Macroeconomics Exam 3

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Causes of a shift in the Credit Demand Curve

-Changes in perceived business opportunities for firms -Change in household preferences or expectations -Changes in government policy

Causes of a shift in the Credit Supply Curve

-Changes in the saving motives of households -Changes in the saving motives of firms

Pendulums swing in an easily-measured rhythm that would make predicting fluctuations simple.

-Limited predictability Using your answer above, how does a pendulum-like structure contradict this property in economic fluctuations?

medium run

A 2-to 3-year time horizon is known as the _____________ to distinguish it from the short run (which corresponds to a few quarters) and the long run (which corresponds to periods of a decade or more)

higher

A ________ real interest rate increases the opportunity cost of current consumption and encourages a higher level of saving.

bank-run

A __________ occurs when a bank experiences an extraordinarily large volume of withdrawals driven by a concern that the bank will run out of liquid assets with which to pay withdrawals.

medium of exchange

A ____________ is an asset that can be traded for goods and services

store of value

A ____________ is an asset that enables people to transfer purchasing power into the future

turning point

A ____________ is either the end of a recession (also referred to as a trough in economic output) or the beginning of a recession (also referred to as a peak in economic output)

progressive tax

A ______________ could be used to either stimulate or contract the economy.

unit of account

A ______________ is a universal yardstick that is used for expressing the worth (price) of different goods and services

self-fulfilling prophecy

A ________________ is a situation in which the expectations of an event (such as a left shift in labor demand in the future) induce actions that lead to that event.

solvent

A bank becomes __________ when the value of the bank's assets is greater than the value of its liabilities.

insolvent

A bank becomes __________ when the value of the bank's assets is less than the value of its liabilities.

remains constant

A cash equivalent would be considered as an asset on the bank's balance sheet and is considered riskless, as its value _________ from day to day

that runs a country's monetary system.

A central bank is the government institution ____________.

the quantity of labor demanded and the quantity of labor supplied are equivalent.

A competitive labor market is in equilibrium when ____________.

would not

A dollar bill that is exchangeable for a certain amount of silver _________ be considered fiat currency.

left

A fall in the (IOR) shifts the demand curve to the ____________

lower

A fall in the federal funds rate implies that private banks are able to borrow reserves in the federal funds market at a ______________ rate.

Asset management company

A financial intermediary that enables Sam and Emma to use their savings to buy a share of ownership in Microsoft Corporation and to lend money to Microsoft Corporation respectively.

Hedge fund

A financial intermediary that gathers funds from a small number of very wealthy individuals and buys stock in companies that are in deep financial trouble.

Private equity fund

A financial intermediary that gathers funds from a small number of wealthy institutions and buys a privately owned family business.

Venture capital fund

A financial intermediary that invests in start up companies that have no track record.

Shadow banking system

A financial intermediary that takes loans from large investors and uses them to create new financial products that it could sell to other institutions and wealthy investors.

matching lenders to the more creditworthy borrowers.

A key role of banks is to identify profitable lending opportunities. Banks perform this function by ____________.

downward wage rigidity

A labor market with ________________, which highlights the implications of shifts of labor demand for unemployment. With ____________ firms are unable or unwilling to cut nominal wages because of contractual restrictions or because they are concerned that wage cuts would reduce worker morale and adversely affect productivity.

increases

A lower interest rate ___________ the quantity of reserves demanded.

above

A minimum wage is considered a wage floor. If placed above the equilibrium wage for an industry, it can cause structural unemployment. Voluntary unemployment would occur _____________ the wage floor.

wage

A movement along the labor demand curve occurs when the _________ changes and no other economic variables change other than the quantity of labor demanded.

wage

A movement along the labor supply curve occurs when the _______ changes and no other economic variable changes.

an economic mechanism that causes an initial shock to be amplified by follow-on effects.

A multiplier is ____________.

employed

A person holding a full-time or part-time paid job is __________

A recession impacts employment __________ severely when wages exhibit downward rigidity

right

A rise in the (IOR) shifts the demand curve to the _________

fall

A rise in the interest rate causes a _________ in the quantity of credit demanded. As the interest rate goes up, fewer firms and individuals are willing to pay the high price to acquire credit.

all of the above.

A shift in the credit demand curve can be caused by ___________. A. changes in perceived business opportunities for firms. B. changes in household preferences or expectations. C. changes in government policy. D. all of the above. E. A and B only.

-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 aging population that is ill-prepared for retirement.

A shift in the credit supply curve can be caused by ____________. (Check all that apply.) A. a heightened desire on the part of firms to internally fund their future activities. B. an elevated perception on the part of households that the future may hold many "rainy days." C. a decrease in the government's budget deficit. D. an increase in the nominal rate of interest adjusted for inflation. E. an aging population that is ill-prepared for retirement.

discretionary

A tax rebate like cash for clunkers is an example of __________________ countercyclical components.

base-year

A variable identified as real is one that is measured in ____________ dollars

unemployed

A worker is _________ is they do not have a job, has actively looked for work in the prior four weeks, and is currently available for work

long-term

ABC Bank has borrowed $10,000 from XYZ Investment House for capital improvements. It must pay this amount back with interest in exactly one year. ABC Bank has taken on a ___________ debt, which is recorded as a liability on its balance sheet.

technology changes.

According to real business cycle theory, the economic impact of changing input prices is similar to the economic impact from ____________.

It should raise the federal funds rate

According to the Taylor rule, should the Fed raise or lower the federal funds rate when the output gap is positive?

It should lower the federal funds rate.

According to the Taylor rule, should the Fed raise or lower the federal funds rate when the output gap is negative? A. It should lower the federal funds rate. B. It should raise the federal funds rate. C. Gaps are self-correcting, so it should do neither. D. It should do neither and instead let fiscal policy close the gap.

-output gap falls. -Fed's long-run target for the federal funds rate falls. - inflation rate falls. -Fed's inflation rate target rises.

According to the Taylor rule, the Federal Reserve should lower the federal funds rate when the ____________. (Check all that apply.) Part 2 A. output gap falls. B. Fed's long-run target for the federal funds rate falls. C. inflation rate falls. D. exchange rate rises. E. Fed's inflation rate target rises.

the output gap increases by 2 percent

According to the Taylor rule, the federal funds rate should increase by 1 percentage point if ____________.

- the growth rate of the money supply is 5 percent. -the growth rate of inflation is 3 percent.

According to the quantity theory of money, if in a year's time, real GDP grew from $10 trillion to $10.2 trillion, and nominal GDP for the same time period grew from $10 trillion to $10.5 trillion, then ____________. (Check all that apply) A. the growth rate of the money supply is 5 percent. B. the growth rate of inflation is 5 percent. C. the growth rate of the money supply is 3 percent. D. the growth rate of inflation is 3 percent.

8.4%

According to the quantity theory of money, what must the growth rate of the money supply be given the following information? The growth rate of real GDP is 6.4%. The growth rate of nominal GDP is 8.4%. The nominal interest rate is 3.2%. The real interest rate is 1.2%. The money supply (M2) is $8,591 (in billions) According to the quantity theory of money, the growth rate of the money supply must be ___________.

nominal wages

Actual wages are also called _______________, which distinguishes them from wages adjusted for inflation, or real wages. To calculate real wages, economists divide nominal wages by a measure of overall prices- for example the Consumer Price Index (CPI)

bonds

All of the following are included when calculating M2 as a measure of the money supply except ___________. A. bonds. B. checking accounts. C. currency in circulation. D. savings accounts.

a homeowner with a fixed-rate mortgage.

All of the following individuals would be negatively impacted by rising inflation except ____________. A. a business owner who pays annual cost-of-living bonuses. B. a retiree on a fixed pension. C. a homeowner with a fixed-rate mortgage. D. the shareholders of a company that deal mostly in exports.

a business-savvy president being elected.

All of the following reasons would cause the credit demand curve to shift to the left except ____________. A. an increase in the corporate tax rate. B. many people within the economy fearing a war on the horizon. C. a business-savvy president being elected. D. Congress enacting a balanced budget amendment to decrease deficit spending.

a surplus of labor demand.

All of the following result from paying efficiency wages except ____________. A. reduced training costs. B. structural unemployment. C. a higher marginal product. D. a surplus of labor demand.

