Macro Flashcards From the Homework
Real..........growth tends to be more volatile than real.......growth.
investment consumption
Money functions as a medium of exchange when you ___________
buy jeans at the mall
Zales in Clearwater, Florida, purchased 88 Rado watches for $525 each and sold 55 of them for $700 each. Zales' value-added contribution to GDP is............
$−700.
If nominal GDP for 2017 is $62 trillion and real GDP for 2017 is $46 trillion, then the GDP deflator for 2017 is.......
134.78
Which of the following cannot produce a shift in the credit demand curve?
A change in the real interest rate.
Aidan, Bianca, Caitlyn and Dmitri want jobs as management consultants. XY Corporation is a management consulting firm in a perfectly competitive market which has advertised a job opening for the post of a management consultant paying the equilibrium salary. Who is voluntarily unemployed based on the information given below?
Aidan receives a job offer from XY Corporation but rejects it as the salary offered was below his expectations
Which of the following would be excluded when calculating the Consumer Price Index (CPI) but included when calculating the GDP deflator?
An ambulance
Which of the following key factors can help explain the Great Recession of 2007-2009?
An increase in mortgage defaults, negatively impacting banks A reduction in new home construction, leading to a decrease in labor demand. A fall in housing prices. A reduction in consumer wealth, curtailing spending.
Which of the following statements would not be true in a situation where the interest rate falls slightly below the zero lower bound?
Banks would earn large profits from the loans issued and would increase their lending operations.
Which of the following is not an example of someone who is frictionally unemployed?
Carl, who is currently taking classes full time in order to qualify for a management position.
Which of the following does not cause the labor supply curve to shift
Changes in the wage rate paid to workers.
Which of the following shows the correct sequence of events from an initial shock to consumption and the resulting multiplier effects?
Consumption declines, firms' revenue falls, labor demand shifts left, unemployment rises, and the multiplier effects continue their cycle.
To achieve its target for the federal funds rate, the Fed may ____________.
Decrease lending from the discount window. Sell Treasury bonds in the open market. Increase the interest rate paid on reserves deposited at the Fed. Increase the reserve requirement.
Which of the following statements are true regarding the quantity theory of money?
Growth rate of money supply=Inflation rate+Growth rate of real GDP. Growth rate of money supply=Growth rate of nominal GDP.
Which series of events would result in a decrease in the inflation rate?
Increase the reserve requirement, which increases the federal funds rate and decreases the demand for loans, which in turn reduces money supply growth and reduces the rate of inflation.
Which of the following statements is true about economic fluctuations?
Investment and business expansion would show co-movement.
Traditional currencies are controlled by central banks. What is a potential problem of restricting the creation of bitcoins to a total of 21 million bitcoins
Monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions.
....................provides a better way to convert GDP in domestic currencies into common units because it reflects the differences in the............between countries.
Purchasing power parity cost of living
Money makes a variety of economic transactions possible. In the following three situations, determine whether money is involved in the transaction. In prison camps during World War II, and in some prisons today, cigarettes circulate among prisoners. For example, an iPod might cost two cartons of cigarettes, whereas a magazine might only cost two cigarettes. Which functions of money are cigarettes fulfilling in this case?
Store of value. Medium of exchange. Unit of account.
What is the correlation between income per capita and welfare measures like absolute poverty and life expectancy? What does this correlation suggest about real income per capita as a measure of welfare?
Strong positive correlation. Real income per capita is a reliablelong dash—though not perfectlong dash—indicator of human welfare within and across countries.
Which of the following is likely to be true of the U.S. economy if there is a rapid rise in prices and low interest rates
The U.S. economy could experience unsustainable expansion, resulting in a sharp economic downturn.
What are the automatic and discretionary components of fiscal policy?
The automatic components do not require deliberate action on the part of the government, while the discretionary components do.
What policies could the government and the central bank use to achieve the goal of slowing down the economic expansion?
The government could raise taxes and/or reduce expenditures, while the central bank could raise interest rates.
How does the confluence of the zero lower bound and restrictions on the fiscal deficit cause problems for countercyclical macroeconomic policy?
The government will not be able to lower tax rates to control recession in an economy.
Why is the rise in housing prices between the late 1990s and 2006 characterized as a bubble by some economists?
The large increase in the price of housing assets did not reflect the true long-run value of the assets.
Which of the following is not true regarding the natural rate of unemployment?
The natural rate of unemployment is 0 percent when the U.S. economy is not in a recession.
What is the difference between nominal and real interest rates?
The real interest rate is the nominal interest rate adjusted for inflation. The nominal interest rate is the rate you pay on a loan.
Which of the following is likely to be true if the central bankers were political appointees that could be hired and fired by the president?
They would be reluctant to increase the federal funds rate during an economic expansion.
Who bears the risk that a bank faces when stockholders' equity is greater than zero?
The bank's stockholders.
Which of the following explains why a central bank would choose to lower interest rates on reserves below zero?
To stimulate the economy
Which of the following are not included in GDP but probably should be?
Transactions in the underground economy The value of leisure.
An example of a multiplier is when ____________.
a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending. an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment.
Contractionary monetary policy can lead to an economy-wide recession through ____________.
a reduction in the price level, leading to a reduction in employment because of downward wage rigidity. an increase in the real interest rate, leading to an increase in production costs and therefore lower demand for labor.
If the level of aggregate expenditure was $16.8 trillion in 2013, the level of aggregate income in the economy during 2013 was ___________.
also $16.8 trillion because of the identity between aggregate expenditure and income.
