Macroeconomics- C719 Western Governors University

What is 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?

A Circular Flow Model (describes a mixed economy)

True or false. The standard of living is lowered when a country has more workers to feed

False Increases in both the size and the quality of the labor force can contribute to economic growth

True or false. Innovations resulting from research and development and investment spending tend to occur at a steady pace

False Innovations do not occur at a steady pace, which leads to some instability. This is the source of real business cycles

Which of the following are benefits of economic growth?

Higher income This enables consumers to enjoy more goods and services, as well as better standards of living

What are the interest-earning assets of a bank?

Loans Loans are the interest-earning assets of a bank

What is one benefit of economic growth?

Lower government borrowing Economic growth creates higher tax revenues and there is less need to spend money on benefits, such as unemployment

Who does the Federal Reserve Board of Governors include?

Seven members appointed by the U.S. president for 14-year staggered terms These governors do not always complete the entire 14-year term. Also, no more than one governor from any of the 12 districts can serve on the board

n 2011, the per capita gross national income was $850 in

Sierra Leone

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. Other transfer programs that can change are Medicaid, Food Stamps and Unemployment Benefits

What are negative effects that have an impact on everyone to some degree?

Public Bads (Pollution, Global Warming, Animal Extinction)

A good that is nonrival in consumption and not subject to exclusion is called a(n)

Public Goods (Sunsets & Lighthouses)

When price changes, there is an opposite change in what?

Quantity demanded

Which of the following is not one of the reasons why the aggregate supply curve slopes upward in the short run?

Quick responses to information The aggregate supply curve's upward slope results from market imperfections, such as delayed responses to information, not quick responses

Real GDP per capita for the year for a population of 50,000 and the real GDP of 5,000,000 is

Real GDP per capita for the year for a population of 50,000 and the real GDP of 5,000,000 is 100. Real GDP/capita = Real GDP/Population = 5,000,000/50,000 = 100

Which of the following is not one of the original functions of the Federal Reserve System?

Regulating the supply of money and the availability of credit in the United States The Federal Reserve System was intended to regulate banks and serve as a lender of last resort. It would also serve as a banker to the treasury, clear checks, and issue currency. Only later did monetary policy become its major function

In which case would the capital gains tax apply?

Rob purchased stock for $10,000 and later sold it for $15,000 Rob would be taxed on the $5,000 profit he made after selling the stock

Which of the following is included in M2, but not in M1?

Savings deposits Savings deposits are included in M2, but not in M1

The idea that supply creates its own demand is known as

Say's law Say's law states that supply creates its own demand

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 When a country's debt is too large, foreign investors find it too risky to hold the debt

True or false. There is an inverse relationship between the price level and the quantity demanded of real GDP

True The aggregate demand curve, like the demand curves for individual goods, is downward sloping

If a tax cut is successful in raising incentives and causing aggregate supply to shift to the right, this supply-side policy will lead to

higher output, income, and employment, but a lower price level Equilibrium output increases and the equilibrium price level falls

The relationship between price level and aggregate supply

is positive At higher price levels across the economy, firms expect that they can sell their final products at higher prices

Transaction demand for money

is positively related to real income Demand for money is positively related to real income

Decreasing money growth leads to

higher interest rates

Higher price levels are associated with

higher interest rates Borrowing usually falls when interest rates go up, so the quantity demanded is reduced

If the economy needs to increase by $800,000 to be at full employment and the marginal propensity to consume is .75, how big an increase in investment would be needed to reach the full-employment output?

$200,000 An increase in investment of $800,000 would be needed to reach the full-employment output. With an MPC of .75, the multiplier is 4, so 4 x $200,000 = $800,000

In Figure 8.2, if current equilibrium income is $3,300, but the target level of income is $3,500, the recessionary gap is

$50, so the expenditure multiplier is 4 The recessionary gap, distance DE, measures how much aggregate expenditure must rise to bring national income up to the desired level. The ratio of the change in equilibrium income ($200) divided by the recessionary gap ($50) is the expenditure multiplier

**Aggregate Demand**

**Aggregate Demand**

**Aggregate Supply**

**Aggregate Supply**

When price changes, one should expect a change in

*quantity* supplied

What are major issues in both political and economic discussions?

1. Deficit spending 2. Debt by the government

Give some reasons why costs tend to increase with output?

1. If firms are using machines and tools more, they wear out faster and break down more often 2. When more entrepreneurs are trying to start or expand businesses, there is greater competition for loans, so interest rates rise 3.In order to raise production with given resources, some labor has to work overtime at higher pay

The Theory of Price Formation is based on 2 propositions

1. Quantity demanded is negatively related to price 2. Quantity supplied is positively related to price

The Federal Reserve has three functions

1. Sets monetary policy through decisions that affect the flow of money and credit 2. Contribute to the safety and soundness of the financial system by supervising and regulating banks 3. Bank for depository institutions and the government and makes sure the payment system works efficiently

What are the three broad types of economies?

1. Traditional economy 2. Command (or planned) economy 3. Market economy

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 large increase in the production of health care products to prevent SARS The production of preventive health care products would increase GDP. Citizens would be better off if there was no virus and the resources used to produce these healthcare products could be used to produce something else

The market demand curve is found by adding up the

Individual demand curves

A banknote is

a promise entitling the bearer to an amount of gold on demand at the bank A banknote is a promise entitling the bearer to an amount of gold on demand at the bank

True or false. Full employment means that everyone in the population is employed.

False

True or false. A negative value for net exports causes GDP to increase

False GDP=C+I+G+(X-M), so GDP falls if the last term is negative

True or false. A market demand curve is the same as an aggregate demand curve

False A market demand curve relates to a particular good or service, while aggregate demand relates to all goods and services combined

True or false. A tariff quota means that a tariff is applied to imports up to the amount of the quota, but then the tariff is removed on additional imports

False A tariff quota means that a certain amount of a good from one country is allowed to enter another country without a tariff. For amounts in excess of that limit, a tariff is applied

True or false. All industrialized countries are in tropical climates

False All industrialized countries are in temperate climates

True or false. In the United States, national-level political elections are infrequent and campaigns are brief

False All members of the House of Representatives and one third of the Senate are elected every 2 years, and presidents are elected every 4 years, so the next election is never very far from the mind of anyone in Congress or the White House

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 Bank reserves increase either way

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

Getting a mandated vaccination that protects you, but also protects others, would be considered

a pure public good

One of the main differences between tariffs and quotas is that

a tariff raises tax revenue, whereas a quota does not A tariff is a tax, so it generates tax revenue as each imported unit is subject to the tax

Fiscal policy is most effective when

a tax cut has a large effect on consumer spending A large change in spending helps the policy have greater impact

Indirect crowding out occurs when

government competes for funds in the credit market, causing interest rates to rise for all borrowers Private sector borrowers, such as a corporation seeking to finance a new factory, are less able to borrow when government borrows available funds and causes higher interest rates

Fiscal policy is

government spending or tax policy passed specifically to affect the economy when it is not at full-employment equilibrium. Fiscal policy is influenced by both Classical and Keynesian economic theory

The U.S. currency that was first issued during the Civil War and not redeemable in gold was called

greenbacks The U.S. currency issued during the Civil War was called greenbacks

Julian Simon, in his book The Ultimate Resource 2e (1998), argues that a

growing population due to high birth rates can have positive consequences Simon argues that an additional person is a productive resource who will ultimately add more to production than society had to invest in his or her care, feeding, and education up to maturity

A rightward shift of supply increases output and causes

growth

Real GDP has been adjusted for inflation and nominal GDP

has not been adjusted for inflation

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 Discretionary fiscal policy has primarily supply side effects, but can also affect aggregate demand through the structure of tax changes or the composition of spending changes

The aggregate supply curve

has various shapes, based on the differing economic theories

According to economist Douglas A. Hibbs, Jr., economic conditions at the time of an election

have a definite effect on the success or failure of the incumbent party Evidence reported in 1989 found that incumbents were more likely to win reelection when the economy was doing well

According to James Gwartney, a public choice economist, the characteristics necessary for economic freedom include all of these, except

heavy environmental regulations One of the characteristics identified by Gwartney was a low level of government regulation, not heavy environmental regulations

In 1983, the Social Security system was reformed because

policymakers noted that there would have to be increased outlays in the period after the year 2000, as the baby boomers began to reach retirement age Baby boomers were born between 1940-1960, so they began to retire in 2005. The Social Security Trust Fund was built up to cover the extra payments needed for a larger group of retirees

The relationship between the number of workers and output, with a fixed amount of capital, is

positive and decreasing Every additional worker will produce less output than the previous one with the resources avail

Ceteris paribus, as applied in demand theory, means holding constant all factors that affect demand except one

price

The two variables on a supply curve are

price and quantity

A supply curve has a positive relation between

price and quantity supplied

A key component of the Keynesian model is that

prices are sticky Keynes assumed that prices were sticky

A decrease in aggregate demand will cause

prices to fall, according to classical economists, and unemployment to increase, according to Keynes For Classical economists, the SRAS is upward sloping and a decrease in aggregate demand will cause a fall in prices. For Keynes, a decrease in aggregate demand will only cause an increase in unemployment, since SRAS is assumed to be horizontal and the shift will have no impact on prices

When the Federal Reserve pays with newly created money, some people call this

printing money

Equilibrium output increases when aggregate demand shifts rightward, and firms employ more workers in order to

produce more output

A function of the early goldsmith was to

provide a storehouse for gold and other metals A goldsmith used to provide a storehouse for gold and other metals

Public investment is undertaken by the government operating in the

public sector

The Fed can increase bank reserves by

purchasing bonds

A key assumption in the Classical model is that

pure competition exists In the Classical model, pure competition exists

Automatic stabilizers are

put into place and left to respond automatically to changes in the level of economic activity Automatic stabilizers respond to changes in economic activity without any need for direct action by policymakers

The length of time needed to become aware of an economic problem is called the

recognition lag The first lag is in identifying the problem

Supply-siders believe higher taxes and transfers

reduce incentives to work, save, invest, and innovate High taxes reduce the rewards to these activities and high transfers increase the rewards associated with being poor or unemployed

When the Fed sells bonds to a bank, the bank's reserves are

reduced, so bank loans must fall Sales of government bonds by the Fed reduce bank reserves

When both demand and supply shift to the right, equilibrium output definitely increases, although the effect on equilibrium price level depends on the

relative size of the two shifts

Developing countries are similar in that they all have

relatively low per capita income Although developing countries are diverse, they all have some important similarities. The most obvious characteristic of a developing economy is low per capita income

Market economy

relies on incentives and the self-interested behavior of individuals to direct production and consumption through market exchanges (America)

According to Classical theory, the best strategy for economic development is to

rely on the power of market forces The Classical tradition, following Adam Smith, favors a laissez-faire approach

A multilateral approach to free trade is one where two or more countries

remove their trade barriers

A unilateral approach to free trade is one where a country, acting alone,

removes its barriers to trade

The money supply contracts when the Fed raises the

required reserve ratio

Encouragement of production through reduced taxes or regulations that lower costs to firms will shift the aggregate supply curve to the

right

Equilibrium output increases when aggregate demand shifts to the

right

An increase in the quantity or quality of resources leads to a

rightward shift of long-run aggregate supply

According to the Keynesian view of the monetary process, higher investment spending causes output and national income to

rise and employment rise Increased spending causes aggregate demand to increase, so equilibrium output increases, resulting in more employment

When aggregate demand shifts to the right, output and the price level

rise in the short run, but only prices rise in the long run Aggregate supply is upward-sloping in the short run, but is vertical in the long run

When the Fed bought government bonds during World War II to help finance the war effort, the money supply

rose, creating inflationary pressures The Fed was buying bonds, causing the money supply to increase and creating inflationary pressures

This behavior consists of people trying to get the most of something they want (to maximize some goal) out of available resources

self-interested behavior

The Classical school advocated a laissez-faire approach. That means no government intervention, as the market will

self-regulate Classical economists believed that the market self-regulated and tended back to full employment

In the Classical model, the economy will tend toward full employment because of

self-regulating markets In the Classical model, the economy will tend to full employment because of self-regulating markets

When the price of the dollar rises, exporters find it harder to

sell their goods abroad

The share of services in total output has been rising for at least 2 decades. The United States has become a

service economy

A higher level of investment would

shift both the aggregate demand curve and the aggregate supply curve to the right Investment affects both demand (spending) and supply. Investment is a type of spending, so aggregate demand increases, but it also affects the ability of business firms to produce by providing additional resources (investment in human capital and physical capital) and technology (investment in research and development)

Increased investment spending causes aggregate demand to

shift to the right

Investment spending is expected to increase when interest rates fall, causing aggregate demand to

shift to the right

Fiscal policy is most effective when policy lags are

short Short policy lags mean that policymakers quickly recognize the problem and implement a solution, and that the policy works quickly to improve the economy's performance

Keynesian theory takes a

short-run view of the economy and does not argue that the economy will self-heal. Keynesian theory views aggregate supply as horizontal so it does not worry a great deal about changes in the price level or inflation. It also believes that demand is the driving force of the economy.

