Macroeconomics Final CH1-16 ECO2013
Positive Questions
A question whose answer is based on societal beliefs on what should or should not take place.
normative questions
A question whose answer is based on societal beliefs on what should or should not take place.
leakages
A reduction in the amount of money that is used for lending that reduces the money multiplier. It is caused by banks choosing to hold excess reserves and from individuals, businesses, and foreigners choosing to hold more cash.
pensions
A retirement program into which an employer pays a monthly amount to retired employees until they die.
Since March 2008, the discount rate has been:
greater than the federal funds rate.
Expansionary monetary policy _____ consumption and _____ investment spending.
increases; increases
Loose monetary policy _____ consumption and _____ investment spending.
increases; increases
If a perpetuity bond has an interest payment of $80 and your required yield is 10%, the most you would be willing to pay for the bond is:
$800
If the marginal propensity to consume is 0.9 and income increases from $10,000 to $11,000, by how much does consumption increase?
$900
Laissez-faire
A market is allowed to function without any government intervention
money illusion
A misperception of wealth caused by a focus on increases in nominal income but not increases in prices.
Price system
A name given to the market economy because prices provide considerable information to both buyers and sellers.
jobless recovery
A phenomenon that takes place after a recession, when output begins to rise, but employment growth does not.
A rising aggregate price level _____ an economy's interest rates and therefore _____ output demanded.
increases; reduces
Economics
is the study of how individuals, firms, and societies make decisions to improve their well-being given limitations.
The economics of uranium mining would be studied in ______.
microeconomics
Adaptive expectations theory describes the use of _____ to form expectations of inflation.
past rates of inflation only
Which of the following items would be included in the GDP accounts?
paying $50 consultation fee over the phone with a psychic adviser
Which type of payment would NOT be a market transaction?
payment made to a disaster victim
What does economics assume?
people are rational, self-interested, and respond to incentives
High taxes and/or heavy regulation:
raise costs of production so that the aggregate supply curve shifts to the left.
The theory of comparative advantage says that countries:
should export those goods they can produce at a lower opportunity cost than another country.
The long-run Phillips curve:
shows no tradeoff between inflation and unemployment; that is, any inflation rate in the long run can be consistent with the natural rate of unemployment
production possibilities frontier (PPF)
shows the different combinations of goods that a fully employed economy can produce, given its available resources and current technology.
A production function:
shows the output that is produced using different combinations of inputs combined with existing technology
BLS reports
size of labor force, # of unemployed and employed (# of unemployed / labor force)
Suppose you took a weekend trip to Colorado during the winter. On Saturday, you're trying to decide whether to go snowboarding, skiing, or snowshoeing. You decide that you would rather ski than snowshoe, but you would prefer to snowboard most of all. What is the opportunity cost of going snowboarding?
skiing
During 2010-2013, the United States underwent a _____ economic recovery with _____.
slow; persistent unemployment
demand schedule
A table that shows the quantity of a good a consumer purchases at each price.
From 2008 to 2009, the money multiplier:
fell from 1.7 to less than 1.
How does income effect the demand curve? (increase)
demand for normal goods shifts right, while demand for inferior goods shifts left
In a speech in September 1998, then-Chairman of the Federal Reserve Alan Greenspan posed the question as to whether there was a new economy. He noted that inflation was falling even as the economy was well into a business expansion. According to an aggregate demand and aggregate supply framework, this result could be explained by aggregate _____ and aggregate _____.
demand increasing; supply increasing even more
In the study of economics, the goals of efficiency and equity are often:
in conflict with one another.
Workers who want to work but have been frustrated by the inability to find work and have stopped searching are known as:
discouraged workers.
U.S. business cycles since 1950 have shown
expansions to be shorter than recessions.
Twin Goals of Monetary Policy
Economic growth and full employment Stable prices and moderate long-term interest rates
liquidity
How quickly, easily, and reliably an asset can be converted into cash.
In the short run, what happens to the aggregate price level when the Fed increases the discount rate?
The aggregate price level falls.
In the short run, what happens to the aggregate price level when the money supply decreases?
The aggregate price level falls.
In the short run, what happens to the aggregate price level when the Fed decreases reserve requirements?
The aggregate price level rises.
In the short run, what happens to the aggregate price level when the Fed decreases the discount rate?
The aggregate price level rises.
➜
The amount by which annual government expenditures exceed tax revenues.
GDP deflator:
The broadest index used to measure inflation; it includes the prices of all goods and services in the economy.
Federal Reserve System
The central bank of the United States.
marginal propensity to consume
The change in consumption associated with a given change in income (ΔC ÷ΔY ).
marginal propensity to save
The change in saving associated with a given change in income (ΔS ÷ΔY ).
opportunity cost
The cost paid for one product in terms of the output (or consumption) of another product that must be forgone.
how does the price of substitutes effect the demand curve? (increase)
The demand curve shifts right
saving
The difference between income and consumption; the amount of disposable income not spent.
barter
The direct exchange of goods and services for other goods and services.
Which of the following did classical economists believe would happen if the economy experienced a downturn?
The economy would self-correct
compounding effect
The effect of interest added to existing debt or savings leading to substantial growth in debt or savings over the long run.
_____ is what financial institutions charge each other for overnight loans used as reserves.
The federal funds rate
store of value
The function that enables people to save the money they earn today and use it to buy the goods and services they want tomorrow.
government budget constraint
The government budget is limited by the fact that G − T = ΔM + ΔB + ΔA.
What would cause a shift from D1 to D2? (shift right)
a new study that shows that honey cures cancer
Which of the following points on the production possibilities frontier would represent a combination of goods that would not be feasible to produce?
a point to the right of the curve
What would cause the price level to decrease and employment to increase?
a shift to the right of the SRAS curve
According to Malthus, a fixed quantity of land and a growing human population will eventually produce:
a stationary state in which growth will cease
Contractionary monetary policy _____ interest rates and _____ aggregate demand.
increases; decreases
What is the main goal of inflation targeting?
keeping inflation levels near 2%
The main goal of inflation targeting is:
keeping the inflation rate near 2%.
Banks create money by:
lending their excess reserves.
Since March 2008, the federal funds rate has been:
less than the prime rate.
If aggregate expenditures equals $7,600 and aggregate income equals $8,000, businesses will produce:
less, lowering both employment and income.
If a customer deposits money in a checking account, the bank's:
liabilities increase.
Developed nations tend to have:
limited labor supplies but lots of capital.
Who will NOT be hurt if the United States monetizes its debt?
people who make fixed mortgage payments
Employed
persons are individuals age 16 and over who work for pay, whether full-time, part-time, or even temporary.
The natural rate of unemployment is the level at which:
the actual inflation rate is equal to people's inflationary expectations.
At any price below the equilibrium price:
the quantity demanded exceeds the quantity supplied in the market.
As the real interest rate falls:
the quantity demanded of loanable funds rises.
Expectation of inflation is:
the rate of inflation expected by workers for any given period
The discount rate is
the rate regional Federal Reserve banks charge depository institutions to borrow reserves.
What is the reserve requirement?
the ratio of funds commercial banks and other depository institutions must hold in reserve against deposits
The aggregate supply curve shows
the real GDP firms will produce at varying price levels.
Expansionary monetary policy shifts the _____ curve to the _____.
AD; right
Who is affected by scarcity?
all people; even the rich
A lower reserve requirement:
increases the ability of banks to make loans.
A good example of a government-imposed price floor is
minimum wage
If a government collects $1,400 in tax revenue and spends $1,600, it has
a deficit of $200.
AE=?
income
Suppose full employment real GDP is $13 trillion, current real GDP is $13.2 trillion, and the marginal propensity to consume is 0.5. The inflationary gap is:
$0.1 trillion.
If the reserve requirement is 25% and a new deposit leads to a potential increase in the money supply of $4,000, the amount of the new deposit must equal:
$1,000.
In the graph above, efficiency in this market is achieved at a price of
$10
According to the table, the equilibrium price is _____, and the equilibrium output is _____ units.
$10; 60
Suppose that a customer's willingness to pay for a product is $79, and the seller's willingness to sell is $64. If the negotiated price is $68, how much is consumer surplus?
$11
How much money can be created if the money multiplier is 3 and the initial deposit is $4,000?
$12,000
If a person borrows $2,000 at 5% interest and never makes any payments, how much will the loan balance be after five years?
$2,552.56
If your salary was $50,000 last year, and this year you receive a cost-of-living increase tied to the consumer price index (CPI), what will your salary be this year assuming the CPI has risen from 110 to 114?
$51,818
In the graph, which price would NOT allow for an effective price floor?
$6
According to the table, real GDP for 2014 is approximately:
$7,552 billion
Ignoring government spending and net exports, aggregate expenditures (AE) are the sum of consumer and business investment:
AE = C + I. Because AE also equals C + S at equilibrium, this means that saving equals investment.
The 45-degree line in the Keynesian model represents
AE=Y
Which region or country holds 11% of U.S. banknotes?
Africa and the Middle East
Between 2008 and 2013, which of the following Eurozone nations did NOT face a financial crisis?
Belgium
Which region or country holds 28% of U.S. banknotes?
Europe and Russia
informal economy
Includes all transactions that are conducted but are not licensed and/or generate income that is not reported to the government (for tax collection).
Capital
Includes manufactured products such as tractors, welding equipment, and computers that are used to produce other goods and services. The payment for capital is interest.
Which of the following describes the informal economy?
It is largely unmeasured.
The informal economy includes all market transactions that are not officially reported and hence are not included in GDP measures; it creates both positive and negative effects
Positive: Transactions in an informal economy create jobs and contribute to overall economic activity. Negative: Taxes are rarely paid on income in the informal economy, putting a greater tax burden on others. Also, the informal economy is less regulated, which can lead to unsafe products or risky job conditions.
How to Calculate the Price of a Perpetuity Bond
Price of Bond = Annual Interest Payment ÷ Yield (%)
yield curve
Shows the relationship between the interest rate earned on a bond (measured on the vertical axis) and the length of time until the bond's maturity date (shown on the horizontal axis).
Government printing money:
The government prints money to finance its borrowing, more money is chasing a relatively fixed amount of goods and services, and therefore prices rise.
Which of the following is true of the Federal Reserve's Board of Governors?
The governors serve 14-year terms.
Tradeoff Between Risk and Return:
The greater the risk involved, the higher the average annual return on investment.
aggregate supply
The real GDP that firms will produce at varying price levels. The aggregate supply curve is positively sloped in the short run but vertical in the long run.
The national income and product accounts (NIPA):
allow economists to judge our nation's economic performance, compare income and output to that of other nations, and track the economy's condition over the course of the business cycle
In _______ or market economics, private individuals, and firms own most of the resources.
capitalist
Wheat and Autos in the United States and South Korea) According to the graph, for every extra:
car South Korea wants to produce, it must give up half a bushel of wheat.
Monetary policy is the ability the Fed has to fix the economy through:
loans.