The concept of multipliers was one of the key elements of John Maynard Keynes's theory of fluctuations. A multiplier is ____________.
an economic mechanism that causes an initial shock to be amplified by follow-on effects.
Expansionary monetary policy would include ____________.
an increase in the supply of reserves, a reduction in the federal funds rate, an increase in lending capacity (reserves) of the banks, and an increase in liabilities (bonds) for the Fed.
An economic expansion begins ____________.
at the end of a recession.
A firm's value added refers to the dollar value of ____________
a firm's sales revenue minus the firm's purchases of intermediate products from other firms.
All of the following are included when calculating M2 as a measure of the money supply except ___________
bonds
During an economic downturn of any duration, _____________
consumption, investment, and GDP decrease while unemployment increases.
Recessions are periods in which the economy...........while economic expansions are defined as the periods
contracts between recessions
If the economy experiences an unexpectedly highhigh rate of inflation, the group that would tend to benefit is ___________.
debtors (people or businesses who owe money).
Conducting countercyclical monetary policy is.........in this case because the real interest rate will be....... .
difficult positive and rising
Countercyclical policy that seeks to raiseraise GDP growth and the level of employment is appropriate when ____________.
excessively pessimistic sentiments about the economy are prevalent. the economy is experiencing a recession.
The...........method of calculating GDP yields exactly the same answer as the production-based method. Even if some of the goods don't get sold, they are........by a firm, and those goods are considered part of the firm's inventory.
expenditure owned
Crowding out occurs when..............borrowing displaces.........borrowing. Since expansionary fiscal policy should only take place during times of...........it seems worth the risk for many policy makers.
government private recession
You decide to hire a lawn care company rather than mow your own lawn. As a result, GDP estimates will...... .
increase
Partial recovery from recession in the medium run......possible with natural market forces. Recovery.........be possible via a fiscal policy tax cut.
is would
Partial recovery occurs while downward wage rigidity.........in effect. Full recovery (full employment) occurs when labor demand shifts to an equilibrium wage that is.........the rigid wage.
is still greater than
Would countercyclical policy still be enacted if central bankers were appointed by popular vote?
no
In 2005, $320 million of the federal government's budget was allocated toward building a "bridge to nowhere" in Alaska that connected two small towns. In 2006, $500,000 was allocated toward a teapot museum in North Carolina, $1 million toward a water-free urinal initiative in Michigan, and $4.5 million toward a museum and park at an abandoned mine in Maine. These projects were requested by specific legislators in order to boost their popularity in their constituencies. These types of expenditures are known as ___________.
pork barrel spending.
One of the biggest.........GDP and GDP per capita is the..........of detailed information about how economic output is divided up among households.
problems with lack
If a country implements a countercyclical fiscal policy, the budget deficit is likely to...........during a recession. If the government borrows money to pay its bills, taxpayers are implicitly responsible for paying back the government's debts.
rise future
Economic fluctuations are ____________.
short-run changes in the growth of GDP.
A central bank is the government institution ____________
that runs a country's monetary system.
According to the quantity theory of money, the inflation rate is
the gap between the growth rate of money supply and the growth rate of real GDP.
According to the quantity theory of money, if in a year's time, real GDP grew from $10 trillion to $10.2 trillion, and nominal GDP for the same time period grew to $10.5 trillion, then ____________.
the growth rate of inflation is 3 percent
An economic expansion is defined as ___________.
the period between two economic recessions.
The Federal Reserve influences the long-run real interest rate through ____________.
the short-term federal funds rate
One of the major functions of banks is to ____________.
transform short-maturity liabilities into long-maturity assets.
In the United States, recessions are usually defined as ____________.
two consecutive quarters of negative growth in real GDP.
Recessions and expansions have.........lengths, which explains why they..........a repetitive, easily predictable cycle. This is why there is............of turning points
variable do not follow a limited predictability
Which of the following would cause the labor demand curve to shift to the right?
An increase in the demand for a product
Which of the following best relays the events of the 2007dash-2009 recession after the bust in housing prices?
Mortgage foreclosures, a credit contraction, a leftward shift in the demand for labor, and a strong drop in consumption
................GDP is the total value of production (final goods and services) using current prices.
NOMINAL
Imagine that the chairperson of the Federal Reserve announced that, as of the following day, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000, etc. Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts. So, if you have $500 in your checking account, as of the following day, your balance would be $5,000, etc. Would you actually be 10 times better off on the day the announcement took effect?
No, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant.
Almost every day, many people sign their names to little pieces of paper called checks, which are then accepted in exchange for goods and services. Do these checks constitute money?
No, because checks simply represent a means of access to money, not money itself.
Over the last 50 years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards money?
No, because you credit cards are not assets.
Since government spending increases employment by shifting the labor demand curve to the right, is it always a good idea for the government to increase expenditure? Explain your answer
No, continual increases in government expenditures will soak up resources that would otherwise be used by households and firms.by households and firms. No, the presence of long and variable lags associated with government expenditures suggests that their use to adjust labor demand with precision will be difficult.adjust labor demand with precision will be difficult. No, continual increases in labor demand may be inflationary if they outpace labor supply growth.
In 2011, China revised its poverty line upward to 2,300 yuan per year, or 6.3 yuan per day. At the prevailing exchange rate, this was equal to a little less than a single U.S. dollar. Some commentators felt that China's poverty line fell short of the World Bank's poverty line of $1.25 per day, in 2005 purchasing power parity (PPP) U.S. dollars.
No, since the Chinese poverty measure is not stated in 2005 PPP U.S. dollars.
