ECO Final

Which of the following is an example of cyclical unemployment?

Hector was laid off from his job with the airline because the recession reduced demand for airline travel. He expects to get his job back when the economy picks up. (This is cyclical unemployment because it was caused by a period of recession.)

If price is above the equilibrium price, then there will be

excess supply (If price is above the equilibrium price, the quantity supplied will be greater than the quantity demanded.)

An economy produces 1,000,000 computers valued at $2,000 each. Households purchase 200,000 computers, of which 100,000 are imported. Businesses purchase 300,000 domestically produced computers, the government purchases 300,000 domestically produced computers, and 100,000 domestically produced computers are sold abroad. At the end of the year, the computer manufacturers hold the unsold computers in inventory. What is the value of the investment component of GDP?

$1.0 billion (Investment is the amount of computers purchased by businesses (300,000) plus the amount of computers added to inventory (200,000), so investment is 500,000 × $2,000 = $1.0 billion.)

Suppose that Tom bought a bike from Lauren for $195. If Lauren's reservation price was $185, and Tom's reservation price was $215, the seller's surplus from this transaction was

$10 (Lauren valued the bike at $185, but sold it for $195, so her surplus is $10)

In Macroland there is $2,000,000 in currency. The public holds 50% of that currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10 percent, deposits in Macroland equal ______ and the money supply equals _______.

$10,000,000; $11,000,000 (In Macroland, banks hold $1,000,000 (0.5 × $2,000,000) in reserves, which must be 10 percent of deposits, so deposits are $10,000,000. Since the public also holds $1,000,000 ($2,000,000 − $1,000,000) in currency, the total money supply equals deposits and currency held by public or $10,000,000 + $1,000,000 = $11,000,000.)

In Econland, 500,000 of the 2 million people in the country are employed. Average labor productivity in Econland is $15,000 per worker. Real GDP per person in Econland totals

$11,250 (To find real GDP per person for Econland, multiply the average amount of output each worker produces times the percentage of population employed. In this case, real GDP per person is ($15,000) × (500,000/2,000,000) = $3,750.)

Taylor has the following assets and liabilities: 2 cars $15,000 House $400,000 Mortgage $300,000 Cash $1,000 Car loans $5,000 Checking account balance $3,000 Credit card balance $3,000 What is Taylor's wealth?

$111,000 (Taylor's wealth is the difference between assets of $419,000 and liabilities of $308,000. This different is $111,000)

Suppose when you are 21 years old, you deposit $1,000 into a bank account that pays 6 percent annual compound interest, and you do not withdraw from the account until your retirement at the age of 65, 44 years later. How much will be in the account when you retire?

$12,985 (Use the formula FV = PV (1 + i)n, where i is the interest rate and n is the number of years. At the interest rate of 6 percent, your deposit after 44 years = $1,000 × (1.06)44 = $12,985.)

Sam earns $25,000 per year (after taxes), and Sam's spouse, Ryan, earns $35,000 (after taxes). They have two pre-school-aged children. Childcare for their children costs $12,000 per year. Given that Ryan doesn't want to stay home with the kids, regardless of what Sam does, Sam should stay home with the kids if, and only if, the value of Sam spending more time with the kids is greater than

$13,000 per year (The benefit of Sam staying home with the kids is the $12,000 per year saved on childcare plus the value of Sam spending more time with the kids. The cost of Sam staying home with the kids is $25,000 in forgone earnings. Thus, weighing costs and benefits, Sam should stay home with the kids if, and only if, the value of Sam spending more time with the kids is greater than $13,000 per year.)

If 50 percent of the population in a country is employed and average labor productivity equals $30,000, then real GDP per person equals

$15,000 (To find real GDP per person, which gives the standard of living, multiply the average output each worker produces times the percentage of population employed. In this case, real GDP per person equals ($30,000 × 0.5) = $15,000.)

Pat earns $1,000 per week and spends $850 per week on living expenses, puts $50 in a savings account, and buys $100 worth of shares in a stock mutual fund. Pat's savings are _____, and Pat's saving rate is _____.

