Macroeconomics
True or False. There is no frictional or structural unemployment at full employment
False, Not all people are employed all the time. Some will be between jobs and others may be laid off due to mismatch between available jobs and desired skills.
True or False. Say's law explains how long-run real GDP stability is achieved in the Keynesian model
False, Say's law only states that supply creates its own demand
True or False. Say's Law states that supply creates its own demand because supply prices are always equal to demand prices
False, Say's law states that supply creates its own demand because the act of producing crates income sufficient to purchase all that is produced
True or False. If the federal government's expenditures equal its revenues in a given year, the budget is in surplus
False, The budget would be balanced
True or false. When the Fed lowered the interest rate to near zero in 2008 through mid-2015, investment spending responding sharply and equilibrium output quickly returned to the full-employment level.
False, The economy recovered very slowly because reducing interest rates did not have a significant effect on borrowing and spending.
True or false. If interest rates are low, the opportunity cost of holding money instead of interest-bearing assets is higher.
False, The opportunity cost of holding money is lower when interest rates are low. By choosing to hold money instead of bonds, people give up the opportunity to earn interest, so the interest rate is the opportunity cost of holding money.
True or False. A major shortcoming of the quantity theory is that it depends on a constant price level in the economy
False, The quantity theory shows the long-term change in price level
True or False. Keynes blamed economic downturns primarily on the instability of consumption
False, They blamed economic downturns primarily on the instability of investment
True or False. The main cause of the 2007-2009 recession was excessive and irresponsible government expenditure
False, the major cause of that recession was the collapse of the US financial system following the boom and bust of the housing market
True or False. Unemployment decreased after the Great Recession ended.
False, the unemployment rate rose another 0.5%
True or False. A rise in the labor force participation rate will always result in a decline in the unemployment rate
False, the unemployment rate will fall only when a greater proportion of the labor force participation rate are employed
True or False. If the government borrows to expand the productive capacity of the economy and put idle resources to work then future generations will inherit a smaller capital stock and a smaller output
False, they will inherit a larger capital stock and higher output
If C=$900, I=$150, G=$250, X=$50, M=$70, foreigner investors' income is $80, and income from Foreign investments is $60, then the GNP is....
$1,260
Florence is a teacher and earns $35,000 a year. Her spouse is a part-time IT specialist who earns $45,000 a year. Florence and her spouse decide that one of them should quit work and become a stay-at-home parent. Based on the *principle of comparative advantage*, who should be the full-time, stay-at-home parent?
Florence should stay home, since she has a lower opportunity cost
What did goldsmiths develop
Fractional reserve banking
What is short-term unemployment called
Frictional unemployment
The maximum number of skilled and unskilled workers are employed in an economy. What type of employment is this?
Full employment
What embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time
Full employment
Assume the following: Personal consumption expenditures= $20,000 Gross private domestic investment= $4,000 Government purchases of goods and services= $6,000 Exports= $4,400 Imports= $4,400
$30,000
Florence could earn an annual salary of $70,000 as a financial advisor or $60,000 as a bank manager. Currently, Florence is a teacher and earns an annual salary of $35,000. What is Florence's opportunity cost for choosing to be a teacher instead of a financial advisor?
$35,000.00
What is the CPI formula
(Expenditures on the market basket in year x / expenditures on the market basket in base year)(100)
The Federal Reserve engages in policy actions that change the amount of the money supply when it wants to change interest rates. What are two reasons why banks prefer to get loans from other banks, rather than from the Federal Reserve Bank? Choose 2 answers
1. The Federal Reserve is considered the "lender of last resorts." 2.Usually the Federal Fund Rate is lower than the discount rate.
What must the CPI be equal to for any designated base year
100
If the price index between year 1 and year 2 rises from $347 to $386, then the inflation rate is _______
11.24 {(386-647)/347}*100=11%
The Federal Reserve System was established as the US central bank is _____. One of the first challenges for the Fed was to help the treasury finance _____
1913, World War 1
Stagflation occurred when?
1970's
If MPS=1/3, the value of the expenditure multiplier is
3
The difference in the money multiplier, if the reserve ratio changes from 0.50 to 0.20, is
3
What is stabilization
A function of the government to promote price stability and full employment
What is structural unemployment
A mismatch of workers and jobs
Who does not lose in inflation
A person who owes a lot on her mortgage
Which event would cause the aggregate demand curve to shift to the right?
A positive outlook on the housing market
What is used to determine the inflation rate in an economy
A price index
a banknote is
A promise entitling the bearer to an amount of gold on demand at the bank
if Y=$3,900, and MPC=0.9, the economy is experiencing both _____ and _____ unemployment
A recessionary gap, High
What is not a motive for holding money
Accumulation demand
In the model of aggregate demand and aggregate supply, the Keynesian alternative would assume a downward-sloping ______________ curve and a _______________ aggregate supply curve
Aggregate Demand, Horizontal
Real GDP is a more accurate measure of output than nominal GDP because
Changes in nominal GDP reflect changes in both output and product prices
Real GDP is a measure of the value of economic output adjusted for
Changes in the price level
What is one of the most important influences on long-run trends in employment
Changes in worker productivity
Who is the largest holder of the US debt
China
What is the most widely known index and the one used to determine consumers' inflation rates
Consumer Price Index (CPI)
What is the main focus of economics?
Consumption, production, and use of scarce resources
At the end of WWII, people feared that another economic recession would occur. What did Keynesian economists encourage as a means of avoiding another recession?
Continued high government spending
If output (Y) falls far below the full_ employment level (Y*), this will create a deficit as tax revenues fall and transfer payment rise. This deficit is called
Cyclical deficit
What is unemployment that is related to declines in the level of aggregate output called
Cyclical unemployment
Unemployment caused by a recession is ______________, whereas one that occurred due to an increased labor force participation rate if ________________
Cyclical, Frictional
Unemployment caused by recession is________, whereas unemployment caused by relocation or production change is ________________
Cyclical, Structural
Unemployment caused by the 2007-2009 recession is _________, whereas unemployment that occurred due to the relocation of telemarketing companies to India is __________?
Cyclical, Structural
The philosophy of a _____ balanced budget calls for the budget to be in deficit during recessions, offset by equal surpluses during expansions
Cyclically
Economists have studied the effects of large _____ on the growth rate of an economy and they have found that when the ratio is over _____, there is approximately 1% decrease in the growth rate. While this doesn't sound large, small differences in growth rate over time lead to large differences in GDP due to percentages _____.
Debt, 90%, Compounding
As price levels get higher and higher, consumer demand for aggregate output
Declines
Having a vertical aggregate supply curve and a left shift in aggregate demand will _______________ price level, but a right shift in AD will _____________ price level
Decrease, Increase
At the end of the Civil War, the value of Confederate Notes
Decreased
What is the difference between GNP and NNP
Depreciation
According to the political business cycle theory, when inflation is not a problem, a politician seeking reelection is likely to pursue
Expansionary fiscal policy prior to the election, so voters will be satisfied with the state of the economy
Aggregate demand is the total of planned _____________, in the economy, whereas aggregate supply is the total of all planned ______________
Expenditure, Production
In the Keynesian model, when the Fed engages in open market operations and causes bank reserves to increase, interest rates will _____,causing investment spending to _____. This change in investment spending leads to a _____ shift of aggregate demand, which causes output and employment to _____
Fall, Rise, Rightward, Rise
What advantage does a market system have over command and traditional economies
Flexibility and capacity for dealing with change
True or False. Aggregate supply relates nominal output to the price level
False, Aggregate supply relates real output to the price level
True or False. Automatic stabilizers are changes in government spending or taxes that Congress approves when the economy goes into recession
False, Automatic stabilizers do not need Congress's approval
True or false. An equal increase in government spending and taxes will have no effect on equilibrium income.
False, For example, if government spending and taxes are both increased by $20 billion, equilibrium income will increase by $20 billion.
True or False. If actual output is equal to potential output, the cyclical deficit is larger than the structural deficit
False, If actual output is equal to potential output, the cyclical deficit is zero
True or False. If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged, price rises and output falls
False, If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged, price rises and output rises
True or False, In unanticipated inflation, lenders gain more than borrowers
False, In unanticipated inflation the value of a dollar is less so their payback is worth less
True or False. If John uses his savings to purchase stock in Coca-Cola, he is making an investment expenditure as defined in the national income accounts.
False, Investment expenditure refers to the purchase of plant and equipment, residential construction, and changes in inventory
In the aggregate demand curve, what explains the negative relationship between price level and real output?
Higher prices have a negative effect on planned purchases
How can unemployment be recognized in the production possibilities curve (PPC)
If the point is inside the PPC
Monetary policy can have lags like fiscal policy. Which type of lag is referred to as "outside lag" in monetary policy?
Impact
One of the offsets of fiscal policies is the time that passes from when the government ascertains there is a need to enact a fiscal policy to when the fiscal policy is officially enacted. What is the name of this time lag?
Implementation lag
Banks are more likely to hold a larger amount of excess reserves when the economy is
In recession and the risk of borrowers defaulting is higher
What is money often confused with
Income, Wealth, Loans, and Productive Resources
In the Classical model, when firms encounter huge demand, they _____________ output and labor. During this situation, prices of Output and labor will _____________
Increase, Increase
When the interest rate is low, a household might decide to borrow to buy a new car. This will _____ consumption, which _____ aggregate demand, which leads to a/an _____ in output
Increase, Increases, Increase
When the economy goes into recession, what is the appropriate fiscal policy proposed by Keynesian economists
Increasing government spending or lowering taxes
The quantity theory of money held that, in the long run, the level of output was _____ the stock and money and the price level
Independent of
The quantity theory of money held that, in the long run the level of output was
Independent of the stock of money and the price level
if interest rates fall to a very low level, then
Individuals will hold more money
Defense expenditure __________ part of the GDP
Is
When faced with an output gap, whether recessionary or inflationary, the Federal Reserve can engage in monetary policy actions, manipulate interest rates and money supply, and bring the economy back to full employment. What is the short-run effect of a decrease in the supply of money?
It causes an increase in both the real Gross Domestic Product (GDP) and the price level.
During a time of economic downturn, unemployment increases. What would be the effect of an increase in unemployment benefit payments?
It would increase government outlays, move the budget toward a deficit, and increase national debt
The U.S. economy is experiencing a time of slow economic growth and is entering a recession. The economy is operating at point A and is experiencing a recessionary gap. What effect would a decrease in taxes have on the economy?