You read a newspaper report that compares wages paid to employees at Starbucks in India and in the United Kingdom. At the time, 1 pound was equal to 87 rupees. The report says that Starbucks baristas in India are paid a mere 56 pence an hour, which is lower than the cheapest coffee that Starbucks sells in the United Kingdom. A friend of yours who read the report is appalled by this information and thinks that Starbucks ought to raise its salaries substantially in India. Is your friend necessarily correct?
No, the flaw in the report is that it converts the wages paid in India to pounds using the current exchange rate, but does not account for the cost of living (or the prices of goods) in India.
Which of the following equations is the equation for velocity in the quantity theory of money?
Nominal GDP Over Money supply
2011 2012 T-Shirts T-Shirts Q: 80 Q: 96 P: 24 P: 24 Red Bull Red Bull Q: 540 Q: 540 P: 2 P: 3 Pizza Pizza Q: 970 Q: 890 P: 3 P: 6 Nominal GDP in 2011 was ........and nominal GDP in 2012 was .......... If 2011 is the base year, real GDP in 2011 was..........and real GDP in 2012 was....... Based on your answer above, the percentage change in real GDP between 2011 and 2012 was percent............
$5910 $9264 $5910 $6054 2.44
Anthony owns a landscaping business that has 4 employees. His company is able to earn revenue of $600 per day. He knows that if he hires another worker, he would have to pay that worker $50 per day and the company would earn revenue of $680 per day if the new worker is hired. Determine the value of the marginal product of labor of the employee that Anthony is considering hiring.
$80
Which of the following will be considered a final good in the calculation of U.S. GDP?
. Defense equipment purchased by the federal government Foot massages at spas in California.
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.9% at a time when inflation is around 0.9%. For the average saver, the real rate of interest on his or her savings is If banks expect that the rate of inflation in the coming year will be 3.93.9% and they want a real return of 66% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is
0% 9.9%
Suppose for the year 2013 the economy of Uplandia has a nominal GDP of $5,100 billion and a real GDP of 4,590 billion. For 2013, this economy's GDP deflator is........ Now suppose the GDP deflator in 2012 was 99.1 Uplandia's year-over-year inflation rate is
111.1 12.1
If the labor force is 195 million and the unemployment rate is 5.0 percent, the number of people considered employed is....... If the labor force participation rate is 75 percent, the number of potential workers is......
185.25 million 260 million
In the first year, inflation is 4.5 percent and the nominal interest rate for both fixed and variable rate loans is 7.5 percent. Given this information, the real interest rate for fixed rate loans is......percent and the real interest rate for variable rate loans is.......percent. (Round your response to the nearest two decimals) In the second year, inflation rises to 6.5 percent. Given this information, the nominal interest rate for fixed rate loans is.....percent and the real interest rate for fixed rate loans is.........percent. (Round your response to the nearest two decimals) In the second year, inflation rises to 6.5 percent. Given this information, the nominal interest rate for variable rate loans is......percent and the real interest rate for variable rate loans is......percent. (Round your response to the nearest two decimals) Suppose the inflation rate in an economy falls. Given the information, the real interest rate for fixed rate loans would.......and the real interest rate for variable rate loans would........ . Suppose you are deciding between a fixed rate loan and a variable rate loan. You dislike risk (variability) in the real interest rate you pay. Given this information, you should opt for a........ .
3 3 7.5 1 9.5 3 increase remain constant variable rate loan
Suppose that in January there were 4,000,000 workers in the labor force, with 3,736,000 employed and 264,000 unemployed, implying a 6.6 percent unemployment rate. A month later, there were 4,170,000 workers in the labor force, with 3,911,000 employed and 259,000 unemployed. (Notice the number employed went from 3,736,000 to 3,911,000, an increase of 175,000.) The unemployment rate in February is.........
6.21 percent
Which of the following factors does not cause a shift in the labor demand curve
Changes in the wage rate.
Firm A earns $200,000 in profits from its production unit set up in Krakozhia. Firm B imports perfumes in wholesale from Krakozhia at $25 each and sells them in Islandia for $550. A third-party retailer, Firm C, pays $1.50 each for the soaps produced by Firm D and sells them at $4.50. Firm E imports blue cheese from Krakozhia at $25 per lb and sells it at the same price in Islandia.
Does not add to GDP Adds to GDP Adds to GDP Does not add to GDP
The period from 2007 to 2009 was a time of economic contraction that came to be known as the "Great Recession." During periods of recession, most firms experience a decline in demand for their product, as well as a decline in the product's equilibrium price. All other things being equal, macroeconomic theory predicts that the wage of most workers should decline in recessionary periods. However, this was not the case in the Great Recession, or during many other economic downturns throughout recent history. Based on the discussion in the chapter, explain why this might be so, and what the implications are for unemployment.
During downturns workers are resistant to the lowering of wages and firms try to avoid doing so. This downward wage rigidity keeps the quantity of labor supplied greater than demand, causing unemployment.
How does fiat money differ from commodities like gold and silver that were used as money?
Fiat money is intrinsically worthless, whereas gold and silver have intrinsic value.
If fiat money is intrinsically worthless, then why is it valuable?
Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.
Relax Foot Spa gave a foot massage to Abigail. This year, Mark's dividend payment amounted to $4,000. Firm M, a financial consulting company, employs Rachel for her analysis expertise. Alex paid $30 to his hairdresser for a haircut at a local salon.
Firms → Households Firms → Households Households → Firms Households → Firms
Suppose U.S. drivers purchased $50 billion of ExxonMobil-produced gasoline during a recent year, with one-half purchased directly from ExxonMobil-owned gas stations and one-half from independent (or third-party) gas stations. Suppose further that ExxonMobil purchased the oil (which it refined into gasoline) from foreign producers for $20 billion and that it receives 60 percent of the sales revenue that independent stations generate from selling ExxonMobil gasoline.
