the discussion, explain why this was inevitable
In the absence of technological innovation, massive capital investments yielded diminishing marginal returns.
if you have studied microeconomics, you may recall a concept called "moral hazard." moral hazard occurs when an economic agent is incentivized to take risks because some (or all) of the losses that might result will be borne by other economic agents. How might federal deposit insurance, as administered by the FDIC, lead to moral hazard?
Insurance gives bank managers incentives to pursue added risks since losses can be shifted to the FDIC. depositors may pay less attention to the lending practices of banks since their deposits are covered up to some cap insurance may cause bank shareholders to be less vigilant in monitoring the investment strategies bank managers
What is accounting identity?
It is an equality that must be true regardless of the value of its variables It is a statement that by definition must be true
How does the zero lower bound on interest rates affect the working of monetary policy?
It reduces the effectiveness of monetary policy by impairing the ability of the public (including investors) to understand the central bank's actions and signals it complicates the formulation of expansionary monetary policy because it forces the central bank to rely on nontraditional and less familiar tools such as quantitative easing it makes the implementation of expansionary monetary policy more difficult since it effectively blocks the central bank's use of its primary tool
used the concepts of animal spirits and sentiment to explain economic fluctuations
John Maynard Keynes
The human Development Index measures
Living standards across various countries
At a symposium of central bankers in 2007, john taylor, after who is named, suggested that if the fed had been following the taylor rule, the federal funds rate would have been increasing in 2002 and not falling. what is likely to happen if instead the Fed raises the federal funds rate when it actually should be decreasing it?
Monetary policy would be too contractionary, setting the stage for a deflationary recession and the possibility of an asset price collapse.
if there are two countries, A and B, and they are capable of producing two goods, pizza and beer, which of the following is true with regards to comparative advantage
Neither country has a comparative advantage in the production of either good if country A has a comparative advantage in the production of either pizza or beer, then Country B must have a comparative advantage in the production of the other good.
recall from the chapter that banks in the united states hold a fraction of their checking deposits as reserves, either as vault cash or as deposits with the federal resereve...... explain why banks would be expected to try to minimize the amount of excess reserves that they hold.
Normally, other assets can be expected to generate much higher returns for banks. excess reserves yield little in the way of earnings for banks, thus making difficult the generation of satisfactory profit banks are privately owned businesses and thus have the goal of maximizing profits for their shareholders
suppose hat there is technological advance from period 1 to period 2 but, at the same time, a decrease in the physical capital stock? can you say whether real GDP will increase or decrease?
Not really, since the two items have offsetting effects
Which of the following characteristics of economic fluctuations does the Great Depression illustrate
Persistence limited predictability co-movement in economic aggregates
consumer sentiment is likely to be ______ with real GDP
Positively correlated
The accounting identity that is used to estimate the gross domestic product of a country is given by
Production=Expenditure=Income
other than open market operations, what tools does the Federal reserve use to manipulate interest rates in the economy?
Quantitiative easing lending from the discount window changing the reserve requirement changing the interest rate paid on reserves deposited at the fed
What does his correlation suggest about real income per capita as a measure of welfare?
Real income per capita is a reliable, though not perfect, indicator of human welfare within and across countries
suppose that the GDP in current dollars for Polonia is higher than Ruritania's GDP. however, using purchasing power parity-adjusted dollars, Ruritania's GDP is high than Polonia's GDP based on this info, you can conclude
Ruritania's standard of living is likely to be better than Polonia's .
an example of catch-up growth is
South Korea, which by 1970 had become poorer relative to the united states, but over the last 40 years grew faster than the united states closing the gap that had opened up previously
Which of the following is NOT in the circular flow diagram as one of the 3 systems of GDP measurement?
Taxes are shown as a flow from the private sector to the public sector
how could rapid growth in these countries (and others as well) have been achieved without a substantial R&D commitment on their part?
Technology developed in other more advanced countries can be adopted and adapted by poor countries to serve local industry in local circumstances
How is the consumer Price Index similar to the GDP deflator
The general form of the formulas used to construct the indexes are nearly indistinguishable
Why is it essential to differentiate between real and nominal growth rates of GDP
The nominal growth rate combines the effect of price changes along with changes in the production of goods and services and thus gives a less clear indication of the impact on living standards. It is the real growth rate that is meaningful since it indicates the change in the production of goods and services, a very significant source of improved living standards.
What important factors do GDP estimates leave out?
The production of illegal professions leisure home production capital depreciation
Suppose you are comparing the income per capita in the United States and Ghana. You try two approaches. in the first approach, you convert the Ghana values into U.S dollars using the current exchange rate between the U.S dollar and the Ghanian cedi. IN the second approach, you also convert both values to U.S. dollars using the purchasing the power parity-adjusted exchange rate. Which approach is likely to give you a more accurate picture of the living standards in both countries?
The second approach, because it takes into account the relative costs for each country.
what are some of the criticisms of the fair trade coffee movement?
There is insufficient and ineffective monitoring of the cooperatives that sell fair trade coffee the fair trade marketing system is riddled with inefficiency and corruption
What does it mean to say that an economic fluctuation involves the co-movement of many aggregate macroeconomic variables?
These variables row or contract together during booms and recessions
based on this information, Nogales, Arizona is likely more prosperous than Nogales, Mexico because
U.S. citizens can take part in elections that allow them to elect their govermnet democratically
e=
Units of foreign currency / 1 unit of domestic currency
Which of the following news stories would typically be studied in macroeconomics?
We believe inflation should rule monetary policy what if economic growth is no longer possible expectations high for march employment
what are the consequences of this increase in unemployment for GDP?