No, because checks simply represent a means of access to money, not money itself.

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?

depression

Although there is no consensus on the definition, the term __________ is typically used to describe a prolonged recession with an unemployment rate of 20% or more.

at the end of a recession.

An economic expansion begins ____________.

-an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment. -a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending.

An example of a multiplier is when ____________. (Check all that apply.) A. an increase in business confidence causes firms to increase production and hire employees, leading to an increase in household spending, causing firms to further increase production and employment. B. a reduction in business investment is offset by increases in consumption and net exports. C. a drop in consumer confidence reduces household spending, causing firms to cut production and lay off employees, leading to a greater reduction in household spending. D. a decrease in labor demand with rigid wages causes a larger increase in unemployment than the same decrease with flexible wages.

When people succeed, they become confident and optimistic, which can lead to actions that stimulate further success.

An old saying goes: "Nothing succeeds like success." How could this saying relate to Keynes's animal spirits view of economic fluctuations and a self-fulfilling prophecy?

an exchange between a private bank and the Federal Reserve where the Fed buys or sells government bonds to private banks.

An open market operation is ____________

sentiments

Animal spirits are in fact one example of a broader phenomenon: _______________, which include changes in expectations and changes in the (actual or perceived) uncertainty facing firms and households. Changes in ____________ lead to changes in household consumption and firm investment.

$80

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.

shift

Any change that affects the entire schedule relating the quantity of labor supplied and the wage will _______ the labor supply curve

structural

An economy's natural rate of unemployment reflects the combined effect of frictional and ________ unemployment

Yes, the long-run data show a one-for-one growth rate of money supply and inflation.

Are the predictions of the quantity theory of money borne out by historical data?

right

As a new expansion in the business cycle starts, we can expect the aggregate labor demand curve to shift to the ________________. This will be met with an increase in real GDP and a movement up the aggregate production function.

rightward

As the real interest rate rises, the opportunity cost of current consumption rises. This causes the credit supply curve to have a positive slope. If an economy has a large aging population that is increasing, one would expect the credit supply curve to shift _________.

$667 billion increase in government spending.

Assume a government expenditure multiplier of 1.2. Fiscal policy could theoretically fix a recessionary output gap of $800.4 billion with a ____________.

The value of the assets will decrease, leading to a decrease in the net asset value of the mutual funds.

Assume that the economy has 15 other identical mutual funds. As the fund discussed in the previous step begins selling assets to pay back its investors, the market price of those assets drops. Given the information, which of the following is likely to be true of the balance sheets of the other mutual funds that invest in those assets?

the revenue from the marginal worker equals the wage rate.

A profit-maximizing firm will continue to hire workers until ___________.

matching people with savings to those who want to use those savings.

Banks provide credit by ____________.

-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 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.

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.) A. The house painter may not do a good job since he isn't being paid in money. B. You might find it difficult to find someone who needs you to wash his car and is willing to paint your house in return. C. It might be difficult to agree on how many car washes is equivalent to painting a house. D. It may take a lot of time to negotiate and finally settle on a deal that you both find fair. E. Inflation would create problems when there is a time difference in the provision of services

-There are psychological factors and biases that can produce excessive reactions to booms and busts. -Fluctuations reflect the rational appraisals by investors of new information relevant to asset profitability.

Based on the information given in this chapter, which of the following factors could explain why asset prices fluctuate? (Check all that apply.) A. Fluctuations reflect the distortion of underlying economic fundamentals by passive and inactive government policy. B. There are swings in the degree to which monopoly power envelops different sectors of the economy. C. There are psychological factors and biases that can produce excessive reactions to booms and busts. D. Fluctuations reflect the rational appraisals by investors of new information relevant to asset profitability.

supply

By affecting certain key interest rates, the Fed can indirectly control the money ___________. The Fed's dual mandate is to maintain low levels of inflation while allowing for sustainable levels of GDP growth.

increases

By moving short-term liabilities into long-term investments, banks increase their illiquidity. This _________ the risk associated with bank runs, as it can make it harder for banks to cover their deposits.

lowering

By raising the federal funds rate, the Fed raises the interest rate that households and firms face, thereby ____________ the quantity of loans demanded and lowering the growth rate of the money supply.

A and C only.

Central banks undertake quantitative easing programs to ____________. A. work around the problems when short-term nominal interest rates approach zero. B. give a boost to the prices of publicly traded equities. C. more forcefully and directly impact the interest rates relevant for investment decisions. D. all of the above. E. A and C only.

along

Changes in the federal funds rate (holding all else equal) generate movement __________ the demand curve for reserves.

fiscal

Changing corporate tax rates is an example of countercyclical _____________ policy. If the government lowers corporate tax rates, its goal would be a rightward shift of the labor demand curve.

an equilibrium wage greater than the market-clearing wage.

Collective bargaining usually results in ____________. When the situation identified above occurs, the quantity of labor supplied will be greater than the quantity of labor demanded.

-rational expectations -adaptive expectations

Consider the following two investors, who are trying to forecast what inflation will be for next year. Sean reasons as follows: "Inflation was 2 percent last year. Therefore, I think it is likely to be 2 percent this year." In contrast, River 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 3 percent this year." How would you best describe how each investor is forming their expectations of inflation? Sean is forming his forecast based on the __________ model of inflation and River is forming her forecast based on the ________________ model of inflation.

positively correlated

Consumer sentiment is likely to be ____________ with real GDP

most likely be implemented for inflation above 2 percent.

Contractionary monetary policy would __________

higher

Corporate bonds always have _______ interest rates than U.S. Treasury bonds because they always have some risk of default, whereas U.S. Treasury bonds have little to no risk of default.

B and C are correct.

Countercyclical policy that seeks to raise GDP growth and the level of employment is appropriate when ____________. A. the nation has an international trade surplus. B. excessively pessimistic sentiments about the economy are prevalent. C. the economy is experiencing a recession. D. all of the above. E. B and C are correct.

government borrowing

Crowding out occurs when _________________ displaces private borrowing.

raises

Decreasing the supply of reserves or increasing the interest paid on reserves ___________ the federal funds rate.

above

Downward wage rigidity can increase structural unemployment when labor demand decreases. In times of recession, more workers are laid off so that continuing workers keep their _________ market-clearing wage.

systemic

Due to the large volume of money leveraged by many financial institutions, the impact of one financial institution defaulting can be quite severe on the others. This _________ risk is the main reason why regulators increase the level of stockholders' equity required of SIFIs, a stipulation that also helps them to pass the stress test.

Hyperinflation

During ________________, a country's price level doubles within 3 years. ____________ episodes are always related to extremely rapid growth of the money supply. In almost all cases, such extreme monetary growth is brought about by (misguided) government policy responses to large government budget deficits.

expansionary policy

During a recession, __________________ aims to reduce the severity of the downturn by shifting labor demand to the right and "expanding economic activity (GDP).

consumption, investment, and GDP decrease while unemployment increases.

During an economic downturn of any duration, _____________.

an inefficient solution to inflation by creating disruptions in supply and a shortage of goods.

During the oil shocks of the 1970s and 1980s, price controls were imposed to control rising fuel prices and slow down inflation. Price controls like these often result in ____________.

Limited predictability.

Early theories of business cycles assumed that economic fluctuations had a pendulum-like structure with systematic swings in economic growth. Which property of economic fluctuations do these early theories contradict? A. Co-movement. B. The inverse relationship of GDP growth and the unemployment rate. C. Limited predictability. D. Persistence in the rate of growth.

debtors

Economic agents who borrow funds—such as entrepreneurs, home buyers, and medical students—are known as ___________. The funds they borrow are referred to as credit.

inflation expectations

Economic agents' ______________ are their beliefs about future inflation rates

short-run changes in the growth of GDP.

Economic fluctuations are ____________.

Yes, since bank runs and bank failures have been relatively rare since the advent of deposit insurance.

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?

an increase in the supply of reserves, a reduction in the federal funds rate, an increase in lending capacity (reserves) of the banks, and an increase in liabilities (bonds) for the Fed.

Expansionary monetary policy would include ____________.

reductions

Expansionary policy can be achieved through ______________ in income taxes. This change in taxes can have multiplier effects, but will likely have to be larger than expenditure-based fiscal policy injections.

in the labor force; in the labor force.