The focus of supply-side fiscal policies is on:
long-run economic growth
One implication of the Phillips curve when it is unable to shift in the short run, is that
policymakers face a tradeoff between low unemployment and low inflation
When C crosses AE, spending equals income (on the 45° line). When C is below the AE line, saving is ______.
positive
The relationship between economic freedom and per capita GDP is
positive.
If a government always balances its budget:
the effect of an increase in government spending on aggregate expenditures is weakened.
The aggregate demand curve is downward sloping due to:
the effect of prices on interest rates
The percentage of a bank's total deposits held in reserve, either as cash in the vault or as deposits at the regional Federal Reserve Bank, is:
the reserve ratio.
Which is an example of capital in the production process of an amusement park?
the roller coaster
If a country's population increases at a higher rate than the growth in its real GDP:
the standard of living in the country has declined
The multiplier is equal to
1/(1 − MPC) or 1/MPS
What is the formula for the money multiplier?
1/reserve requirement
How many regional Federal Reserve Banks are there in the United States?
12
How many regional Federal Reserve Banks are there?
12
If nominal GDP in 2014 is $20,000 billion while real GDP is $16,000 billion, then the GDP deflator in 2014 is:
125
According to the table, the GDP for 2010 was:
14,592.3 billion
Which of the following is (are) a liability for a bank?
deposits made by a firm
CPI =
CPI = (Cost in current period) ÷ (Cost in base period) × 100
What countries are apart of NAFTA?
Canada, Mexico, and the United States
Which statement is a key idea in economic thinking?
Incentives matter.
Which of the following is (are) a liability for a bank?
deposits made by an individual
Distributive Effiency
goods being produced are just what individuals in a society whant
Using the equation of exchange, what is nominal GDP if the money supply is $5 trillion and the velocity of money is 4?
$20 trillion
The Federal Deposit Insurance Corporation protects bank deposits up to _____ from bank failure.
$250,000
A lawyer can argue a case in court for one hour and make $300. She could alternatively use that hour of time to type a legal brief in her office. What is the opportunity cost of her typing the legal brief?
$300, since that is the amount she could have made by arguing a case in court
Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. What is the change in his bank's required reserves?
$375
Suppose that a customer's willingness to pay for a product is $79, and the seller's willingness to sell is $64. If the negotiated price is $68, how much is producer surplus?
$4
Jonathan purchased coffee for $5 at Jennifer's coffee shop; however, he was willing to pay $9. Jennifer was willing to accept $3 for the coffee. The results of this transaction are a consumer surplus of:
$4 and a producer surplus of $2
If $1,000 of additional spending occurs and the marginal propensity to consume is 0.8, the total effect on the economy is an increase of _____ in income or output.
$5,000
If the reserve requirement is 10%, a withdrawal of $500 leads to a potential decrease in the money supply of:
$5,000.
According to the table, nominal GDP for 2013 is approximately:
$5,050 billion
How much money can be created if the initial deposit is $5,000 and the required reserve ratio is 10%?
$50,000
Sumit deposits $1,500 cash into his checking account. The reserve requirement is 25%. How much money can the banking system create?
$6,000
In the graph, how much is deadweight loss at a price of $12?
$70
In the graph, which price would NOT allow for an effective price floor?
$8
Suppose the Federal Reserve's target for inflation is 2%, the current inflation rate is 2%, and the output gap is 4%. What should be the target for the federal funds rate according to the Taylor rule as it is presented in the book?
%6
Equity
(or fairness) of an outcome is a subjective matter, where differences of opinion exist.
In response to the financial crisis, the Fed changed its federal funds target rate to:
0
What did the Fed change its federal funds target rate to in response to the financial crisis?
0
Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. This bank's reserve ratio is:
0.10
Paolo can walk three dogs or mow two lawns in two hours. Ashanti can walk six dogs or mow three lawns in two hours. Ashanti's opportunity cost for each additional dog walked is:
0.5 lawn mowed.
If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume?
0.6
If the Bureau of Economic Analysis reports that the annualized U.S. growth rate was 2.5% for the second quarter, then the actual growth rate from the first quarter to the second quarter was:
0.625%
The slope of the saving schedule is:
1 minus the marginal propensity to consume.
What are the 8 key principals of economics?
1. Economics Is Concerned With Making Choices With Limited Resources 2. When Making Decisions, One Must Take Into Account Tradeoffs and Opportunity Costs 3. Specialization Leads to Gains for All Involved 4. People Respond to Incentives, Both Good and Bad 5. Rational Behavior Requires Thinking on the Margin 6. Markets Are Generally Efficient; When They Aren't, Government Can Sometimes Correct the Failure 7. Economic Growth, Low Unemployment, and Low Inflation Are Economic Goals That Do Not Always Coincide 8. Institutions and Human Creativity Help Explain the Wealth of Nations
What three things must every economy decide?
1. What to produce. 2.How to produce it. 3.Who will get the goods produced.
The Index of Economic Freedom ranks
178 nations in terms of overall environment for promoting economic growth. In 2016 Hong Kong ranked first, and the United States came in 11th.
The Great Recession lasted about _____ months.
18
Which of the following two years had the LOWEST rates of inflation and unemployment?
1972 and 1973
During which period did the Fed respond to the dot.com boom and act to raise interest rates?
1998-1999
If the current year's consumer price index is 214 and last year's consumer price index was 209, then the rate of inflation is:
2.4%
If an economy's GDP will double in 25 years, then its growth rate must be about:
2.8%.
When the supply shifts from S0 to S1 (a leftward shift of the supply curve), the equilibrium quantity changes from:
20 units to 15 units.
During which period did the Fed respond to the collapse of technology stock prices and act to reduce interest rates?
2001-2003
During which period did the Fed respond to the growth in the economy, especially in housing-related industries, and act to raise interest rates?
2004-2006
During which period did the Fed respond to the housing bubble collapse by reducing interest rates?
2007-2009
Fixed contribution plans, such as
401(k), 403(b), and TIAA-CREF, allow workers to contribute pretax dollars and employers to partially match contributions.
How many weeks does it take to find a job?
5-6 weeks
Suppose a one-year bond with a face value of $200 is sold for $188. What is the bond's yield?
6.4%
If the marginal propensity to consume is 0.85, the value of the spending multiplier will be
6.67
The Fed's Board of Governors consists of _____ members who are appointed by the president and confirmed by the Senate.
7
According to the equation for the Phillips curve, if wages increase by 5% and productivity decreases by 2%, then inflation will be:
7%
The table shows coffee and tea units produced for the United States and Japan. If Japan decides to increase production of tea from 12 units to 24 units, the opportunity cost is:
8 units of coffee. U.S. Cofee: 25, 20, 15, 10, 5, 0 Tea: 0, 2, 4, 6, 8, 10 Japan Coffee: 58,52,44,34,20,0 Tea: 0, 12, 24, 36, 48, 60
Prior to the financial crisis, how much of the Fed's balance sheet consisted of Treasury securities?
90%
Stable financial system:
: A functioning and stable monetary system ensures investment is undertaken when the opportunity arises
Enforcement of contracts:
: A strong legal system
M2
A broader definition of money that includes "near monies" that are not as liquid as cash, including deposits in savings accounts, money market accounts, and money market mutual fund accounts.
financial system
A complex set of institutions, including banks, bond markets, and stock markets, that allocate scarce resources (financial capital) from savers to borrowers.
Laffer curve
A curve that shows a hypothetical relationship between income tax rates and tax revenues. As tax rates rise from zero, revenues rise, reach a maximum, then decline until revenues reach zero again at a 100% tax rate.
credit default swap
A financial instrument that insures against the potential default on an asset. Because of the extent of defaults in the last financial crisis, issuers of credit default swaps could not repay all of the claims, bankrupting these financial institutions.
Discretion:
A flexible money approach based on current economic conditions. It is useful in severe recessions when constant money growth might not be enough
money multiplier
A formula that measures the potential or maximum amount the money supply can increase (or decrease) when a dollar of new deposits enters (exits) the system and is defined as 1 divided by the reserve requirement.
medium of exchange
A function of money in which goods and services are sold for money, then the money is used to purchase other goods and services.
What events lead to the Great Recession?
A glut in worldwide savings in the early years of the 21st century reduced interest rates. Low interest rates and easy bank loans fueled a housing bubble. Risky subprime mortgages were packaged into securities that were inadequately investigated and given perfect AAA ratings. Loan defaults led to a reduction in home prices and the collapse of mortgage-backed securities. Banks lost money from poor investments, insurance companies could not cover losses, and the contagion spread to other industries and eventually to the entire economy.
inferior good
A good for which an increase in income results in declining demand.
normal good
A good for which an increase in income results in rising demand.
demand curve
A graphical illustration of the law of demand, which shows the relationship between the price of a good and the quantity demanded.
supply curve
A graphical illustration of the law of supply, which shows the relationship between the price of a good and the quantity supplied.
Open market operations involve the purchase and sale of:
government securities.
Taylor rule
A rule for the federal funds target that suggests the target is equal to 2% + Current Inflation Rate + 1/2(Inflation Gap) + 1/2(Output Gap).
solvency crisis
A situation when a bank's liabilities exceed its assets.
An interest rate that is low for only a short period of time is called:
A teaser rate
Federal Open Market Committee (FOMC)
A twelve-member committee that is composed of members of the Board of Governors of the Fed and selected presidents of the regional Federal Reserve Banks. It oversees open market operations (the buying and selling of government securities), the main tool of monetary policy.
Rational behavior requires thinking at the margin. Which example represents this type of thinking? C
A. deciding whether a second burger is worth the extra $2 B. deciding whether the overtime pay is worth working on your day off C. All of these examples represent thinking at the margin. D. deciding whether to pay a fine for polluting the local harbor or installing antipollution machinery
Which region or country holds about 11% of U.S. banknotes?
Africa and the Middle East
_____ is the output of goods and services demanded at different price levels.
Aggregate demand
national income
All income, including wages, salaries and benefits, profits (for sole proprietors, partnerships, and corporations), rental income, and interest.
The recent global financial instability
All of the answers are correct
functional finance
An approach that focuses on fostering economic growth and stable prices, while keeping the economy as close as possible to full employment.
Consumer price index (CPI):
An index of the average change in prices of a market basket of consumer goods and services.
Producer price index (PPI):
An index of the average change in prices received by producers for their output.
Willingness-to-pay
An individual's valuation of a good or service, equal to the most an individual is willing and able to pay.
Which region or country holds 13% of U.S. banknotes?
Asia
Which graph shows an increase in quantity supplied?
B. arrow pounts up. bottom of line is a, middle is b, and top is S(0)
cyclically balanced budget
Balancing the budget over the course of the business cycle by restricting spending or raising taxes when the economy is booming and using these surpluses to offset the deficits that occur during recessions.
what are leakages caused by?
Banks choosing to hold excess reserves by not lending out the maximum amount allowed. Individuals and businesses holding money in cash rather than in a bank. Foreign consumers, businesses, and governments holding cash in reserves or as a medium of exchange.
Which of the following is NOT a reason people choose to hold more cash?
Banks start paying interest on funds deposited in all checking accounts. Holding cash becomes less convenient. Interest rates paid on savings and checking accounts at the bank rise dramatically.
