Final Exam
Every society faces trade-offs because we live in a world of scarcity. Suppose a student-athlete has the opportunity to earn $800,000 next year playing for a minor league baseball team, $300,000 next year playing for a European professional football team, or $0 returning to college for another year. The opportunity cost of the student-athlete returning to college next year is _____.
$800,000.
Three Key economic ideas
1. People are rational 2. People respond to economic incentives 3. Optimal decisions are made at the margin
Your father earned #34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2008 if the CPI in 2008 is 215 and CPI in 1984 was 104?
34000/104=?/215 or 34000*215/104 = 70,288
Which of the following transactions is not counted in GDP?
A consumer repairs her own car.
Which of the following is an example of an expansionary fiscal policy? Suppose the government decrease taxes. Use the AD and AS model to show the effects of the decrease in taxes on the economy.
A decrease in taxes. AD shifts right.
What do economists mean by market equilibrium?
A market outcome where quantity supplied is equal to quantity demanded.
The following graph shows AD and SRAS. Show the effect of an increase on taxes.
AD shifts left.
The following graph shows AD and SRAS. Show short-run effect of an increase in govt spending.
AD shifts right.
In the year 2000, the country of Economika was in long-run macroeconomic equilibrium, as shown in the graph below. The full-employment level of GDP in 2000 was $5bil. In 2001, the following occurred. Growth in factors of production and technology caused potential GDP to rise to $6bil Consumers became more pessimistic about the future, and thus AD was not as large. There was a sharp and unexpected increase in the price of oil.
AD shifts right; SRAS shifts left; LRAS shifts right.
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from _____. The new short-run macroecon occurs at _____. Long-run adjustment will shift the SRAS curve from _____ as workers adjust to lower-than-expected prices. The new long-run macroecon occurs at _____.
AD0-AD1 (shift left) Point B SRAS-SRAS1 (shift right) point C, below A on LRAS.
The graph to the right shows the Keynesian cross. The economy is currently in macroeconomic equilibrium at output level Y0. Suppose that the price level decreases.
AE shifts left (up).
The graph below shows a 45degree-line (Keynesian cross) diagrem. The economy is currently in macroeconomic equilibrium at output level Y0 (vertical dotted line) Suppose investment increases
AE shifts up (left)
Which of the following statements is correct?
Actual investment will equal planned investment only when there is no unplanned change in inventories.
Some economists argue that the "new economy" has led to an increase in US productivity growth since 1995. What caused the development of the "new economy"?
Advances in information technology.
The diagram to the right shows a 45degree-line (Keynesian cross) diagram. Use the point tool to select a point on the expenditure line where: inventories are rising.
After the intersection on AE line.
What do economists mean when they use the Latin expression ceteris paribus.
All else equal.
The use of money
Allows for greater specialization Reduces transaction costs of exchange Eliminates the double coincidence of wants.
The GDP of the country of Sumeria has grown at an average rate of 6% over the last two years, while the rate of inflation has remained more or less stable. Macroeconomists in the country are arguing that this increase in GDP is a clear indication of an overall improvement in the well-being of its people. Which of the following, if true about the last two years in Sumeria, would strengthen this argument?
An increasing percentage of the population is choosing leisure time over time spent in the work force.
Which of the following is not a policy tool the Fed uses to manage the money supply?
Changing Income tax rates.
Which of the following is not a function of money?
Commodity.
The price index which is used to measure changes in the cost of living is the
Consumer Price Index
Consider the PPF that shows the trade-off between the production of cotton and the production of soybeans depicted in the figure to the right. Show the effect that improved fertilizers would have on the initial PPF by drawing a new one.
Curve shifts outward.
Suppose the economy whose PPF is shown on the right experiences economic growth. Show how growth affects the trade-offs the country faces between producing ships and food. Label a point on the new PPF that shows the economy producing more of both goods. Which of the following may have caused the shift you have drawn?
Curve shifts outward. point in the middle on new curve. A larger labor force An increase in capital stock Advances in technology.