Explain whether each of these individuals will be counted as a part of the labor force. Alex has not responded to interview requests from banks but applied to be a realtor last week. John left his full−time job as a teacher and now works part−time at the library. We know that Alex is ____________, and we know that John is ____________.

investment banks are not FDIC insured, liabilities are larger, and bank runs can trigger stock market collapses.

Failure of an investment bank is typically more serious than failure of a regional bank because ____________.

meets

Fiat currency ________ all the required functions of money.

something that is used as legal tender by government decree and is not backed by a physical commodity.

Fiat money is ______________.

Short-term interest rates fall→Long-term interest rates fall→Demand for goods and services increases→Labor demand shifts right.

Following the Fed's successful open market purchase, the process that ensues is given by ____________.

-It takes time to find what jobs are available in a specific field -It takes time for firms to find applicants with the right skills and experience -It takes time for applicants to prepare a resume and line up references

Frictional unemployment can result when . (check all that apply) -An increase in the population causes an above-average number of births -It takes time to find what jobs are available in a specific field -It takes time for firms to find applicants with the right skills and experience -It takes time for applicants to prepare a resume and line up references

-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 -Firms and workers have imperfect information about each other

Frictional unemployment can result when ____________ (check all that apply) -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 -Government regulations may limit the number of people that a firm can hire -Firms and workers have imperfect information about each other

greater than

Full recovery (full employment) occurs when labor demand shifts to an equilibrium wage that is ________________ the rigid wage

26.39

Given the following information, what is the growth rate of nominal GDP? Y0 real GDP = $1200 (in millions) Y1 real GDP = $1400 (in millions) Y0 price level = 120 Y1 price level = 130 The growth rate of nominal GDP is _________%

severity

Government policies can only decrease the _______________ - not the very existence - of fluctuations

seigniorage

Government revenue obtained from printing currency is called ______________

demand

Governments sometimes seek to directly stimulate hiring by the private sector by engineering a shift in the labor ____________ curve

Growth rate of real GDP

Growth rate of money supply = (Inflation rate) + __________

4% to 5%

Historically, the targeted goal for unemployment is _____________. An unemployment rate higher than this would generate high economic and social costs.

higher

Holding all else equal, the _________ the inflation rate, the higher the prices of the goods and services that firms sell and the easier it is to pay back loans at a given nominal rate of interest.

Fiat money is intrinsically worthless, whereas gold and silver have intrinsic value.

How does fiat money differ from commodities like gold and silver that were used as money?

It would reduce risk in the banking system by reducing the likelihood of bank runs and liquidity problems for banks.

How would narrow banking reduce the level of risk in the banking system?

People believed that a house was a worthwhile investment, which led to an increased demand for housing and thus pushed prices up. This confirmed to people that housing was a worthwhile investment, which led to more demand, resulting in an upward spiral driven by optimism.

How would Keynes's concept of animal spirits explain the creation of a housing bubble?

government expenditure multiplier

If a $1 charge in government expenditure causes an $m change in GDP, then the ___________________ is m.

government taxation multiplier

If a $1 reduction in taxation causes an $m increase in GDP, then the __________________________ is m.

increase

If a country enacts fiscal policy to alleviate a recession by lowering taxes and increasing government spending, this will likely ________ the deficit and increase the risk of inflation

rise

If a country implements a countercyclical fiscal policy, the budget deficit is likely to __________ during a recession

leftward shift in the labor supply curve.

If a significant tax reduction was offered to families that homeschool their children, we would most likely see a ____________.

rises

If an economic shock increases labor demand, equilibrium employment ___________ and real GDP rises

12.65

If banks expect that the rate of inflation in the long run will be 4.15 percent and they want a real return of 8.5 percent on a certain category of loans, then the nominal rate they should charge borrowers on those loans is __________ percent.

M1 increases and M2 does not change

If consumers were to shift funds from savings accounts to checking accounts, which of the following is true?

decrease

If demographic trends reduce the saving behavior of households, the credit supply curve will shift to the left. As a result of this shift, and assuming the demand for credit among households and businesses does not change, the equilibrium real interest rate will rise and the equilibrium quantity of credit demanded will _________.

depreciating

If expansionary monetary policy pushed interest rates into negative territory, then money would be a ___________________ asset that would not be saved. Such a policy would likely increase the risk of asset bubbles.

decrease

If expectations about inflation rise and the nominal interest rate remains unchanged, the expected real interest rate will ______________

Fiat money is used as legal tender by government decree and other people will accept it as payment for transactions.

If fiat money is intrinsically worthless, then why is it valuable?

decrease

If inflation raises the price index, real wages will _____________ and nominal wages will remain constant.

Banks still practice maturity transformation simply because it is generally very profitable to do so, and it enables society to undertake significant long-term investment.

If narrow banking would reduce systemic risk, why does society allow banks to practice maturity transformation?

-An increase in real GDP -An increase in the price level

If nominal GDP increases, what might be the cause of this? If nominal GDP increases, this could be caused by:

will also

If nominal wages are downwardly rigid, real wages _______________be.

open market operations

If the Fed increases the level of reserves that private banks hold, it offers to buy government bonds from the private banks, and in return it gives the private banks more electronic reserves. If the Fed wishes to decrease the level of reserves, it offers to sell government bonds to the private banks and in return the private banks give back some of their reserves. By buying or selling government bonds, the Fed shifts the vertical supply curve in the federal funds market and thereby controls the level of reserves. These transactions are referred to as ______________.

3.9

If the annual inflation rate is predicted to be 2.7 percent and the real interest rate is 1.2 percent, the nominal interest rate is ______ percent

If the anticipated inflation rate is 1.75 percent and the nominal interest rate is 5.75 percent, the real interest rate is __________ percent

Creditors (people or institutions that are owed money)

If the economy experiences an unexpectedly low rate of inflation, the group that would tend to benefit is ___________.

debtors (people or businesses who owe money)

If the economy experiences an unexpectedly high rate of inflation, that group that would tend to benefit is ________

creditors (people or institutions that are owed money)

If the economy experiences an unexpectedly low rate of inflation, that group that would tend to benefit is ________

future

If the government borrows money to pay its bills, _________________ taxpayers are implicitly responsible for paying back the government's debts.

positive

If the growth rate of money supply is larger than the growth rate of real GDP, the inflation rate is _________

163.63

If the labor force is 175 million and the unemployment rate is 6.5 percent, the number of people considered employed is __________ million

250

If the labor force is 175 million and the unemployment rate is 6.5 percent, the number of people considered employed is __________ million If the labor force participation rate is 70 percent, the number of potential workers is ________

217.65

If the labor force is 185 million and the unemployment rate is 5.0 percent, the number of people considered employed is 175.75 million. If the labor force participation rate is 85 percent, the number of potential workers is _________ million

175.75

If the labor force is 185 million and the unemployment rate is 5.0 percent, the number of people considered employed is _________ million

smaller than

If wages are flexible, the increase in employment and real GDP will be ________________ the increase if wages are rigid.

1 + i

If π denotes the rate of inflation and i denotes the nominal rate of interest, then the amount a borrower repays in a year on a one-dollar loan is _______.

a productivity increase, with a resultant increase in real GDP.

If oil, which is a major input to most production processes, abruptly falls in price, the impact on the economy would be similar to ____________.

accelerate the decrease in unemployment

Imagine a new technology emerged, allowing for increased productivity and driving U.S. real GDP growth from 4.5 percent one year to 6.5 percent in the next year. Given this information, when the growth rate is 4.5 percent the unemployment rate will decrease by 1.25 percent. When the growth rate increases is 6.5 percent, the unemployment rate will decrease by 2.25 percent. Using Okun's Law, we can infer that the change in the growth rate of GDP will ________________

1.25

2.25

Imagine a new technology emerged, allowing for increased productivity and driving U.S. real GDP growth from 4.5 percent one year to 6.5 percent in the next year. When the growth rate increases is 6.5 percent, the unemployment rate will decrease by _________ percent.

It may increase, decrease, or not change depending on how many people started searching for jobs during the month.

