Final exam study guide
When a bank or banklike institution borrows from individuals or firms with excess funds and lends to those who need funds, it is
acting as a financial intermediary.
The figure to the right gives an economy's initial aggregate demand (AD) curve. Using the line drawing tool, show an increase in aggregate demand. Properly label
ADshifts up Increased government expenditures for war.
Suppose the economy depicted in the figure to the right experiences a surge in energy pricesenergy prices. Using the three-point curved line drawing tool or the line drawing tool, show the price/output consequences of this event. Properly label this curve. If the economy's policymakers seek to reverse the output loss via the implementation of expansionary policies, the result will be
AS shifts up on the AD curve moves left even higher prices.
The equation for a consumption function in a simple economy, where there are no taxes, is given by C =200 + 0.67Y, where Y denotes aggregate income.
Autonomous consumption is 200. (Enter your response as an integer.) MPC is .67. (Enter your response rounded to two decimal places.)
A higher wage that is paid to compensate a worker for unpleasant aspects of a job is known as a: Graphically show the impact of a union restricting membership on wages. 1.) Using the line drawing tool, show the impact of a union restricting membership on wages. Properly label your curves. 2.) Using the point drawing tool, show the new equilibrium. Label your point 'E2'.
compensating differential. S shifts up qualintiy shifts left on old D curve
Expansionary fiscal policy is used by the government to
create new jobs in the economy
You are laid off from your job because of a general downturn in economic activity. This is an example of
cyclical unemployment
Some economists argue that the "animal spirits" of investors are so important in determining the level of investment in the economy that the interest rates do not matter at all and planned investment is insensitive to changes in interest rate. In such a situation, an increase in government purchases an increase in government purchases
increases GDP by a large amount
According to the real wealth effect (or real balance effect), a decrease in the price level
increases consumers' expenditures due to an increasean increase in the purchasing power of household wealth.
The multiplier
is equal to the ratio of change in equilibrium income to a change in autonomous expenditure
The opportunity cost of holding money
is the forgone interest from holding bonds.
Since the 1970's changes in expected inflation and the price of oil and other imports have shown the Phillips Curve to be unstable. This has led economists to conclude that
policy involves more than choosing a point along a nice smooth Phillips Curve.
If the economy is operating on the vertical part of the AS curve and the Fed pursues a policy of stabilizing interest rates in the face of expansionary fiscal policy, the result will most likely be
sustained inflation.
When the interest rate decreases
the cost of borrowing decreases and the consumption function shifts up
When the interest rate decreases,
the cost of borrowing decreases and the consumption function shifts up.
When there is an excess supply of money,
there is an excess demand for bonds, so those looking to borrow by selling bonds can do so at a lower interest rate.
The cumulative sum of several years of budget deficits is known as the:
total debt
If the economy is operating above potential GDP, then
unemployment is below the natural rate and wages will rise.
Marginal Propensity to consume (MPC)
Change in C divided by change in Y or the slope (C=a+bY) (Y=C+I+G) That fraction of a change in income that is consumed, or spent.
Which of the following statements is true?
Each year the budget deficit of the federal government adds to the federal debt.
Sherman Peabody earns a monthly salary of $1,200, which he receives at the beginning of each month. He spends the entire amount each month at the rate of $40 per day. (Assume 30 days in a month.) The interest rate paid on bonds is 6 percent per month. It costs $8 every time Peabody sells a bond. The optimal average level of money holdings is the amount that
The optimal average level of money holdings is the amount that A. maximizes the profits from money management.
In an economy where taxes and government spending do not depend on income, the government spending multiplier is calculated to be 5. The value of the tax multiplier is
The value of the tax multiplier is -4
Automatic stabilizers are mechanisms built into the economy that tend to reduce the multiplier effect. Which of the following items act as automatic stabilizers?
Unemployment compensation
Government interest payments as a percentage of GDP have fallen dramatically since 1995. This can be attributed to
a decrease in government debt until 2001, and lower interest rates thereafter.
On June 5, 2003, the European Central Bank acted to decrease the short-term interest rate by half a percentage point to 2 percent. The bank's president at the time, Willem Duisenberg, suggested that the bank could reduce rates further in the future. The likely impacts of such a rate cut were
an increase in planned aggregate expenditure, an increase in aggregate income and output, and an increase in consumption.
The two equivalent formulas for the Investment Multiplier are:
1/1-MPC and 1/MPS
What are the two equivalent formulas for investment multiplier?
1/MPS and 1/1-MPC
c. Unemployment has been caused by a recently enacted minimum wage law. Consider the labor market in the figure 3 to the right. If the minimum wage is $12, then the number unemployed will be 20 million. (Enter your response as an integer.)
60- 40= 20 S-D= unemploy
During the last half of the 1990's the federal government budget went from deficit to surplus. Since 2001, though, the reverse is true. What has significantly contributed to recent budget deficits ?
A. Increased Medicare payments B. The war in Iraq C. Lower tax rates D. ALL OF THE ABOVE
Given the information in the table, how many people are in the labor force?
Military dont count 166.5 million
Suppose all tax collections are fixed and independent of income and all spending and transfer programs are also fixed and do not depend on the state of the economy. In such a situation what is the relationship between the full employment deficit and actual budget deficit?
Actual budget deficit is the same as the full employment budget deficit.
In Japan during the first half of 2000, the Bank of Japan kept interest rates at a near zero level in an attempt to stimulate demand. In addition, the government passed a substantial increase in government expenditure and cut taxes. Slowly, Japanese GDP began to grow with absolutely no sign of an increase in the price level. 1.) Using the line drawing tool, show the monetary and fiscal policy affects on the AD curve described above. Properly label the new curve. 2.) Using the point drawing tool, plot the new equilibrium point. Label the new point 'B'. Note: Carefully follow the instructions above and only draw the required objects.
AD SHIFT right still on flat part of AS equillibrium is on this line
You are appointed secretary of treasury of a recently independent country called Rugaria. The currency of Rugaria is the lav. The new nation began fiscal operations this year and the budget situation is that the government will spend 88 million lavs and taxes will be 77 million lavs. The difference will be borrowed from the public by selling 10-year government bonds paying 33 percent interest. The interest on the outstanding bonds must be added to spending each year, and we assume that additional taxes are raised to cover that interest. Assume that the budget stays the same except for interest on the debt for 10 years.
After one year, government expenditure is 8.03 million lavs (enter your response rounded to two decimal places) and debt is 1 million lavs (enter your response as an integer). After five years, government expenditure is 8.15 million lavs (enter your response rounded to two decimal places) and debt is 5 million lavs (enter your response as an integer). After ten years, government expenditure is 8.30 million lavs (enter your response rounded to two decimal places) and debt is 10 million lavs (enter your response as an integer).
During the 1960s there seemed to be an obvious trade-off between inflation and unemployment (lower inflation implies higher unemployment). However, from the 1970s onward, that relationship appeared to breakdown. Which of the following are possible causes of this apparent breakdown? . The AS shifts but the AD does not. B. The AD curve shifts but AS does not. C. Both the AD and AS supply curve shift. D. Both A and C
Both A and C
The Federal Reserve tends to forecast that GDP will be: A. stable. B. lower than it turns out to be. C. higher than it turns out to be. Your answer is correct.D. consistently growing. The European Central Bank has the best track record of forecasting: A. inflation. B. economic growth. Your answer is correct.C. interest rates. D. None of the above.
C. higher than it turns out to be. interest rates.
Before 1995, proponents of the NAIRU theory argued that the value of the NAIRU in the U.S. was around 6 percent. After 1995, the unemployment rate steadily declined, and by the year 2000 it was 3.9 percent. Further, the 1995 to 2000 period saw slightly declining inflation. This evidence would suggest that increased worker productivity led to a leftward shift of the PP curve. B. increased worker productivity led to a rightward shift of the PP curve. C. the NAIRU theory is vacuous (without meaning). D. Both A and C are correct.
D. Both A and C are correct.
Before 1995, proponents of the NAIRU theory argued that the value of the NAIRU in the U.S. was around 6 percent. After 1995, the unemployment rate steadily declined, and by the year 2000 it was 3.9 percent. Further, the 1995 to 2000 period saw slightly declining inflation. This evidence would suggest that A increased worker productivity led to a leftward shift of the PP curve. B. increased worker productivity led to a rightward shift of the PP curve. C. the NAIRU theory is vacuous (without meaning). D. Both A and C are correct.
