Econ 300 FINAL (Part 3)

Inflation is defined as:

An increase in the average level of prices. -Inflation is an increase in the average level of prices, not a change in any specific price.

The value of output in constant prices is measured by:

Real GDP. -Real GDP is the inflation-adjusted value of GDP; the value of output measured in constant prices.

Based on Table 12.1, what is the marginal propensity to save?

0.25 -If the MPC is 0.75 then the MPS is .25.

The reserve requirement directly limits the ability of banks to:

Make new loans -Banks cannot loan out all money they take in.

Assuming aggregate demand is represented by AD1, the equilibrium level of income in Figure 12.1 is:

$6.0 trillion -AD1 intersects with AS at $6.0 trillion.

In Table 10.2, what is the unemployment rate in Year 1?

20.0% -To calculate rate of unemployment subtract Number employed from the Labor Force the divide the difference by the total number of people in the labor force.

Which of the following is the appropriate fiscal policy during a recession?

A budget deficit -Whenever government expenditures exceed tax revenues a budget deficit exists.

If the price of computers falls during a period when the average price level remains constant, which of the following has occurred?

A change in relative prices -Relative price is price comparison of one good to another good.

Ceteris paribus, _______ in consumer confidence will cause _______ in aggregate demand.

A decrease; a decrease -A slowdown in consumer spending causes an inward shift of the AD curve.

In order to simplify market transactions, an economy must use:

A form of money. -The use of money greatly simplifies market transactions.

Ceteris paribus, which of the following changes in the aggregate demand curve best characterizes a cutback in exports?

A leftward shift -A leftward shift demonstrates the effect of a decline in exports.

One News Wire article in the text is titled "Fed Cuts Key Interest Rate Half-Point to 1 Percent." Which of the following is the Fed trying to accomplish as a result of this action?

A rightward shift of aggregate demand. -The Fed hopes to revive the economy and stimulate aggregate demand.

Frictional unemployment goes up when:

A worker quits one job in order to search for another. -Unemployment associated with a job search is frictional unemployment.

Inflation occurs when:

Aggregate demand increases faster than output. -If aggregate demand increases faster than output, prices tend to rise.

When the economy overheats, the government sometimes cools it down with higher taxes, spending reductions, and less money. Which of the following indicates the appropriate change in the U.S. economy after government intervention?

Aggregate demand shifts to the left -With higher tax etc., people become cautious about spending. Aggregate demand decreases.

The various quantities of output that all market participants are willing and able to buy at alternative price levels in a given time period is:

Aggregate demand. -Aggregate demand is the collective demand for all goods and services, rather than the demand for any single good.

The total amount of output producers are willing and able to produce at alternative price levels in a given time period is known as:

Aggregate supply. -Aggregate supply: The total quantity of output producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus.

Fiscal stimulus is:

An increase in government spending or a decrease in taxes. -Tax cuts or spending hikes intended to increase (shift) aggregate demand.

Fiscal policy includes:

An increase in government spending. -Fiscal policy includes government spending to help stimulate the economy.

Which of the following is true for U.S. banks?

Banks must keep only a fraction of total deposits as reserves. -Banks keep a fraction of deposits and loan out the rest.

Who among the following would be counted as unemployed?

Bob, a college student looking for summer work. -Bob is considered unemployed because he is over 16 and actively seeking work.

A tax cut can best be characterized as:

Both fiscal and supply-side policy. -A tax cut is a fiscal policy because it uses money and interest rates to alter economic outcomes. It is supply sided because tax cuts are designed to increase supply.

If the Fed wants to increase bank reserves, it can:

Buy bonds. -If the Fed offers to pay high prices for bonds, people will sell some of their bonds to the Fed. They will deposit the proceeds into their bank accounts.

The policy lever most commonly used by the Fed is:

Buying and selling bonds -If people hold more bonds and smaller bank balances, banks will have fewer reserves and less lending power. The Fed buys or sells bonds in order to alter the level of bank reserves.

