Macro 2020
Refer to the graphs. Terryville has a comparative advantage in producing
product A.
Refer to the diagram. Suppose that aggregate demand increased from AD1 to AD2. For the price level to stay constant,
the aggregate supply curve would have to shift rightward.
When a bank has a check drawn and cleared against it
the amount of required reserves the bank must have will fall.
Macroeconomics approaches the study of economics from the viewpoint of
the entire economy
Which one of the following expressions best states the idea of opportunity cost?
"There is no such thing as a free lunch"
If a U.S. importer can purchase 10,000 British pounds for $20,000, the rate of exchange is
$1 = 2 British pounds in the United States.
Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The per-unit cost of production in the economy described is
$2.
Refer to the accompanying balance sheet for the ABC National Bank. Assume the required reserve ratio is 20 percent. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit and has a check cleared against it for that amount, its reserves and checkable deposits will now be
$22,000 and $110,000, respectively.
Expected Rate of Return (%)Amount of Investment With This Rate of Return or Higher ($B)12%$101020830640450260 The investment schedule in the given table indicates that if the real interest rate is 8 percent, then
$30 billion of investment will be undertaken.
Refer to the tables of information for a private closed economy. If the real interest rate is 9 percent, the equilibrium GDP will be
$300
Gross Private Domestic Investment$46Exports of the U.S.9Disposable Income190Personal Saving10Government Purchases84Net Foreign Factor Income10Consumption of Fixed Capital52Dividends13Imports of the U.S.12Taxes on Production and Imports22Personal Taxes38Social Security Contributions23Statistical Discrepancy0 Refer to the accompanying data. All figures are in billions of dollars. The national income is
$346.
Ig=Ig=80Ig=Ig=80 S=−80 + 0.4YS=-80 + 0.4Y (Advanced analysis) The equations refer to a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). The equilibrium GDP will be
$360.
If the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank?
$450
Money Market Mutual Fund Balances Held By Businesses$100Money Market Mutual Fund Balances Held By Individuals220Currency In Banks10Currency In Circulation60Savings Deposits, Including Money Market Deposit Accounts50Large-denominated ($100,000 or more) Time Deposits180Small-denominated ($100,000 or less) Time Deposits80Checkable Deposits70 Refer to the table. Money supply M2 for this economy is
$480
Money Supply Money DemandInterest RateInvestment (at Interest Rate Shown)$400$6002%$700$4005003600$4004004500$4003005300$4002006200 Answer the question on the basis of the information in the table. The amount of investment that will be forthcoming in this economy at equilibrium is
$500
Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by
$6 billion.
Gross Investment$18National Income100Net Exports2Personal Income85Personal Consumption Expenditures70Saving5Government Purchases20Net Domestic Product105Statistical Discrepancy0 Refer to the accompanying data (all figures in billions of dollars). Disposable income is
$75.
Item 32 Item 32 YearUnits of OutputPrice Per Unit120$422543306 Assume an economy that is producing only one product. Output and price data for a three-year period are shown in the table. If year 2 is chosen as the base year, real GDP for year 1 is
$80.
Refer to the accompanying table of information for the Moolah Bank, and assume that Moolah Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moolah is a part could expand loans by
$900.
Suppose the balance on the current account is +$50 billion and the balance on the capital account is +$1 billion. The balance on the financial account is
+$51 billion.
Refer to the given data for a hypothetical economy. At the $100 level of income, the average propensity to save is
0.10
(Advanced analysis) Assume the following consumption schedule: C = 20 + 0.9Y, where C is consumption and Y is disposable income. The MPC is
0.45
The following are hypothetical exchange rates: $1 = 140 yen; 1 Swiss franc = $0.10. We can conclude that
1 Swiss franc = 14 yen.
The multiplier can be calculated as
1/(1 - MPC)
Assume the price of product Y (the quantity of which is on the vertical axis) is $15 and the price of product X (the quantity of which is on the horizontal axis) is $3. Also assume that money income is $60. The absolute value of the slope of the resulting budget line is
1/5
If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is
12.5 percent
In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. A decrease in the interest rate not caused by a change in the price level would
125
Assume an economy that is producing only one product. Output and price data for a three-year period are shown in the table. The nominal GDP for year 3 is
125 percent higher than the nominal GDP for year 1.
