Macro Final
what is the output gap formula?
(actual-potential/potential) x 100
what is the inflation rate formula?
(new-old/old)x100
what is the gdp deflator formula?
(nominal/real)x100
what is the unemployment rate formula?
(unemployed/labor force) x 100
the fed model consists of what 3 things?
-IS curve -MP curve -Phillips curve
give examples of tax incentives in the US
-health insurance purchased through employers -rental value on owner occupied housing -your mortgage
examples of causes of demand pull inflation:
-increased consumer spending (spending more creates higher demand) -gov. spending (increases demand especially if not matched by increased productivity) -monetary policy (excessive growth in money supply (low interest rates) increase spending and demand)
the aggregate production function shows that economic growth can occur if...
-more labor is employed -human capital increases
examples of causes of cost push inflation:
-rising input prices -supply chain shortages or disruptions (raises cost of production) -higher wages
if government spending rises by $62 billion and gdp rises by $110 billion, then the multiplier would be approximately...
1.77 (110/62=1.77)
France must give up the production of 75 ties to produce 25 additional dress shirts. the opportunity cost of producing 4 dress shirts is __ ties. 4, 12, 71, 79
12
What is the formula for aggregate demand?
AD= Consumption+Investment+Government Spending+Net Exports
the fed's lender of last resort function has been curtailed over time by the...
Dodd-Frank Act
what is the formula for federal funds rate?
FFR=Neutral rate of interest+inflation+(0.5*inflation)+(0.5*output gap)
if exports increase, what happens to the is-mp curve?
IS curve shifts to the right
which economic indicator tells you about the future expected profits of business?
S&P 500
which country enjoyed significant catch-up economic growth in the second half of the 20th century?
South Korea
what is the aggregate production function formula?
Y=f(L,H,K)
you have saved $747. where should you go to open a checking account?
a commercial bank
credit constraints limit the...
amount of money that people can borrow
Henry Ford's $5 per day wage is an example of...
an efficiency wage
a minimum wage that is above the equilibrium wage is...
an example of a price floor
sensing weaker future earnings, firm managers become cautious about investment. what is the effect on the loanable funds market?
demand shifts to the left (decreased demand)
the Affordable Care Act is an example of...
discretionary spending
if the US government lowers personal income tax rates...
disposable income increases, and this leads to an increase in consumption and a right shift of the IS curve
which economic indicator tells you how fast wages and benefits are rising?
employment cost index
which indicator tells you how fast wages and benefits are rising?
employment cost index
when unexpected inflation is 0, the corresponding unemployment rate is called the ___ unemployment rate
equilibrium
equilibrium in the loanable funds market determines the...
equilibrium real interest rate
what are net financial inflows?
excess of funds entering the economy
what are net financial outflows?
excess of funds leaving the economy
in order to boost output, the federal government engages in ___ fiscal policy, which __ government spending and __ taxes.
expansionary; raises; lowers
planned investment is the...
expenditure on capital goods by businesses
what is Okun's rule of thumb?
for every 1% increase in potential output, unemployment decreases by 0.5%. for every 1% decrease in potential output, unemployment increases by 0.5%
which of the following is an investment? dan purchases $6,800 worth of gold, ben's computer depreciates by 15%, Fred pays a contractor to add 2 new rooms to his house, frank buys a used car
fred pays a contractor to add 2 new rooms to his house
what is the present value formula?
future value/(1+r)^n
if an economy has a positive output gap of 1.5%, this means that...
gdp is 1.5% above potential output
give an example that shows the medium of exchange function of money
going to the store and buying roses with US dollars (the exchange of roses for money)
which of the following is a scaled number? the sum of all incomes earned in the economy, total tax revenues in the economy, government budget deficit as a percentage of gdp, the country's national debt
government budget deficit as a percentage of gdp
in the long run, inflation is determined by...
inflation expectations
what will probably rise when the economy is in a recession?
initial unemployment claims
describe the business cycle
it is the fluctuations of gdp around the potential output
if the federal reserve ha a 2% target on inflation and actual inflation is 1%, the fed will want the new real interest rate to be...
lower than the neutral interest rate
the higher the opportunity cost of consumption, the...
