Review Questions
If nominal GDP equals $5,000 and real GDP equals $4,000, then the GDP Deflator equals
125
If real GDP per capita was $20,000 in 1980 and $21,000 in 1990, then we conclude that the standard of living has increased
5.0 percent
If the reserve requirement is 2 percent, then the money multiplier is
50
If real GDP per capita was $10,000 in 1990 and $15,000 in 2000, then the amount of economic growth is
50 percent
If real GDP per capita grows at a rate 10 percent a year, then we can expect the standard of living to double in
7 years
The Fed's Board of Governors has ____ members, each serving ______ - year terms.
7, 14
Which of the following would NOT shift the aggregate demand curve?
A change in technology.
Which of the following will promote economic growth?
A new production technique that lowers costs.
If XYZ Corporation buys an original Matisse painting to hang in its board room, then
GDP is unaffected because it is a second hand sale.
Automatic, or built-in, stabilizers
are government policies already in place that promote deficit spending during recessions and surplus budgets during expansions.
Recessions
are marked by a sustained decline in output.
"Flash" estimates of GDP
are subject to revision. and are available after a thirty-day lag.
The theory of rational expectations
assumes that consumers and businesses anticipate rising prices when the government pursues an expansionary fiscal policy.
Crowding out
occurs when consumers and firms spend less offsetting expansionary fiscal policy.
What you give up to pursue another alternative is known as
opportunity cost.
If the standard of living increases, we can conclude that
output must have increased proportionally more than population.
When products improve in quality the CPI will
overestimate the inflation rate.
According to experts, the CPI
overstates increases in the cost of living.
Economists use the term "capital" to mean
plant and equipment.
Monetarists believe that V and Q are
stable.
Business cycles
are each comprised of a recession and an expansion.
Prices in capitalist economies are
determined in competitive markets.
Inflation
discourages savings.
Suppose a nation only produces two goods, pizza and soda. In 2015, 20 pizzas are sold at $4 each, and 10 sodas are sold at $2 each. If the price of pizza was $2 each and the price of soda was $1 each in 2014, the base year, then nominal 2015 GDP is
$100, real 2002 GDP is $50, and the GDP deflator is 200.
If nominal GDP equals $6,000 and the GDP Deflator equals 200, then real GDP equals
$3,000
Imagine an economy that produces only two goods, cheese and crackers. Calculate GDP for this economy if cheese retails for $3 a loud and 10 pounds are produced while crackers sell for $2 a pound and 20 pounds are produced.
$70
Which of the following would cause the price of a good to increase above the equilibrium price and stay there permanently?
An effective price floor
Which of the following will promote economic growth?
An increase in the amount of capital.
Which of the following would NOT shift the aggregate supply curve?
An increase in the price level.
Which of the following will result in economic growth?
An increase in the size of the labor force.
Which of the following would shift the aggregate demand curve to the left?
Business firms reduce spending on plant and equipment.
Which of the following would cause the aggregate demand curve to shift to the left?
Contractionary demand management policies.
Output in country A is 1,200 units and its population is 100 persons. Output in country B is 2,400 units and its population is 400 persons.
Country A has a higher standard of living than country B.
Which of the following is not included in M1?
Credit cards.
Which of the following is not included in M2?
Credit cards.
In the equation of exchange
P stands for price level and V stands for the velocity of money.
Assume the supply of bananas decreases due to rising costs of production, while demand increases due to consumer preferences. What will happen to the new equilibrium price and quantity?
Price=increase Quantity=indeterminate
The standard of living is measured by
Real GDP per capita.
Which of the following is NOT a major cost of inflation?
Real incomes will fall.
Which of the following statements id true?
Some of the things included in M2 are not as liquid as the things in M1.
Which of the following would lead to an expansion of the money supply?
The Fed buys government securities in the secondary market.
If consumers are advised that multigrain bread will substantially lessen the risk of cancer, which of the following will happen in the market for multigrained bread?
The demand curve will shift to the right, increasing the price of multigrained bread.
What will happen to the equilibrium price level and the equilibrium quantity of output if consumer confidence increases? Assume an upward-sloping aggregate supply curve.
The equilibrium price level and quantity of output increase.
What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate demand curve shifts to the right? Assume an upward-sloping aggregate supply curve.
The equilibrium price level and quantity of output increase.