D. Both A and C are correct.
Consider the following information for Freedonia, a legendary country: Saving Function: S = −400 + 0.25Y Investment Function: I =200 1.) Using the line drawing tool, draw the Saving Function and label it 'S'. 2.) Using the line drawing tool, draw the Investment Function and label it 'IA'. 3.) Using the point drawing tool, identify the initial equilibrium. Label this point 'A'. 4.) Using the line drawing tool, draw a new Investment Function when investment increases by 200. Label the new investment function 'IB'. 5.) Using the point drawing tool, plot the new equilibrium point. Label this point 'B'.
Check screenshot graph savings and investment
China's Selling Tons of U.S. Debt. Americans Couldn't Care Less Source: Kruger, Daniel "China's Selling Tons of U.S. Debt. Americans Couldn't Care Less" Bloomberg.com, posted 10/18/2015. Carefully read the article, and then answer the following questions. China currently holds _________ of U.S. Treasury securities. Domestic funds now hold approximately _________ of U.S. Treasury securities. What happens to Treasury yields if there is a decrease in demand for Treasuries? A decrease in demand pushes price ___________ . A ____________ priced Treasury means that investors buying that security now will earn a __________ yield.
China currently holds _________ of U.S. Treasury securities. 1.4 trillion Domestic funds now hold approximately _________ of U.S. Treasury securities. 1.6 trillion What happens to Treasury yields if there is a decrease in demand for Treasuries? A decrease in demand pushes price LOWER A LOWER priced Treasury means that investors buying that security now will earn a HIGHER yield.
What is the coupon payment of a bond with a face value of $10,000 and an annual interest rate of 8%?
Coupon payment is equal to $800. (Enter your response as an integer.)
For each of the following, determine whether it is an asset or a liability on the accounting books of a bank and indicate why for each case. Demand deposits are a _____________ because it is something the bank OWES Savings deposits areSavings deposits are a _____________ because it is something the bank OWES . Reserves areReserves are an _______________ because it is something the bank OWNS
Demand deposits are a liability because it is something the bank OWES . Savings deposits areSavings deposits are a liability because it is something the bank OWES . Reserves areReserves are an asset because it is something the bank OWNS
Expansionary policies are designed to stimulate the economy by increasing aggregate output. Expansionary fiscal policy and expansionary monetary policy have opposite effects on the interest rate despite having the same goal of increasing aggregate output because expansionary fiscal policy _____________ the demand for money and interest rates, whereas expansionary monetary policy ______________ interest rates. 1.) Using the line drawing tool, draw and label a new line on the diagram that shows expansionary fiscal policy. 2.) Using the point drawing tool, plot and label the new equilibrium interest rate.
Expansionary fiscal policy and expansionary monetary policy have opposite effects on the interest rate despite having the same goal of increasing aggregate output because expansionary fiscal policy INCREASES the demand for money and interest rates, whereas expansionary monetary policy DECREASES interest rates. Md shifts up right and intrest rate is increased on the MS line where both intersect
Many workers commit to employment contracts with 1 to 3 year terms. These contracts stipulate workers' wages for each year of the contract. Given the uncertainty of future economic conditions, why do workers and firms bind themselves in this way?
Negotiating wages is costly.
Assume the NAIRU inflation rate is 3 percent. Further assume that the unemployment rate is 2 percent below the NAIRU and stays there for many periods. Using the NAIRU diagram on the right, after 3 periods the inflation rate is 6
Start at 3 and move 3 times to find
What institution has formal responsibility for setting U.S. monetary policy?
The FOMC federal open market committee
Related to Economics in Practice: The Simple "Keynesian" Aggregate Supply Curve LOADING... This example describes the simple Keynesian aggregate supply curve as one in which there is a maximum level of output given the constraints of a fixed capital stock and a fixed supply of labor. The presumption is that increases in demand when firms are operating below capacity will result in output increases and no input price or output price changes but that at levels of output above full capacity, firms have no choice but to raise prices if demand increases. The aggregate demand (AD) and aggregate supply (AS) equilibrium may occur at a very flat portion of AS curve, when
The aggregate demand (AD) and aggregate supply (AS) equilibrium may occur at a very flat portion of AS curve, when =there exists considerable excess capacity and high unemployment in the economy. The aggregate demand (AD) and aggregate supply (AS) equilibrium may occur at a very steep portion of AS curve, when =the economy is operating at or near full employment and output level is above full capacity. In reality, however, the short-run aggregate supply curve isn't flat and then vertical. Rather, it becomes steeper as we move from left to right. This somewhat unique shape of the short-run aggregate supply curve is based in part on the fact that =when the economy has excess capacity, input prices are slow to adjust whereas output adjusts quickly to increases in aggregate demand; as the economy approaches full capacity prices increase at a faster rate than does output.
Glacialand, the largest country in central Antarctica, receives word of an imminent fur seal attack. The news causes expectations about the future to be shaken. As a consequence, there is a sharp decline in investment spending plans a. What will be the effects of such an event on the economy of Glacialand assuming no response on the part of the central bank or the Treasury, so that the money supply, taxes, and government spending all remain constant? b. To counter the fall in investment, the leader of GlacialandGlacialand calls for a proposal to increase government spending. To finance the program, the head of the Exchequer has proposed three alternative options: (1) Keep taxes constant and finance the expenditures by printing new moneyKeep taxes constant and finance the expenditures by printing new money (2) Keep tax revenues constant and borrow the money from the public by issuing new government bondsKeep tax revenues constant and borrow the money from the public by issuing new government bonds (3) Finance the expenditures with an equal increase in taxesFinance the expenditures with an equal increase in taxes Consider the three financing options and rank them from most expansionary to least expansionary. The most expansionary policy is option __, followed by __, and option __ would be the least expansionary.
The decrease in investment will reduce aggregate expenditure causing equilibrium output/income to decrease in the goods market. A. 1; 2; 3
The figure to the right shows an economy resting in equilibrium at its ________________ . Using either the line drawing tool or the 3-point curved line drawing tool, show the short run impact of an increase in planned aggregate expenditures. Properly label this line or curve. Which of the following is likely to occur at the new short run equilibrium you've indicated?
The figure to the right shows an economy resting in equilibrium at its potential output AD shifts right . Using either the line drawing tool or the 3-point curved line drawing tool, show the short run impact of an increase in planned aggregate expenditures. Properly label this line or curve. Which of the following is likely to occur at the new short run equilibrium you've indicated? =Upward pressure on costs
Federal Reserve policy that involves increasing interest rates is known as: Graphically show the impact on interest rates when the Fed sells bonds.
contractionary monetary policy. Federal Reserve policy that involves increasing interest rates is known as contractionary monetary policy. The Fed raises interest rates to slow the economy down or bring inflation in check. Lowering interest rates is expansionary policy since lower interest rates stimulate consumption and investment. Fiscal policy is the government's use of taxation and spending to achieve an economic objective. Ms moves left no new Md line needed
Banks borrow not only from the Fed but also from each other. What is the interest rate in this market called?
federal funds rate
Economists who hold the classical view of the labor market believe that
fiscal and monetary policy have little or no effect on employment and real GDP.
When considerable overlap occurred between inflation and recession in the last half of the 1970s and early 1980s, the Fed responded by
keeping interest rates high.