lower the aggregate expenditures
the intersection of the IS curve and the MP curve determine...
macroeconomic equilibrium
as long as people have different __, everyone has a comparative advantage in something
opportunity costs
once you have identified the point of equilibrium, the horizontal axis will show you the...
output gap
what encourages the development of new ideas an inventions?
patents
a prediction market is a market where...
payoff are linked to whether an uncertain event occurs
the 4 stages of the business cycle are..
peak, recession, trough, and expansion
the job creation argument for protection against free trade is...
restricting imports allows for greater domestic production
suppose the economy is in a recession. you would expect to see the unemployment rate...
rise above the equilibrium unemployment rate
based on okun's rule of thumb, if you forecast the output gap will decline from 0% to -3%, the unemployment rate will...
rise by 1.5%
if the fundamental value of a stock is above the current market price of the stock, there will be a...
rise in the price and demand of its stock
if the US places a tariff on imported wood, as a result, the domestic price of lumber will __, consumer surplus will __, and producer surplus will __
rise; fall; rise
if you buy a new car for $38,000 and sell it for $31,500, how much does gdp rise because of these transactions?
rises by $38,000 (only rises in the amount of the new purchase not the second hand purchase)
according to okun's rule of thumb, for every 1% fall in actual output below potential output, the unemployment rate...
rises by 0.5%
which of the following is a narrow indicator? real gdi, cpi, non farm payrolls, stock price for JPMorgan Chase & Co.
stock price for JPMorgan Chase & Co.
tariffs on inputs lead to a __ shock
supply
the United States experiences net financial inflows. what is the effect on the loanable funds market?
supply shifts the right (increased supply)
the United States experiences net financial outflows. what is the effect on the loanable funds market?
supply shifts to the left (decreased supply)
insufficient demand leads to a...
surplus and falling prices
the government's debt is...
the accumulation of all deficits
if banks cannot get other banks to loan them money, where can they got for a loan?
the discount window
even though deposit insurance existed, the US experienced a major financial crisis from 2007-2009 because...
there was a run on shadow banks, which were not covered by deposit insurance
are supply shocks positive or negative?
they can be both!
economists generally believe that a person should specialize in the production of a good or service if...
they can produce the product while forgoing fewer alternative products than any other person
fiscal policy works best when it is...
timely, targeted, and temporary (the 3 T's)
what is excess demand?
to many buyers for too few goods
if Qs=-10+w and the minimum wage is $25, how many workers will be willing to work in the market?
15,000,000 (15mil)
what was the fed's inflation target in 2019?
2%
if gdp is expected to equal potential gdp and current inflation expectations are 2%, how much does your nominal salary have to change to maintain your current purchasing power?
2% (must be the same as inflation)
contractionary fiscal policy will shift the...
IS curve to the left
a debt crisis occurs when...
a government cannot repay its loans
you're a financial advisor. your client wants a professional management of their investments but also wants a diversified portfolio. what investment is right for this client?
a mutual fund
what is an in-kind transfer?
a non monetary type of assistance (social security, medicaid)
if there is a temporary rise in income, a consumption smoother will exhibit __ in consumption, and a hand to mouth consumer will exhibit __ in consumption
a small increase; a large increase
a decreasing returns to scale production function is one where increasing all inputs by a certain proportion leads to output rising by...
a smaller proportion
what is a supply shock?
a sudden, unexpected, and significant change in the supply of a key resource or factor of production in an economy
what is an efficiency wage?
a wage set above the market equilibrium wage
the liquidity of an asset is defined as the...
ability to quickly and easily convert the asset to cash, with little or no loss in value
person A can type reports faster and more accurately than person B. So person A has an __ in typing reports
absolute advantage
how do you find unexpected inflation?
actual - expected
what is the relationship between potential and actual inflation?
actual inflation tends to follow expectations
the IS curve is constructed by...
adding up the level of aggregate expenditure at each real interest rate
monetary policy is defined as the...
adjustment of interest rates to influence economic conditions
what will fall the economy is expanding?
applications for unemployment benefits
in order to be considered unemployed, a person must...
be part of the working age population, be actively looking for work, be non institutionalized
which benefit could a company gain from using internal markets?
better allocation of its resources and more accurate predictions
stock prices are an important macroeconomic indicator because they...