In this case, the value added by ExxonMobil to U.S. GDP is $20 billion.
Which of the following statements regarding cyclical unemployment are not true?
It is the difference between the longdash-term average rate of unemployment and the natural rate of unemployment. It is negative in recessions and positive in economic booms.
In February 2014, the United States added 175,000 jobs to the economy. Given this information, what can we say about the unemployment rate of the country?
It may increase, decrease, or not change depending on how many people started searching for jobs during the month.
Which of the following would not be an example of someone in the labor force
Mark, 45, a self-made millionaire, who volunteers full-time between several local charities
Sometimes new technology in production reduces the time that a worker takes to complete a task. Technological innovations can also completely replace a factory worker. Does this mean that technological progress will lead to large-scale unemployment?
No, some sectors may experience unemployment as a result of the innovations but overall productivity and incomes will increase, leading to more employment opportunities.
Which of the following statements about gross domestic product (GDP) and the aggregate accounting identity are not true?
The aggregate accounting identity states that Production=Income−Expenditure. GDP is a measure of sales to consumers.
In August, 1979, the annual rate of inflation in the U.S. was nearly 12%, and the U.S. short-term nominal interest rate was nearly 10%. Over the next 35 years, both the rate of inflation and short-term nominal interest rate tended to fall. By August 2014, the rate of inflation was about 2% and the short-term nominal interest rate was close to 0%. How has the real short-term interest rate changed from 1979 to 2014?
The real rate remained stable at minus−2%.
Why do the inflation rate and the nominal interest rate tend to move together over the long-run?
Their up and down together movement tells us that the real interest rate is relatively stable in the long run. This synchronized movement indicates that credit market conditions have tended to be relatively stable over time.
Which of the following statements are true when a bank is insolvent?
The bank's stockholders' equity goes to zero. The government bank regulator shuts down this bank's operations and makes payouts to its depositors. The bank owes more than it owns.
Firms, households, and governments use the credit market for borrowing. The credit demand curve shows the relationship between the quantity of credit demanded and the real interest rate. The credit demand curve slopes downward because ____________. A shift in the credit demand curve can be caused by ___________.
a higher real interest rate reduces a borrowing firm's profit and hence its willingness to borrow. changes in perceived business opportunities for firms, changes in household preferences or expectations, changes in government policy.
When there are changes that improve the quality and value of leisure time, the supply of labor will ____________.
decrease and shift to the left.
Although GDP per capita........for income distribution, statistics show it..........a good indicator of overall life satisfaction.
does not account is
Items are classified as final goods only if they are the............in a chain of production.
end product
Households and firms with savings lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest rate. The credit supply curve slopes upward because a ____________. A shift in the credit supply curve can be caused by ____________.
higher real interest rate discourages current consumption and higher real interest rate encourages more saving. an aging population that is ill-prepared for retirement, an elevated perception on the part of households that the future may hold many "rainy days", a heightened desire on the part of firms to internally fund their future activities.
Explain whether each of these individuals will be counted as a part of the labor force. Alex left his full-time job as a teacher and now works part-time at the library John is a full−time student that works as a waiter on the weekends at Chili's. We know that Alex is ____________, and we know that John is ____________
in the labor force in the labor force
The distribution of GDP between different factions within an economy most closely relates to the.............method of aggregate accounting. The fact that the value of GDP remains equal regardless of whether GDP is measured by what people are earning or what they are producing is referred to as an.............. .
income identity
When there is an increase in population, the supply of labor will ____________.
increase and shift to the right
Failure of an investment bank is typically more serious than failure of a regional bank because ____________.
investment banks are not FDIC insured, liabilities are larger, and bank runs can trigger stock market collapses.
he depreciation of capital equipment...........measured by most governments on their national accounts. That depreciation amount..........subtracted from GDP. Depreciation of human capital..........subtracted from GDP.
is is not is not
The salary paid to a financial advisor would be considered .............income. On a national level, the.........of labor income and capital income is equivalent to aggregate expenditure.
labor sum
The value of the marginal product of labor is the ____________.
market value of a worker's additional output for a firm
Which one of the sets of terms given below would correctly complete the following definition of GDP? "Gross Domestic Product is the ____ value of the ____ goods and services produced _____ of a country during a particular period of time."
market; final; within the borders.
A key role of banks is to identify profitable lending opportunities. Banks perform this function by ____________
matching lenders to the more creditworthy borrowers.
When current marketcurrent market prices are used to determine the value of each unit that is produced in an economy, the resulting aggregate is known as ____________.
nominal GDP
Economists include the word final in the definition of GDP because we ____________
only seek to value the end product in a chain of production. must avoid the error of double counting.
A country's gross nationalnational product would exceed its gross domesticdomestic product when the ____________
production of domestically-owned factors operating abroad exceeds the production of foreign-owned factors operating in the United States
In order for comparisons of production across time to be meaningful, we must use.........
real GDP
The demand for labor ____________
reflects diminishing marginal productivity
By how much would current GDP change in response to each of the following transactions? Dell sells a $2,500 computer right off the assembly line to a student. In this case, current GDP ......... A homemaker buys a $2 loaf of bread at the grocery store to prepare sandwiches for her family. In this case, current GDP..... On the rebound again, a famous rock star marries her butler, whom she formerly paid $50,000 a year. After they are married, her husband continues to wait on her as before, and she continues to support him as before−but as a husband rather than as an employee, that is, not with a regular salary. In this case, current GDP.....
rises by $2,500 rises by $2 falls by $50,000
Maturity transformation is a process that transfers........into long-term investments. To avoid maturity mismatch, banks hold back some fraction of the deposit pool as........
short-term liabilities reserves
The level of economic activity is calculated using the income method by ____________.
summing labor income and capital income. adding together the income payments received by the various agents in the economy. tracking the flow of funds from firms to the owners of the factors of production.