According to an article in the Wall Street Journal, one of the effects of an increase in the demand for corn was a decline in the number of US farmers growing rice: "The number of acres dedicated to rice likely will decline 3% this spring compared with last year, to 2.61 million acres." Use a demand and supply graph to analyze the effect on the equilibrium price of rice resulting from the increase in the demand for corn. The shift made in the diagram reflects the effect of
D and S intersect, S shifts left on D curve. a decrease in the number of rice farmers.
Consider the market for Blackberry Cell Phones. Suppose household income decreases. Show how this affects the demand for Blackberries by drawing a new demand curve. Assume Blackberries are a normal good. According to the graph, when income decreases, the demand for Blackberry Cell Phones ______. Instead, consider an inferior good. If income decreases, then the demand for an inferior good _____.
D shifts left. decreases. increases.
The recent recession that began in December 2007 resulted in declining incomes as some people lost their jobs and others were forced to work fewer hours or have their wages reduced. How did this affect the market for fast food restaurants.
D shifts right.
According to an article on the wine market in the Wall Street Journal, "many farmers in recent years stopped planting new [grape] vines, and some even switch to nuts, vegetables and other fruit." But at the same time, "Americans kept drinking more wine." The equilibrium quantity of wine will The equilibrium price of wine will
D shifts right; S shifts left. increase only if demand increases more than supply decreases. increase.
Consider the market for college textbooks illustrated in the figure to the right. Suppose the recent economic recession has resulted in less income for college students. Show how this has likely affected the market for college textbooks.
D shifts to the right.
Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?
Debt-spending on education Debt-spending on reasearch and development Debt-spending on highways and ports.
Use the data in the following table to calculate the GDP deflator for each year. Which span of years saw the largest percentage increase in the price level, as measure by change in the GDP deflator?
Deflator=Nominal GDP/Real X 100 2010-2011
The following graph shows the market for loanable funds. On the graph, show effect of an increase in the profitability of new investment. Show new equilibrium point.
Demand curve shifts right.
Consider the market for Ping golf clubs. Suppose the price of memberships at local golf courses increases. Show how this affects the demand for Ping golf clubs by drawing a new demand curve. Assume memberships at local golf courses and Ping golf clubs are complements. Instead, suppose the price of tennis rackets decreases. If tennis rackets and golf clubs are substitutes, then the demand for Ping golf clubs will _____.
Demand curves shifts left. Decrease.
The FOMC The Fed of NY is always a voting member of FOMC because
Determines the target funds rate and the direction of open market operation policies. Includes the Board of Governors and presidents of 12 Fed regional banks makes decision that are voted on by all 7 members of Board bu only 5 of 12 regional bank presidents. it carries out the policy directives of the FOMC.
What is the general relationship between the business cycle and unemployment and inflation?
During an expansion, unemployment falls and inflation increases.
The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD2 to AD2policy and reach equilibrium point C in the second period? If the Fed policy is successful, what is the effect on the following macrecon indicators?
Expansionary monetary policy. Actual: increases Potential: does not change Price: Increases UE: decreases
Calculate the missing values in the table below by using the provided data collected in the household survey for February 2016. Working-age population 252,556 Employed 151,074 Unemployed 7,784 Unemployment rate 4.9% Labor force 158,858 Labor force participation rate 62.9%
First unemployed, labor, population Unemployed=X/(151,074+X)=.049 + Employed = Labor force Labor force/Population = .629 Population = Labor Force/0.629
What is fiscal policy? Who is responsible for it?
Fiscal policy can be described as changes in govt spending and taxes to achieve macroecon policy objectives The federal government controls it
US GNP differs from US GDP in which of the following ways? In the US, the difference between GNP and GDP is _____ that of many other countries.
GNP considers production that occurs outside the US GNP is the value of final goods/services produced by residents of US smaller than
Which of the following equals the amount of public saving? A government that collects more in taxes than it spends experiences
Govt tax revenue minus the sum of government purchases and transfer payments to households. budget surplus.
All of the following are correct except Which component of Gross Domestic Income is the largest?
Gross domestic income does not include health insurance benefits received by the employees. wages.