Which of the following men was the Federal Reserve chairman when the housing bubble collapsed in 2008?
Ben Bernanke
Suppose expansionary monetary policy is used to offset a negative demand shock. Which of the following is correct?
Both output and the price level can be restored to their original levels.
Which of the following caused short-run aggregate supply to decrease during the Great Recession?
Businesses reduced their production capacity.
Which of the following did NOT cause aggregate demand to decrease during the Great Recession?
Businesses reduced their production capacity.
Supply shocks affect the SRAS curve.
Caused by factors such as changing input prices or technological innovation. Monetary policy is less effective because targeting one goal makes the other target worse.
Demand shocks affect the AD curve.
Caused by factors such as consumer confidence, business sentiment, or export demand. Monetary policy is more effective because targeting one goal automatically targets the other.
Which of the following acts did NOT further clarify, supplement, and expand the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?
Communications Act of 1934 Fair Housing Act of 1968 Freedom of Information Act of 1966
Which of these is NOT an example of market failure?
Competition leads firms to provide products at the lowest possible price.
Which of the following summarizes the president's and Congress's role in conducting monetary policy?
Congress and the president do not play a role in carrying out monetary policy.
aggregate expenditures
Consist of consumer spending, business investment spending, government spending, and net foreign spending (exports minus imports): GDP = C + I + G + (X − M).
Which of the following illustrates the paradox of thrift?
Consumer uncertainty causes people to save more; consumption falls; equilibrium income and production falls; savings decreases because income is lower.
Which of the following is a reason people choose to hold more cash?
Consumers become fearful of the stability and safety of the financial system. Interest rates paid on savings and checking accounts at the bank are near zero. Holding cash becomes more convenient.
The demand for gasoline is rising. Which statement describes a possible cause?
Consumers expect prices to rise in the near future
Strong consumer demand:
Consumers spend more money, demand increases, and prices rise.
Suppose the price of a good rises above equilibrium to $75. The higher price causes two effects on consumer surplus and two effects on producer surplus:
Consumers who are priced out of the market lose consumer surplus equal to the blue area. Consumers who continue to buy the good pay more, and lose consumer surplus equal to the pink area. Producers who want to sell more at $75, but cannot, lose producer surplus equal to the yellow area. Producers who do sell units earn $25 more per unit, equal to the pink area.
The determinants of aggregate demand include the components of aggregate spending:
Consumption spending Investment spending Government spending Net exports Changing any one of these aggregates will shift the aggregate demand curve.
Social Security:
Current workers pay benefits of retirees through the payroll tax on wages.
Who benefits from inflation?
Debtors
Which economists believe that fiscal policy is effective, while monetary policy may be ineffective?
Keynesians
Causes of inflation
Demand factors: consumer confidence, income, wealth supply shocks: price fluctuations on items such as food and oil government policy: its ability to borrow and print money
How does tastes and preferences effect the demand curve? (increase)
Demand shifts right
Which of the following acts further clarified, supplemented, and expanded the mission of the Fed as originally mandated by the Federal Reserve Act of 1913?
Depository Institutions Deregulation and Monetary Control Act of 1980
fractional reserve banking system
Describes a banking system in which a portion of bank deposits are held as vault cash or in an account with the regional Federal Reserve Bank, while the rest of the deposits are loaned out to generate the money creation process.
_____ allows monetary authorities to respond to economic shocks on a case-by-case basis, using their best judgment in applying monetary policy prescriptions.
Discretionary monetary policy
_____ is a reduction in the rate of inflation.
Disinflation
Disposable income after taxes equation
Disposable income, YD, is income after all taxes have been paid. Disposable income can either be spent (C) or saved (S). Thus, YD = C + S.
__________ is the most important factor influencing a country's standard of living.
Economic growth
Efficiency
Efficiency reflects how well resources are used and allocated
efficiency wage theory
Employers often pay their workers wages above the market-clearing level to improve morale and productivity, reduce turnover, and create a disincentive for employees to shirk their duties.
Protection of property rights:
Ensuring that monetary rewards are provided to innovators
Entrepreneurs
Entrepreneurs combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for their effort.
balanced budget multiplier
Equal changes in government spending and taxation (a balanced budget) lead to an equal change in income (the balanced budget multiplier is equal to 1).
Suppose policymakers wish to use fiscal policy to fight inflation. Which statement, then, is MOST accurate?
Essentially, the way to lower the inflation rate is to decrease aggregate demand, causing a rise in unemployment.
Which region or country holds a greater percentage of U.S. banknotes than Latin America?
Europe and Russia
annually balanced budget
Expenditures and taxes would have to be equal each year.
net exports
Exports minus imports for the current period. Exports include all goods and services we sell abroad, while imports include all goods and services we buy from other countries.
tight money or restrictive monetary policy
Fed actions designed to decrease excess reserves and the money supply to shrink income and employment, usually to fight inflation. See also contractionary monetary policy.
contractionary monetary policy
Fed actions designed to decrease the money supply and raise interest rates to shrink income and employment, usually to fight inflation.
easy money, quantitative easing, or accommodative monetary policy
Fed actions designed to increase excess reserves and the money supply to stimulate the economy (increase income and employment). See also expansionary monetary policy.
expansionary monetary policy
Fed actions designed to increase the money supply and lower interest rates to stimulate the economy (expand income and employment).
The _____ protects bank deposits up to $250,000 from bank failure
Federal Deposit Insurance Corporation
The main policymaking arm of the Fed is the:
Federal Open Market Committee
financial intermediaries
Financial firms (banks, mutual funds, insurance companies, etc.) that acquire funds from savers and then lend these funds to borrowers (consumers, firms, and governments).
Which of these is NOT a way that hiring practices have changed over the past few decades?
Firms are more likely to hire permanent employees.
Factors affecting the willingness to save or borrow lead to a change in the market for loanable funds.
For example, growing business confidence increases firms' willingness to invest, thus shifting the demand for loanable funds to the right, causing interest rates to rise.
Technology:
Funding research via grants and the establishment of major government research labs
Equation for GDP
GDP = AE = C + I + G + (X - M)
GDP-PPP:
GDP adjusted for cost of living relative to a base country
When Mr. Wilson worked full time, he paid a service to have his house cleaned twice a month. Now that he is retired, Mr. Wilson does his own cleaning. What is the effect on GDP?
GDP falls as a result of this change.
Nominal GDP:
GDP measured in current year prices
Real GDP:
GDP measured using prices from a base year
Personal consumption expenditures
Goods and services purchased by residents of the United States, whether individuals or businesses; they include durable goods, nondurable goods, and services.
substitute goods
Goods consumers will substitute for one another. When the price of one good rises, the demand for the other good increases, and vice versa.
complementary goods
Goods that are typically consumed together. When the price of a complementary good rises, the demand for the other good declines, and vice versa.
law of demand
Holding all other relevant factors constant, as price increases, quantity demanded falls, and as price decreases, quantity demanded rises.
law of supply
Holding all other relevant factors constant, as price increases, quantity supplied rises and as price declines, quantity supplied falls.
In equilibrium, all injections must equal all withdrawals:
I + G + X = S + T + M
Which situation(s) may require government intervention? I. A local business has made a profit in each of the last ten years. II. Students are having difficulty deciding whether to go the beach or to go hiking for their class trip. III. A manufacturing firm on a river is dumping production run off into the water.
III only
Increase Infrastructure Spending:
Improving roads and communications networks, stabilizing legal and financial systems, and improving human capital and technologies (R&D).
Labor
Includes the mental and physical talents of individuals who produce products and services. The payment to labor is wages.
government spending
Includes the wages and salaries of government employees (federal, state, and local); the purchase of products and services from private businesses and the rest of the world; and government purchases of new structures and equipment.
Frictional unemployment:
Includes workers who voluntarily quit their jobs in search of better positions, or recent graduates seeking their first full-time job
Factors that shift the LRAS curve:
Increase in technology Greater human capital Trade Innovation and R&D
Decrease Tax Rates:
Increases aggregate supply by providing firms incentives to expand or for individuals to work more
how to increase productivity?
Increasing access to natural resources Improving quality of labor (human capital) Increasing the capital-to-labor ratio Promoting innovation and technology
The basic relationship among the rate of increase in nominal wages, inflation, and the rate of increase in labor productivity is:
Inflation = Increase in Nominal Wages − Rate of Increase in Labor Productivity.
adaptive expectations
Inflationary expectations are formed from a simple extrapolation from past events.
Factors that shift the SRAS curve:
Input prices Productivity Taxes and regulation Market power of firms Inflationary expectations
Markets
Institutions that bring buyers and sellers together, so they can interact and transact with each other
According to the Keynesian monetary transmission mechanism, what happens when the supply of money increases?
Interest rates decrease and investments increase.
Which of the following may be an explanation for the shift in aggregate demand from line A to line B? (whole line moving up)
Interest rates fall and boost investments.
Promoting free and competitive markets:
International trade allows for specialization and gains from trade, and competitive markets ensure firms do not exploit market power, their ability to set prices for goods and services in a market
gross private domestic investment (GPDI)
Investments in such things as structures (residential and nonresidential), equipment, and software, and changes in private inventories.
What happens to the money multiplier when the reserve requirement increases from 10% to 12%?
It decreases.
What happens to the money multiplier when the reserve requirement increases from 20% to 25%?
It decreases.
The Federal Reserve Bank does three important things. Which of the following is NOT one of them?
It gives funds to states to allow them to fix bridges.
Which of the following is true of the Federal Reserve System?
It has the power to create money.
What happens to the money multiplier when the reserve requirement decreases from 12% to 10%?
It increases.
Which of the following is true of the Federal Reserve System?
It is subject to oversight from Congress.
How does the fractional reserve banking system help to prevent bank runs?
It requires that banks keep a portion of their deposits as reserves.
What happened to the Phillips curve during the early 1970s?
It shifted outward.
In May 2011, China ordered many of its banks to increase the amount they hold in reserves. It was the fifth increase that year. What would you expect to be true about the money multiplier as a result?
It was decreasing.
Which of the following is NOT true of the Eurozone?
It was established in the 1960s.
Which of the following is an example of rational expectations?
Jed assumes that there will be high inflation this year because that's what all of the economic data are pointing to.
Which of the following is an example of adaptive expectations?
Jed assumes that there will be high inflation this year because there has been high inflation the past three years.
Which of the following cities has a regional Federal Reserve Bank?
Kansas City
monetary rule
Keeps the growth of money stocks such as M1 or M2 on a steady path, following the equation of exchange (or quantity theory), to set a long-run path for the economy that keeps inflation in check.
What are the reasons for market failure?
Lack of competition: When a firm faces little to no competition, it has an incentive to raise prices. Existence of external benefits or costs: Markets tend to provide too little of products that have external benefits, and too much of products with external costs A mismatch of information: Asymmetric information occurs when either a buyer or a seller knows more about a product than the other Existence of public goods: Public goods are nonrival and nonexclusive. This means: My consumption does not diminish your ability to consume. Once a good is provided for one person, others cannot be excluded from enjoying it.
