Econ 110 Exam 3 Review

If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit) in the banking system as a whole of up to

$10,000

If Aggregate Expenditure is less than GDP, then

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

If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will decline, and GDP and employment will rise.

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will rise, and GDP and employment will decline.

inflation rate=

M-Y growth rate of the money supply-GDP

The Federal Reserve's narrowest definition of the money supply is

M1

T/F A rising price level decreases consumption by decreasing the real value of household wealth.

True

T/F If planned aggregate expenditure is less than real GDP, some firms will experience unplanned increases in inventories.

True

T/F Macroeconomic equilibrium can occur at any point on the 45-degree line.

True

T/F One drawback of the patent system is that firms must disclose to the public information about the product or process.

True

T/F One reason why many low-income countries experience low rates of growth is because of low rates of saving and investment in those countries.

True

T/F Technological change is the key to sustaining economic growth.

True

In the long run, a country will experience an increasing standard of living only if it experiences

continuous technological change.

Corruption

curtails economic growth Corruption is dishonest or fraudulent conduct by those in power, typically involving bribery.

In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services.

equals

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

equilibrium real GDP; autonomous expenditure

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

expansion; cash flow NOT government spending

An economic growth model

explains changes in real GDP per capita in the long run.

Creative destruction means that

firms develop new products that replace old products in the economy, thereby encouraging economic growth.

The purchase or building by a corporation of a facility in a foreign country is called

foreign direct investment

The purchase by an individual or firm of stock or bonds issued in another country is called

foreign porfolio investment

When firms benefit from the results of research and development they didn't pay for, we say firms

free ride

Commodity Money

goods used as money that also have value independent of their use as money—like animal skins or precious metals.

Which of the following policies is designed specifically to directly promote technological change in an economy?

government subsidization of research and development NOT tax incentives to promote investment in 401K plans laws to strengthen property rights a vaccination program to combat infectious diseases

From 1990-2014, productivity growth in the United States was ________ the growth rates of other high-income countries.

greater than

Countries that are more globalized tend to have

higher growth rates in real GDP per capita

T/F Economies cannot function without money

False

T/F The difference between consumer surplus and producer surplus in a market is equal to the deadweight loss.

False

T/F Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports.

False; PLANNED

T/F A series of bank runs in a country should have no effect on M1 as money simply moves from checking deposits to currency.

False; a bank run is when everyone withdraws their money at the same time.

T/F An increase in the price level in the United States will reduce imports and increase exports.

False; an increase in price level will decrease exports

T/F The purchase of stocks and bonds issued in another country is known as foreign direct investment.

False; foreign portfolio investment

Globalization is defined as the process of countries becoming ________ open to foreign trade and ________ open to foreign investment.

more; more

The small group of East Asian countries that experienced high rates of growth in the 1980s and 1990s are referred to as

newly industrializing countries.

Knowledge capital is ________ in production and ________. As a result, firms ________ free ride.

nonrival; nonexcludable; can

Credit card balances are

not part of the money supply

In the United States, currency includes

paper money and coins in cirrculation

What is the difference between planned investment and actual investment

planned investment does not take into account inventories

Decreases in the price level will

raise consumption because real wealth increases.

Fiat Money

refers to any money, such as paper currency, that is authorized by a central bank or governmental body and that does not have to be exchanged by the central bank for gold or some other commodity money.

Suppose the reserve ratio is RR. Then,

required reserves= RR X deposits

Excess Reserves

reserves over the legal requirement.

Required Reserves

reserves that a bank is legally required to hold, based on its checking account deposits.

Commodity money is a good

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

The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is

vertical

A major source of inefficiency in barter economies is that they require

a double coincidence of wants in exchange double coincidence means that you both want what the other has, so it works

A good can serve as money only if

citizens accept the good as a means of payment for transactions and debts.

To increase the money supply, the Federal Reserve could

conduct an open market purchase of Treasury securities.

