Macroeconomics chapter
Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?
All of the above.
The process of critical thinking is useful in macroeconomics because:
Macroeconomics is focused on choosing effective policies.
In April 2012, the Bazanian Daily, a leading newspaper in the country of Bazania, carried a report titled "20,000 jobs added in the last quarter; unemployment rate shoots up from 5 percent to 6.7 percent." How could the unemployment rate in Bazania increase even when new jobs were created?
. The new jobs may have made discouraged workers optimistic enough to start applying for jobs, thus re-entering the labor force and being counted as unemployed, which causes the overall unemployment rate to increase.
In August, 1979, the annual rate of inflation in the U.S. was nearly 12%, and the U.S. short-term nominal interest rate was nearly 10%. Over the next 35 years, both the rate of inflation and short-term nominal interest rate tended to fall. By August 2014, the rate of inflation was about 2% and the short-term nominal interest rate was close to 0%. How has the real short-term interest rate changed from 1979 to 2014?
. The real rate remained stable at −2%.
Positive
1. Families where both parents earn high wages (high opportunity cost of time) are more likely to both work at a paid job and hire outside help for household chores than otherwise similar families where parents earn low wages (low opportunity cost of time).
Recall from the chapter that banks in the United States hold a fraction of their checking deposits as reserves, either as vault cash or as deposits with the Federal Reserve (where they earn very little interest). Regulations require them to hold a certain percentage (currently 10 percent) of their checking deposits as reserves. However, banks are free to hold additional reserves if they choose. The latter are called excess reserves. Ordinarily, banks held very few excess reserves. However, starting in the financial crisis of 2007-2009, the amount of excess reserves held by banks went from virtually zero to over 1.8 trillion dollars. Explain why banks would be expected to try to minimize the amount of excess reserves that they hold.
All of the above.
What other reasons might explain why unemployment is lower among workers with a relatively higher level of education?
All of the above.
This implies that if the money supply grows by 10 percent, then nominal GDP needs to grow by ▼ .
10 percent
Normative
2. Parents should carefully weigh all the costs and benefits, including their preferences and values, when deciding how to care for children.
The economy witnessed the sharpest change in the unemployment rate from ____________.
2008 to 2009 as a result of the financial crisis that hit the United States starting in late 2007.
Normative
3. Some economists recommend granting unpaid leave to parents after the birth of a child because they calculate that the benefits exceed the costs.
What steps do bank regulators take to prevent SIFIs from failing or to minimize the effect of such failures?
All of the above.
When the economy is at full employment,
All of the above.
Which of the following is an example of what economists refer to as job search?
All of the above.
Why do the inflation rate and the nominal interest rate tend to move together over the long-run?
A and B only.
What is the difference between nominal and real interest rates?
A and C only.
What is deposit insurance?
A program implemented in most countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its withdrawals.
Caveat lector is:
A summary of the argument that one should be skeptical when gathering information.
What are the two models that are used to describe inflationary expectations? (Check only two.)
Adaptive expectations. Rational expectations.
According to this Evidence Based Economics (EBE) feature, the following factors set the stage for the German hyperinflation after World War I:
All of the above
Suppose that you allocate $20 each week for your entertainment budget. This money is spent on two items: either renting movies for $1 each at Redbox or downloading songs from iTunes at $1 each. Given this information, which of the following would represent your budget constraint for entertainment?
Amount spent on iTunes + Amount spent at Redbox = $20.
Which of the following is not one of the factors that can increase wage rigidity in the labor market?
An increase in the time needed to search for available jobs.
Households and firms with savings lend money to banks and other financial institutions. The credit supply curve shows the relationship between the quantity of credit supplied and the real interest rate. The credit supply curve slopes upward because a ____________.
B and C only.
If a bank runs short of reserves, a reasonable step would be to ____________.
B and C only.
If narrow banking reduces systemic risk, why do banks still practice maturity transformation?
Banks still practice maturity transformation simply because it is generally very profitable to do so.
Usury laws place an upper limit on the nominal rate of interest that lenders can charge on their loans. In the 1970s, some credit card companies moved to states where there were no ceilings on interest rates to avoid usury laws. Why would credit card companies move to states without usury laws during a period of high inflation, like the 1970s?
Because usury law ceilings may limit the real return lenders can earn during inflationary periods, lenders have an incentive to move to states without such laws.
Which of the following does not cause the labor supply curve to shift?
Changes in the wage rate paid to workers.
Which of the following statements about the role of communication in the process of critical thinking is false?
Communication can play a role, but more often than not its role is not important.
The federal funds rate is the ____________.
interest rate in the federal funds market where banks obtain overnight loans of reserves from one another.