The implementation lag is

shorter for monetary policy The FOMC is able to make faster decisions than Congress

The Fed has the most direct control over

the monetary base The Fed controls the monetary base, which consists of currency in the hands of the public plus reserves held by banks

It is not possible for the Fed to target both

the money supply and interest rates

When the Federal Reserve buys government bonds,

the money supply increases The Federal Reserve is able to create new money to pay for bonds, and purchasing bonds puts new money into circulation, so the money supply increases

If most government bondholders are rich, repaying the debt will redistribute income from

the poor to the rich

According to Simon Kuznets, developing countries will not necessarily follow the stages of growth identified by W. W. Rostow, because

the population is growing more rapidly in developing countries than in today's developed countries at a similar stage in their development This is one of many reasons identified by Kuznets that developing countries will not necessarily follow the stages of growth identified by W. W. Rostow

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 Increases in the money stock do cause the price level to rise in the long run

The two primary markets in the circular flow diagram are

the product market (upper flow) and the resource market (lower flow) The labor market is the largest part of the resource market

An example of a leakage from the income stream is

the purchase of imported goods, like wine from countries like Italy, France, or Spain Leakages occur when income is received, but not spent directly on purchases from domestic firms

Spillover benefits to third parties are called

Positive Externalities (Public Education)

The total of all planned expenditures in the entire economy is

aggregate demand The aggregate demand curve is the total planned expenditures in an economy

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 With higher spending, aggregate demand shifts right and equilibrium price and output both increase

The amount of real output that can be produced by various amounts of labor can be represented by a(n)

aggregate production function The relationship between real output and labor is represented by the aggregate production function

The total amount of goods and services that firms are willing to sell at a given price level during a specific time period in an economy is called the

aggregate supply

According to real business cycle theory, economic fluctuations result from changes in

aggregate supply Economic fluctuations result from changes in aggregate supply, according to real business cycle theory

the relationship between the quantity of total real output supplied and the price level when all other factors influencing production plans are held constant is called the

aggregate supply curve

If aggregate demand and nominal GDP increase while the price level is constant, one would conclude that the

aggregate supply curve is horizontal Graphically, if aggregate supply is horizontal, shifts in aggregate demand can only affect the output level

A curved production possibilities curve (PPC) changes the assumption that resources are

alike

If aggregate demand increases and the aggregate supply curve is upward sloping and unchanged,

"P" rises (When the aggregate demand shifts to the right, the new equilibrium will be at a higher price level) and "Y" rises (When the aggregate demand shifts to the right, the new equilibrium will be at a higher real output)

Dannon purchased plastic containers for $20,000 and fruit for $30,000, and then added $40,000 in value by producing individual yogurts. Based on this data, Dannon's activities caused GDP to increase by how much?

$90,000 GDP includes the value of the final good, which includes the value added at each stage of production, or $20,000 + $30,000 + $40,000.

The World Bank has established the threshold for absolute poverty at $1.25 per day in 2005 U.S. dollars. At this level, approximately how many people are living below the extreme poverty line?

1.3 billion people Although all regions have reduced the level of poverty, a large percentage of the world's population still faces extreme poverty

Since WWII the highest unemployment rate during a downturn was

10.8% (occurred in October 1982)

The Fed was established in

1913

According to the rule of 70, the number of years it takes for the population to double is equal to

70 divided by the growth rate

If the labor force is 250,000 and the working-age population is 350,000, what is the labor force participation rate?

71.43% Labor force participation rate = (labor force/working age population) * 100 = (250000/350000) * 100 = 71.43%

Which of the following activities is counted as part of GDP?

A baker purchasing flour to use an an ingredient for cookies to be sold to the baker's customers The value of the final product (cookies) includes the value of intermediate products like flour (nothing illegal or "under the table")

Which of the following decreases aggregate supply?

A decrease in labor supply If there is less input of production, aggregate supply will decrease

Which of the following will not cause a leftward shift in the aggregate demand curve?

A decrease in taxes A decrease in taxes generally does not cause a leftward shift of the aggregate demand curve

What is one of the costs of economic growth?

A deficit on the current account Increased economic growth tends to cause an increase in spending on imports, causing a deficit on the current account

Which of the following is an example of consumption expenditure, which is one of the components of aggregate demand (AD)?

A family's purchase of a durable good, such as a new refrigerator Consumption expenditure includes spending on consumer durables as well as services and nondurables

Which of the following is not a motive for holding money?

Accumulation demand Accumulation demand is not a motive for holding money

Who was the original theorist of economic development?

Adam Smith Adam Smith was the original theorist of economic development. He was also the person who is regarded as the founder of market economics

In 1987, Federal Reserve chair Paul Volcker was succeeded by whom?

Alan Greenspan Greenspan served as Fed chair for the remainder of Volcker's term and was then appointed to his own 14-year term

How does M1 differ from M2?

All the items in M1 are used for transaction purposes, whereas all the items in M2 a are not All the items in M1 are used for transactions purposes, whereas all the items in M2 are not

Which is an example of foreign direct investment (FDI) in the United States?

BMW building a car factory in Spartanburg, South Carolina States in the United States often welcome foreign direct investment and give tax credits and subsidies to foreign companies that create jobs in their cities

Generally, when firms increase output using existing resources, higher costs lead to higher prices, resulting in an upward-sloping supply curve. Which explanation does not help to explain why costs tend to increase with output?

Businesses purchasing more raw materials may be given volume discounts Volume discounts result in a lower cost of materials, so this does not help explain why costs increase with output

In a two-sector economy, planned expenditures equal

C + I In a two-sector economy, planned expenditures equal Consumption + Investment

Which would be counted in GDP, but not in GNP?

Cars produced at a Japanese-owned factory located in Detroit GDP includes the value of output produced by a foreign-owned plant located within the U.S

Which of the following is not one of the Federal Reserve's tools for changing the money supply and interest rates?

Changing the prime rate The prime rate is determined by market forces, so the Fed can try to shift supply and demand to move this interest rate, but the Fed does not set this rate directly

What is the largest liability for most banks?

Checkable deposit accounts A bank's biggest liability are checkable deposit accounts

Since 2010, the most significant demand for natural resources has come from

China China has the most significant demand for natural resources. With nearly 20% of the world's population, China is demanding more and more natural resources, such as energy, oil, and gas

Who is the largest holder of the U.S. debt?

China China holds $1.3 trillion of U.S. debt

The composite aggregate supply is vertical in the

Classical region

Automatic stabilizers DO NOT require further action by

Congress

In the Keynesian view, several things could go wrong in translating changes in the money supply into changes in output. Which of the following is not one of these things?

Consumers may not respond to lower taxes This is a potential problem with fiscal policy rather than with monetary policy

An unexpected reduction in inflation would tend to benefit which of the following?

Creditors When inflation decreases, the value of the dollar increases, making the loan more profitable.

Which of the following will prevent expansion of the money supply from reaching its potential maximum?

Currency withdrawals by the public Currency withdrawals by the public will prevent the expansion of the money supply from reaching its potential maximum

As the price level rises, the purchasing power of financial assets owned by households

Declines If the prices increase, purchasing power is reduced

Which of the following will cause an increase in aggregate supply?

Decreased input prices A decrease in input prices makes it cheaper to produce goods and increases aggregate supply

What is the most basic function of the government in a market economy?

Defining and Enforcing property rights

The relationship between the quantity demanded at the price applied is the

Demand curve

What is the decrease in the capital stock that results from wear and tear and obsolescence?

Depreciation

Which is not one of the major differences between NI (national income) and PI (personal income)?

Depreciation of capital equipment Correct. Depreciation is the difference between GNP and NNP

Which of the following characteristics of money is important for considering how well it will stand up under continued use?

Durability Durability is important for the continued use of money

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. 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. Trading allows people, businesses, and countries to consume inside their production possibility curve

False Consumption is inside the production possibilities curve if there is inefficiency or high unemployment

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. If government follows a laissez-faire approach, it must not define and protect property rights or discourage monopoly

False Defining and protecting property rights, and discouraging monopoly are important functions for government to perform and are consistent with a reduced role for government, according to the Classical tradition

True or false. The monetary base is equal to deposits made by the public in their bank accounts

False Deposits are larger than the monetary base in a fractional reserve system because of bank loans

True or false. Development economists in the field are more interested in broad theories than in workable strategies

False Development economists in the field are less interested in broad theories than in workable strategies

True or false. Developing countries' development efforts are hampered by foreign direct investment by private firms and individuals

False Direct foreign investment supplies scarce financial capital and aids the development process for many countries

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. Disposable income is the income households earned before income taxes are deducted

False Disposable income is the income the household sector has left after taxes. DI can be spent on consumption or saved

True or false. GDP and price indexes are computed the same way in all countries

False Each country develops its own methods for computing national statistics, although the methods are very similar

True or false. Expanding aggregate demand is a way to stabilize the economy when recession threatens, but it is not a strategy for achieving economic growth

False Expanding aggregate demand can be a growth strategy as well as a stabilization strategy

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. Firms often do not purchase inputs at prices that stay fixed for considerable periods of time

False Firms decide how much to produce by comparing their selling prices with their costs of production, and production costs depend, among other things, on input prices

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 people doubt money's acceptability, then they will still using it as a medium of exchange

False If people doubt money's acceptability, they will not use it as a medium of exchange

True or false. If required to choose between imposing a tariff or an import quota with equivalent consequences, most economists prefer quotas over tariffs

False If they have to choose, economists usually consider a tariff less harmful in terms of efficiency than an equivalent quota

True or false. In 2011, $1.5 billion in aid flowed from the developed countries to the 48 developing countries

False In 2011, $133.5 billion in aid flowed from the developed countries to the 48 developing countries

True or false. Currently, loans from the World Bank must be used for such developmental projects as roads, dams, electric power plants, and water systems

False In the 1980s, the World Bank concluded that infrastructure projects for a poorly functioning economy were not getting at the root of the problem

True or false. In the long run, an increase in aggregate demand raises the equilibrium price level and the equilibrium level of real GDP

False In the long run, an increase in aggregate demand only raises the equilibrium price level

True or false. Environmental cost is a benefit of economic growth

False Increased economic growth will lead to increased output and, therefore, increased pollution and congestion. This will cause health problems such as asthma, reducing the quality of life

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.