Y1 >Y2
dollar cost =
Yuan cost X dollars/Yuan = Yuan cost X 1/e
which of the following are sources of income based payments that domestic residents make to foreigners?
a canadian citizen working is seattle washington sends money to his parents in calgary the us government pays interest on the treasury bonds owned by the chinese government a resident of california buys a bottle of wine from a french producer
which of the following is an example of foreign direct investment
a chinese company opens a factory in india a us company opens a factory in india
household savings decisions impact investment in the economy by having
a direct impact on investment, as saving is correlated with investment
an example of a multiplier is when
a drop in business confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment
an example of a multiplier is when
a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment
how does a fixed exchange rate differ from a managed exchange rate
a fixed exchange rate is set at a long-run value determined by the government, while a managed exchange rate can vary day to day depending on government actions
suppose a us citizen lives and works in nigeria the us citizen would be considered ___________ in the us international transactions accounts
a foreigner
Firms, households, and governments use the credit market for borrowing. The credit demand curve shows the relationship between the quantity of credit demanded and the real interest rate. The credit demand curve slopes downward because
a higher real interest rate reduces a borrowing firm's profit and hence its willingness to borrow
how does a flexible exchange rate differ from a managed exchange rate?
a managed exchange rate involves government intervention, while a flexible exchage rate does not
the international accounting system maintains a clear distinction between residency and citizenship who would be considered a domestic resident of the united states, according to the international accounting system?
a person who lives in the united states, whether or not they are a us citizen
if oil, which is a major input to most production processes, abruptly falls in price, the impact on the economy would be similar to
a productivity increase, with a resultant increase in the real GDP
what is deposit insurance
a program implemented in most countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its withdrawals.
which of the following key factors can help explain the Great Recession of 2007-2009
a reduction in consumer wealth, curtailing spending a fall in housing prices a reduction in new home construction, leading to a decrease in labor demand an increase in mortgage defaults, negatively impacting banks.
contractionary monetary policy can lead to an economy-wide recession through
a reduction in the price level, leading to a reduction in employment because of downward wage rigidity an increase in the real interest rate, leading to an increase in production costs and therefore lower demand for labor
which of the following are way that domestic residents can receive income-based payments from foreigners
a resident of norway buys a guitar while on vacation in nashville the chinese government sends money and medical supplies to miami resident after a hurricane the swiss government pays interest on the governmnet bonds owned by the us government
quantitative easing is
a variation on the central bank's traditional manner of conduction open market operations an attempt by the central bank to more directly impact long term interest rates the central bank's purchase of long-term bonds in the open market
how does comparative advantage in trade differ from absolute advantage?
absolute advantage looks at the number of goods or services that a producer can make, whereas comparative advantage looks at the opportunity cost of the goods or services that a producer can make
M1 money stock
add currency component of M1, total checkable deposits, and travelers checks outstanding.
average for the M2 money stock
add the 3 months of the quarter and then divide by 3
the aggregate production function describes the relationship between the
aggregate GDP of a nation and its factors of production
foreign direct investment in several sectors in india is still heavily regulated. after much debate what would you suggest to the government based on the discussions in this chapter
allow more fdi, because the resulitng technology transfer would bring increased effciency and benefit india
If the level of aggregate expenditure was $16.8 trillion in 2013, the level of aggregate income in the economy during 2013 was
also $16.8 trillion because of the identity between aggregate expenditure and income
a shift in the credit supply curve can be cause by
an aging population that is ill-prepared for retirement an elevated perception on the part of households that the future may hold many "rainy days" a heightened desire on the part of firms to internally fund their future activities
the concept of multipliers was one of the key elements of John Maynard Keynes's theory of fluctuations. A multiplier is
an economic mechanism that causes an initial shock to be amplified by follow-on effects
the concept of multipliers was one of the key elements of John Maynard Keynes's theory of fluctuations. A multiplier is
an economic mechanism that causes an initial shock to be amplified by follow-on effects
a shift in the credit supply curve can be cause by
an elevated perception on the part of households that the future may hold many rainy days, an aging population that is ill-prepared for retirement, and a heightened desire on the part of firms to internally fund their future activities.
a bank run is
an extraordinarily large volume of withdrawals driven by a concern that a bank will run out of liquid assets with which to pay withdrawals
over the past 200 years , the U.S. economy has shown
an increase in income per capita, albeit not an entirely steady one.
Briefly explain how an increase in the quantity of reserves that commercial banks hold at the federal reserve could lead to inflation
an increase in reserves triggers a multiple expansion of banks loans and deposits, which generates an increase in the stock of money. if the money supply grows faster than real GDP, inflation will occur
what is the difference between the terms physical capital and capital stock? physical capital is _______ the capital stock of an economy is ________
any good, including machines and buildings, used for production the value of equipment, structures, and other non-labor inputs used in production.
the supply curve for dollars slopes upward because when the dollar
appreciates in value, goods from abroad become relatively less expensive in the united states, causing more people to sell dollars to buy the foreign currency
the demand curve for dollars slopes downward because when the dollar
appreciates in value, us goods become relatively more expensive abroad, causing fewer people to buy dollars
what could explain why the ratio of imports to GDP in the united states fell sharply after 1929 before rebounding shorty thereafter?
as a response to the Great Depression, many countries, including the untied states, passed legislation restricting imports
from each of the two lists select the categories that are appropriate to each side of the balance sheet
assets: reserves cash equivalents long-term investments liabilities and stockholders' equity: demand deposits short-term borrowing long-term debt stockholders' equity
an economic expansion begins
at the end of a recession
if narrow banking reduces systemic risk, why do banks still practice maturity transformation?
banks still practice maturity transformation simply because it is generally very profitable to do so
industrial revolution affected economic growth
because technological changes, such as new machinery and new methods of production, became more systematic and pervasive, underpinning economic growth
Usury laws place an upper limit on the nominal rate of interest that lenders can charge on their loans. In the 1970s ,some credit card companies moved to states where there were no ceilings on interest rates to avoid usury laws. Why would credit card companies move to states without usury laws during a period of high inflation, like the 1970s?
because usury law ceilings may limit the real return lenders can earn during inflationary periods, lenders have an incentive to move to states without such laws.
what are the consequences of the decrease in real GDP for real GDP per capita and real GDP per worker?
both of these items will decrease
the taylor rule states that
central banks should set their policy rates (in the united states, the federal funds rate) according to a formula that incorporates the long-term target for the policy rate, the output gap, and the deviation of inflation from its target.