Expenditure by households on final goods and services is referred to as:

Consumption. -Household consumption is defined as expenditure by consumers on final goods and services.

Most market transactions are made using:

Cash -As of 2010, $861 billion of the money supply was cash.

As the size of purchases becomes larger, a greater percentage of the purchases are made using:

Checks and debit cards. -Checks and debit cards are a safer way to make larger purchases rather than carry large sums of cash.

The uncertainty that results from inflation causes changes in:

Consumption, saving, and investment behavior. -Uncertainties of inflation may cause people to change their consumption, saving or investment behavior.

Almost all Internet purchases are paid for by:

Credit card -Because cash and checks don't work in cyberspace, almost all Internet purchases are completed with credit cards.

A stock person who is laid off by a department store because retail sales across the country have decreased is _______ unemployed.

Cyclically -Cyclical unemployment refers to the joblessness that occurs when there are simply not enough jobs to go around.

A reduction in the money supply should shift the aggregate:

Demand curve to the left. -People can't get the loans or credit they need to finance desired consumption or investment.

An increase in the amount of bank loans should shift the aggregate:

Demand curve to the right. -The loans banks offer to their customers will be used to purchase new cars, homes, business equipment, and other output.

By raising or lowering the ______, the Fed changes the cost of money for banks, which impacts the incentive to borrow reserves.

Discount rate -By raising or lowering the discount rate, the Fed changes the cost of money for banks and therewith the incentive to borrow reserves.

One News Wire article in the text has the title "Fed Cuts Key Interest Rate Half-Point to 1 Percent." The Fed has most likely reduced the:

Discount rate. -Discount rate is the interest rate the Fed charges to make direct loans to banks.

Monetary policy involves the use of federal government spending to change the money supply.

False -The use of money and credit controls to influence macroeconomic activity.

Both Keynesian and monetarist theories believe that _______ aggregate _______ causes inflation.

Excessive; demand -If excessive aggregate demand exists, many people will want to purchase goods and services. This could cause a shortage thus driving up the price and the end result is inflation.

If the aggregate supply curve is upward sloping, an increase in aggregate demand will cause an increase in output and no change in prices.

False -Whenever the aggregate supply curve is upward sloping, an increase in aggregate demand increases prices as well as output.

According to the real balances effect, when the price level:

Falls, cash is worth more and therefore people buy more. -When real incomes and wealth increase because of a decline in the price level, consumers respond by buying more goods and services.

When the Fed sells bonds, bank reserves increase.

False -By selling bonds, the Fed reduces bank reserves. This is an attempt to slow the growth in the money supply.

If the labor force has fewer of the skills required for the available jobs, cyclical unemployment increases, ceteris paribus.

False -If the labor force has fewer of the skills required for the available jobs, structural unemployment increases.

Output, jobs, and the price level are considered to be determinants of macroeconomic performance.

False -Internal market forces, external shocks and policy levers are the macro determinants.

Macroeconomics is the study of individual businesses and government agencies.

False -Macroeconomics is the study of aggregate economic behavior, of the economy as a whole.

Monetary policy emphasizes the role of money and interest rates in shifting the aggregate supply curve.

False -Monetary policy refers to the use of money and interest rates to alter economic outcomes by shifting aggregate demand.

Everyone is made worse off by inflation.

False -Not everyone suffers equally from inflation.

The rate of interest banks charge each other for lending reserves is the:

Federal funds rate. -Interbank borrowing is the federal funds market; and the interest rate banks charge each other is the federal funds rate.

Keynesian policy levers include:

Fiscal Policy -Fiscal policy is the use of government tax and spending powers to alter economic outcomes.

During the Great Depression, Keynes advocated the use of _____ policy to increase the _____ goods and services.

Fiscal; demand for -Keynes advocated aggressive use of fiscal policy, the deployment of the government's tax and spending powers to alter macro outcomes.

If you deposit $1,000 in your checking account, your bank is only required to hold a portion of the deposit and is allowed to lend out the balance. This illustrates the concept known as:

Fractional reserves. -Banks keep a fraction of deposits and loan out the rest.