The process of thinking critically is best described as:
Deciding what the issue is, becoming aware of your initial frame of reference, gathering information, and constructing a conclusion.
Which of the following is not a part of the critical thinking step of gathering relevant information?
Deciding which possible answer you gather is the right one.
Suppose your New Year resolution is to get back in shape. You are considering various ways of doing this: you can sign up for a gym membership, walk to work, take the stairs instead of the elevator, or watch your diet. How would you evaluate these options and choose an optimal one?
Do a cost-benefit analysis to compare the alternatives.
The period from 2007 to 2009 was a time of economic contraction that came to be known as the "Great Recession." During periods of recession, most firms experience a decline in demand for their product, as well as a decline in the product's equilibrium price. All other things being equal, macroeconomic theory predicts that the wage of most workers should decline in recessionary periods. However, this was not the case in the Great Recession, or during many other economic downturns throughout recent history. Based on the discussion in the chapter, explain why this might be so, and what the implications are for unemployment.
During downturns workers are resistant to the lowering of wages and firms try to avoid doing so. This downward wage rigidity keeps the quantity of labor supplied greater than demand, causing unemployment.
Your client becomes critical of your "sloppy" technique of using a model that does not include all factors. What is the most appropriate reply to this criticism?
Economic models are meant to be approximations that predict what happens in most circumstances.
The EBE also reports evidence from an extensive study that included hundreds of U.S. labor market regions from 1990-2007. The findings tend to confirm the model of labor markets depicted in Exhibit 9.9. Match each finding from the study to the relevant labor market feature. You may need more than one! Communities with high exposure to Chinese imports experienced sharper declines in manufacturing employment than low-exposure communities. (Check all that apply.)
Leftward shift in labor demand.
Bitcoins are defined as a "peer-to-peer decentralized digital currency." The supply of bitcoins is not controlled by the government or any other central agency. The value of each bitcoin is determined on the basis of supply and demand and is defined in terms of dollars. New bitcoins can be generated through a process called "mining." However, new bitcoins will not be created once there are a total of 21 million bitcoins in existence. Some commentators feel that bitcoins can eventually replace most of the major currencies in the world. What are some of the issues with bitcoins replacing major currencies? (Check all that apply.)
Fiat money is generally worthless without a government decree that it is legal tender. The value of a bitcoin is highly volatile and so people that hold them may lose money. Bitcoin deposits are not insured by the government.
Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to encounter? (Check all that apply.)
It might be difficult to agree on how many car washes is equivalent to painting a house. It may take a lot of time to negotiate and finally settle on a deal that you both find fair. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return.
Barter is a method of exchange whereby goods or services are traded directly for other goods or services without the use of money or any other medium of exchange. Suppose you need to get your house painted. You register with a barter Web site and want to offer your car cleaning services to someone who will paint your house in return. What are the problems you are likely to encounter? (Check all that apply.)
It might be difficult to agree on how many car washes is equivalent to painting a house. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return. It may take a lot of time to negotiate and finally settle on a deal that you both find fair.
Which of the following is true regarding wage rigidity?
It occurs when wages are held fixed above the competitive equilibrium level.
Banks that practice narrow banking match the maturity of their investments with the term of the deposits that they collect from the public. In other words, narrow banks take short-maturity deposits and invest in assets that carry a low level of risk and are also of short-term maturity, like short-term government debt. Suppose that all FDIC-insured banks decide to adopt narrow banking. How would narrow banking reduce the level of risk in the banking system?
It would reduce risk in the banking system by reducing the likelihood of bank runs and liquidity problems for banks.
anks that practice narrow banking match the maturity of their investments with the term of the deposits that they collect from the public. In other words, narrow banks take short-maturity deposits and invest in assets that carry a low level of risk and are also of short-term maturity, like short-term government debt. Suppose that all FDIC-insured banks decide to adopt narrow banking. How would narrow banking reduce the level of risk in the banking system?
It would reduce risk in the banking system by reducing the likelihood of bank runs and liquidity problems for banks.
Yap is a small island in the Pacific Ocean with a total land area of 39 square miles. In the 1900s, there were only three commodities that were traded on this isolated island—fish, coconuts, and sea cucumber. However, the monetary system in Yap was highly sophisticated. The currency that was used on Yap was called "Fei." Fei were large wheels of stone with a hole in the center. These stone wheels were not quarried in Yap but were brought to the island from elsewhere. The value of each wheel as currency depended on its size, which ranged from 1 foot in diameter to 12 feet. Each time a transaction had to be settled in Fei, the ownership of each stone wheel was transferred to the seller, even if the wheel was not physically moved to the seller's house. What functions of money do Fei satisfy? (Check all that apply.)