During 2005, the Federal Reserve was tightening monetary policy in an attempt to slow the economy. The Congress passed a substantial cut in the individual income tax at the same time. As a result of these policy changes During the summer of 2003, the Congress passed and President George W. Bush signed the third tax cut in three years. Many of the tax cuts took effect in 2005. Suppose that the initial planned aggregate expenditure and interest rate were illustrated by AE 1AE1 with r equals 5 percentr=5 percent. Assuming that the Federal Reserve held the money supply constant, in figure 1, which aggregate expenditure line and interest rate combination can illustrate the effect on aggregate expenditure, GDP and interest rate in 2005? In 1993, the Congress and the President raised taxes. At the same time the Fed was pursuing an expansionary monetary policy. Suppose that the initial planned aggregate expenditure and interest rate were illustrated by AE 1AE1 with r equals =5 percent. The aggregate expenditure line and interest rate combination in 2005 in figure 1 that could result from this combination of these fiscal and monetary policies would be In 2005, conditions in Iraq led to a sharp drop in consumer confidence and consumption. Suppose that the initial planned aggregate expenditure and interest rate were illustrated by AE 1AE1 with r =5 percent. Suppose that the Fed kept the money supply unchanged, then the aggregate expenditure line and interest rate combination that shows the effect on aggregate expenditure, GDP and the interest rate in 2005 in figure 1 would be
the rate of interest was expected to increase and the effect on GDP was likely to be ambiguous. . AE 2 with r =6 percent. . AE 3with r =4 percent. AE 5with r=4 percent.
What if, at a low level of interest rates, the money demand curve became nearly horizontal, as in the graph at right. That is, with interest rates so low, the public would not find it attractive to hold bonds; thus, money demand would be very high. Many argue that this was the position of the U.S. economy in 2003. If the Fed decided to expand the money supply in the graph shown at right, interest rates
would not change. Horizontal money demand: When the demand for money is virtually horizontal (insensitive to interest rate changes), changes in the money supply will not influence the interest rate.
It can be argued that minimum wage laws raises the unemployment rate for teenagers as a group. In response to this problem, Congress established a sub-minimum wage for teenagers. It allows employers to hire teenagers at an opportunity wage of
$4.25 for up to 90 days.
Since 1970 the Fed has faced a "binding situation" during the
2008-2012 period.
Many workers commit to employment contracts with 1 to 3 year terms. These contracts stipulate workers' wages for each year of the contract. Given the uncertainty of future economic conditions, why do workers and firms bind themselves in this way?
. Negotiating wages is costly.
Federal government consumption expenditures make up about ___ of total government expenditures.
28 percent
In an economy where taxes and government spending do not depend on income, the tax multiplier is calculated to be −4. The value of the government spending multiplier is
5
Which of the following changes will unambiguously increase consumption expenditure at every level of income and shift the consumption function upward?
A reduction in interest rate and expectations of higher income in the future
Attansio, Guiso, and Jappelli found that Which of the following statements is true?
A. people carried more cash once ATMs were introducedpeople carried more cash once ATMs were introduced. B. the higher the interest rate comma the smaller checking account balances people keptthe higher the interest rate, the smaller checking account balances people kept. C. the higher the interest rate comma the less often people visited ATM machinesthe higher the interest rate, the less often people visited ATM machines. D. NONE OF THE ABOVE Which of the following statements is true? With a large ATM network, people carry less cash, since cash does not earn interest.
During 1999 and 2000, a debate raged over whether the United States was at or above potential GDP. Some economists feared the economy was operating at a level of output above potential GDP and inflationary pressures were building. They urged the Fed to tighten monetary policy and increase interest rates to slow the economy. Others argued that a worldwide glut of cheap products was causing input prices to be lower, keeping prices from rising. a. Those pushing the Fed to act were right, and prices start to rise more rapidly in 2000. Figure A on the right shows an economy in an initial short-run equilibrium at point A. 1.) Using the line drawing tool, illustrate the impact of the contractionary monetary policy. Properly label this line. 2.) Using the point drawing tool, identify the new equilibrium point and label it 'B'. Note: Carefully follow the instructions above and only draw the required objects. b. The worldwide glut gets worse, and the result is a falling price level (deflation) in the United States. Figure B on the right shows an economy in an initial short-run equilibrium at point A. 1.) Using the three-point curved line drawing tool, illustrate the impact of the decrease in input prices due to the worldwide glut. Properly label this curve. 2.) Using the point drawing tool, identify the new equilibrium point and label it 'B'. Note: Carefully follow the instructions above and only draw the required objects.
AD curve shifts down and equillibrium is on new curve b. The worldwide glut gets worse, and the result is a falling price level (deflation) in the United States. Figure B on the right shows an economy in an initial short-run equilibrium at point A. 1.) Using the three-point curved line drawing tool, illustrate the impact of the decrease in input prices due to the worldwide glut. Properly label this curve. 2.) Using the point drawing tool, identify the new equilibrium point and label it 'B'. Note: Carefully follow the instructions above and only draw the required objects. AS Curve moves left on the AD cruve no new one needed new equilibrium is on in on new AS curve and old AD curve
Use the figure on the right to determine what happens to the equilibrium values of the price level and aggregate output when there is aa decrease in Upper GG with no change in the money supply the money supply. 1.) Use the line drawing tool to illustrate the impact of the decrease in Upper G. Label the new curve either AD2 or AS2. 2.) Use the point drawing tool to identify the economy's new equilibrium point. According to the graph, the economy's equilibrium price level will decrease and its equilibrium output level will decrease Use the figure on the right to determine what happens to the equilibrium values of the price level and aggregate output when there is anan increaseincrease in Upper GG with no change in the money supplythe money supply. 1.) Use the lineline drawing tool to illustrate the impact of the increaseincrease in Upper GG. Label the new curve either AD 2AD2 or AS 2AS2. 2.) Use the point drawing tool to identify the economy's new equilibrium point. .
AD shift left According to the graph, the economy's equilibrium price level will DECREASE and its equilibrium output level will DECREASE AD shift right According to the graph, the economy's equilibrium price level will increase and its equilibrium output level will increase .
The figure to the right gives an economy's initial aggregate demand (AD) curve. Using the line drawing tool, show a decrease in aggregate demand. Properly label this line. Note: Carefully follow the instructions above and only draw the required object. Which of the following will generate a decrease in aggregate demand?
AD shifts down to left A tax increase.
The figure to the right shows an economy experiencing a short run equilibrium at point A. Using the line drawing tool, illustrate demand-pull inflation. Properly label this line. The magnitude of the inflation initiated by the change in aggregate demand depends upon
AD shifts far right on the AS curve B. the slope of the AS curve.
The figure to the right shows an economy in an initial short run equilibrium. Using the line drawing tool, indicate the demand-side impact of expansionary fiscal policy. Properly label your new line. Note: Carefully follow the instructions above and only draw the required object. Which of the following best describes your diagram's depiction of the relative changes in aggregate output and the price level?
AD shifts right along AS Aggregate output increased more than the level of prices.
b. Figure: 2 on the right shows an economy in an initial short-run equilibrium at point A. 1.) Using the line drawing tool, illustrate the impact of an increase in the money supply during a period of high unemployment and excess industrial capacity. Properly label this line. 2.) Using the point drawing tool, identify the new equilibrium point and label it 'B'.
AD shifts rights on AS curve still on lower side of AS curve
a. Figure: 1 on the right shows an economy in an initial short-run equilibrium at point A. 1.) Using the line drawing tool, illustrate the impact of a tax cut holding government purchases constant with the economy operating at near full capacity. Properly label this line. 2.) Using the point drawing tool, identify the new equilibrium point and label it 'B'. Note: Carefully follow the instructions above and only draw the required objects.
AD shifts up and equilibrium is on this line where intersects AS
Given the following event: Consumer and business optimism sharply increases. Using the line drawing tool or three point curved line drawing tool, draw the appropriate object in the figure to the right to show the impact on the economy's short-run equilibrium price level and equilibrium aggregate output (income). Properly label this new line or curve. According to your graph, the short run result is that
AD shifts up and right both the price level and aggregate output (income) increase.
The figure to the right shows the economy initially in equilibrium at output Y0. Suppose that the price level in the economy increases. Using the line drawing tool, show the impact this increase has on the AE curve. Properly label this line AE1. According to your graph, the relationship between the price level and the level of aggregate output (income) is ______________ .
AE shifts down According to your graph, the relationship between the price level and the level of aggregate output (income) is NEGATIVE .
The relationship between the price level and aggregate output (income) depicted in the figure to the right is known as the aggregate supply curve . The somewhat unique shape of the short run aggregate supply curve is based in part on how firms respond to an increase in aggregate demand. As firms and the economy move closer to full capacity, the response of firms is likely to change from
AGGREGATE SUPPLY CURVE . mainly increasing output to mainly increasing prices.