AssetsLiabilities and Net WorthReserves$20Checkable Deposits$100Loans25Stock Shares50Securities15 Property90 Refer to the accompanying balance sheet for the First National Bank of Bunco. All figures are in millions. If this bank has excess reserves of $6 million, the legal reserve ratio must be
14 percent.
Between 1950 and 2015, U.S. real GDP grew at an average annual rate of about
2.0 percent
(Last Word) Suppose Balin has $100 to invest in an opportunity that returns, for every $100 invested, $120 if it goes well but only $80 if it goes poorly. If leverage allows Balin to borrow $90 for every $10 he invests, what are his rates of profit and loss, respectively, if he borrows the full amount to invest in the opportunity?
200 percent profit; 100 percent loss
In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines
4 and 3
Answer the question on the basis of the following sequence of events involving fiscal policy: (1) The composite index of leading indicators turns downward for three consecutive months, suggesting the possibility of a recession. (2) Economists reach agreement that the economy is moving into a recession. (3) A tax cut is proposed in Congress. (4) The tax cut is passed by Congress and signed by the president. (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover. The operational lag of fiscal policy is reflected in event(s)
5.
(Last Word) The combined cost of Social Security and Medicare programs was what percentage of U.S. GDP in 2014?
8.5
Refer to the figures. Which figure(s) represent(s) a situation where prices are flexible?
A only
Domestic Market For Steel, AlphaQsPQd60$51040420303302024010150 Domestic Market For Steel, BetaQsPQd80$52070430603405025040160 The accompanying tables show data for the hypothetical nations of Alpha and Beta. Qs is domestic quantity supplied, and Qd is domestic quantity demanded. Assuming that Alpha and Beta are the only two nations in the world, the equilibrium world price must be higher than $1 because, at $1,
Alpha wants to export more than Beta.
Which of the following statements is false?
As a percentage of GDP, U.S. exports are the highest among the industrially advanced nations.
The tables give production possibilities data for two countries, Alpha and Beta, which have populations of equal size. Alpha's production possibilities ABCDEFish (Tons)806040200Chips (Tons)05101520 Beta's production possibilities ABCDEFish (Tons)240180120600Chips (Tons)010203040 The given data show that
Beta is more efficient than Alpha both in catching fish and in producing chips.
The government agency responsible for collecting and reporting unemployment data is the
Bureau of Labor Statistics
Disposable Income (Yd)Consumption (C)$0$40100100200160300220400280 (Advanced analysis) Which of the following equations correctly represents the given data?
C = 40 + 0.6Yd.
The United States' most important trading partner quantitatively is
Canada.
With which of the following countries does the United States have its largest goods and services deficit?
China
Which of the following has contributed to large U.S. trade deficits in recent years?
China fixing its exchange rate
In terms of absolute dollar volume, the top 3 leaders in world exports are
China, the United States, and Germany.
Because of the recent rise in the average rate of productivity growth, the business cycle is dead.
False
Which of the following is a true statement?
Fiscal policy swung from contractionary to expansionary in 2002.
The market system's answer to the fundamental question "What will be produced?" is essentially
Goods and services that are profitable
Which of the following is correct?
Granting a bank loan destroys money; repaying a bank loan creates money.
(Consider This) Madison, the CPA, is faster than Mason, the house painter, at both accounting services and painting. This means that
Madison should trade her accounting services for Mason's painting services, so long as Madison is relatively more efficient at accounting services.
(Last Word) Which of the following explanations argues that the Great Recession resulted from asset-price bubbles caused by euphoria and debt-fueled speculation?
Minsky explanation (sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money)
Which of the following is a true statement?
Most economists believe that increases in real GDP actually produce decreases in overall economic well-being because of spillover costs.
The aggregate expenditures model is built upon which of the following assumptions?
Prices are fixed.
Refer to the diagram, where Sd and Dd are the domestic supply and demand for a product and Pc is the world price of that product. With a PcPt per-unit tariff, per-unit revenue received by domestic and foreign producers, respectively, will be
Pt and Pc.
Which of the following would call for outpayments from the United States?
The United States purchases assets abroad.
Prices tend to be more flexible when there are only two or three rival firms rather than a large number of sellers in the market.
True
The economic perspective entails
a comparison of marginal benefits and marginal costs in decision making
On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by
a downsloping line or curve from left to right.