Medium of exchange. Store of value. Unit of account.
Traditional currencies are controlled by central banks. What is a potential problem of restricting the creation of bitcoins to a total of 21 million bitcoins?
Monetary authorities cannot undertake expansionary monetary policy to stimulate the economy during recessions.
Imagine that the chairperson of the Federal Reserve announced that, as of the following day, all currency in circulation in the United States would be worth 10 times its face denomination. For example, a $10 bill would be worth $100; a $100 bill would be worth $1,000, etc. Furthermore, the balance in all checking and savings accounts is to be multiplied by 10 as will the balance of all outstanding debts. So, if you have $500 in your checking account, as of the following day, your balance would be $5,000, etc. Would you actually be 10 times better off on the day the announcement took effect?
No, because all prices would increase by a factor of 10 as well, keeping the real value of your money constant.
Almost every day, many people sign their names to little pieces of paper called checks, which are then accepted in exchange for goods and services. Do these checks constitute money?
No, because checks simply represent a means of access to money, not money itself.
Banks fail when they invest in long-term assets that subsequently fall in price. What are the two views on why asset prices fluctuate so much that they lead to financial crises and bank failures?
One view holds that asset prices are rationally based on fluctuating fundamentals, while the other asserts that psychological factors and biases play a significant role.
Economics, anthropology, psychology, sociology, and political science all study human behavior. Economics differs from these other social sciences because it also addresses these three key concepts: _________.
Optimization, equilibrium, and empiricism.
What are some factors that explain why people save for the future? (Check all that apply.)
People save for retirement. People save for predictable large expenses. People save for a 'rainy day.' People save for their children People save to invest in a personal business
What were some of the costs of the hyperinflation? (Check all that apply.)
People spent time exchanging money multiple times per day. Businesses were forced to adjust prices several times per day. Price controls were applied.
Suppose that Sally J. Society recently lost her job as an underwater welder. In looking for a new job, she discovers that the only available jobs are for economists and that there are no openings for underwater welders because the trade is now obsolete. If Sally J. Society decides to return to school to earn an Economics degree, what is the best classification of her unemployment status?
Structurally unemployed
Critical thinking about macroeconomic issues requires that you do what before analyzing the particular issue at hand?
Take stock of any relevant macroeconomic information, theories, and conclusions that you already hold or believe.
When deciding whether to install visible countdown timers for pedestrians at crosswalks, which of the following would be considered in the cost-benefit analysis? (Check all that apply.)
The cost in terms of dollars of installing these new timers all over the city. The value of the lives lost by drivers who watch the countdown timers and try to make it through a light. The higher maintenance bill associated with fixing these more complex signals when they break down. The value of the pedestrians' lives saved by having the timers to assist in crossing the street.
What is stockholders' equity?
The difference between a bank's total assets and total liabilities.
Everything else remaining unchanged, what is likely to happen to the equilibrium real interest rate and quantity of credit if the credit supply curve shifts to the right?
The equilibrium rate of interest will decrease and the quantity of credit will increase.
What were some of the benefits? (Check all that apply.)
The government gained the seignorage.
The 1970s saw a period of high inflation in many industrialized countries including the United States. Due to the increase in the rate of inflation, lenders, including credit card companies, revised their nominal interest rates upward. How is the rate of inflation related to the nominal interest rate that credit card companies charge, and why would lenders need to increase the nominal interest rate when the inflation rate increases?
The nominal rate of interest is the real rate of interest plus the rate of inflation; lenders need to raise the nominal rate when inflation increases to maintain their desired real return.
The opportunity cost of an activity is a measure of what is given up when you do that activity. Let's say that you are trying to decide what to do on Friday at 11 a.m. You rank your possible options from the one you value the most to the one that you value the least in the following order: going to class, sleeping in late, going to work early, getting lunch, going to the gym to exercise, and watching television. If you decide to go to class, then what do we know about the opportunity cost of your decision?
The opportunity cost would be sleeping in late, since it was your next-best option.
Who bears the risk that a bank faces when stockholders' equity is greater than zero?
The bank's stockholders.
Some barter Web sites allow the use of "barter dollars." The registration fee that you pay to a barter Web site gets converted into barter dollars that can be exchanged with other users to buy goods and services. Would the use of barter dollars resolve the problems you identified above?
Yes, because you could both pay and be paid in "barter dollars."
Excluding cases where banks had accumulated a lot of non-deposit liabilities that are not covered by FDIC insurance, would analysts generally agree that deposit insurance has been successful in preventing bank runs?
Yes, since bank runs and bank failures have been relatively rare since the advent of deposit insurance.
Are the predictions of the quantity theory of money borne out by historical data?