The figure to the right shows the determination of the economy's short run equilibrium price level and aggregate output (income). Draw a single line or curve (either AD or AS) such that a new equilibrium occurs with a lower price level and a higher output (income). NOTE: Shifts in AD require the line drawing tool while the three-point curved line drawing tool is used to shift AS. Properly label your new line or curve. Which of the following events could have caused this particular change?
AS shifts below old AS Which of the following events could have caused this particular change? A sharp increase in immigration.
c. Figure: 3 on the right shows an economy in an initial short-run equilibrium at point A. 1.) Using the three point curved line drawing tool, illustrate the impact of an increase in the price of oil caused by a war in the Middle East. Properly label this curve. 2.) Using the point drawing tool, identify the new equilibrium point and label it 'B'.
AS shifts left on the old AD curve
Using the three-point curved line drawing tool, show how the following event will impact the economy's short-run aggregate supply (AS) curve. Properly label this curve. Event: A substantial increase occurs in the wages paid to workers.
AS shifts to the left up
The figure to the right shows an economy in a short-run equilibrium at point A. Using the three-point curved line drawing tool, illustrate cost-push inflation. Properly label this curve. Which of the following is most likely to cause the cost shock that shifts the AS curve consistent with cost-push inflation?
AS shifts up A surge in the price of crude oil.
The figure to the right shows an economy in a short-run equilibrium at point A. Using the three-point curved line drawing tool, illustrate cost-push inflation. Properly label this curve. Which of the following is most likely to cause the cost shock that shifts the AS curve consistent with cost-push inflation?
AS shifts up on the AD line moveing left C. A surge in the price of crude oil.
The figure to the right shows the result of an increase in aggregate demand from AD 0AD0 to AD 1AD1. In its new short run equilibrium the economy is resting above its potential output. Because the economy is producing beyond its potential output level, input prices and hence production costs are being pushed upward. Using either the line drawing tool or the 3-point curved line drawing tool, illustrate the impact of rising production costs. Properly label your new line or curve. Note: Carefully follow the instructions above and only draw the required object. According to your figure, the eventual long-run impact of the increase in aggregate demand is
AS shifts up over old AS is above potential output higher prices, unchanged output.
What End of U.S. Tax Credits Mean for Solar Business Source: Werner, Tom (interviewed in video) "What End of U.S. Tax Credits Mean for Solar Business" Bloomberg.com, posted 11/18/2015. Carefully watch the video, and then answer the following questions. The expiration of tax credits for solar power will likely result in SLOWER growth for the solar panel industry. Approximately _________ of California's electricity comes from solar power. Solar panels have fallen in price as more units are produced. This price decline can be attributed to:
Approximately 30% of California's electricity comes from solar power. Solar panels have fallen in price as more units are produced. This price decline can be attributed to:Economies of scale
d. Suppose the government increases taxes and cuts government spending, and the Fed tries to keep output from falling. As a result,
B. the effect on both GDP and prices will be ambiguous.
The Republic of Yuck is a simple economy with no government, no taxes, and no imports and exports. Yuckers (citizens of Yuck) are creatures of habit. They have a rule that everyone saves exactly 24 percent of income. Assume that planned investment is fixed and remains at 72 billion Yuck dollars. Expert economists of the Republic of Yuck have estimated the following: Real GDP (Y): 197 billion Yuck dollars Planned Investment Spending (I): 72 billion Yuck dollars You are asked by the business editor of the Weird Herald, the local newspaper, to predict the economic events of the next few months. Based on the information given above you predict that the inventories will decrease and output will increase .
Based on the information given above you predict that the inventories will decrease and output will increase .
At the beginning of the year 2013, we have the following information for the Republic of Nurd: Government Spending, G = $0 Net Taxes, T = $0 Planned Investment, I = $25 billion. The citizens of Nurd consume 75 percent of their income and save 25 percent. In other words their MPC = 0.75 and MPS = 0.25. Thus the consumption and saving function of Nurd are given to be: C = 0.75Yd and S = 0.25Yd, where disposable income, Yd = Y−T. Currently the economy of Nurd is in equilibrium. As the leading econometrician of Nurd, you have estimated the full employment level of income for the economy to be $250 billion. Calculate the adjustment in government spending, if any, to achieve full employment in Nurd.
Change in G = $ 37.5 billion.
Carefully watch the video, and then answer the following questions. The government's use of taxation and spending policies to achieve a desired economic objective is known as fiscal policy . Changes in taxation or spending that result from deliberate changes in government policy are known as _________ fiscal policy. The primary source of government funding is:
Changes in taxation or spending that result from deliberate changes in government policy are known as discretionary fiscal policy. The primary source of government funding is: Tax reciepts
During the 1960s there seemed to be an obvious trade-off between inflation and unemployment (lower inflation implies higher unemployment). However, from the 1970s onward, that relationship appeared to breakdown. Which of the following are possible causes of this apparent breakdown? A. The AS shifts but the AD does not. B. The AD curve shifts but AS does not. C. Both the AD and AS supply curve shift. D. Both A and C
D. Both A and C
Study the table on the right. Which of the following could explain why the long-term rate was higher than the short-term rate in 1993 but lower in 1980. A. In 1980, most debt holders believed that the inflation rate would decrease in the future. In contrast, in 1993, inflation was unusually low and debt holders were wary of higher inflation in the future. B. 1980 was an anomaly referred to as an inverted yield curve. It was an anomaly because long-term rates are always higher than short-term rates. Many economists believe it was the cause of the rather severe 1981 recession. C. Expected future short-term rates were falling in 1980 so that the average of the current and expected future short-term rates was lower. In 1993, the current short-term rate was low and expected future short-term rates were rising so that the average of these rates was higher. D. Both A and C are correct
D. Both A and C are correct 1980 1993 Three-month U.S. government bills 11.39 % 2.92 % Long-term U.S. government bonds 10.81 % 6.85 % Prime rate 15.26 % 6.00 %
Some economists argue that the "animal spirits" of investors are so important in determining the level of investment in the economy that the interest rates do not matter at all and planned investment is insensitive to changes in interest rate. Using the line drawing tool, draw such an investment function. Label this line 'ID'.
DRAW Id straight up on 50 in planned investment
Assume that in 2013, the following prevails in the Republic of Nurd: Government Spending, G = $0 Net Taxes, T = $0 Planned Investment, I = 25. Furthermore it is known that the citizens of Nurd consume 80 percent of their income and save 20 percent. Thus the consumption and saving function of Nurd are given to be: C = 0.80Yd and S =0.20Yd, where disposable income, Yd = Y−T. Determine the equilibrium level of income.
Equilibrium Income = 125. (Enter your response as an integer.)
According to sticky wage theory, wages are just as likely to be stuck in the upward direction as they are in the downward direction. False One explanation for downwardly sticky wages is that firms enter into social, or implicit contracts with workers not to cut wages. True Workers in one industry may be unwilling to accept a pay decrease because they are concerned that their wage will fall relative to workers in other industries. True
FAlse true true
Fed's Big Three Expected to Reinforce December as Liftoff Option Source: Condon, Christopher "Fed's Big Three Expected to Reinforce December as Liftoff Option" Bloomberg.com, posted 11/03/2015. Carefully read the article, and then answer the following questions. The branch of the Fed charged with setting interest rate policy is the: The Fed has two often-conflicting goals which are: The Fed's primary tool for stimulating the economy is:
Federal Open Market Committee (FOMC). price level stability and economic growth. open market operations to lower interest rates.
For each of the following, say whether it is an asset on the accounting books of the Federal Reserve or a liability . Federal Reserve notes (outstanding)_______ Bank reserves (from depository institutions)__________ Gold_______ Loans to banks________ Deposits made by the U.S. Treasury_______ U.S. Treasury securities ___________
Federal Reserve notes (outstanding) liability Bank reserves (from depository institutions) liability Gold asset Loans to banks asset Deposits made by the U.S. Treasury liability U.S. Treasury securities assest
When the average income tax rates increase as a result of economic expansion, it is known as
Fiscal drag
Can Obama and Congress Agree on a Budget? Source: Olorinnipa, Toluse (commentator in video) "Can Obama and Congress Agree on a Budget?" Bloomberg.com, posted 09/08/2015. Carefully watch the video, and then answer the following questions. Governments typically provide which of these services? A. Social safety nets. B. Roads and bridges. C. Military protection. D. All of the above.