Scarce vs scarcity
Large uncut diamonds are scarce—only a few are found in the world each year—and are sold for millions of dollars each. A car, on the other hand, is less scarce, as car dealerships around the country have lots full of them. But both large diamonds and cars are subject to scarcity—many people want them, but can only buy what they can afford.
Which region or country holds 17% of U.S. banknotes?
Latin America
Which region or country holds about 17% of U.S. banknotes?
Latin America
Eliminate Burdensome Regulations:
Leads to greater efficiency if the costs of regulation outweigh the benefits.
Decision lag:
Legislative process to enact policies
Structural unemployment:
Longer-term unemployment that is caused by changes in consumer demands or technology, and requires workers to be retrained for a career in another industry
Which of the following is the correct expression for the equation of exchange in the classical quantity theory of money? (M is the supply of money, V is the velocity of money, P is the price level, and Q is the economy's real output level.)
M × V = P × Q
M2 =
M1 + "near monies" (savings accounts, money market deposit accounts, small-denomination time deposits, and money market mutual fund accounts).
Which statement is correct?
M2 includes M1.
Microeconomics is concerned with how much you plan to spend on travel this year. ________ is(are) concerned with how high unemployment will get during a recession.
Macroeconomics
Higher interest rates affect aggregate demand by:
Making borrowing more expensive, forcing consumers and firms to cut spending and investing Giving people more incentive to save than spend Forcing the government to spend more on financing the national debt Increasing the value of the U.S. dollar, making U.S. exports more expensive
Marginal propensity to consume equation
Marginal propensity to consume (MPC) = ΔC ÷ ΔYD
Marginal propensity to save equation
Marginal propensity to save (MPS) = ΔS ÷ ΔYD MPC + MPS = 1 (all money is either spent or saved)
equilibrium
Market forces are in balance when the quantities demanded by consumers just equal the quantities supplied by producers.
Three primary functions of money
Medium of exchange: Eliminates the double coincidence of wants common to barter. Unit of account: Reduces the number of prices needed to just one per good. Store of value: Allows people to save now and spend later.
rules
Money grows by a fixed amount each year, preventing monetary policy from causing too drastic an effect because the economy is inherently stable in the long run
unit of account
Money provides a yardstick for measuring and comparing the values of a wide variety of goods and services. It eliminates the problem of double coincidence of wants associated with barter.
fiat money
Money without intrinsic value but nonetheless accepted as money because the government has decreed it to be money.
subprime mortgage
Mortgages that are given to borrowers who are a poor credit risk. These higher-risk loans charge a higher interest rate, which can be profitable to lenders if borrowers make their payments on time.
Natural rate of unemployment equation
Natural rate of unemployment = Frictional + Structural Unemployment
People who are considered unemployed include:
None of those listed is considered unemployed.
determinants of demand
Nonprice factors that affect demand, including tastes and preferences, income, prices of related goods, number of buyers, and expectations.
determinants of supply
Nonprice factors that affect supply, including production technology, costs of resources, prices of related commodities, expectations, number of sellers, and taxes and subsidies.
macroeconomic equilibrium
Occurs at the intersection of the short-run aggregate supply and aggregate demand curves. At this output level, there are no net pressures for the economy to expand or contract.
leverage
Occurs when a small amount of capital is used to support a larger amount of investment by borrowing. The risk of highly leveraged investments is that a small decrease in price can wipe out one's account.
monetized debt
Occurs when debt is reduced by increasing the money supply, thereby making each dollar less valuable through inflation.
change in demand
Occurs when one or more of the determinants of demand changes, shown as a shift in the entire demand curve.
change in supply
Occurs when one or more of the determinants of supply change, shown as a shift in the entire supply curve.
surplus
Occurs when the price is above market equilibrium, and quantity supplied exceeds quantity demanded.
shortage
Occurs when the price is below market equilibrium, and quantity demanded exceeds quantity supplied.
change in quantity demanded
Occurs when the price of the product changes, shown as a movement along an existing demand curve.
change in quantity supplied
Occurs when the price of the product changes, shown as a movement along an existing supply curve.
absolute advantage
One country can produce more of a good than another country.
comparative advantage
One country has a lower opportunity cost of producing a good than another country.
What is it called when the government chooses to build tourist centers, the selected resources are no longer available to build highways.
Opportunity Cost
The classical form of the production function states that
Output = f(L, K)
What occurs during a negative demand shock?
Output and price level decrease.
Changes in the PPF:
PPFA to PPFB: (left to right)An increase in productivity in the production of one good (e.g., an increase in the number of students studying computer engineering). From PPFA to PPFC: (whole curve moves outward) An increase in productive capacity of both goods (e.g., an increase in overall technology, or an increase in labor or capital resources).
What was the governments policy response to the great recession?
Passed the $700 billion Troubled Asset Relief Program (TARP) to bail out banks nearing bankruptcy. Loaned over $100 billion to AIG to prevent its insolvency in insuring risky assets by financial institutions. Passed the $787 billion American Recovery and Reinvestment Act (stimulus package). Bailed out the U.S. automobile industry. Reduced the federal funds target rate to 0% and began a series of quantitative easing (QE) programs to purchase risky assets from banks.
Four phases of a business cycle:
Peak: The economy is operating at its capacity. Recession: Occurs when the economy runs out of steam and business investment falls. Trough: The economy reaches the depth of the recession. Recovery: Economic activity picks up and the economy grows. https://image.slidesharecdn.com/the-business-cycle-1205101419919645-2/95/the-business-cycle-1-728.jpg?cb=1205076220
Which of the following countries had the HIGHEST average annual inflation between 1970 and 2010?
Peru
Land + Labor + Capital + entrepreneural ability = ?
Poduction Method = Output (goods and services)
contractionary fiscal policy
Policies that decrease aggregate demand to contract output in an economy. These include reducing government spending, reducing transfer payments, and/or raising taxes.
supply-side fiscal policies
Policies that focus on shifting the long-run aggregate supply curve to the right, expanding the economy without increasing inflationary pressures. Unlike policies to increase aggregate demand, supply-side policies take longer to impact the economy.
expansionary fiscal policy
Policies that increase aggregate demand to expand output in an economy. These include increasing government spending, increasing transfer payments, and/or decreasing taxes.
discretionary fiscal policy
Policies that involve adjusting government spending and tax policies with the express short-run goal of moving the economy toward full employment, expanding economic growth, or controlling inflation.
_____ occurs when goods and services are produced with as few resources as possible, while _____ occurs when the mix of goods and services produced is the most desired by society.
Production efficiency; allocative efficiency
automatic stabilizers
Tax revenues and transfer payments automatically expand or contract in ways that reduce the intensity of business fluctuations without any overt action by Congress or other policymakers.
Resources
Productive resources include land (land and natural resources), labor (mental and physical talents of people), capital (manufactured products used to produce other products), and entrepreneurial ability (the combining of the other factors to produce products and assume the risk of the business).
teaser rates
Promotional low interest rates offered by lenders for a short period of time to attract new customers and to encourage spending.
The Fed is composed of a seven-member Board of Governors and twelve regional Federal Reserve Banks. The regional banks and their branches conduct the following services:
Provide a nationwide payments system. Distribute coins and currency. Regulate and supervise member banks. Serve as the banker for the U.S. Treasury
Human capital:
Providing subsidized public college education, financial aid grants, and loans
externally held debt
Public debt held by foreigners, including foreign industries, banks, and governments.
internally held debt
Public debt owned by domestic banks, corporations, mutual funds, pension plans, and individuals.
In the equation of exchange, if M = $1.5 trillion, V = 7, and P = 1.05, then:
Q = $10 trillion
What factors lead to jobless recoveries?
Rapid increases in productivity Changes in employment patterns Offshoring
rational expectations
Rational economic agents are assumed to make the best possible use of all publicly available information, then make informed, rational judgments on what the future holds. Any errors in their forecasts will be randomly distributed.
real GDP per capita
Real GDP divided by population. Provides a rough estimate of a country's standard of living.
_____ government spending, _____ transfer payments, and _____ taxes are all examples of contractionary fiscal policy.
Reducing; reducing; raising
excess reserves
Reserves held by banks above the legally required amount.
If there are advances in technology, the short-run aggregate supply curve will shift from SRAS0 to _____ and the price level will shift to
SRAS1; P1
production possibilities frontier (PPF)
Shows the combinations of two goods that are possible for a society to produce at full employment. Points on or inside the PPF are attainable, and those outside of the frontier are unattainable.
stagflation
Simultaneous occurrence of rising inflation and rising unemployment.
The largest category of federal government spending in 2015 was:
Social Security.
when we have a warped or bowed outward production possibility frontier is it due to what?
Specialized resources
mandatory spending
Spending authorized by permanent laws that does not go through the same appropriations process as discretionary spending. Mandatory spending includes Social Security, Medicare, and interest on the national debt.
investment
Spending by businesses that adds to the productive capacity of the economy. Investment depends on factors such as its rate of return, the level of technology, and business expectations about the economy.
consumption
Spending by individuals and households on both durable goods (e.g., autos, appliances, and electronic equipment) and nondurable goods (e.g., food, clothing, and entertainment).
multiplier
Spending changes alter equilibrium income by the spending change times the multiplier. One person's spending becomes another's income, and that second person spends some (the MPC), which becomes income for another person, and so on, until income has changed by 1/(1 − MPC) = 1/MPS. The multiplier operates in both directions.
_____ are mortgages issued to borrowers who are a poor credit risk.
Subprime mortgages
Which way does the supply curve open up to? What about the demand curve?
Supply curve opens up ward (s'up'ply). Demand curve opens downward
when the economy is weak:
Tax receipts fallTransfer payments rise(both have expansionary effects to offset the recession)
When the economy is strong:
Tax receipts riseTransfer payments fall(both have contractionary effects to fight inflation)
Which statement concerning the structure of the Federal Reserve System is correct?
The Chair and Vice Chair of the Board of Governors are appointed by the president and confirmed by the Senate for terms of 4 years.
Federal Reserve Chairman Ben Bernanke was not happy about bailing out institutions that had gotten themselves into trouble by taking on too much risk. So, why did the Fed do it?
The Fed feared that failures of very large institutions threatened the stability of the entire financial system.
Which of the following is NOT one of the criticisms of the Fed's actions leading up to and during the financial crisis?
The Fed's monetary policy drastically increased prices shortly after the crisis.
How Does the Government Finance Its Deficit (G - T)?
The Federal Reserve prints money to buy bonds: ΔM Treasury bonds held domestically and externally: ΔB Sales of government assets: ΔA
_____ is a formula that takes into account the Federal Reserve's inflation target and the gap between potential GDP and current GDP to set a target for the federal funds rate.
The Taylor rule
Compounding
The ability of growth to build on previous growth. It allows variables such as income and GDP (as well as debt) to increase significantly over time.
Price level
The absolute level of a price index, whether the consumer price index (CPI; retail prices), the producer price index (PPI; wholesale prices), or the GDP deflator (average price of all items in GDP).
What happens to the aggregate demand curve when the money supply is decreased?
The aggregate demand curve shifts to the left.