It would make the AD curve shift right due to increases in consumption and investments
Which government spending programs are easy to cut?
It's very difficult to find a specific type of government spending program that is easy to cut.
What is an example of an unfunded liability of the US federal government
Medicare payments for those who are retiring this year
According to Classical economists, real output is pushed toward the full employment level through a ___________ market process, whereas Keynesian economists believe that the same is achieved through n ___________ market process
Natural, Artificial
What is part of Keynes's criticism of classical macroeconomic theory
Neither labor markets nor product markets can be counted on to be self-regulating
During the expansionary phase of the business cycle, it is likely that
Output increases, the price level increases, and the unemployment rate decreases
The implication of Say's law is that
Overproduction in a market economy is not possible
A function of the early goldsmith was to
Provide a storehouse for gold and other metals
When the Fed sells bonds to a bank, the bank's reserves are
Reduced, so bank loans must fall
What is included in M2, but not in M1
Savings deposits
True or False. The Keynesian short-run aggregate supply curve is horizontal when there are unused resources and prices do not increase when aggregate demand increases
True, According to Keynes, when there are unused resources, the SRAS tends to be horizontal, so prices do not increase when aggregate demand increases
True or False. The actual deficit is not known until after the fiscal year of over
True, One of the problems with taming the deficit is that its size is difficult to predict and control
True or False. The interest rate is determined by where the money market is in equilibrium
True, The price of money is the interest rate and that is determined by where the money demand curve intersects the money supply curve.
True or false. The Keynesian belief that banks are more likely to hold larger amounts of excess reserves during a recession was supported when excess reserves rose from $1.5 billion in September 2008 to above $900 billion in January 2009.
True, This increase happened when the economy entered recession
True or False. The value of final goods and services evaluated at base-year prices is not difficult to compare across time and countries
True, this is real GDP, which, by holding price changes constant over time, measures if the change is due to growth or not
A Federal Reserve note is accepted as money by most Americans because
US law establishes it as legal tender
An increase in the number of discouraged workers will ___________ the unemployment rate
Understate
Keynesian theories encourage the government to do what
Use fiscal policy to stabilize the economy
What are the three economic questions
What to produce? How to produce? For whom to produce?
Why is the slope of the consumption function usually much steeper than the slope of the saving function
When consumers receive more income, a much larger share of it normally goes to consumption than saving
If the Federal Reserve decreases the money supply, bank reserves _____ and the interest rate _____
decrease, rises
When interest rates rise, the transactions demand for money usually
decreases
One of the main benefits of active fiscal policy is _____. The main cost of active fiscal policy is _____
increased employment, a budget deficit
The chair of the Federal Reserve Board of Governors
is chosen by the president from among the sitting governors for a 4-year, renewable term
Transaction demand for money...
is positively related to real income
Is the reserve ratio the numerator or the denominator
the denominator
On a policy level, quantity theorists argue that in the long run, ceteris paribus, increases in the money stock cause....
the price level to rise
The Classical model assumes that the general price level is determined by...
the supply of money
Real GDP is the...
value of final output in 1 year after adjusting for inflation for the same year
What is a price index
A basket of goods and services that is typically bought with the goods weighed by their price.
China is experiencing fast economic growth that has caused an increase in the price level. The economy is operating at point C of the graph below and is experiencing an inflationary gap. What should the government focus on to bring the economy back to full employment equilibrium?
A contractionary fiscal policy to bring AD back through point A
The Federal Reserve engages in policy actions that change the amount of the money supply when it wants to change interest rates. What are the results of a contractionary monetary policy?
A decrease in the money supply and an increase in interest rates.
What causes cyclical unemployment
A fall in demand generally or specifically for the products they produce
Several economists have recognized the limits of fiscal policies when attempting to stabilize or aid economic recovery. During times of economic contraction, fiscal policies are enacted to close the recessionary gap. Which statement explains why the federal tax rebate in 2008 had minimal effects on economic activity?
A one-time tax rebate does not cause a change in taxpayers' permanent income
What is not achieved when an economy grows
A reduction in pollution
the part of a deficit that includes the entire amount of the deficit is called
Actual Deficit
The Silver National Bank of Spring Gulch, Nevada, has checkable deposits of $250,000 and total reserves of $75,000. The reserve ratio is 25%. How much can the Silver National Bank lend?
$12,500
Bernice deposits $15,000 into her checking account at Bank of America, and the required reserve ratio is 10%. How much do the bank's excess reserves increase as a result of Bernice's deposit?
$13,500
The national debt is often a topic of debate on the news and among economists, who are concerned about how it will be paid off and by whom. In the first quarter of 2015, the U.S. national debt was almost 103% of its GDP and was held mostly by foreign lenders. Which two things will happen if the government has to borrow funds to finance the increases in government spending? Choose 2 answers
1. The government will run a budget deficit 2. Interest rates will increase, causing a decrease of private investment.
What does it mean if the government runs a federal deficit of $230 billion? Choose 2 answers
1. The national debt will increase by $230 billion. 2. The government is spending $230 billion a year more than its tax revenue.
What would happen if a U.S. firm constructed a plant in China? Choose 2 answers
1. U.S. producers would be able to pay lower wages abroad. 2. Unemployment would increase in the United States.
What is likely to happen if a developing country is able to attract FDI (Foreign Direct Investment)? Choose 2 answers
1. Unemployment will decrease in the developing country. 2. The economy will improve in the developing country.
In the car manufacturing industry, the supply for cars has a positive slope. Which two factors can cause the supply curve to shift?
1. a change in expectations about the future 2. a change in the cost of labor
If a worker spends 50% of every dollar he earns, what is the worker's expenditure multiplier?
2
Suppose RR = 0.50. What is the money multiplier
2
The Silver National Bank of Spring Gulch, Nevada, has checkable deposits of $225,000 and total reserves of $75,000. The reserve ratio is 25%. What is the money multiplier for this system?
4
Country Y is a large country with a population of 100,000. It has a low standard of living, as reflected by its real GDP per capita of $50. What is the GDP of Country Y?
5,000,000
When banks are holding excess reserves,
Actual reserves exceed required reserves, and they are not maximizing loans and profit potential
What are sources of economic growth
Added resources, usually labor or capital
In the classical tradition, an increase in the money supply creates excess money balances. As these balances are spent
Aggregate demand shifts to the right, increasing equilibrium prices and output
What is not the Federal Reserve's tool for changing the money supply and interest rates
Changing the currency exchange rate
What is the largest liability for most banks
Checkable deposit accounts
Money can have several forms, including dollar bills, coins, or other commodities that are accepted as form of payment in exchange of goods and services. What did World War II soldiers use as money while they were held in prisoners' camps in Germany?
Cigarettes
Heather is watching the news and expresses her frustration with the Federal Reserve's inability to control the economic recession over the past five years. Her frustration stems from her belief that the government cannot time its policies to react quickly enough to the stagnating economy. What kind of economist is Heather?
Classical
According to _________________ economists, the best way to reduce unemployment is to wait for the economy to correct itself, whereas for _____________ economists, government intervention is the best way to reduce unemployment
Classical, Keynesian
One of the roles of the Federal Reserve is to
Clear Checks
What economic system relies on one central authority to make economic decisions
Command and Control
True or False, There is no difference between GDP and GNP
False GDP is the market value of total good and services produced within a nation's borders, whereas GNP is produced by the citizens of a nation regardless of where the citizens produce
True or False. Cyclical unemployment occurs when a company becomes more capital intensive
False, A company lays off workers because it is losing money due to a downturn or a recession in the economy.
True or false. According to the quantity theory, individuals and private banks find that they are holding smaller money balances than they want when the central bank increases the money supply.
False, Because individuals and private banks are holding larger money balances than they want they will react by spending and making more loans
True or false. Changes in the discount rate bring about large changes in bank reserves, lending, the money supply, and spending, so the discount rate is the Fed's preferred monetary tool.
False, Changes in the discount rate are used more as a signal of the direction of upcoming policy.
True or False. Because changing the required reserve ratio is such a powerful tool, the Fed uses this option most often to bring about desired changes in the money supply
False, Changing the required reserve ratio is too powerful and uncertain
True or False. Keynesian theorists argue that both saving and investment decisions depend on interest rates
False, Classical Theorists (not Keynesians) claim both saving and investment decisions depend on interest rates
True or false. The Federal Reserve System was established in the U.S. Constitution, so Congress cannot take away the powers assigned to it.
False, Congress passed the Federal Reserve Act in 1913 and created the Fed. The Federal Reserve is aware that Congress has the power to change the laws concerning it and is prepared to lobby for its position on any proposed legislation.
True or False. Consumption expenditure refers to spending on goods, but not services
False, Consumption expenditure includes expenditures on consumer durables, nondurables, and services
True or false. Actual deficit reduction may be larger than planned because the economy may suffer from slow growth and high unemployment.
False, Cutting the deficit is a form of contractionary fiscal policy. Out of a lower level of output, tax revenues will fall and transfer payments will rise as the automatic stabilizers kick in.
True or false. Discretionary fiscal policy makes an economy more stable when there are lengthy policy lags.
False, Discretionary fiscal policy combined with lags could actually make an economy less stable.
True or False. During the expansionary phase of the business cycle, it is likely that real income will increase, the price level will increase, and the unemployment rate will increase
False, During the expansionary phase of the business cycle, it is likely that real income will increase, the price level will increase, and the unemployment rate will decrease
True or False. The dollar value of total expenditure in the economy depends on household and government consumptions only.
False, Expenditures on private investment and exports are also included in the dollar value of total expenditure
True or False. Exports, investments, and savings are leakages of the circular flow of income
False, Exports and investments are an injection of resources into the circular flow, rather than a leakage. Saving, taxes, and imports are leakages from the circular flow of income
True or false. When the economy is doing well and income and output are rising at a healthy rate, transfer payments for food stamps, unemployment compensation, and social security are likely to rise.
False, Fewer people will be eligible for these programs when the economy is healthy, so these payments are likely to fall
True or false. Bank reserves may increase when the Fed buys bonds directly from a bank, but not when the Fed buys bonds from the public.
False, If the Fed buys bonds directly from the public, paying for them with a check, the bond seller must deposit the check in a bank account, adding to bank reserves.