Governments typically provide which of these services? ALL OF THE ABOVE
In 2012, the country of Ruba was suffering from a period of high unemployment. The new president, Clang, appointed Laurel Tiedye as his chief economist. Ms. Tiedye and her staff estimated these supply and demand curves for labor from data obtained from the secretary of labor, Robert Small: QD=100−55W QS=25W−2020 where Q is the quantity of labor supplied/demanded in millions of workers and W is the wage rate in slugs, the currency of Ruba. Currently, the law in Ruba says that no worker shall be paid less than 9 slugs per hour. Estimate the quantity supplied, the number unemployed, and the unemployment rate. The quantity supplied is 205 million. (Enter your response as an integer.) The number unemployed is 150 million. (Enter your response as an integer.) The unemployment rate is 73.17 percent. (Enter your response as an integer.) President Clang, over the objection of Secretary Small, has recommended to congress that the law be changed to allow the wage rate to be determined in the market. If such a law was passed and the market adjusted quickly, what would happen to total employment, the size of the labor force, and the unemployment rate? The employment would be 80 million. (Enter your response as an integer.) The size of the labor force would be 80 million, and the unemployment rate would be 0 percent. (Enter your responses as integers.) 1.) Using the point drawing tool, plot the wage and employment level with the minimum wage. Attach the corresponding label. 2.) Using the point drawing tool, plot the wage and employment level when the market is in equilibrium. Attach the corresponding label. Will the Rubanese labor market adjust quickly to such a change in the law? Why or why not. The Rubanese economy
Graph will not adjust quickly due toocial contracts.
The relationship between aggregate expenditure and real GDP is best described by
If aggregate expenditure falls short of real GDP, inventories will accumulate and real GDP and aggregate income will fall in future.
Which of the following best describes the relationship between aggregate expenditure and real GDP ?
If aggregate expenditure falls short of real GDP, inventories will accumulate and real GDP and aggregate income will fall in future.
[Related to the Economics in Practice LOADING... in this section] The Economics in Practice states that the capital value of Professor Serebryakov's estate is not the value for which he could sell the estate if the interest rate on "suitable" securities is higher than the average yield from the estate. If the interest rate on "suitable" securities rose, the value of the estate would_______ If investment in the estate was suddenly viewed as being more risky than investment in the securities, the value of the estate would ___________ If the securities were suddenly viewed as being less risky than was previously thought, the yield on the securities would_____________
If the interest rate on "suitable" securities rose, the value of the estate would fall . If investment in the estate was suddenly viewed as being more risky than investment in the securities, the value of the estate would fall . If the securities were suddenly viewed as being less risky than was previously thought, the yield on the securities would decrease .
Suppose that in an economy, net taxes and government spending are independent of income. It is determined that when government spending decreases by $200 billion, income falls by $1000 billion. In this economy the value of the MPS = In this economy the value of the MPC =
In this economy the value of the MPS =.2 -> to find 200/1000=.2 In this economy the value of the MPC = .8
Normally, people both in the U.S. and from around the world think of highly-rated corporate or government bonds as a safe place to put their savings relative to common stocks. Because the stock market had performed so poorly during the recession, and because many foreigners turned to the U.S. as a safe place to invest, bond sales boomed. If you were a holder of high-grade fixed-rate bonds that you purchased a few years earlier when rates were much higher, you found yourself with big capital gains. That is, as rates went lower, the value of previously issued bonds increased. Many investment advisors in late 2010 were telling their clients to avoid bonds because inflation was going to come back. Suppose you bought a $10,000 ten-year fixed-rate bond issued by the U.S. Treasury in July of 2007 that paid 5% interest. In July of 2010, new seven-year fixed-rate bonds were being sold by the Treasury that paid 2.43%. In this case, the flow of interest
In this case, the flow of interest has changed, making the bond worth more if you sell it today. Bond prices fall if people fear inflation is coming because the Fed can be expected to react by raising rates to reduce aggregate demand.
If planned investment is greater than actual investment then,
Inventories decrease and production increases
The relationship between interest rate (r) and planned investment (I) is given by the following investment function. I = 1200minus−40r Determine the value of planned investment when the interest rate is 5 percent (r = 5).
I = 1000. (Enter your response as an integer.)
currency held outside banks $440 savings accounts $2,100 other near monies $1000 traveler's checks/ other checkable deposits $60 money market accounts $1,100 demand deposits $700 The table on the right contains an approximate breakdown of the U.S. money supply in September 2001. Use this data to calculate M1 and M2. The main advantage of looking at M2 instead of M1 is that M2 is generally more stable. To illustrate, suppose banks raised the interest rate paid on checking accounts, while the rate paid on savings accounts remained unchanged, resulting in consumers transferring $125 billion from savings into their checking accounts. How would the money supply be affected?
M1 was $ 1200 billion. (Enter your response as an integer.) M2 was $ 5400 billion. (Enter your response as an integer.) M1 would increase by $125 billion, but M2 would remain unchanged.
As a measure of the money supply, M1 differs from M2 in that
M2 includes M1 plus savings accounts, money market accounts, and other near monies.
As a measure of the money supply, M1 differs from M2 in thatA.
M2 includes M1 plus savings accounts, money market accounts, and other near monies.
You are given the following data concerning Freedonia, a legendary country: Consumption Function: C = 200200 + 0.600.60Y Investment: I = 300300 Aggregate Expenditure Function: AE = C + I Equilibrium: AE = Y Find the following:
MPC = .60. (Enter your response rounded to two decimal places.) MPS = .4. (Enter your response rounded to two decimal places.) The level of equilibrium income, Y = $1250. (Enter your response as an integer.) The value of the investment multiplier = 2.5. (Enter your response rounded to two decimal places.) The change in the level of equilibrium income if investment increases by $10. ΔY = $25. (Enter your response rounded to two decimal places.) SEE notebook for work
You are given the following data concerning Freedonia, a legendary country: Consumption Function: C = 100 + .90Y Investment: I = 300 Aggregate Expenditure Function: AE = C + I Equilibrium: AE = Y Find the following:
MPC = .90. (Enter your response rounded to two decimal places.) MPS = .10. (Enter your response rounded to two decimal places.) The level of equilibrium income, Y = $4000. (Enter your response as an integer.) The value of the investment multiplier = 10. (Enter your response rounded to two decimal places.) The change in the level of equilibrium income if investment increases by $10. ΔY = $100. (Enter your response rounded to two decimal places.)
Graphically show how a central bank uses a change in the money supply to lower interest rates. 1.) Using the line drawing tool, show how a central bank uses a change in the money supply to lower interest rates. Properly label your curve. 2.) Using the point drawing tool, show the new equilibrium. Label your point 'E2'. Carefully follow the instructions above, and only draw the required objects. Which of these is a common goal of central banks? A. Full employment. B. Economic growth. C. Price level stability. D. All of the above.
MS shifts right D ALL OF THE ABOVE
In an economy taxes are lump-sum. If MPS = 0.40, calculate the value of the Government Spending Multiplier and the Tax Multiplier. Government Spending Multiplier = Tax Multiplier =
Multiplier = 2.5. (Enter your response rounded to one decimal place.) Tax Multiplier =−1.5. (Enter your response rounded to one decimal place and include a minus sign if appropria
Sherman Peabody earns a monthly salary of $2000, which he receives at the beginning of each month. He spends the entire amount each month, at the rate of $67 per day. (Assume 30 days in a month.) The interest rate paid on bonds is 10 percent per month. It costs $4 every time Peabody sells a bond. Using the information above compute the following: Peabody should sell (switch) bonds ___times per month, because he can _______________ his net profit by doing so. (Enter your response as an integer.) The maximum net profit would be $ _______. (Enter your response as an integer.) The optimal average of money holdings is $ __________. (Enter your response as an integer.)
Peabody should sell (switch) bonds 4 times per month, because he can maximize his net profit by doing so. (Enter your response as an integer.) The maximum net profit would be $ 64. (Enter your response as an integer.) The optimal average of money holdings is $ 200. (Enter your response as an integer.)