According o his theory of animal spirits and sentiment, changes in sentiment cause economic fluctuations through
changes in household consumption an firm investment
according to his theory of animal spirits and sentiments, changes in sentiment cause economic fluctuations through
changes in household consumption and firm investment
a shift in the credit demand curve can be caused by
changes in perceived business opportunities for firms changes in government policy changes in household preferences or expectations
a shift in the credit demand curve can be caused by
changes in the household preferences or expectations, changes in perceived business opportunities for firms, changes in government policy.
in general, career choices that individuals make are a consequence of
comparative advantage
throughout the 1950s and 1960s many poor countries pursued a policy called import-subsituting industrialization based on the discussion in this chapter what are the possible reasons why isi was ultimately a failure and why integration with the global economy promotes economic growth and development
comparative advantage allows a country to produce those goods or services in which it is most ifficient and therefore scarce resources are directed to their most productive uses fdi facilitates technonoly transfer, resulting in increased productivity that promotes economic growth capital flows into porer regions give domestic busniess
two economists estimate the government expenditure multiplier and come up with different results. one estimates the multiplier at 0.6 while the other comes up with and estimate of 1.2. explain why these estimates are different in terms of the assumptions that each economist is making
compared to the first economist, the second economist must be assuming either a larger induced increase in consumption, a smaller crowing out effect, or both
what does Moore's Law predict?
computer processing power would double approximately every 2 years
based on what you learned about banking in the chapter, explain why you think that the crisis prompted banks to dramatically expand the amount of excess reserves they held
confidence was shaken so severely by the crisis that banks chose to effectively ration credit among viable borrowers, including other banks the federal reserve made excess reserves attractive to hold by paying interest for the first time in history there was a sharp decline in profitable private sector lending opportunities for financial intermediaries .
what could explain why a decrease in taxes could lead to a less-than-proportionate increase in output
consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future as a result of diminishing return to current consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once
The category of expenditure that accounts for the highest share of GDP in the United States is
consumption
recessions are periods in which the economy ____________, while economic expansions are defined as the periods of
contracts, between recessions
the correlation between this index and real income per capita in a country is
countries with higher real income per capita tend to have higher levels of this index
using the data in the table, which country has an absolute advantage in the production of pizza? Which country has an absolute advantage in the production of beer? country A: pizza (20 pizzas/hour), beer (48 bottles/hours) country B: Pizza (15 pizzas/hour), beer (36 bottles/hour)
country A has an absolute advantage in the production of pizza, and country A has an absolute advantage in the production of beer.
using the data in the table, calculate the opportunity costs in the table below. country A: 20 pizzas/hour, 36 bottles/hour Country b: 31 pizzas/hour, 65 bottles/hour
country A: pizza(1.8 bottles of beer), beer (0.6 pizzas) country B: pizza(2.1 bottles of beer), beer (0.5 pizzas) country A should produce pizza, and country B should produce beer
the existence of extractive institutions discourages entrepreneurship in an economy by
creating barriers to entry
the M2 money supply is defined to include
currency in circulation, checking accounts, saving accounts, travelers' checks, and money market accounts
if the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is
debtors (people or businesses that owe money)
if the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is
debtors (people or businesses who owe money)
Economic agents who borrow funds are known as ______, the funds that they borrow are referred to as ____, and this activity occurs in the ________ market.
debtors; credit; credit or loanable funds
You decide to cook your own meal rather than eat in a restaurant. As a result, GDP estimates will ________
decrease
In this question, we will use what you learned in the second part of the chapter to compare the performance of an economy in two different time periods, as its physical capital stock and efficiency units of labor change. the total efficiency units of labor will _____ because______
decrease; less workers are employed
a country with a very low per capita GDP can have a very high growth rate because mathematically, when the ______ is __________, even a small difference in the ______ will result in a large growth rate
denominator; lower; numerator;
which of the following are included in bank reserves for private banks
deposits at the central bank vault cash
according to the table, as this economy uses more effiency units of labor, the rate of change in GDP
diminishes
ratio of M2 to GDP
divide m2 by GDP
A currency is said to depreciate against a foreign currency when the nominal exchange rate goes
down, meaning the domestic currency now buys less of the foreign currency
political creative destruction refers to
economic growth destabilizing political regimes
given that inda and china are now among the fastest growing economies in the world, how effective do you think the culture hypothesis is in explaining economic development
effective, because cultural factors other than religion affect growth
real business cycle theory
emphasizes the role of changing productivity and technology in causing economic fluctuations
Items are classified as final goods only if they are the ________ in a chain of production
end product
unlike extractive economic institutions, inclusive economic institutions
enforce contracts
it follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. in this case, inflation is
equal to the gap between the growth rate of money supply and the growth rate of real GDP
the net flows in the financial account
exactly offset the net flows in the current account
how can expansionary expenditure-based fiscal policy lead to crowding out in the economy
expenditure-based fiscal policy leads to more government borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector
would Zimbabwe be considered to have extractive or inclusive institutions
extractive institutions, because it doesn't protect property rights
this country is likely to have ________ economic institutions, which will likely ______ its ability to achieve a high level of economic development
extractive; prevent
recall the identity between gdp and aggregate expeniture why isn't the entire current account included in the calculation of GDP
factor payments do not constitute production of goods or services transfer payments do not constitute production of goods or services
the coffee market is one of the most glo what are some of the arguments in favor of the fair trade coffee movement
fair trade coffee ensures that poor coffee farmers will have enough income to provide for their families volatility in the market is dampened by putting a price floor under world coffee prices
if an economic shock decreases labor demand, equilibrium employment _______ and read GDP ___________
falls/falls
according to the taylor rule, the federal reserve should raise the federal funds rate when the
fed's inflation rate target falls inflation rate rises output gap rises fed's long-run target for the federal funds rate rises
how does fiat money differ from commodities like gold and silver that were used as money?
fiat money is intrinsically worthless, whereas gold and silver have intrinsic value
if fiat money is intrinsically worthless, then why is it valuable?