can predict changes in gdp
the great moderation refers to the...
decreased volatility of the US economy
a bond that is issued by a firm in financial distress is most likely to have...
default risk
if the government lowers the corporate tax rate, then the __ loanable funds shifts to the__.
demand for; right
what are net exports?
exports - imports
what is the formula for net exports?
exports - imports
the risk premium is the...
extra interest charged by lenders to account for risk
hyperinflation is...
extremely high rates of inflation
the news of an impending recession in the economy will lead to a...
fall in consumption, rise in precautionary saving, rises in national saving
medicaid is funded by...
federal and state governments
who funds medicaid?
federal and state governments
if a shock causes the real interest rates to rise, then the economy has been hit by a ___ shock
financial
which of the following causes shifts in the MP curve? changes in tariffs, spending shocks, financial shocks, changes in tax rates
financial shocks
what are the steps needed to calculate inflation rate?
find out what people typically buy, collect the prices from the stores where people shop, tally up the cost of the basket of goods and services, and calculate the inflation rate
an initial public offering occurs when a company...
first sell stock directly to the public
you are driving to see your grandparents when you get caught in traffic caused by construction on the interstate. this construction is an example of...
government expenditure
a budget deficit occurs when...
government spending > government revenue
if a country's domestic price of a good is below the world price of the good, then with trade, the domestic quantity supplied of the good will be __ the domestic quantity demanded
greater than
what is a reason to worry about government debt?
high and rising debt slows economic growth
the higher the minimum wage, as compared to the equilibrium wage, the...
higher the structural unemployment rate
what are the functions of money?
medium of exchange, store of value, unit of account
what is the difference between micro and macro?
micro is the study of individuals, macro use the study of the economy as a whole
if managers expect ongoing inflation, it is likely that...
prices will rise
when a country's production mix becomes more specialized due to increased international trade based on comparative advantage...
some industries in the country will shrink and possibly disappear
actual poverty is less than official poverty rate because...
tax credits and non cash benefits are not included when calculating incomes
actual poverty is less than the official poverty rate primarily because...
tax credits and non cash benefits are not included when calculating incomes
what is structural unemployment?
unemployment because of a mismatch in skills possessed and skills employers are looking for
what did the New Deal create?
unemployment benefits
which of the following is an example of transfer payments? government loans, military salaries, interest earned on savings in banks, unemployment benefits
unemployment benefits
what is frictional unemployment?
unemployment between jobs
what is cyclical unemployment?
unemployment due to fluctuations in the business cycle or the economy (economic downturn/recession)
once you have connected the output gaps from the IS-MP model and the Phillips curve, the next step is to identify the...
unexpected inflation from the Phillips curve
social insurance programs do NOT...
use a means test to qualify people for benefits
if the risk free rate is 1.5% and the risk premium is 2%, the MP curve is at...
3.5%
what is the effect on the IS-MP if there is a rise in home values and wealth in the economy?
IS curve shifts to the right
many government programs associated with the welfare state are believed to cause deadweight loss, since they...
affect incentives to work and to save
holding everything else equal, the __ the interest rate on saving, the __ the future value of that saving
higher; greater
when using the fed model, the first step is to...
identify the shock and shift the supply curve
what is a shadow bank?
institutions that exist outside the formal banking sector so they don't follow bank rules. they act as banks though
price is functioning as a message when it...
is a line of communication between buyers and sellers in a market
if the output gap is negative, then relative to the neutral interest rate, the fed will __ the real interest rate to drive __ consumption and investment
lower; up
what is consumption smoothing?
maintaining a relatively stable level of consumption even when faced with fluctuations in income
an example of a broad indicator is...
real gross domestic income
south Korea's comparative advantage in cellular technology can be attributed to...
specialized skills
during the Great Recession of 2007-2009, banks made fewer loans as they became wary of risky projects. what is the effect on the investment line?
the investment line shifts to the left
what is aggregate?
the total
if actual inflation is lower than expected and there is no change in supply, what does this mean?
there is insufficient demand
the region below the 0% inflation line but above the Phillips curve means...
there is insufficient inflation
others making less than you have a higher standard of living because they have more...
wealth
what is demand pull inflation?