What happens to the aggregate demand curve when the money supply is increased?
The aggregate demand curve shifts to the right
In the long run, what happens to the aggregate price level when the Fed increases the discount rate?
The aggregate price level falls.
In the short run, what happens to the aggregate price level when the Fed increases reserve requirements?
The aggregate price level falls.
surplus
The amount by which annual tax revenues exceed government expenditures.
Physical capital:
The building and maintenance of the country's public capital (infrastructure), which includes roads, bridges, airports, power plants, and telecommunications networks
open market operations
The buying and selling of U.S. government securities, such as Treasury bills and bonds, to adjust reserves in the banking system.
capital-to-labor ratio
The capital employed per worker. A higher ratio means higher labor productivity and, as a result, higher wages.
inflation targeting
The central bank sets a target on the inflation rate (usually around 2% per year) and adjusts monetary policy to keep inflation near that target.
return on investment
The earnings, such as interest or capital gains, that a saver receives for making funds available to others. It is calculated as earnings divided by the amount invested.
public choice theory
The economic analysis of public and political decision making, looking at issues such as voting, the impact of election incentives on politicians, the influence of special interest groups, and rent-seeking behaviors.
equation of exchange
The heart of classical monetary theory uses the equation M × V = P × Q, where M is the supply of money, V is the velocity of money (the average number of times per year a dollar is spent on goods and services, or the number of times it turns over in a year), P is the price level, and Q is the economy's real output level.
Recessionary gap:
The increase in aggregate spending (that is then multiplied) to bring a depressed economy to full employment.
federal funds rate
The interest rate financial institutions charge each other for overnight loans used as reserves.
discount rate
The interest rate the Federal Reserve charges commercial banks and other depository institutions to borrow reserves from a regional Federal Reserve Bank.
long-run aggregate supply (LRAS) curve
The long-run aggregate supply curve is vertical at full employment because the economy has reached its capacity to produce.
_____ is the change in consumption associated with a change in income
The marginal propensity to consume
demand
The maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors.
Considering goals and markets is an example of which basic economic question?
What to produce
supply
The maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant (the ceteris paribus condition).
vesting period
The minimum number of years a worker must be employed before the company's contribution to a retirement account becomes permanent.
In which of the following scenarios would government action to increase the money supply be MOST effective?
The money multiplier is 5.5. (the highest number possible)
In which of the following scenarios would government action to increase the money supply be LEAST effective?
The money multiplier is equal to 0.8.
In which of the following scenarios would government action to increase the money supply be LEAST effective?
The money multiplier is zero.
M1
The narrowest definition of money that measures highly liquid instruments including currency (banknotes and coins), demand deposits (checks), and other accounts that have check-writing or debit capabilities.
Phillips curve
The original curve posited a negative relationship between wages and unemployment, but later versions related unemployment to inflation rates. The Phillips curve presented policymakers with a menu of choices. By accepting modest inflation, they can keep unemployment low
equilibrium quantity
The output that results when quantity demanded is just equal to quantity supplied.
discretionary spending
The part of the budget that works its way through the appropriations process of Congress each year and includes national defense, transportation, science, environment, and income security.
tradeoff between risk and return
The pattern of higher risk assets offering higher average annual returns on investment than lower risk assets.
reserve ratio
The percentage of a bank's total deposits that are held in reserves, either as cash in the vault or as deposits at the regional Federal Reserve Bank.
average propensity to consume
The percentage of income that is consumed (C ÷Y ).
average propensity to save
The percentage of income that is saved (S ÷Y ).
Who appoints members to sit on the Fed's Board of Governors?
The president of the United States
equilibrium price
The price at which the quantity demanded is just equal to quantity supplied.
According to classical economists, if there is a 12% increase in the money supply, what will happen to price levels?
The price level will increase by 12%.
Production
The process of converting resources (factors of production)—land, labor, capital, and entrepreneurial ability—into goods and services.
infrastructure
The public capital of a nation, including transportation networks, power-generating plants and transmission facilities, public education institutions, and other intangible resources such as protection of property rights and a stable monetary environment.
inflationary expectations
The rate of inflation expected by workers for any given period. Workers do not work for a specific nominal wage but for what those wages will buy (real wages); therefore, their inflationary expectations are an important determinant of what nominal wage they are willing to work for.
Inflationary gap:
The reduction in aggregate spending (again expanded by the multiplier) needed to reduce income to full employment levels.
reserve requirement
The required ratio of funds that commercial banks and other depository institutions must hold in reserve against deposits. Establishing the minimum level of reserves banks must hold.
short-run aggregate supply (SRAS) curve
The short-run aggregate supply curve is positively sloped because many input costs are slow to change (sticky) in the short run.
Keynesian macroeconomic equilibrium
The state of an economy at which all injections equal all withdrawals. There are no pressures pushing the economy to a higher or lower level of output.
What does the original Phillips curve tell us about the relationship between wages and the unemployment rate?
The unemployment rate decreases when wages increase.
Opportunity Costs
The value of the next best alternative; what you give up to do something or purchase something
Business cycles can vary in duration and intensity, just like a roller coaster.
These fluctuations take place around a long-run growth trend.
Business cycles are officially dated by the National Bureau of Economic Research, which assigns a committee of economists to determine "turning points" when the economy switches from peak to recession or from trough to recovery.
They do this using past data, which means announcements take place after the turning points occur.
how does the number of buyers effect the demand curve (increase)
demand curve shifts right
Which statement is TRUE about specialization and exchange between two individuals?
They generally benefit the poorer individual as well as the richer individual
Implementation lag:
Time required after laws are passed to set up programs
Information lag:
Time required to acquire macroeconomic data
Recognition lag:
Time required to recognize trends in the data
Opportunity Cost Equation
Total Revenue - Economic Profit = Opportunity Cost
Markets tend to provide too little of products with external benefits.
True
Which of the following items is NOT public debt?
U.S. dollars
When workers lose their job, they file for unemployment benefits; therefore government spending on such programs naturally rises during recessions. As the economy recovers and people go back to work, spending on unemployment programs shrinks. Based on the given information, which of the following is correct?
Unemployment compensation is a form of an automatic stabilizer.
Cyclical unemployment:
Unemployment that results from the business cycle—when a recession hits, firms lay off workers until the economy recovers.
Which is NOT an example of infrastructure?
Walmart stores
What are the three main reasons for aggregate demand curve is downward shoping?
Wealth effect: When price levels rise, the purchasing power of money saved falls. Export price effect: Rising price levels cause domestic goods to be more expensive in the global marketplace, resulting in fewer purchases by foreign consumers. Interest rate effect: When price levels rise, people need more money to carry out transactions. The added demand for money drives up interest rates, causing investment spending to fall.
crowding-out effect
When deficit spending requires the government to borrow, interest rates are driven up, reducing consumer spending and business investment.
allocative efficiency
When individuals who desire a product the most (as measured by their willingness to pay) get those goods and services
liquidity trap
When interest rates are so low, people hold on to money rather than invest in bonds due to their expectations of a declining economy or an unforeseen event such as war.
paradox of thrift
When investment is positively related to income and households intend to save more, they reduce consumption. Consequently, income and output decrease, reducing investment such that savings actually end up decreasing.
Supply shocks on key inputs:
When prices for goods with inelastic demand (such as food or oil) rise, the higher prices are passed on to other industries and to consumers.
Which action was NOT taken in response to the financial crisis?
a bailout of Lehman Brothers
Which of the following will NOT reduce the actual money multiplier?
a bank being loaned up
In general terms, which item is an example of an inferior good?
a city bus
Simultaneous recession and deflation can be explained by:
a decrease in aggregate demand.
Which of the following will NOT shift the aggregate supply curve to the left?
a decrease in corporate taxes
which of the following will cause a movement up along the aggregate demand curve
a decrease in exports brought about by a higher price level
which will cause the aggregate demand curve to shift left?
a decrease in exports due to decreasing consumer confidence in europe
In the aftermath of the recent financial crisis, critics of the Federal Reserve's actions argued that printing money would result in high rates of inflation. Inflation, however, failed to rise significantly. Which of the following could explain this situation?
a decrease in velocity.
Consider the case where six months after a recession, productivity is growing by 4% but employment is unchanged from its level during the recession. This is an example of:
a jobless recovery,
Assume the unemployment rate after a recession remains unchanged from its recession level. This is an example of:
a jobless recovery.
Unemployment remained above 7% four years after the 2007-2009 recession ended. This is an example of:
a jobless recovery.
escalator clauses
a just payment or wages for changes in price level such as rental agreements, labor union contracts, and social security payments
A price ceiling is :
a maximum price for a good. A binding price ceiling appears below equilibrium and causes a shortage. https://thismatter.com/economics/images/price-floors-price-ceilings.svg
What is the money multiplier?
a measure of the potential or maximum amount the money supply can increase when $1 of new deposits enters the system
A price floor is:
a minimum price for a good. A binding price floor appears above equilibrium and causes a surplus. https://thismatter.com/economics/images/price-floors-price-ceilings.svg
When a scarce good or resource is consumed by the person who does not value it most, economists refer to the situation as:
a misallocation of resources
change in quantity demanded
a movement from one point to another on the same demand curve
Economic growth is measured by
a nation's ability to increase real GDP and real GDP per capita.
In the graph, point b represents:
a point where all of society's resources are fully employed.
Double-dip recession
a recession that begins after only a short period of economic recovery from the previous recession
change in demand
a shift in the entire demand curve
what effect of high commodity prices have on the economy:
a shift to the left of the entire short-run aggregate supply curve
The Rule of 70
a simple tool used to estimate the number of years it takes for a value to double given a constant growth rate. Number of Years = 70/Growth Rate
Cost-push inflation occurs when
a supply shock hits the economy, shifting the SRAS curve to the left. Cost-push inflation makes using policies to expand aggregate demand to restore full employment difficult because of the additional inflationary pressures added to the economy.
Model
a theory composed of assumptions and facts boiled down to their basic relevant elements
how does the price of complements effect the demand curve? (increase)
demand shifts left
The twelve Federal Reserve Banks and their branches do all of the following EXCEPT:
accept deposits from you and me.
Financial intermediaries
accept funds from savers and efficiently channel these to borrowers, reducing transaction and information costs, as well as lowering risk.
Which of the following factors is NOT generally viewed by economists as critical to economic growth?
access to large amounts of natural resources
Easy money is also called:
accommodative monetary policy.
The national debt is the
accumulation of all past deficits less surpluses
After the acceptance of Keynesian analysis, the government
actions toward macroeconomic policy grew significantly.
Roth IRAs use
after-tax dollars to fund investments. Contributed funds (but not earnings on those contributions) can be withdrawn anytime without penalty, and no taxes are paid on withdrawals (including earnings on investment) after one reaches the age of 59.5.
Demand -pull inflation occurs when _______ expands so much that equilibrium output exceeds full employment output and the price level rises.
aggregate demand
The solution to simultaneous deflation and unemployment is to shift the:
aggregate demand curve to the right.