fiat money is used as legal tender by government decree and other people will accept it as payment for transactions
Keynes's theory of multipliers involved an element of he self-fulfilling prophecy. which of the following illustrates the concept of a self-fulfilling prophecy?
firms expect an increase in demand in the future and so hire additional workers now, which leads to an increase in consumption demand.
the saving rate in an economy is defined as the
fraction of total income that households save
an open economy _________, and a closed economy _________
freely trades with the rest of the world, does not trade with the rest of the world
what is liquidity
funds that are available for immediate payment
which of the three hypotheses developed in the chapter would be most likely to view foreign aid as essential for economic development
geography hypothesis, because climate cannot be changed
the geography hypothesis states
geography is responsible for differences in prosperity
as in the thermostat analogy, what might be some possible unintended consequences of monetary policy?
greater business cycle volatility as policy swings from possibly being too contradictory to too expansionary excessive instability in the export and import sectors as exchange rates potentially exhibit greater volatility less efficient investment because credit availability may lack stability
The duration of an economic fluctuation
has limited predictability
what do you think as the flaw in Ehrlich's argument
he did not account for the role that technology can play in increasing the food supply
how did george soros benefit from the overvaluation of the british pound
he was an investor that bet against an overvalued british pound by buying foreign currency with british pounds. this forced the british government to abandon its pegged exchange rate with the german mark
why is efficiency of production so important to real GDP?
higher efficiency translates into higher incomes for workers
Households and firms with saving lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest rate. The credit supply curve slopes upward because a
higher real interest rate discourages current consumption higher real interest rate encourages more saving
Households and firms with savings lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest rate. The credit supply curve slopes upward because a
higher real interest rate encourages more savings, and higher real interest rate discourages current consumption.
the average American is so much richer than the average Indian due to differences in
human capital, technology, the capital stock
if increasing the stock of physical capital does not lead to sustained growth for china, what should china do to ensure the sustainability of its growth model?
improve its technology
based on your understanding of the chapter, poverty can best be reduced by
improving the knowledge and technologies available in the world economy increasing international trade
why might one consider the value of depreciation in estimates of national income
including depreciation gives a more complete picture of economic production failing to do so overstates what society can consume
the relationship between this concept and human capital is descried as: an increase in the average worker's level of human capital will, all else equal, ___________ the total efficiency units of labor in an economy.
increase
to achieve its target for the federal funds rate, the fed may
increase lending from the discount window purchase treasury bonds in the open market decrease the interest rate paid on reserves deposited at the fed decrease the reserve requirement
what policies can be used to raise real GDP in a country?
increase technology and improve efficiency in the allocation of resources
suppose the fed wants to raise the federal funds rate. which of the following are available mechanisms that the fed can use to achieve this goal
increase the interest rate paid on reserves deposited at the fed decrease lending from the discount window increase the reserve requirement
how did the fall in housing prices cause the entire financial system in the United States to freeze up the fall in housing prices resulted in __________ , leading to enormous __________ disrupting the bank's ability and willingness to make loans to _____________
increased defaults, bank losses, consumers and firms
according to the aggregate production function, GDP increases when a nation
increases its stock of physical capital (k) increases the human capital of its workers (h) improves its technology (a)
has trade been increasing or decreasing over the past few decades?
increasing, as this is evidenced by the increase in the ratio of imports and exports of GDP
to say that private property rights are well enforced in an economy means that
individuals can securely hold assets
Factors of production are the
inputs used to produce other goods and services in an economy
what is foreign direct investment
investments by foreign individuals and companies that generate an ownership stake in domestic business
how does the zero lower bound on interest rates affect the working of monetary policy?
it complicates the formulation of expansionary monetary policy because if forces the central bank to rely on nontraditional and less familiar tools such as quantitative easing
how does the Federal Reserve obtain a particular value for the federal funds rate?
it finds the point on the demand curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the demand curve
based on the information in the chapter, and perhaps your own reading, explain why foreign aid designed to spur investment usually does not work
it is insufficient to sustain growth
in his book where the right went wrong based on your understanding of bilateral trade deficits, identify the flaw in pat buchanans reasoning
it is not necessary for the united states and china to buy the same quantity of goods and services from each other, and in fact, there are countries with which the united states has a trade surplus
barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to encounter
it might be difficult to agree on how many car washes is equivalent to painting a house you might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return it may take a lot of time to negotiate and finally settle on a deal that you bot find fair
banks that practice narrow banking match the maturity of their investments with the term of the deposits that they collect from the public. in other words, narrow banks take short-term maturity, like short-term government debt. Suppose that all FDIC insured banks decide to adopt narrow banking. How would narrow banking reduce the level of risk in the banking system?
it would reduce risk in the banking system by reducing the likelihood of bank runs and liquidity problems for banks
assume that an american worker can produce 7 cars per year or 16 tons of grain per year, whereas a japanese worker can produce 20 cars per year or 8 tons of grain per year. assume labor is the only input in car and grain production ___________ has the absolute advantage in the production of cars, and _________ has the absolute advantage in the production of grain
japan, the united states
used the concepts of animal spirits and sentiment to explain economic fluctuations
john maynard Keynes
countries peg their exchange rates at a level that overvalues their own currency
keep inflation in check by making foreign goods more attractiv to domestic comsumers make debts to foreign lenders easier to pay off for domestic borrowers keep up the perception of strength since a drop in the relative value of the currency may be seen as a failure of government policites
what are the important mechanisms that reverse the effects of a recession in a modern economy?
labor demands increases due to market forces labor demand increases due to expansionary government policies
economic variables are sometimes divided into "leading indicators" and "lagging indicators". Leading indicators are variables that start to change before an economic expansion or contraction. Lagging indicators change only when an expansion or contraction is well underway, or even about to reverse. Based on the graph, is unemployment a leading or lagging indicator of recessions?
lagging indicator
how do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor falls? when the demand for labor falls, the fall in employment is __________ when real wages are flexible and __________ when wages are downward rigid.
limited, amplified
Gross domestic product is the ______ value of the __________ goods and services produced ______ of country during a particular period of time.