Globalization is positively associated with

economic growth

Suppose that in 2016, real GDP grew in Estonia by 3% and the population increased by 5%. Therefore, in 2016, Estonia experienced

economic growth, but not an increase in economic living standards

At macroeconomic equilibrium,

total spending equals total production.

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 AE=C+PI+G+NX NOT unplanned investment

If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by

$5 million Consumption=(MPC)(disposable income) C=MD

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A can make a maximum loan of

$8,000

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

0.1 MPS= (C2-C1)/(Y2-Y1)

Given the consumption schedule in the table above, the marginal propensity to save is Consumption (dollars) Disposable Income (dollars) $600 $1,000 900 1,500 1,200 2,000

0.6 MPS= Change in consumption/Change in income 600/1000 900/1500 1200/2000

MPC+MPS=

1

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

1. open market operations 2. discount policy 3. reserve requirements.

How to calculate the multiplier

1/ (1-MPC) Therefore; the smaller the MPC, the larger the mulitplier

A general formula for the multiplier is

1/MPS

If the required reserve ratio is RR, the simple deposit multiplier is defined as

1/RR

What is the formula for the Simple Deposit Multiplier?

1/RR

During which of the following periods was growth in GDP per capita the strongest?

1900-2000 A.D. lots of technological change

Growth in real GDP per hour worked in the United States was slowest during what period of time?

2006-2014

If an economy is growing at a rate of 2.5% per year, how long will it take the economy to double in size?

28 years

According to the quantity theory of money, 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

4% inflation rate= growth rate of money supply-growth rate of real output (GDP)

How can freedom of the press promote economic growth?

A free press can act as a watchdog for corruption, increasing chances for economic growth.

Aggregate Expenditure Model

A macroeconomic model that focuses on the short-run relationship between total spending and real GDP, assuming that the price level is constant.

Quantity Theory of Money

A theory about the connection between money and prices that assumes that the velocity of money is constant. M + V=P(inflation rate/price level) + Y

What are the components of Aggregate Expenditure?

C+PI+G+NX

Which of the following is not counted in M1?

Credit card balance These ARE counted in M1 checking account balances coins in circulation currency in circulation

New Growth Theory

Developed by Paul Romer. It is a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system.

When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing

Diminishing Returns

Suppose that in 2016, real GDP grew in Estonia by 3% and the population increased by 5%. Therefore, in 2016, Estonia experienced

Economic Growth, but not an increase in living standards

The Industrial Revolution began in

England around 1750

T/F Human capital refers to the percentage of the working-age population in the labor force.

False; human capital is the skills, knowledge, and experience possessed by an individual or population, viewed in terms of their value or cost to an organization or country.

T/F Liquidity increases as we move from M1-M2

False; it decreases

T/F When net exports equal zero, the economy is in macroeconomic equilibrium.

False; macroeconomic equilibrium is when market supply and market demand balance eachother

T/F Over the last three decades in the United States, services have become a smaller fraction of GDP relative to goods.

False; services have become a larger fraction of GDP relative to goods

T/F The marginal propensity to consume measures the average amount of wealth that a consumer spends in a given period of time.

False; the MPC is change in consumption/ change in income

T/F A person's wealth is the same as his income.

False; wealth is the value of the assests a person owns. It is an accumulation of resources

T/F An economy without money would have no exchanges of goods and services.

False; you can barter with other things

In a small economy in 2016, 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 2016. NOT Aggregate expenditure is always less than GDP in developed countries. Firm investment in inventories was less than anticipated in 2016. Aggregate expenditure is always less than GDP in developing countries.

The best measure of a country's standard of living is

GDP per capita

The economic growth model pedicts

GDP per capita of poor countries will grow more rapidly than in rich countries.

In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million, assuming no technological change and no change in the hours of work?

GDP would increase further, but by less than $1 million.

If real GDP per capita in the United States is $8,000 in 2016, and if real GDP per capita is $12,000 in 2026, what is the total percent change in the growth rate of GDP per capita between 2016 and 2026?