The country Panjim has been growing at the rate of 8 percent annually following a series of economic reforms. Adelphia, a neighboring country, is also growing rapidly, but at a rate that is slightly lower than Panjim's. Elaine Mack and Prisca Baresi, who live in Adelphia, are discussing whether Adelphia's economy will surpass Panjim soon. Elaine is of the opinion that the high level of sales of capital goods indicates that growth in Adelphia will increase further. Prisca however reminds Elaine that the working population in Adelphia is shrinking, which will actually reduce its growth prospects. Elaine claims that the high level of sales of capital goods indicates that growth in Adlephia will only increase further. Which of the following questions is most important to answer in order to determine the accuracy of this claim.
How has the change in capital-labor ratio affected efficiency?
Use the graph to help determine which one of the following statements regarding fluctuations in real GDP is true:
In the first half of the twentieth century, real GDP had much more severe swings than in the second half of the twentieth century.
The graph below shows three production function. PF0 (center function) shows the current production function for the economy, and capital per worker is currently (K/L)0 (horizontal dotted line); thus output per worker is (Y/L)0 (vertical dotted line). Suppose that there is technological change. Which of the points on the graph could show the new capital per worker and output per worker?
In the middle of PF1 (top function).
Panel a above shows an idealized business cycle. Panel b shows an actual business cycle by plotting fluctuations in real GDP during the period from 1999 to 2002. Use the graphs to help determine which one of the following statements is not true:
Inconsistent movements in real GDP around the business cycle peak can mean that the beginning and ending of a recession are clear-cut.
The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What action can Congress and the president take to move the economy back to potential GDP? Show the results on the graph.
Increase govt spending or decrease taxes. AD shifts to the left, then back to equilib.
What does increasing marginal opportunity costs mean? What are the implications of this idea for the shape of the production possibilities frontier?
Increasing the production of a good requires larger decreases in the production of another good. The PPF will be bowed outward.
Suppose Dell is currently selling 2,000,000 computers per year. However, managers at Dell are considering whether to increase production by 200,000 computers. One manager explains that after increasing production by this amount, total profit would be $100 million. Given this information, should Dell increase production by 200,000 computers?
Information about the additional revenue earned and the additional cost incurred from producing 200,000 additional computers is required to answer this question.
The relationship between the marginal propensity to consume MPC and the propensity to save MPS can best be described as
MPS=1-MPC MPC+MPS=1 MPC=1-MPS
The graph shows equilibrium in the money market. The equilibrium interest rate is determined at point E where the money demand and money supply curves intersect. Suppose the Fed wants to lower the equilibrium interest rate. Using the line drawing tool, draw a new money demand or money supply curve that can show how the Fed would accomplish this objective.
MS shifts right.
GDP is
Market value of all final goods and services produced in a country during a period of time.
Which of the following statements regarding NE is not correct?
NE are typically one of the largest components of AE.
Consider the demand for large homes illustrate din the figure to the right. What demographic change would likely result in the demand curve for large homes shifting to the left? D1 shifts left to D2
Portion of the population that is elderly increases.
The Standard & Poor's/Case-Shiller Home Price Index is one of the leading indicators of housing price trends in the US. The base year for the index is Jan 2000. The following table lists index numbers for August 2014 and Aug 2015 for five cities. NY 174.0 --> 177.7 Miami 186.4 --> 200.3 Phoenix 147.6 --> 154.8 Dallas 139.6 --> 152.1 San Diego --> 200.8 --> 212.7 Calculate the percentage changes in the price indixes from Aug 2014-Aug 2015 for the following cities NY: Miami: Phoenix: Dallas: San Diego: The prices of homes changed the most during this year in Based on these numbers, you can determine which city had the most expensive homes in Aug 2015?
Price Index=Recent year-Earlier year/earlier year X 100 2.1% 7.5% 4.9% 9.0% 5.9% Dallas It is not possible to determine this with the info provided.
Why do some consumers tend to favor price controls while other tend to oppose them?
Price ceilings generate shortages. Consequently, the consumers who obtain the product at a lower price win, but other consumers will lose because they would like to purchase the product but are unable to because of a shortage.
In a closed economy, the values for GDP, consumption, investment, transfer payments, and taxes are as follows: Y=12tril C=9tril I=3tril TR=2tril T=3tril Using the info above, what is the value of private saving and public saving?
Private saving equals 2 (Y-T+TR-C) and public saving equals 1 tril. (T-G-TR) or (T-TR)
_____ occurs when a good or service is produced at the lowest possible cost. _____ occurs when production is in accordance with consumer preferences.