True or False. If the price index between year 1 and year 2 changes from $88.90 to $75, then the inflation rate is 18%
False, If the price index between year 1 and year 2 changes from $88.90 to $75, it is deflation. {(75-88.9)/88.9}*100
True or False. In CPI calculation for time (t), the quantity of goods and services in time (t) is included in the calculation
False, In CPI calculation, the basket of goods and services used for comparison are those fixed quantity of goods and services
True or False. If the average person in an economy has more goods and services this year than last year, the economy has experienced an increase in real total output
False, In that situation, the economy has experienced an increase in real per capita output
True or False. When an economy goes into recession, the appropriate fiscal policy is to lower interest rates
False, Increasing government spending or reducing taxes is the appropriate fiscal policy at the time of recession
True or False. If the Federal Reserve decides to increase the money supply, interest rates will rise
False, Interest rates will decrease as the money supply curve shifts to the right
True or False. Payments for labor and land are included in the investment component of the expenditure in GDP
False, Investment is not payment for labor and capital, but is the purchase of final outputs for establishing factories, residential constructions, and equipment
True or false. Keynesian economists advocate using fiscal policy to offset any shift in aggregate demand that will cause equilibrium income to deviate from full-employment income.
False, Keynesian economists advocate using policy to offset shifts that have substantial and prolonged effects on output, employment, and prices
True or false. Regardless of whether monetary policy works the way Keynesians believe or the way Monetarists believe, it is more effective in an open economy than in a closed economy.
False, Keynesians and Monetarists agree that monetary policy is less likely to be effective in an economy with international investing and trade.
True or False. One of the primary roles of money in the economy is its function as a medium of exchange. Without money, consumers would exchange goods and services by negotiating.
False, Negotiation involves debating over the price of a good or service; not the exchange of that good or service. Bartering requires a double coincidence of wants and equal value to successfully exchange one good or service for another
True or false. In the Keynesian view, financial markets are linked to aggregate supply and aggregate demand primarily through changes in planned investment. Additionally, planned investment is the most stable component of aggregate demand.
False, Planned investment changes when interest rates change, along with other factors. Planned investment is the most volatile component of aggregate demand
True or False. Health care is the largest source of the federal government's expenditures that cased a rise in the deficit
False, Social Security is the largest source of the government spending, which accounts for 33% of the spending
True or false. To stabilize the economy, fiscal policy should be used to reduce spending during recessions and increase spending during inflationary periods.
False, Stabilizing the economy means using expansionary policy when spending is too low and using contractionary policy when spending is too strong.
True or false. The Federal Open Market Committee (FOMC) consists of the 12 Federal Reserve Bank presidents, one from each district.
False, The FOMC consists of the seven members of the board of governors plus the presidents of five district banks, always including the president of the New York Federal Reserve Bank.
True or false. The Keynesian horizontal short-run aggregate supply curve assumes that there is full employment in the economy.
False, The Keynesian horizontal SRAS assumes that there is unemployed and underutilized resources.
True or false. The reason the aggregate supply curve might slope upward to the right is mainly because as production increases, people want to buy less
False, The aggregate supply curve slopes upward because as price increases, producers want to supply more
True or false. If a deficit exists, the government must be pursuing an expansionary fiscal policy.
False, The deficit may simply be the result of automatic stabilizers and recessionary conditions.
True or false. The deficits of the 1970s and 1980s were largely due to attempts by the federal government to implement Keynesian policies to combat recessions.
False, The deficits of the 70's and 80's were incurred even during years when the economy was booming
True or false. Due to the uncertainty created by widespread bank failure, the public began holding more cash relative to bank deposits in the early 1930s, causing the monetary base to contract, but not the money supply.
False, The monetary base remained stable while the ratio of currency to deposits rose and the ratio of deposits to reserves fell.
True or False. The national debt is the amount by which the federal government's expenditures exceed its revenues in a given year
False, The national debt is the cumulative total of all past budget deficits minus all past surpluses. It is the amount owed to lenders by the federal government
True or false. During a period of inflation, the real value of the debt increases.
False, The real deficit measures the federal budget deficit as the change in the real (inflation-adjusted) value of the national debt from one year to the next.
True or false. If consumers fail to respond to a temporary increase in disposable income by spending a large fraction of it, then fiscal policy will have more of an effect on output.
False, The size of the multiplier effect depends on the amount of new spending caused by policy. Failure to respond means consumers are not spending in response to the policy, so it will have little or no effect.
True or False. Cyclical unemployment occurs when a company transforms from manufacturing auto parts to solar panel glass parts
False, This would require a different of skill sets and so would be structural
True or false. Because economic conditions can influence political outcomes, economists are certain that politicians are able to create a political business cycle for their own benefit.
False, Thus far, no economist has been able to show that politicians are actually able to create a political business cycle for their own benefit.
True or False. Politically, it is much easier to raise taxes than it is to lower them
False, Voters are generally supportive of tax cuts
True or False. Throughout US history, recessions have been the most common cause of substantial increases in national debt
False, Wars (not recessions) are the most common cause of US national debt
True or False. At lower interest rates, people will not be willing to hold larger cash balances
False, When interest rates are lower, people will hold more cash balances
True or False. There is more injection in a circular flow model if there are more imports than exports
False, With more imports, more will be paid out of the economy and , therefore, there is more leakage than injection
True or False. Economic growth is the result of an increase in non-marketed output
False, an increase in non-market output will decrease the GDP, Economic growth is the result of additional resources and advances in technology
True or False. Discouraged workers are still included in the labor force.
False, discouraged workers are no longer seeking jobs and, therefore, are excluded from the labor force number
True or False. Milton Friedman believes that the Keynesian consumption function does not reflect the way people behave because it ignores the savings of households
False, he believes it does not reflect the way people behave because it considers only the current income of a household
True or False, the previous unemployment rate will fall if both new employment and unemployment numbers each increase by 100,000 people
False, in the numerator, the increase is only 100,000 (unemployed), but in the denominator the increase will be 200,000 (unemployed + employed), therefore the rate will increase
True or False, A CPI compares prices between two years in a row
False, it compares the dollar expenditure of the market basket in a year to the dollar expenditure of the market basket in the base year
True or False. Construction income of undocumented workers is accounted for in the GDP
False, the department of labor and the IRS have no record of undocumented workers, so it is difficult for GDP accountants to track these payments
True or False. If people doubt money's acceptability, then they will still use it as a medium of exchange
False, they will not use it as a medium of exchange
When the economy is booming, income is rising...
Faster than normal, so tax revenues are likely to be higher than anticipated
A successful economy is capable of increasing the production of goods and services __________than the growth in population and with allocation of more __________
Faster, Technology
One way for banks to correct a shortage of required reserves is to borrow reserves from each other as well as from the Fed. Loans between banks are made in the _____ market. If the interest rate in this market drops below the target rate set by the Fed, the Fed will _____ bonds to adjust reserves and cause the rate to rise. The Fed typically lowers the target rate if the economy is experiencing higher than normal _____
Federal Funds, Sell, Unemployment
controlling the money supply in the economy is the responsibility of the
Federal Reserve
During the Great Depression, the velocity of money
Fell Significantly
During the recession, consumer spending __________ because there were fewer jobs and ___________ income
Fell, Less
What is not included in the expenditure approach to GDP
Financial Institutions
According to the Keynesian theory, the government uses its ____________ policy to minimize unemployment
Fiscal
Gross private domestic expenditures include
Fixed investment (plants and equipment), residential construction, and changes in inventory
The Keynesian consumption function was first modified by __________________ to account for differences in spending patterns that occur over the life cycle. These ideas were further developed by ____________, who hypothesized that current consumption depends on past income and expected future income and not current income alone
Franco Modigliani, Milton Friedman
Under a ___________ employment situation, some level of unemployment is acceptable. One such natural unemployment could be ____________
Full, Frictional
GDP Deflator formula
GDP deflator= (Nominal GDP/Real GDP)*100
If rising GDP comes at the expense of leisure time,
GDP may be overstating the increase in well-being
what is the formula for GDP
GDP=C+I+G+X-M
The federal government ___________ from inflation
Gains
The first modern bankers that developed paper currency were who
Goldsmiths
According to Keynes, what is the only way to bring the economy out of a downturn as severe and prolonged as the Great Depression?
Government intervention
In US history, the most severe downturn was called the _________, which occurred from _______________
Great Depression, 1929-1939
If a country has more investment abroad, but few foreigners are investing locally, its GNP is ______________ than the GDP. On the other hand, if a country has less investment abroad but more foreigners are investing locally, its GNP is ___________than the GDP
Greater, Less
The US currency that was first issued during the civil War and not redeemable in gold was called
Greenbacks
Keynes found many failings in Classical theory. He criticized the quantity theory because it neglects the role of _____________ and fails to explain _______________ changes in velocity
Interest Rates, Short-Run
In the long run, external debt will hurt the economy because
Interest is paid to foreign debtors
Classical economists believed that the role of the government should be limited, while Keynes believed the government should
Intervene when necessary
Japan has been experiencing a time of economic stability with its full employment real GDP at U.S. $12 trillion. A market shock has caused the economy to slow down, and there is now a recessionary gap at real GDP U.S. $11.5 trillion. At a current level of real GDP U.S. $11.5 trillion, the economy is below the full-employment level. Which fiscal policy action should be implemented to reduce the size of this recessionary gap?
Increasing government spending
The Federal Reserve is able to monetize debt by creating new money. If the Federal Reserve creates too much money, the result is
Inflation
What are the assets that people buy as insurance against inflation called
Inflation Hedges
What is Core inflation
Inflation that excludes food and energy prices
What is headline inflation
Inflation that includes food and energy prices
classical economists are more concerned with _____________ situations, but Keynesians are more concerned about _____________
Inflation, Unemployment
The goal of fiscal policy is to
Influence employment, inflation, and economic growth
What is an example of an injection into the income stream
Investment spending by business firms
The persistence of deficits during expansionary phases of the business cycle is due to
Political difficulties in cutting government spending
_____ is one of the reasons deficits persist even during the expansionary phase of the business cycle
Political difficulties in cutting government spending
While GDP is useful for evaluating a standard of living, it does not account for the side effects of increased production. What is an example of a side effect that is not included in GDP?
Pollution
Labor force participation is measured by dividing ________________, and multiplying this by 100
Labor force by the working age population
Because of the multiplier process, if a tax cut causes consumption spending to initially rise by $100, the resulting change in income is likely to be
Larger than $100, as spending by one person creates additional income for another person
With government taxation of households, there is ___________, and with more exports than imports, there is _______________ in the circular flow model
Leakage, Injection
If inflation is less than anticipated, the gainer is the __________, whereas if inflation is greater than anticipated the gainer is the _________________
Lender, Borrower
If the CPI is under 100 the year prices are _______________ than the base-year price
Less
The federal government is
Less likely to declare bankruptcy than a city government, since it has a broader tax base
According to Keynes, household spending habits are stable. Which factor has the most significant impact on consumer spending, according to Keynes?