$150; 15% (The savings rate is the amount saved divided by income. In this case, saving is $150, which is the income not spent on current needs, and the saving rate is $150/$1,000 = 0.15, or 15 percent.)

There is $5,000,000 of currency in Econland, which are all held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is 0.25, then the money supply equals

$20,000,000 (With the existing desired reserves by banks, the money multiplier is 1/0.25 = 4. If $5,000,000 is the bank reserves, then the money supply is $5,000,000 × 4 = $20,000,000.)

Carlos purchases a bond, newly issued by the Big Time Corporation, for $20,000. The bond pays $1,000 to its holder at the end of the first, second, and third years and pays $21,000 upon its maturity at the end of four years. The principal amount of this bond is _____, the coupon rate is _____, and the term of this bond is _____.

$20,000; 5%; four years (The principal is the original amount borrowed, i.e., $20,000 in this case. The annual payment is $1,000, which is the principal times the annual interest rate (or $1,000/$20,000 = 0.05, or 5 percent). At maturity, which is after four years, the bondholder gets his/her money back plus the annual interest payment.)

Refer to the accompanying figure. The equilibrium price is ______, and the equilibrium quantity is ______.

$35; 20

Your classmates from the University of Chicago are planning to go to Miami for spring break, and you are undecided about whether you should go with them. The round-trip airfare is $600, but you have a frequent-flyer coupon worth $500 that you could use to pay part of the airfare. All other costs for the vacation are exactly $900. The most you would be willing to pay for the trip is $1,400. Your only alternative use for your frequent-flyer coupon is for your trip to Atlanta two weeks after the break to attend your sister's graduation, which your parents are forcing you to attend. The Chicago-Atlanta round-trip airfare is $450. What is the opportunity cost of using the coupon for the Miami trip?

$450 (if you use the coupon for the Miami trip you lose the value of using it to go to Atlanta)

As real wages decrease, firms desire more employees. Conversely, as real wages decrease, fewer people find it worthwhile to work or workers desire fewer hours.

$46,050 (Use the formula FV = PV (1 + i)n, where i is the interest rate and n is the number of years, so that your deposit after 50 years = $2,500 × (1.06)50 = $46,050.)

Suppose that Tom bought a bike from Lauren for $330. If Lauren's reservation price was $300, and Tom's reservation price was $350, the total economic surplus from this transaction was

$50 (Tom valued the bike at $350 and Lauren valued the bike at $300, so the total economic surplus from this transaction is $50 (= $350 − $300).)

You expect a share of EconNews.Com to sell for $65 a year from now and to pay a $2 dividend per share in one year. What should you pay (rounded to the nearest dollar) for the stock today if you require an 8 percent return?

$62 (If you require an 8 percent return, you must discount future payments by that amount. Using the present value equation: PV (current stock price) = FV (future value)/(1 + i), where PV = ($65 + $2)/1.08 = $62.04.)

If real GDP per person in a country equals $40,000 and 60 percent of the population is employed, then average labor productivity equals

$66,667 (If real GDP per person is obtained by multiplying the average output each worker produces times the percentage of population employed. Then average output per worker or average labor productivity is = real GDP divided by the percentage of population employed = $40,000/0.60 = $66.667.)

Lauren was accepted at three different graduate schools, and she must choose one. Elite U costs $50,000 per year and did not offer Lauren any financial aid. Lauren values attending Elite U at $60,000 per year. State College costs $30,000 per year and offered Lauren an annual $10,000 scholarship. Lauren values attending State College at $40,000 per year. NoName U costs $20,000 per year and offered Lauren a full $20,000 annual scholarship. Lauren values attending NoName at $15,000 per year. Lauren's opportunity cost of attending Elite U is

$70,000 (If Lauren attends Elite U, she not only has to pay out-of-pocket expenses, but she also has to give up the value of her next-best option. So her opportunity cost of going to Elite U is $70,000.)