GDP2/GDP1 X100 50%

Cash Flow

How firms often pay for investments the difference between the cash revenues received by a firm and the cash spending by the firm.

T/F A cash withdrawal reduces deposits, reserves, and excess reserves in the banking system.

True

Which of the following can explain why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita?

Many of these developing countries do not have a functioning court system that can enforce laws. Countries that are relatively poor are more likely to experience wars and revolutions. Countries that are relatively poor are likely to have a lower quality of health care.

Unit of Account

Money allows a way of measuring value in a standard manner.

Store of Value

Money allows people to defer consumption till a later date by storing value. Other assets can do this too, but money does it particularly well because it is liquid, easily exchanged for goods.

Standard of deferred payment

Money facilitates exchanges across time when we anticipate that its value in the future will be predictable.

Medium of Exchange

Money is acceptable to a wide variety of parties as a form of payment for goods and services.

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

Which of the following countries had the highest GDP per capita in 2014?

Qatar

On the 45-degree line diagram, the 45-degree line shows points where real aggregate expenditure equals

REAL GDP

If the slope of the per-worker production function is 1/2 in a given range, how will a $10,000 increase in capital per hour worked affect real GDP per hour worked in the same given range?

Real GDP per hour worked will increase by $5,000.

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

The British government was able to more easily seize wealth. it IS The British government was committed to upholding private property rights. The British government was able to eliminate arbitrary increases in taxes. Institutional changes by the British government helped protect wealth.

All of the following statements are true about the multiplier except

The multiplier is a value between zero and one it IS the multiplier rises as the MPC rises. the smaller the MPS, the larger the multiplier. the multiplier effect occurs when autonomous expenditure changes.

Paul Romer, an economist at Stanford, is most clearly associated with which economic idea?

The new growth theory The new growth theory argues that real GDP per person will perpetually increase because of people's pursuit of profits.

When aggregate expenditure is less than GDP, which of the following is true?

There was an unplanned increase in inventories. it is NOT Firms spent more on capital goods than they anticipated. Households bought more new homes than they anticipated.

Which of the following is not one of the four main categories of spending identified by John Maynard Keynes?

Transfer payments These ARE main categories of spending consumption planned investment government purchases

T/F The Fed can change the money supply more quickly by using open market operations as compared to discount policy.

True; Open market operations refers to the buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system, facilitated by the Federal Reserve (Fed). Money supply is the total amount of money in circulation in a county Discount policy is policy taken by the central bank to increase and decrease the money circulation by raising or lowering bank rates.

T/F If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts a price deflation.

True; inflation rate=M-Y

T/F "The distribution of income should be determined by the government" is an example of a normative economic statement.

True; normative statements are "should be" statements. They cannot be proven true or false

T/F The larger the MPS, the smaller the value of the multiplier.

True; the MPS and the multiplier have an inverse relationship

M2

a broader definition of the money supply: it includes M1, plus savings account deposits, small-denomination time deposits, balances in money market deposit accounts, and noninstitutional money market fund shares.

Which of the following is an example of a human capital?

a college education NOT a computer a factory building a software update

A central bank can help stop a bank panic by

acting as a lender of last resort

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 can result from

actual investment that is greater than planned investment.

An unplanned decrease in inventories will cause

actual investment which is less than planned investment

Banks can continue to make loans until

actual reserves equal their require reserves

Which of the following is not one of the three sources of technological change?

additional amounts of existing capital The three sources are: better machinery and equipment increases in human capital better means of organizing and managing production

The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure.

aggregate demand curve

Marginal Propensity to Save

amount by which savings changes over income

Money is

an asset that people are willing to accept in exchange for goods and services.

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

an increase in government purchases NOT an increase in the value of the dollar an increase in the price level an increase in interest rates

If the price of prime rib falls, the income effect due to the price change will cause

an increase in the QUANTITY of prime rib demanded.