Yes, the long-run data show a one-for-one growth rate of money supply and inflation.
The factors that would shift the demand curve for reserves include ____________. (Check all that apply.)
a changing deposit base. anticipated liquidity shocks. an economic expansion or contraction.
Suppose the wage is flexible. Now, the impact from the decline in demand for Starbucks products would lead to ____________.
a decrease in employment but not by as much as under the fixed-wage rate system.
If this market were frictionless and could adjust freely, then over time we would expect ____________.
a decrease in the wage rate, since there are more people looking for jobs at that wage than firms want to higher.
Hyperinflation is ____________.
a doubling of the price level within three years.
Based on this story, should you conclude that demand will fall to zero if the client raises gas prices by one cent? No , since this is an argument by anecdote , which can lead to wrong conclusions . Instead of relying on Debbie's college story to make a conclusion, you decide it is smarter to collect and analyze __________.
a large amount of empirical data.
Firms, households, and governments use the credit market for borrowing. The credit demand curve shows the relationship between the quantity of credit demanded and the real interest rate. The credit demand curve slopes downward because ____________.
a lower real interest rate raises a borrowing firm's profit and hence its willingness to borrow.
For banks and other financial institutions, the discrepancy between the short-term maturities of their deposits and the long-term maturities of their assets is referred to as ____________.
a maturity mismatch.
Economics is divided into two broad fields of study: microeconomics and macroeconomics. Microeconomics studies _________, while macroeconomics studies _________.
a small piece of the overall economy; the economy as a whole.
The inflationary expectation model that states inflationary expectations are determined by the level of inflation in the recent past is called ▼ rational expectations adaptive expectations short-run expectations . The inflationary expectation model that assumes people have highly sophisticated beliefs that incorporate all of the available information is called ▼ adaptive expectations long-run expectations rational expectations. Adaptive expectations are ▼ forward-looking irrational backward-looking .
adaptive expectations. rational expectations backward-looking
The definition of economics states that it is the study of how _________.
agents choose to allocate scarce resources and the impact of those choices on society.
A shift in the credit demand curve can be caused by ___________.
all of the above.
The inflation-adjusted purchasing power of the originally borrowed dollar is subtracted from the amount a borrower repays in a year on a one-dollar loan. The result is the ____________.
all of the above.
A shift in the credit supply curve can be caused by ____________. (Check all that apply.)
an aging population that is ill-prepared for retirement. a heightened desire on the part of firms to internally fund their future activities. an elevated perception on the part of households that the future may hold many "rainy days."
An open market operation is ____________.
an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks.
Recessions are periods in which the economy contracts , while economic expansions are defined as the periods between recessions . An economic expansion begins ____________.
at the end of a recession.
The Federal Reserve is referred to as the "lender of last resort" because ____________.
banks borrow from the Fed's discount window when other banks won't lend to them.
Policy decisions made by the government are analyzed by _________.
both microeconomics and macroeconomics.
The functions of a central bank are to ____________. (Check all that apply.)
control certain key interest rates. monitor financial institutions. indirectly control the money supply.
The two basic types of financial capital are ____________.
credit and equity.
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.25% at a time when inflation is around 1.61.6%. For the average saver, the real rate of interest on his or her savings is −1.35%. (Round your response to two decimal places and use a minus sign if necessary.) If banks expect that the rate of inflation in the coming year will be 4.6% and they want a real return of 6% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is 10.6%. (Round your response to two decimal places.) If the economy experiences an unexpectedly low rate of inflation, the group that would tend to benefit is ___________.
creditors (people or institutions that are owed money).
The M2 money supply is defined to include ___________.
currency in circulation, checking accounts, savings accounts, travelers' checks, and money market accounts.
The goal of a country with a healthy economy is to have ____________ equal to zero.
cyclical unemployment.
Empiricism .
describes a situation where economists use data to analyze what is happening in the world .
Equilibrium
describes a situation where no one would benefit from changing his or her behavior
Optimization
describes a situation where people weigh costs and benefits when making a decision
Seignorage is the ____________.
difference between the cost of printing paper money and the value of the goods and services that the government can purchase with the newly printed money.
It follows that the growth rate of money supply and the growth rate of nominal GDP will be the same. In this case, inflation is ____________.
equal to the gap between the growth rate of money supply and the growth rate of real GDP.
Convertibility is the ability to convert ____________.
fiat money into a physical commodity, such as gold.
Banks and other financial institutions of an economy are in the business of channeling funds from suppliers of financial capital to users of financial capital. This process is known as ____________.
financial intermediation.
