ECON FINAL EXAM STUDY GUIDE

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During a​ year, a​ firm's net investment is ​$5,600 and depreciation is ​$1,400 What is the​ firm's gross investment?

$7,000

the money price of a box of ramen noodles is $0.50 and the money price of a jar of pasta sauce is $2.00. The opportunity cost of a jar of pasta sauce is The relative price of a jar of pasta sauce is an opportunity cost because​ ______.

4.00 boxes of ramen noodles​,which is the relative price of a jar of pasta sauce the relative price tells us how many boxes of ramen noodles we must give up to get a jar of pasta sauce

According to RBC​ theory, a fall in productivity growth brings a decrease in investment​ demand, a decrease in the demand for loanable​ funds, and a decrease in the real interest rate. It also brings a decrease in the demand for​ labor, a decrease in the supply of​ labor, a decrease in​ employment, and a decrease in the real wage rate.

According to RBC​ theory, a fall in productivity growth brings a decrease in investment​ demand, a decrease in the demand for loanable​ funds, and a decrease in the real interest rate. It also brings a decrease in the demand for​ labor, a decrease in the supply of​ labor, a decrease in​ employment, and a decrease in the real wage rate.

A recessionary gap eventually emerges even if aggregate demand remains constant because over time​ ______.

potential GDP increases

The mainstream business cycle theory is that​ ______ grows at a steady rate while​ ______ grows at a fluctuating rate.

potential​ GDP; aggregate demand

The aggregate demand curve shows the relationship between the quantity of real GDP demanded and​ ______ when everything else remains the same.

price level

A movement along the aggregate demand curve occurs if​ _______.

price level changes and all other factors remain the same

If the demand curve for bikes shifts leftward and the supply curve for bikes shifts​ rightward, the equilibrium

price of bikes definitely decreases.

The combination of a rising​ _____ and decreasing​ _____ is called stagflation.

price​ level; real GDP

Aggregate expenditures include all of the following EXCEPT: -purchases of intermediate goods. -purchases of a piece of capital equipment -consumption of food -purchases of guns by govt.

purchases of intermediate goods.

The defining feature of the Keynesian view of macroeconomics is that the economy is​ ______.

rarely at full employment

Labor productivity is defined as

real GDP per hour of labor.

Aggregate demand is the relationship between the quantity of​ _____ demanded and the​ _____ when all other influences on expenditure plans remain the same.

real GDP; price level

The main criticisms of RBC theory include all of the following except​ ______.

real business cycle theory relies too heavily the role of money in the economy to make its predictions

n the long​ run, the money wage rate​ ______, short-run aggregate supply​ ______, and the economy returns to a​full-employment equilibrium.

rises; decreases

Flights to Paris are a normal good and​ people's incomes rise. At the same​ time, the price of jet fuel rises. The equilibrium price of a flight to Paris​ ________ and the equilibrium quantity of flights to Paris​ ________.

rises; might​ increase, decrease, or not change

The defining feature of the classical view of macroeconomics is that the economy is​ ______.

self-regulating and always at full-employment

The defining feature of the monetarist view of macroeconomics is that the economy​ is______.

self-regulating and that it will normally operate at full​ employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady

When the money wage rate rises ​_______. When the price level in India increases​ _______.

short run aggregate supply decreases; quantity of real gap supplied

A supply curve that illustrates the law of supply​ _______.

shows that the quantity supplied increases as the price rises

In mainstream business cycle​ theory, the money wage rate is

sticky

Which of the following measurements of inflation tracks the rate at which infrequently changed prices are​ changing?

sticky-price CPI

Real GDP is calculated by​ _______.

summing together the value of the years production using the prices of the reference base year.

An assumption of neoclassical growth theory is that

technology change is random

Which of the following statements illustrate fiscal policy​?

the US government has proposed a hike in corporate tax

Because of the choices people make in the pursuit of​ profit, new growth theory argues that

the economy can enjoy a period of indefinite growth.

Aggregate demand will increase if​ ______.

the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect of the​ housing, credit, and financial crises

Russell studies instead of playing tennis. The opportunity cost to him of studying is

the forgone value of playing tennis.

The marginal benefit that Veronica receives from the second taco is​ _______.

the maximum amount she is willing to pay for the second taco

Marginal cost of a good is​ _______

the opportunity cost of producing one more unit of it

When the price level in Mexico falls, ​_______.

the quantity of real GDP demanded in Mexico increases (along curve)

The nominal interest rate approximately equals which of the​ following?

the real interest rate plus the inflation rate

Full employment occurs when the

the unemployment rate equals the natural unemployment rate

If the price of chocolate chip cookies​ rises, then

there is a movement upward along the demand curve for chocolate chip cookies.