A plumber quits his job in Dallas and moves to San Francisco where additional plumbers are needed, but it takes a couple of months for him to find a job. He is said to be:

Frictionally unemployed -Unemployment associated with a job search is frictional unemployment.

If consumers save 15 cents out of every dollar received, the:

MPS is 0.15. -The marginal propensity to save is 15 cents per additional dollar.

The basic money supply:

Includes currency and transactions accounts. -The basic money supply includes currency held by the public, plus balances in transactions accounts.

When calculating aggregate demand, government expenditure:

Includes spending by federal, state, and local governments on goods and services. -The federal government currently spends roughly $3 trillion a year and state and local governments collectively spend even more.

Which of the following is not a component of aggregate demand?

Income transfers -The components of aggregate demand are consumption, investment, government spending and net exports.

Which of the following is a fiscal policy prescription for ending a recession?

Increase government expenditures to let the multiplier work -When the government increases its spending, it creates additional income for market participants.

Refer to Figure 14.1. Suppose the Federal Reserve buys bonds in the open market. The money supply will _______ and cause a shift from ______.

Increase; AD1 to AD2 -When the Federal Reserve buys bonds from private investors, they purchase at a fairly high rate. The investors in return will place the money from the sell into transaction accounts that increases the money supply.

Ceteris paribus, based on the aggregate supply curve, if the price level _______ the quantity of real output _______ increases.

Increases; produced -Producers respond to wider profit margins by supplying more output.

If the current level of spending falls short of full employment, the government can close the GDP gap by:

Increasing government spending by an amount less than the GDP gap. -This will shift aggregate demand to the right.

Banks are most profitable when:

Loans are initiated -Banks earn profits from the creation of loans.

If consumers spend 98 cents out of every extra dollar received, the:

MPC is 0.98 -The marginal propensity to consume is .98 of every dollar.

Members of the Federal Reserve Board of Governors are appointed for one fourteen-year term so that they:

Make their decisions based on economic, rather than political, considerations. -They are not beholden to any elected official and will hold office longer than any president.

For a particular economy, the production possibilities curve shows the:

Maximum potential output. -Production possibilities is the alternative combinations of goods and services that could be produced in a given time period with all available resources and technology.

One explanation for why production costs tend to rise as output increases is that producers:

May have to pay overtime wages to workers. -Producers may have to pay overtime wages, raise base wages, and pay premium prices to get needed inputs.

Which of the following functions like money but is not included in M1?

Money-market mutual funds -Money market funds are held in a mutual fund pool.

According to the foreign trade effect, when the U.S. price level decreases, U.S. consumers are likely to buy:

More American-made products. -When American made outputs become cheaper; U.S. consumers will buy fewer imports.

Which of the following is true during the expansionary phase of the business cycle?

Real GDP increases -Real GDP measures value of output in constant prices. If real GDP expands then the economy is producing more goods and services.

If the federal government uses its budget to shift aggregate demand in an attempt to manage the macroeconomy, it is likely that the budget will:

Often be unbalanced. -By reducing/increasing tax revenues and increasing/decreasing expenditures simultaneously, the federal government will throw its budget out of balance.

The principal mechanism for directly changing the reserves of the banking system is:

Open market operations -The Fed purchases and sales of government bonds for the purpose of altering bank reserves.

In Figure 11.2, at what price level does equilibrium occur?

P3 -The price level where supply and demand intersects is at P3.

According to the text, which of the following is a determinant of macroeconomic performance?

Policy levers -Determinates of Macro performances are: internal market forces, external shocks, and policy levers.

Banks do all of the following except:

Print dollar bills. -Banks do not have the authority to print money.

Which of the following is not a possible source of last-minute reserves for a private bank?

Raising the discount rate. -Raising the discount rate is not a way banks can obtain funds to cover a temporary deficit in reserves.

Aggregate demand:

Refers to the collective behavior of all buyers. -Aggregate demand is defined as the total quantity of output demanded at alternative price levels in a given time period, ceteris paribus.