Frictional unemployment can result when ____________. (Check all that apply.)
firms and workers have imperfect information about each other firms and workers have imperfect information about the state of the economy it takes time for firms to find applicants with the right skills and experience it takes time to find what jobs are available in a specific field.
Inflation is the ____________.
growth rate of the overall price level in the economy.
The duration of an economic fluctuation ____________.
has limited predictability.
Unemployment statistics are measured and released by the Bureau of Labor Statistics (BLS), a division of the U.S. Department of Labor. The BLS officially classifies a person as being employed ____________.
if that person holds either a part-time or full-time paid job.
According to the quantity theory of money, ____________.
in the long run, the growth in the money supply is directly related to the inflation rate.
When large firms and the general banking community lose confidence in a weak bank, FDIC insurance is ______ the situation
incapable of alleviating
Economists believe that the German government could have averted the hyperinflation if it had responded to its situation by: ▼ Decreasing Increasing taxes, ▼ borrowing from lending to the public and ▼ paying defaulting on its debt.
increasing borrowing from defaulting on
The Federal Reserve conducts open market operations when it wants to ____________.
influence the federal funds rate.
Economists say the opportunity cost of an activity includes the value of the alternative use of your time . The opportunity cost of an activity takes account not only of required money outlay but also the value of the time you spend on the activity. The opportunity cost of your time can be roughly estimated using your wage . Positive economic analysis_____________.
involves objective statements that can be disproven using data.
Hyperinflation is most likely caused by ____________.
large budget deficits financed by printing more money.
The value of the marginal product of labor is the ____________.
market value of a worker's additional output for a firm.
Normative economic analysis______________.
may include subjective and ethical judgments. makes recommendations on the best decision to achieve a given end.
Structural unemployment can be caused by ____________.
minimum wage laws. labor unions. collective unemployment can be caused by
The ethical implications of a hotly debated government policy would best be considered a _________.
normative question, since it deals with a subjective issue based on personal preferences.
Explain whether each of these individuals will be counted as a part of the labor force. Alex is a full−time stay−at−home parent while his wife works. John is a full−time student that volunteers on the weekends at an animal shelter. We know that Alex is ____________, and we know that John is ____________.
not in the labor force; not in the labor force.
Banks usually hold a small pool of reserves because ____________.
on most days the withdrawals of existing deposits are roughly offset by inflows of new deposits.
If the growth rate of money supply is larger than the growth rate of real GDP, the inflation rate is ▼ .
positive
Normative economic analysis
recommends what people and society ought to do and takes the subjective preferences and ethical judgments of those making the decision into account.
When compared to the Great Depression, the typical length of unemployment in the modern (post-Great Depression-era) U.S. economy is
relatively brief.
The funds that are lent in this market are ____________.
reserves at the Federal Reserve Bank.
Economic fluctuations are ____________.
short-run changes in the growth of GDP.
The unemployment rate
shows the percentage of the labor force that is considered unemployed.
Given your graph, the total amount of unemployment that would result from the decline in demand for Starbucks products along with having a fixed wage at $10 can be found by ______________.
subtracting the quantity of labor at point B from the quantity of labor at point A.
A central bank is the government institution ____________.
that runs a country's monetary system.
Why do economists believe that setting a goal of zero percent unemployment is not feasible or desirable? Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because
the economy needs some short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets.
Using sophisticated statistical techniques, economists can usually predict ____________.
the end of a recession.
Deflation is ____________.
the rate of decrease of the overall price level in the economy.
Recall the discussion in the chapter about the "quantity theory of money." The quantity theory of money assumes that ____________.
the ratio of money supply to nominal GDP is exactly constant.
Consider two banks: Bank A and Bank B. Suppose the value of liabilities of both the banks is equal. However, Bank A is solvent but Bank B is insolvent. This would imply that:
the value of Bank A's assets exceeds the value of Bank B's assets.
Potential workers are classified as being unemployed when ____________.
they do not have a paid job, have looked for work in the previous 4 weeks, and are available for work.
The Federal Reserve influences the long-run real interest rate LOADING... through ____________.
the short-term federal funds rate.
As used in finance, the term maturity refers to the ____________.
time until a debt must be repaid.
Anthony owns a landscaping business that has 4 employees. His company is able to earn revenue of $600 per day. He knows that if he hires another worker, he would have to pay that worker $50 per day and the company would earn revenue of $680 per day if the new worker is hired. Determine the value of the marginal product of labor of the employee that Anthony is considering hiring.
$80.