Level of income
Money is organized into monetary aggregates based on its _____
Liquidity
According to the permanent income hypothesis, a temporary tax change will have _____ effect on the economy because of a weak multiplier effect
Little
According to Keynes, unemployment was high because planned spending was too low to generate the level of output that would result in full employment. Therefore, too ___________ spending was the cause of unemployment. To reduce unemployment, planned spending had to __________
Little, Increase
What are the interest-earning assets of a bank
Loans
Effective monetary policy increases bank reserves, which results in
More lending and more investment spending
At higher rates of interest, households save ___________ and businesses invest ____________
More, Less
During inflation ________ money will be spent on the market basket, whereas during deflation________ money will be spent on the market basket
More, Less
The general acceptability of money means
Most transactions can be completed using money
The equation of exchange
Ms (money supply) * V = P*Y
What is an observed and repeated pattern of the ups and downs in output, employment, and prices called
The Business Cycle
The difference between this year's receipts and this year's expenditures by the federal government is
The deficit
If the market for money is in equilibrium, then
The demand for money must be equal to the supply of money
Suppose you store part of your income in the form of money to be used 1 year from now. Which function of money are those dollars performing
The dollars are acting as a Store of wealth
The U.S. government plans to impose a quota on the amount of coffee imported from Brazil. Which argument supports imposing the quota?
The price of coffee in the United States will go up
What is likely to happen if the government temporarily increases taxes?
The short-run AS curve will shift left, and the long-run AS curve will stay the same.
What is likely to happen if there is an increase in oil prices
The short-run AS curve will shift left, the long-run AS will not shift
Considered from the perspective of long run aggregate supply, what is likely to happen if a government lowers the marginal tax rate?
The short-run AS curve will shift right
What is likely to happen if a government decides to apply lower levels of environmental regulation?
The short-run AS curve will shift right, and output will go up
What is likely to happen if the government temporarily cuts taxes?
The short-run AS curve will shift right, and the long-run AS curve will stay the same.
What is likely to happen if production costs are reduced due to deregulation?
The short-run AS will shift right, and output will increase
What causes a supply curve to shift
The state of technology, the prices of the productive resources, the number of suppliers, expectations about the future, and the prices of related goods
What is comparative economic systems
The study of the different ways of organizing economic activity, or answering the three basic questions (What, how, and for whom)
What is aggregate expenditure for a four-sector economy
The sum of the purchases of all sectors AE=C+I+G+(X-M)
A drought in Columbia destroyed the rice crops, which caused the supply of rice to decrease. Which scenario will occur as a result of the decrease in supply?
The supply curve for rice will shift leftward. This will cause an increase in the equilibrium price and a decrease in the equilibrium quantity.
The Keynesian short-run aggregate supply curve is horizontal if
There are unutilized resources in the economy
In the car manufacturing industry, the supply for cars has a positive slope. What happens if the price of cars increases?
There will be a movement along the supply curve
Why do classical economists believe that the government should not become involved with markets during an economic downturn?
They believe that there is a time lag that makes the coordination of government policies with markets difficult
During the late 90s, the U.S. government ran a budget surplus for several consecutive years by reducing federal spending and increasing some tax rates. What effect do budget surpluses have on the national debt?
They help reduce the national debt.
Why are models an important part of economic analysis
They permit more orderly thinking about the world
What happens when foreign investors lose confidence in a nation's ability to repay the loans
They will no longer want to hold that country's debt
According to the production possibilities curve model, as you increase the production of one good, what will happen to the sacrifices of the alternate good?
They will steadily increase
What is currently the main function of the Federal Reserve
To manage the money supply to promote economic growth, high employment, and a stable price level
Why did Congress create the Federal Reserve (the US Central Bank)
To regulate lending practices and act as a 'lender of last resort'
Coins with a value less than the monetary value are
Token money
True or False. Classical economists believed that the level of real output is determined by the labor market equilibrium
True, Classical economists believed that the level of real output is determined by the labor market equilibrium
True or False. Currency is included in the M1 definition of the money supply
True, Currency (cash and coins) is included in M1
True or False. Discretionary fiscal policy has primarily supply side effects but can affect aggregate demand as well through the structure of tax changes or the composition of spending changes
True, Discretionary fiscal policy has primarily supply side effects
True or False. People tend to spend and borrow less money during times of deflation
True, During deflation, people start to anticipate falling prices, and become much less willing to buy or borrow from real estate assets.
True or false. An annually balanced budget would force Congress to collect taxes to pay for spending programs and, thus, restrict the growth of government.
True, During the recession phase, when tax revenue automatically falls and transfer programs are more expensive, there is a deficit, which would have to be reduced through higher taxes or lower spending under an annually balanced budget rule.
True or False. Comparing the GDP across countries is complicated because each country uses its own currency
True, Each country uses its own currency, and because exchange rates often fluctuate, it is difficult to compare the GSP among countries
True or false. During the Great Depression, there was support for spending more on social projects during economic downturns and cutting back when the economy returned to full employment.
True, Economic downturns are often the result of weak spending, so spending more on social projects is a way to prevent a downturn from becoming more severe.
True or False. When all the excess reserves in the banking system have been used up, the money supply stops expanding
True, Expansion of the money supply cannot continue when there are no more excess reserves in the banking system
True or False. Fractional reserve banking is the practice of holding a fraction of money deposited as reserves and lending the rest
True, Fractional reserve means that not all the money is lent out since a portion is reserved
True or False. According to Keynesian theory, I order to increase the level of income and output, the government can cut taxes or increase government spending
True, Government can increase spending or cut taxes
True or false. According to the Keynesian model, the economy varies from the goal of full employment when aggregate expenditure is too weak.
True, If aggregate expenditure is too weak, equilibrium income will be less than full-employment income.
True or False, In the Keynesian view, the monetary process is longer and more complicated than in the Classical view
True, In the Keynesian model, monetary policy may be ineffective if interest rates do not fall or if investment spending does not increase
True or False. The cost of maintaining underground activities is much larger than formal economic sectors
True, Informal sectors have to pay substantial bribes to government officials to remain in business
True or false. In 2015, the majority of foreign investors are not worried about the United States defaulting. This has allowed the U.S. government to issue government bonds with very low interest rates.
True, Interest rates in the United States are still very low, thanks also to the confidence of investors.
True or false. When budget deficits are not controlled, there is no constraint on the size of the public sector.
True, It is much easier for everyone to support government spending when they do not have to face the burden of higher taxes.
True or false. It is estimated that it takes about 18 to 24 months for the full effect of monetary policy to be felt due to inside and outside lags.
True, It takes this much time to recognize a problem, implement policy, and wait for policy to have effect.
True or False. One of Keynes' criticism of the Classical macroeconomic is based on the belief that neither labor markets nor product markets can be counted on to be self-regulating
True, Keynes did not believe that the markets could correct themselves
True or false. The three fiscal policy lags are the recognition lag, the implementation lag, and the impact lag.
True, Lags in making policy decisions provide a limitation on discretionary fiscal policy.
True or False. Lowering the interest rate to try to get businesses to invest more and people to borrow more money is a common way governments try to stimulate economic growth
True, Lowering the interest rates will encourage people and businesses to invest more
True or False. M1, which is often referred to as the money supply, consists of coins, currency in non-bank hands, checkable deposits, and traveler's checks
True, M1 is the monetary aggregate with the greatest liquidity
True or false. The Fed did not cause the Depression, but perhaps a more aggressive expansionary monetary policy would have made it shorter and milder.
True, Monetarists, led by Milton Friedman, have demonstrated that the Fed's lack of action may have caused such a prolonged and severe downturn.
True or false. In the process of producing GDP, income is generated
True, NI consists of wages, rent, interest, profit, and proprietors' net income
True or False. As a percentage of GDP, the US national debt has been increasing for the past several decades
True, National debt has been increasing
True or False. People who deliberately continue to receive unemployment benefits overstate the unemployment rate
True, People who deliberately continue to receive unemployment benefits overstate the unemployment rate, since they are avoiding job offers
True or False. If you have an equilibrium of output and employment and attempt to use aggregate supply to increase output, prices should fall
True, Prices should fall
True or False. In 2014, the target range for the federal funds rate was between 0 and 0.25%
True, Rates were kept very low after the financial crisis of 2007
True or false. The first two attempts at central banks were also private banks, but concerns about corruption led Congress to seek a different structure for the U.S. central bank.
True, The Bank of the United States, established in 1791, was privately owned but chartered by the federal government. Its charter expired in 1811. In 1816, the Second Bank of the United States was created, but its charter was not renewed in 1835.
True or false. The Bush and Clinton tax increases in 1990 and 1993 were both intended primarily to control the deficit rather than to influence the level of output.
True, The Bush and Clinton tax increases in 1990 and 1993 were both intended primarily to control the deficit rather than to influence the level of output.
True or False. The Fed's most frequently used monetary tool is buying and selling government bonds in the open market
True, The Fed's preferred tool is open market operations
True or False. When the Federal Reserve buys federal debt, it is monetizing the debt
True, The Federal Reserve is able to pay for government bonds using newly created money, which increases the money supply
True or False. As a result of the Great Depression and World War II, the national debt increased significantly
True, The Great Depression caused a sharp drop in output, leading to lower tax revenues and an increase in government borrowing. World War II brought a large increase in output, but an even larger increase in government borrowing.
True or False. The aggregate demand curve is derived from the family of aggregate expenditure curves
True, The aggregate demand curve is derived from the family of aggregate expenditure curves
True or false. The points on an aggregate demand curve are equal to the various equilibrium points on the aggregate expenditure graph when the price level changes, but all other components remain the same.
True, The aggregate demand curve shows the relationship between demand and price levels. Each aggregate expenditure line has a given price level.
True or false. Reducing the deficit requires raising taxes and/or lowering government spending and both of these have political difficulties.
True, The deficit can only be reduced if the government raises taxes, cuts spending, or some of each.
True or False. The unemployment number this year increased because a large number of high school and college graduates entered the labor force
True, The large number of new graduate students are searching for jobs and it takes some time for them to get one.
True or false. According to Friedman's permanent income hypothesis, a 22-year-old who is about to graduate from college will likely spend more than a 22-year-old with very little education or job experience.