Productive efficiency. Allocative efficiency.
Assume the figure to the right illustrates the market for houses for sale in a small city. Suppose the market price of houses is $200,000. How large will the resulting surplus be? At $200,000, there will be ___ surplus houses. Equilibrium price is _____.
S and D intersect at $150,000 and 600 houses. 400. 150,000.
The figure to the right illustrates the US market for rugs made in a particular foreign country. Suppose the market price of rugs is $1,250. At price of $1,250, there will be _____ of rugs. To reach equilibrium, the price of rugs in this market must _____.
S and D intersect at $1500 and 6 (thousand) rugs. a shortage. rise.
Consider the market for the Nissan Xterra. Suppose the price of metal, which is an input in automobile production, decreases. According to the graph, when the price of metal decreases, the quantity of Nissan Xterras supplied at any particular Xterra price _____. Instead, consider the future price of Xterras. If Nissan believes the future price of Xterras will be lower, then Nissan may ____ supply today.
S1 shifts right to S2. increases. increase
The following graph shows AD and SRAS. Show effect of expectations of an increase in the future price level.
SRAS shifts to the left.
The GDP and employment growth rates in the developing country of Tinseltown... Which of the following, if true, would weaken Sam's argument?
Since the government funded most of its spending through borrowing, interest rates in Tinseltown increased sharply.
Which of the following statements about the consumption component of GDP is not correct?
Spending on services is smaller than the amount of consumption spending on durable and nondurable goods.
Consider the market for MP3 players, illustrated in the figure to the right. The market is initially in equilibrium at a price of $70 and at a quantity of 250 (thousand) players. Suppose new firms enter the MP3 market. Show how this affects the MP3 market by adding either a new supply curve or a new demand curve. As a result of new firms entering the MP3 player market, the new equilibrium price will be _____, and the new equilibrium quantity will be _____. Suppose instead that the demand curve shifts to the right. Then, relative to the initial market equilibrium,
Supply shifts right. lower; higher the new equilibrium price would be higher and the new equilibrium quantity would be higher.
What is the difference between the consumer price index and the producer price index?
The CPI is an average of the prices of goods purchased by the typical urban family of four, whereas the PPI is an average of the prices received by producers of goods at all stages of the production process.
What is absolute advantage? What is comparative advantage? Is it possible for a country to have a comparative advantage in producing a good without also having an absolute advantage? A country w/o an absolute adv in producing a good
The ability to produce more of a good or service than competitors using the same amount of resources. The ability to produce a good or service at a lower opportunity cost than other producers. will have a comparative advantage if it has a lower opportunity cost of producing that good.
Use the graph to help determine which one of the following statements is true: (graph: real GDP per capita, 1900-2006
The average American in 2006 could buy nearly 8 times as many goods and services as the average American in 1900.
From the list below, select the variable that will cause the supply curve to shift:
The cost of raw materials.
What is the long-run effect of a permanent increase in government spending?
The decline in investment, consumption, and net exports exactly offsets the increase in govt spending; therefore, real GDP remains unchanged.
The market for corn in country A is highly competitive. At the current market price of $5/bushel there is a shortage of 100,000 bushels of corn in this country. Media reports claim that the price of corn will rise drastically in the near future. According to these reports, the neighboring country B had witnessed a similar situation recently. At the same price, the shortage in country B was also 100,000 bushels and eventually the equilibrium price in B went up to $10/bushel. Both countries are known to have equal number of corn producers and the market supply of corn is identical at all prices. This, combined with the fact that consumers in the two countries also have similar tastes and preferences, led the media to conclude that the price of corn in country A would soon be as high as $10/bushel. If the new equilibrium price turns out to be below $10/bushel, which of the following inferences can be drawn?
The demand curve for corn must be flatter in country A must be higher than the equilibrium quantity demanded at $10/bushel in country B.
Which of the following statements regarding the 2009 stimulus package is true?
The largest category of expenditures was health care, social services, and education; the largest category of tax cuts was individual tax cuts.
Based on the quantity theory of money, if velocity is constant, inflation is likely to occur when:
The money supply grows at a faster rate than real GDP.