Demand-pull inflation occurs when
aggregate demand expands so much that equilibrium output exceeds full employment output. Temporarily, the economy can expand beyond full employment as workers incur overtime and more workers are added. But as wages rise, the economy will move to a new long-run equilibrium, where prices are permanently higher.
In the short run,
aggregate supply is upward-sloping (SRAS).
In the long run,
aggregate supply is vertical (LRAS).
Land
all natural resources used to produce goods and services. Includes mineral deposits, oil, natural gas, water, and land.
The multiplier effect
allows each dollar of government spending to expand aggregate output by a multiple of the amount spent. Changes in government spending have a larger multiplier than changes in taxes.
When a customer takes out a loan from a bank, this loan is:
an asset for the bank.
Paying a salesperson more for increased sales is an example of:
an incentive.
what would cause the aggregate demand curve to shift?
an increase in consumer spending brought by higher household wealth
TrueTex, Inc. is a manufacturer of denim fabric used to make jeans. Recently, TrueTex's employees received a wage increase, but TrueTex has not had to increase prices. What could explain this?
an increase in employee productivity
Which of the following can cause a positive demand shock to the economy?
an increase in exports
Which of the following would shift the aggregate demand curve from AD2 to AD1? (line shifts down)
an increase in interest rates
Which of the following scenarios would MOST likely cause stagflation?
an increase in resource costs
Which of these will cause the supply of loanable funds curve to shift leftward?
an increase in the government deficit
Which one of the following would NOT lead to higher prices?
an increase in the supply of food
Credit default swaps
are a type of insurance against defaults
If the reserve requirement is less than the reserve ratio, excess reserves:
are greater than zero.
If the reserve ratio is less than the reserve requirement, excess reserves
are negative.
Students who do not work:
are not counted in the labor force.
Business cycles
are the alternating increases and decreases in economic activity typical of market economies.
Discouraged workers
are the portion of marginally attached workers who have given up looking for work because they believe there are not enough good jobs.
Unemployed
are those without jobs but actively seeking work.
The financial panic in late 2008 put the spotlight on the Federal Reserve's role:
as a lender of last resort.
All of the following are functions of money EXCEPT:
as a standard value.
If a customer deposits $500 cash in a checking account, the bank's:
assets increase by $500. liabilities increase
If a customer deposits cash in a checking account, the bank's:
assets increase.
The adaptive expectations model
assumes that people form their future expectations based on their past experiences. Therefore, it is a backward-looking model of expectations.
The rational expectations model
assumes that rational economic agents use all publicly available information in forming their expectations, and is a forward-looking model of expectations.
Ceteris Paribus
assumption and hold some important variables constant
A long-run macroeconomic equilibrium occurs
at the intersection of the LRAS and AD curves, at full employment.
A short-run macroeconomic equilibrium occurs
at the intersection of the SRAS and AD curves. Short-run equilibrium can occur below full employment (recession) or above full employment (inflationary pressure).
In general, how long do monetary policy lags last?
between three quarters and two years
The Federal Reserve uses its tools to counteract:
booms and recessions.
An increase in the interest rate causes the aggregate _____ curve to shift _____.
demand; leftward
Developing countries can achieve higher productivity per unit of capital because they can use technologies developed by other countries. This is known as the:
catch-up effect
In the demand curve shown, an increase in price from $1 to $2 will:
cause quantity demanded to fall from 30 units to 20 units.
The idea that all income ultimately goes to households, which then use it to buy goods and services from firms, is a central idea of the:
circular flow diagram.
The idea that a change in the money supply would affect prices but not real GDP is associated with the
classical monetary transmission mechanism
A financial instrument backed by a collection of mortgages is called a(n):
collateralized debt obligation.
A production possibilities frontier that is a straight line is the result of:
constant opportunity costs.
The largest component of GDP is:
consumption expenditure.
The Fed selling government bonds is considered:
contractionary monetary policy.
To move the economy from point a to point b in the short run, policymakers implement _____ monetary policy, thereby accepting _____ to reduce _____.
contractionary; more unemployment; the rate of inflation
Suppose that anticipated inflation is 4% for the coming year, with loan contracts set at 7% with the expectation of a 3% return after inflation. If the actual inflation rate at the end of the year is 2%:
creditors gain at the expense of debtors
M1 = .
currency (banknotes and coins) and demand deposits (checking accounts)
A supply-side economist is advocating reducing income tax rates. She is probably assuming that the economy is at point _____ in the graph.
d. d
Macroeconomics
deals with aggregate entities, such as cities or the nation.
microeconomics
deals with individual entities, such as individuals, firms, and industries
Withdrawals
decrease spending in an economy, and include savings (S), taxes (T), and imports (M).
According to the Taylor rule, if inflation is below the Federal Reserve's target and there is a negative output gap, the Fed should:
decrease the target federal funds rate.
Increases in leakages cause the money multiplier to:
decrease.
The 2007-2009 recession can be shown as a combination of a(n) _____ in aggregate demand and _____ in the short-run aggregate supply.
decrease; a decrease
What is the impact of higher interest rates on consumption and investment?
decreased consumption and investment spending
Consider the graph. If the price is raised from $8 to $12, consumer surplus:
decreases by $120 and deadweight loss increases by $70.
Tight money:
decreases excess reserves and the money supply.
Contractionary monetary policy _____ consumption and _____ investment spending.
decreases; decreases
Tight monetary policy _____ consumption and _____ investment spending.
decreases; decreases
Loose monetary policy _____ interest rates and _____ aggregate demand.
decreases; increases
The limits on international trade include all of these EXCEPT:
decreasing opportunity costs and increasing returns.
If the cost of a typical market basket in 2019 is 400 and the cost of a typical market basket in 2020 is 390, then during this period the economy is undergoing:
deflation
how do price expectations effect the demand curve? (increase)
demand curve shifts right
Which of the following was NOT one of the conditions that helped create the perfect storm that led to the financial meltdown?
depreciation of house values prior to the housing bubble
Fiscal policy
describes the use of government taxation and spending to influence the economy. Specifically, it involves three main tools: taxation, government spending on goods and services, and transfer payments.
Simon Kuznets:
devised the gross national product as a way of measuring a nation's economic output
The Fed decides to decrease the interest rate at which banks can borrow from a regional Federal Reserve Bank. Which monetary policy tool is it using?
discount rate
The 45-degree line in the Keynesian model represents a set of points where _____ equals _____.
disposable income; consumption
Suppose a price floor is set on cane sugar that is approximately three times the equilibrium price. One of the effects is a(n):
drop in the quantity of sugar consumed
diminishing returns to capital
each additional unit of capital provides a smaller increase in output than the previous unit of capital.
The Fed buying government bonds is considered
easy money.
to find the market supply of a good or service,
economists add together the quantities each producer would produce at each price
Investment in human capital refers to:
education, on-the-job training, and professional training activities.
Economists and policymakers often confront the tradeoff between
efficiency and equity
The government decides to subsidize the development of a new communications network. It is acting in its role to promote economic growth by:
enhancing physical and human capital.
The ability to use physical resources in creative ways to produce goods and services is known as:
entrepreneurial ability, technology, and ideas.
comparative advantage
exists when one country can produce a good at a lower opportunity cost than another.
absolute advantage
exists when one country can produce more of some good than another.
Which of the following is a monetary policy meant to reduce interest rates and stimulate the economy?
expansionary monetary policy
Loose monetary policy is:
expansionary.
What are the four determinants of investment demand
expectations, technological change, operating costs, and capital goods on hand
If Abigail withdraws $300 cash from her checking account, her bank's assets then:
fall by $300 and liabilities fall by $300.
When the interest rate falls, the value of the U.S. dollar in foreign exchange markets tends to _____ and net exports tend to _____.
fall; increase
Suppose that while households are deciding to increase savings, the demand by firms for investment funds falls. In the market for loanable funds, the real interest rate will _____ and the quantity of loanable funds will _____.
fall; rise, fall, or stay the same
Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:
falls to $875.
Arlina got a 5% raise while the rate of inflation was 6%. Arlina's standard of living:
fell by 1%.
It is important for a central bank to remain independent in order for it to:
fight inflation.
The U.S. gross domestic product is equal to the total market value of all:
final goods and services produced by resources in the United States
The long-run aggregate supply curve uses the classical assumptions that all variables are _____ in the long run and that long-run equilibrium occurs at _____.
flexible; full employment
Core inflation is found by removing _____ from the consumer price index.
food and energy
Which of the following did NOT occur when the housing bubble collapsed?
foreclosures took place Housing prices increased dramatically.
Which of these is a basic goal of the Federal Reserve System?
full employment
Markets exhibit efficiency when every buyer and every seller eager to buy or sell goods are able to do so, resulting in ____________.
gains from trade.
Consumer surplus is defined as the:
gap between the demand curve and the market price.
Producer surplus is defined as the:
gap between the supply curve and the market price.
The four types of spending in GDP are personal consumer spending, _____ private domestic investment, government spending, and _____.
gross; net exports
long-term growth
growth for more than 5 years economy finds new resources or finds new ways https://image.slidesharecdn.com/f585theglobaleconomyindicators-120125084235-phpapp01/95/f585-the-global-economy-indicators-14-728.jpg?cb=1327481155
Which of these is NOT a way financial institutions reduce risk?
guaranteeing a high rate of return for all lenders
Which of the following did NOT help increase homeownership rates in the 21st century?
higher home prices lower rental prices
According to the classical model, which of the following developments does NOT contribute to economic growth?
higher interest rates
Which of these circumstances would NOT affect the supply of new automobiles?
higher interest rates for new car financing
What factor does NOT help to explain the recent phenomenon of a jobless recovery?
higher levels of government stimulus spending
Since March 2008, the 30-year mortgage rate has been
higher than the prime rate.
Those with less than a High school diploma had the ______ unemployment rate in 2015.
highest
horizontal summation
horizontal summation
An asset's liquidity is determined by
how fast, easily, and reliably it can be converted into cash
as a standard value.
how quickly, easily, and reliably an asset can be converted into a medium of exchange.
Which is not considered a basic economic question?
how will the system accommodate change?