True, The permanent income hypothesis is the view that current consumption depends on expected income and the soon-to-be graduate will likely spend more based on higher expected income.
True or False. The Chairman of the Federal Reserve must be appointed by the President
True, The president has the authority to appoint the Chairman of the Federal Reserve, but then must get confirmed by the Senate
True or False. A major shortcoming of the quantity money is that it cannot explain short-run fluctuations in the level of output and employment
True, The quantity theory of money cannot explain short-run fluctuations if the level of output and employment
True or False. Monetary policy is affected by the same kinds of lags as fiscal policy: recognition, implementation, and impact
True, These are often called inside and outside lags, but they are essentially the same
True or false. If output falls far below full employment, progressive income taxes and transfer programs will create a deficit, as tax revenues fall and transfer payments rise, but these changes will help increase spending and output.
True, These automatic stabilizers help to smooth out the ups and downs of the business cycle.
True or false. Keynesian economists believe that the market may fix itself, but unless the government intervenes, there will be painful suffering of the people due to declining output and widespread unemployment
True, They believe the aggregate supply is below full employment level during a recession, and instead of letting people suffer for long, the government can intervene in shifting AD rightward in effort to realize full employment of output and labor faster
True or false. The Fed's dual mandate is to maintain both full employment and price stability.
True, This dual mandate was formalized with legislation passed in the 1970s.
True or false. Congressional legislation over the years, much of it enacted during the Great Depression, has created a system of tax collections and transfer payments that change automatically in response to changes in national income.
True, This legislation has primarily included changes in income tax collections, Social Security and welfare benefits, and unemployment compensation claims.
True or False. Unplanned changes in inventories play a very important role in moving an economy toward equilibrium. Sudden increases or decreases in inventories may signal to producers that they need to change their level of output
True, Unplanned changes in inventories will cause producers to change their level of output, and this will affect the equilibrium
True or false. A negative demand curve is also attributed to increased taxation following a price rise
True, When a price rises, nominal income will increase and household income will fall into a higher tax bracket
True or False. If firms' unplanned inventories are increasing, then in a closed, private economy consumers are saving more than businesses anticipated
True, When consumers are saving more than anticipated, businesses are left with unplanned inventory
True or false. A recessionary gap occurs when aggregate expenditures intersects the 45-degree line to the left of the full-employment level of output.
True, When the aggregate expenditure intersects the 45-degree line that is the equilibrium output. Since it is less than full-employment it would be to the left.
True or False. In a closed economy, equilibrium output occurs where the C+I+G line crosses the 45-degree line
True, Where aggregate expenditure crosses the 45 degree line determines the equilibrium output
True or False. The two government groups that own federal debt are the Social Security Trust Fund and the Federal Reserve
True, While the Social Security Trust fund owns the majority of the non-public debt, the Federal Reserve owns some of the debt
True or false, With an increase in capital or an improvement in technology, the production function will shift to the right, real output will rice, and price level will decline
True, With an increase in capital or an improvement in technology, the production function will shift to the right, real output will rise, and price level will decline
True or False. With economic growth, labor productivity will be improved
True, With economic growth, new technology will be introduced to improve the productive efficiency of labor and capital
True or false. an increase in government spending shifts the aggregate demand curve to the right
True, With increased government spending, businesses get more revenue to demand more goods and services for expansion, which shifts the AD curve to the right
True or False. Running a budget deficit can help end a recession
True, With increased spending a recession could end
True or False. Decreasing investments will shift the aggregate demand curve left
True, decreasing investments will decrease aggregate demand
True or False. If the structural deficit is negative (= structural surplus), fiscal policy is contractionary
True, fiscal policy would be contractionary
True or false According to Keynesian theorists unemployment situation could be minimized without causing inflation
True, for Keynesians, the aggregate supply is horizontal at certain price levels, and the introduction of fiscal policy could push the aggregate demand to the right to increase output and employment without any change in price level
True or False. government takes funds out of the stream by taxing households and by borrowing in the credit market
True, government taxes and borrowing are leakages from the income flow
True or False. During the Great Depression, the velocity of transactions declined
True, individuals held on to more money, but made fewer transactions. Thus, the velocity declined
A farmer fully utilizes his resources to produce cauliflower and kale. As the farmer produces more cauliflower, he has fewer resources available to produce kale. Which curve is illustrated in this scenario?
Production possibilities curve
A measure of economic performance that shows changes in output per worker hour from one year to the next is called
Productivity
True or False. GDP is defined as the final sales of goods and services produced in a given time period
True, it includes all those final products produced in the country for a particular year, valued at the market price
True or False. Experience suggests that a good candidate for serving as money should be somewhat scarce, portable, durable, divisible, and generally acceptable
True, money should possess all of those characteristics
True or False. If US spending for foreign-made autos increases while foreign spending for autos made in the US decreases, ceteris paribus, then US net exports will decrease
True, net exports will decrease
True or False. Checking accounts have many advantages over banknotes
True, one benefit is that they make it easier to protect cash from theft through the use of a stop payment on checks.
True or False. If the AE curve shifts upward, the AD curve shifts to the right
True, the AD curve would shift to the right
True or False. The US is divided into 12 Federal Reserve districts, each with its own Reserve Bank
True, the Federal Reserve System was designed to allay fears about concentrating financial power at the federal level
True or False. When net exports are negative, imports exceed exports
True, the calculation for GDP adds exports and subtracts imports; these two operations are often combined and the difference between them (net exports) is reported.
True or False. The ease with which an asset can be converted into the medium of exchange is called liquidity
True, the more an asset can be used as a medium of exchange, the more liquid it is considered
True or False. the turning points of the business cycle are called peaks and troughs
True, the turning point from expansion to recession is called a peak, and the turning point from recession to expansion is called a trough
What is an example of a leakage from the income stream
Purchases of imported goods
When using the GDP to compare countries, economists recommend converting currency values with the ___________ exchange rate, and when comparing GDP across time, it is recommended to use a ___________ time period
Purchasing Power Parity, Short
a key assumption in the Classical model is that...
Pure competition exists
Automatic stabilizers are
Put into place and left to respond automatically to changes in the level of economic activity
The banking system is fully loaned up when
RR(reserve ratio) equals BR (bank reserves)
Real GDP per capita formula
Real GDP/population
The aggregate production function shows the relationship between the level of ...
Real output and the level of employment
In Keynesian theory, full employment is achieved by shifting the AD curve to the ___________
Right
An increase in exports will shift aggregate demand to the ____________, while a decrease in exports will shift aggregate demand to the ____________
Right, left
According to the Keynesian view of the monetary process, higher investment spending causes output and national income to
Rise and employment rise
When the Fed bought government bonds during World War II to help finance the war effort, the money supply
Rose, creating inflationary pressures
A major shortcoming of the quantity theory of money is that it cannot explain _____ fluctuations in the level of output and employment
Short-run
The implementation lag is
Shorter for monetary policy. The FOMC is able to make faster decisions than Congress
Some machine operators were laid off because they are not proficient with a new, cutting-edge equipment. What type of unemployment does this represent
Structural
The part of a deficit that would persist even if the economy were at full employment level is called
Structural Deficit
When the jobs available in a market do not fit the skills of those looking for work, the economy is experiencing what?
Structural unemployment
The _____ deficit is the part of a deficit that would persist even if the economy were at the full-employment level. The _____ deficit is that part of a deficit that is due to a downturn in economic activity
Structural, Cyclical
True or False. In order to use fiscal policy to influence the level of output and employment, Keynesians argue that macroeconomic equilibrium does not ensure that the economy will have full employment and price stability
True, they argue that macroeconomic equilibrium does not ensure that the economy will have full employment and price stability
Say's law says that ___________ creates its own demand
Supply
Are there benefits from unemployment
Yes, the benefits of unemployment is that it allows for economic growth without increasing inflation and imposes discipline of the labor
According to Franco Modigliani, which groups are most likely to engage in dissaving
Young families and retired individuals
Fiscal policy is most effective when
a tax cut has a large effect on consumer spending
In the Keynesian view, several things could go wrong in translating changes in the money supply into changes in output. What is not one of them
consumers may not respond to lower taxes
Cutting the government's budget deficit is a form of
contractionary fiscal policy.
Natural resource depletion and pollution could be considered...
costs of economic growth
Indirect crowding out occurs when
government competes for funds in the credit market, causing interest rates to rise for all borrowers.
In a two-sector economy, planned expenditures equal
C+I
The lags for fiscal policy
Can be long and variable, thus making fiscal policy difficult to implement
When the economy is in recession, running a budget deficit
Can help end the recession by increasing spending
If the MPC is zero, the multiplier is
1
A country has a population of 50,000,000 people and a labor force of 20,000,000 people. The unemployment rate is 9.5%. How many people are unemployed in this country?
1,900,000 unemployment rate= unemployed workers/labor force X 100
Classify each option as either increasing or decreasing if the price of tablets is expected to go down. 1. Current demand for tablets (increase or decrease) 2. Future demand for tablets (increase or decrease) 3. Equilibrium price for the current month (i or d)
1. Decrease 2. Decrease 3. Increase
Classify each statement as either a flow of resources or a flow of dollars. (Circular Flow diagram) 1. Household supply to labor to firms 2. Firms sell products to households 3. Households provide productive resources to firms. 4. Households buy consumer products from firms.
1. Flow of resources 2. Flow of dollars 3. Flow of resources 4. Flow of dollars
Which two factors explain why the aggregate supply curve slopes upward in the short run?
1. Immobile resources 2. Long-term contractual agreements
What would happen if the U.S. government imposed trader barriers for cars imported from Japan? Choose 2 answers
1. Japanese producers would be hurt 2. U.S. consumers would be hurt
In 1987, Federal Reserve chair Paul Volcker was succeeded by whom?
Alan Greenspan
MPC and MPS will always add up to 1 because...
All consumer income that is not spent on a final good or service must be saved
The Classical model uses the assumption that
All wages and prices are flexible
What would cause the aggregate demand curve to shift to the right
An increase in government spending
Who does not contribute to an increased labor force participation rate
An increase in the number of senior citizens
what is an example of a non-economic condition that would increase GDP but not the standard of living
An outbreak of the SARS virus leading to a large increase in the production of health care products to prevent SARS
According to the Keynesian model, contractionary monetary policy is more likely to be effective than expansionary monetary policy because
Banks have no choice but to reduce loans when reserves fall, but they can maintain positive excess reserves
In the Keynesian view, several things could go wrong in translating changes in the money supply into changes in output. What are they
Banks may not lend, Borrowers may not respond to lower interest rates, Interest rates may not fall
When the Federal Reserve attempt to lower interest rates by buying government bonds what happens
Banks sell their bonds, only when the interest rate is acceptable for them
Unemployment causes the economy to function ________________ its potential capacity. This causes the economy to be ___________________ the production possibility curve
Below, Below
The US government must pay interest on the outstanding debt. The annual interest payment of the federal budget is _____ of the federal budget
Between 7-9%
When government spends more than the revenue it takes in, it must....?