when aggregate demand is greater than aggregate supply
an underemployed person is someone who is...
working but whose skills are not fully utilized
which of the following represents consumption spending? your parents pay their income taxes, you eat at a fancy restaurant for valentines day, you take out a bank loan, a new hospital is constructed in your town
you eat at a fancy restaurant for valentines day
if you and your group partners assign various tasks for a project in the most efficient way possible, then it is likely that...
you got a task in which you have a comparative advantage
which of the following is cyclical unemployment? Arthur quit his job to look for a better job, Reagan is in a nursing home, Martha is a full time stay at home parent, kelsey lost her job after her company lost a lot of customers during an economic downturn
Kelsey lost her job after her company lost a lot of customers during an economic downturn
the efficient market hypothesis states that...
at any point in time, stock prices reflect all publicly available information
the neutral interest rate occurs when the economy is...
at its potential
bond A is a 5 year bond issued by a company with a very good credit rating. bond B is a 5 year bond issued by a different company in financial distress. what is likely to happen?
bond B will have a higher interest rate than bond A
a financial shock is any change in...
borrowing conditions that changes the real interest rate at which people can borrow
when trade is based on comparative advantage...
both trading partners ended up better off than when there is no trade
which of the following are provided by local government? pell grants, military defense, bus services, medicare
bus services
property rights refer to...
control over a tangible or intangible resource
the official poverty line depends on __ and is adjusted every year to reflect change in the cost of living
the size and composition of a family
the official poverty line depends on __ and is adjusted every year to reflect changes in the cost of living
the size and composition of a family
an example of a leading indicator is...
the stock market
what is the effect of a government budget deficit on the loanable funds market?
the supply shifts to the left (decreased supply)
you hope to find a job, which enables you to earn a high income, but you recognize that others making less may have a higher living standard because they have more...
wealth
what is cost push inflation?
when the cost of production rises, leading to a decrease in aggregate supply
what is a financial bubble?
a rapid and unsustainable increase in asset pries, followed by a sharp and significant decline, often resulting in a market crash or correction
which of the following would lead to a slowdown in economic growth? increase in innovation in the economy, increase in capital accumulation coupled with technological advancement, reduction in the birth rate coupled with an increase in the retirement rate of a population, institution of a savings tax credit
a reduction in the birth rate coupled with an increase in the retirement rate of a population
much of the rise in economic inequality in recent years in the US comes from...
a rising gap between the incomes of highly educated and less educated workers
much of the rise in income inequality in recent years in the US comes from...
a rising gap between the incomes of highly educated and less educated workers
the federal reserve was created after...
a series of bank runs and bankruptcies
if Mario is a consumption smoother and has just won a prize of $12,000, we can expect Mario to exhibit...
a small change in consumption
a trade cost is...
an extra cost incurred as a result of buying or selling a good abroad rather than domestically
during the Great Recession, the US Congress increased the length of time that unemployment benefits could be received from 52 weeks to 99 weeks. this change caused...
an increase in the costs for the government
which of the following would lead to a slowdown in economic growth? an increase in human capital, an increase in the dependency ratio, reduced inefficiency in production, an increase in capital accumulation in the economy
an increase in the dependency ratio
what does the minimum wage have to be at for there to be no unemployment?
at the equilibrium point between the supply and demand curves
permanent income is a persons...
average income over their lifetime
the moral of the story of the Solow growth model is that...
capital accumulation alone cannot lead to sustainable economic growth
the government passes a new investment tax credit initiative. which input in the production function changes, and what is the effect on economic growth in the country?
capital stock increases, and economic growth is positively affected
what is the Marginal Propensity to Consume formula?
change in consumption/change in disposable income
when a spending shock occurs, the IS curve shifts by the...
change in spending x the multiplier
which of the following cause shifts in the MP curve? business optimum, spending shocks, changes in monetary policy, consumer pessimism
changes in monetary policy
If a bakery buys a second oven, hires a second baker, buys double the number of ingredients, doubles the size of the bakery, and then produces double the number of cakes, then the bakery is experiencing...
constant returns to scale
collectively, people in nations that engage in international trade are likely to...