True or false. Policies that encourage investment have a negative impact on the economy's future rate of growth

False Investment makes workers more productive and leads to increased output, so the economy's future rate of growth is enhanced

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. Economists disagree on why aggregate supply shifts

False Many economists tend to agree on the reasons for aggregate supply shifts

True or false. The national security argument is used to prevent having specialized military hardware made in a different country, but is never applied to non-military output

False Many industries use this argument when it is not necessary

True or false. The Federal Open Market Committee (FOMC) consists of the 12 Federal Reserve Bank presidents, one from each district

False Membership of the FOMC reflects a compromise between centralized and decentralized power

True or false. Since 1982, the Fed has been committed to a money supply target and has allowed the money supply to grow at a fixed rate each year

False Money supply growth has not been stable during this time period

True or false. Most U.S. output is produced by the government sector, including federal, state, and local government entities.

False Most output is from the business sector, the government produces roughly 20% of GDP in the United States

True or false. The amount of income households receive is equal to the amount of income households earn

False PI is the amount of income households receive and NI is the amount of income households earn

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

True or false. Say's law explains how long-run real Gross Domestic Product (GDP) stability is achieved in the Keynesian model

False Say's law only states that supply creates its own demand

True or false. In developing countries, foreign direct investment can bring needed expertise and technology, but it creates too much reliance on foreign governments

False Since foreign direct investment is done privately, it is a way for countries to grow without having to deal with other governments

True or false. A shift of the aggregate demand curve to the right will have the greatest impact on the price level if the aggregate supply curve is horizontal

False Since the aggregate supply curve is horizontal, there will be no impact on the price level that remains constant

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. If a worker's job providing technical support in a call center is outsourced to another country, that worker is frictionally unemployed

False Structural unemployment occurs when jobs are lost due to structural changes in the economy, like outsourcing

True or false. Labor force participation has increased recently in the United States, while in other countries, such as Germany and Spain, the rate is declining

False Table 16.1 shows a slight decline for the United States and increases for both Germany and Spain since the year 2000

True or false. Economic growth is not associated with technological changes

False Technological change increases productivity and is associated with economic growth

True or false. An interest rate target requires the Fed to decrease the monetary base when the actual interest rate is higher than the target rate

False The Fed would need to increase the monetary base to cause the actual interest rate to fall in the direction of the target rate

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. 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 1970s and 1980s were incurred even during years when the economy was booming

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. The fact that most countries have become members of WTO provides strong support for the claim that free trade has more costs than benefits

False The fact that the majority of countries have become members of WTO is a reflection of the vast good that comes from free trade and the harm that trade barriers impose

True or false. Economists agree that the short-run aggregate supply curve is vertical

False The long-run aggregate supply is vertical at full-employment output

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 money supply fell 25% between 1929 and 1933

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. 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

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 something causes the short-run aggregate supply curve to shift, it will also cause the long-run aggregate supply curve to shift

False The short-run aggregate supply curve can shift without shifting the long-run aggregate supply curve

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. If the economy achieves full employment at an income level of $15 trillion, and equilibrium income is currently $14.9 trillion, Keynesian economists recommend using fiscal policy to reduce equilibrium income

False The target income level is $15 trillion, where the economy reaches full employment

True or false. According to the theory of diminishing marginal productivity, additional resources add more and more to total output as an economy grows

False The theory of diminishing marginal productivity suggested that as an economy grew, additional resources would add less and less to total output

True or false. If China's economy is growing at a faster rate than Canada's economy, people living in China are better off than people living in Canada

False There are many reasons why GDP growth may not exactly coincide with individual well-being, including income distribution and economic bads

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. Total labor supply does not affect the unemployment rate over longer periods.

False Total labor supply *does* affect the unemployment rate over longer periods

True or false. If the price of a washing machine increases because of an improvement in durability, GDP should not reflect this change

False Unless a specific feature can be separated out and assigned a price tag, GDP accountants have no good way of correcting for quality improvements

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. 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

What did goldsmiths develop?

Fractional reserve banking Goldsmiths developed fractional reserve banking

The Keynesian consumption function was first modified by

Franco Modigliani Modigliani hypothesized that spending behavior is different for young families getting started, middle-aged families with higher earnings, and older families who have retired

The total market value of all final products produced within a country during a given time period is

GDP (gross domestic product) GDP is output produced on U.S. soil and includes production by foreign-owned businesses and foreign workers

If rising GDP comes at the expense of leisure time,

GDP may be overstating the increase in well-being Although there is more output, the reduction in leisure time causes the quality of life to fall

Which is the correct formula for GDP?

GDP= C + I + G + (X - M)

Which is a criticism often made against the role of multinational corporations in developing countries?

Good jobs are often filled by foreign nationals, but not local workers Host countries are concerned that the opportunities for local workers are limited

Which of the following is not a component of aggregate supply?

Government spending Government spending is a part of aggregate demand

An increase in interest rates, ceteris paribus, will cause the money demand curve to do which of the following?

It only causes a movement along the demand for money curve A change in interest rates, ceteris paribus, will only cause a movement along the money demand curve

Which of the follow accurately describes the types of production not included in GDP and how the non-included production affects GDP and the economy

It probably does not make a big difference in year-to-year comparisons within a country Changes from one year to the next are not likely to be significant

Macroland's crime rate has dropped significantly and is expected to stay low for the foreseeable future. What effect will this have on the economy?

It will lead to a higher living standards Even if the reduced crime rate had no effect on GDP, people prefer living safely

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 Every program, every subsidy, every agency has a constituency—the employees, customers, and suppliers that depend on its survival for their economic futures

Import substitution, or self-sufficiency, has been a productive development strategy in a few countries, notably

Japan

Which of the following is not one of the benefits of free trade?

Job gains in both export- and import-competing industries As a country transitions to a free trade equilibrium, export industries are likely to expand, resulting in job creation, but import-competing industries will shrink as consumers are offered cheaper, imported goods

The composite aggregate supply is horizontal in the

Keynesian region

The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy is the

Keynesian short-run aggregate supply curve The horizontal portion of the SRAS is from the Keynesian model

The quantity of money demanded is very sensitive to interest rates in the

Keynesian view

Give an example of an unfunded liability of the U.S. federal government?

Medicare payments for those who are retiring this year Government has been using past contributions to Medicare to fund medical expenses for past retirees. The medical expenses of those who are retiring now must be funded out of money that has not yet been collected

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 As a medium of exchange, money avoids the need for double coincidence of wants

Who said, "It is possible to have economic freedom without political freedom, but it is not possible to have political freedom without economic freedom?"

Milton Friedman Milton Friedman said that famous quote. Friedman wrote such books; some of which were made into a series on PBS

Franco Modigliani's ideas were further developed by

Milton Friedman, who hypothesized that current consumption depends on past income and expected future income and not current income alone The permanent income hypothesis is the view that consumption does not depend on current income alone, but on past income and expected future income as well

The income earned by resources is called

NI (national income) Several adjustments have been made to convert GDP to NI and measure only income payments to resources

GNP minus depreciation is

NNP (net domestic product) GNP includes gross private domestic investment, but NNP includes net private domestic investment. The difference between gross and net private domestic investment is depreciation, or the value of capital that has been used up, worn out, or become obsolete

The vertical axis of the aggregate demand curve represents the

Price level The aggregate demand curve represents the total quantity of all goods and services demanded by the economy at different price levels

What did Classical economists assume?

Prices and wages are flexible According to Classical economists, both prices and wages are flexible

The relationship between the inputs employed by a firm and the maximum output that it can produce with those inputs is the firmʹs

Production function A production functions shows how much a firm can produce with the inputs available

What is a good for which demand increases as income increases, ceteris paribus?

Normal good (meat, you might eat hamburger when you have less money, but you'll still eat steak if you earn a little more money)

The value of the best alternative that is sacrificed to obtain something you want is a/an

Opportunity cost

Which types of workers might cause unemployment to be understated?

Part-time workers who are working fewer hours than they would like and discouraged workers

In sequence, what are the four phases of the business cycle?

Peak, recession, trough, expansion

Who is most likely to be a winner during times of inflation?

People who hold real assets and the government. When inflation increases, the value of real assets increases, making it more profitable to hold them. The government also is a winner because tax revenue increases.

What is one of the criticisms of the CPI?

People's taste and consumption habits change with the introduction of new goods or trends or changes in prices and the basket should be revised more often

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 The permanent income hypothesis is supported by historical experience

Which proposed tax cut is likely to have the largest effect on output, according to the permanent income hypothesis?

Permanently reducing tax rates at all income levels A permanent change in tax rates creates an increase in currency and expected future disposable income

Which of the following is a function performed by a modern society's money?

Store of wealth Store of wealth is a function 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?

Store of wealth The dollars are acting as a store of wealth

What effect would taxation have on real consumption spending when government spending is autonomous?

Taxation reduces real consumption spending Taxation reduces real consumption spending by reducing consumers' income

Which event will cause a country's production possibilities curve to shift outward?

Technological advances that improve productivity Technological advances that improve productivity enable a country to produce more output with available resources

The longest contractionary period in the U.S. was

The Great Depression (1929-1939)

The U.S. government must pay interest on the outstanding debt. Which group is ultimately responsible for paying this expense?

The U.S. taxpayers The debt imposes a net interest burden on the U.S. government and, by extension, the U.S. taxpayers

When investment spending increases, the aggregate expenditure line

The aggregate expenditure line increases. AE = C + I + G + (X - M)

What is the consumer price index (CPI)?

The current CPI is a measure of the average of the prices paid by consumers for a fixed market basket of consumer goods and services. The market basket is based on the consumption of the typical urban family of four.

The following are justifications for the allocation function of the government

The existence of public bads The presence of external effects The existence of public goods (NOT the basic instability of the economy)

Which of the following is not included when public debt is reported?

The government debt held in the Social Security Trust Fund Debt owned by non-government groups (the public) is called public debt

Which of the following would cause aggregate demand to decrease?

The government increases personal income taxes When the government increases personal income taxes, consumers' spending plans will decrease as they have less disposable income

This is an indicator of strength or weakness in the national labor markets. It provides information on how many positions need to be filled.

The help wanted index

What is the labor force participation rate?

The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work. The labor force participation formula is Labor Force/Working age population X100

If the aggregate supply curve shifts to the right and the aggregate demand curve shifts to the left, what happens to the price level and real output?

The price level falls, but the effect on real output cannot be determined If both curves shift in opposite directions, in general, we cannot determine the real output without knowing the extent of the shifts

In the first year, the real GDP for a population of 200 people is $50,000 and in the second year, the real GDP for a population of 202 people is $51400. The growth rate of the real GDP from year 1 to year 2 is

This is calculated as follows: (real GDP for year 2 − real GDP for year 1) divided by (real GDP for the year 1) ✕ 100 = 2.8%

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 This is now the Fed's most important function, but it was not part of the original design of the system

Why did Congress create the Federal Reserve (the U.S. Central Bank)?

To regulate lending practices and act as a "lender of last resort" The Fed seeks to keep banks from making risky loans that threaten the safety of deposits. A second purpose is to rescue sound banks threatened with failure because of temporary economic conditions

In the United States, GDP is about twice as large now as it was 20 years ago. What does this indicate?

Total spending has doubled, but part of this increase reflects higher prices Increases in GDP reflect both higher output and higher prices

True or false. Although GDP is used as a proxy for living standards or economic well-being, there are reasons why GDP is not a perfect proxy

True

True or false. As a percentage of GDP, the U.S. national debt has been increasing for the past several decades

True

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 change in the price level will not shift the aggregate supply curve

True A change in the price level does not cause a shift of the aggregate supply curve

True or false. Infant industries may need protection from foreign competition initially, but if they have this protection, there may be little incentive for them to "grow up."