A competitive labor market is in equilibrium when ____________.
the quantity of labor demanded and the quantity of labor supplied are equivalent.
According to salary.com, the average salary for a software engineer level III (a higher-level position in software design and implementation) in the Silicon Valley area of California is $108,244. However, Google pays its level III software engineers an average salary of $124,258. Why does Google pay a salary higher than the equilibrium salary for equivalent positions in the same area?
Google is paying an efficiency wage in order to minimize worker turnover, increase worker productivity, and attract the top talent.
Which of the following statements correctly describes the effects of price controls
Imposing these in inflationary times is economically destructive.
Suppose that there are only two small countries in the world: Ascot, with a population of 27,300 people, and Delwich, with a population of 21,000 people. Ascot's GDP is equal to $150 million while Delwich's GDP is $225 million. Delwich's GNP has been estimated to be equal to $265million. The revenue earned by firms that operate in Delwich but are headquartered in Ascot is equal to $80 million. Given the data above, Ascot's GNP is In Ascot, the per capita GDP is In Delwich, the per capita GNP is
$110 million $5495 $12619
What important factors do GDP estimates leave out?
Home production. Capital depreciation. Leisure. The production of illegal professions.
If the anticipated inflation rate is 3.00 percent and the nominal interest rate is 3.25 percent, the real interest rate is If expectations about inflation rise and the nominal interest rate remains unchanged, the expected real interest rate will
.25 percent. decrease
A representative bundle of commodities costs $100 in the United States and 80 pounds in England. The purchasing power parity (PPP) conversion factor between U.S. dollars and the British pound is . (Round your response to two decimal places.)
1.25
Suppose that Antegria and Centopia are hypothetical neighboring countries. Centopia's GDP per capita was measured to be 53,000 Centopian dollars (C$) in 2012. Antegria's GDP per capita was measured as 62,000 Antegrian dollars (A$) in the same year. The Antegrian dollar to Centopian dollar exchange rate in this year was 1.02 A$/C$. Suppose the cost of a representative bundle of commodities in Centopia is C$0.51 and in Antegria is A$0.66. The PPP conversion factor between the Antegrian dollar and the Centopian dollar is........A$/C$. (Round your answer to two decimal places.) Centopian GDP per capita in terms of Antegrian dollars is A$..........using the exchange rate and A$.........using the PPP conversion factor. (Enter your answers as whole numbers.) Which of the following statements is true based on the answers obtained in the previous step?
1.29 54060 68370 Antegria's GDP per capita is greater than Centopia's GDP per capita when compared using the exchange rate and lower when compared using the PPP conversion factor.
Federal funds rate=Long−run target+1.5(Inflation rate−Inflation target)+0.5(Output gap) Suppose the Fed has set the long-run target for the federal funds rate at 1.5 percent and its target for inflation at 3 percent. If the economy is currently hitting the Fed's inflation target and GDP exactly equals the trend GDP, then the Fed will set the federal funds rate at.........percent. (Enter your response with no rounding.) Now suppose the economy heats upheats up, causing the actual inflation rate to increaseincrease to 4 percent and the economy to rise 1.5 percent above trend GDP. In this case, the Fed will seek to set the federal funds rate at..........
1.5 3.75
Long−term interest rates fall Labor demand shifts right Demand for goods and services increases Short−term interest rates fall and access to credit expands Order them
2 4 3 1
Okun's Law is defined as: Change in the unemployment rate= (−1/2)x(g−3%) If the unemployment rate is 5.15.1% and real GDP grows by 5.2%, the new unemployment rate is
4%
Consider an illustrative economy that produces luxury pens. Assume that in 2013 this economy produced 2020 luxury pens at a market price of $200 per pen. In 2014, the number of luxury pens produced remains the same but the market price has increased to $300 per pen. If 2013 is the base year, the real GDP in 2014 is The nominal GDP in 2014 has..........by.......percent from what it was the year before
4000 increased 50
According to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 4.8%. The growth rate of nominal GDP is 6.2%. The nominal interest rate is 1.8%. The real interest rate is 0.4%. The money supply (M2) is $10,612 (in billions) According to the quantity theory of money, the growth rate of the money supply must be According to the quantity theory of money, what is the inflation rate?
6.2% 1.4%
Suppose the government enacts a stimulus program composed of $600 billion of new government spending and $100 billion of tax cuts for an economy currently producing a GDP of $15,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.6, the expenditure portion of the stimulus package will add...........percentage points of extra growth to the economy. (Round your response to two decimal places.) If the government taxation multiplier is 1, the tax cut portion of the stimulus package will add ............. percentage points of extra growth to the economy. (Round your response to two decimal places.) As a result of the stimulus program, the economy's GDP was increased by ........... percentage points over its value without the program. (Round your response to two decimal places.) If the economy's actual growth was 55 percent, then without the stimulus package, growth would have been negative ...........percentage points. (Round your response to two decimal places and use a minus sign if necessary.)
6.46.4 . 67 7.07 −2.07
Let's assume the U.S. dollar/Mexican peso exchange rate is 1/15 pesos and the price of a Big Mac in the United States is $4. Mexico's GDP is 16,696 billion pesos, and its population is 130 million people. Assuming the countries have purchasing power parity , the price of a Big Mac in Mexico is..........pesos. (Round your response to the nearest integer.) Mexican income per capita is.........thousand pesos. (Round your response to the nearest integer.) Mexican income per capita in U.S. dollars is.........thousand USD.