If a decrease in income leads to an increase in the demand for macaroni, then macaroni is

an inferior good

In economics, money is defined as

any asset people generally accept in exchange for goods and services.

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Why do some firms choose not to file for a patent and instead try to keep the results of their research a trade secret?

because firms must disclose information about the product or process being patented in a patent application

How do you calculate MPC

change in consumption/change in disposable income

Investment spending includes spending on

changes in business inventories

The required reserves of a bank equal its ________ the required reserve ratio.

deposits multiplied by

When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing

diminishing returns

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

insuring deposits in the banking system It DOES acting as a lender of last resort acting as a banker's bank performing check clearing services

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

insuring deposits in the banking system it DOES acting as a lender of last resort acting as a banker's bank performing check clearing services

If AE>GDP, then what will happen to inventories and employment?

inventories will decrease, and employment will rise

If AE<GDP, then what will happen to inventories and employment?

inventories will increase and employment will decrease

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

A commercial bank like Comerica creates money by

making loans

The additional cost to a firm of producing one more unit of a good or service is the

marginal cost

The Industrial Revolution

marked the beginning of significant economic growth in the world.

An explanation for the productivity slowdown from 1974 through 1995 is

measurement problems

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

sell U.S. Treasury Securities. U.S. Treasury securities—such as bills, notes and bonds—are debt obligations of the U.S. government. When you buy a U.S. Treasury security, you are lending money to the federal government for a specified period of time. Open market operations (OMO) refers to the buying and selling of government securities in the open market

The ________ the reserve ratio, the ________ the money multiplier.

smaller; larger

A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money?

standard of deferred payment

Examples of assets that are included in household wealth would be

stocks, bonds, and saving accounts

The Federal Reserve was established in 1913 to

stop bank panics by acting as a lender of last resort.

Which of the following functions of money would be violated if inflation were high?

store of value

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 A store of value is the function of an asset that can be saved, retrieved and exchanged at a later time, and be predictably useful when retrieved.

According to new growth theory,

technological change is influenced by economic incentives.

What is comparative advantage

the ability to produce a GOOD OR SERVICE at a LOWER opportunity cost than any other producer.

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

the aggregate expenditure model

Marginal Propensity to Consume (MPC)

the amount by which consumption spending changes when disposable income changes. The marginal propensity to consume is the slope of the consumption function.

The slope of the consumption function is equal to

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

Net worth is

the difference between a firms assets and liabilities what they make-what they have to spend=how much they make

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.

Which of the following advances contributed to the "new economy" of the mid-1990s?

the increased use of the Internet in selling products and services expanded cell phone use the lower cost and increased availability of laptop computers

Which of the following would you expect to result in faster economic growth?

the invention of new computers that increase labor productivity NOT the invention of new computers that increase labor productivity a decrease in the average level of education in the economy a decrease in the stock of capital per worker a decrease in research and development spending

Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time college students. This would cause

the labor force participation rate to decrease.

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

Required Reserve Ratio

the minimum fraction of deposits banks are required by law to keep as reserves.

M1

the narrowest definition of the money supply: the sum of currency in circulation, checking account deposits in banks, and holdings of traveler's checks.

Catch-up

the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries.

Simple Deposit Multiplier

the ratio of the amount of deposits created by banks to the amount of new reserves.

Consumption Function

the relationship between consumption spending and disposable income.

Per-worker production function

the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant. the first unit of capital would create the most return, and then after that you would be experiencing diminishing returns

The more excess reserves banks choose to keep,

the smaller the deposit multiplier

The more excess reserves banks choose to keep,Q

the smaller the deposit multiplier

The quantity theory of money was derived from the quantity equation by asserting that

the velocity of money was fixed.

Which of the following is an example of an economic trade-off a firm has to make?

whether it is cheaper to produce with more machines or with more workers NOT deciding why consumers want its products whether or not consumers will buy its products deciding what profit margin it desires for its products

If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially, the money supply

will not change