consume more than they could consume in the absence of trade
focusing differences in the amount people actually spend on goods/services as a measure of their material wellbeing rather than comparing their current incomes leads to a focus on __ in discussions of the level of economic inequality across household
consumption
why does an anticipated change3 in income lead to no change in consumption for a consumption smoother?
consumption is based on permanent income, which is already factored into anticipated future changes in income
what are economies of scale?
cost advantages companies experience when production becomes efficient (buying in bulk means getting more for less)
what tasks are performed by banks?
create long term loans form short term deposits, pool savings from many savers
on the fed model, the MP curve shows the...
current real interest rate
why is the discount rate the upper bound for the federal funds rate
it is set higher than the federal funds rate
what happens to the Phillips curve when productivity increases?
it shifts down
what is the effect on the consumption function when consumer wealth decreases?
it shifts down
when production costs fall, what happens to the Phillips curve?
it shifts down
if the dollar appreciates, what happens to the Phillips curve?
it shifts down (falling costs)
what effect does a booming real estate market have on the consumption function?
it shifts it up
what is the effect of increased consumer confidence and spending on the IS curve?
it shifts to the right
suppose interest rates fall and discourage saving. what is the effect on the consumption function?
it shifts up
what is the effect on the consumption function when customer wealth increases?
it shifts up
when domestic currency depreciates, what happens to the Phillips curve?
it shifts up
a good proxy for the risk free interest rate is the interest rate on a....
loan to the US government
the equilibrium unemployment rate is also known as the __ unemployment rate
long run
how do interest rates affect investment in the economy?
lower interest rates lower the cost of borrowing for firms, and so investment rises
if inflation is 0%, and a firm wants to lower real wages by 1%, it will need to...
lower nominal wages by 1%
a bank run occurs when...
many bank customers try to withdraw their savings at the same time
a bank run occurs when...
many people want to withdraw their savings from a bank at the same time, but the bank does not have enough cash on hand
the rational rule of consumption is to consume more today if the...
marginal benefit of a dollar of consumption today is greater than(or equal to) the marginal benefit of spending a dollar plus interest in the future
the benefit of an extra dollar of consumption is called the...
marginal benefit of consumption
menu costs are the...
marginal cost of adjusting prices
social security is a __ that is __
monetary transfer; not means tested
with a progressive tax, those with __ income tend to pay a __.
more; higher share of their income in taxes
why don't most tax expenditures help much if your federal tax bill is zero?
most tax breaks reduce taxable income, but reducing taxable income below zero does not reduce the tax bill
a fall in the interest rate causes a...
movement to the right along the IS curve
a decrease in the risk free rate shifts the...
mp curve down
the real interest rate is the...
nominal interest rate minus the rate of inflation
what is the formula for real wage change?
nominal wage change - inflation
are social security and Medicare means tested or non means tested?
non means tested
if you see that CPI this year is lower than last year, this means that...
on average, prices went down across the economy
if you see that inflation between this year and last year is 3%, this means that...
on average, prices went up across the economy by 3%
working infrequently and saving a portion of your income to use when you are unemployed is an example of the...
permanent income hypothesis
the fundamental value of a business is the...
present value of the future profits it will earn
what is the future value formula?
present value x (1+r/m)^mn m=times compounded per year n=number of years r=rate
the gdp deflator is an index that tracks the...
price of all goods and services produced domestically
during covid, global supply chain issued caused the supply of new cars to shift left. what role did price play in the new car market?
price was a message to potential buyers that the marginal cost of manufacturing new cars is rising
a supply shock is any change in...
production costs that lead suppliers to change the prices they charge at any given level of output
what is the social safety net?
programs and policies implemented by the government to provide assistance to families facing economic hardships
forward guidance occurs when the federal reserve...
provides information about the future course of monetary policy in order to influence expectations about future interest rates
if the output gap is positive, the federal reserve will __ the real interest rate to __.
raise; cool inflationary pressures
a tariff or quota will __ prices and __ the consumption of the protected goods in the importing country
raise; decrease
if actual inflation is > target inflation, then relative to the neutral interest rate, the fed will __ the real interest rate to drive __ consumption and investment.
raise; down
if output gap is positive, then the fed will use its floor framework to __ the federal funds rate, influence short and long term rates __, and __ total spending in the economy
raise; upward; decrease
if government expenditure rises by $27.5 billion and the multiplier is 2.5, then...