In February 2014, the United States added 175,000 jobs to the economy. Given this information, what can we say about the unemployment rate of the country?

frictionless

In a _____________ market, firms can instantly hire and fire workers, both workers and firms have complete information about each other, and the wage adjusts instantly to clear the market (setting the quantity of labor supplied equal to the quantity of labor demanded).

open market purchase

In an ______________, the Fed buys government bonds from private banks and in return gives the private banks more reserves.

open market sale

In an ________________, the Fed sells government bonds to private banks, and in return the private banks give some of their reserves.

forward guidance

In general, the Fed's effort to influence today's expectations about future monetary policy is referred to as _______________

two consecutive quarters of negative growth in real GDP

In the United States, recessions are usually defined as ____________.

demand

In the labor market firms ________ labor

supply

In the labor market households ____________ labor

reduces

Increasing the supply of reserves or decreasing the interest paid on reserves ____________ the federal funds rate.

combine

Industry demand curves are added together to derive the aggregate labor demand curve. In doing so, economists are able to ___________ different industries to look at the aggregate labor situation.

nominal wages do not adjust

Inflation can have a positive effect on production if ___________.

Federal funds rate

Interest on interbank loans, aka:

pork barrel spending

In 2005, $320 million of the federal government's budget was allocated toward building a "bridge to nowhere" in Alaska that connected two small towns. In 2006, $500,000 was allocated toward a teapot museum in North Carolina, $1 million toward a water-free urinal initiative in Michigan, and $4.5 million toward a museum and park at an abandoned mine in Maine. These projects were requested by specific legislators in order to boost their popularity in their constituencies. These types of expenditures are known as ___________.

deliver benefits greater than the opportunity costs.

In general, the government should finance only those public projects that ____________.

equal to the gap between the growth rate of money supply and the growth rate of real GDP.

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 ____________.

borrowing

Lowering interest rates increases ____________, which raises consumption and investment

medium of exchange

M2 exceeds M1 since the former includes assets not generally viewed as serving the ______________ function

buy jeans at the mall

Money functions as a medium of exchange when you ___________.

-Medium of exchange. -Store of value. -Unit of account.

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, today a cell phone might cost 600 cigarettes, whereas a magazine might cost two cigarettes Which functions of money are cigarettes fulfilling in this case? (Check all that apply.) A. Medium of exchange. B. Store of value. C. Fiat money. D. Unit of account.

automatic

More people in the country now claim unemployment insurance from the government. This is an example of ____________ fiscal policy

increase

Nominal GDP can increase when prices _________, real GDP increases, or both prices and real GDP increase.

when growth in real GDP is above 2%, unemployment drops and when it is below 2%, unemployment increases.

Okun's Law states that ____________.

is usually an accurate representation of the data.

Okun's Law ____________.

- g = growth rate of real GDP - Change in u = year-to-year change in the rate of unemployment - The unemployment rate holds steady when real GDP growth = 2% - The unemployment rate increases when real GDP grows less than 2% -The unemployment rate decreases when real GDP grows more than 2%

Okun's law: Change in u = -1/2 (g - 2%) This can mean:

decrease

On a household's annual balance sheet, a one-time loan made to a relative would be included as a loan on the assets side and purchasing a car with cash would __________ the cash available to the buyer on the assets side.

decreased

On the assumption that velocity was constant during this period, it may be deduced that the average annual inflation rate was 8.28%. However, because actual annual inflation averaged 2.93%, it can be concluded that velocity during this period must have ___________

there is no issue of rigid nominal wages when modeling booms

One major difference between modeling economic busts and booms is that __________________.

transform short-maturity liabilities into long-maturity assets.

One of the major functions of banks is to ____________.

No, because you credit cards are not assets.

Over the last 50 years, credit cards have become an increasingly popular way for people to purchase goods and services. Are credit cards themselves money?

Partial recovery from recession in the medium run ________ possible with natural market forces

is still

Partial recovery occurs while downward wage rigidity ___________ in effect.

interest on reserves

Private banks that hold reserves at the Fed, including reserves that they have borrowed, are paid interest on those reserves. This is called _____________ (IOR), and this interest rate is set by the Fed.

automatic

Progressive income taxes are an example of ______________ countercyclical components of fiscal policy.

all of the above

Quantitative easing is ____________. A. an attempt by the central bank to more directly impact long-term interest rates. B. a variation on the central bank's traditional manner of conducting open market operations. C. the central bank's purchase of long-term bonds in the open market. D. all of the above. E. B and C only.

borrowing

Raising interest rates decreases ______________, which dampens consumption and investment

the natural rate

Real potential GDP measures the output corresponding to (or consistent with) unemployment at _____________

would

Recovery ______________ be possible via a fiscal policy tax cut.

Sean is not maximally rational, and River can not be as good at understanding how the economy works as she thinks she is.

Sean is forming his forecast based on the adaptive expectations model of inflation and River is forming her forecast based on the rational expectations model of inflation. What are possible criticisms of the way each investor is forming their expectations? Economists might argue that

economic fluctuations

Short-run changes in the growth of GDP are referred to as ___________________ or business cycles

recession

Since expansionary fiscal policy should only take place during times of _________________, it seems worth the risk for many policy makers.

All of the above

Since government spending increases employment by shifting the labor demand curve to the right, is it always a good idea for the government to increase expenditure? Explain your answer. A. No, continual increases in government expenditures will soak up resources that would otherwise be used by households and firms. B. No, government efforts aimed at shifting the labor demand curve to the right should only be used during recessions. C. No, continual increases in government expenditures may result in projects that are not socially desirable. D. All of the above

highest

Since Baa-rated corporate bonds have the highest default risk, they also have the _______ interest rate.

Yes, because you could both pay and be paid in "barter dollars."

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?

-There will be a decrease in the liabilities of the fund. -There will be a decrease in the assets of the fund.

Suppose several large investors in the mutual fund start getting nervous about market conditions and decide to redeem, all on the same day. Given this information, which of the following are likely to happen? (Select all that apply) A. There will be a decrease in the liabilities of the fund. B. There will be a decrease in the assets of the fund. C. There will be an increase in the assets of the fund. D. There will be an increase in the liabilities of the fund.

discouraged

Suppose that a deep and prolonged recession induces some job seekers to discontinue their job search efforts due to the belief that no jobs are available for them. These individuals are known as _________ workers, and an increase in their numbers, all else constant, will cause the unemployment rates to decrease.

6.29

Suppose that in January there were 5,000,000 workers in the labor force, with 4,670,000 employed and 330,000 unemployed, implying a 6.6 percent unemployment rate. A month later, there were 5,170,000 workers in the labor force, with 4,845,000 employed and 325,000 unemployed. (Notice the number employed went from 4,670,000 to 4,845,000, an increase of 175,000.) The unemployment rate in February is ____________ (Round your response to two decimal places.)

6.6

Suppose that in January there were 5,000,000 workers in the labor force, with 4,670,000 employed and 330,000 unemployed, implying a ________ percent unemployment rate.

recession

Suppose the Fed conducts an open market purchase. Such an action would be called for if the economy faced the possibility of _______________.

recession

Suppose the Fed conducts an open market sale. Such an action would be called for if the economy faced the possibility of _______________.

Suppose the Fed has set the long-run target for the federal funds rate at 2 percent and its target for inflation at 1.5 percent. If the economy is currently hitting the Fed's inflation target and GDP exactly equals the trend GDP, then the Fed will set the federal funds rate at ____________ percent.

Suppose the Fed has set the long-run target for the federal funds rate at 2 percent and its target for inflation at 1.5 percent. Now suppose the economy slows down, causing the actual inflation rate to decrease to 0.5 percent and the economy to fall 2.5 percent below trend GDP. In this case, the Fed will seek to set the federal funds rate at _______________ percent

Suppose the Fed has set the long-run target for the federal funds rate at 2.5 percent and its target for inflation at 2 percent. Suppose the economy slows down, causing the actual inflation rate to decrease to 1 percent and the economy to fall 1 percent below trend GDP. In this case, the Fed will seek to set the federal funds rate at _____________ percent.

2.5

Suppose the Fed has set the long-run target for the federal funds rate at 2.5 percent and its target for inflation at 2 percent. If the economy is currently hitting the Fed's inflation target and GDP exactly equals the trend GDP, then the Fed will set the federal funds rate at __________ percent.