If the Central Bank of Macroland puts an additional $1,000 of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______.

$9,000; $10,000 (In this case, the money multiplier is 1/0.10 = 10. If 1,000 new dollars of currency are deposited in banks, they must hold $100 as required reserves and can lend out $900. Through the money multiplier, loans will increase by $900 × 10 = $9,000. The expansion of the money supply is the original deposit(s) + the increase in loans or $1,000 + $9,000 = $10,000.)

Real GDP per person in both Alpha and Omega is equal to $2,000. Over the next 100 years, real GDP per person grows at a 1 percent annual rate in Alpha and at a 2 percent annual rate in Omega. After 100 years, real GDP per person in Alpha is ______ smaller than real GDP per person in Omega.

$9,080 (For Alpha, the future value equation is: Future GDP = $2,000 × (1.01)100 = $5,409.6. For Omega, the future value equation is: Future GDP = $2,000 × (1.02)100 = $14,489.3. The difference is $9,079.7 or $9,080.)

Okun's law

1 percent more unemployment results in 2 percent less output

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6 percent paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 7 percent coupon rate?

$9,907 (In equilibrium, the previously issued bond must pay the same as the newly issued bond. The previously issued bond pays $10,000 × 1.06 = $10,600 when redeemed in a year, while the newly issued one-year bond pays $10,000 × 1.07 = $10,700. Therefore, Sydney's previously issued bond requires a discount. Since the price of Sydney's bond must allow the purchaser to earn the same 7 percent as on the newly issued bond, the bond price can be computed as: Bond price × 1.07 = $10,600 or Bond price = $10,600/1.07 = $9,907.)

output gap (in percentage)

(Y-Y*)/ Y* x 100

On January 1, 2008, Edwardo invested $10,000 at 5 percent interest for one year. The CPI on January 1, 2008 stood at 1.60. On January 1, 2009, the CPI was 1.76. The real rate of interest earned by Edwardo was ______ percent.

-5 (The real rate of interest equals the nominal rate of interest minus inflation. In this case, the real rate was −5 percent because the inflation rate was 10 percent from 2008 to 2009: (1.76 − 1.60) / 1.6 = 0.10 or 10 percent.)

The consumer price index for Planet Econ consists of only two items: books and hamburgers. In 2018, the base year, the typical consumer purchased 10 books for $25 each and 25 hamburgers for $2 each. In 2020, the typical consumer purchased 15 books for $30 each and 30 hamburgers for $3 each. The consumer price index for 2020 on Planet Econ equals

1.25 (First, note that in the computation of the CPI, the basket of goods and services is fixed - so the quantities remain the same as in the base year. The market basket cost in 2018 was (10 × $25) + (25 × $2) = $300. The same market basket's cost in 2020 was (10 × $30) + (25 × $3) = $375, so the consumer price index is 1.25.)

Based on the information in the table, what is the unemployment rate? Population 16 and older: 2,000,000 participation rate: 63% employment workers: 1,100,000

12.7% (There are 1,260,000 in the labor force, i.e., 2,000,000 × 0.63. From this labor force, 1,100,000 are employed and so 160,000 must be unemployed. The unemployment rate is 160,000/1,260,000, or 12.7 percent.)

If the money supply equals 1,250, velocity equals 5, and real GDP equals 3,125, then the price level equals

2 (The quantity equation says: P × Y = M × V. In this case, (P × 3,125) = 1,250 × 5, or P = 6,250/3,125 = 2. Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock. In this case, V = / 6,250 = 2.)

The CPI in year one equaled 1.45. The CPI in year two equaled 1.51. The rate of inflation between years 1 and 2 was ______ percent.

4.1 (The percentage change in CPI is calculated as: (current price index − historic prices)/historic price index. In this case: (1.51 − 1.45)/1.45 = 0.041, or 4.1 percent.)

If real GDP equals 5,000, nominal GDP equals 10,000, and the price level equals 2, then what is velocity if the money stock equals 2,000?