Borrow funds in the credit market to cover the deficit
What is one of the challenges in implementing monetary policy according to the Keynesian school of thought?
Borrowers may not respond to lower interest rates
The transactions demand for money depends on
Both the price level and real income
What are the three functions of price in the market system
Directing, motivating, and informing
Why is the unemployment rate important
It measures the state of the economy
In Sequence, what are the four phases of the business cycle
Peak, Recession, Trough, Expansion
What does the Marginal Propensity to Consume (MPC) mean
People are more likely to increase spending when they earn an extra dollar, but they are not likely to increase it by the whole dollar
Who does not understate the unemployment rate
People who prefer to continue to receive unemployment benefits overstate the unemployment rate
The 1964 and 1981 income tax cuts, which were enacted as permanent changes, appear to have had more effect on income and consumption than the 1968 temporary surcharge or the 1975 one-time tax rebate. What is the most probable explanation for this?
Permanent tax cuts increase permanent income, which in turn increases current consumption
What proposed tax cut is likely to have the largest effect on output, according to the permanent income hypotheses
Permanently reducing tax rates at all income levels
What value is calculated by taking the national income less income tax plus transfer payment to be received
Person income
The _____ is a result of the use of fiscal policy to influence the outcome of elections
Political business cycle
There is an output gap, and the Federal Reserve buys bonds from the public leading to the money supply increasing and the interest rate decreasing. What will take place next?
Spending will increase, and the AD will shift right.
Keynesian claimed instability of investment during the Great Depression was mainly attributed to poor expectations of future_________ that necessitated ____________ intervention
Spending, Government
To explain how people react when money balances increase, Classical theory puts a strong emphasis on _____. The Keynesian model puts an equally strong emphasis on _____
Spending, Lending
The US government must pay interest on the outstanding debt. Which group is ultimately responsible for paying this expense
The US taxpayers
Deflation is the situation in which?
The average of all prices is declining
Referring to the three economic questions (what, how, and for whom), in a market system, by whom are these questions determined?
The buyers and sellers
Comparing the size of the debt to the size of the economy by using the percentage of GDP is more meaningful than just looking at the absolute value of the debt because
The capacity to repay the debt grows as the economy grows
The Classical explanation of the price level is based on
The equation of exchange and the quantity theory of money
When tax rates decrease, society's disposable income increases. What will happen when this disposable income is deposited in banks?
The equilibrium interest rate will decrease
GNP is defined as
The final sales of goods and services produced in a 1-year time period within a nation's borders
What is a criticism of the CPI
The market basket is not changed often enough
What is the current CPI
The measure of the average of the prices paid by consumers for a fixed market basket of consumer goods and services.
When the Federal Reserve buys government bonds,
The money supply increases
"A given change in business investment spending will cause a larger change in equilibrium national income." What important Keynesian concept does this statement express
The multiplier effect
What is Full Employment rate of unemployment
The natural or normal rate which includes frictional and structural unemployment
The U.S. government plans to impose a quota on the amount of oil imported from the Organization of the Petroleum Exporting Countries (OPEC). There are arguments from the public about whether this policy should be applied or not. Who will be negatively affected by this policy?
The oil consumers in the United States
In the Keynesian model, government spending is considered
To be autonomous
When can running deficit cause a problem for future generations
When resources may be diverted away from productive investment
When is there full employment
When the number of job seekers is approximately equal to the number of job vacancies
What are two examples of when price does not affect supply
When there is no time to produce more units (theater seats) When a unique supplier no longer exists (Picasso)
If the carpenter makes a bookcase for personal use, it ____________ be counted in the GDP. However, if a carpenter makes and sells bookcases, the value of those bookcases _____________ be included in the GDP
Will Not, Will
In the Classical model, an increase in the unemployment rate
Will likely be temporary
Is consumption positively related to income
Yes, consumption rises when income rises and falls when income falls
If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged, then
both price level and real GDP will rise
The recognition lag is
about the same for monetary and fiscal policy
If interest rates decrease from 8% t0 5%,
aggregate demand increases
How does M1 differ from M2
all the items in M1 are used for transaction purposes, whereas all the items in M2 are not
According to the Keynesian consumption function, if disposable income increases,
both saving and consumption will increase
The Consumer Price Index is estimated by.....
calculating changes in the cost of a market basket of goods and services.
If a bank sells a bond and uses the proceeds to make a loan, it has
exchanged one asset for another
Pollution and resource depletions are economic bads that are _______________ in the GDP calculation
excluded
True or False. According to the Keynesian model, households spend for consumption only if they are earning income from employment, owning capital, or entrepreneurship
false, Households will spend even if they have no income
Between August of 1929 and March of 1933, the U.S. money supply
fell by 25%, and there were widespread bank failures.
What does the term "money" mean to economists
items that are used to make purchases in a market economy
Unanticipated positive inflation will create...
losses for creditors and gains for debtors
Successful deficit reduction is likely to result in
lower interest rates and a reduction in the international value of the dollar.
A mixed economic system is best described as an economy with a mix of
market economy and command economy
If unemployment exists, then a nation is...
not operating on its production possibilities curve
What does trade enable firms to do
produce for larger markets, often lowering their average costs of production
Several economists have recognized the limits of fiscal policies when attempting to stabilize or aid economic recovery. During times of economic contraction, fiscal policies are enacted to close the recessionary gap. Which three lags make fiscal policies less effective? Choose 3 answers
1. Impact lag 2. Implementation lag 3. Recognition lag
Budget deficits and surpluses are a flow concept, while the national debt is a stock concept made up by the sum of past budget deficits minus all past budget surpluses. The national debt is the amount of debt the federal government owes its lenders. What are two problems Congress faces when trying to determine the budget deficit?
1. It can only project a budget deficit, but not determine the actual budget deficit. 2. The automatic stabilizers do not allow Congress to accurately determine the budget deficit.
In response to trade barriers in the United States for Japanese cars, the Japanese government decides to impose trade restrictions on computers imported from the United States. What would happen if these two trade barrier policies were applied against each other? Choose two answers
1. Japanese car producers and U.S. computer producers will be hurt. 2. Japanese computer producers and U.S. car producers will benefit.
Japan has been experiencing a time of economic stability with its full employment real GDP at U.S. $12 trillion. A market shock has caused the economy to slow down, and there is now a recessionary gap at real GDP U.S. $11.5 trillion. Which two actions should the government take to close this recessionary gap?
1. Reducing income taxes 2. Increasing government spending on roads
If there is an output gap, which two actions will cause the AD curve to shift right? Choose 2 answers
1. The Federal Reserve buys bonds from the public 2. The Federal Reserve increases the money supply through FOMC
By definition, an economy is at full employment when ____________ of those who want to work are employed
93% - 94%
In a four-sector model, the addition of _______________ and _____________ that are positive has increased the equilibrium level of income compared to the two-sector model
A government with a balanced budget, Net Exports
The standard value function of money refers to money as
A method of measurement or comparison
A market basket is a collection of goods that is used by what
A typical family
What is the circular flow model
A visual picture of the relationships between the resource market, in which income is earned, and the product market, in which income is used to purchase goods and services
An increase in government spending shifts the
AD curve to the right
The fact that money is legal tender increases its _____
Acceptability
At full employment, some level of unemployment is____________________. That natural unemployment could be ____________________
Acceptable, Structural or Frictional
The effects of national debt _____ how large the debt is relative to the size of the economy, who owns the debt, and what the debt was spent on.
Depend On
What does a bank's balance sheet show?
Assets and liabilities
____________________ partially offset changes in private spending and tend to reduce fluctuation is output and employment and are triggered by changes in the economy. Therefore, they _________ require further action by Congress
Automatic stabilizers, do not
How do consumers "vote" in the market
By using their dollars to obtain particular goods and services
In aggregate production function, real output is a ______________ variable and employment is a _________________ variable
Dependent, Independent
The national debt is a _____ concept, whereas the annual budget deficit is a _____ concept
Stock, Flow
An economist gave a lecture on economic fluctuations. When a student said that inflation hurts everyone, the economist said that this is not necessarily true. Who would most likely benefit from inflation?
Borrowers of a loan with variable interest
If the government _____ money to expand the productive capacity of the economy and puts _____ resources to work, then future generations will inherit a _____ capital stock and enjoy a higher output
Borrows, Idle, Larger
What are the twin deficits
Budget Deficit and Trade Deficit
What are the Federal Reserve's tools for changing the money supply and interest rates
Buying and selling bonds in the open market, changing the discount rate, changing the required reserve ratio
Expansionary monetary policy is effective when the Fed _____ bonds in the open market and makes appropriate changes to the discount rate and the federal funds target rate. These changes cause bank reserves to _____, which leads to _____ borrowing and spending. As a result, aggregate demand shifts to the _____ and equilibrium output _____
Buys, Increase, More, Right, Increases
The national debt is often a topic of debate on the news and among economists, who are concerned about how it will be paid off and by whom. In the first quarter of 2015, the U.S. national debt was almost 103% of its GDP and was held mostly by foreign lenders. How do agencies compare the national debts of different countries?
By comparing the debt to GDP ratio
What is a function performed by a modern society's money
Store of wealth
What does trade enable households to do
Consume goods that are not produced domestically or would be much more costly to produce
Consumption expenditures are divided into what
Consumer Durables, Nondurables, and Services
The fiscal policy that is likely to reduce the government's budget deficit is the .....
Contractionary Fiscal Policy
Based on the Keynesian model, policymakers are able to use _____ fiscal policy to reduce inflation and _____ fiscal policy to reduce unemployment. Used correctly, active fiscal policy should _____ the ups and downs of the business cycle
Contractionary, Expansionary, Decrease
What will prevent expansion of the money supply from reaching its potential maximum
Currency withdrawals by the public
The part of a deficit that is due to a downturn in economic activity is called
Cyclical Deficit
What is likely to happen if there is an increase in oil prices?