60 128 9
Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation.
An increase in reserves triggers a multiple expansion of bank loans and deposits, which generates an increase in the stock of money. If the money supply grows faster than real GDP, inflation will occur.
If nominal GDP increases, what might be the cause of this increase? If nominal GDP increases, this could be caused by:
An increase in the price level An increase in real GDP
Which of the following statements is likely to be true?
An individual likes variability in the nominal interest rate rather than the real interest rate she faces because she gets paid in nominal dollars.
Which of the following problems is the Fed likely to face if it wants to set its policy by applying the Taylor rule?
Applying the Taylor rule would reduce the Fed's flexibility to respond to changes in economic conditions.
The Centers for Disease Control and Prevention (CDC) has studied the economic impact of a global pandemic. According to its estimates, if MERS develops a resistance to current treatments, the U.S. population will fall from 315 million to 220 million, worst case, over the course of a year. Consequently, real GDP will collapse due to the pandemic. It is estimated that real GDP will fall from $15,000 billion to $4,000 billion. Calculate real income per capita before and after the MERS pandemic.
Before the pandemic, real income per capita is $47.62 thousand. After the pandemic, real income per capita is $18.18 thousand.
What are the disadvantages of using Big Macs to measure purchasing power parity? (Check all that apply.)
Big Macs represent only a very small fraction of people's consumption. The Big Mac index simply compares a bundle consisting of only one good.
Two economists estimate the government expenditure multiplier and come up with different results. One estimates the multiplier at 0.8, while the other comes up with an estimate of 1.2. Explain why these estimates are different in terms of the assumptions that each economist is making.
Compared to the first economist, the second economist must be assuming either a larger induced increase in consumption, a smaller crowding out effect, or both.
What could explain why a decrease in taxes could lead to a less-than-proportionate increase in output?
Consumers may choose to save much of the tax cut in anticipation of having to pay higher taxes in the future. As a result of diminishing returns to current consumption, consumers may choose to spread the extra spending over the long term rather than consuming the proceeds of a tax cut all at once.
Consumption might not rise very much as a result of a tax cut in the short run. Which of the following are reasons for this? (Check all that apply.)
Consumers might try to smooth their consumption by spreading the proceeds of a tax cut over the long term. Consumers might recognize that the government will have to raise taxes in the future to pay for the current tax cut. Wealthy consumers don't have an urgent reason to consume the tax cut right away.
The European Central Bank (ECB) manages monetary policy for the eurozone. Following the financial crisis of 2007-2008, the ECB, like the Fed, lowered interest rates to around zero. Using the concept of the zero lower bound, which of the following problems is likely to arise for the Fed while using countercyclical monetary policies?
During a recession, the fed will not be able to lower interest rates beyond a certain limite to mitigate unemployment and deflation
Using the concept of the zero lower bound, which of the following problems is likely to arise for the Fed while using countercyclical monetary policies?
During a recession, the Fed will not be able to lower interest rates beyond a certain limit to mitigate unemployment and deflation
How do expansionary policies differ from contractionary policies?
Expansionary policies seek to reduce the severity of recessions, while contractionary policies seek to slow down the economy when it grows too fast. Expansionary policies seek to increase economic growth and increase employment, while contractionary policies seek to reduce the risk of excessive price inflation. Expansionary policies seek to shift the labor demand curve to the right, while contractionary policies seek to shift it to the left.
How can expansionary expenditure-based fiscal policy lead to crowding out in the economy?
Expenditure-based fiscal policy leads to more government borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector.
According to the Taylor rule, the Federal Reserve should lowerlower the federal funds rate when the ____________. (Check all that apply.)
Fed's inflation rate target rises. output gap falls Fed's long-run target for the federal funds rate falls inflation rate falls.
What are some of the issues with bitcoins replacing major currencies?
Fiat money is generally worthless without a government decree that it is legal tender. Bitcoin deposits are not insured by the government. The value of a bitcoin is highly volatile and so people that hold them may lose money.
How does the zero lower bound on interest rates affect the working of monetary policy?
It complicates the formulation of expansionary monetary policy because it forces the central bank to rely on nontraditional and less familiar tools such as quantitative easing. It makes the implementation of expansionary monetary policy more difficult since it effectively blocks the central bank's use of its primary tool. It reduces the effectiveness of monetary policy by impairing the ability of the public (including investors) to understand the central bank's actions and signals.
How does the Federal Reserve obtain a particular value for the federal funds rate?
It finds the point on the demand curve that corresponds to that federal funds rate and makes available the exact level of reserves associated with that point on the demand curve.
How does a bank manage risk?
It invests in a diverse set of assets.
Which of the following statements regarding the natural rate of unemployment are true?
It is the longdash-term average rate of unemployment. It is the rate around which the actual rate of unemployment fluctuates.
Which of the following statements are consequences of lengthening eligibility for unemployment insurance? (Check all that apply.)
It supports household spending by increasing the incomes of unemployed workers and shifts the labor demand curve to the right. It partially reduces the incentive for unemployed workers to find new jobs and shifts the labor supply curve to the left. It gives unemployed workers more time to find a job that is a good fit for their skills.
Based on your answers in the previous parts, which of the following functions is likely to be true if the central bank works independently?
It would be able to control short-term interest rates to regulate inflation.