5 (Numerically, V = (P × Y)/M, where V is velocity, P × Y is nominal GDP, and M is the money stock. In this case, V = 10,000/2,000 = 5.)

Refer to the accompanying table. Julia's opportunity cost of making a pie is Time to Make a Pie: Kate: 60 minutes Julia: 50 minutes Time to Make a Cake: Kate: 80 minutes Julia: 60 minutes

5/6 of a cake (In the time it takes Julia to make a pie, she could have made 5/6 (= 50/60) of a cake.)

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually fell to $981. The one-year interest rate must be

7% (In equilibrium, both bonds have the same yield. Thus, $981 × (1 + i) = $1,000 × (1.05). Solving for i: 1 + i = $1,050/$981 and i = 0.07, or 7 percent.)

In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs but wanted them. How many people are in the labor force of this town?

73 (The age-eligible population is 90, taking out the 10 children who are too young to work. The labor force is 73, taking out the 17 people who are not in the labor force (retired, full-time students, and homemakers).)

Tamika is lending Juan $1,000 for one year. The CPI is 1.60 at the time the loan is made, and they both expect it to be 1.68 in one year. If Tamika and Juan agree that Tamika should earn a 3 percent real return for the year, the nominal interest rate on this loan should be ______ percent.

8 (The inflation rate is expected to be 5 percent: (1.68 − 1.60) / 1.6 = 0.05. To achieve a real return of 3 percent, the nominal rate has to be 3 percent higher than the rate of inflation, or 5 percent + 3 percent = 8 percent.)

In Econland population and average labor productivity are constant. If a larger proportion of the population becomes employed workers, then total output will _____ and output per person will ______.

Increase; Increase (If a larger proportion of a constant population becomes employed, and average labor productivity is also constant, then the total output must increase as more people are actively producing output. With more output and a constant population, output per person must also be increasing.)

The Cost-Benefit Principle indicates that an action should be taken if

Its extra benefit is greater than or equal to its extra cost. (The extra benefits and extra costs from taking an action determine whether that action should be taken.)

Refer to the accompanying table. ______ has the comparative advantage in making pies and ______ the comparative advantage in making cakes. Time to Make a Pie: Kate: 60 minutes Julia: 50 minutes Time to Make a Cake: Kate: 80 minutes Julia: 60 minutes

Kate; Julia (Kate's opportunity cost of making a pie (3/4 of a cake) is less than Julia's (5/6 of a cake), and Julia's opportunity cost of making a cake (6/5 of a pie) is less than Kate's (4/3 of a pie).)

M1 differs from M2 in that

M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.

Recessionary vs expansionary

Recessionary: Real GDP< potential GDP Expansionary: Real GDP> Potential GDP

Where Y is GDP, C is consumption, I is investment, G is government spending, T is net taxes, and there is no international trade, private saving equals

Y-T-C (In this closed economy, private saving equals GDP minus taxes minus consumption.)

Chris has a one-hour break between classes every Wednesday. Chris can either stay at the library and study or go to the gym and work out. The decision Chris must make is

an economic problem because Chris has only one hour, and engaging in one activity mean giving up the other (Chris has to make a trade-off: if Chris goes to the gym, Chris cannot also study and vice versa.)

Suppose you observe an increase in the equilibrium price of coffee and a decrease in the equilibrium quantity of coffee. Of the options listed below, this is most consistent with

an increase in the cost of producing coffee (An increase in the equilibrium price of coffee and a decrease in the equilibrium quantity of coffee suggest that the supply of coffee has decreased. An increase in the cost of producing coffee would lead to a decrease in the supply of coffee.)

When a slice of pizza at the student union sold for $2, Moe did not purchase any. When the price fell to $1.75, Moe purchased a slice each day for lunch. Thus, we can infer that Moe's reservation price for a slice of pizza is

at least $1.75 but less than $2 (A buyer will purchase an item if, and only if, its price is less than or equal to the buyer's reservation price. Since Moe buys a slice of pizza for $1.75, his reservation price must be at least $1.75, and since he does not buy a slice of pizza for $2.00, his reservation price must be less than $2.00.)