According to the quantity theory of money, inflation results which of the following?
The money supply grows faster than real GDP.
Goods X and Y are perfect substitutes. When the market price of good X is $5/unit, firm F produces 500 units of X. When the price of Y rises, 100 consumers of Y shift to the consumption of good X. This causes industry analysts to believe that firm F has increased quantity supplied of X by 100 units to meet the higher demand for it.
The new buyers of good X will, on average, consume one unit each.
When a competitive market is in equilibrium, what is the economically efficient level of output?
The output level where marginal cost is equal to marginal benefit.
Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate? Why might the unemployment rate continue to rise during the early stages of a recovery?
The unemployment rate increases and the inflation rate falls during recessions. Because both a and c are true: Employment growth may be slow relative to the growth in labor force; some firms continue to operate well below capacity even after recession has ended.
Consider the market for Apple iPods. Assume the market is perfectly competitive and at a market-clearing equilibrium. What area represents consumer surplus? What are represents producer surplus?
The upper area left of D. The lower area left of S.
According to the law of supply,
There is a positive relationship between price and quantity supplied. As the price of a product increases, firms will supply more of it to the market.
The unemployment rate is calculated as follows: Which of the following is not one of the conditions someone needs to meet to be counted as unemployed?
Unemployment Rate=Number of Unemployed/Labor Force X 100 They had worked only one hour per week during the previous four weeks.
Which of the following is not included in the calculation of total government purchases?
Unemployment insurance benefits paid for by the federal govt.
Which of the following is true with respect to Irving Fisher's quantity equation, MxV=PxV?
V=PxY/M M=M1 definition of the money supply V=Average number of times a dollar is spent on goods/services P=the GDP deflator
What are the four categories of income?
Wages, Interest, Rent, and Profit.
Which equation represents the relationship between GDP and the four major expenditure components? What are the four major components of expenditures in GDP?
Y=C+I+G+NX Consumption, Investment, Government purchases, Net exports.
The figure to the right illustrates the economy using the Dynamic AD-AS model. If actual real GDP in 2006 occurs at points B and potential GDP occurs at LRAS06, we would expect the Fed to pursue _____ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroecon indicators?
a contractionary Actual: decreases Potential: Doesn't change Price: decreases UE: increases
Refer to the graphs below. Each graph shows the supply curve for smartphones. Figure 1 (S shifting right) illustrates _____, and figure 2 (S shifting left) illustrates _____.
a decrease in the price of an input; an increase in the price of a substitute in production.
A recession occurs when an economy experiences a period in which there is The business cycle exists because
a decrease in total production. total production experiences periods of increases and decreases.
A good for which demand increases as income rises is _____, and a good for which demand increases as income falls is _____. Goods and services that can be used for the same purpose are _____, and goods and services that are used together are _____.
a normal good; an inferior good. substitutes; complements
What are the names of the following events in a business cycle? High point of economic activity Low point of econ activity Period between high point and following low point Period between low point and high point
a peak a trough recession expansion
If a surplus exists in a market, we know that the actual price is If a shortage exists in a market, we know that the actual price is
above the equilibrium price, and the quantity supplied is greater than the quantity demanded. below the equilibrium price, and the quantity demanded is greater than the quantity supplied.
A country's rate of economic growth is important because
an economy that grows too slowly fails to raise the living standards of its citizens.
When a firm pays a wage that is higher than the market wage in order to increase worker productivity, the wage is called
an efficiency wage.
Which of the following changes does not cause an increase in the quantity of goods and services that can be produced by one worker, or in one hour of work? Which of the following changes will ensure that an economy experiences sustained economic growth?
an increase in the number of workers. technological change.
Which of the following events would cause a decrease in short-run aggregate supply?
an unexpected increase in the price of oil.
Research conducted by Edward Prescott of Arizona State University, and Edward Glaeser of Harvard University along with Bruce Sacerdote of Dartmouth College indicate that the effects of supply-side policies
are, as of now, unclear and require more careful study.
The basis for trade is _____ advantage.
comparative.
The most important determinant of consumption is Which of the following causes saving to increase? If the marginal propensity to consume is 0.9, how much additional consumption will result from an increase of $100 bill of disposable income?
current disposable income. An increase in the interest rate. $90bill
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
current income.