The short-run AS curve will be upward sloping and will shift left
In the production process of the national output, firms _____________ factors of production and households ______________ factors of production
Demand, Supply
If US spending for foreign-made autos increases while foreign spending for autos made in the US decreases, ceteris paribus, the US net exports will
Decrease
In order to eliminate a budget deficit, the government must _____ spending and/or _____ taxes. However, it is politically very difficult to do either of these during the expansionary phase of the business cycle
Decrease, Increase
The best example of a contractionary fiscal policy, designed to decrease aggregate spending, is
Decreased spending on national defense and elimination of tax loopholes
Between 1960 and 2010 in the US, the labor force participation for men __________, but ____________ for women
Decreased, Increased
If the CPI _____________ between year 1 and year 2, the deflation rate over that same period will increase
Decreases
Active fiscal policy results in budget _____ when used to combat recession and in budget _____ when used to combat inflation
Deficits, Surpluses
According to the M1 definition, the money supply consists of currency held by the public, plus
Demand deposits and traveler's checks
In January, Harry was laid off from his job, and he immediately began seeking employment. In May, he stopped looking for a job. It is now July, and he is still receiving unemployment benefits. How would you classify Harry's employment status?
Discouraged worker
_________________ not a component of the unemployment rate calculation
Discouraged workers are
The government outlays are caused by transfer payments and approved expenditures to fund Federal programs, whereas the government collects revenue through tax collection. What happens when there is a budget deficit?
Discretionary fiscal policy leads to spending more than is collected through tax revenues
The U.S. government plans to impose anti-dumping codes for steel imported from Japan. What is likely to happen as a result of this policy?
Domestic producers in the United States will benefit
What characteristics of money is important for considering how well it will stand up under continued use
Durability
When outputs are preferred more to less, they are _________________, and when these goods and services are preferred less to more, they are ___________________
Economic Goods, Economic Bads
If the economy is experiencing both high unemployment and high inflation, the Fed can use monetary policy to solve
Either high unemployment or high inflation, but cannot solve both at once
The labor force is the sum of ____________ workers and ___________ job seekers
Employed, Active
According to the Classical model, the income generated by production is
Enough to purchase all the goods and services produced
What is not incorporated in the labor force
Everyone over 16 years of age
Full=time homemakers are ______________ from the labor force and those in military service are ______________ in the labor force
Excluded, Excluded
In the Classical view, monetary policy works directly to change the economy because when the Federal Reserve buys bonds in the open market, the money supply
Expands and spending increases as well
What is a reason why the aggregate demand curve has a negative slope
Higher prices reduce the purchasing power of assets, reduce the demand for consumption, and increase interest rates
For Keynes, the short-run aggregate supply (SRAS) curve is
Horizontal
If a shift in aggregate demand only affects real Gross Domestic Product (GDP), then the short-run aggregate supply (SRAS) curve must be
Horizontal
In the Keynesian model, the AS is ___________, and achieving a higher equilibrium level of income is possible by shifting the AD curve to the ______________ until all unemployed resources are fully utilized
Horizontal, Right
How can the market supply curve be derived
Horizontally adding the individual supplies at each price level
Everything that is produced in a year must be purchased by...
Households, business, firms, the government, or foreign entities
In a real-world situation, the circular flow model includes:
Households, firms, government, and foreign sectors
What are the 8 categories of goods and services used for CPI
Housing, Transportation, Food and Beverages, Apparel, Medical Care, Recreation, Education and Communication, and Other
The functions of the Federal Reserve include setting _____ policy, supervising and regulating _____, and serving as a bank for _____
Monetary, Banks, The Federal Government
When money supply increases, interest rates are kept low. The direct effect of an increase in the money supply is to
Increase aggregate demand, as people try to spend their excess money balances
The nation is entering a recession. The classical economist says the government should do nothing and the market will correct itself eventually. What would the Keynesian economist suggest?
Increase planned spending by the government
Suppose there is a surplus of goods, and firms collectively cut their output. A classical economist would predict that unemployment will ______________, and competition among workers for fewer jobs will drive wages ______________
Increase, Down
When the Fed buys bonds from banks, bank reserves _____. When the Fed buys bonds directly from the public rather than from banks, the switch from bonds to money _____ the money supply. If the public deposits payments from the Fed in checkable deposits, bank reserves will _____
Increase, Increases, Increase
The best example of an expansionary fiscal policy, designed to increase aggregate spending, is
Increased public spending on infrastructure and a reduction in the income tax
Adding the foreign sector to the Keynesian model,
Increases income and output only if net exports are positive
a very important fact about national income accounting is that saving _____________ an expenditure
Is Not
In the Keynesian model, employment
Is determined by output
In the Keynesian view, money demand _____ highly sensitive to interest rates. When money demand is highly sensitive to interest rates, the money demand curve is _____ than when money demand is insensitive to interest rates, and a given expansion of the money supply will bring about a _____ decline in interest rates, causing monetary policy to by _____ effective
Is, Flatter, Smaller, Less
Classical economists support government intervention through ______________ to push the aggregate supply curve to the right, whereas Keynesian economists encourage ______________ to push aggregate demand to the right
Money Supply, Spending
Why does the CPI tend to overstate the true inflation rate
It fails to consider the effects of new products in the marketplace
When faced with an output gap, whether recessionary or inflationary, the Federal Reserve can engage in monetary policy actions, manipulate interest rates and money supply, and bring the economy back to full employment. What is the direct effect of an increase of the money supply when the economy faces a recessionary gap?
It increases aggregate demand because people try to spend their excess money balances, closing the recessionary gap.
Assume that the unemployment rate starts at 10%, and then the number of able workers increases from 50 million to 55 million and half of those new workers find jobs. What happens to the unemployment rate
It increases to about 14%
Interest rates have an affect on
Money demand
What is a major benefit of international trade
It permits a nation to go beyond its production possibilities curve without acquiring more resources or improving technology
The Keynesian short-run aggregate supply curve is horizontal because
It reflects the wage and price inflexibility
For monetary policy, the outside lag may be long because
It takes time for banks to increase or decrease their lending or for individuals to adjust their spending
When economists change the way they define full employment, it does what?
It usually reflects changes in their estimate of structural unemployment
Given the existence of automatic stabilizers, if the budget is balanced when the economy is at full employment
It will be in deficit when the economy is in recession and in surplus when the economy is booming
What will happen to the equilibrium interest rate if money stock increases due to an increase in capital inflows?
It will decrease
If John Brown deposits $500 in cash in his checking account at the Smith City National Bank on the same day that Leslie Evans takes out a $2,500 loan from that bank, how will these two transactions affect the money supply? (Ignore any multiplier effects.)
It will increase initially by $2,500
An increase in interest rates, ceteris paribus, will cause the money demand curve to do what
It will only cause a movement along the demand for money curve
Textbooks and class enrollments are complements. What happens to the demand curve for textbooks if the tuition rate increases?
It will shift to the left
The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy is the _____________ short-run aggregate supply curve
Keynesian
What will unanticipated positive inflation create
Losses for creditors and gains for debtors
Inflation will be positive if the current-year CPI is ____________ than the previous year's CPI
Lower
In the Keynesian view, an increase in the money supply causes aggregate demand to shift to the right. That means that if there is an increase in bank reserves, this leads to
Lower interest rates, which causes investment spending to increase
The indirect effect of an increase in the money supply is to
Lower interest rates, which stimulates both investment and consumption spending, thereby increasing aggregate demand
The equation of Exchange
M*v=P*Y
What is the formula for MPC
MPC= %change in consumption spending/%change in disposable income
What is the formula for MPS
MPS=%change in saving/%change in disposable income
According to the law of diminishing productivity, if capital stock is fixed, what will happen to marginal productivity with each additional worker?
Marginal productivity will increase at a decreasing rate
A main function of money is to avoid the need for double coincidence of wants. What is the name of this function
Medium of exchange function
What are some additional sources of Economic Growth
New or improved technology, invention, innovation, discovery of resources, improvements in productivity
Is borrowed money a capital resource
No, borrowed money is financial capital used to purchase real physical capital
Is Productivity an economic bad
No, it is the amount of output produced by one unit of input at a given time. So if productivity increases, GDP will undoubtedly increase
Are the answers to the "what," "how," and "for whom" questions independent of one another
No, the answers are not independent due to the distribution of income and the production process.
__________________ GDP is a value before it is corrected for inflation
Nominal
P*Y is the same as
Nominal GDP
According to the Classical model, in the short run, the money supply affects...
Only the general price level
In a market system __________ allocates goods and services and creates motivation for people to fins ways to ______________, which will help the economy grow
Price, earn income
The Federal Reserve recently announced that it will promote an expansionary policy. It is expected that output will increase. Which event will also occur as a result?
Prices will rise rapidly, and unemployment will fall.
Discretionary fiscal policy has...
Primarily supply side effects, but can affect aggregate demand as well through the structure of tax changes or the composition of spending changes
Aggregate supply is the market value of ___________ output supplied, and aggregate demand is the market value of _________output purchased
Real, real
If the GDP declines for two successive quarters the economy is said to be in a ________
Recession
The decline in real output for two quarters is a _______________
Recession
If the impact of expansionary fiscal policy is delayed until the economy has already recovered by itself, it is possible that policy intended to combat...
Recession may simply fuel inflation
in discussions of monetary policy, the inside lag is the
Recognition and implementation lags combined
The length of time needed to become aware of an economic problem is called the _____ lag. The time it takes after a problem is recognized to choose and enact a fiscal policy in response is the _____ lag. The _____ lag is the time that elapses between the implementation of a fiscal policy and its full effect on economic activity
Recognition, Implementation, Impact
If most government bondholders are rich, repaying the debt will _____ income from _____
Redistribute, The poor to the rich
In a recession business firms ___________ output because they can not sell their products. They ____________ investing because they have little confidence in the future
Reduce, Stop
What is not one of the original functions of the Federal Reserve System
Regulating the supply of money and the availability of credit in the US
During periods of recession, and economy usually experiences what
Relatively high unemployment rates
In the Classical model, the economy will tend toward full employment because of
Self-regulating Markets
In the Classical model, the economy will end toward full employment because of
Self-regulating markets
In the classical model, the economy will tend toward full employment because of
Self-regulating markets
What are the foundations of the Classical macroeconomics
Self-regulating markets, Say's Law, The quantity theory of money
The Federal Reserve bank can engage in expansionary or contractionary monetary policies to pursue economic stability. What should the Federal Reserve do to contract the money supply?
