An Introduction to Macroeconomics

The important questions about government policy that are clarified by macroeconomic models are:

(1) Are some government policy tools more effective than others? (2) Can government reduce the severity of recessions by smoothing out short-run fluctuations? (3) Is there a trade-off between lower rates of unemployment and higher rates of inflation (4) Can government promote long-run economic growth?

Which of the following are factors that increase short-run price stickiness?

(1) Consumers preferring stable and predictable prices (2) Firms' fear of price wars

What are the reasons that the Industrial Revolution is important to modern economic growth (i.e. an increase in output per person)?

(1) Increases in research and development led to more technology and innovation (2) Introduction of factory production led to increased rates of output (3) Introduction of automation made production more efficient

Which of the following will lead to better living standards and economic growth?

(1) Savings (2) Economic investment

Which of the following are examples of financial investment?

(1) Stocks (2) Bonds

Which of the following are true of the prices of many goods and services in the short run?

(1) They are inflexible (2) They are slow to change (3) They are "sticky"

Why do economists collect and analyze economic data?

(1) Understand how economies operate (2) Learn how economies' performance can be improved

Economic investment spending represents spending on:

newly created capital goods

When GDP is measured in "current prices," it is known as:

nominal GDP

A __________ demand shock refers to a situation in which demand turns out to be higher than expected. A __________ demand shock refers to a situation in which demand turns out to be lower than expected.

positive; negative

Purchasing __________ __________ adjusts for the fact that prices are much lower in some countries than others.

power parity

In the short-run, the __________ of many goods and services are sticky or inflexible and unable to rapidly change.

price

The biggest problem with inflation is that:

real income may fall as nominal wages do not keep up with price changes

Modern economic growth is best measured as an increase in:

real output per person

If prices are fully flexible, there will be no short-run fluctuations, which means output will __________ and unemployment will __________ because quantity demanded will always equal quantity supplied.

remain constant; not change

In simple terms, any income that is not consumed is

savings

An unanticipated event that changes the demand or supply of goods and services either positively or negatively is called an economic __________

shock

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are known as:

sticky prices

Flexible prices are prices:

that adjust freely through the forces of supply and demand

GDP per person measures:

the amount of output per person if total output were equally divided among everyone

Nominal GDP is:

the current market prices multiplied by current total output

Economists do not consider financial investments to be the same as economic investments because financial investments

transfer ownership of old assets from one party to another; they do not pay for newly created assets

The difference in growth rates among countries can best be explained by __________.

varying economic policies

The end result of inflation is a __________ in the purchasing power of money.

decrease

An event that unexpectedly shifts the demand curve is called a __________

demand shock

Financial intermediaries reduce the risk faced by savers through:

diversification of investment projects

Price stickiness moderates over time because:

firms that choose a fixed-price policy in the short run do not have to stick with that policy in the long run.

Financial intermediaries are:

organizations that receive funds from savers and then channel those funds to investors

__________ prices react within seconds to changing supply and demand while sticky prices sometimes take months to change.

Flexible

__________ in a country lead to high living standards.

High rates of economic growth

Which of the following indicate that a nation is not using a large fraction of the talents and skills of its people?

High unemployment rate

Which of the following best defines unemployment?

The state a person is in if she cannot get a job though she is willing to work and actively seeking work

What is the definition of real GDP?

The value of all final goods and services produced within a country during a given period of time, adjusted for inflation

If output prices were fully __________, output would remain constant and unemployment levels would not change.

flexible

As a result of shocks and things not going to plan there are

fluctuations in output and employment

An example of a good that has flexible prices is

gasoline

The principle source of savings is:

households

Inventories are useful because they can:

increase or decrease in periods when demand is unexpectedly high or low

Real GDP, unemployment, and __________ are the main statistics used by economists to assess the health of the economy.

inflation

Because output prices are __________, the economy is forced to respond in the short run to demand shocks primarily through changes in output and employment.

inflexible

If prices are __________, an unexpected decline in demand that persists for any length of time will eventually force a firm to cut production.

inflexible

The aggregate expenditures model assumes perfectly __________ prices while the aggregate demand-aggregate supply model allows for __________ prices.

inflexible; flexible

The short run in macroeconomics is the period in which:

input prices do not change at all or very much

Output that has been produced but not yet sold is called

inventory

Firms try to predict future trends so that they can:

invest only in projects that are likely to succeed.

Actions by businesses today that incur current costs and provide benefits in the future are called:

investments

What is the definition of inflation?

An increase in the overall level of prices

What event began the rapid and sustained economic growth that is a modern phenomenon?

Industrial Revolution

__________ GDP or adjusted GDP is an important measure of output because it allows valid comparisons between different years.

Real

How does real gross domestic product (GDP) differ from nominal GDP?

Real GDP controls for price changes while nominal GDP does not.

Business cycle fluctuations typically arise because:

actual demand ends up being lower or higher than expected

Rising inventories usually indicate:

an unexpectedly slowing economy

The main role of financial systems is to:

channel funds from savings into investments

A greater amount of GDP is preferred because it means that:

consumers have greater consumption possibilities

Nominal GDP is calculated by multiplying __________ market prices by currently produced quantities.

current