True A company that gets protection or a subsidy has a strong incentive to never "grow up"

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. As countries have developed, death rates fell first, as better health care, better nutrition, and higher standards of living lengthened life spans. Then, birth rates fell later

True A nation that has bridged the developmental gap from falling death rates to falling birth rates, thus slowing population growth and reducing the dependency ratio, has made the demographic transition

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. 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. Aggregate income could be measured to calculate economic growth

True Aggregate income is the component of GDP, which is the measure of a country's economic growth

True or false. Aggregate supply is defined as the total amount of goods and services (real output) produced and supplied by an economy's firms over a period of time

True Aggregate supply represents the ability of an economy to deliver goods and services to meet demand

True or false. Economist Simon Kuznets noted many differences between conditions in developing countries and the pre-industrial phase of developed countries

True Although the stages might describe the development process of the present industrialized nations, critics point out that the present developing countries will not necessarily follow the same sequence

True or false. If taxes increase and the aggregate supply curve is upward sloping, then output falls and the price level increases

True An increase in taxes causes a decrease in aggregate demand. The new equilibrium will show a fall in output and increase in the price level

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. Events that shift the aggregate supply curve to the right lead to economic growth

True Anything that shifts the aggregate supply curve to the right is a source of economic growth because it will produce a rise in real output and income

True or false. As the domestic price level rises, the demand for imports increases

True As the domestic price level rises, foreign‐made goods become relatively cheaper, so that the demand for imports increases

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. Aggregate supply and demand combined with the aggregate production function determine not only the price level and real output, but also the level of employment and, by extension, the level of unemployment

True By extending the AD/AS equilibrium to the production function, you can determine the level of employment and unemployment at every level of real output

True or false. The aggregate supply and demand curves, taken together, determine the price level and the level of real output. Adding an aggregate production function also indicates the level of employment

True By extending the equilibrium line from the AD/AS graph to the production function graph, you can identify the level of employment

True or false. An increase in capital or an improvement in technology will shift the aggregate production function

True Capital and technology are the ceteris paribus factors that will cause a shift of the production function when they change

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 because changes in the price level affect the purchasing power of money

True or false. Checking accounts have many advantages over banknotes. For example, checking accounts are easier to protect from theft than cash, because you can stop payment on checks if your checkbook or checking account number is stolen

True Checking accounts have many advantages over banknotes. One benefit is that they make it easier to protect cash from theft through the use of a stop payment on checks, when your checkbook or checking account number is stolen

True or false. The Classical theory claims that most government economic policies are ineffective, ill timed, or downright harmful, and that the market system works best in macroeconomics, as well as microeconomics, when left alone

True Classical economists assumed that the market is self-regulating and that no government intervention is necessary

True or false. The percentage of the labor force that is 16 to 24 years of age has been declining since 1990

True Correct. The percentage of workers that are 16 to 24 years of age has fallen from about 18% in 1990 to 13.5% in 2010, and is projected to fall further by 2020

True or false. Countries with high levels of economic freedom have longer life expectancy, higher average incomes, lower child mortality, cleaner environments, and less governmental corruption

True Countries with high levels of economic freedom have longer life expectancy, higher average incomes, lower child mortality, cleaner environments, and less governmental corruption. For these reasons, economic freedom is closely associated with economic growth

True or false. The urban population in a dual economy is too small to provide a market for manufacturing and services, or to generate enough saving and investment in human and physical capital

True Dualism can be a major handicap to development

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. 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. Hotel chains and professionals in need of household help are likely to see immigrants as a major benefit if they are willing to work for lower wages

True Employers benefit when wages are lower

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. In the short run, when aggregate supply slopes upward, expansionary policies can stimulate production and job creation

True Expansionary policies cause aggregate demand to shift to the right

True or false. According to Keynesian theory, fiscal policy works by shifting the aggregate demand curve to either increase output and employment or reduce the price level

True Fiscal policy can be either expansionary, shifting AD to the right to increase output and employment, or contractionary, shifting AD to the left to reduce the equilibrium price level

True or false. According to the Keynesian model, there is sometimes a conflict between actions that are in the social interest and actions that are in a person's self-interest

True For example, in a recession, social interest calls for increased spending, but self-interest might best be served by saving more money due to concerns about future job loss

True or false. For most of its history, the United States has had high tariffs and other trade restrictions

True For example, the Smoot-Hawley Tariff Act of 1930 imposed an average tariff charge of 53%

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. 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. The basic elements of the development process are the same as those for economic growth in developed countries

True Growth and development go hand in hand

True or false. An increase in energy prices causes aggregate supply to shift to the left

True Higher input prices make production more expensive and cause aggregate supply to shift to the left. When aggregate supply shifts to the left, the equilibrium price level increases, demonstrating that higher costs lead to higher product prices

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. The omission of barter, or "under-the-table," transactions understates GDP

True If an accountant trades services with a dentist, production has increased for both of these individuals, yet this would not be reflected in GDP because GDP excludes barter transactions

True or false. If wages do not change, improvements in productivity stemming from improved technology will decrease business costs, improve profitability, and encourage more production

True If the wage of a labor remains the same, the improvement in technology will decrease business costs and improve profitability because the output per hour of work is increased

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. A hurricane that destroys businesses can have a positive effect on GDP

True In the short run, destruction can increase GDP because of the rebuilding that occurs. In the long run, it does not create economic growth because of the broken window fallacy, which you learned about in module 1

True or false. Demand-based growth strategy is more effective if the short run is actually a long period of time

True Increasing output by increasing aggregate demand in the short run is possible, so this strategy has more impact if the short run is a significant period of time

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. Keynes challenged the classical school during the Great Depression. He advocated government intervention in the form of fiscal policy to shift aggregate demand

True Keynes advocated government intervention to bring the economy back to equilibrium by shifting aggregate demand while Classical theorists believed the market self-regulated

True or false. One of Keynes' criticism of 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 be self-regulating

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 and 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. Comparing current GDP with last year's GDP provides more accuracy than comparing current GDP with GDP 20 years ago

True Many changes have occurred over the past 20 years, such as the introduction of new products. These changes are not always reflected in GDP estimates

True or false. According to the Monetarist view, the Fed should use monetary policy to stabilize money growth and keep the economy on a stable growth path

True Monetarists place less emphasis on interest rates and more on the direct effects of changes in the money supply on spending

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. 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. A family spending on electricity is a consumer's expenditure

True Money that is spent on maintaining a household is considered a consumer's expenditure. Examples could include food, gas, and clothing

True or false. In the process of producing GDP, income is generated

True National income consists of wages, rent, interest, profit, and proprietors' net income; business owners deduct wages and other expenses from revenue and the amount that is left becomes profit or income to the proprietor (owner) of the business

True or false. A decrease in net export spending caused by an appreciation of the U.S. dollar would cause the aggregate demand curve to shift to the left

True Net exports are one of the components of aggregate demand. If they decrease, aggregate demand will shift left

True or false. Non-Economic conditions can affect the economy both positively and negatively

True Non-economic conditions in the country can have both negative and positive effects on GDP

True or false. The actual deficit is not known until after the fiscal year is over

True One of the problems with taming the deficit is that its size is difficult to predict and control

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. Remittances sent from workers employed in foreign countries back to their home countries are considered a massive poverty-alleviation program; although not one that leads to economic development

True Remittances sent from workers employed in foreign countries back to their home countries are considered a massive poverty-alleviation program; although not one that leads to economic development

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. The United States 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 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 benefit of inflation targeting is to reduce uncertainty and reassure the public regarding how the Fed intends to respond when inflation threatens to escalate

True The Taylor Rule is one example of inflation targeting

True or false. In 2011, the United States fell out of the top ten countries ranked according to economic freedom, and for the first time Canada surpassed the United States with a ranking of sixth place

True The United States had been in the top ten for a long time prior to 2011

True or false. The World Bank was created when representatives of the major nations met in Bretton Woods, New Hampshire in 1944 to make plans for international economic coordination in the postwar period

True The World Bank's first charge was to assist Europe in recovering from World War II. The International Monetary Fund was also created at this time

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. The aggregate production function shows how much total real output can be produced by various amounts of labor, given the amount of capital and available technology

True The aggregate production function shows the relationship between the total real output and the inputs available

True or false. Evidence suggests that some recessions or expansions may be triggered by aggregate supply shifts, but fluctuations also result from aggregate demand shifts

True The behavior of the price level over the course of the business cycle provides evidence regarding whether the change in output was caused by a supply shift or a demand shift

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. 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. Equilibrium values of the price level, and real output is determined by the intersection of aggregate supply and aggregate demand

True The intersection of aggregate demand and aggregate supply determines the equilibrium values for price level and real output

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. If a country is poor in skilled labor, it has two possible remedies: it can import the goods that require skilled labor to produce, or it can make the effort to raise the level of skilled labor through immigration or education

True The movement of inputs between countries can substitute for free movement of goods

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 interest rate is determined where the money market is in equilibrium

True The price of money is the interest rate and that is determined where the money demand curve intersects the money supply curve

True or false. A major shortcoming of the quantity theory of 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 in the level of output and employment

True or false. The most successful form of import substitution for many developing countries has been improving domestic agriculture to reduce dependence on imported food

True The result of this successful strategy has been hard times for farmers in countries like the United States that formerly exported food to developing countries

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. More fuel-efficient cars, alternative energy sources, insulation, modified production methods, and other responses minimized the long-run effect of high energy costs on the economy after 1980

True These changes prevented higher energy prices from having such a negative impact on the economy

True or false. If leakages are greater than injections, the size of the income flow will shrink

True Think of a bathtub; if a lot of water is being drained, but only a little is being added, the water level falls

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. 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. After 40 years of economic growth, average weekly earnings, adjusted for inflation, have only risen about 11.7%

True This is a dismal picture of real gains for U.S. workers

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. Goods and services for export, such as chemicals, entertainment, and financial services, are also a key component of aggregate supply

True Traded goods are the components of aggregate supply

True or false. The value of government expenditure included in GDP is smaller than the true amount spent by government, because it does not include transfer payments.

True Transfer payments are income payments to individuals who provide no goods or services in exchange, such as Social Security or welfare

True or false. The distribution of income in developing countries shows great inequality, making it difficult to save and invest because the wealthy group is so small and most of the rest of the population is at a subsistence level of income

True Typically there are greater extremes of wealth and poverty, with a small wealthy elite, a large mass of people who are poor in both urban and rural areas, and a very small middle class

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. The slope of the aggregate supply curve depends on how costs change when firms change the level of production or quantity of output supplied

True When costs go up as firms attempt to increase output, the aggregate supply (AS) curve is upward-sloping

True or false. A declining labor force participation rate means fewer workers are supporting an increasing number of non-workers.

True When people leave the labor force, they still consume goods and services, and it is up to the remaining workers to create these goods and services

True or false. A higher price level causes an increase in nominal GDP, but not an increase in real GDP

True When real GDP is calculated, the increase in the price level is removed

True or false. The Fed cannot pursue both an interest rate target and a money supply target at the same time

True When the Fed chooses one target, it loses control of the other

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. If the price level increases net exports, assets, government spending and household wealth all decrease

True When the price level increases the economy will move up and to the left on the aggregate demand curve

True or false. As women entered the labor force, male participation declined partially due to the increased safety net for married men.

True When their wives work more men have the option of leaving the workforce and still having their families provided for

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. Lower unemployment is a benefit of economic growth

True With higher output firms tend to employ more workers creating more employment

True or false. A number of studies have concluded that workers are more productive when offered incentives like profit-sharing or bonuses

True Workers are motivated to work harder or acquire more skills when offered financial incentives

True or false. If Emily puts her son into the local daycare, GDP increases. If she stays home and cares for her son, GDP does not increase

True If Emily pays a childcare provider, this is considered a market transaction and is counted in GDP. If Emily cares for her son herself, this is a non-market transaction and is not counted in GDP

True or false. In the United States, gross domestic produce (GDP) is currently the most widely used measure of total output.

True (we stopped using GNP in 1991)

Which statement about the U.S. political system is false?