What will happen to the equilibrium price level and the equilibrium quantity of output if a major earthquake destroys much of the plant and equipment on the West Coast? Assume an upward-sloping aggregate supply curve.
The equilibrium price level increases while the equilibrium quantity of output decreases.
What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate supply curve shifts to the left? Assume a long-run aggregate supply curve.
The equilibrium price level increases while the equilibrium quantity of output decreases.
What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate supply curve shifts to the left? Assume an upward-sloping aggregate supply curve.
The equilibrium price level increases while the equilibrium quantity of output decreases.
What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate demand curve shifts to the right? Assume a long-run aggregate supply curve.
The equilibrium price level increases while the equilibrium quantity of output remains unchanged.
Which of the following statements is positive?
The production possibilities frontier is concave to the origin because of the law of increasing costs.
Output in country X is 30,000 units and there are 3,000 persons working, while country Z has an output of 40,000 units and 8,000 workers.
The productivity of labor in country X is twice as much as country Z.
Which of the following is NOT an argument for restricting trade?
To fight inflation.
Which of the following is a fundamental economic question?
Who will get how much of each good and service?
Which of the following events has no effect on GDP?
You buy a 1957 Chevy from a friend.
which of the following will have an effect on GDP?
Your father's firm makes computers and exports them to China.
An effective price ceiling is characterized by
a price set below the current (or equilibrium) market price of the good.
When opportunity cost is constant across all production levels, the productions possibilities frontier is
a straight diagonal line sloping downward from left to right.
The size of the labor force in Japan is expected to shrink as a large segment of its population retires. This will
affect economic growth more than labor productivity.
Land refers to
all natural resources.
Lowering reserve requirements would
allow banks to make more loans and buy more investments thus increasing the money supply.
In the balance of payments, the trade balance
appears in the current account.
If demand for dollars rises while the supply of dollars falls, then
dollar will appreciate.
According to Monetarists theory, when the money supply is changed, the economy is affected
because interest rates change and so do many other factors that affect spending.
According to the way in which economists use the word, the bulk of "investment" is done by
businesses.
In order to conduct expansionary monetary policy, the Fed could use open market operations to
buy Treasury bonds in order to lower the federal funds rate.
The appropriate fiscal policy to remedy a recession
calls for the federal government to run a deficit.
Required reserves
can be held in a bank's vault or its account at the Fed.
Fiscal policy refers to
changes in government spending and taxes to fight recessions or inflations.
In the equation of exchange, if V and Q are constant, then
changes in the price level must be proportional to changes in the money supply.
With a managed float
countries sometimes intervene in foreign exchange markets.
Economic growth is
critical in determining the standard of living in a nation.
Fiscal policy is not always effective because of
crowding out and rational expectations.
Sue loses her job at a shoe factory when the economy falls into a recession. Sue is
cyclically unemployed.
Assume the reserve requirement is 10 percent. If the Fed sells $29 million worth of government securities in an open market operation, then the money supply can
decrease by $290 million.
One strategy a corporation may use to gain market share in a foreign market is
dumping.
Compared to a command economy, a capitalist economy emphasizes
efficiency.
When the Fed lowers the discount rate its intention is to
encourage borrowing by depository institutions so that the money supply may expand.
Keynes
explained the cause and cure for the Great Depression.
In the equation GDP = C+I+G+X, X stands for
exports minus imports.
The value of the U.S. dollar depreciates, [ceteris paribus], then U.S.
exports will rise.
A federal deficit occurs when
federal spending exceeds federal tax revenue.
According to Keynesian theory,
fiscal policy is the preferred way of shifting the aggregate demand curve.
It is unlikely that the unemployment rate will ever fall to zero because of
frictional unemployment.
In the market for goods and services in the circular flow diagram, households
get goods and services from firms.
In the market for resources in the circular flow diagram, households
get wages and profits from firms.
If a country has a negative value on its current account, then it must
have a positive value of equal magnitude on its capital plus financial account.
In the United States over the years, V and Q
have increased significantly.
Private industry can promote economic growth by
implementing innovative production techniques.
Allocative efficiency
implies optimal resource deployment.
The Federal Reserve is
in control of the money supply.
Assume the reserve requirement is 5 percent. If the Fed buys $4 million worth of government securities in an open market operation, then the money supply can
increase by $80 million.
The Phillips curve
indicates that inflation will be high when unemployment is low.
The primary focus of microeconomics is
individual units within the overall economy.