Sell U.S. government bonds
If the Fed's goal is to slow spending in order to reduce inflationary pressures, it can use the monetary tools to accomplish this goal. Specifically, the Fed would _____ bonds in the open market, _____ the discount rate, and/or _____ the required reserve ratio in order to lower the money supply or reduce the rate of growth in the money supply
Sell, Raise, Raise
When wages are lower, production yields the same output, but at a lower cost. The lower costs allow the firm to hire more workers and increase output. Sellers will have to reduce prices to sell the extra output. How is this advantageous to a seller?
Sellers can afford to reduce prices because of lower labor costs
Who does the Federal Reserve Board of Governors include
Seven members appointed by the US president for 14-year staggered terms
The Federal Reserve Board of Governors includes _____ members, each appointed by the president to serve _____-year terms. The chair of the Board of Governors is appointed to serve a _____-year term. _____ was appointed in 2013 to replace _____.
Seven, 14, 4, Yellen, Bernanke
A business owner is creating a sales forecast for the next year. She chose to monitor the consumer price index for indications of inflation. However, she is worried that there may be drawbacks to this index. What is a limitation faced by the owner in using the consumer price index?
She frequently adds new products and services to her business to appeal to her constantly changing customer base.
An increase in the money supply will...
Shift aggregate demand to the right
Classical economists strongly oppose government intervention, but argue that if there is a government policy that may have a positive role, it should be one that can do what
Shift the long run aggregate supply to the right
Fiscal policy is most effective when policy lags are
Short
Which category of transfer programs is least likely to change in response to changing economic conditions?
Social Security Survivor's Benefits. A family is eligible for a survivor's benefits when a covered employee (parent or spouse) dies; this is not an event that depends on the state of the economy.
What is the goal of stabilization
Stable prices, steady economic growth, and full employment
What is the term for when the economy is stagnant but there is also inflation at the same time
Stagflation
Why is the AS curve upward sloping
Sticky wage theory
classical economists tend to
Support Say's Law
With a cyclically balanced budget...
Surpluses during the expansion phase of the business cycle offset deficits incurred in the recession phase
What is redistribution
Taking income from one group and giving it to another through taxes and transfer payments
What restricts the movement of foreign trade
Tariffs, quotas, immigration restrictions, capital controls, and exchange controls
An increase in _______________ will shift the aggregate supply curve to the left.
Technology
Fiscal policy is most effective when policymakers are motivated to pursue actions
That improve the economy's performance
What does full employment assume
That some level of unemployment is normal (acceptable or desirable) and is only concerned about unemployment in excess of that amount
What is likely to happen if a government decides to apply lower levels of environmental regulation?
The cost of production will go down, and output will go up
What is the goal of an economy when it comes to allocating its goods and services
The goods and services go to the people who will value them the most
What is not included when public debt is reported
The government debt held in the Social Security Trust Fund
According to Keynes, what should the government do when the economy is booming?
The government should cut spending
What does the term market refer to
The group of buyers and sellers of a product and the arrangement by which their trade comes together
What is an indicator of strength or weakness in the national labor markets, by providing information on how many positions need to be filled
The help wanted index
The United States is a large importer of Japanese cars. The U.S. government plans to impose trade barriers for cars imported to Japan. If the government proceeds with this plan, how will it impact the U.S. economy?
The impact on the U.S. economy will be negative because free trade allows countries to enjoy a variety of goods produced by internationally efficient producers, and prices will be low.
What is disposable income
The income consumers have to save or spend after taxes have been taken out.
Ignoring the government and foreign sectors, equilibrium output is determined by
The intersection of planned saving and planned investment
Aggregate Supply
The relationship between the quantity of real GDP supplied and the price level when all other influences on production plans remain the same
In response to trade barriers in the United States for Japanese cars, the Japanese government decides to impose trade restrictions on computers imported from the United States. What impact will these restrictions have?
The restrictions will benefit Japanese computer producers
At an equilibrium of output and employment, a right shift in aggregate demand will result in ___________________
The rising of price levels, an increase in labor employment, and an increase in real output
One tenet of Classical economics that Keynes criticized is that
The role of the government should be limited, since the market will always be self-correcting
Below are likely scenarios that affect the demand curve for automobiles. Which scenario is correct?
The unemployment rate increases to 15% in the state of Michigan due to a recession. As a result, people will have less income and will be spending less. This will decrease the demand for automobiles, and the demand curve for automobiles will shift to the left.
What disadvantage does a market system have over command and traditional economies
The uneven distribution of income can create extremes of poverty and wealth, and encourages self-centered behavior at the expense of community interests
The U.S. government plans to impose a quota on the amount of oil imported from the Organization of the Petroleum Exporting Countries (OPEC). There are arguments from the public about whether this policy should be applied or not. Which is an argument against applying the quota?
This policy will hurt the U.S. customers because of higher prices.
The U.S. government plans to impose a quota on the amount of oil imported from the Organization of the Petroleum Exporting Countries (OPEC). There are arguments from the public about whether this policy should be applied or not. Which argument supports the imposing quota?
This policy will protect oil production industry in the United States.
What is the economist's definition of public goods
Those goods that are nonrival in consumption and not subject to exclusion
At times, the economy is growing too rapidly (beyond its full employment level), and the Federal Reserve intervenes with monetary policies to close the inflationary gap and restore economic stability. In the real world, how would a contractionary monetary policy be used?
To combat high inflation
Different people often pay different prices for the same good. This may be due to the presence of
Transaction Costs
What is not included in the national income accounting
Transfer payments are not accounted for in the government expenditure of the GDP
True or false. If the government must cut spending programs in order to use tax revenues to repay the debt, the people who would benefit from those spending programs will essentially be "taxed" to pay back the debt.
True, A cut in government spending could involve a cut in welfare spending programs.
True or False. A large national debt is beneficial for the future generation of a country if it expands the productive capacity of the economy and puts idle resources to work. Then, future generations will inherit a larger capital stock and enjoy a higher output
True, A large national debt can be beneficial
True or False. According to Say's law, if a company produces output with a value of $500, then the company also creates incomes for the resources equal to $500
True, According to Say's law the production of goods and services generates an amount of income equal to the value of the products produced
True or False. The Federal Reserve can change the money supply using the reserve ratio
True, Although an uncommon tool to use
True or false. Suppose the Federal Reserve increases the money supply. In a Keynesian model, the increase in the money supply will cause an inflationary gap, a demand-pull inflation, and a movement along the short-run aggregate supply curve.
True, An increase in the money supply will cause an inflationary gap, a demand-pull inflation and a movement along the short-run aggregate supply curve.
True or false. Transformation from analog to digital technology will shift the aggregate supply of telecommunications services to the right
True, An increase of productivity and the distribution efficiency of telecom access to millions of people will increase aggregate supply shifting it to the right.
True or False. If the Federal Reserve decides to increase interest rates from 4% to 7%, businesses declines
True, As interest rates rise, so does the cost of investing.
True or false. The Fed changes the discount rate to signal the direction of monetary policy rather than as a direct tool for changing the money supply.
True, Banks have many other options for obtaining reserves, so they will not necessarily alter the amount of reserves they borrow when this rate changes.
True or false. The relationship between the number of workers and output, with a fixed amount of capital, is positive and decreasing
True, Based on the law of diminishing return, with an increase in number of workers, real output is increasing at a decreasing rate
True or False. The larger the marginal propensity to consume, the larger the multiplier
True, Based on the multiplier formula 1/(1-MPC), the larger the MPC, the smaller the denominator, the larger the multiplier
True or False. Changes in price expectations influence the demand for money because changes in the price level affect the purchasing power of money
True, Changes in price expectations influence the demand for money
A teacher working as a server in a restaurant _________ the unemployment rate, whereas a laid-off teacher preferring to continue his/her unemployment benefits ____________ the unemployment rate
Understates, Overstates
The unemployment rate is the fraction of _________________________ workers and ________________________________ workers
Unemployed, Employed and Unemployed
Classical economists are less concerned with _______________ and Keynesians are less concerned with _________________
Unemployment, Inflation
With economic growth, ________________ decreases, and __________________ increases
Unemployment, Inflation
The standard currency used in the United States is the dollar bill. Among other functions, dollars are universally accepted as a form of payment for goods and services. If you say, "My computer costs $500," which function of money are you referring to?
Unit of account
Suppose that there is no government and no international trade. When C+I is less than the level of output
Unplanned inventories increase
Governments try to maintain the _____ of the money stock by limiting the quantity of money they produce
Value
A fixed real output level and a variable price level imply a ______________ aggregate supply curve
Vertical
classical economists believe that the aggregate supply curve is _____________ in the long run, and government action is ___________ needed to adjust to full employment
Vertical, Rarely
The price level has no effect when the aggregate supply curve is ______________. The price level has an effect when the AS curve is _________________
Vertical, Upward Sloping
Frictional unemployment is sometimes classified as what?
Voluntary unemployment
Due to the lengthy impact lag between the time the contractionary fiscal policy was enacted and the time it was effective, the economy has self-adjusted to full employment. What are the potential implications of a contractionary fiscal policy?
With an economy at full employment, a contractionary fiscal policy could bring economic contraction and cause a recessionary gap
What are influences on consumption besides income
Wealth, Interest Rates, Price Level, Expectations
The U.S. government plans to impose either a quota or a tariff on laptops imported from China. There are debates on whether the quota or tariff should be preferred. What is likely to happen?
With a quota, permit holders can buy the good at the low foreign price and resell it at the higher domestic price.
When the Fed uses the monetary tools to increase bank reserves,
banks may not increase lending so the policy is not always effective
If the Fed is seeking to expand the availability of credit in order to increase aggregate demand, it will most likely
buy bonds in the open market. Bank reserves increase when the Fed buys bonds
With an anticipated high inflation rate, what will people do
buy now before the price goes up
Bank reserves increase when the Fed
buys bonds in the open market, and decrease when the Fed sells bonds in the open market
How does specialization improve a nation's standard of living
by specializing, individuals, regions, and nations can produce greater total output without any increase in resources or breakthroughs in technology
When a bank lends out a portion of its customers' deposits, it is
called fractional reserve banking
Leakages in the circular flow model are...
caused by people saving instead of spending
What is the Quantity theory of Money
changes in the price level are proportional to changes in the money supply
The M1 money supply includes
checkable deposit accounts
Monetary policy is less effective in a global economy, because if policymakers expand the money supply and cause spending to increase,
some of the increased spending is used to purchase foreign-produced goods and services.
What effect would taxation have on real consumption spending when government spending is autonomous
taxation reduces real consumption spending