Holding other factors constant, if a tax increase moves the government budget from deficit to surplus, then the real interest rate will ______ and the equilibrium quantity of national saving and investment will ____.

decrease; increase (When the government reduces its deficit, it increases the supply of loanable funds to private businesses, shifting the supply of savings right. The real interest rates decrease but the quantity of national savings and investment increase.)

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will ______ net capital inflows and ______ the equilibrium domestic real interest rate.

decrease; increase (Increased interest rates abroad cause both domestic and foreign investors to turn their attention to foreign investments. This decreases net capital inflows and thus, increases the domestic real interest rate.)

At each value of the domestic interest rate, increases in the riskiness of domestic assets ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

decrease; increase; decrease (Increased riskiness of domestic assets induces both domestic and foreign investors to desire foreign investments. This decreases capital inflows, increases capital outflows, and decreases net capital inflows.)

If the CPI equaled 1.00 in 2008 and 1.65 in 2018 and a typical household's income equaled $35,000 in 2008 and $40,000 in 2018, then between 2008 and 2018, real household income

decreased (Household real income fell because real income was $35,000 ($35,000 / 1.00) in 2008 and only $24,242 ($40,000 / 1.65) in 2018.)

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ______ and public saving ______.

does not change; increases (Private saving consists of household and business savings. In this case, the decrease in household saving was offset by an equal increase in business saving. Public saving depends on the budget surplus. In this case, the government reduced its deficit by $4 million, so public saving increased.)

Emily did not like her job as a receptionist, so she quit and is looking for one that better suits her artistic talents. Ting Pei would like to work, but employers are not willing to hire him because he does not speak English. Emily is ______ unemployed and Ting Pei is ______ unemployed.

frictionally; structurally (Emily expects to be out of work for a short while as she finds a better fit for her talents. Ting Pei, on the other hand, might be out of work for a long time as he learns a new language that will make him more employable.)

Countries with large amounts of capital per worker tend to have ______ levels of real GDP per person and ______ levels of average labor productivity.

high; high (Countries with large amounts of capital per worker benefit from high productivity; this results in high real GDP per person.)

Other things equal, the combination of a ______ saving rate and a ______ real interest rate will result in the largest accumulation of wealth over time.

high; high (If savings rates are high and the annual earnings on those savings are high, it results in large accumulation of wealth over time.)

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ______ and there is a capital ______ the United States.

imports increase; inflow to (The wine purchase by the U.S. restaurant is an import. With U.S. currency in hand, the French wine company's purchase of U.S. government debt is a capital inflow to the United States.)

As the differences in opportunity costs between the U.S. and its trading partners increase, the potential gains from specialization and trade ______.

increase (The gains from specialization and trade grow with increases in the opportunity costs between trading partners.)

Holding other factors constant, a technological improvement that increases the marginal product of capital will

increase investment (As capital productivity increases, investors are more inclined to invest.)

An increase in the size of the working-age population

increase labor supply (When the working-age population increases, the potential labor supply increases.)

Holding other factors constant, if a change in tax laws discourages people from saving more for retirement, then the real interest rate will ______ and the equilibrium quantity of saving and investment will _____.

increase; decrease (When people save less for retirement, the supply of savings shift left, and real interest rate increases while the quantity of national saving and investment decrease.)

Stock prices increase when expected future dividends _____, interest rates _____, and/or the risk premium _____.

increase; decrease; decrease (Higher future dividends increase the expected future value of a stock, which increases the stock price as it makes the stock more attractive compared to alternate assets. Similarly, when market interest rates fall, newly issued bonds become less attractive compared to stocks, so stock prices increase as savers choose to move funds to stocks from bonds. Finally, when a stock's riskiness falls, there is a smaller risk premium, which also causes a stock's price to rise.)