The circular flow diagram shows how businesses and households interact through the resource and product markets. It shows spending as well as income.
https://slideplayer.com/slide/4725566/15/images/5/The+Circular-Flow+Diagram.jpg
This time series graph shows the number of civilians 16 years and older employed in the United States since 1990. Employment has grown steadily over this period, except in times of recession, indicated by the vertical strips. Note that employment fell during the recession, and then bounced back after each recession ended.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_01.jpg
This scatter diagram plots the relationship between median household income and the percentage of Americans holding a college degree. Median household income increased as a greater proportion of Americans earn college degrees. Note that the percentage of Americans earning college degrees has increased significantly in the last half-century.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_02.html
This pie chart shows the relative importance of the components of the consumer price index, showing how typical urban households spend their income.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_03.html
This bar chart shows the annual percent change in real (adjusted for inflation) gross domestic product (GDP) over the last 50 years. Over this period, GDP declined only 7 times.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_04.html
These curves show the percentage of Americans using a social media site by age. The curves slope downward because older Americans are less likely to use social media than younger Americans. However, over time, more Americans in all age groups are using social media, as evidenced by each point on the August 2014 curve being higher than the corresponding point on the August 2007 curve, and each point on the August 2015 curve being higher than the corresponding point on the August 2014 curve.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_05.html
This figure shows a hypothetical linear relationship between average study hours and GPA. Without studying, a D average results, and with 10 hours of studying, a C average is obtained, and so on.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_06.html
Computing the slope is based on a simple rule: rise over run (rise divided by run). In the case of this straight line, the slope is equal to 0.1 because every 10 additional hours of studying yield a 1.0 increase in GPA.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_07.html
This nonlinear graph of study hours and GPA is probably more typical than the one shown in Figures APX-6 and APX-7. Like many other things, studying exhibits diminishing returns. The first hours of studying result in greater improvements to GPAs than further hours of studying.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_08.html
Computing the slope of a nonlinear curve requires that you compute the slope of each point on the curve. This is done by computing the slope of a tangent to each point.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_09.html
The formula for a linear relationship is Y = a + bX, where Y is the y axis variable, X is the x axis variable, and a and b are constants. For the original relationship between study hours and GPA, this equation is Y = 1.0 + 0.1X.
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_10.html
The effects of tutoring and partying on our simple model of studying and GPA is shown. Partying harms your academic efforts and shifts the relationship to the right, making it harder to maintain your previous average (you now have to study more hours). Tutoring, on the other hand, improves the relationship (shifts the curve to the left).
https://www.macmillanhighered.com/BrainHoney/Resource/6712/digital_first_content/trunk/test/chiangmacro4e/asset/img_ch1/chiang_econ_micro_macro4e_APX_01_11.html
a lawyer with a degree from university is an example of:
human capital
One of the reasons wages may be sticky is because of:
imperfect information
Which of the following items is NOT included in the GDP deflator?
imported mangoes
The GDP deflator is an index that includes prices of all of the following EXCEPT:
imports.
A shift to the right of the supply curve could be caused by a(n):
improvement in production technology
supply and demand analysis is used
in both micro and macroeconomics
According to monetarists, when will the economy move back to the natural rate of unemployment after a change in output?
in the long run
Contractionary fiscal policy
includes reducing government spending or transfer payments, or raising taxes. The effect is a shift of the AD curve to the left, decreasing prices and aggregate output.
In the Keynesian model, the principal determinant of saving is:
income
Decreases in leakages cause the money multiplier to:
increase
According to the graph, which of the following changes may cause the production possibilities frontier to shift inward from PPF1 to PPF0?
increase government regulation on businesses overall
Injections
increase spending in an economy, and include investment (I), government spending (G), and exports (X).
According to the Taylor rule, if inflation is above the Federal Reserve's target and there is a positive output gap, the Fed should:
increase the target federal funds rate.
According to the Taylor rule, if inflation is above the Federal Reserve's target but there is little or no output gap, the Fed should:
increase the target federal funds rate.
When the economy is sluggish, the Fed aims to _____ consumption and _____ investment spending
increase; increase
When current real output exceeds potential real output, the Federal Reserve will _____ interest rates in an effort to fight _____.
increase; inflation
____________ would cause a country's production possibility frontier
increased work force
Since 1984, the size of the U.S. monetary base has generally:
increased.
Expansionary fiscal policy includes
increases in government spending or transfer payments, or reducing taxes. The effect is a shift of the AD curve to the right, increasing prices and aggregate output.
Tight monetary policy _____ interest rates and _____ aggregate demand.
increases; decreases
When the Fed buys bonds, its demand _____ the price of bonds, _____ nominal interest rates.
increases; decreasing
What are some sources of economic growth?
increasing business investment (physical capital), increasing average education levels (human capital), increasing research and development, reducing both the level and variability of inflation, reducing tax burden, increasing the level of international trade
Which of the following is the best description of stagflation?
increasing inflation at the same time as increasing unemployment
Which of the following policies do supply-side economists believe is the best for increasing the standard of living?
increasing investment in capital that boosts worker productivity
Which of the following describes monetary targeting?
increasing the money supply at a steady level
Which of these is NOT a measure taken by the European Central Bank to prevent the financial crises in individual countries from collapsing the Eurozone?
increasing the rate it paid on bank deposits
The largest source of federal government revenues is:
individual income taxes.
An expansionary fiscal policy can result in:
inflation and higher GDP.
The twin perils of the modern macro economy are said to be:
inflation and unemployment.
If actual unemployment is at its natural rate
inflation is very low
In order to make rational choices, people need ________.
information
The _____ lag is the time policymakers must wait for economic data to be collected, processed, and reported.
information
Monetary policy, like fiscal policy, is subject to _____ lags
information, implementation, and decision
The Fed announced in September 2013 that it would postpone winding down its monetary stimulus until the economic recovery was stronger. When the Fed does finally begin to reduce bond purchases
interest rates will rise.
Which of the following was one of the conditions that helped create the perfect storm that led to the financial meltdown?
investors and financial institutions buying trillions of dollars of assets that depended on housing values
The demand curve for loanable funds represents _____ and is _____.
investors; downward sloping
Inflation
is a general rise in prices throughout the economy. Prices for individual goods can fluctuate up or down, but the price level captures the overall trend in the movement of prices.
Total factor productivity
is a measurement of productivity taking into account all other factors beyond the quantity and quality of inputs that could influence production. Examples include natural disasters, climate, or cultural norms that influence the effectiveness of productive inputs.
The value of cars that the Ford Motor Company produces in a German plant:
is a part of U.S. GNP.
Hyperinflation
is an extremely high rate of inflation. It typically is caused by excess government spending over tax revenues (high deficits) and the printing of money to finance deficits.
Money
is anything that is accepted in exchange for goods and services or for the payments of debts
When the money multiplier is less than 1, government action to increase the money supply:
is less effective.
GDP per capita:
is measured as GDP divided by the population. It provides a rough measure of a country's standard of living relative to other countries. However, it does not reflect differences in wealth within a country.
To say that the Federal Reserve is transparent means that the Fed
is open regarding its monetary policy.
Productivity
is the ability to turn a fixed amount of inputs (factors of production) into more outputs (goods and services).
The federal deficit
is the annual amount by which government spending exceeds tax revenues.
Consumer Surplus
is the difference between a person's willingness-to-pay and the price paid. For a market, consumer surplus is the area between the demand curve and the market price. In the figure, consumer surplus equals $1,250.
Producer surplus
is the difference between the price a seller receives and its willingness-to-sell. For a market, producer surplus is the area between the market price and the supply curve. In the figure, producer surplus equals $1,000
Scarcity
is the idea that people have unlimited wants but limited resources. Resources can be money, time, ability, work ethic, or anything that can be used to generate productive outcomes.
The natural rate of unemployment or nonaccelerating inflation rate of unemployment (NAIRU):
is the rate of unemployment that exists when prices and wages are equal to people's expectations. At the natural rate of unemployment, the economy is at "full employment."
Gross domestic product (GDP) :
is the total market value of all final goods and services produced in a year within a country's borders, regardless of a firm's nationality. Gross national product (GNP) measures goods produced by a country's firms, regardless of where they are produced.
The goal of supply-side fiscal policy
is to shift the LRAS curve to the right. Such policies do not require a tradeoff between output and prices; however, these policies require more time to work.
According to public choice theorists, deficit spending:
is undertaken as a politically palatable way of funding programs
The compounding effect is powerful because
it causes debt (if no payments are made) and savings to increase dramatically over time.
critics of the NAFTA point out that:
jobs were lost in the United States
The __________ is the total number of people employed or unemployed.
labor force
What are the four resources in economics?
land, labor, capital, and entrepreneurship
The Federal Reserve Act mandates monetary policies that will:
lead to stable prices.
A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded.
left; decrease
Some analysts blame the financial crisis of 2007-2009 on Federal Reserve policy. They argue that:
low interest rates encouraged excessive mortgage borrowing, leading to the housing bubble.
The twin goals of the Federal Reserve are _____ and stable prices.
low unemployment
What are the twin goals of the Federal Reserve?
low unemployment and stable prices
We are most likely to see a recession if interest rates on long-term bonds are:
lower than interest rates on short-term bonds
The dramatic collapse in the price of technology stocks in 2001-2003, coupled with a short recession in 2001, caused the Federal Reserve to _____ interest rates to stimulate _____.
lower; employment
Checking deposits generally have a _____ return on investment than do certificates of deposit because checking deposits are _____.
lower; more liquid
One major conclusion of the rational expectations theory is that:
macroeconomic policy has no impact on GDP, even in the short run.
The Federal Reserve Act mandates monetary policies that will
maintain high employment.
Deflation can be a problem because it:
makes it more difficult to pay off debt
The short-run aggregate supply curve is positively sloped because:
many input prices are slow to change in the short run
People use _____ to determine how many hours to work, and businesses use _____ to determine how much of their product they are willing to supply to the market.
marginal analysis; marginal analysis
Entrepreneurs combine land, labor, and capital to produce goods and services. They absorb the risk of being in business, including the risk of bankruptcy and other liabilities associated with doing business. Entrepreneurs receive profits for their effort.
market; planned
short-run growth
max 5 years of growth when an economy makes use of existing but underutilized resources. This is common during a recession https://image.slidesharecdn.com/f585theglobaleconomyindicators-120125084235-phpapp01/95/f585-the-global-economy-indicators-14-728.jpg?cb=1327481155
Economic analysis uses a stylized approach:
models boil issues and facts down to their basic relevant elements
Milton Friedman advocated _____ as an approach to monetary policy.
monetary targeting
A market exists when people exchange ______ for goods and services
money
Leakages are reductions in the amount of money used for lending that reduce the:
money multiplier.
Pensions are
monthly payments made by employers to their retired employees based on length of employment with the company.
If the pound sterling appreciates against the U.S. dollar, England buys _____ U.S. goods, causing the U.S. aggregate demand curve to shift to the _____.
more; right
The collapse of the housing market in 2008 was a:
negative demand shock.
The 1973 oil crisis was a:
negative supply shock.
if the economy is at both short-tun and long-run macroeconomic equilibrium, then:
neither the price level or GDP will change
The spending multiplier exists because
new spending generates income that results in more spending and income, based on the marginal propensities to consume and save.
In the equation of exchange, the term P × Q is the same as:
nominal GDP.
When a supply shock occurs, what is the Federal Reserve's best target?
nominal income or output
Institutionalized persons including persons in prison also are:
not counted in the labor force.
Retired persons and children under 16 are:
not counted in the labor force.
multiplier effect
occurs when a dollar of spending generates many more dollars of spending in the economy.
Deadweight loss
occurs when prices deviate from equilibrium. In the preceding example, deadweight loss is shown by the blue and yellow areas. https://www.reviewecon.com/wp-content/uploads/2018/04/price-ceiling_1_orig.jpg
Disinflation
occurs when the rate of inflation falls, but is still positive.
Deflation
occurs when the rate of inflation turns negative.
What were the two main causes of the outward-shifting Phillips curves during the 1970s and early 1980s?
oil price shock and increasing inflationary expectations
In a T-account, assets are:
on the left side.