market; final; within the borders.
traditional currencies are controlled by central banks. What is a potential problem of restricting the creation of bitcoins to a total of 21 millions bitcoins?
monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions.
the functions of a central bank are to
monitor financial institutions control certain key interest rates indirectly control the money supply
What distinguishes "physical" capital and capital stock from natural resources natural resources are produced by _________, while capital must be produced by _______.
nature; society
the average number of initial applications for unemployment insurance is likely to be __________ with real GDP
negatively correlated
the trade balance is known as
net exports
what does the current account include?
net transfers from abroad net factor payments from abroad net exports
in the 1980's, the saving rate in Japan was extremely high. the saving rate ranged between 30 percent and 32 percent since saving leads to investment, is a very high saving rate always good for the economy?
no, a high saving rate cannot lead to sustained economic growth because there is a maximum amount of aggregate income that an economy can achieve by increasing saving, since the economy can never exceed a saving rate of 100 percent.
almost everyday, many people sign their names to little pieces of paper called checks, which are then accepted in exchange for goods and services. Do these checks constitute as money?
no, because checks simply represent a means of access to money, not money itself.
china's economy is one of the fastest-growing economies in the world... do you agree
no, because diminishing marginal product of capital means that growth will not be sustained.
did his predictions come true
no, because he failed to account for the demographic transition and the impact of the industrial revolution
does an increase in GDP per capita of a nation imply that all its citizens have become richer?
no, because the average income per capita of a nation is not the same as the income of each individual in that nation
over the last 50 years, credit cards have become increasingly popular way for people to purchase goods and services. are credit cards money?
no, because your credit cards are not assets.
since government spending increases employment by shifting the labor demand curve to the right, is it always a good idea for the government to increase expenditure?
no, continual increases in labor demand may be inflationary if they outpace labor supply growth no, government efforts aimed at shifting the labor demand curve to the right should only be used during recessions no, continual increases in government expenditures will crowd out expenditures by households and firms very likely leaving labor demand little changed
in 2011, china revised its poverty line upward to 2300 yuan per year, or 6.3 yuan per day. at the prevailing exchange rate, this was equal to a little less than a single us dollar..... would you agree
no, since the chinses poverty measure is not stated in 2005 PPP us dollars
engaging in trade increases overall economic efficiency. does this also imply that everyone gains from trade equally?
no, some workers will lose their jobs in industries where their country does not have a comparative advantage
you read a newspaper report that compares wages paid to employees at starbucks in india and in the united kingdom. at the time, one pound was equal to 87 rupees..... etc.... is your friend necessarily correct
no, the flaw in the report is that it converts the wages paid in India to pounds using the current exchange rate, but does not account for the cost of living (or the prices of goods) in India
real rate of interest
nominal rate minus the rate of inflation
what is the shadow banking system?
nonbank financial institutions that behave like banks in many respects a group of several thousand disparate nonbank financial intermediaries financial institutions that make loans from funds raised by means other than by accepting deposits.
liabilities were mostly household owned deposits went bankrupt and out of business precipitated by a refusal of creditors to extend new short term loans survived by being taken over by the government precipitated by a desire of depositors to withdraw cash liabilities were short-term loans from other institutions
northern rock lehman brothers lehman borthers northern rock northern rock lehman brothers
holding all else equal, will increasing the efficiency units of labor lead to sustained growth? why?
not likely, because each individual has finite life and there is a limit to the number of years of schooling that an individual can obtain
the return to entrepreneurship curve shows the
number of entrepreneur with at least a particular level of returns
The nominal exchange rate between two currencies is defined as the
number of units of foreign currency that can be purchased with one unit of domestic currency price of one country's currency in units of another country's currency.
the nominal exchange rate between two currencies is defined as the
number of units of foreign currency that can be purchased with one unit of domestic currency price of one country's currency in units of another countrys currency
bank fail when they invest in long-term assets that subsequently fall in price. what are the two views on why asset prices fluctuate so much that they lead to financial crises and bank failures?
one view holds that asset prices are rationally based on fluctuating fundamentals, while the other asserts that psychological factors and biases play a significant role.
the national income identity shows that
output is a function of consumption, investment, government spending, and net exports
how would Keynes's concept of animal spirits explain the creation of a housing bubble?
people believed that a house was a worthwhile investment, which led to an increased demand for housing and thus pushed prices up. This confirmed to people that housing was a worthwhile investment, which led to more demand, resulting in an upward spiral driven by optimism.
what are some factors that explain why people save for the future?
people save to invest in a personal business people save for their children people save for retirement
when workers are laid off, what happens to physical capital
physical capital becomes less productive, leading firms to reduce capacity utilization.
which factors explain economic growth in the united states over the past few decades
physical capital, k technology, a human capital,h
which industries were most affected by the slowdown
pipelines auto repair oil and gas extraction
these types of expenditures are known as
pork barrel spending
if the growth rate of money supply is larger than the growth rate of real GDP, the inflation rate is
positive
The S&P 500 stock index is likely to be _______ with real GDP
positively correlated
The amount of new building permits for residential buildings is likely to be ________ with real GDP
positively correlated
The amount of new orders for capital goods unrelated to defense is likely to be ____________ with real GDP
positively correlated
i. the average weekly hours worked by manufacturing workers ii. The average number of initial applications for unemployment insurance iii. the amount of new orders for capital goods unrelated to defense iv. the amount of new building permits for residential buildings v. the s&p 500 stock index vi. consumer sentiment the average weekly hours worked by manufacturing workers is likely to be _____________ with real GDP
positively correlated
catch-up growth is the
process by which relatively poorer nations increase their incomes by taking advantage of the knowledge and technologies already invented in other technologically advanced nations
sustained growth is the
process where GDP per capita grows at a positive and relatively steady rate for long periods of time.
comparative advantage is the ability to
produce a good or service at the lowest opportunity cost per unit than any other producer
Absolute advantage is the ability to
produce more of a good or service in a given period of time than any other producer
imports are goods and services that are ___________, and exports are goods and services that are ____________
produced abroad and consumed domestically, produced domestically and consumed abroad
A country's gross national product would exceed its gross domestic product when the _________-
production of domestically-owned factors operating abroad exceeds the production of foreign-owned factors operating in the United States.