-decrease -selling treasuries to private banks -open market operations

Suppose the economy is overheating. If the Fed wants to slow economic growth, it could __________ the level of reserves by _________________. These transactions are referred to as _______________.

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.

Suppose the government decided that it will print new notes to fund its fiscal deficit as well as all its ongoing expenditure. Identify a possible problem with this policy.

Printing paper money has a small direct cost and so gives the government money to spend.

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?

-13.15

Suppose the government enacts a stimulus program composed of $600 billion of new government spending and $300 billion of tax cuts for an economy currently producing a GDP of $13,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.8, the expenditure portion of the stimulus package will add 8.31 percentage points of extra growth to the economy. If the government taxation multiplier is 0.8, the tax cut portion of the stimulus package will add 1.85 percentage points of extra growth to the economy. As a result of the stimulus program, the economy's GDP was increased by 10.15 percentage points over its value without the program. If the economy's actual growth was −3 percent, then without the stimulus package, growth would have been ______________ percentage points.

10.15

Suppose the government enacts a stimulus program composed of $600 billion of new government spending and $300 billion of tax cuts for an economy currently producing a GDP of $13,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.8, the expenditure portion of the stimulus package will add 8.31 percentage points of extra growth to the economy. If the government taxation multiplier is 0.8, the tax cut portion of the stimulus package will add 1.85 percentage points of extra growth to the economy. As a result of the stimulus program, the economy's GDP was increased by ______________ percentage points over its value without the program.

8.31

1.85

Suppose the government enacts a stimulus program composed of $600 billion of new government spending and $300 billion of tax cuts for an economy currently producing a GDP of $13,000 billion. If the government taxation multiplier is 0.8, the tax cut portion of the stimulus package will add ____________ percentage points of extra growth to the economy.

-10.23

Suppose the government enacts a stimulus program composed of $400 billion of new government spending and $100 billion of tax cuts for an economy currently producing a GDP of $13,000 billion. As a result of the stimulus program, the economy's GDP was increased by 5.23 percentage points over its value without the program. If the economy's actual growth was −5 percent, then without the stimulus package, growth would have been _____________ percentage points

5.23

Suppose the government enacts a stimulus program composed of $400 billion of new government spending and $100 billion of tax cuts for an economy currently producing a GDP of $13,000 billion. If all of the new spending occurs in the current year and the government expenditure multiplier is 1.5, the expenditure portion of the stimulus package will add 4.62 percentage points of extra growth to the economy. If the government taxation multiplier is 0.8, the tax cut portion of the stimulus package will add .62 percentage points of extra growth to the economy. As a result of the stimulus program, the economy's GDP was increased by ____________ percentage points over its value without the program.

4.62

.62

Suppose the government enacts a stimulus program composed of $400 billion of new government spending and $100 billion of tax cuts for an economy currently producing a GDP of $13,000 billion. If the government taxation multiplier is 0.8, the tax cut portion of the stimulus package will add ___________ percentage points of extra growth to the economy.

-0.4

Suppose the rate paid by banks on savings accounts is 0.75 percent at a time when inflation is around 1.15 percent. For the saver, the real rate of interest on his or her savings is ___________ percent.

Regulation

The FED engages in different types of activities to achieve its dual mandate. In the following example, identify the type of activity being carried out by the FED. The FED fails Morgan Stanley in its stress test and orders the bank to improve its balance sheet by adding more capital.

Management of macroeconomic fluctuations

The FED engages in different types of activities to achieve its dual mandate. In the following example, identify the type of activity being carried out by the FED. The FED increases the quantity of bank reserves to stimulate the economy by increasing inflation and lowering unemployment.

Management of interbank transfers

The FED engages in different types of activities to achieve its dual mandate. In the following example, identify the type of activity being carried out by the FED. The FED transfers $1 million from Santander Bank's reserves (on deposit at the FED) to Deutsche Bank's reserves when Alice, a customer at Deutsche Bank, goes to clear a check written to her by April, a customer of Santander Bank.

low and predictable levels of inflation

The FED's dual mandate includes maintaining ____________

lender of last resort

The Fed acts as a ____________________ during times of crisis, providing loans to banks and other firms when standard financing channels become unavailable

Interest on reserves (IOR)

The Fed can influence the federal funds rate by shifting the demand curve for reserves (by changing ___________)

open market operations

The Fed can influence the federal funds rate by shifting the quantity of reserves supplied (with _______________)

-Regulation -Management of interbank transfers -Countercyclical monetary policy

The Fed engages in these three types of activities

long-term real interest rate

The Fed influences both the federal funds rate and the ___________________

-Low and predictable levels of inflation -Maximum (sustainable) levels of employment

The Fed uses monetary policy to pursue these two key goals or objectives referred to as the Fed's dual mandate.

-Changing the supply of reserves -Changing interest on reserves (IOR)

The Fed uses these two key tools to influence the federal funds market equilibrium

influence the federal funds rate.

The Federal Reserve conducts open market operations when it wants to ____________.

nominal interest rate

The ______ is the annual growth rate of what you owe on a loan = principal + interest (in nominal dollars)

credit market

The ________ is where borrowers obtain funds from savers

labor force

The _________ is the sum of all employed and unemployed workers

quantity theory of money

The __________ assumes that the growth rate of the money supply and the growth rate of nominal GDP are the same over the long run

labor demand curve

The __________ depicts the relationship between the quantity of labor demanded and the wage. The value of the marginal product of labor is also the labor demand curve because they both show how the quantity of labor demanded varies with the wage.

decline

The __________ in the net asset value of other mutual funds is an example of systemic risk.

central bank

The __________ is the government institution that monitors financial institutions, controls certain key interest rates, and indirectly controls the money supply. these activities constitute monetary policy.

credit demand curve

The __________ is the schedule that reports the relationship between the quantity of credit demanded and the real interest rate

labor supply curve

The __________ represents the relationship between the quantity of labor supplied and the wage

interest rate

The ___________ (also referred to as the nominal interest rate), i, is the annual cost of a $1 loan, so i times L is the annual cost on an $L loan

value of the marginal product of labor

The ___________ is the contribution of an additional worker to a firm's revenues

real interest rate

The ___________ is the nominal interest rate minus the inflation rate

unemployment rate

The ___________ is the percentage of the labor force that is unemployed

credit supply curve

The ___________ is the schedule that reports the relationship between the quantity of credit supplied and the real interest rate

federal funds market

The ___________ refers to the market where banks obtain overnight loans of reserves from one another

money supply

The ____________ adds together currency in circulation, checking accounts, savings accounts, travelers' checks, and money market accounts. It is sometimes referred to as M2.

Phillips curve

The ____________ describes the empirical relationship between employment growth and inflation, showing that employment growth tends to produce more inflation, especially when an economy is near full employment

federal funds rate

The ____________ is the interest rate that banks charge each other for overnight loans in the federal funds market. The funds being lent are reserves at the Federal Reserve Bank.

real wage

The ____________ is the nominal wage divided by a price index, like the consumer price index (CPI)

real interest rate

The _____________ is the nominal interest rate minus the inflation rate, where r is the real interest rate, π is the inflation rate, and i is the nominal interest rate. r = i -π = Real interest rate

long-run rate of unemployment

The ______________ is the average historical rate of unemployment.

expected real interest rate

The ______________ is the nominal interest rate minus the expected rate of inflation

natural rate of unemployment

The ______________ is the rate of unemployment around which a healthy economy fluctuates.

deflation

The ______________ rate is the rate of decrease of a price index

Federal Reserve Bank

The ______________, or the Fed, is the name of the central bank in the United States

labor force participation rate

The _______________ is the percentage of potential workers who are in the labor force

federal funds rate

The ________________ is the interest rate that banks use to make loans to one another, using reserves on deposit at the Federal Reserve Bank

Great Depression

The _________________ refers to the severe contraction that started in 1929, reaching a low point for real GDP in 1933. The period of below-trend real GDP did not end until the buildup to World War II in the late 1930s.

long-term real interest rate

The ____________________ is the long-term nominal interest rate minus the long-term inflation rate

realized real interest rate

The _______________________ is the nominal interest rate minus the realized rate of inflation

positively correlated

The amount of new building permits for residential buildings is likely to be ________________ with real GDP

positively correlated

The amount of new orders for capital goods unrelated to defense is likely to be _________________ with real GDP

negatively correlated

The average number of initial applications for unemployment insurance is likely to be ___________ with real GDP

positively correlated

The average weekly hours worked by manufacturing workers is likely to be _______________ with real GDP

-Changing output markets (Demand for the good or service, and output price of the good or service) -Changing productivity (Technological progress and high productivity) -Changing input markets (Input prices of land, labor, and capital)

The causes of a shift in the labor demand curve

-Tastes or preferences -Opportunity cost of time -Population and demographics

The causes of a shift in the labor supply curve

increased

The charging of interest encourages savers to lend their excess money to borrowers as compensation for risk. Therefore, the credit market can improve the allocation of resources in the economy. A downside of charging interest could be the___________ accumulation of the overall money supply by the lenders.

market-clearing wage

The competitive equilibrium wage is the _______________. At this wage, every worker who wants a job can find one: the quantity of labor demanded matches the quantity of labor supplied.

discrtionary

The country introduces a tax cut of 4 percentage points to reduce economic hardship. This is an example of ___________ fiscal policy

a lower real interest rate raises a borrowing firm's profit and hence its willingness to borrow.