Draw a graph to illustrate the following. a. A Phillips Curve based on the assumption of a vertical long-run aggregate supply curve Using the line drawing tool, graph a Phillips Curve based on a vertical long-run aggregate supply curve in figure 1. Assume long-run output corresponds to an unemployment rate of U (marked on the x-axis). Properly label this curve.
Phil curve is vertical line stright up in middle
b. The effect of a change in inflationary expectations on a recently stable Phillips Curve Using the line drawing tool, graph a new Phillips Curve in figure 2 assuming inflationary expectations decreasedecrease. Properly label this curve.
Phil curve shifts below curve
Aggregate saving(S)
S=Y-C
In the Republic of Ragu, the currency is the rag. During 2012, the Treasury of Ragu sold bonds to finance the Ragu budget deficit. In all, the Treasury sold 50,000 10-year bonds with a face value of 100 rags each. The total deficit was 5 million rags. Further, assume that the Ragu Central Bank reserve requirement was 20 percent and that in the same year, the bank bought 500,000 rags' worth of outstanding bonds on the open market. Finally, assume that all of the Ragu debt is held by either the private sector (the public) or the central bank. a. The combined effect of the Treasury sale and the central bank purchase on the total Ragu debt outstanding is a change in overall debt of 5,000,000 rags and, in particular, the debt held by the private sector increases by 4,500,000 rags. b. The Treasury sale will change the money supply in Ragu by 0 rags. c. Assuming no leakage of reserves out of the banking system, the effect of the central bank purchase of bonds on the money supply is a change of 2,500,000 rags.
SEE notes- in notebook
The following consumption function incorporates wealth (W) as a determinant of consumption. We have the following information on consumption (C) and investment (I): C = 10 +0.70Y + 0.03W I = 100
See notebook for worked out problem
We have the following information for a country. Consumption Function: C = 200 + 0.8(Yminus−T) Net Taxes: T = 125 Planned Investment: I = 100 Government Spending: G = 200 The graph of the consumption function is shown as C. 1.) Using the line drawing tool, draw the Aggregate Expenditure line. Label it AE1. 2.) Using the line drawing tool, draw the Aggregate Expenditure line after net taxes increase by 125. Label it as AE2.
See screen shot AE1 and AE2 and consumption
Assume there are no taxes. The equation for the consumption function is given to be: C = 100+ 0.78Y, where Y represents aggregate income. Determine the equation for the saving function:
S = −100 + .22Y. (Enter your response for the y-intercept as an integer and round your response for the slope to two decimal places.)
The FOMC (Federal Open Market Committee) consists of _____voting members. Seven of the members are ____________________ . _____of the 12 presidents of the Federal Reserve district banks vote on a rotating basis. The president of the NY Federal Reserve Bank _________ gets a vote.
The FOMC (Federal Open Market Committee) consists of 12voting members. Seven of the members are the Board of Governors . 4 of the 12 presidents of the Federal Reserve district banks vote on a rotating basis. The president of the NY Federal Reserve Bank always gets a vote.
China's Selling Tons of U.S. Debt. Americans Couldn't Care Less Source: Kruger, Daniel "China's Selling Tons of U.S. Debt. Americans Couldn't Care Less" Bloomberg.com, posted 10/18/2015. Carefully read the article, and then answer the following questions. The U.S funds government deficits by: U.S. Treasury securities include: The current total debt (October 2015) of the U.S. is approximately:
The U.S funds government deficits by: selling U.S. Treasury U.S. Treasury securities include: Treasury bills The current total debt (October 2015) of the U.S. is approximately:18 trillion
Jane wins $150,000 playing the lottery, and instead of spending it, she deposits it into her checking account at the First Bank of Anywhere. Her bank makes a loan (equal to its excess reserves) to Mary, who uses the money to remodel her home. The remodeling company deposits the money into the Second Bank of Anywhere. The required reserve ratio is 5 percent and each bank initially has no excess reserves . The amount of the loan made by the First Bank equals _______ The amount of the remodeling company's deposit that Second Bank is required to keep as reserves equals______
The amount of the loan made by the First Bank equals 142500-> (150000*.05=7500, 150000-7500=142500) The amount of the remodeling company's deposit that Second Bank is required to keep as reserves equals 7125 (142500*.05=7125)
Can Obama and Congress Agree on a Budget? Source: Olorinnipa, Toluse (commentator in video) "Can Obama and Congress Agree on a Budget?" Bloomberg.com, posted 09/08/2015. Carefully watch the video, and then answer the following questions. The deadline for passing a new budget for the United States government is: Congress will only be in session for______ Several members of Congress are taking uncompromising stances on budget issues since they are:
The deadline for passing a new budget for the United States government is: sept 30,2015 Congress will only be in session for 10 DAYS Several members of Congress are taking uncompromising stances on budget issues since they are: running for president.
Consider the following information for a country: Consumption Function:C = 85 + 0.5Yd Investment Function: I = 85 Government Spending: G = 150 NetTaxes: T =−50 +0.25Y DisposableIncome: Yd = Y−T Equilibrium: Y = C + I + G The level of equilibrium income, Y, = The amount of taxes collected by the government at equilibrium, T, = Consider the following information for a country: Consumption Function: C = 85 +0.5Yd Investment Function: I =85 Government Spending: G = 150 Net Taxes: T =−50+0.25Y Disposable Income: Yd = Y−T Equilibrium: Y = C + I + G The level of equilibrium income, Y, = $552. (Enter your response rounded to two decimal places.) The amount of taxes collected by the government at equilibrium, T, = $88. (Enter your response rounded to two decimal places.) The budget deficit at equilibrium, (G−T), = 62
The level of equilibrium income, Y, = 552 The amount of taxes collected by the government at equilibrium, T, = $88. (Enter your response rounded to two decimal places.) The budget deficit at equilibrium, (G−T), = 62
When the interest rate is very low—well below what would be considered normal—households and firms will expect the rate to rise in the long run. How does this affect the demand for holding money in the present?
The money demand curve will be nearly flat but downward sloping on the expectation that bond prices are going to fall
Suppose in the Republic of Madison that the regulation of banking rested with the Madison Congress, including the determination of the reserve ratio. The Central Bank of Madison is charged with regulating the money supply by using open market operations. In April 2013, the money supply was estimated to be 80 million hurls. At the same time, bank reserves were 8.0 million hurls and the reserve requirement was 10 percent. The banking industry, being "loaned up," lobbied the Congress to cut the reserve ratio. The Congress yielded and cut the reserve requirement to 8 percent. The money supply could potentially _____________ by ________ million hurls. (Enter your response rounded to one decimal place.) If the central bank decided that the money supply should not be increased, it could
The money supply could potentially increase by 20 million hurls. (Enter your response rounded to one decimal place.) sell government securities to prevent the expansion of the money supply. To increase the money supply the central bank creates additional reserves by lowering the discount rate, buying government securities, or lowering the required reserve ratio. Change in money supply=(8.4-(0.10*70))*(1/0.10) To increase the money supply, the central bank creates additional reserves by lowering the discount rate, buying government securities, or lowering the required reserve ratio. To decrease the money supply, the central bank creates additional reserves by raising the discount rate, selling government securities, or raising the required reserve ratio.
Suppose the Treasury of the United States issues bonds and sells them to the public to finance the deficit. What happens to the money supply and why?
The money supply remains unchanged because every dollar taken in by the Treasury goes right back into circulation through government spending.
The U.S. money supply (M1) at the beginning of 2000 was $1,148 billion broken down as follows: $523 billion in currency, $8 billion in traveler's checks, and $616 billion in checking deposits. Suppose the Fed decided to increase the money supply by decreasing the reserve requirement from 11 percent to 10 percent. Assume all banks were initially loaned up (had no excess reserves) and the quantity of currency and traveler's checks held outside of banks did not change. How large a change in the money supply would have resulted from the change in the reserve requirement? The money supply will change by ________
The money supply will change by $ 61.6 billion. (Enter your response rounded to two decimal places and include a minus sign if necessary.)
Controlling money supply
To increase the money supply, the central bank creates additional reserves by lowering the discount rate, buying government securities, or lowering the required reserve ratio. To decrease the money supply, the central bank creates additional reserves by raising the discount rate, selling government securities, or raising the required reserve ratio.