U.S. Senators are all elected every 4 years Senators serve 6-year terms and one-third of the Senate is up for election every 2 years

A Federal Reserve note is accepted as money by most Americans because

U.S. law establishes it as legal tender Money is accepted because the U.S. law established it as legal tender

Unit 4: Economic Theory and Fiscal Policy

Unit 4: Economic Theory and Fiscal Policy

In 2011, the per capita gross national income was $48,890 in the

United States

Two types of workers that cause unemployment to be overstated are

Unreported legal workers and reported illegal workers (These problems result from the inability of the BLS (Bureau of Labor Statistics) to verify the truthfulness of the information provided by respondents.)

The difference between GDP and GNP is likely to be what?

Very large, if many foreign citizens are employed within a country Output produced by foreign citizens working within a country is counted in GDP, but is not counted in GNP

As of April of 2015, 161 countries are members of the

WTO (World Trade Organization)

Which two presidential candidates lost their elections due to the public's dislike of tax increases?

Walter Mondale and George H.W. Bush In 1984, Democratic presidential candidate Walter Mondale admitted that, if elected, he would raise taxes. He carried two states and the District of Columbia. In 1988, George H. W. Bush promised no new taxes. He was elected, agreed to raise taxes, and lost the election in 1992

The fifth stage, high mass consumption, describes the present level of development in the United States and

Western Europe

When can running a deficit cause a problem for future generations?

When resources may be diverted away from productive investment If the government increases spending when the economy is at full employment, resources may be diverted away from productive investment

Multilateral organizations involved in assisting developing countries include the

World Bank, United Nations, and the World Trade Organization These organizations are involved in assisting developing countries

The Fed's first challenge was helping the treasury finance the budget deficit during and after

World War I

According to Franco Modigliani, which groups are most likely to engage in dissaving?

Young families and retired individuals Modigliani hypothesized that young families would dissave to acquire their start-up capital of houses and cars while their current earnings were low, but their potential future earnings were high. During retirement years, households would again become dissavers, drawing on their pool of accumulated savings, as their consumption needs exceeded their income

The main cost of active fiscal policy is

a budget deficit The negative effect of using active fiscal policy to combat recession is a budget deficit. Since it is politically difficult to cut spending or raise taxes, there is a bias in favor of deficits

Because the demand for agricultural output is not very responsive to price changes,

a bumper crop will lead to a big price drop A bumper crop means an increase in supply, which causes a large decrease in price if demand is inelastic

NAFTA is

a free trade agreement between Canada, the United States, and Mexico Canada, the United States, and Mexico formed NAFTA in 1993 when Bill Clinton was president

Aggregate supply is vertical in the long run, so a rightward shift of aggregate demand leads to

a higher equilibrium price level

Smith's Classical principles of economic development rested on

a laissez-faire governmental policy of nonintervention toward private industry and commerce Smith is regarded as the founder of market economics

The big push strategy calls for

a major thrust on all fronts in the economy by government or by private enterprise with the government's support Development in all sectors helps create new markets to aid in continued development

The standard of value function of money refers to money as

a method of measurement or comparison The standard of value makes money a method of measurement and comparison

Economists generally believe that the aggregate demand curve has

a negative slope

For the United States, the average rate of growth from 1950 to 2011 has been

about 3.3% The overall (compounded) rate of growth from 1950 to 2011 has been about 3.3% per year

The recognition lag is

about the same for monetary and fiscal policy The time it takes for policymakers to recognize a problem with the economy is independent of the type of policy chosen to combat the problem

The fact that money is legal tender increases its

acceptability

When banks are holding excess reserves,

actual reserves exceed required reserves, and they are not maximizing loans and profit potential Banks are allowed to continue making loans until excess reserves equal zero, when actual reserves are equal to required reserves

Resources flow to certain sectors of the economy, such as real estate, that enjoy tax

advantages

GNP (gross national product) is the total market value of

all final products produced by a nation's citizens during a given time period GNP is output produced by U.S. resources, whether production happens in the United States or in a foreign country

The Classical model uses the assumption that

all wages and prices are flexible Classical economists assume that prices and wages are flexible

The Classical model uses the assumption that

all wages and prices are flexible In the Classical model, all wages and prices are flexible

If the Fed is committed to a money supply target and interest rates increase because of a housing boom, the Fed would need to

allow interest rates to increase, even though investment spending could suffer as a result High interest rates have a negative impact on investment spending

Reduced tax rates give people more disposable income, resulting in

an increase in spending

Increased demand for natural resources causes

an increase in the price of natural resources, which causes aggregate supply to shift to the left Higher input prices cause aggregate supply to shift to the left

Keynesians emphasize the impact of changes in interest rates on investment spending, aggregate demand,

and equilibrium output and employment

An aggregate supply curve shifts to the left when

any non-price-level factor decreases the total cost of production

With all else held constant, suppliers usually will supply less of a good or service

at lower prices

The big push strategy calls for

balanced growth The big push strategy calls for a major thrust on all fronts

If the Fed sells bonds,

bank reserves decrease

If the Fed buys bonds,

bank reserves increase

Monetary policy refers to the Fed's control over

bank reserves, credit, and interest rates

Additional deposits create additional reserves for the

banking system

A document that entitles the bearer to an amount of gold on demand at the bank is a

banknote A banknote is a document that entitles the bearer to an amount of gold on demand at the bank

The federal funds rate is the interest rate

banks charge each other on reserve loans If a bank is not meeting the reserve requirement, it can borrow reserves from another bank in the federal funds market

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 If the Fed acts to reduce bank reserves, banks may borrow reserves from the Fed on a temporary basis, but will have to contract their loan portfolios to avoid negative excess reserves

In the Keynesian model, monetary policy is effective when

banks lower interest rates and increase lending

When the Fed uses the monetary tools to increase bank reserves,

banks may not increase lending, so the policy is not always effective Banks may choose to hold positive excess reserves if they are not confident that borrowers will repay loans

Import substitution is a strategy of

becoming less dependent on other countries by developing domestic industries to produce goods that had previously been imported Import substitution is a strategy of becoming more self-sufficient

After classifying 115 economies on the basis of political rights, individual rights, and use of a free market, Gerald Scully found that those that most strongly emphasized political and individual rights and the use of markets had

been growing at a rate 2.7 times as fast as those that did not Scully found that countries that emphasized political and individual rights and the use of markets had been growing at a rate 2.7 times as fast as those that did not. Adkins and Savvides confirmed these findings more recently, using data for 73 developed and developing countries

Capitalism is based on the

benefits of competition

In general, when unskilled workers migrate to the United States, business firms and skilled workers are

better off

The composite aggregate supply is upward-sloping in

between the Classical & Keynesian regions

If the interest rate in this market drops below the target rate set by the Fed, the Fed will sell

bonds to adjust reserves and cause the rate to rise Bank reserves are reduced when the Fed sells bonds, so the supply of federal funds decreases, causing the equilibrium price in this market to go up

Aggregate demand shifts to the right when businesses and consumers are able to

borrow and spend more

When government spends more than the revenue it takes in, it must

borrow funds in the credit market to cover the deficit

The transactions demand for money depends on

both the price level and real income The transactions demand for money does depends on both the price level and real income

When money demand is highly sensitive to interest rates, a given expansion of the money supply will

bring about a smaller decline in interest rates

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

Bank reserves increase when the Fed

buys bonds in the open market, and decrease when the Fed sells bonds in the open market The Fed creates new money to pay for bonds, causing bank reserves to expand. When the Fed sells bonds, bank reserves are taken out of the system

These two groups will experience higher returns to their past investment in physical and human capital, because unskilled labor is a

complement to these other productive resources

Research has shown that public and private investments can be

complementary

The quantity theory of money states that The quantity theory of money states that

changes in the price level are proportional to changes in the money supply

The M1 money supply includes

checkable deposit accounts The M1 money supply does includes checkable deposit accounts

When a bank lends out a portion of its customers' deposits, it is

called fractional reserve banking Lending a portion of the deposits is called fractional reserve banking

When the economy is in a recession, running a budget deficit

can help end the recession by increasing spending Higher government spending and higher private spending resulting from lower taxes creates a budget deficit, but also helps end the recession

Plants, equipment, and machinery are examples of

capital resources

The initial effect of expansionary policy was a decrease in the interest rate, but inflationary expectations offset this change and

cause interest rates to move in the other direction

Leakages in the circular flow model are

caused by people saving instead of spending When people save, not all the income produced is used to purchase the goods produced

What is the most important assumption in economic models?

ceteris paribus assumption "all else being equal."

The measure of inflation is the

change in the price index. The percentage change in the CPI from one year to the next is the inflation rate.

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 Nominal GDP is adjusted for changes in the price level to arrive at real GDP

Real GDP is a measure of the value of economic output adjusted for

changes in the price level Nominal GDP is adjusted for changes in the price level to arrive at real GDP

A total fertility rate of 2 keeps the population

constant

Consumption expenditures are divided into

consumer durables, nondurables, and services

A war in the Middle East that affects the U.S. stable economy could cause a

contraction. This means that the economic activity has slowed down.

Cutting the government's budget deficit is a form of

contractionary fiscal policy Contractionary fiscal policy involves reducing government spending and/or raising taxes, both of which lead to a leftward shift of aggregate demand

Based on the Keynesian model, policymakers are able to use

contractionary fiscal policy to reduce inflation

If the Fed attempts to maintain a target interest rate and a recession causes interest rates to fall, the Fed would need to pursue

contractionary monetary policy to raise interest rates, but this would likely worsen the recession This is an argument against using an interest rate target

In the short run, an increase in aggregate demand

creates an opportunity for firms to increase profit if they sell more units of output Assuming there is no change in input prices, an increase in product price creates a larger profit margin on each unit sold. A firm that sells more units of output will earn more profit on each unit as well as more profit in total

The Fed acts as the government's bank to prevent

cronyism

The United States does not export a lot of rice to Japan based on the

cultural heritage argument Japan views rice and rice farming as part of its heritage, and has many programs protecting rice farming from foreign competition

An increase in the interest rate is the correct policy to

cure inflation

The monetary base consists of

currency in the hands of the public plus reserves held by banks The Fed determines the size of the monetary base, the public determines the division between cash and bank deposits

The first stage is the traditional society, in which economic decisions are made on the basis of

custom and obligation

When the economy is in a downturn, automatic fiscal policy creates a deficit. Since this deficit is the result of business cycle activity, it is called a

cyclical deficit

According to the M1 definition, the money supply consists of currency held by the public, plus

demand deposits and traveler's checks Demand deposits and traveler's checks are part of M1 monetary aggregate

Active fiscal policy results in budget

deficits when used to combat recession and in budget surpluses when used to combat inflation

EPA regulations that prevent irrigation of farms in order to protect the smelt fish cause the GDP and standard of living to

decrease Fewer fruits and vegetables are produced, which decreases GDP. This increases the price, leading households to buy less and puts farm workers out of work. Both effects decrease the standard of living

If U.S. spending for foreign-made autos increases while foreign spending for autos made in the United States decreases, ceteris paribus, then U.S. net exports will

decrease If U.S. spending for foreign-made autos increases while foreign spending for autos made in the United States, ceteris paribus, then U.S. net exports will decrease

If two goods are complements, a rise in the price of one will

decrease the demand of the other (if the price of cream cheese goes up, people will eat less bagels)

Used correctly, active fiscal policy should

decrease the ups and downs of the business cycle

A rightward shift of the short-run aggregate supply causes the equilibrium price level to

decrease, and the equilibrium output level to increase Prices fall and output increase when aggregate supply shifts right

The best example of a contractionary fiscal policy, designed to decrease aggregate spending, is

decreased spending on national defense and elimination of tax loopholes Both of these actions result in lower spending