The credit demand curve slopes downward because ____________.

B and C only.

The credit supply curve slopes upward because a ____________. A. higher real interest rate induces more investment. B. higher real interest rate discourages current consumption. C. higher real interest rate encourages more saving. D. all of the above. E. B and C only.

-Economic expansion or contraction -Changing liquidity needs -Changing deposit base -Changing reserve requirement -Changing interest paid by the fed for deposits at the Fed

The demand curve for bank reserves shifts when one of the following five changes occur

reflects diminishing marginal productivity.

The demand for labor ____________.

principle of optimization

The fact that unemployment is lower among workers with a relatively higher level of education can be explained in part by the ____________

short

The federal funds rate is a _______________-term nominal interest rate

-control certain key interest rates. -monitor financial institutions. -indirectly control the money supply.

The functions of a central bank are to ____________.

actively searching for work

The fundamental difference between those who are unemployed and those classified as not being in the labor force is that the latter are not _____________

pork barrel spending

The government frequently funds __________________, which is the (derogatory) name given to inefficient public spending that some politicians value because it increases their popularity with constituents.

modest

The impact of the minimum wage on the labor market as a whole is ________, since around 1% of workers earn the minimum wage rate.

wages

The labor supply curve shows that the quantity of labor supplied will increase as _________ increases. This results in a labor supply curve that is upward-sloping.

cash and checking accounts

The most liquid assets for a household are ________

output is a function of consumption, investment, government spending, and net exports.

The national income identity shows that ___________.

cyclical

The natural rate of unemployment includes structural unemployment. It serves as a benchmark around which __________ unemployment deviates.

decrease

The onset of a recession would likely ________ the employment-population ratio

federal funds market equilibrium

The point where the supply and demand curves cross in the federal funds market is the _________________

wage

The profit-maximizing firm will hire the amount of labor that makes the value of the marginal product of labor equal to the market _________

shift labor demand to the right, increase employment, increase the equilibrium wage, increase household income, and increase consumption.

The purpose of a wage subsidy during times of high unemployment is to ____________.

the ratio of money supply to nominal GDP is exactly constant.

The quantity theory of money assumes that ____________.

inflation

The quantity theory of money implies that ____________ occurs during decades in which the growth rate of money supply exceeds the growth rate in real GDP.

capacity utilization

The rate of utilization of physical capital is called ________________, and recessions are usually accompanied by a reduction in _________________.

inflation-adjusted wage

The real wage is the _________________.

the C and I components through a reduction in consumer wealth and a drop in housing construction.

The recession of 2007-2009 affected the components of the national income identity by primarily affecting ____________.

an increase

The rise in the real average hourly wage indicates that individuals have, since May of 2017, experienced ____________ in their standard of living

Financial and monetary theories

The school of thought/ theory that explains aggregate economic fluctuations are due to changes in prices and interest rates

Keynesian theory

The school of thought/ theory that explains aggregate economic fluctuations are due to changing beliefs about the future

Real business cycle theory

The school of thought/ theory that explains aggregate economic fluctuations are due to changing productivity and technology

false

The sum of M2 and real GDP represents the gross wealth of the United States. This claim is ________

false

The sum of M2 and real GDP represents the gross wealth of the United States. This claim is __________

-Changes in the output prices for a firm's products -Changes in productivity or technology -Changes in the costs of a firm's inputs

The three factors that shift the labor demand:

-It is a medium of exchange -It is a store of value -It is a measure of relative value, or a unit of account

The three functions that money serves in the modern economy

-Co-movement of many aggregate macroeconomic variables -Limited predictability of turning points -Persistence in the rate of economic growth

The three key properties of economic fluctuations:

-Countercyclical monetary policy -Countercyclical fiscal policy

The two main categories of countercyclical policies:

-Changing interest on bank reserves held at the Fed by private banks, which is referred to as "interest on reserves" or IOR -Changing the total supply of bank reserves held at the Fed by private banks, which is known as "open-market operations"

The two methods of monetary policy which the Fed uses to control the federal funds rate:

-The labor demand curve shifts back to the right due to market forces -The labor demand curve shifts back to the right due to expansionary government policies

The two recovery mechanisms:

lower

The upward slope of the labor supply curve indicates that the opportunity cost of leisure increases as the wage increases. The steeper the slope of the labor supply curve, the __________ the likelihood of new entries into the market.

market value of a worker's additional output for a firm.

The value of the marginal product of labor is the ____________.

final

The velocity of money indicates the number of times, on average, that each unit of the money stock is used in the purchase of __________ goods and services

supply of reserves

The Fed's open market purchase impacts the federal funds market by shifting the ___________ rightward

supply of

The Fed's open market purchase impacts the federal funds market by shifting the ______________ reserves right

left

The Fed's open market sale impacts the federal funds market by shifting the supply of reserves reserves ____________

positively correlated

The S&P 500 stock index is likely to be ____________ with real GDP

1 + π

The inflation-adjusted purchasing power of the originally borrowed dollar is ________.

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 ____________. A.real interest rate. B.real price of the loan. C.inflation-adjusted cost of the loan. D.all of the above. E.A and B only.

willing to work, but not at the prevailing wage.

Those who are voluntarily unemployed are ____________.

reduce the short-term interest rate

Through open market operations, the Fed can _________________ by buying up Treasury bonds from the public.

buy

Through quantitative easing, the Fed prints extra money in order to ______________ long-term bonds and reduce the long-term interest rate.

-Decrease the reserve requirement. -Decrease the interest rate paid on reserves deposited at the Fed. - Increase lending from the discount window. -PurchaseTreasury bonds in the open market.

To achieve its target for the federal funds rate, the Fed may ____________. (Check all that apply.) A.Decrease the reserve requirement. B. Decrease corporate taxes. C.Decrease the interest rate paid on reserves deposited at the Fed. D. Increase lending from the discount window. E. PurchaseTreasury bonds in the open market.

((Real GDP) - (Real Potential GDP))/ (Real Potential GDP) Then multiply by 100

To calculate the percent that real GDP is below real potential GDP, use the following formula

deflator

To compute the GDP _____________, divide nominal GDP by real GDP and multiply the result by 100.

Compared to the first economist, the second economist must be assuming either a larger induced increase in consumption, a smaller crowding out effect, or both.

3.88

Two economists estimate the government taxation multiplier and come up with different results. One estimates the multiplier at 0.75, while the other comes up with an estimate of 1.2. If the current value of GDP is $23.18 trillion and the government is planning to make transfers to people $1.2 trillion (all in one year), the percentage increase in GDP using the multiplier estimate of the first economist is _________ percent

6.21

The multiplier of 0.75 would result in a smaller increase in GDP from a tax cut (or transfer increase) than the multiplier of 1.2.

grey

Using the graph which re-resents the chart for the first quarter of 2022, potential real GDP is the ______________ line, nominal GDP is the blue curve, and real GDP is the red curve.