private property rights foster economic development by
providing incentives to invest
expansionary monetary policy shifts the labor demand curve to the right by
pushing long-term interest rates down, thereby causing greater private expenditures and inducing firms to want to hire more workers
other than open market operations, what tools does the federal reserve use to manipulate interest rates in the economy?
quantitative easing changing the reserve requirement lending from the discount window changing the interest rate paid on reserves deposited at the Fed
in 1973, the major oil-producing nations of the world declared an oil embargo. the price of oil, a key source of energy, increased. this led to widespread inflation as costs of production increase steeply The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would be fir this explanation of the 1970s recession?
real business cycle theory
the internet boom of the 1990s has changed all of our lives and transformed the way business is conducted. During the late 1990s, the economy was describe as the "best of all possible worlds" with quite high employment (and low unemployment). which of the business cycle theories explained in the chapter would best explain how the internet boon had such a positive effect? the business cycle theory that would best explain how the internet boom had such a positive effect is
real business cycle theory
The inflation-adjusted purchasing power of the originally borrowed dollar is subtracted from the amount a borrower repays in a year one a one-dollar loan. The result is
real price of the loan, inflation-adjusted cost of the loan, and real interest rate.
suppose the fed conducts an open market purchase. such an action would be called for if the economy faced the possibility of
recession
in the context of this chapter, what is meant by an institution
regulations
what steps do bank regulators take to prevent SIFIs from failing or to minimize the effect of such failures?
require banks to take on less risk require banks to establish "living wills," procedures for their treatment in the event they become insolvent. mandate that banks hold more stockholders' equity
suppose that the mythical country moricana has a very high minimum wage. labor market laws are trade union-friendly and allow unions a high degree of bargaining power. moricana is in a recession-capacity utilization in the economy is at an all-time low, surveys show that firms do not expect economic conditions to improve in the coming year. firms in the country are cutting back on capital spending and investment. in morcana, wages are likely to be
rigid
if an economic shock increases labor demand, equilibrium employment _______________ and real GDP _______
rises/rises
since personal consumption expenditures are exceeded by disposable income, the implication is that the second quarter of 2015 saw households engaged in
saving
assuming flexible wages, in which case would the change in total employment be greater during a recession scenario 1: if workers do not increase their quantity of labor supplied very much in response to an increase in the wage scenario 2: workers substantially increase their quantity of labor supplied in response to an increase in the wage
scenario 2, because the labor supply curve in this case will be flatter.
what factors explain the dramatic increases in life expectancy that we saw in most countries in the twentieth century
scientific breakthroughs leading to the development of antibiotics and vaccines innovations in disease control, including the use of DDT against malaria
economic fluctuations are
short-run changes in the growth of GDP
following the feds successful open market purchase, the process that ensues is given by
short-term interest rates fall ---> Long-term interest rates fall ---> demand for goods and services increases ---> Labor demand shifts right
if wages are flexible, the increase in employment and real GDP will be _______ the increase if wages are rigid
smaller than
the culture hypothesis states
societal values are responsible for differences in prosperity
trade allows buyers and sellers to exploit gains from specialization because it allows sellers to
specialize in the production of the good or service for which they have a comparative advantage and buy goods and services for which they do not have a comparative advantage
in prison camps during WWII, and in some prisons today, cigarettes circulate among prisoners. for example, an iPod might cost two cartons of cigarettes, whereas a magazine might only cost two cigarettes. which functions of money are cigarettes fulfilling in this case?
store of value medium of exchange unit of account
What is the correlation between income per capita and welfare measures like absolute poverty and life expectancy?
strong positive correlation
Production-based accounting is used to estimate GDP by
summing each firm's value added to the production process computing for each firm the difference between sales revenue and the purchase of intermediate products, then summing this difference across all firms
The level of economic activity is calculated using the income method by
summing labor income and capital income tracking the flow of funds from firms to the owners of the factors of production adding together the income payments received by the various agents in the economy
the fed's open market purchase impacts the federal funds market shown on the right by shifting the
supply of reserves
tariffs are
taxes levied on imports only
how does real business cycle theory best explain the economic boom
technological innovation leads to increases in productivity, which in turn increases the marginal product of labor and therefore labor demand
which factor is the most important contributor to growth in the united states
technology
according to real business cycle theory, the economic impact of changing input prices is similar to the economic impact from
technology changes
how does foreign direct investment benefit the recipient country
technology transfer ultimately improves productivity in the recipient country
how do expansion policies differ from contractionary policies?
texpansionary policies seek to shift the labor demand curve to the right, while contractionary policies seek to shift it to the left expansionary policies seek to reduce the severity of recessions, while contractionary policies seek to slow down the economy when it grows too fast. expansionary policies seek to increase economic growth and increase employment, while contractionary policies seek to reduce the risk of excessive price inflation
A central bank is the government institution
that runs a country's monetary system
the two main conclusions that Nordhaus reaches concerning the 1970's slowdown are
the 1970's energy crises accounted for approximately two-thirds of the slowdown the nonfarm sector performed significantly better than the farming sector
the recession of 2007-2009 affected the components of the national income identity by primarily affecting
the C and I components through a reduction in consumer wealth and a drop in housing construction
use the following diagram to explain the relationship between a country's physical capital stock and GDP the diagram shows
the aggregate production function , holding total efficiency until of labor constant. both the increasing relationship between capital and output and the law of diminishing marginal product
if banks expect that the rate of inflation in the coming year will be 4.8% and they want a real return of 8.5% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is ___%
the appropriate nominal rate would be the sum of the banks desired real return and the expected rate of inflation: 8.5% + 4.8% = 13.3%
what are the automatic and discretionary components of fiscal policy?