The fracking of oil that occurred after 2010

decreased the price of oil and shifted short-run aggregate supply rightward A decrease in the price of oil will shift the short-run aggregate supply to the right

When interest rates rise, the transactions demand for money usually

decreases When interest rates rise, the transactions demand for money decreases

Economists in the Keynesian tradition argue that the short run is a long period of time. This is the reason Keynesian economists support active

demand-management policies

Economists of the Classical tradition claim that the short run is a short period of time. This is the reason Classical economists do not support active

demand-management policies

Export promotion is a strategy of

developing export industries in order to earn foreign exchange to purchase consumer goods, capital equipment, raw material, and food from abroad This explanation is what is meant by export promotion. Promoting exports is a way to foster growth and development

The leading sectors strategy calls for

developing successful sectors that will then influence other sectors in the chain of production through backward and forward linkages If there is a successful sardine fishing industry, for example, it could be linked forward to a canning operation, which in turn could be linked forward to a packing and shipping industry

The existence of transactions costs means that

different people may pay different prices for the same good or service

In the Classical view, the link between money and spending is

direct

The money supply contracts when the Fed raises the

discount rate

It is important for the Fed to pay attention to interest rates, because letting interest rates rise too high will likely

discourage investment and cause a recession High interest rates cause investment spending to fall and lower spending shifts aggregate demand left, which causes output, income, and employment to fall

People who have looked for work in the past 6 months, but NOT in the past 4 weeks, are called

discouraged workers (not calculated in labor force #'s)

In response to a free trade treaty, a country increases its exports of computer software and begins to import kitchen appliances. As a result of free trade,

domestic jobs are lost in the kitchen appliance manufacturing industry, but jobs are created in the computer software industry Because domestic consumers are importing kitchen appliances from abroad, the number of domestic jobs manufacturing appliances will fall. Jobs in the export sector will increase

Suppose there is a surplus of goods, and firms collectively cut their output. A Classical economist would predict that competition among workers for fewer jobs will drive wages

down A Classical economist would predict that competition among workers will drive wages down

The aggregate demand curve is

downward sloping

Selling a good at a lower price in a foreign country than in the firm's home country is known as

dumping Firms may dump abroad to get rid of surpluses, to take advantage of differences in elasticity of demand (price discrimination), or to establish a foothold in a competitive market

Chile is an example of a country that used export promotion to achieve

economic development

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 If the Fed pursues expansionary monetary policy, it can reduce unemployment; if it pursues contractionary monetary policy, it can reduce inflation

The second stage develops the preconditions for takeoff. In this stage, an entrepreneurial class of risk takers begins to

emerge

Classical economists thought that the economy tended naturally toward full

employment Classical economists assumed that the economy always tended back to a full employment equilibrium

What are the two major characteristics that governments look at when determining the health of their economies?

employment and inflation

According to the Classical model, the income generated by production is

enough to purchase all the goods and services produced According to Classical economists, production is the source of demand

According to the Classical model, the income generated by production is

enough to purchase all the goods and services produced According to the Classical model, the income generated by production is enough to purchase all the goods and services produced

If a bank sells a bond and uses the proceeds to make a loan, it has

exchanged one asset for another Bonds and loans are both assets

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 When the Fed increases the money supply, then at the current level of money income, money supply will exceed money demand. People attempt to spend their excess cash balances

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 Political business cycle theory suggests that incumbents are more likely to win when economic conditions are favorable immediately before an election

Based on the Keynesian model, policymakers are able to use

expansionary fiscal policy to reduce unemployment

The Fed buys bonds in the open market to pursue

expansionary monetary policy

Goods and services sold to foreign buyers are

exports Exports are injections into the income stream

If an attempt is made to use aggregate supply to increase output, prices should

fall When aggregate supply shifts to the right, real output will increase, but the price level will decrease

When the economy is booming, income is rising

faster than normal, so tax revenues are likely to be higher than anticipated Since the federal government's main source of tax revenue is the federal income tax, higher income results in higher tax revenue

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

federal funds market Banks borrow reserves from each other in the federal funds market and the interest rate in this market is called the federal funds rate

In the United States, 2% of the labor force produces enough agricultural output to

feed the entire nation

Between August of 1929 and March of 1933, the U.S. money supply

fell by 25%, and there were widespread bank failures The money supply fell by 25% from August 1929 to March 1933, in part because of widespread bank failures

During the Great Depression, the velocity of money

fell significantly During the Great Depression, the velocity of money fell significantly

Microfinancing is when

financial services are offered to small business owners who lack access to traditional banking avenues Microfinancing loans are very small and are most often made to women

Multinational corporations are

firms with headquarters in one country and one or more branch plants in other countries There has been a foreign corporate presence in most developing countries at least since World War II, and in many cases going back to the beginning of the century

Gross private domestic expenditures include

fixed investment (plants and equipment), residential construction, and changes in inventory Investment occurs when someone starts a new business or grows an existing business. Investment activities include building factories or stores, purchasing equipment, and adding inventory. Residential construction is also counted as an investment.

The annual budget deficit is a

flow concept The annual budget deficit is the amount added to the national debt each year

If the Fed follows a money supply target, interest rates will

fluctuate with the ups and downs of the business cycle, causing more volatile investment spending Interest rates are sensitive to the business cycle because the demand for investment funds is stronger when the economy is stronger, and vice versa

Economists use the phrase "business cycle" when discussing

fluctuations in aggregate measures of economic output or income.

If aggregate demand increases, the likely effect in the short run is

higher product prices and increased output In the short run, aggregate supply is upward-sloping, so the equilibrium price level and output level increases when aggregate demand shifts to the right

If a shift in aggregate demand only affects real Gross Domestic Product (GDP), then the short-run aggregate supply (SRAS) curve must be

horizontal A shift in aggregate demand that only affects the real GDP means that SRAS is horizontal

The Keynesian short-run aggregate supply (SRAS) curve is

horizontal For Keynes, SRAS is horizontal in the short run

Keynes challenged the classical school during the Great Depression. He suggested that the aggregate supply curve could be

horizontal Keynes assumed that aggregate supply was horizontal in the short run, or at least very flat in the short run Keynes assumed that AS is horizontal only on the short run because prices are "sticky"

For Keynes, the short-run aggregate supply (SRAS) curve is

horizontal The Keynesian SRAS is horizontal

Everything that is produced in a year must be purchased by

households, business, firms, the government, or foreign entities The sum of spending by the four buying sectors is GDP

Mexico complained that the United States was unfairly banning its tuna after the United States put a requirement on imported tuna that it had to be caught with dolphin-safe nets. The WTO found that the United States had put a

illegal trade barrier up, and the regulation was repealed

The time that elapses between the implementation of a fiscal policy and its full effect on economic activity is called the

impact lag The third lag is waiting for the policy to have an impact

The time it takes after a problem is recognized to choose and enact a fiscal policy in response is the

implementation lag The second lag is implementing the policy

Purchases from foreign firms are

imports Purchases of imports are flows out of the stream (leakages)

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 Individuals are more likely to become unemployed and businesses are more likely to fail when the economy is in recession, so this increases the risk of default and motivates banks to extend fewer loans

Suppose there is a surplus of goods, and firms collectively cut their output. A Classical economist would predict that unemployment will

increase When there is a surplus, a Classical economist would predict that unemployment will increase

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 An increase in money supply increases aggregate demand, as people try to spend their excess money balances

When the interest rate is low, a household might decide to borrow to buy a new car. This will

increase consumption, which increases aggregate demand, which leads to an increase in output

If a politician is seeking to reduce unemployment and increase economic growth prior to an election, the fiscal policies that would most likely achieve these goals would be to

increase government spending and decrease taxes Increased government spending increases aggregate demand, leading to higher equilibrium output and employment Decreased taxes raise disposable income, causing aggregate demand to shift rightward. Stronger spending causes higher equilibrium output and employment

The Fed can buy bonds in the open market to

increase the money supply and lower interest rates

The Taylor rule stipulates that for each 1% increase in inflation, the Fed should

increase the nominal interest rate by more than 1% The benefit of such a rule is to reduce uncertainty about how the Fed would choose to respond to inflation, thereby promoting price stability

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. During an expansionary phase, price level and real income will increase while unemployment will decrease.

One of the biggest benefits of free trade is

increased consumption Numerical examples in the previous section illustrate the potential gains from trade in terms of additional output

One of the main benefits of active fiscal policy is

increased employment Active fiscal policy means raising government spending and/or lowering taxes to combat recession. If successful, this policy increases output and employment

In the 1970s, the labor force changed significantly because of the

increased labor force participation by women and the entrance of baby boomers The labor force grew significantly during the 1970s because of more women joining the labor force and the entrance of baby boomers. However, productivity did not improve because so many new entrants had low skills and experience

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 Both of these actions result in higher spending

When consumption increases, aggregate demand also

increases

When households buy new goods, consumption

increases

If investment increases in the aggregate expenditure equation, aggregate demand

increases An increase in aggregate expenditure will lead to an increase in aggregate demand

When aggregate expenditures increases the equilibrium output

increases When aggregate expenditures increases the equilibrium output increases. The new AE line intersects the 45-degree at a higher point, leading to a higher equilibrium output

Adding the foreign sector to the Keynesian model,

increases income and output only if net exports are positive The foreign sector increases income and output only if the net exports are positive

Falling prices worsens the position of debtors because it

increases the real value of money

An aggregate demand curve shifts to the right when any non-price-level factor

increases total planned real spending An increase in aggregate demand means the curve has shifted to the right

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 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 less money If interest rates fall, individuals will tend to hold less money

During the Great Recession (2007 to 2009), the United States experienced increasing unemployment and a low rate of

inflation

The Federal Reserve is able to monetize debt by creating new money. If the Federal Reserve creates too much money, the result is

inflation If too much new money is created, the value of the currency decreases and leads to inflation

In the 1970s, when oil prices increased tenfold, the economy experienced

inflation combined with high unemployment, because aggregate supply shifted to the left Higher input prices cause aggregate supply to shift to the left, increasing the equilibrium price level, reducing output and employment, and increasing unemployment

Most of the problems caused by inflation are caused by the fact that

inflation is often unanticipated, and therefore comes as a surprise to individuals in the economy

Fully anticipated inflation occurs when

inflation rises the same as the forecast expected, then inflation is fully anticipated.