In macroeconomics, a "leading indicator" is defined as a measurable economic variable that changes prior to when the economy as a whole starts to follow a given trend. Conversely, a "lagging indicator" is a measurable variable that only changes in the latter phaseslong dash—or even afterlong dash—an overall trend is evident in the economy. The following chart shows the evolution of the U.S. unemployment rate from January 1948 to January 2014 (monthly data). Note that the shaded bars are recessions and that the unemployment rate increases during recessions. The U.S. Unemployment Rate from 1948 to 2014
Lagging, since in every recession the unemployment rate did not peak until very late into the recession, or in some cases, after the recession.
Over the last 50 years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards money?
No, because you credit cards are not assets.
Suppose you have just been hired as a management consultant by a major oil company to help it optimally price gasoline at its service stations. During a meeting with your client, the CEO asks if your economic models include all factors that impact gasoline prices. What is your response to his question?
No, the model is a simplified representation of reality.
Which of the following characteristics of economic fluctuations does the Great Depression illustrate? (Check all that apply.)
Limited predictability. Persistence. Co-movement in economic aggregates.
Which of the following are functions banks perform as financial intermediaries in the economy? (Check all that apply.)
Manage risk through diversification strategies. Identify profitable lending opportunities. Transform short-term liabilities into long-term assets.
What were some of the adaptations that the country adopted to cope with the situation? (Check all that apply.)
Redenominations of the Zimbabwean dollar. The use of foreign currencies for transactions. The use of the black market for many transactions.
The study found no decline in manufacturing wages. (Check all that apply.)
Rigid or not completely flexible wages.
The rate of unemployment also rose more in the areas with high exposure than those with low exposure. (Check all that apply.)
Rigid or not completely flexible wages. Leftward shift in labor demand.
If you have studied microeconomics, you may recall a concept called "moral hazard." Moral hazard occurs when an economic agent is incentivized to take risks because some (or all) of the losses that might result will be borne by other economic agents. How might federal deposit insurance, as administered by the FDIC, lead to moral hazard?
All of the above are plausible.
What is the shadow banking system?
All of the above describe the shadow banking system.
Based on what you learned about banking in the chapter, explain why you think that the crisis prompted banks to dramatically expand the amount of excess reserves they held.
All of the above.
Free riding occurs when people's private benefits are out of sync with the public interest . Which of the following is subject to the free-rider problem?
All of the above.
In which of the following areas will taking an economics course help benefit you throughout your life?
All of the above.
How does fiat money differ from commodities like gold and silver that were used as money?
Fiat money is intrinsically worthless, whereas gold and silver have intrinsic value.
If fiat money is intrinsically worthless, then why is it valuable?
Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.
As the Choice and Consequence box on "Too Big to Fail" notes, bank regulators worry about the prospect of the failure of large financial institutions, dubbed "systemically important financial institutions" (SIFIs). How would the failure of a systemically important financial institution (SIFI) affect the economy?
Financial intermediation would likely be impaired, with negative consequences for the economy's performance.
The sharpest one-day percentage decline in the Dow Jones Industrial Average (DJIA) took place on October 19, 1987. The DJIA fell 23 percent on this one day. Foreign exchange markets and other asset markets also exhibit large fluctuations on a daily basis. Eugene F. Fama, Robert J. Shiller, and Lars Peter Hansen shared the Nobel Prize in Economic Sciences in 2013 for their work on the "empirical analysis of asset prices." Based on the information given in this chapter, which of the following factors could explain why asset prices fluctuate? (Check all that apply.)
Fluctuations reflect the rational appraisals by investors of new information relevant to asset profitability. There are pychological factors and biases that can produce excessive reactions to booms and busts.
The process of critical thinking often involves formal and informal writing. Why do critical thinkers use both types of writing?
Formal writing is used to communicate the results of one's critical thinking and to persuade others that one is right. Informal writing is primarily intended for oneselft or others with whom one is working, and is used to facilitate the critical thinking process itself.
What type of unemployment does job search lead to?
Frictional unemployment.
Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?
Frictionally unemployed
Suppose that you are doing a macroeconomic research paper on whether to the Federal government should balance its budget in the coming year. Suppose further that in working on that paper you are frustrated by the inability to find statistics on government spending and economic growth in other countries. This frustration suggests you are having with what step of the critical thinking process?
Gathering relevant information to answer the question.
According to salary.com, the average salary for a software engineer level III (a higher-level position in software design and implementation) in the Silicon Valley area of California is $108,244. However, Google pays its level III software engineers an average salary of $124,258. Why does Google pay a salary higher than the equilibrium salary for equivalent positions in the same area?
Google is paying an efficiency wage in order to minimize worker turnover, increase worker productivity, and attract the top talent.
Which of the below is not a distinguishing characteristic of critical thinking?
Intuitiveness
Which of the following is true regarding the concept of causation?
It describes how one event can bring about change in another.