Business cycles are

unpredictable, but always have two phases and two turning points.

Why does the aggregate demand curve slope​ downward? The aggregate demand curve slopes downward because​ _______.

wealth effect and the substitution effect.

In​ ______ cycle​ theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand. In​ ______ cycle​ theory, fluctuations in both investment and consumption​ expenditure, driven by fluctuations in the growth rate of the quantity of​ money, are the main source of fluctuations in aggregate demand.

​Keynesian; monetarist

When the inflation rate exceeds the expected​ rate, the economy behaves like it does in a​ ______ inflation: The price level is higher than expected and real GDP​ ______ potential GDP.

​demand-pull; rises above

The increase in investment​ ______ aggregate demand. The decrease in government spending​ _______ aggregate demand.

​increases; decreases

The fall in the average weekly wage rate​ ______ short-run aggregate supply and​ ______ long-run aggregate supply.

​increases; does not change

Gross Domestic Product for the First Quarter of 2017 The increase in real GDP in the first quarter primarily reflected increases in personal consumption​ expenditures, exports, and investment. Government spending decreased. ​Source: Bureau of Economic​ Analysis, June​ 29, 2017 Explain how the items in the news clip influence U.S. aggregate demand. The increase in the personal consumption expenditures​ ______ aggregate demand. The increase in exports​ ______ aggregate demand.

​increases; increases

The fall in the minimum wage​ ______ short-run aggregate supply and​ ______ long-run aggregate supply.

​increases; increases

If the price level rises and the money wage rate remains​ constant, the quantity of real GDP supplied​ ______ and there is a movement up along the​ ______ aggregate supply curve.

​increases; short-run

In Keynesian cycle theory​, fluctuations in​ _____ driven by fluctuations in business confidence​ - summarized by the phrase​ "animal spirits"​ - are the main source of fluctuations in​ _____.

​investment; aggregate demand

Krugman on Monetary and Fiscal Policy Nobel Laureate economist Paul Krugman has launched an​ all-out attack on the monetary policy actions and inactions of Fed Chairman Ben Bernanke. Bernanke has increased the quantity of money by historically large amounts and in​ mid-2012 was cautiously trying to determine whether more stimulation was needed. Krugman says Bernanke is too cautious and should print money faster and move the inflation rate upward. Krugman also wants Congress to cut taxes and increase spending. Based on this news​ clip, Paul Krugman most likely follows the​ ______ school of thought and Ben Bernanke most likely follows the​ ______ school of thought.

D. Keynesian or new​ Keynesian; Keynesian or new Keynesian

If Geoffrey and Hermione devote equal amounts of time and effort to making​ pretzels, Geoffrey produces more units than Hermione. This information tells us that

Geoffrey has an absolute advantage in producing pretzels.

In monetarist cycle theory​, fluctuations in both​ _____, driven by fluctuations in the growth rate of the quantity of​ money, are the main source of fluctuation in aggregate demand.

Investment and consumption expenditure

In more than a year of​ campaigning, Barack Obama has made a long list of promises for new federal programs costing tens of billions of dollars. Obama has said he would strengthen the​ nation's bridges and dams​ ($6 billion a​ year), extend health insurance to more people​ (part of a​ $65-billion-a-year health​ plan), develop cleaner energy sources​ ($15 billion a​ year), curb home foreclosures​ ($10 billion in​ one-time spending) and add​ $18 billion a year to education spending. In total a​ $50-billion plan to stimulate the economy through increased government spending. A different blueprint offered by McCain proposes relatively little new spending and tax cuts as a more effective means of solving problems. Based on this news​ clip, Barack Obama most likely follows the​ ______ school of thought and John McCain most likely follows the​ ______ school of thought.

Keynesian or new​ Keynesian; classical or new classical

Treasury Secretary Timothy Geithner is reported as having said that the United States can no longer rely on consumer spending to be the growth engine of recovery from recession. Washington needs to plant the seeds for business investment and exports.​ "We can't go back to a situation where​ we're depending on a near​ short-term boost in consumption to carry us​ forward," he said.

Keynesian school of thought if he is recommending an active policy of tax cuts to combat the recession

The two main official measures of money in the United States today are​ ______. The two main official measures of money in the United States​ ______ really money.

M1 and​ M2; are

The opportunity cost to produce 1 pretzel for Mark is 2 cookies. For​ Jessica, the opportunity cost to produce 1 pretzel is 3 cookies. From this​ information, we know that

Mark has a comparative advantage in pretzel production.

When the U.S. economy goes into a recession, a ​______.

Mexico's exports to the United States decrease ​Mexico's aggregate demand decreases and​ Mexico's AD curve shifts leftward

Which of the following statements illustrate monetary policy​?