____________ used the concepts of animal spirits and sentiment to explain economic fluctuations.
John Maynard Keynes
Suppose the market participants expect that the Fed will increase the federal funds rate from 1.25 percent to 1.625 percent. Based on this information, which of the following outcomes is likely to be true?
Loan origination will decrease.
Which of the following would not likely contribute to business cycle fluctuations?
Long-term interest rates that closely follow short-term rates
Which of the following is an example of countercyclical monetary policy for controlling inflation?
Lower bank reserves and increase interest rates
Which of the following statements correctly describe purchasing power parity (PPP)?
PPP-based measures of GDP account for the fact that many commodities are cheaper in poorer countries. PPP constructs the cost of a representative bundle of commodities in each country and uses these relative costs for comparing GDP across countries.
Suppose the government prints and spends new currency. Which of the following statements are true in this case
Printing/spending a modest amount of new currency is socially beneficial. The citizens lose because the resulting inflation reduces the real value of the currency that they already hold The citizens gain because their government has more money to spend.
Other than open market operations, what tools does the Federal Reserve use to manipulate interest rates in the economy?
Quantitative easing. Changing the interest rate paid on reserves deposited at the Fed. Lending from the discount window. Changing the reserve requirement.
In 1973, the major oil-producing nations of the world declared an oil embargo. The price of oil, a key source of energy, increased. This led to widespread inflation as costs of production increased steeply. The resulting fall in GDP and employment led the United States into a recession. Which of the business cycle theories explained in the chapter would best fit this explanation of the 1970s recession?
Real business cycle theory.
Which of the following will be considered a final good in the calculation of U.S. GDP?
School supplies purchased by a local school board Golf outings at courses in North Carolina.
Which of the following mechanisms can the Fed use to implement a contractionary countercyclical monetary policy?
Selling government bonds in an open market operation.
Which of the following is true about the equilibrium federal funds rate
The Fed can increase the equilibrium federal funds rate by decreasing the supply of reserves.
During the financial crisis of 2007-2008, many central banks, including the Federal Reserve and the Bank of Japan, lowered their federal funds rate (or the non-U.S. equivalent) to around zero. The Bank of Japan took an additional, unusual measure: it introduced a negative short-term interest rate on excess reserves. Faced with a negative interest rate, banks must pay to lend their excess reserves to other banks. Given this information, which of the following is likely to happen as a result of this policy change?
The demand curve for reserves will shift to the left.
What is stockholders' equity?
The difference between a bank's total assets and total liabilities.
Though fiscal policies are controlled by individual governments in the eurozone, the European Union's Stability and Growth Pact places strict limits on country-level deficit spending. How does the confluence of the zero lower bound and restrictions on the fiscal deficit cause problems for countercyclical macroeconomic policy?
The government will not be able to lower tax rates to control recession in an economy.
Given the following information, what is the growth rate of nominal GDP? Upper Y 0 real GDP = $1000 (in millions) Upper Y 1 real GDP = $1100 (in millions) Upper Y 0 price level = 120 Upper Y 1 price level = 130
The growth rate of nominal GDP is 18.33%
If the inflation rate is negative, what must be true?
The growth rate of real GDP greater than> the growth rate of money supply.
Which of the following would not be counted in a nation's gross domestic product (GDP)
The hard drive inside your computer
Some economists stress the role of monetary policy in the period leading up to the recession of 2007-2009. Between 2001 and 2003, the Federal Reserve lowered the target federal funds rate from 6.5% to 1%, and kept it there through much of 2004. This resulted in a substantial decline in real interest rates throughout the economy, including mortgage rates. Based on the chapter's discussion of monetary and financial factors, how could the Federal Reserve's policies have contributed to the economic "bubble" of the pre-recession years of 2000-2006?
The low federal funds rate also lowered mortgage rates, driving an increase in demand for housing, which in turn drove up real estate prices.
In April 2012, the Bazanian Daily, a leading newspaper in the country of Bazania, carried a report titled "20,000 jobs added in the last quarter; unemployment rate shoots up from 5 percent to 6.7 percent." How could the unemployment rate in Bazania increase even when new jobs were created?
The new jobs may have made discouraged workers optimistic enough to start applying for jobs, thus re-entering the labor force and being counted as unemployed, which causes the overall unemployment rate to increase.
Suppose you are comparing the income per capita in the United States and Ghana. You try two approaches. In the first approach, you convert the Ghana values into U.S. dollars using the current exchange rate between the U.S. dollar and the Ghanaian cedi. In the second approach, you also convert both values to U.S. dollars using the purchasing power parity-adjusted exchange rate. Which approach is likely to give you a more accurate picture of the living standards in both countries?
The second approach, because it takes into account the relative costs for each country.
Which of the following statements are true if the government expenditure multiplier is zero? (Check all that apply.)
This implies that private investment is fully 'crowded out' by government borrowing. Many economists believe this multiplier is close to zero when the economy is already booming.
The former chairman of the Federal Reserve, Alan Greenspan, used the term "irrational exuberance" in 1996 to describe the high levels of optimism among stock market investors at the time. Stock market indexes such as the S&P Composite Price Index were at an all-time high. Some commentators believed that the Fed should intervene to slow the expansion of the economy. Why would central banks want to clamp down when the economy is growing?
To block the formation of unsustainable speculative asset bubbles. To prevent inflationary forces from gathering momentum.
Which of the following statements correctly describe co-movements that are historically observed in the data?
Unemployment moves negatively with real GDP. Real consumption moves positively with real investment.
Making generalizations about the welfare of a country's citizens based on its income per capita is problematic because ____________.
a high per capita income could be poorly distributed.