Complete the following table for a static AD-AS model
decrease taxes; rise Decrease gov't spending;fall
Which of the following is the largest liability of a typical bank? Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
deposits required reserve ratio
Which of the following do we subtract from GDP to obtain national income?
depreciation.
Suppose, in an effort to prevent the population from declining, Italy begins offering new mothers extended periods of paid family leave from work and, consequently, the birthrate per woman increases. If so, then this could best be characterized as an example of people responding to
economic incentives.
In the diagram to the right, point A (horizontal dotted line) provides the _____, point B (equilibrium) the _____, and point C (vertical dotted line) the _____.
equilibrium price; market equilibrium; equilibrium quantity.
In economic terminology, the inputs used to produce output are referred to as
factors of production.
The interest rate that banks charge each other for overnight loans is called As interest rates decline, stocks become a _____ attractive investment relative to bonds, which causes the demand for stocks and their prices to _____.
federal funds rate. more; rise
The financial system of a country is important for long-run economic growth because
firms need the financial system to acquire funds from households.
When a corporation purchases or builds a facility in a foreign country, it is called Which countries have experienced faster economic growth?
foreign direct investment Countries that have been generally more open to foreign trade and investment.
The three types of unemployment are The type of unemployment most likely to result in hardship for the people who are unemployed is
frictional, structural, and cyclical unemployment. structural because this type of unemployment requires retraining to acquire new job skills.
Property rights have been determined to be a major factor that helps countries sustain economic growth. Governments can change laws and policies in order to give individuals and firms more freedom. By doing so, govt can help promote growth because greater property rights
give entrepreneurs more incentive to take risks that create new products, ideas, and more technology.
Each year that the federal government runs a deficit, the federal debt _____. Each year that the federal government runs a surplus, the debt _____.
grows;shrinks.
Scarcity implies that every society and every individual face trade-offs because scarcity means that
human wants are greater than what available resources can produce.
For each of the following policies, indicate whether it will or not increase the rate of economic growth in the US. Congress passes an investment tax credit, which reduces a firm's taxes if it installs new machinery and equipment. It is likely that the rate of economic growth will _____. Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state sales taxes they pay. It is likely that the rate of economic growth will _____. Congress provides more funds for low-interest loans to college students. It is likely that the rate of economic growth will _____.
increase increase increase
Assume the tax multiplier is estimated to be 1.3 and the AS curve has its usual upward slope. Suppose the government lowers taxes by $115 mil. AD will _____ by $______ mil.
increase; 149.5
Suppose the government reduces the corporate income tax rate. This will increase the return to firms for investing, which should _____ investment and cause _____ in capital in the long run. Show the long-run effect of this reduction in corporate tax rates on long-run aggregate supply. The long-run impact of a reduction in corporate tax rates would be
increase; an increase LRAS shift right an increase in long-run potential output while actually reducing inflation.
Refer to the diagram to the right: draw a demand curve shifting to the right. With this shift, equilibrium price will _____ and equilibrium quantity will _____.
increase; increase.
Suppose the government increases expenditures while holding taxes the same. This will _____ deficits or _____ surpluses. Assume the increase in government expenditures, from above, occurs. The increase in government expenditures will _____ the interest rate, which will cause _____ in private investment spending, and is referred to as _____.
increase;decrease MD shifts right. increase; a decrease; crowding out.
Over time, potential GDP _____, which is shown by the _____ curve shifting to the right.
increases; long-run aggregate supply
On the diagram to the right, movement along the curve from points A to B to C (Curving downward) illustrates.
increasing marginal opportunity costs.
The real interest rate Suppose an economy has an inflation rate of 3.6% and a bank makes a loan with an interest rate of 7.9%. In this case, the real interest rate is __%.
is equal to the nominal interest rate - the inflation rate. 7.9-3.6 = 4.3
If the market price 'Pmkt" is below the price 'P0', then quantity supplied is_____ quantity demanded and the market is in _____.
less than; shortage.
According to the multiplier effect, an initial increase in government purchases increases real GDP by _____ the initial increase in govt purchases.
more than.