Monetary policy includes changing the quantity of money and the interest rate. The fact that the Fed has raised the federal funds rate by 0.3​ percent, implies a change in the interest rate. So it illustrates monetary policy.

Defenders of RBC theory claim all of the following except ​______

RBC theory is consistent with a negligible intertemporal substitution effect

Which business cycle theory would say that the second economist is correct and​ why? ​______ business cycle​ theory, because it says unemployment is​ ______ .

Real; structural, caused by technological shocks that decrease aggregate supply

What must happen to create a​ demand-pull inflation​ spiral?

The quantity of money must persistently increase.

consider the market for broccoli. if the price of a pound of broccoli increases, what happens to the supply of broccoli?

The supply of broccoli increases

Which of the following questions is a macroeconomic​ issue?

What is the future growth prospect for an​ economy?

Describe the policy change that a classical​ macroeconomist, a​ Keynesian, and a monetarist would recommend for U.S. policymakers to adopt in response to each of the following​ events: a. Growth in the world economy slows. b. The world price of oil rises. c. U.S. labor productivity declines.

a classical and monetarist recommend that taxes

A​ cost-push inflation begins when an increase in the money wage rate or an increase in the money prices of raw materials brings ​ ______ .

a decrease in​ short-run aggregate supply

Economic growth results from​ ______.

a growing supply of labor and increasing labor productivity, which increases long-run aggregate supply

A rise in the money wage rate with no change in potential GDP creates​ ______.

a leftward shift of the SAS curve and no change in the LAS curve

If as Stephens income decreases, his demand for leather gloves decreases, then for Stephen, leather gloves are ​_______.

a normal good

Inflation results from​ ______.

a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply

Describe three types of​ short-run macroeconomic equilibrium. A macroeconomic equilibrium in which real GDP exceeds potential GDP is​ _____ equilibrium. And one in which real GDP is less than potential GDP is​ _____ equilibrium.

above full​-employment​; below full​-employment

An inflation that starts because​ _____ is called ​demand-pull inflation.

aggregate demand increases

A​ demand-pull inflation begins with​ _______.

an increase in aggregate demand

Which of the following always raises the equilibrium​ price?

an increase in demand combined with a decrease in supply

According to the quantity theory of​ money, in the long run

an increase in the quantity of money creates an increase in prices but no additional increase in real GDP.

If aggregate demand grows faster than potential​ GDP, ______ gap emerges and if it grows more slowly than potential​ GDP, ______ gap emerges.

an​ inflationary; a recessionary

Discouraged workers​ ________ counted as officially unemployed because they​ ________.

are​ not; are not actively seeking work

The consumer price index​ (CPI)

compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.

An inflation that is kicked off by an increase in​ _____ is called ​cost-push inflation.

costs

event 3

decreases aggregate demand

The following events have occurred at times in the history of the United​ States: 1. A deep recession hits the world economy 2. The world oil price rises sharply 3. U.S. businesses expect future profits to fall Explain the effect of each of the following events on aggregate supply and aggregate demand in the United States. Event 1​ ______. Event 2​ ______.

decreases aggregate​ demand; decreases​ short-run aggregate supply

A rise in the wage rate​ _______.

decreases short run aggregate supply and does not change long run aggregate supply

Paychecks in Kansas are​ growing, according to the U.S. Department of Labor. Jacqueline​ Midkiff, with the​ department's office in Kansas​ City, says the average overall increase across the board through the​ Midwest, is 1.9 percent over this time last​ year, while inflation grew at 1.4 percent for the same time period. The​ "average overall increase across the​ board" wage increase​ _______.

decreases short run-supply because it increases firms' costs

How do a decrease in the quantity of money and an increase in expected future income change aggregate​ demand? Aggregate demand​ _______ when a decrease in the quantity of money occurs. Aggregate demand​ _______ when an increase in expected future income occurs.

decreases; increases

A rise in wages in China​ _______ .

decreases​ China's short-run aggregate supply and the quantity of real GDP supplied does not change

An open market sale of securities by the Fed

decreases​ banks' reserves and increases​ banks' securities.