Stagflation occurs when
inflation and unemployment both rise.
If your grandparents have a new home built for their retirement, this would primarily affect
investment.
Real GDP
is GDP adjusted for price changes.
Scarcity
is an issue in every economy.
Expansionary fiscal policy
is less effective in an open economy with floating exchange rates.
Fiat money
is not backed by any precious commodity.
The Federal Open Market Committee
is part of the federal reserve system.
Economics is a social science that
is primarily concerned with how resources are used.
Say's Law
is the basis of classical economic analysis.
The velocity of money
is the number of times a typical dollar is used to make a purchase in a year.
The law of increasing costs
is the result of resources not being perfectly adaptable between the production of two goods.
The GDP Deflator
is used to calculate inflation rates. and is an alternative to the CPI.
When a country has a balance of trade deficit
its imports exceed its exports.
The government can promote economic growth by
job training programs.
A balance of trade surplus can be the result of
low levels of income relative to other nations.
Tariffs and quotas on imports
lower the amount of the product sold domestically.
According to Keynesian analysis, a decrease in money supply would
lower the price level and output in the economy.
According to monetarist analysis, a decrease in money supply would
lower the price level and output in the economy.
According to Classical economic theory, a decrease in the money supply would
lower the price level in the economy.
Rising prices are a problem because
money in household savings accounts can now buy fewer goods and services.
The CPI is calculated for each _____ by ____.
month; The Bureau of Labor Statistics
If the relative price of coffee rises due to a change in tastes in a capitalist society, then
more resources will be devoted to coffee production.
The cabbages you grow in your summer garden are
not counted in GDP.
GDP measures
production within a nations boarders. and income earned by the factors of production plus depreciation and indirect business taxes.
GDP measures
production, income earned during the production process, and spending by consumers, businesses, governments, and foreigners
GDP is calculated for each _____ by ______.
quarter; The Bureau of Economic Analysis
According to Keynesian theory, a decrease in money supply would
raise interest rates, which would discourage borrowing, and, therefore, reduce spending.
The standard of living will increase if
real GDP increases at a greater rate than the population.
According to the interest rate effect, aggregate demand slopes downward because lower prices
reduce interest rates and therefore increase the quantity demanded in aggregate.
An increase in the price level
reduces real financial wealth and therefore decreases consumer demand.
Market economies
rely on markets to coordinate economic activity.
The term "menu costs" refers to
resource misallocation due to inflation.
When the economy produces a combination of goods that lies on the production possibilities frontier,
resources are being used fully and efficiently.
Tariffs and quotas on imports
result in higher domestic prices.
If a capitalist society wants more coffee, then the relative price of coffee will
rise.
If the CPI goes to 150 from 120, then prices have
risen 25 percent.
If buyers bid up the price of a good, then
sellers will try to bring more of it to market.
In the market for resources in the circular flow diagram, households
send land, labor, and capital to firms.
There is a strong demand for welders in California but Bill, an unemployed welder, liver in New York. Bill is
structurally unemployed.
According to Monetarists theory,
the Fed should allow the money supply to grow at a constant rate.
To close an inflationary gap with fiscal policy
the aggregate demand curve should be shifted to the left.
To close a recessionary gap with fiscal policy
the aggregate demand curve should be shifted to the right.
In a command economy
the central government dictates the answers to the fundamental economic question.
One drawback of using fiscal policy to close a recessionary gap is that
the equilibrium price level will rise.
The appropriate fiscal policy to remedy inflation calls for
the federal government to run a surplus.
Production possibilities frontiers are concave to the origin because
the law of increasing costs.
If the Fed buys bonds in the secondary market
the money supply will increase.
Fisher's Hypothesis states that
the nominal interest rate equals the real interest rate plus the inflation rate.
Macroeconomics focuses on
the resource use of the entire nation.
If the government subsidizes the production of halogen headlights,
the supply curve will shift to the right.
If interest rates rise in the United States relative to other nations, then
the value of the dollar will tend to appreciate.
If the demand for our exports rises while our tastes for foreign goods falls off, then
the value of the dollar will tend to appreciate.
If prices rise in the United States relative to other countries, then
the value of the dollar will tend to depreciate.
If the market for corn is competitive, then
there must be many buyers and sellers.
The secondary market for government securities is
where government securities that have already been issued may be bought or sold.
The invisible hand
works in capitalist societies.