The goal of fiscal policy is to

influence employment, inflation, and economic growth Only when changing government spending or taxes is an attempt to change economic conditions are they considered fiscal policy

An event that causes the aggregate demand curve to shift inward or outward is one that

influences spending plans When consumers change their spending plans, aggregate demand will shift

The supply curve for an individual good is drawn under the assumption that

input prices remain constant As the price of good X rises, sellers' per unit costs of providing good X do not change

Keynes found many failings in Classical theory. He criticized the quantity theory because it neglects the role of

interest rates and fails to explain short-run changes in velocity

Investment spending rises when

interest rates fall

In the Classical model, aggregate demand and aggregate supply will

intersect at the point of full employment Classical economists assume that AD/AS intersect at full employment

The Fed is able to create money to pay for the bonds, thus putting new money

into the economy

An example of an injection into the income stream is

investment spending by business firms Injections are additions to the circular flow that represent spending not paid for out of resource income

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 The current chair is Janet Yellen, formerly the vice-chair and the first woman to serve in this capacity

In the Keynesian model, employment

is determined by output In the Keynesian model, employment is determined by output

It is more difficult to measure output in services like banking or health care. For example, with widespread use of automatic teller machines and electronic banking, the number of checks is significantly down, yet productivity

is up

One reason why governments try to restrain inflation is because

it causes an unintended and often undesirable redistribution of income and wealth

The CPI tends to overstate the true inflation rate because

it fails to consider the effects of new products in the marketplace The CPI does not adjust the basket when new products are introduced that will shift consumption from one good to another

If GDP is growing at a faster rate in country A than in country B,

it is likely that living standards are improving more in country A, but this may not be the case It is possible that living standards are improving more in country B, yet GDP is not reflecting this because of omitted transactions, changes in leisure, or inaccurate data

The Keynesian short-run aggregate supply curve is horizontal because

it reflects wage and price inflexibility The Keynesian SRAS is horizontal because it reflects wages 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 The outside lag refers to the time from action to impact. Once monetary policymakers take action, they must wait for banks to extend loans and borrowers to take out loans, then they must wait for borrowers to spend and for the additional spending to work it's way through the economy

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 Government will automatically take in less tax revenue when recessions lower income and more tax revenue during upturns. Likewise, transfer programs like unemployment compensation are more expensive during recession

The argument against fair trade that is most used and most often makes the news is the

jobs argument People losing their jobs at a factory is bigger news than people gaining jobs from trade

When U.S. workers and voters express concern about outsourcing, they are generally worried that

jobs will be sent overseas because there is cheaper labor to be found there Workers in other countries are often paid substantially less than U.S. workers because their economic and legal environment is different

An indicator that is helpful in sorting out the relative importance of changes in total demand for labor and total labor supply is the

labor force participation rate The labor force participation rate measures the fraction of the adult population that is employed or actively seeking work

According to real business cycle theory, unemployment is

largely voluntary, caused by the decision to work less during times when wages are low Workers work extra hard when wages are high and then catch up on leisure time when wages are low, according to the real business cycle theory

Dirigiste means "directing" and represents the belief that government should play a

larger role

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 The multiplier process magnifies the initial change in spending into a much larger change because each time someone receives additional income, their spending rises by the added income multiplied by the marginal propensity to consume

Takeoff is the third stage, during which there is a large increase in the rate of saving and increased saving finances capital investment in the

leading sectors

At higher rates of interest, businesses invest

less When interest rates are higher, business investments are more costly and businesses will invest less

During the depression, consumer spending fell because there were fewer jobs and

less income

The federal government is

less likely to declare bankruptcy than a city government, since it has a broader tax base The federal government has the power to tax over 300 million people and has access to other revenue sources as well

A quota is a

limit on the amount of a good or service that can be imported during a given time period A limit on the quantity to be imported is called a quota

The big push strategy is based on the Classical notion that growth in the output of an industry is

limited by the extent of the market At low levels of economic development, it is futile for any one industry to expand its output to a larger scale because it would be unable to sell its added product

Money is organized into monetary aggregates based on its

liquidity

The vicious circle of poverty occurs because

little is invested in human capital due to a low level of income, and a low level of income due to little being invested One reason why low-income countries invest little in human capital is that they have little to invest

Classical theory takes a

long-run view of the economy and believes that the economy will self heal if given time. It also believes that supply is the driving force of the economy.

Unanticipated positive inflation will create

losses for creditors and gains for debtors. When inflation is unanticipated interest rates are not adjusted for inflation and loans have lower interest rates.

The World Bank considers any country with a gross national income (GNI) of less than $1,006 per capita (in 2012 U.S. dollars) as a

low-income country

Aggregate demand is downward-sloping because a higher price level leads to

lower exports Higher domestic prices mean that a country's exports become more expensive to foreigners, so the quantity demanded falls

The results of airline deregulation over the past 30 years has been

lower fares, but increases in bankruptcy filings, union disputes, and customer complaints Although the average fare per passenger mile did fall from 33.3 cents in 1974 to 13 cents in 2010 (in real terms), deregulation also brought about a wave of bankruptcy filings, union disputes, and a sky-high number of passenger complaints

Successful deficit reduction is likely to result in

lower interest rates and a reduction in the international value of the dollar Lower interest rates will reduce the price of the dollar and stimulate export sales while curtailing import purchases

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 An increase in the money supply reduces interest rates because more funds will be available for banks to lend. The lower interest rates will stimulate investment demand

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 An increase in the money supply will lower interest rates and ultimately increase aggregate demand

Over time, there is a tendency for

major macroeconomic variables to move together in a predictable way In theory, major macroeconomic variables move together in a predictable way

A capital inflow means an increase in the demand for dollars and an increase in the price of a dollar,

measured in foreign currency

At higher rates of interest, households save

more When interest rates are higher, households will save more

Banks lower interest rates to encourage

more borrowing

Market transactions are

more important in developed countries than in less developed countries In developed countries, families are more likely to purchase services like cleaning, child care, and repairs

Effective monetary policy increases bank reserves, which results in

more lending and more investment spending If banks are willing to lend and businesses are willing to borrow, monetary policy has a significant impact on aggregate demand

If banks have more reserves, they are able to finance

more loans

The interest rate increases when prices are expected to increase because lenders

must charge an inflation premium

Import substitution and export promotion strategies are

mutually exclusive, since one concentrates on developing production for domestic buyers, while the other focuses on products to be sold abroad in order to earn the foreign exchange with which to import goods for domestic consumers.Correct. The two strategies are alternative trade strategies from which countries must choose The two strategies are alternative trade strategies from which countries must choose

The World Trade Organization (WTO) deals with the global rules of trade between

nations

In the Classical view, economic freedom is

necessary for a country to experience growth Many Classical economists see a need for economic freedom in order to have economic growth

Private investment is undertaken by business firms operating in the

private sector

In a four-sector model, the addition of a government with a balanced budget and

net exports that are positive has increased the equilibrium level of income compared to the two-sector model (Correct. Net exports are the fourth sector added to the model) (Correct. The four-sector model includes government expenditure)

The Fed is able to create money to pay for the bonds, which the public is

now holding

Most economists in the Classical tradition consider fiscal policy to be

of limited benefit, sometimes even harmful

Most economists in the classical tradition consider fiscal policy to be

of limited benefit, sometimes even harmful

According to the Classical model, in the short run, the money supply affects

only the general price level In the short run, the money supply affects only the general price level

The money supply contracts when the Fed sells bonds in the

open market

An increase in aggregate demand leads to an increase in

output

The second stage develops the preconditions for takeoff. In this stage, cultural barriers to development are

overcome

The implication of Say's law is that

overproduction in a market economy is not possible In the case of overproduction, supply will adjust and produce only what can be purchased

The turning points of the business cycle are called

peaks and troughs

The Fed can sell bonds in the open market to decrease the money supply and

raise interest rates

Monopolies restrict output in order to

raise the product price

In 1993, Federal Reserve Board of Governors chair Alan Greenspan announced that the policy of the Fed would emphasize

real (inflation-adjusted) interest rates as a policy target Greenspan's goal was to slow the growth of bank reserves and put the brakes on bank lending so that the expansion would continue, but not at a pace that would result in accelerating inflation

The tax advantages increase after-tax returns in the

real estate sector

Productivity is the measure of

real output per worker hour Productivity is defined to measure how much output is produced per worker hour

If real gross domestic product increases 10% and, at the same time, the population and the labor force both increase 10%,

real per capita gross domestic product remains the same Real per capita GDP is equal to GDP divided by population; if the numerator and denominator increase at the same rate, the ratio is unchanged

Lower output and employment is the defining characteristic of

recession

One possible result of a fall in aggregate demand coupled with a stable short-run aggregate supply is a(n)

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 If the economy has already recovered, additional spending can lead to demand-pull inflation

Organized labor has generally opposed raising or eliminating immigration quotas because it wants to protect jobs for U.S. citizens, especially during and after a

recession, like that of 2007-2009 Organized labor is concerned with restricting the supply of labor in order to keep wages high

In discussions of monetary policy, the inside lag is the

recognition and implementation lags combined Both of these lags are called the inside lag, and the outside lag refers to the time from action to impact

Laissez-faire means "let it be" and represents the belief that government should play a

smaller role

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 Some of the extra money is, in effect, exported, increasing demand in the rest of the world as well as at home

According to Keynes, the government should use its power to

spend (According to Keynes, through spending and taxing the government can affect the aggregate demand curve) and tax people in order to shift aggregate demand to the right, increasing output and employment. (According to Keynes, the government should increase aggregate demand to increase output and employment)

Deflation is bad for the economy because when people start anticipating falling prices, they are less willing to

spend or borrow money

In order to eliminate a budget deficit, the government must decrease

spending and/or increase taxes However, it is politically very difficult to do either of these during the expansionary phase of the business cycle Bringing in more tax revenue will reduce the size of the deficit. Spending less will reduce the size of the deficit

Because a given expansion of the money supply has little effect on the interest rate, it has a smaller impact on

spending, output, and employment

Keynesian economists consider fiscal policy to be an important

stabilization tool

One of the Fed's functions is to supervise and regulate banks to ensure the monetary system of the United States is

stable

If supply and demand both shift to the right by the same amount, the equilibrium price level

stays the same

A key component of the Keynesian model is that prices are

sticky

The national debt is a

stock concept The national debt is the total amount owed at a particular time

During the depression, business firms reduced output because they could not sell their products. They also

stopped investing because they had little confidence in the future

This is the part of a deficit that would persist even if the economy were at the full-employment level

structural deficit

Say's law says that

supply creates its own demand Say's law states that supply creates its own demand

Prices rise during a

supply-induced recession

Classical economists tend to

support Say's law Classical economists support Say's law

The Keynesian short-run aggregate supply curve is horizontal if

there are unutilized resources in the economy When resources are underutilized, SRAS is horizontal

With a cyclically balanced budget,

surpluses during the expansion phase of the business cycle offset deficits incurred in the recession phase The surpluses and deficits occur automatically and cancel each other out over the course of the business cycle

Protection of domestic industries is accomplished with two main tools, including

tariffs and quotas Tariffs are taxes imposed on imports and quotas are quantity limits

A tariff is a

tax on imported goods or services The tariff can be specific (based on weight, volume, or number of units) or ad valorem (figured as a percentage of the price)

Fiscal policy is most effective when policymakers are motivated to pursue actions

that improve the economy's performance The Keynesian argument in favor of active fiscal policy assumes that policymakers are motivated to do what is in the best interest of the economy, both in the short run and in the long run

The United State is in a recession if

the GDP (real output) declines for two successive quarters

The main competing views in economics today are

the New Keynesian and the various new Classical theories (Classical theories came first, before Keynesian)

Deflation is the situation in which

the average of all prices is declining

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 Incomes are rising when the economy is growing, so anticipated tax revenues are up. Similarly, a household can afford to take on more debt when income is higher

Economic growth can not be measured by

the credit market The credit market is the broad market for companies looking to raise funds through debt issuance. The credit market encompasses both investment-grade bonds and junk bonds, as well as short-term commercial paper. Economic growth cannot be measured by the credit market

If the market for money is in equilibrium, then

the demand for money must be equal to the supply of money If the market is in equilibrium the demand for money will be equal to the supply of money

Automatic stabilizers partially offset changes in private spending and tend to reduce fluctuations in output and employment and are triggered by changes in

the economy

If aggregate demand and aggregate supply both shift to the right by approximately the same distance,

the equilibrium level of output will increase with little or no change in the price level A higher level of investment would shift both the aggregate demand curve and the aggregate supply curve to the right, resulting in increased output and employment without inflation

The more sensitive money demand is to the interest rate,

the flatter the money demand curve

Keynes developed his theory at a time when

the government was a drastically smaller part of the economy than it is today and therefore had much less impact on it. This smaller size influenced his theory

For most people, the problems of inflation are caused by the fact that

the inflation is unanticipated

Ignoring the government and foreign sectors, equilibrium output is determined by

the intersection of planned saving and planned investment In a closed economy, equilibrium output is determined by the intersection of planned saving and planned investment

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 Keynes did not believe that the role of the government should be limited

The Classical model assumes that the general price level is determined by

the supply of money The general price level is determined by the supply of money

When the price of the dollar rises, import-competing firms find that their foreign competitors can more easily undersell them because

their goods are cheaper in dollar terms

Monopolies have less incentive to expand output, innovate, or take risks because

there are no competitors nipping at their heels

Politicians tend to prefer bilateral aid rather than multilateral aid, because

they can exercise more control Politicians can attach conditions to bilateral aid

Unskilled workers in the United States are worse off because

they face increased competition for jobs and from people who are often willing to work for less

The labor force consists of

those who are working and those who are actively seeking work.