In a T-account, liabilities are:
on the right side.
Traditional Individual Retirement Accounts (IRAs) are taxed:
only when you make withdrawals.
Which of the following is one of the three primary tools for conducting monetary policy?
open market operations
The main tool of monetary policy is:
open market operations.
comparative advantage occurs when one country has lower _________ of producing a goof than another country.
opportunity cost
If the government of Spain decides to spend less on the military and more on health care, the forgone spending on military items represents the:
opportunity cost of the extra health care.
Which of the following functions do the Federal Reserve regional banks NOT perform?
oversee open market operations regulate consumer credit determine national monetary policy
Studies of the retail industry have shown that salespeople who are paid on commission tend to sell more merchandise than those who are paid a straight salary. Which of the following key ideas of economics can explain these results?
people follow incentives
Economics is BEST defined as the study of how:
people make rash decisions
Traditional IRAs use
pretax dollars to fund investments; taxes are paid upon withdrawal after age 59.5.
"Price gouging" laws are types of _____ and often result in _____.
price ceilings; shortages of a scarce good
The market economy is equal to ______.
price economy
What are the short-run goals of monetary policy?
price level and income
What is the primary long-run goal of monetary policy?
price stability
Because a monopolist reduces the quantity supplied in order to increase prices, it will not produce the good at the lowest possible cost. This firm is operating without:
production efficiency
Although iPhones are designed in California, they are assembled in China to take advantage of lower labor costs. This is an example of:
production efficiency.
Which is a determinant of aggregate supply?
productivity
The Federal Reserve Act mandates monetary policies to:
promote economic growth.
Which of the following is NOT included in gross private domestic investment?
purchases of common stock by investors
If a monetary authority uses inflation targeting of 1% to 2% per year, deflation calls for:
quantitative easing
To continue expansionary monetary policy with interest rates at 0%, the Fed engaged in various _____________ strategies, including purchasing long-term assets from banks to expand the monetary base.
quantitative easing
Other factors held constant, as the price of an iPad rises, the:
quantity demanded for iPads falls.
Economic expectations formed after individuals make the best possible use of all publicly available information are known as _____ expectations.
rational
"capital" refers to _______?
real (or physical) capital
Over the past century, when worker productivity rose:
real wages rose
Why is economic growth important?
reduced poverty rates improved health and longer life expediencies greater investment in education and technology
Which of the following is an example of contractionary fiscal policy?
reducing military spending
Which is NOT a source of economic growth?
reducing the level of international trade
When a financial institution provides a standardized financial product such as a mortgage, it is:
reducing transaction costs
Leakages are:
reductions in the amount of money used for lending that reduce the money multiplier.
A payment supplier of natural gas is called:
rent
What is the oayment of land called?
rent
A good example of a government imposed-price ceiling is:
rent controls.
Long-run growth
requires an expansion of production capacity through an increase in resources and/or technology, and is shown by a shift of the PPF (such as from PPFA to PPFB).
The Fed decides to increase the proportion of deposits that banks must hold from zero to 1%. Which monetary policy tool is it using?
reserve requirements
What are excess reserves?
reserves held by banks above the legally required amount
Which of the following is a monetary policy meant to shrink income and employment, usually in the interest of fighting inflation?
restrictive monetary policy tight money
If oil prices decline, the short-run aggregate supply curve shifts _____ and output supplied will _____.
right; increase
Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded.
right; increase
The crowding-out effect recognizes that if the government sells bonds to finance spending, it can cause interest rates to _____ investment.
rise, thereby reducing
In May of 2011, a study released by the global firm Boston Consulting Group (BCG) explained why some companies (like Wham-O Inc., the toy manufacturer) were moving production facilities out of China and back to the United States. What would explain this?
rising wages in China
At point A in the graph provided
saving is zero
Which list represents monetary policy actions that are consistent with one another?
sell government bonds, raise reserve requirements, raise the discount rate
economic growth is illustrated by a:
shift of the long-run aggregate supply curve to the right
Contractionary monetary policy:
shifts the aggregate demand curve to the left.
expansionary monetary policy
shifts the aggregate demand curve to the right.
if corporate taxes were increased, how would it affect the short-run aggregate supply?
short-run aggregate supply curve shift to the right
what would be the likely effect of government actions that would decrease the concentration of industries?
short-run aggregate supply curve shift to the right
Cost-push inflation is a situation in which the:
short-run aggregate supply curve shifts leftward.
As inflationary expectations rise, the _____ Phillips curve shifts to the _____.
short-run; right
The ________ -run aggregate supply curve is _________ sloped.
short; positively
The original Federal Reserve Act, the Employment Act of 1946, and the Full Employment and Balanced Growth Act of 1978 together mandated all of the following national economic objectives EXCEPT:
small money supply.
Flipping a house occurs when:
speculators purchase it with the intention of selling it as soon as possible for a tidy profit.
GDP can be found either by adding up all of the _____ or all of the _____ in the economy.
spending; income
Which of the following is NOT making the jobs of policymakers more difficult?
stable price levels
The twin goals of the Federal Reserve are low unemployment and:
stable prices.
If Jack Sparrow buries a chest of gold on a deserted island and plans to come back for it later, then the gold is functioning as a:
store of value.
If a product becomes obsolete and the workers who produced that product will need additional training to find new jobs, then they are experiencing:
structural unemployment
market equalibrium:
supply and demand are equal
If the quantity is down because of price,
supply curve point lowers
hoe does related commodities effect the supply curve (increase)
supply shifts left
how does price expectations effect the supply curve (increase)
supply shifts left
how does taxes effect the supply curve (increase)
supply shifts left
how does the cost of resources effect the supply curve (increase)
supply shifts left
How does technology production effect the supply curve (increase)
supply shifts right
how do subsidies effect the supply curve (increase)
supply shifts right
how does the number of sellers effect the supply curve (increase)
supply shifts right
Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:
supply-side fiscal policy.
Leakage-adjusted money multiplier
takes into account the excess reserves and cash holdings that reduce the loans made and therefore reduces the actual money multiplier.
Which of the following would promote long-run economic growth?
technological advancement
In the graph, a movement from point f to point g could occur if:
technological improvements occur.
What is the primary explanation for the rapid growth of the U.S. economy over the last century?
technological progress
What event was a major influence on the development of macroeconomics?
the Great Depression
Which organization determines the beginning and end dates of a recession
the National Bureau of Economic Research
Which of the following groups must agree in order to implement fiscal policy?
the Senate, House of Representatives, and executive branch
Which region or country holds a percentage of U.S. banknotes as large as Europe and Russia?
the United States
If banks increase excess reserves to increase their ability to absorb a higher rate of defaults
the actual multiplier will fall.
The opportunity costs of attending college do NOT include:
the expenditures for food.
Incentives
the factors that motivate individuals and firms to make decisions int heir best interest
The Taylor rule suggests that:
the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half the output gap.
The market for loanable funds describes
the financial market for saving and investment. Savers provide more funds to the loanable funds market as interest rates increase. Firms demand more funds for investment opportunities as interest rates fall.
Economic efficiency is measured by __________.
the gains that consumers and producers achieve when engaging in an economic transaction.
Firms decide how much to invest by comparing the rate of return on their projects with:
the interest rate.
The graph represents:
the law of supply.
Supply is defined as:
the maximum amount of a product that sellers are willing and able to provide for sale over a particular time period at various prices, holding all other relevant factors constant.
A production function is
the method by which firms turn factors of production into goods and services.
Which school of economic thought is MOST closely associated with calls for monetary rules to guide monetary policy decisions?
the monetarist school
Monetary targeting is setting a steady growth rate in:
the money supply.
Which of the following tends to make aggregate demand decrease by more than the amount that consumer spending decreases?
the multiplier effect
What is the reserve ratio?
the percentage of a bank's total deposits held in reserve, either as cash in the vault or as deposits at the Federal Reserve
A business cycle is:
the periodic fluctuation of economic activity.
The public debt is
the portion of the national debt that is held by the public.
The aggregate demand curve shows
the quantity of goods and services (real GDP) demanded at different price levels.
demand:
the willingness to purchace
The graph shows the supply and demand for loanable funds. If the market interest rate is 3%:
there will be an excess supply of funds
when the aggregate price level increases,
this causes net exports to fall.
Marginally attached workers
those who have looked for work in the past 12 months but not in the last 4 weeks.
The Federal Reserve Act of 1913 tasked the central bank with which of the following purposes?
to afford means of rediscounting commercial paper to establish more effective supervision of banking in the United States to provide for the establishment of Federal Reserve Banks
The Federal Reserve Act of 1913 tasked the central bank with all of the following purposes EXCEPT:
to keep interest rates low.
The Federal Reserve Act of 1913 tasked the central bank with all of the following purposes EXCEPT:
to provide employment in the federal government.
Flu vaccination shots provide external benefits. Thus:
too few flu vaccination shots are given.
Gains from trade are measured by the ___________ or the sum of consumer and producer surplus in a market. Total surplus is maximized when a market is at equilibrium.
total surplus
The measure of society's benefits due to a market transaction is called:
total surplus.
In 2011, the Chairman of the Federal Reserve, Ben Bernanke, began to have press conferences after the Federal Open Market Committee reports were released. This is an indication of the Fed's commitment to:
transparency.
Suppose an economy has historically grown at a rate of 1.25%. Economic activity decreased every quarter over the past year, but the decline stopped this quarter. The economy is expected to grow at a rate of 1.4% in the near future, but monetary authorities are concerned that inflation may increase. This economy is probably in the _____ stage of the business cycle.
trough
If an economy is operating at a point that is inside of its production possibilities frontier, then it can be assumed that its resources are:
underutilized
Macroeconomics is concerned with issues such as:
unemployment.
In the classical quantity theory of money, which variables were considered fixed?
velocity and output
The Great Recession:
was about the same length as past recessions. affected a large number of industries.
There are two sellers in the DVD market, Wen and Ahmed. If the market price were $5 per DVD, Wen would be willing to sell 10 DVDs and Ahmed would want to sell 15 DVDs. If the market price were to rise to $7, then:
we can confidently say that market quantity supplied is at least 25 DVDs.
What are the four determinants of consumption and saving
wealth, expectations, household debt, and taxes
The 1990-1991, 2001, and 2007-2009 recessions all deviated significantly from what has happened in past business cycles in that they:
were followed by jobless recoveries.
Gains from trade result
when a country specializes in the production of goods in which it has a comparative advantage, and trades these goods with another country. Trade is a positive-sum game. Both countries can benefit even if one country has an absolute advantage in both goods.
Short-run growth
when an economy makes use of existing or underutilized resources, and is shown as a movement from inside a PPF toward the PPF (such as from point a to point b).
production efficiency
when goods are produced at the lowest possible cost
surplus
when price is above market equilibrium and quantity supplied exceeds quantity demanded
A surplus occurs
when tax revenues exceed government spending.
Who is unaffected by inflation
workers with escalator clauses and social security recipients
lowest opportunity cost on a graph:
x-axis; lowest number