10 %

Using the quantity theory of money, it implies that if the money supply grows by 10 percent, then nominal GDP needs to grow by ________

stimulate both employment and GDP

Using the real business cycle approach, it can be concluded that the new technology will _______________

negative

We refer to periods of ____________ GDP growth as downturns, contractions, or recessions

positive

We refer to periods of ____________ growth in GDP as expansions or booms.

What are the similarities and the differences between monetary and fiscal policies? To answer this, complete the following table by identifying those features that both policies share and those features where the policies differ. Do this by inserting the letter S (for similarity) or D (for difference) in each response box. The aspect of the labor market they impact.

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.

What is deposit insurance?

Funds that are available for immediate payment

What is liquidity?

Since an increase in inflation reduces the real wage that firms must pay, firms are more willing to hire workers, thus stimulating economic activity.

What is the significance of the real wage as it relates to inflation?

The difference between a bank's total assets and total liabilities.

What is stockholders' equity?

All of the above.

What other reasons might explain why unemployment is lower among workers with a relatively higher level of education? A. More educated workers have a higher opportunity cost of time. B. More educated workers have more human capital. C. Workers with a higher level of education are in greater demand by firms. D. All of the above.

The government could raise taxes and/or reduce expenditures, while the central bank could raise interest rates.

What policies could the government and the central bank use to achieve the goal of slowing down the economic expansion?

Frictional unemployment

What type of unemployment does job search lead to?

an institutional bank run

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.

When a bank experiences withdrawals of deposits and short-term loans by firms and other banks, the situation is described as ____________.

stockholders' equity

When a bank records a loss in assets, that loss flows to the ___________ portion of the balance sheet. For a bank to be considered insolvent, stockholders' equity must be zero.

countercyclical monetary policy

When central banks manipulate interest rates to either stimulate a faltering economy or dampen an overheating economy, it is referred to as _____________

All of the above

When is the output gap, defined as the percent difference between GDP and potential GDP, positive? -When actual real GDP rises above potential GDP -When the economy experiences an inflationary boom -When the economy's capacity to produce is exceeded by its actual production -All of the above

All of the above.

When is the output gap, defined as the percent difference between GDP and potential GDP, negative? A. When actual real GDP falls below potential GDP. B. When the economy's capacity to produce exceeds its actual production. C. When the economy experiences a recession. D. All of the above. E. A and C only.

incapable of alleviating

When large firms and the general banking community lose confidence in a weak bank, FDIC insurance is _____________ the situation.

incapable of alleviating

When large firms and the general banking community lose confidence in a weak bank, FDIC insurance is ____________ the situation

co-movement

When many aggregate variables grow or contract together during economic booms and recessions it is a pattern referred to as ________________

principal and interest

When repaying a loan, the payment a borrower makes consists of ____________.

increases

When the Fed buys government bonds from private banks, it __________the electronic reserves that banks hold.

long

When the Fed influences short-term interest rates, such as the federal funds rate, this affects the __________-term nominal interest rate.

sensitive

When the credit demand curve is relatively flat, the quantity of credit demanded is relatively __________ to variation in the real interest rate.

doesn't

When the credit demand curve is relatively steep, the quantity of credit demanded ________ change that much in response to variation in the real interest rate

persistence

When the economy is growing, it will probably keep growing the following quarter. Likewise, when the economy is contracting-in other words, when the growth is negative- the economy will probably keep contracting the following quarter. So if the the economy is in a recession this quarter, our best bet is that it will be in a recession the next quarter as well. Thus there is a large amount of __________ in the rate of economic growth.

false

When the nominal wage increases, workers know that their buying power (over goods and services) is unambiguously higher. This claim is __________

A and B are the usual responses

When the value of a U.S. bank's assets becomes less than its liabilities, the government, through the FDIC, __________ A. Shuts the bank down and makes payouts to its depositors B. Searches for a healthy bank to take over its operations C. Lets the "chips fall where they may" D. presses Congress for bailout money E. A and B are the usual responses F. C and D represent the standard operating procedures

insolvent

When the value of a bank's assets is less than its liabilities, the bank is said to be ___________.

flexible

When wages are ___________, a shift to the left of the labor demand curve reduces both employment and wages but does not increase unemployment because the labor market clears.

rigid

When wages are _______________, a shift to the left of the labor demand curve creates a large decline in employment because the wage does not decline, and as a result, unemployment increases.

Physical capital becomes less productive, leading firms to reduce capacity utilization.

When workers are laid off, what happens to physical capital?

falls below

Whenever the economy's actual rate of unemployment falls below its natural rate as was the case in May, 2022, it can be deduced that potential real GDP __________ actual real GDP for that period.

Monitoring key stock prices

Which of the following activities of the central bank do not constitute monetary policy? -Controlling certain key interest rates -Monitoring key stock prices -Monitoring financial institutions -Indirectly controlling the money supply

-Identify profitable lending opportunities. -Transform short-term liabilities into long-term assets. -Manage risk through diversification strategies.

Which of the following are functions banks perform as financial intermediaries in the economy? (Check all that apply.) A. Identify profitable lending opportunities. B. Introduce new paper currency into the economy. C. Enforce lending standards and rules. D. Transform short-term liabilities into long-term assets. E. Manage risk through diversification strategies.

-Vault cash -Deposits at the central bank

Which of the following are included in bank reserves for private banks?

Cash, retirement accounts, and equities

Which of the following assets is an average household likely to hold?

A change in the real interest rate

Which of the following cannot produce a shift in the credit supply curve? A. A change in household saving motives B. A change in the real interest rate C. A change in firms' retained earnings D. All of the above

All of the above.

Which of the following is an example of what economists refer to as job search? A.People that engage in the job hunt by sending out resumes. B. An individual that engages in the job hunt by determining who is hiring and how much they pay. C. A person who applies for a high-paying job but does not qualify, so she begins searching for an appropriate position. D. All of the above.

Assets and liabilities will not necessarily be equal because many households face large debts and their liabilities are greater than their assets.

Which of the following is likely to be true of a household's balance sheet?

The investor will likely redeem on that day because he would know that the net asset value on the next day would be lower.

Which of the following is likely to be true of the behavior of an investor who anticipates large redemptions in a day?

Carl, who is currently taking classes full time in order to qualify for a management position.

Which of the following is not an example of someone who is frictionally unemployed? A. Jo, who is looking for a seasonal job gift wrapping for a department store. B. Bill, who quit his job in Michigan to visit his brother in Florida and is looking for work there. C. Al, who got laid off from his programming job and is looking at other available programming positions in his area. D. Carl, who is currently taking classes full time in order to qualify for a management position.

The economy falling into a recession

Which of the following is not one of the factors that can increase wage rigidity in the labor market? A. The economy falling into a recession. B. Increased union membership. C. Minimum wage legislation. D. Efficiency wages.

It occurs when wages are held fixed above the competitive equilibrium level.

Which of the following is true regarding wage rigidity? A. It usually causes the quantity of labor demanded to be greater than the quantity of labor supplied. B. It occurs when wages are held fixed above the competitive equilibrium level. C. It results in frictional unemployment. D.All of the above.

Consumption declines, firms' revenue falls, labor demand shifts left, unemployment rises, and the multiplier effects continue their cycle.

Which of the following shows the correct sequence of events from an initial shock to consumption and the resulting multiplier effects?

-Many economists believe this multiplier is close to zero when the economy is already booming. -This implies that private investment is fully 'crowded out' by government borrowing.

Which of the following statements are true if the government expenditure multiplier is zero? (Check all that apply.) A. An expansionary policy will shift the firms' labor demand curve to the left instead of right. B. Many economists believe this multiplier is close to zero when the economy is already booming. C.This implies that government borrowing is fully 'crowded out' by private investment. D.This implies that private investment is fully 'crowded out' by government borrowing.

They provide a bridge from lenders to borrowers of financial capital

Which of the following statements best describes financial intermediaries?

The effect of the new technology on the unemployment rate would be moderated by substituting capital for labor.

Which of the following statements explains why the new technology is likely to lead to higher unemployment than estimated using Okun's Law?

Investment and business expansion would show co-movement.

Which of the following statements is true about economic fluctuations? A. Once in an expansion, the probability of recession increases. B. Recessions are always short and therefore harder to see coming. C. Economic fluctuations are fairly easy to predict. D. Investment and business expansion would show co-movement.