Holding constant risk and the real returns available abroad, higher domestic real interest rates ______ capital inflows, ______ capital outflows, and ______ net capital inflows.

increase; decrease; increase (Higher domestic real interest rates make both domestic and foreign investors more likely to invest in the domestic economy compared to foreign economies. This increases capital inflows, reduces capital outflows, and increases net capital inflows.)

Holding other factors constant, if oil prices rise relative to the prices of other products, then the real wages of oil workers will ______ and employment of oil workers will _____.

increase; increase (If oil prices rise, then producers of oil will be more inclined to hire workers and there will be more demand for oil workers (demand shifts right). As a result, wages and employment will increase.)

One family earned an income of $28,000 in 1995. Over the next five years, their income increased by 15 percent, while the CPI increased by 12 percent. After five years, this family's nominal income ______, and their real income ______.

increase; increase (The family's nominal income increased, as it was 15 percent higher in 2000. The family's real income also increased because their percentage income gains were greater than the percentage price level increases. In other words, their nominal income grew faster than average prices increasing the purchasing power or real income of the family.)

If the price of motel rooms increases by 10 percent while the prices of other goods and services increase by 5 percent on average, the relative price of motel rooms has

increased (In this case, motel rooms prices increased by more than other goods and services, so the relative price of motel rooms increased.)

According to the quantity equation, if velocity and real GDP are constant, and the Federal Reserve increases the money supply by 5 percent, then the price level

increases by 5% (The quantity equation says: P × Y = M × V. In this case, if M goes up by 5 percent then then P × Y must also go up 5 percent. Since Y is constant, P must go up by 5 percent._

An increase in the price of the output produced by labor will

increases the demand for labor (When the price that the firm can sell output increases, more workers will be desired. The labor demand curve shifts to the right.)

As the real wage decreases, the quantity of labor demanded ______ and the quantity of labor supplied _______.

increases; decreases (As real wages decrease, firms desire more employees. Conversely, as real wages decrease, fewer people find it worthwhile to work or workers desire fewer hours.)

Assume that the union wage already exceeds the market-clearing wage. If the union wage is increased, holding other factors constant, then the number unemployed ______ and the number employed _____.

increases; decreases (At wages above the market-clearing level, more workers are supplied than demanded. If the wage goes up from there, the number unemployed will increase further because more labor will be supplied and even less will be demanded. The decrease in the quantity of labor demand is the same thing as a decrease in the number of employed.)

Holding other factors constant, technological progress ______ the real wage and ______ employment.

increases; increases (Technical progress almost always increases worker productivity, which makes workers more desirable to employers. The demand for labor will shift right and therefore puts upward pressure on wages and increases employment too.)

Alpha has $40,000 of capital per worker, while Beta has $5,000 of capital per worker. In all other respects, the two countries are the same. According to the principle of diminishing returns to capital, an additional unit of capital will increase output ______ in Alpha compared to Beta, holding other factors constant.

less (Since Alpha starts out with more capital per worker, the marginal increase in worker output in Alpha is less than the marginal increase in Beta (where workers have much less capital to begin with).)

Based on the accompanying table and assuming that returns to capital are positive but diminishing, then total packages wrapped when a fourth machine is installed must be ______ packages. # of machines total packages wrapped 1 10,000 2 13,000 3 15,000

less than 17,000 (The marginal return to the first machine was 10,000 packages, the marginal return to the second machine was 3,000 packages (13,000 − 10,000), and the marginal return to the third machine was 2,000 packages (15,000 − 13,000). Thus, the marginal return to the third machine has to be less than 2,000 packages, which makes the total less than 17,000 packages.)

A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A college graduate in 2019 found a job paying $60,000. The CPI was 2.40 in 2019. The 1972 graduate's job paid ______ in nominal terms and ______ in real terms than the 2019 graduate's job.

less; less (The 1972 graduate's job paid less not only in nominal terms ($7,200 is clearly less than $30,000) but also in real terms. The real wage for the 1972 graduate was $17,225 ($7,200/0.418) compared to $25,000 ($60,000/2.40) for the 2019 graduate.)