real gdp rises by $68.75 billion, and the IS curve shifts to the right
which indicator is a cross check on gdp?
real gross domestic income (gdi)
if inflation is 4% and a firm gives its worker a 1.5% nominal wage raise, then...
real wages have fallen by 2.5%
a constant returns to scale production function means that if all inputs are increased by 75%, this should lead to output...
rising by 75% (input=output)
in macroeconomics, the difference between saving and investment is that...
saving is the money left over after paying for spending, and investment is the purchase of new capital
what kind of data adjustment removes the effect of sale spikes due to the holiday season?
seasonally adjusted data
retirement benefits, unemployment benefits, maternity leave benefits, and death/funeral benefits are examples of...
social insurance
the tech startup you worked went out of business. you were worried about your depleting wealth but avoided that thanks to...
social insurance
which income redistribution would increase total well being the most?
someone in the 95th percentile to someone in the 10th percentile
which of the following is a source of comparative advantage? small scale production, scarce inputs, specialized skills, high tariff rates
specialized skills
what is hand to mouth consumption?
spending most, if not all, of your income on immediate needs and having little left for savings
what causes shifts in the IS curve?
spending shocks occur
the 3 major pillars of the financial sector are the...
stock market, the bond market, and the banks
when a manager uses comparative advantage to assign tasks in a workplace, then each...
task is assigned to the worker with the lowest opportunity cost for performing the task
along the same aggregate production function, the level of __ is the same
technology
if there is a __ rise in income, there will be an intermediate increase in total consumption in the economy
temporary
money illusion is the...
tendency to focus on nominal values instead of inflation adjusted values
in september 2008, the stock market fell sharply and continued to perform poorly due to the financial crisis. how did this change impact gdp in the economy?
the IS curve shifts to the left
on the IS-MP curve, if the US dollar appreciates...
the IS curve shifts to the left (decreased spending)
on the IS-MP curve, an increase in exports will shift...
the IS curve to the right
what is the effect on the IS-MP if there is a credit crunch and banks are unwilling to lend except at high interest rates?
the MP curve shifts up
what changes could create a more positive output gap?
the US dollar depreciates, trading partners reduce tariffs on US exports, monetary policy actions boost the economy
why does apple design the iPhone in California but assemble the iPhone in China?
the US has a comparative advantage in iPhone design
technological advancement is NOT represented by which of the following? adoption of an existing technology by new firms, creation of new apps designed to enhance efficiency and reduce wastage in production lines, invention of robotic meal preparation, invention of the light bulb
the adoption of an existing technology by new firms
your candle stick business is doing well domestically so you decide to expand it to other countries. you would like make many international sales you hope...
the dollar will depreciate against other currencies
if actual gdp is greater than potential gdp...
the economy can experience inflation
what is the floor framework that the federal reserve uses to influence the federal funds rate?
the fed's approach of setting other interest rates to put a lower bound on how low the federal funds rate can go
suppose a high, middle, and low income person all buy identical houses with similar mortgages. who spends the most on tax preferred goods?
the high income person
suppose a high, middle, and low income person buy identical houses with similar mortgages. who gets the largest tax benefit?
the high income person
keeping all other things constant, what is the relationship between a financial instrument and its future value?
the higher the interest rate on the instrument, the higher the future value
what happens to the investment line if the government institutes a tax break for funds invested?
the investment line shifts to the right
what is the effect on the investment line if an investment project is expected to earn higher revenues over time?
the investment line shifts to the right
what are diminishing marginal benefits
the level of satisfaction you gain from extra of something (money) increases less and less as you have more
keeping all other thing constant, what is the relationship between a financial instrument and its future value?
the longer the time to maturity of the instrument, the higher the future value
what is a reserve requirement?
the minimum amount of reserves that each bank must hold
fiscal policy is increased in its effectiveness through...
the multiplier effect
the region above the 0% inflation line but below the Phillips curve means...
the output gap is positive
an economy's potential output level is...
the output that is possible when all resources are fully employed
which of the following is an example of a durable good? your new car, fresh flowers from the florist, a soft drink, your haircut
your new car