The value added of a firm is the market value of
a firm's output less the value of the inputs bought from others.
The fact that international specialization and trade based on comparative advantage can increase world output is demonstrated by the reality that
a nation's trading possibilities line lies to the right of its production possibilities line.
In the balance of payments of the United States, inflows of foreign currencies to the United States are recorded as
a positive entry
The recessionary expenditure gap associated with the recession of 2007-2009 resulted from
a rapid decline in investment spending.
Refer to the diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a(n)
actual budget surplus.
Shocks to the economy occur when
actual economic events do not match what people expected.
The MPC can be defined as that fraction of a
change in income that is spent
The assertion that "there is no free lunch" means that
all production involves the use of scarce resources and thus the sacrifice of alternative goods.
A decrease in the reserve ratio increases the
amount of excess reserves in the banking system.
Which of the following will cause the demand curve for product A to shift to the left?
an increase in money income if A is an inferior good
The interest-rate effect suggests that
an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
Near monies
are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.
Economic Theories
are generalizations based on hypotheses tested and supported with observed facts.
In considering euros and dollars, the rates of exchange for the euro and the dollar
are inversely related.
In 2015, the capital account in the U.S. balance of payments was in
balance, with no deficit or surplus.
Which of the following is not considered a legitimate concern of a large public debt?
bankruptcy of the federal government
Which is an example of a nontariff barrier (NTB)?
box-by-box inspection requirements for imported fruit
Refer to the diagram, in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of
built-in stability
Given the annual rate of inflation, the "rule of 70" allows one to
calculate the number of years required for the price level to double.
In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?
capital goods
Countries engaged in international trade specialize in production based on
comparative advantage.
If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to
consume is three-fifths.
The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of
consumer sovereignty
When an economist says that the demand for a product has increased, this means that
consumers are now willing to purchase more of this product at each possible price.
(Consider This) Which of the following is not part of the M2 money supply?
credit card balances
In the United States from 1929 to 1933, real GDP _____________ and the unemployment rate ________________
declined by 27 percent, rose to 25 percent
Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public, which pays for them by drawing checks. As a result, commercial bank reserves will
decrease by $2 billion.
Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is AD3 and the monetary authorities desire to reduce it to AD2, they should
decrease the money supply from $120 to $100.
Fiscal policy refers to the
deliberate changes in government spending and taxes to stabilize domestic output, employment, and the price level.
If X is a normal good, a rise in money income will shift the
demand curve for X to the right
If Z is an inferior good, an increase in money income will shift the
demand curve for Z to the left
Which one of the following is presently a major deterrent to bank panics in the United States?
deposit insurance
Real income is found by
dividing nominal income by the price index (in hundredths).
Private property
encourages owners to maintain or improve their property so as to preserve or enhance value
If Congress adjusted the U.S. tax system so that the MPC was reduced, the
economy would become more stable.
Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as
employed
Refer to the figure. Suppose that the economy is currently operating at the intersection of AS and AD2 and that the full-employment level of output is Y. If the government wants to move the level of real GDP back to Y and reduce demand-pull inflation, in the presence of a ratchet effect, it should
enact a contractionary fiscal policy that will shift aggregate demand to the left, but not as far as AD1.
The amount that a commercial bank can lend is determined by its
excess reserves.
Refer to the diagram pertaining to two nations and a specific product. Lines FA and GB are
export supply curves for two countries.
Suppose the domestic price (no-international-trade price) of wheat is $3.50 a bushel in the United States while the world price is $4.00 a bushel. Assuming no transportation costs, the United States will
export wheat.
"Consumer sovereignty" refers to the
idea that the decisions of producers must ultimately conform to consumer demands.
Which of the following lists of exchange-rate systems is arranged in proper historical order, from earliest to most current?
gold standard, Bretton Woods system, managed float
Final goods and services refers to
goods and services purchased by ultimate users, rather than for resale or further processing.
Refer to the graphs. Assume that pizza is measured in slices and beer in pints. In which of the graphs is the opportunity cost of a pint of beer equal to one slice of pizza?
graph D
Which of the following best measures improvements in the standard of living of a nation?
growth of real GDP per capita
The simple circular flow model shows that
households are on the selling side of the resource market and on the buying side of the product market
A market is in equilibrium when
if the amount producers want to sell is equal to the amount consumers want to buy
You should decide to go to a movie:
if the marginal benefit of the movie exceeds its marginal cost.