The difference between a nominal variable and a real variable is that
nominal variables are calculated in current-year prices and the real variables are measured in dollars of the base year for the price index to correct the effects of inflation.
The employment-population ratio measure the When an unemployed person drops out of the labor force, the unemployment rate When an unemployed person drops out of the labor force, it
percentage of the working age population that is employed. understates the true degree of joblessness in the economy. does not affect the employment-population ratio.
Your consumption point before trade is illustrated by
point on the line (A).
Which of the following is a major difference between the AD-AS model and dynamic AD-AS model? The dynamic AD-AS model assumes
potential GDP increases continually, while the AD-AS model assume the LRAS does not change.
The difference between a change in supply and a change in the quantity supplied is that the latter is
produced by a change in the product's own price while the former is caused by a variety of variables other than the products's price.
When potential real GDP is equal to 70, this economy is in _____. The amount of the shortfall in planned aggregate expenditure is equal to
recession. the vertical distance between AE and the 45degree line at the level of potential real GDP.
Which of the following policy tools is the Fed least likely to use in order to actively change the money supply? Reserve requirements are changed infrequently because
reserve requirements banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.
Two important trends in the labor force participation rates of adults aged 20 and over in the US since 1948 are the _____ labor force participation rate of adult women and the _____ labor force of adult men.
rising; falling
An increase in interest rates affects AD by As the interest rate increases,
shifting the AD curve to the left, reducing real GDP and lowering the price level. consumption, investment, and net exports decrease; AD decreases.
Consider the market for LCD TVs, illustrated in the figure to the right. Identify the market equilibrium. Suppose instead that the price of LCD TVs is $800.00. This will result in a _____, which will place _____ pressure on the price.
shortage; upward.
The unemployment rate Suppose an economy is given by the following: Population 272 milion Labor force 177 mil Employed 166.4 mil Unemployed 10.6 mil Given the information above, the unemployment rate is __%.
shows the percentage of the labor force that is considered unemployed. 6
Economic models are:
simplified versions of reality designed to analyze "what is" to explain human decision making in any context.
Potential GDP is
sometimes greater, sometimes less, and sometimes equal to actual real GDP.
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and the requirements of jobs is called
structural unemployment.
In calculating the CPI for the year, the BLS uses the quantities in the market basket, rather than the quantities purchased during the current year. This gives rise to
substitution bias.
The PPF depicted in the diagram to the right illustrate Tank side increases.
technological advances in the tank industry.
Which of the following is most likely to lead to sustained long-run growth?
technological change.
A curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called
the AD curve.
The term tax incidence refers to Refer to the graphs above. In each of the graphs, a curve has shifted as a result of a new Social Security tax. In which graph do workers bear a larger burden from the tax?
the actual division of the burden of a tax between buyers and sellers in a market. In both cases, the burden on workers is the same.
Menu costs are The internet has _____ the size of menu costs.
the costs to firms of changing prices. reduced.
From a trough to a peak, the economy goes through
the expansionary phase of the business cycle.
Opportunity cost is
the highest valued alternative that must be given up to engage in an activity.
GDP is best defined as What happens if we measure GDP by adding up the value of every good and service produced in the economy?
the market value of all final goods/services produced in a country during a period of time, typically 1 year. GDP is overestimated because of double counting.
The law of demand is the assertion that An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects. More specifically,
the quantity demanded of a product is inversely related to its price. the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers' purchasing power.
Macroeconomics is
the study of the economy as a whole, including topics such as inflation, unemployment, and economic growth.
Real GDP is Over time, prices may change relative to each other. To take this change into account, the Bureau of Economic Analysis calculates
the value of goods/services evaluated at base year prices. real GDP using chain weights.
According to the law of demand,
there is an inverse relationship between price and quantity demanded.
When Congress established the Fed in 1913, its main responsibility was Congress broadened the Fed's responsibility since
to make discount loans to banks suffering from large withdrawals by depositors. the 1930s as a result of the Great Depression.
The multiplier represents the
total amount of additional increases in consumption spending induced by an initial change in AE.
In the diagram to the right, pint G (up and to left of production line) indicates an
unattainable result.
A free market exists
when the government places few restriction on how a good or service can be produced or sold or on how a factor of production can be employed.