What is the critical thinking issue in the story "What Do You Mean, Mr. President?" in Box 1.3?
Knowing what the issue is.
The EBE presents data from the Pittsburgh and Raleigh-Durham labor markets from 1990dash-2007. Which of the following are likely explanations the change in their local unemployment rates: (Check all that apply.)
Labor demand shifted relatively farther left in Raleigh-Durham. Economic activity in Pittsburgh was concentrated in industries that experienced relatively slow growth of Chinese imports.
Economic variables are sometimes divided into "leading indicators" and "lagging indicators." Leading indicators are variables that start to change before an economic expansion or contraction. Lagging indicators change only when an expansion or contraction is well underway, or even about to reverse. Based on the graph, is unemployment a leading or lagging indicator of recessions?
Lagging indicator.
Money makes a variety of economic transactions possible. In the following three situations, determine whether money is involved in the transaction. In prison camps during World War II, and in some prisons today, cigarettes circulate among prisoners. For example, an iPod might cost two cartons of cigarettes, whereas a magazine might only cost two cigarettes. Which functions of money are cigarettes fulfilling in this case? (Check all that apply.)
Medium of exchange. Unit of account. Store of value
Sometimes new technology in production reduces the time that a worker takes to complete a task. Technological innovations can also completely replace a factory worker. Does this mean that technological progress will lead to large-scale unemployment?
No, some sectors may experience unemployment as a result of the innovations but overall productivity and incomes will increase, leading to more employment opportunities.
Which of the following is an example of what economists refer to as job search?
People that engage in the job hunt by sending out resumes. An individual that engages in the job hunt by determining who is hiring and how much they pay. A person who applies for a high-paying job but does not qualify, so she begins searching for an appropriate position.
Which of the following people are counted as potential workers?
People who are already employed full-time.
The following table shows the cost of producing dollar notes of various denominations. As you can see in the table, it costs only 12.7 cents to produce a $100 bill. Suppose the government decided that it will print new notes to fund its fiscal deficit as well as all its ongoing expenditure. What would be the effects of such a policy?
Printing paper money has a small direct cost and so gives the government money to spend.
Identify a possible problem with this policy.
Printing too much money may lead to a high rate of inflation, reducing the amount of goods and services that the government can purchase with the newly printed notes.
Which of the following equations is correct?
Real interest rate = Nominal interest rate minus− Inflation rate
The chapter discusses different models of how people form their expectations regarding inflation. Consider the following two investors, who are trying to forecast what inflation will be for next year. Sean reasons as follows: "Inflation was 2.5 percent last year. Therefore, I think it is likely to be 2.5 percent this year." Carlos, on the other hand, thinks this way: "The economy has recovered from recession sufficiently that inflationary pressures are likely to build. Likewise, a weaker dollar means that imports are going to be more expensive. I don't think the Fed will risk slowing the recovery and raising unemployment by raising interest rates to fight inflation. So, in light of all these factors, I expect inflation to increase to 5 percent next year." How would you best describe how each investor is forming his expectations of inflation? Sean is forming his forecast based on the adaptive expectations model of inflation and Carlos is forming his forecast based on the rational expectations model of inflation. What are possible criticisms of the way each investor is forming his expectations? Economists might argue that
Sean is not maximally rational, and Carlos can not be as good at understanding how the economy works as he thinks he is.
The critical thinking step of coming to a conclusion:
Should include a consideration of the implications and consequences of your answer to the question at hand.
Which of the following would be classified as unemployed?
Someone who is not working and looked for work two weeks ago.
In response to high unemployment, the Spanish government enacted a series of labor market reforms in 2012. Among other measures, the government reduced severance pay and the influence of unions in setting wages and hours of work. What could be the rationale behind using these measures to boost employment?
The rationale behind these measures was to lower unemployment by addressing the wage rigidity caused by unions and firms' unwillingness to hire new employees because of severance pay obligations.
In an economy, the working-age population is 200 million. Of this total, 160 million workers are employed. 6 million workers are unemployed. 28 million workers are not available for work (homemakers, full-time students, etc.). 4 million workers are available for work but are discouraged and thus are not seeking work. 2 million workers are available for work but are not currently seeking work due to transportation or childcare problems.
The unemployment rate in this economy is 3.63.6%. (Round your answer to one decimal place.)
What role do personal (or professional) values play in thinking critically about macroeconomic issues?
Their role depends on the nature of the macroeconomic issue being investigated. However, one should be aware of any values that one holds that might be relevant to the macroeconomic issue.
Which of the following is not one of the general trends that you observed in the table?
There has been a steady increase in both the size of the adult population and the labor force participation rate between 2006 and 2016.