the automatic components do not require deliberate action on the part of the government, while the discretionary components do
who bears the risk that a bank faces when stockholder' equity is greater than zero
the bank's stockholders
a country's financial account includes
the change in foreign assets held domestically the change in domestic assets held by foreigners
the dramatic change in economic growth beginning in the 18th centrury may be accounted for by
the development of new technologies and their systematic and pervasive application to the production of goods and services the emergence of economic and social incentives for smaller families
what is stockholder' equity?
the difference between a bank's total assets and total liabilities
what does it mean to say that, at an exchange rate of 1 usd= 40 inr, the us dollar is undervalued and the indian rupee is overvalued?
the dollar is worth less rupee than it would be under a flexible exchange rate system; thus, the quantity of dollars supplied is less than the quantity of dollars demanded
according to Keynes's view on animal spirits,
the economy could fluctuate beyond the level that could be explained by the underlying economic fundamentals
using sophisticated statistical techniques, economists can usually predict
the end of a recession
what is the major reason for these industries being the most affected?
the energy crises in the 1970s
since the economy needs both food and housing, what must happen so that both are produced?
the equilibrium wage for housing production must increase relative to the wage for food production
parts of the world that were relatively ore prosperous 500 years ago have experienced a reversal of fortune and are relatively poorer today. what factors could explain this?
the establishment of inclusive institutions by euorpean colonialists in areas previously not well developed the establishment in those previously prosperous places of extractive institutions by European colonialists
fundamental causes of Buronodo's lack of properity are
the farmers have limited incentives to increase output the geography Is not favorable there are few constraints to the exercise of power
how are the proximate causes of prosperity different from the fundamental cause of prosperity
the fundamental causes of prosperity are the factors that explain the levels of the proximate causes of prosperity
what policies could the government and the central bank use to achieve the goal of slowing down the economic expansion?
the government could raise taxes and/or reduce expenditures, while the central bank could raise interest rates.
economic growth is
the increase in income (GDP) per capita of an economy
factors that help households decide whether to consume or save their income are ________-
the interest rate expectations of the nation's investment needs expectations about taxes
what are the 2 components of technology
the knowledge of how to produce new products a more efficient means of production
why is the rise in housing prices between the late 1990s and 2006 characterized as a bubble by some economists
the large increase in the price of housing assets did not reflect the true long-run value of the assets
some economists stress the role of monetary policy in the period leading up to the recession of 2007-2009. between 2001 and 2003, the federal reserve lowered the target federal funds rate from 6.5% to 1% and kept it there through much of 2004. this resulted in a substantial decline in real interest rates throughout the economy, including mortgage rates. based on the chapter's discussion of monetary and financial factors, how could the federal reserve's policies have contributed to the economic "bubble" of the pre-recession years of 2000-2006?
the low federal funds rate also lowered mortgage rates, driving an increase in demand for housing, which in turn drove up real estate prices
give an intuitive explanation of the concept of "efficiency of production" efficiency of production is the ability of the economy to produce
the maximal amount of output at a given cost or for given amounts of the factor of production
the 1970s saw a period of high inflation in many industrialized countries including the united states. due to the increase in the rate of inflation, lenders, including credit card companies, revised their nominal interest rates upward. How is the rate of inflation related to the nominal interest rate that credit card companies charge, and why would lenders need to increase the nominal interest rate when the inflation rate increases?
the nominal rate of interest is the real rate of interest plus the rate of inflation; lenders need to raise the nominal rate when inflation increases to maintain their desired real return.
what did Malthus predict about economic growth
the number of children per family would adjust so that income would remain close to a subsistence level
why was there no sustained economic growth before modern times, that is, before 1800
the pace of technological change was much slower than in modern times increases in aggregate
suppose the peso-dollar exchange rate rises (pesos per dollar) and causes an appreciation of the dollar what do we know about the peso?
the peso must be depreciating relative to the dollar
the potential process of political creative destruction could lead to extractive institutions because
the politically powerful fear losing their privileged positions
what do you think milton friedman was referring to?
the presence of long, variable, and imperfectly understood linkages between monetary policy and the behavior of the overall economy a central bank's inability to accurately forecast changes in the macroeconomic environment a central bank's inability to fine tune an economy through the continuous manipulation of monetary policy
the total efficiency units of labor are
the product of the total number of workers and the average human capital of each worker
the demand curve for dollars shows the relationship between
the quantity of dollars demanded and the exchange rate
the supply curve for dollars shows the relationship between
the quantity of dollars supplied and the exchange rate
productivity varies across countries because
the quantity of physical capital that workers can access varies greatly across countries human capital per worker varies the level of technology differs
recall the discussion in the chapter about the "quantity theory of money." the quantity theory of money assumes that
the ratio of money supply to nominal GDP is exactly constant.
what is the difference between nominal and real interest rates?
the real interest rate is the nominal interest rate adjusted for inflation the nominal interest rate is the rate you pay on a loan
in August 1979, the annual rate of inflation in the us was nearly 12% and the us short term nominal interest rate was nearly 10%. over the next 35 years, both the rate of inflation and short term nominal interest rate tended to fall. By august 2014, the rate of inflation was about 2% and the short term nominal interest rate was close to 0%. How has the real short term interest rate changed from 1979 to 2014?
the real rate remained stable at -2%
what is meant by capital depreciation?
the reduction in the value of physical capital due to obsolescence or wear and tear
What is the key difference between the Consumer Price Index (CPI) and the GDP deflator?
the two indexes measure price changes for different "baskets" of products
lehman brothers was not insured by the federal deposit insurance corporation (FDIC) but deposits at northern rock were insured by the uk government. what could explain why there was still a bank run at northern rock?
the uk insurance had upper limits (or caps) on protected depostis that were relatively low fully insured depositors at northern rock worried the bank's failure would temporarily block them from their funds
suppose that the united states and chile are the only two countries in the world, and that labor is the only productive input. in the untied states, a worker can produce 22 bushels of corn or 17 barrels of oil per day. In chile, a worker can produce 12 bushels of corn or 15 barrels of oil per day ________ has the absolute advantage in the production of oil, and ____________ has the absolute advantage in the production of corn
the united states, the unites states
given your answer, Sam should buy tires from
the united states.