Suppose the United States sets a limit on the number of tons of sugar that can be imported each year. This is an example of a(n)
import quota.
Refer to the diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE1 to AE2 would
increase aggregate demand from AD1 to AD2.
In the diagram, a shift from AS1 to AS3 might be caused by a(n)
increase in the prices of imported resources.
An increase in the price of product A will
increase the demand for substitute product B
Depreciation of the dollar will
increase the prices of U.S. imports, but decrease the prices to foreigners of U.S. exports.
In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. A decrease in the interest rate not caused by a change in the price level would
increase the values in column Ig and increase aggregate demand.
Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for $10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last year's pizzas) but sold them for $12 each. Based on this information, we can conclude that Harry's production of large pepperoni pizzas
increased nominal GDP from last year, but real GDP was unaffected
Exports have the same effect on the current size of GDP as
investment
Discretionary fiscal policy is so named because it
involves specific changes in T and G undertaken expressly for stabilization at the option of Congress.
An economic system
is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
Refer to the figure. Assuming this market is representative of the economy as a whole, this economy
is capable of always producing at its optimal capacity.
Consider This) North Korea's command economy
is one of the few remaining command economies.
A nation's gross domestic product (GDP)
is the dollar value of all final output produced within the borders of the nation during a specific period of time.
efer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaultsThe assets that are not included in either M1 or M2 are
items 1, 5, 9, and 10.
Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The M2 definition of money includes
items 2, 3, 4, 6, 7, and 8.
The current account section in a nation's balance of payments includes
its goods exports and imports and its services exports and imports.
Refer to the diagram. Flow 2 represents
land, labor, capital, and entrepreneurial ability
Refer to the diagrams. Other things equal, an interest rate increase will
leave curve A in place but shift curve B downward.
The near-money components of M2 are
less liquid than the M1 components of M2.
The French term "laissez-faire" means
let it be
Most economists agree that the immediate determinant of the volume of output and employment is the
level of total spending
Reserves$100Checkable Deposits1,000Loans (to customers)300Property400Securities (owned)300Stock Shares100 Refer to the accompanying table of information for the Moolah Bank. Assume that the listed amounts constitute this bank's complete set of accounts. Moolah's
liabilities are $1,000.
If the Fed were to reduce the legal reserve ratio, we would expect
lower interest rates, an expanded GDP, and a higher rate of inflation.
Structural unemployment
may involve a locational mismatch between unemployed workers and job openings.
Purchasing groceries using a debit card best exemplifies money serving as a
medium of exchange
The transactions demand for money is most closely related to money functioning as a
medium of exchange.
GDP is the
monetary value of all final goods and services produced within the borders of a nation in a particular year.
Given the information, and assuming trade occurs between the three states, we can expect
money to flow counter-clockwise from Michigan to Texas to Washington.
The primary gain from international trade is
more goods than would be attainable through domestic production alone.
Refer to the diagram. A decrease in quantity demanded is depicted by a
move from point x to point y.
If country A can produce both goods X and Y more efficiently, that is, with smaller absolute amounts of resources, than can country B,
mutually advantageous specialization and trade between A and B may still be possible.
Which of the following is a land resource?
natural gas
Time deposits of $100,000 or more are
not a component of M1 or M2.
Currency held in the vault of First National Bank is
not counted as part of the money supply.
(Consider This) The Consider This box on patents and innovation demonstrates that
patent protection for U.S. companies may not be as effective when other countries do not respect or enforce U.S. patent laws.
(Consider This) Credit cards are
not money, as officially defined.
The invisible hand refers to the
notion that, under competition, decisions motivated by self-interest promote the social interest.
The goldsmith's ability to create money was based on the fact that
paper money in the form of gold receipts was rarely redeemed for gold.
The aggregate supply curve (short run) is upsloping because
per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
For economists, the word "utility" means
pleasure or satisfaction.
"Macroeconomics is the part of economics concerned with individual units, such as a person, a household, a firm, or an industry." This statement is
positive but incorrect.
The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is
price
Refer to the diagram. An effective government-set price ceiling is best illustrated by
price A.
The demand curve shows the relationship between:
price and quantity demanded
The supply curve shows the relationship between:
price and quantity supplied
Real GDPConsumption (after taxes)Gross InvestmentNet ExportsGovernment Purchases$0-$20$10$+5$1510010+515402010+515704010+5151006010+5151308010+51516010010+515 Refer to the table. The economy shown is a
private economy.