In new classical cycle theory​, the rational expectation of the price​ level, which is determined by potential GDP and expected aggregate​ _____, determines the​ _____ and the position of the SAS curve.

demand; money wage rate

If the price level and the money wage rate rise by the same​ percentage, the quantity of real GDP supplied​ ______ and there is a movement up along the​ ______ aggregate supply curve.

does not​ change; long-run

A rational expectation is a forecast that results from the use of all the relevant data and​ _____.

economic science

An increase in labor productivity increases potential GDP because​ ______.

employment increases and a given amount of employment produces more real GDP

According to RBC​ theory, the source of the business cycle is​ _______, which result mainly from​ _______.

fluctuations in​ productivity; fluctuations in the pace of technological change

The law of supply states that other things remaining the​ same, the​ _______ the price of a​ good, the​ _______.

higher; greater is the quantity supplied

Gustavo graduates from college and his income increases by $20,000 a year. nothing else changes. Gustavo decreases the quantity of T-shirts and bread rolls that he buys and increases the quantity of hot caramel apple cider that he buys. For Gustavo,

hot caramel apple cider is a normal good

The Fed is the lender of last​ resort, which means​ _______.

if depository institutions are short of​ reserves, they can borrow from the Fed

Which of the following is NOT one of the​ Fed's monetary policy​ tools? -required reserve ratio -last resort loans -income tax rate -buying and selling us securities

income tax rate

An increase in the demand for computers and a decrease in the number of sellers of computers will​ ________.

increase the price of a computer

T-shirts and tank tops are substitutes IF the price of a t-shirt increases, the demand for tank tops will

increase, and the demand curve for tank tops will shift rightward

When Canada sets new environmental standards that require power utilities to upgrade their production​ facilities, Canada's aggregate demand​ _______.

increases

When Mexico increases the quantity of​ money, Mexico's aggregate demand​ ______.

increases and its AD curve shifts rightward

The Fed increases the quantity of money and all other things remain the same. Explain the effect of the increase in the quantity of money on aggregate demand in the short run. In the short​ run, aggregate demand​ _______.

increases because interest rates fall and it is it easier to get a loan to buy homes and large consumer goods

An increase in exports of goods or services with no change in imports of goods or services

increases GDP.

Starting from a​ full-employment equilibrium, an increase in aggregate demand​ ______, and creates​ ______ gap.

increases real GDP above potential​ GDP; an inflationary

Starting from a​ full-employment equilibrium, a decrease in​ short-run aggregate supply​ ______ the price level and​ ______ potential GDP.

increases; decreases real GDP below

When the government of Canada cuts income​ taxes, Canada's aggregate demand​ _______. When the United States experiences strong economic​ growth, Canada's aggregate demand​ _______.

increases; increases

Explain how a rise in labor productivity and wages in China will influence the quantity of real GDP supplied and aggregate supply in China. A rise in labor productivity​ _______.

increases​ long-run aggregate supply and​ short-run aggregate supply

Which of the following pairs does not​ match?

land; profit

Because of the biases in calculating the​ CPI, actual inflation is

less than the measured inflation rate.

When potential GDP​ increases, ______.

long-run aggregate supply and​ short-run aggregate supply increase. The LAS and the SAS curve shift rightward

Which business cycle theory would say that the first economist is correct and​ why? ​______ business cycle​ theory, because it says unemployment is caused by too little aggregate​ ______ .

mainstream; demand

In any​ year, the real GDP of an economy

may be greater or less than potential GDP.

In any​ year, real GDP

might be greater or less than potential GDP.

The required reserve ratio is the ​______.

minimum percentage of deposits that depository institutes are required to hold as reserves

An increase in the real interest rate results in a

movement along the supply of loanable funds curve.

In​ ______ cycle​ theory, the rational expectation of the price​ level, which is determined by potential GDP and expected aggregate​ demand, determines the money wage rate and the position of the SAS curve. In​ ______ cycle​ theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.

new classical; new key

In calculating​ GDP, household production is

not included because there is no market transaction

The​ Fed's three policy tools are​ _______.

open market​ operations, last resort​ loans, and the required reserve ratio

Because pollution reduces economic​ welfare, on this count real GDP

overstates economic welfare.

The new Keynesian cycle theory emphasizes the fact that​ today's money wage rates were negotiated at many past​ dates, which means that​ _____ rational expectations of the​ _____ price level influence the money wage rate and the position of the SAS curve.

past; current

Keynesian macroeconomists recommend​ ______.

policies that actively offset changes in aggregate demand that bring recession

Monetarist macroeconomists recommend​ ______.

policies that keep taxes low to avoid disincentive effects that decrease potential GDP

Classical macroeconomists recommend​ ______.

policies that minimize the disincentive effects of taxes on​ employment, investment, and technological change

In one​ hour, Sue can produce 60 caps or 18 jackets and Tessa can produce 60 caps or 24 jackets. Sue's opportunity cost of producing a cap is​ ______ jackets and​ Tessa's opportunity cost of producing a cap is​ ______ jackets. ​______ has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 3 caps, ___

0.3;0.40 Sue; both Sue and Tessa gain

At one point along a PPF, 50 tons of coffee and 100 tons of bananas are produced. At another point along the same PPF, 30 tons of coffee and 140 tons of bananas are produced. The opportunity cost of a ton of coffee between these points is

2 tons of bananas


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