Which of the following is not part of M1 but is included in "near money" according to the text?

Savings accounts -Not all savings accounts are easily spendable.

Which of the following types of unemployment would best characterize a tax accountant's unemployment after tax returns are due?

Seasonal unemployment -Seasonal variations in employment conditions are a persistent source of unemployment.

If the Fed wants to decrease the money supply, it can:

Sell government bonds. -The Fed buys or sells bonds in order to alter the level of bank reserves.

The Federal Reserve Board of Governors has:

Seven members appointed by the president of the United States. -The seven members of the board are appointed by the president and confirmed by the U. S. Senate.

If money is used to transform current income into future purchases, it is functioning as a:

Store of value -Money held for future purchases serves the purpose of store of value.

Individual employment and training programs are levers most likely to be advocated by:

Supply-side economists. -Government subsidies for education and training are viewed as supply-side.

A budget deficit is incurred whenever:

Tax revenues fall short of expenditures over the fiscal year. -Whenever government expenditures exceed tax revenues, a budget deficit exist.

Which of the following serves as the central banker for private banks in the United States?

The 12 regional Federal Reserve banks. -Each of the 12 Federal Reserve banks acts as a central banker for the private banks in its region.

Which of the following individuals is part of the labor force?

The CEO of General Motors -The CEO is the only selection that meets the definition of someone in the labor force; over 16 and is being paid.

Which of the following requires U.S. banks to maintain a minimum reserve ratio?

The Federal Reserve -The Federal Reserve System requires banks to maintain some minimum reserve ratio.

Which of the following is responsible for providing currency and cash to banks?

The Federal Reserve System. -Banks hold very little cash in their vaults, they turn to the Fed to meet sporadic cash demands.

Which of the following is not a reason for the downward slope of the aggregate demand curve?

The cost effect -The downward-sloping demand curve is explained by three separate phenomena; real balances effect, foreign trade effect, and the interest-rate effect.

Which of the following is not a basic monetary policy tool used by the Fed?

The income tax rate -The income tax rate is not regulated by the Fed.

Ceteris paribus, if the Fed raises the reserve requirement, then:

The lending capacity of the banking system decreases. -Banks must hold more funds used for loans in reserve.

When calculating nominal GDP, the volume of output is measured using:

The market value. -Nominal GDP is the total value of goods and services produced within a nation's borders, measured in current prices.

The unemployment rate is calculated by dividing:

The number of unemployed by the size of the labor force. -The unemployment rate equals the number of unemployed people divided by the size of the labor force.

If an economy is experiencing a recession, the Keynesian approach to achieving full employment is to:

Use tax cuts or more government spending or both. -Keynes view is that the inherent instability of the marketplace required government intervention.

Excess reserves are calculated as:

Total reserves minus required reserves. -Excess reserves are bank reserves in excess of required reserves.

Which of the following is an essential function performed by banks?

Transferring funds from savers to spenders. -Banks transfer money from savers to spenders by lending funds (reserves) held on deposit.

The smallest component of the basic money supply is in the form of:

Traveler's checks. -As of 2010, travelers' checks account for only $5 billion of the total money supply.

Macroeconomics is the study of the economy as a whole.

True

By changing the reserve requirement the Fed can change the level of bank reserves and the lending capacity of the banking system.

True -A change in the reserve requirement also increases the money multiplier, and affects how large or small an amount of reserves a bank must hold.

If a person who works as a snowplow operator during the winter cannot find employment in the summer, this is an example of seasonal unemployment.

True -At the end of the snowplow season, the operator must go searching for new jobs.

"Full employment" means that some people in the labor force are still unemployed.

True -Because there will always be frictional unemployment there will always be people in the labor force who are unemployed.

Keynesian economists advocate active government policy during periods of high unemployment and low output.

True -Government intervention is needed to jump-start the economy.

Important measures of economic performance include economic growth, employment, and price stability.

True -Other terms for growth, employment and price stability are the three basic measures of macro performance which are Output (GDP) growth, unemployment and inflation.