The law of supply indicates that, other things equal
producers will offer more of a product at high prices than at low prices.
Banks and other financial institutions
promote economic growth by helping to direct household saving to businesses that want to invest.
Excise taxes on imported goods that help shield domestic producers of the good are called
protective tariffs.
In national income accounting, government purchases include
purchases by federal, state, and local governments.
"International trade" refers to
purchasing or selling currently produced goods or services across an international border
"International trade" refers to
purchasing or selling currently produced goods or services across an international border.
An increase in product price will cause
quantity demanded to decrease.
If the monetary authorities want to reduce the monetary multiplier, they should
raise the required reserve ratio.
From society's point of view, the economic function of profits and losses is to
reallocate resources from less-desired to more-desired uses
From society's point of view, the economic function of profits and losses is to
reallocate resources from less-desired to more-desired uses.
The desire to hold money for transactions purposes arises because
receipts of income and expenditures are not perfectly synchronized.
Answer the question on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks (paid for out of commercial bank reserves) and buys $500 of securities from individuals, who deposit the cash in checking accounts. As a result of the given transactions, reserves in the banking system will
remain unchanged.
When economists refer to "investment," they are describing a situation where
resources are devoted to increasing future output.
An excise tax on an imported good that is not produced domestically is called a
revenue tariff.
In 2010, Tatum's nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Tatum's real income
rose by approximately 3 percent.
TD Ameritrade, Charles Schwab, and Merrill Lynch are all primarily
securities firms
Households and businesses are:
sellers in the resource and product markets respectively.
An increase in investment spending caused by higher expected rates of return will
shift the aggregate expenditures curve upward and the aggregate demand curve to the right.
The business cycle depicts
short-run fluctuations in output and employment
The two topics of primary concern in macroeconomics are
short-run fluctuations in output and employment and long-run economic growth.
Refer to the diagram, which shows the domestic demand and supply curves for a specific standardized product in a particular nation. If the world price for this product is $0.50, this nation will experience a domestic
shortage of 160 units, which it will meet with 160 units of imports.
An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because
some of the tax increase will be paid out of income that would otherwise have been saved.
Money functions as
store of value, unit of account, medium of exchange
The asset demand for money is most closely related to money functioning as a
store of value.
Refer to the diagram, where D and S are the United States' demand for and supply of Swiss francs. At the equilibrium exchange rate, E, the United States' balance of payments is in equilibrium. Under a system of fixed exchange rates, the shift in demand from D to D' will cause
the United States to reduce its foreign exchange reserves.
At the economy's natural rate of unemployment,
the economy achieves its potential output.
Item 15 Item 15 Year Nominal GDP Price Index 1$550$1402560135357612045861175604108 In the economy described in the table,
the growth of nominal GDP understates the growth of real GDP
Graphically, the market demand curve is
the horizontal sum of individual demand curves
In the 1990s and early 2000s, Japan's central bank reduced real interest rates to zero percent, but investment spending did not respond enough to bring the economy out of recession. Japan's experience is an illustration of
the liquidity trap.
As it relates to economic growth, the term long-run trend refers to
the long-term expansion or contraction of business activity that occurs over 50 or 100 years.
The exchange rate system currently used by the industrially advanced nations is
the managed float.
Economics may best be defined as the
the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity
If the economy adds to its inventory of goods during some year,
this amount should be included in calculating that year's GDP.
The U.S. supply of Japanese yen is
upsloping because a higher dollar price of yen means U.S. goods are cheaper to the Japanese.
In the aggregate expenditures model, technological progress will shift the investment schedule
upward and increase aggregate expenditures.
The real interest rate is
usually higher than the nominal interest rate.
Real per capita GDP
was much more equal across nations in 1820 than it is today.
(Last Word) The fallacy of composition states that
what is true for the individual must necessarily be true for the group.
To say money is socially defined means that
whatever performs the functions of money extremely well is considered to be money.
Shocks to the economy occur
when expectations are unmet.
Increasing marginal cost of production explains
why the supply curve is upsloping
Which of the following is an example of a land-intensive commodity?
wool
In 2015, the United States' balance on goods was about
−$486 billion.