An old saying goes: "Nothing succeeds like success." How could this saying relate to Keynes's animal spirits view of economic fluctuations?
When people succeed, they become confident and optimistic, which can lead to actions that stimulate further success.
Which of the following best explains why the labor supply curve slopes upward
When wages increase, the opportunity cost of not working increases, leading people to seek more work hours.
You and a friend are debating the merits of using monetary policy during a severe recession. Your friend says that the central bank needs to lower interest rates all the way down to zero. According to him, zero nominal interest rates will boost lending and investment; consumers and firms will surely borrow and spend when interest rates are zero. Given that inflation in your country is currently 3 percent, would you agree with his reasoning? Explain your answer.
Yes, a zero nominal interest rate coupled with a 3 percent inflation rate yields a negative value for the real rate, which is the rate that is meaningful for investment decisions.
Is real income per capita more relevant in understanding differences in international living standards than real income per worker?
Yes, as it conveys the conditions of the whole population including children and the elderly.
When nominal interest rates have hit the zero lower bound, can central banks use interest rates to stimulate the economy? Explain.
Yes, but the mechanism by which central banks manipulate the interest rates that matter for spending must deviate from the banks' traditional method. Yes, since the zero lower bound applies to nominal rates, not real rates, and it is real rates that are relevant for investment decisions.
Does the effectiveness of monetary policy depend on inflation expectations? Explain
Yes, the central bank's ability to influence the long-term expected real interest rate is partly determined by the public's long-term expectations of the inflation rate.
Quantitative easing is ____________.
an attempt by the central bank to more directly impact long-term interest rates. the central bank's purchase of long-term bonds in the open market. a variation on the central bank's traditional manner of conducting open market operations.
The supply curve for reserves is vertical, or perfectly inelastic, because ____________.
it is set by Fed policy and does not respond to the federal funds rate.
The Taylor rule states that ___________.
central banks should set their policy rates (in the United States, the federal funds rate) according to a formula that incorporates the long-term target for the policy rate, the output gap, and the deviation of inflation from its target.
According to his theory of animal spirits and sentiment, changes in sentiment cause economic fluctuations through ____________.
changes in household consumption and firm investment.
The long-term real interest rate moves..........with the federal funds rate. If the federal funds rate falls, the long-term nominal interest rate.........and inflation expectations respond..........
directly falls minimally
market participants will form their expectations of the federal funds rate by using
economic news
Real business cycle theory ____________.
emphasizes the role of changing productivity and technology in causing economic fluctuations.
Changing corporate tax rates is an example of countercyclical.............policy. If the government lowers corporate tax rates, its goal would be a...........shift of the...............curve.
fiscal rightward labor demand
Suppose an economy has been growing for the last five quarters. It is more likely to..........in the next quarter.
grow
According to the quantity theory of money, ____________
in the long run, the growth in the money supply is directly related to the inflation rate
Given the circumstances, the countercyclical monetary policy adopted by the Federal Reserve is likely to result in a(n)
increase in the federal funds rate
How did the fall in housing prices cause the entire financial system in the United States to freeze up? The fall in housing prices resulted in..........leading to enormous........disrupting the banks' ability and willingness to make loans to......... .
increased defaults bank losses consumers and firms
The functions of a central bank are to ____________.
indirectly control the money supply. control certain key interest rates. monitor financial institutions.
Okun's Law ____________.
is usually an accurate representation of the data.
An economic expansion begins ____________.
just after the trough of a recession
According to the concept of persistence in the rate of growth, if the economy grows this quarter, it will ____________.
likely grow next quarter.
How do wage flexibility and downward wage rigidity affect the extent of unemployment in the economy when the demand for labor falls? When the demand for labor falls, the fall in employment is.......when real wages are flexible and.........when wages are downwardly rigid.
limited amplified
GDP at purchasing power parity (PPP) takes into account variations in....... PPP attempts to work out how much currency will be needed to buy.........quantity of goods and services in different countries. GDP per capita in PPP is the most useful for comparing...... .
living costs the same living standards
The cost to a business from frequently changing its prices due to high inflation rates is called.......
menu cost
Suppose the Fed wants to implement an anti-recession monetary policy. For each of the tools listed below, indicate the direction the Fed's action should take. The Fed should conduct an open market.......of Treasury bonds. The Fed should............the reserve requirement. The Fed should............the interest rate paid on reserves deposited at the Fed. The Fed should...........lending from its discount window.
purchase lower decrease expand
Expansionary monetary policy shifts the labor demand curve to the right by ____________.
pushing long-term interest rates down, thereby causing greater private expenditures and inducing firms to want to hire more workers.
Expansionary policy can be achieved through...........in income taxes. This change in taxes............have multiplier effects, but will likely have to be..............than expenditure-based fiscal policy injections.
reductions can larger
During an economic expansion, the demand curve for reserves will ____________.
shift rightward, as banks make more loans.
When the inflation rate starts to rise above the Fed's inflation target, the Fed will try to.........the rate of money supply growth When the Fed attempts to reduce the federal funds rate, it can do so with the help of the following three tools: By..........the quantity of bank reserves through open market operations. By..........the reserve requirement. By.........the interest rate it pays on reserves.
slow down raising reducing reducing
Okun's Law states that ____________.
when growth in real GDP is above 3%, unemployment drops and when it is below 3%, unemployment increases.
Structural unemployment is the unemployment that arises ____________
when wage rigidity creates a persistent gap between labor supply and labor demand.
Central banks undertake quantitative easing programs to ____________.
work around the problems when short-term nominal interest rates approach zero. more forcefully and directly impact the interest rates relevant for investment decisions