When a government spends more money than it receives in revenues it is said to run a budget ________
When a government spends more money than it receives in revenues it is said to run a budget DEFICIT
Consider the following information on the levels of income, consumption and planned investment for a country:- Gives aggregate output, consumption expenditute
Y=C+I+G S=Y-C
The Republic of Yuck is a simple economy with no government, no taxes, and no imports and exports. Yuckers (citizens of Yuck) are creatures of habit. They have a rule that everyone saves exactly 20 percent of income. Assume that planned investment is fixed and remains at 175 billion Yuck dollars. Further assume that autonomous consumption (independent of Y) is zero such that consumption (C) is MPC ×Y. Expert economists of the Republic of Yuck have estimated the following: RealGNP(Y) 656 billion Yuck dollars Planned Investment Spending (I) :175 billion Yuck dollars
You are asked by the business editor of the Weird Herald, the local newspaper, to predict the economic events of the next few months. Based on the information given above you predict that the inventories will DECREASE and real GNP will INCREASE . Things will stop changing when SAVINGS EQUALS INVESTMENT . The Republic of Yuck's economy will reach equilibrium when its Real GNP = 875 billion Yuck dollars. (Enter your response as an integer.)
The government of Lumpland is enjoying a fat budget surplus with government expenditure G = 150 and taxes T =200. Both G and T are independent of income. The consumption function of Lumpland has been estimated to be C = 150 + 0.90(Y−T). Suppose further that investment spending is fixed at I = 100. Calculate the equilibrium level of GDP in Lumpland. Solve for equilibrium levels of Y, C, and S. Now, suppose that the Republican Congress of Lumpland succeeds in reducing taxes by 30 billion to a new fixed level of 170. Determine the value of the tax multiplier.
Y = 2200. (Enter your response rounded to two decimal places.) C = 1950. (Enter your response rounded to two decimal places.) S = 50. (Enter your response rounded to two decimal places.) Tax Multiplier = negative −9. (Enter your response rounded to two decimal places and include a minus sign if appropriate.) -(MPC/MPS) is the Tax multiplier equation Solve for equilibrium levels of Y, C, and S after the tax cut and check to ensure that the multiplier worked. Y = 2470. (Enter your response rounded to two decimal places.) C = 2220. (Enter your response rounded to two decimal places.) S = 80. (Enter your response rounded to two decimal places.)
Consider the following model of a very simple economy: Household saving and investment behavior depend in part on wealth (accumulated savings and inheritance). In the late 1990's many were concerned with very large increases in stock values (a form of wealth) and its possible effect on saving and investment. The following consumption function incorporates wealth (W) as a determinant of consumption. We have the following information on Consumption (C) and Investment (I): C = 15 + 0.60Y + 0.04W I =200 W = 1,000, We are ignoring the fact that saving adds to the stock of wealth. Calculate the values of equilibrium Y, C and S. (Enter your responses as integers.) Suppose that wealth increases by 50%. Calculate the values of equilibrium Y, C and S. (Enter your responses as integers.)
Y = $638; C = $438; S = $200. New Y = $688; New C = $488; New S = $200. As a result of the wealth accumulation, GDP INCREASES .
Suppose the economy is initially operating well below capacity. In this case, an expansionary macroeconomic policy will result in
a small price increase relative to the output increase.
An organization of workers with a legal right to bargain with employers with regard to wages and working conditions is known as:
a union
You are given the following data concerning Freedonia, a legendary country: Consumption Function: C = 200 + 0.6Y Investment: I = 200 Aggregate Expenditure Function: AE = C + I Equilibrium: AE = Y Calculate the following:
a. The level of equilibrium income, Y = 1000. (Enter your response as an integer.) b. The value of the investment multiplier = 2.5. (Enter your response rounded to one decimal place.) c. The change in the level of equilibrium income if investment increases by 10. Upper Delta Upper ΔY= 25. (Enter your response as an integer.)(10*2.5=25)
If the government increases purchases to stimulate the economy
aggregate demand increases
a tax increase
always decreases equilibrium outcome
Aggregate output is
always equal to aggregate income
Which of the following is the best explanation of the shape of the AD curve? The aggregate demand curve slopes downward because
an increase in the price level causes the demand for money to rise, driving up the interest rate and discouraging investment, which causes aggregate demand to fall.
In the short run, an increase in AD can sometimes cause output to rise without raising prices because
at low levels of output, firms can have excess capacities which do not raise marginal costs as they begin to be utilized.
Using money as a medium of exchange is more efficient than barter because
barter requires a double coincidence of wants.
Two countries, A and B have the same MPC out of disposable income (Y-T) . In each country the tax obligations are based on fixed tax rates, so that T = t times ×Y, where t is the proportional tax rate. The tax rate is lower in country A than in country B. The graph shows two consumption functions, C1 and C2. Based on the information given above, country B's consumption function must be C1 .
because B will be lower in consumption than A taxes cause decrease in consuptions because portion of income is taken from consumption and saving so lower line is B
Expansionary monetary policy has people concerned about future inflation, which is causes an increase in expected inflation. This will
cause the Phillips Curve to shift right.
You are given the following data concerning Freedonia, a legendary country: Consumption Function: C = 250 +0.75Y Investment: I = 150 Aggregate Expenditure Function: AE = C + I Equilibrium: AE = Y Complete the following: 1.) Using the line drawing tool, draw the Consumption Function. Label this line 'C'. 2.) Using the line drawing tool, draw the Aggregate Expenditure Function. Label this line 'AE'. 3.) Using the point drawing tool, identify the equilibrium level of income.
check screen shot Graph Consumption and AE add investment amount to the number in C in this case 250=250+150->C shifts to 400 is parallel to C function
The following information is available for a small country: Saving Function : S = minus−200 + 0.5Y Investment Function: I = 200 1.) Using the line drawing tool, draw the Saving Function and label it S. 2.) Using the line drawing tool, draw the Investment Function and label it IA. 3.) Using the point drawing tool, identify the initial equilibrium. Label this point A. 4.) Using the line drawing tool, draw a new Investment Function when Investment increases by 100. Label the new investment function IB. 5.) Using the point drawing tool, plot the new equilibrium point. Label this point B.
check screen shot labeled savings function Remember investment looks like X=200 a straight line across where Y equals all values at X=200
Which of the following best describe the functions of the Federal Reserve ?
clearing interbank payments, regulating the banking system, and managing the nation's foreign exchange reserves
Assume the classical view of the labor market. An auto worker is laid off. After looking for a job for some time he is offered a lower paying job, but does not take it because he believes he can do better. The worker is
considered unemployed, but the labor market is working properly.
During the third quarter of 1997, Japanese GDP was falling at an annual rate of over 11 percent. Many blame the big increase in Japan's taxes in the spring of 1997, which was designed to balance the budget. Usually, if taxes are increased,
disposable income declines, consumption falls, planned aggregate expenditure falls, and aggregate income (output) declines.
During an expansion, interest rates may riserise even if the Fed takes no action to cut the money supply. Using the line drawing tool, draw and label a new line that illustrates this situation. Note: Carefully follow the instructions above, and only draw the
draw md line only supply does not change
Empirical studies of labor markets have identified several benefits firms receive from paying workers more than the market-clearing wage. These studies tend to support the
efficiency wage theory.
The problem of solving global warming and the problem of attaining adequate household saving are similar, because both
emphasize the trade-off between present and future.
Suppose government spending and lump sum taxes are both reduced by $3030 billion. As a result, GDP will
fall by $30 billion.
They have also estimated that Yukkers consume 7575 percent of their income and save 2525 percent. You are asked by the business editor of the Yuk Gazette to predict the events of the next few months by using the above estimates. Based on the above estimates, you predict that if the government of Yuk makes no changes, income will If no changes were made, the economy of Yuk will settle at
fall since aggregate expenditure is less than output/income 700 billion yukks
During periods of budget surpluses (when Gless than<T), government debt
falls
During the late 1970s and early 1980s the Fed used monetary policy primarily to
fight inflation.
The multiplier is
finite because a portion of income is saved.
According to advocates of the long-run vertical Phillips curve, the natural rate of unemployment is determined by
frictional and structural unemployment.