-It is negative in recessions and positive in economic booms -It is the difference between the long-term average rate of unemployment and the natural rate of unemployment

Which of the following statements regarding cyclical unemployment are not true (check all that apply) -It is negative in recessions and positive in economic booms -It is the difference between the current rate of unemployment and the natural rate of unemployment -It is positive in recessions and negative in economic booms -It is the difference between the long-term average rate of unemployment and the natural rate of unemployment

-It is the long-term average rate of unemployment -It is the rate around which the actual rate of unemployment fluctuates

Which of the following statements regarding the natural rate of unemployment are true (check all that apply) -It is the the rate of unemployment that is socially optimal or desirable -It is the long-term average rate of unemployment -It is the rate which fluctuates around the actual rate of unemployment -It is the rate around which the actual rate of unemployment fluctuates

The money supply would be determined by individual banks.

Which of the following would be true for the banking system if there were no government regulation? A. The money supply would be determined by individual banks. B. Bank owners would bear all the risks of bank failures. C. Borrowers would bear all the risks of bank failures. D. The money supply would never fluctuate.

Long-term interest rates that closely follow short-term rates

Which of the following would not likely contribute to business cycle fluctuations? A. Long-term interest rates that closely follow short-term rates B. Improvements to AI software that increase assembly line productivity significantly C. The fear of an impending war D. The Fed deciding to contract M2 via open market operations

if the economy is close to full employment and full capacity utilization before the beginning of the boom, the economy might eventually experience a leftward shift in labor demand, causing a recession rather than a gentle fall to pre-boom levels.

While economic booms are generally positive, they also have a dark side. This is because ______________.

labor hoarding slows down the hiring process.

While the inverse relationship between unemployment and real GDP growth is unquestionable over time, it is not always proportional because ____________.

The bank's stockholders.

Who bears the risk that a bank faces when stockholders' equity is greater than zero?

A and C only.

Why would central banks ever want to clamp down when the economy is growing rapidly? A. To block the formation of unsustainable speculative asset bubbles. B. To curtail excessive profits in the banking system. C. To prevent inflationary forces from gathering momentum. D. All of the above. E. A and C only.

Job search

________ refers to the activities that workers undertake to find appropriate jobs.

Debters

________, or borrowers, are economic agents who borrow funds

Growth rate of nominal GDP

_________ = (Growth rate of prices) + (Growth rate of real GDP) or __________ = (Inflation rate) + (Growth rate of real GDP)

Total assets(for banks)

_________ = Total liabilities + Stockholders' equity

Discouraged workers

_________ are potential workers who would like to have a job but have given up looking for one

Bank reserves

_________ consist of vault cash and reserves held at the Federal Reserve Bank

Long-term debt

_________ is defined as debt that is due to be repaid in a year or more to the institution that loaned the money. Both short-term borrowing and long-term debt are recorded as liabilities on the borrower's balance sheet.

Credit

_________ refers to the loans that the debtor receives

Maturity

_________ refers to the time until debt must be repaid

Securities

__________ are financial contracts. For example, securities may allocate ownership rights of a company (stocks), or promise payments to lenders (bonds)

Potential workers

__________ include everyone in the general population with three exceptions: children under 16 years of age, people on active duty in the military, and people who are living in institutions where the residents have restricted personal mobility, like long-term medical care facilities and prisons

Wage rigidity

__________ refers to the condition in which the market wage is held above the competitive equilibrium level that would clear the labor market.

Inflation rate

___________ = (Growth rate of money supply) - (Growth rate of real GDP)

Money

___________ is the asset that people use to make and receive payments when buying and selling goods and services

Realized real interest rate

___________= (Nominal interest) - (Realized inflation rate)

Real interest rate

____________ = (Nominal interest rate) - (Inflation rate)

Multipliers

____________ are economic mechanisms that amplify the initial impact of a shock.

Demand deposits

____________ are funds that depositors can access on demand by withdrawing money from the bank, writing checks, or using their debit cards.

Stockholders' equity

____________ is the difference between a bank's total assets and its total liabilities

Maturity transformation

____________ is the process by which banks take short-term liabilities and invest in long-maturity assets (long-term investments)

Liquidity

____________ refers to funds available for immediate payment. To express the same concept in a slightly different way, funds are liquid if they are immediately available for payment.

Fiat money

____________ refers to something that is used as legal tender by government decree and is not backed by a physical commodity, like gold or silver

Frictional unemployment

____________ refers to the unemployment that arises because workers have imperfect information about available jobs and need to engage in a time-consuming process of job search.

Stockholders' equity

_____________ = Total assets - Total liabilities

Efficiency wages

_____________ are wages above the lowest pay that workers would accept; employers use them to increase motivation and productivity

Structural unemployment

_____________ arises when the quantity of labor supplied persistently exceeds the quantity of labor that is demanded.

Financial intermediaries

_____________ channel funds from suppliers of financial capital to users of financial capital

Cyclical unemployment

_____________ is the deviation of the actual unemployment rate from the long-run rate of unemployment.

Downward wage rigidity

______________ arises when workers resist a cut in their wage and firms respond to this resistance by holding nominal wages fixed.

Sentiments

______________ include changes in expectations about future economic activity, changes in uncertainty facing firms and households, and fluctuations in animal spirits. Changes in _____________ lead to changes in household consumption and firm investment.

Growth rate of money supply

_______________ = Growth rate of nominal GDP

Real

_______________ are nominal wages divided by a measure of overall prices (price index).

Animal spirits

_______________ are psychological factors that lead to changes in the mood of consumers or businesses, thereby affecting consumption, investment, and GDP

Economic expansions

_______________ are the periods between recessions. Accordingly, an economic expansion begins at the end of one recession and continues until the start of the next recession.

Contractionary policy

_______________ is sometimes used to slow down the economy when it grows too fast or "overheats"

Aggregate demand

_______________ is the economy's overall demand for the goods and services that firms produce. ____________ derives the hiring decisions of firms and consequently determines the labor demand curve.

Collective bargaining

_______________ refers to contract negotiations between firms and labor unions

Expected real interest rate

_______________= (Nominal interest rate) - (Expected inflation rate)

Okun's law

________________ states that the year-to-year change in the rate of unemployment is equal to = -1/2 (g - 2%) Where g represents the annual growth rate of real GDP in percentage points

Automatic stabilizers

_________________ are components of the government budget that automatically adjust to smooth out economic fluctuations

Quantitative easing

__________________ is achieved when the central bank creates a large quantity of bank reserves to buy long-term bonds, simultaneously increasing the quantity of bank reserves and pushing down the interest rate on long-term bonds.

Expansionary fiscal policy

__________________ uses higher government expenditure and lower taxes to increase the growth rate of real GDP

Contractionary fiscal policy

__________________ uses lower government expenditure and higher taxes to reduce the growth rate of real GDP.

Discretionary countercyclical components

___________________ are those aspects of the government's fiscal policy that policymakers deliberately enact in response to economic fluctuations. In most cases, these new policies introduce a package of specific expenditure increases or temporary tax cuts to reduce economic hardships and stimulate GDP.

Countercyclical policies

___________________ attempt to reduce the intensity of economic fluctuations and smooth the growth rates of employment, GDP, and prices.

Contractionary monetary policy

___________________ slows down growth in bank reserves, raises interest rates, reduces borrowing, slows down growth in the money supply, and reduces the rate of inflation

Real business cycle theory

____________________ is the school of thought that emphasizes the role of changes in technology in causing economic fluctuations

Crowding out

____________________ occurs when rising government expenditure partially or even fully displaces expenditures by households and firms.

Automatic countercyclical components

______________________ are aspects of fiscal policy that automatically partially offset economic fluctuations. These _________________ do not require deliberate action on the part of the government.

Expansionary monetary policy

_______________________ increases the quantity of bank reserves and lowers interest rates.

Countercyclical monetary policy

________________________, which is conducted by the central bank (in the United States, the Fed), attempts to reduce economic fluctuations by manipulating bank reserves and interest rates

Countercyclical fiscal policy

________________________, which is passed by the legislative branch and signed into law by the executive branch, aims to reduce economic fluctuations by manipulating government expenditures and taxes

Movements

________along the credit supply curve correspond to savers' response to changes only in the real interest rate.

Macroeconomics Exam 3

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