If average labor productivity in two countries is the same, average living standards will be lower in the country with the

lower share of population employed (To find real GDP per person, which gives the standard of living, multiply the average output each worker produces times the percentage of population employed.)

The slope of a production possibilities curve is ______ because ______.

negative; producing more of one good requires producing less of the other (The downward slope of the production possibilities curve shows that having more of one good means having less of the other.)

According to the accompanying table, Kate has the absolute advantage in making Time to Make a Pie: Kate: 60 minutes Julia: 50 minutes Time to Make a Cake: Kate: 80 minutes Julia: 60 minutes

neither pies nor cakes (It takes Kate longer to make both pies and cakes than Julia.)

If both the lender and borrower agree on an 8 percent interest rate, both expect a 4 percent inflation rate, and inflation turns out to be 4 percent, then ______ by the inflation.

neither the borrower nor the lender is hurt (When inflationary expectations are fulfilled, neither the lender nor the borrower is hurt by inflation.)

If the demand for cucumbers and tomatoes both fall when income rises, then we know that tomatoes and cucumbers are

normal goods (Two goods are complements if an increase in the price of one good leads to a decrease in the demand for the other. Two goods are substitutes if an increase in the price of one good leads to an increase in the demand for the other. A good whose demand increases when the incomes of buyers increase, or whose demand decreases when the incomes of buyers decrease is called a normal good. A good whose demand decreases when the incomes of buyers increases or whose demand increases when the incomes of buyers decrease is called an inferior good.)

"Any tax cut to increase demand for output should favor lower-income people" is a ______ statement about ______ policy.

normative; fiscal (Normative analysis addresses the question of whether a policy should be used and inevitably involves the values of the person doing the analysis. Normative statements comment on the desirability of an action and often include terms such as should. Fiscal policy refers to decisions that determine the government's budget and includes decisions on the amount of taxes collected.)

The value of output was $1,000 billion in Northland and $2,000 billion in Southland. The population of Northland was 50 million and the population of Southland was 120 million. There were 30 million employed workers in Northland and 75 million employed workers in Southland. Average labor productivity was higher in _________ and the standard of living was _______.

northland; higher in northland (Average labor productivity, which is output per employed worker, was $33,333 ($1,000 billion/30 million) in Northland and 26,667 ($2,000 billion/75 million) in Southland. So average labor productivity was higher in Northland. The standard of living, as measured by output per person, was $20,000 ($1,000 billion/50 million) in Northland and 16,667 ($2,000 billion/120 million) in Southland. So the standard of living was also higher in Northland.)

Janie must choose to either mow the lawn or wash clothes. If she mows the lawn, she will earn $21, and if she washes clothes, she will earn $27. She dislikes both tasks equally and they both take the same amount of time. Janie will therefore choose ______ because ______.

not to mow the lawn; it generates a smaller economic surplus (Because both activities have the same cost (Janie's time and her dislike of the task), the activity with the greatest benefit will yield the greatest economic surplus.)

"If the Federal Reserve raises interest rates, demand for housing is likely to fall" is a _______ statement about ________ policy.

positive; monetary (Positive analysis aims at determining only the economic consequences of a particular event, not whether those consequences are desirable. Monetary policy is the control of the money supply and thereby interest rates.)

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve-deposit ratio is 0.1. Assuming the values of the currency held by the public and the desired reserve-deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ______ government bonds.

purchase of 50 (When the Central Bank wants to increase the money supply, it must purchase government from the public. To compute the amount of the purchase it uses the equation: MS = currency held by the public + (bank reserves/desired reserve-deposit ratio). In this case, currency held by the public is unchanged, so the increase MS by 500 comes from (bank reserves/desired reserve-deposit ratio): (x/0.1) = 500, where x is the increase in bank reserves. In this case x = 50 (500 × 0.1), so an open-market purchase of 50 is appropriate.)