If planned investment increases by $200, the change in equilibrium output will be greater than $200.
greater than $200.
As shown in the diagram to the right, the short-run aggregate supply curve (AS) is upward-sloping. This positive slope is explained in part by the fact that
in the short-run, input priceslong dash—particularly wage rateslong dash—are slower to adjust to increasing aggregate demand than are output prices.
What action could the central bank take to counteract the affects of the increase in taxes? The central bank could _______ the money supply, which would _______ interest rates and _______ investment.
increase; decrease; stimulate
If MPC increases, the value of the investment multiplier
increases
An increase in planned investment will increase equilibrium income of those working on that investment project, thereby
increasing their consumption, and creating more income and more spending multiple times over and over.
The Phillips Curve models the relationship between __________________________. It asserts that these variables are ________________ correlated.
inflation and unemployment; negatively
During a recession ,
investment may not respond positively to lower interest rates since low demand for goods leads to low capital utilization and low investment. Your answer is correct.B.
In the first few chapters of this book, we introduced the notion of supply and demand. One of the first things we did was to derive the relationship between the price of a product and the quantity demanded per time period by an individual household. Now we have derived what is called the aggregate demand curve. The two look the same and both seem to have a negative slope, but the logic is completely different. The negative slope of the aggregate demand curve
is due to a higher price level raising interest rates comma reducing investment and aggregate output
Assume the classical view of the labor market. During a recession,
labor demand will decrease, the real wage will fall, and there will be no unemployment.
The figure to the right contains a point indicating the economy's initial price and aggregate output (P 0,Y0) combination. Suppose that the price level rises such that P1 > P0. 1.) Using the point drawing tool, identify a potential location for the economy's new price and aggregate output (Upper P 1P1,Upper Y 1Y1) combination. Label this point B. 2.) Using the line drawing tool, connect these points and properly label this line.
new point is on demand curve b IS to the left of and above A
The Republic of Yuck is a simple country with no government, no taxes and no imports or exports. Everyone saves exactly 22 percent of income. Economists have estimated that the Real GDP (Y) for Yuck is 192 billion Yuck dollars. Planned investment is 67 billion Yuck dollars. Based on the data you determine that in Yuck the level of real GDP is
not in equilibrium
The economy of Mayberry is currently in equilibrium at point Upper AA on the graph at right. Prince Barney of Mayberry has decided that he wants the economy to grow, and has ordered the Royal Central Bank of Mayberry to print more currency so banks can expand their loans to stimulate growth. Move the cursor on the graph at right to the new short minus runshort−run equilibrium point.
point A moves along AD to point B
The economy is beginning to slip into a recession. Further, data indicate that inflation is low. The Fed will most likely respond to this state of the economy by
purchasing government securities to lower the interest rate.
The demand for money in a country is given by Upper M Superscript dMd = 10,000minus−10,000r + P times •Y where Upper M Superscript dMd is money demand in dollars, r is the interest rate (a 10 percent interest rate means r = 0.1), and P times •Y is national income. Assume P•Y is initially 7,500, and the money supply (Ms) is set by the central bank at $15,000. Suppose you are asked to find the equilibrium interest rate. How would you find it? First you need to know what determines the interest rate. It is the point at which the quantity of money demanded equals the quantity of money supplied. This can be solved for algebraically by setting the equation for money demand equal to money supply: Upper M Superscript dMd = 10,000minus−10,000r + P times •Y = Upper M Superscript sMs Now substitute in for any known values and solve for the interest rate (r): 10,000minus−10,000r + 7,500 = 15,000 minus−10,000r = minus−2,500 r = 2,500/10,000
r=.25 or 25%
Suppose planned investment is completely insensitive to changes in the interest rate and also consumption does not depend on the interest rate. If the interest rate is reduced, planned aggregate expenditure
remains unchanged
The derivation of an economy's aggregate demand (AD) curve
requires knowledge regarding the interaction between the goods market and the money market.
According to the classical view of the labor market, if there is an excess supply of labor,
some workers will work for a lower wage and others will exit the labor market.
Suppose that planned investment is fixed in an economy. Now if all individuals attempt to save more,
the aggregate saving function shifts up, equilibrium income decreases, but aggregate saving remains the same.
In order to expand the supply of money in Japan in 2009, the head of the Central Bank of Japan should This action
the head of the Central Bank of Japan should lower the discount rate This action increases credit availability and raises the money supply
if there is excess demand in the money market,
the interest rate will increase until the quantity of money demanded is equal to the quantity of money supplied.
During 2003, we began to stop worrying that inflation was a problem. Instead we began to worry about deflation, a decline in the price level. Assume that the Fed decided to hold the money supply constant. What impact would deflation have on interest rates?
the money demand curve would shift down and to the left (decrease in demand) and interest rates would decline.
If the FOMC orders the open market desk to sell government securities,
the money supply will decrease, and the interest rate will increase.
If the FOMC orders the open market desk to purchase government securities,
the money supply will increase, and the interest rate will decrease
As the interest rate rises, the
the optimal amount of bond holdings increase
The term "privately held federal debt" refers to
the part of the federal debt that is held by private individuals and organizations.
Two countries, A and B, both are currently in recession. The values of the MPS for A and B are 0.1 and 0.5 respectively. The governments of both countries are planning to boost income through an expansionary policy of a tax cut of $1 billion. The policy of tax cut
will be less effective in country B than in country A since the value of the tax multiplier is lower in country B.
Use the figure on the right to determine what happens to the equilibrium values of the interest rate and output when there is an increase in P with no change in government spending government spending. 1.) Use either the 3-point curve to shift the IS curve or the line drawing tool to shift the FR curve, as appropriate, to illustrate the impact of the increase in P. Properly label your curve. 2.) Use the point drawing tool to identify the economy's new equilibrium point. Carefully follow the instructions above and only draw the required objects. According to the graph, the equilibrium interest rate will __________ and the equilibrium output level will __________ .
1.) Use either the 3-point curve to shift the IS curve or the line drawing tool to shift the FR curve, as appropriate, to illustrate the impact of the increase in P. Properly label your curve. fed rule cure shift up on the IS curve no new IS curve needed 2.) Use the point drawing tool to identify the economy's new equilibrium point. Carefully follow the instructions above and only draw the required objects. According to the graph, the equilibrium interest rate will INCREASE and the equilibrium output level will DECREASE .
Given the information in the table, what is the unemployment rate? Catagory Number of people (millions) Less than 16 years old 40 Full-time workers 135 Full-time military 1.2 Part-time workers 20 Institutionalized 14.8 Looking for work 11.5 Retired 41.5
6.9%
Assume that in 2013, the following prevails in the Republic of Nurd: Government Spending, G = $0 Net Taxes, T = $0 Planned Investment, I = 25 Income, Y = 200 It is also known that the households of Nurd consume 75 percent of their income and save 25 percent of their income, i.e., MPC = 0.75 and MPS = 0.25. Thus the consumption and saving function are given by: C = 0.75Yd and S = 0.25Yd where disposable income, Yd = Y−T. At the current level of income, Y =200,
Leakages, S + T exceed injections, I + G and income will fall in coming months.
During the third quarter of 1997, Japanese GDP was falling at an annual rate of over 11 percent. Many blamed the big increase in Japan's taxes in the spring of 1997, which was designed to balance the budget. How could an increase in taxes with the economy growing slowly precipitate a recession? When taxes increase, disposable income will _______. As disposable income _______, it causes consumption to ______ which _______ output/income.
fall; decreases; decline; reduces
The curve displayed in the figure to the right is known as the economy's The level of aggregate output (Upper Y 0Y0) where the curve at right is drawn is called
long-run aggregate supply. potential output or potential GDP.
In an economy, when net taxes decrease by $200 billion, real GDP increases by $600600 billion. The value of the MPC in this economy is
.75
The structural deficit
remains the same at full employment
and aggregate income equals the
total income received by all the factors of production during a time period
Aggregate output is equal to the
total quantity of goods and services produced in an economy during a time period
In an economy, government spending (G) and taxes (T) are independent of income. The value of MPC is known to be 0.80. If government spending increases by $20 billion, the amount by which taxes must be adjusted so that income or output (Y) does not change, to curb possible inflationary pressure, is:
ΔT = 25