an example of sustained growth is
the untied states, which demonstrated sustained growth between 1820 and 2007
a country has a trade deficit when ____________ and a trade surplus when _____________
the value of exports is less than the value of imports, the value of imports is less than the value of exports
Productivity is
the value of output that a worker generates for each hour of work
the institutions hypothesis explains the difference in prosperity among nations is due to
the way societies provide public goods
proximate causes of Burondo's lack of prosperity are
the workforce is not skilled the oil extraction process in inefficient
why do the inflation rate and the nominal interest rate tend to move together over the long-run?
their up and down together movement tells us that the real interest rate is relatively stable in the long run. this synchronized movement indicates that credit market conditions have tended to be relatively stable over time.
which of the following is one of the three important elements that define institutions
they are determined by individuals
suppose that a 10 percent increase in the physical capital stock increases GDP by 10 percent. Now consider an additional 10 percent increase in the physical capital stock
this increase in the physical capital stock will increase GDP by less than 10 percent
why would a government undertake policies that would adversely affect the lives of its citizens
to maintain its power
the former chairman of the federal reserve, alan greenspan, used the term.......... why would central banks want to clamp down when the economy is growing?
to prevent inflationary forces from gathering momentum to block the formation of unsustainable speculative asset bubbles
comparative advantage is the ability
to produce a good or service at the lowest opportunity cost per unit than any other producer
comparative advantage is the ability to
to produce a good or service at the lowest opportunity cost per unit than any other producer
maturity transformation is the process by which banks
transfer short-term liabilities into long-term investments
which of the following are functions banks preform as financial intermediaries in the economy
transform short-term liabilities into long-term assets manage risk through diversification strategies identify profitable lending opportunities
In the United States, recessions are usually defined as
two consecutive quarters of negative growth in real GDP
are multinational companies harming factory workers in the developing world by hiring them at low wages
uncertain, because it is unclear as to whether the positives outweigh the negatives
what are the functions of money in a modern economy?
unit of account medium of exchange store of value
according to the geography hypothesis, incomes in poor countries are
unlikely to be changed, because climate is largely out of their control
a currency is said to be appreciate against a foreign currency when the nominal exchange rate goes
up, meaning the domestic currency now buys more of the foreign currency
the trade balance is defined as the
value of a country's exports minus the value of its imports
the opportunity cost of entrepreneurship is the
value to a potential entrepreneur of her best alternate activity
draw the parallel between the natural experiment discussed in the chapter and the case of east and west Germany. east and west Germany likely had different growth rates because
west Germany's economic institutions were market oriented
an old saying goes: "nothing succeeds like success". how could this saying relate to Keynes's animal spirits view of economic fluctuations?
when people succeed, they become confident and optimistic, which can lead to actions that stimulate further success.
how do increases in technology affect the aggregate production function
with increases in technology, the aggregate production function shifts up, indicating more output is produced from the same amount of inputs
central banks undertake quantitative easing programs to
work around the problems when short-term nominal interest rates approach zero more forcefully and directly impact the interest rates relevant for investment decisions
Nobel laureate Simon Kuznets, who did significant work on national income accounts back in the 1930's, said that the welfare of a nation can scarcely be inferred from a measurement of national income.
yes and no. The improved methods of national income accounting available today do allow general assessments of a nation's welfare, even though the are undoubtedly imperfect.
is Moore's Law borne out by historical data?
yes, Moore's prediction has been remarkably accurate
you and a friend are debating merits of using monetary policy during a severe recession. your friend says that the central banks needs to lower interest rates all the way down to zero. According to him, zero nominal interest rates will boost lending and investment; consumers and firms will surely borrow and spend when interest rates are zero. given that inflation in your country is currently 3 percent , would you agree with his reasoning?
yes, a zero nominal interest rate coupled with a 3 percent inflation rate yields a negative value for the real rate, which is the rate that is meaningful for investment decisions
is real income per capita more relevant in understanding differences in international living standards than real income per worker?
yes, as it conveys the conditions of the whole population including children and the elderly
Does the behavior of the unemployment rate illustrate the principle of co-movement discussed in the chapter>
yes, because when real GDP declines, unemployment increases
some barter Web sites allow the use of "barter dollars". The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified above?
yes, because you could both be paid in barter dollars.
when nominal interest rates have hit the zero lower bound, can central banks use interest rate to stimulate teh economy?
yes, but the mechanism by which central banks manipulate the interest rates that matter for spending must deviate from the banks traditional method yes, since the zero lower bound applies to nominal rates, not real rates, and it is real rates that are relevant for investment decisions.
might there be a similar effect for fiscal policy
yes, fiscal policy can be mismanaged and/or poorly timed, and the consequences may be worse since it is often imbued with political goals
excluding cases where banks had accumulated a lot of non-deposit liabilities that are not covered by FDIC insurance, would analysts generally agree that deposit insurance has been successful in preventing bank runs?
yes, since bank runs and bank failures have been relatively rare since the advent of deposit insurance
does the effectiveness of monetary policy depend on inflation expectations
yes, the central bank's ability to influence the long-term expected real interest rate is partly determined by the public's long-term expectations of the inflation rate
are the predictions of the quantity theory of money borne out by historical data?
yes, the long-run data show a one-for-one growth rate of money supply and inflation
the economist Alan Blinder said that any economist who mows his own lawn probably has not understood the concept of comparative advantage would you agree with professor blinder?
yes, the opportunity cost of the economists time is very high, so they should hire others to do those activities
you and your roommate are enrolled in the same course: Postmodern Deconstructionism. The course requires a term paper. since the professor encourages collaboration on the paper, you decide to work on it together, trading tasks in 8 hours you can type 29 pages, whereas your roommate can only type 19. if you do outlining instead of typing, in the same 8 hours you could produce 16 summary outlines of the course readings, while your roommate could only produce 9. ______ the absolute advantage in typing, and ______ the absolute advantage in outlining
you have, you have,
____________ should do the typing, and __________ should do the outlining you determine this allocation of tasks on the basis of ___________
your roommate, you, comparative advantage