Which of the following are possible benefits of inflation? (Check all that apply.)
There may be a reduction in real wages. Revenue is generated to the government when it prints money. There may be a reduction in the real interest rate.
According to the BBC, inflation in the country of Zimbabwe reached an annualized rate of 231,000,000 percent in October of 2008. Prices got so high that in January of 2009, the country's central banklong dash—the Reserve Bank of Zimbabwelong dash— introduced a $100 trillion bill. Use the following link to read the summary of Zimbabwe's experience with hyperinflation in Wikipedia: http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe). What was the root cause of hyperinflation in Zimbabwe?
There was an increase in the money supply in excess of the growth rate of real GDP.
Suppose the equilibrium wage in the market for food service workers is $11 per hour. The government then establishes a minimum wage at $9 per hour. What will be the effect of the minimum wage on the market for labor in the food service industry?
There will be no effect, since the market equilibrium wage that equates the amount of labor supplied with the amount of labor demanded is above the minimum wage.
What does it mean to say that an economic fluctuation involves the co-movement of many aggregate macroeconomic variables?
These variables grow or contract together during booms and recessions.
What are the costs associated with inflation? (Check all that apply.)
Uncertainty about the aggregate price level, which can distort prices and make planning difficult. Logistical costs related to the need to frequently change prices. Unproductive policies such as price controls, which may be due to voter dissatisfaction.
Real-time data analysis exercise Click the following link to view unemployment data from FRED*. Then use that data to answer the following questions. LOADING... *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. The data in the table below shows employment data for June 01, 2017. Using the link above, correctly identify the title for each series
Unemployed , Civilian Labour force , Employment level-part-time for economic reasons...
Remaining firms in the area may prefer not to lower wages for their workers because it might result in reduced worker morale and productivity. If this is the case, when local employers go out of business, we are likely to see:
Unemployment equal to the difference between the quantity demanded and supplied of labor at the rigid wage.
What are the functions of money in a modern economy? (Check all that apply.)
Unit of account. Medium of exchange. Store of value.
Which of the following is more susceptible to the free-rider problem:government−funded symphonies or city−wide pest control?
Use of city−wide pest control is more susceptible since even those who don't pay taxes still benefit, while government−funded symphonies can charge for admission, so that everyone who goes pays their share.
Which of the following is more susceptible to the free-rider problem: state parks or city−wide pest control?
Use of city−wide pest control is more susceptible since even those who don't pay taxes still benefit, while state parks can charge for admission, so that everyone who goes pays their share.
Which of the following is more susceptible to the free-rider problem: fishing in public lakes or street lights?
Use of street lights is more susceptible since even those who don't pay taxes still benefit, while fishing in public lakes can charge for a fishing license, so that everyone who goes pays their share.
The study found a significant decline in wages of non-manufacturing workers in high exposure areas. (Check all that apply.)
Wage rigidity may not extend to new jobs outside the impacted industry. Leftward shift in labor demand.
Which of the following is not an example of causation?
Washing your car will lead to raining that day. Wearing your lucky socks while watching the football game will lead to your team winning. Driving without car insurance will lead to getting into an accident.
Which of the following best explains why the labor supply curve slopes upward?
When wages increase, the opportunity cost of not working increases, leading people to seek more work hours.
A bank run is ____________.
an extraordinarily large volume of withdrawals driven by a concern that a bank will run out of liquid assets with which to pay withdrawals.
When a bank experiences withdrawals of deposits and short-term loans by firms and other banks, the situation is described as ____________.
an institutional bank run.
The labor supply curve shows that the quantity of labor supplied will increase as wages increase . This results in a labor supply curve that is upward-sloping . The labor supply curve is derived from the concept that ____________.
as wages increase, the opportunity cost of leisure increases, leading people to work more hours.
When the value of a bank's assets is lessless than its liabilities, the bank is said to be ____________.
insolvent
Maturity transformation is the process by which banks ____________.
transfer short-term liabilities into long-term investments.
In the United States, recessions are usually defined as ____________.
two consecutive quarters of negative growth in real GDP.
Go to FRED, which shows the U.S. unemployment rate since 1948. Every recession during this period is shown by the gray bars on the graph. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Does the behavior of the unemployment rate illustrate the principle of co-movement discussed in the chapter?
Yes, because when real GDP declines, unemployment increases.
Excluding cases where banks had accumulated a lot of non-deposit liabilities that are not covered by FDIC insurance, would analysts generally agree that deposit insurance has been successful in preventing bank runs?
Yes, since bank runs and bank failures have been relatively rare since the advent of deposit insurance.
Comparing a set of feasible alternatives and picking the best one is an optimization process called _________.
cost-benefit analysis.