In the Keynesian model, government spending is considered

to be autonomous (acting independently or having the freedom to do so)

Coins with a value less than the monetary value are

token money Coins with a value that is less than the monetary value are token money

Redistribution is more likely to occur when inflation is

unanticipated

The leading sectors strategy calls for

unbalanced growth The leading sectors strategy, sometimes referred to as "unbalanced growth," argues that a country should concentrate on developing successful sectors that will then influence other sectors in the chain of production through backward and forward linkages

According to Keynes, increased planned spending would reduce

unemployment

According to Keynes, too little spending was the cause of

unemployment

The Fed typically lowers the target rate if the economy is experiencing higher than normal

unemployment The Fed lowers this rate by pumping reserves into the system, which leads to more borrowing and spending and can potentially help to reduce unemployment

Keynesian economics recommends the use of active fiscal policy. Specifically, policymakers should increase spending to reduce

unemployment and decrease spending to reduce inflation

If the economy is in equilibrium at a point on the long-run aggregate supply,

unemployment is equal to the natural rate The long-run aggregate supply curve is vertical at the real output level corresponding to the natural rate of unemployment

Suppose that there is no government and no international trade. When C + I is less than the level of output

unplanned inventories increase When C + I is less than the level of output, unplanned inventories increase

Foreign competition is

unpopular with the owners of productive resources, whether the competition is in product markets or in resource markets The owners of productive resources experience reduced income as a result of foreign competition, whether it is in product markets or in resource markets

Seventy countries made the list of high-income countries, including both industrial market economies and high-income oil exporters. Among this prosperous group, per capita incomes ranged from $12,275 and

up

Dualism refers to the coexistence of

urban, market-oriented societies and rural societies with little market activity Almost all developing countries are really two societies in the same country, and this coexistence is called dualism

Keynesians regard active fiscal policy as a

valuable tool for stabilizing economic activity

If changes in the price level have no effect on real output, aggregate supply is

vertical A fixed real output level and a variable price level imply a vertical aggregate supply curve

The Classical aggregate supply curve was

vertical Classical economists assumed that the aggregate supply curve is vertical because prices will adjust so that output is always at full employment

In the long run, aggregate supply is

vertical, because input prices are flexible in the long run Firms might earn higher profit per unit in the short run, because product prices are rising while input prices remain the same. However, in the long run, input prices will rise as well, and per unit profit returns to normal

If the demand for food is highly price-inelastic and there is an increase in the supply, the equilibrium quantity will increase

very little, while the equilibrium price will fall substantially A rightward shift of supply causes a small increase in quantity and a large drop in price when demand is inelastic

In recent years, the link between the money supply and GDP has

weakened, leading the Fed to focus more on interest rate targets This link has weakened, leading the Fed to focus more on interest rate targets

The goal of an economy is for the goods and services to go to the people

who will value them the most

In the Classical model, an increase in the unemployment rate

will likely be temporary In the Classical model, an increase in the unemployment rate is likely to be temporary

A change in one of the ceteris paribus conditions will cause the entire supply curve to shift. The most important of these are:

1. the state of technology 2. the prices of the productive resources 3. the number of suppliers 4. expectations about the future, and 5. the prices of related goods

The nonprice determinants of demand are:

1. the tastes of the group demanding the good or service 2. the size of the group demanding the good or service 3. the income and wealth of the group demanding the good or service 4. the prices of other goods and services 5. expectations about future prices or income

In a certain year, 143,060 of a country's residents were employed and 11,844 were unemployed. Under the formal definition for being unemployed, what is the unemployment rate for that year?

7.64% Unemployment rate = (unemployed worker/labor force/)*100 = {11,844 ÷ (143,060 + 11,844)}*100 = 7.64%.

If the unemployment rate is 3.5% and the labor force is 25,0000, what is the number of unemployed workers?

8750 Unemployment rate = (unemployed worker/labor force/)*100. This means, 3.5 = (unemployed worker/250000)*100 = 8750

How does a change in quantity supplied differ from a change in supply?

A change in the price affects quantity supplied, not supply.

What is a graph that shows the various combinations of choices an individual can make with the resources available?

Choice curve

What are goods that are jointly consumed?

Complementary goods (cereal and milk, lamps and light bulbs)

This occurs during periods of slow economic growth or during periods of economic contraction

Cyclical unemployment (an auto worker being laid off during a recession)

Goods that nonpayers, or free riders, *CAN* be kept from consuming

Excludables

True or false. When quantity supplied equals quantity demanded, there is an excess of quantity supplied

False

True or false. If the quantity demanded for pizza is 100 and the quantity supplied is 120, and the pizza is sold at a fair price, the market for pizza is in equilibrium.

False (Quantity supplied is more than quantity demanded, so the market is not in equilibrium)

True or false. The unemployment rate is defined as the percentage of the labor force that is actively looking for a job.

False Besides actively looking for a job, a person must also not currently have a job.

True or false. Full employment means that everyone in the population is employed or even that 100% of those who are able are willing to take a job.

False One way of defining full employment is to identify some level of unemployment as normal (acceptable or desirable) and only be concerned about unemployment in excess of that amount.

True or false. The presence of discouraged workers may cause the unemployment rate to be overstated.

False The presence of discouraged workers may cause the unemployment rate to be understated. This is because discouraged workers are those who were seeking employment, but have given up and stopped looking, so they are not included in unemployment calculations.

True or false. The system of income distribution in a market economy is not dependent on employment.

False The system of income distribution in a market economy is very dependent on employment. If people do not have jobs, they do not earn income.

True or false. If there is a shortage of coffee in the market, the price of coffee will drop.

False (If there is a shortage of coffee in the market, the price will rise because the sellers will raise the price to make more profit since it's hard to get)

True or false. If there is a surplus of coffee in the market, the price of coffee will rise.

False (If there is surplus of coffee in the market, the price will drop because the sellers will drop the price to get rid of their coffee because it's taking up space)

Short-term unemployment is called

Frictional unemployment (approx. 3-4% of the labor force) Frictional unemployment is chosen by the workers. Frictional unemployment would generally be classed as voluntary unemployment because workers are choosing to remain unemployed rather than get the first job that comes along.

This embodies the highest amount of skilled and unskilled labor that could be employed within an economy at any given time

Full employment

What is a good for which demand falls when income rises?

Inferior good (ramen noodles)

The policy of stealing employees away from jobs by offering them higher salaries doesn't lead to more production for the economy. Instead, this policy just rearranges what is produced and leads to

Inflation Workers who take higher-paying jobs have more money, but more goods and services aren't being produced, which leads to inflation.

What is most likely to happen if the supply of coffee shifts to the right, and the price has not yet changed to a new price?

Market forces will drive the price down (When the supply curve shifts to the right, the new equilibrium has greater quantity and lower prices)

Which of the following is the most successful method to allocate sweaters in Macroland?

Market prices

What is the sum of all of the individual supply curves?

Market supply curve

All else being equal (ceteris paribus), as the price of a good or service increases,

People will buy less of it

What is an example of a negative externality?

Pollution. It's a negative externality because it has spillover costs to third parties.

What function of the government promotes price stability and full employment?

Stabilization (The Government cutting taxes to end a recession)

A mismatch of workers and jobs is commonly known as

Structural unemployment (available workers do not match the jobs in terms of skills or location)

What are goods that replace each other?

Substitute goods (orange juice & apple juice, Coke & Pepsi, Reebok & Adidas)

With ceteris paribus conditions remaining constant, suppose the price of cement goes up in the United States. What happens in the market for new homes?

Supply shifts upward and to the left

If the quantity demanded for strawberries is more than the quantity supplied, what will happen to the price of strawberries?

The price will rise ( If there is more demand than supply of strawberries, this provides an incentive to the sellers to raise the price of strawberries. Thus, the price of strawberries will rise)

In the United States, the redistributive function of the government is carried out mainly by

The redistribution function is financed at the federal level and implemented at the state and local levels.

True or false. Each period of unemployment is a lost opportunity to develop skills and experience that may make a worker more valuable to an employer.

True

True or false. When there is full employment, the number of job seekers is approximately equal to the number of job vacancies.

True

True or false. A situation in which all available labor resources are being used in the most economically efficient way is full employment.

True By this definition, an economy is at full employment when 93%-94% of those who want to work are employed.

True or false. By definition, an economy is at full employment when 93%-94% of those who want to work are employed.

True Full employment does not mean that everyone in the population is employed or even that 100% of those who are able are willing to take a job.

True or false. Unemployment allows for growth in the economy.

True If a business wants to expand, but there are no workers available to hire, the only way the expanding business can get a new employee is to "steal" the employee away from the existing employer, which can be done by offering higher pay or benefits.

Unit 3

Unit 3

Which of the following is an example of a transfer payment?

Veterans' benefits. They are transfer payments because they are income and they are disbursed without work being done.

What are the three basic economic questions?

What to produce? How to produce? For whom to produce?

Mixed economy

a blend of tradition, command, and market economies (Most modern industrial countries have this)

When quantity supplied equals quantity demanded, there is

a market-clearing price (equilibrium price)

Prices play a central role in a market system in allocating scarce resources and

answering the basic economic questions (The primary functions of prices are to inform, direct, and motivate consumers and firms)

Traditional economy

answers the basic economic questions by tradition, or custom (Haiti banana farmers)

Command (or planned) economy

answers the basic economic questions through central command and control (Soviet Union, China, North Korea and Cuba)

When the supply of a product increases, but the demand for the product remains unchanged, the equilibrium price of the product will

fall, and the equilibrium quantity will increase

An outward shift of the production possibilities curve (PPC) increases the economy's capacity to respond to

human wants

As prices rise, the quantity supplied will

increase (because it's more profitable to produce and sell the good when you're charging more)

If two goods are substitutes, a rise in the price of one will

increase the demand for the other (if the price of mountain dew goes up, people will buy mellow yellow to replace it)

With increased prices for cars, producers

increase their supplies, and consumers decrease their demands

The demand curve for cars will shift upward when income

increases and when the price of gasoline decreases

The four factors of production are

land, labor, capital and entrepreneurship

Capital increases only when

physical or human capital increases

When the quantity demanded equals the quantity supplied,

price is at equilibrium

Demand is the relationship between quantities demanded and

price levels at a certain time period

When the quantity demanded is less than the quantity supplied,

prices will fall

When the quantity demanded exceeds the quantity supplied,

prices will rise

When price changes, there is an opposite change in

quantity demanded and demand, when the whole set of price and quantity change

Equilibrium occurs at a price for which the

quantity supplied and the quantity demanded are equal

Market equilibrium occurs at that price for which quantity demanded by consumers is equal to

quantity supplied by producers (This equilibrium price is also called the market-clearing price)

Economists assume people are

rational

The assumption that all resources are alike will produce a

straight line curve

There is a positive relationship between price and quantity

supplied, and there is a negative relationship between quantity demanded

What is entrepreneurship?

the activity of combining the other productive resources to produce goods and services, taking risks, and introducing new methods and new products (innovation.)

What explains how the production of larger amounts of one good leads to an increase in the sacrifice of the alternative good?

the law of increasing opportunity costs

What is profit?

the reward for innovation, risk taking, and organization

In the absence of government intervention, there will be both

too many public bads and too few public goods.

A period of 18 months of job searching is considered an

unemployment period

What is the formula to calculate the unemployment rate?

unemployment rate=Unemployed workersLabor force×100