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve-deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve-deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ______ government bonds.

purchase of 50 (When the Central Bank wants to increase the money supply, it must purchase government from the public. To compute the amount of the purchase it uses the equation: MS = currency held by the public + (bank reserves/desired reserve-deposit ratio). In this case, currency held by the public is unchanged, so the increase MS by 500 comes from (bank reserves/desired reserve-deposit ratio): (x/0.10) = 500, where x is the increase in bank reserves. In this case x = 50, so an open-market purchase of 50 is appropriate.)

recessionary vs expansionary output gap

recessionary gap is negative: Y*>Y expansionary gap is positive: Y*<Y

cyclical unemployment is the different between total unemployment

recessionary gaps have u>u* expansionary gaps have u<u*

shift in supply

result in a higher equilibrium price and a lower equilibrium quantity

shift in demand

result in a lower equilibrium price and a higher equilibrium quantity.

An increase in an economy's productive resources will lead the production possibilities curve to

shift outward (An increase in an economy's productive resources makes it possible to increase the production of all goods, leading the PPC to shift outward.)

Normative economic principles are concerned with how people ______ make decisions while positive economic principles are concerned with how people ______ make decisions.

should; do (Normative economic principles describe how people should behave; positive economic principles predict how they will behave.)

Refer to the accompanying figure. Suppose the solid line shows the current demand for coffee. In response to a news story explaining that coffee causes heart disease, you should expect

the demand curve to shift down because people will stop drinking coffee (News that coffee causes heart disease will lead to a decrease in the demand for coffee.)

Two countries, Alpha and Beta, have the same levels of nominal and real GDP. Each dollar in Alpha is used more frequently than each dollar in Beta. Therefore, it must be the case that ______ in Alpha than in Beta.

the money stock is smaller (This comes from the Quantity Equation which says: P × Y = M × V and M = P × Y/V. In this case, both countries have the same PY. In Alpha, V is larger than it is in Beta. Therefore, M has to be smaller in Alpha than Beta.)

The market interest rate in Alpha is 7 percent, and the market interest rate in Beta is 10 percent; the inflation rate in Alpha is 3 percent, and inflation rate in Beta is 8 percent. Which of the following statements is true?

the real interest rate is higher in Alpha, but the nominal interest rate is higher in Beta (In Alpha, the real interest rate is 7 percent − 3 percent = 4 percent. In Beta, the real interest rate is 10 percent − 8 percent = 2 percent. Thus, the real interest rate is higher in Alpha and the nominal interest rate is higher in Beta.)

After the price of Revlon nail polish increased, Jen stopped buying Revlon nail polish and started buying a cheaper brand of nail polish instead. This is called

the substitution effect of a price change (Jen is looking to switch to a lower-priced substitute for name-brand nail polish)

Refer to the accompanying figure. Suppose all the sellers in this market started out charging a price of $45 per unit. What is the most likely result?

they would lower their prices because at $45 there would be excess supply (At a price of $45, there would be excess supply, so sellers would have an incentive to lower their prices in order to increase sales.)

The Cub Scouts and Girl Scouts have so far sold 300 tickets for their upcoming raffle, but they sell an additional 32 tickets every day. The ______ is a stock variable, and the ______ is a flow variable.

total number of tickets sold by the time of the raffle; number of tickets sold each day (Total tickets sold by the time of the raffle is a stock variable because it is measured at a moment in time. The number of tickets sold each day is a flow variable because it is measured over time.)

If domestic saving is less than domestic investment, then a country will have a ______ and positive net capital ______.

trade deficit; inflows (If domestic savings is less than domestic investment then capital inflows are positive. This follows from the equation S + KI = I. Since KI is positive, NX must be negative (there must be a trade deficit), as is shown by the equation NX + KI = 0.)

Whether studying the output of the U.S. economy or how many classes a student will take, a unifying concept is that

wants are unlimited and recourses are scarce, so trade-offs have to be made. (The Scarcity Principle states that although we have boundless needs and wants, the resources available to us are limited. So having more of one thing means having less of another.)