Economics Chapter 9, ECON 131 Final, Ch 16 Review, AP Macro Econ Ch 15 & 16, Test Practice Questions (Exam 3), Chapter 10 Macro Review, Macro Final
what constitutes M1?
currency (paper money and coins), checking account, and travelers checks
what are the 5 most important variables in consumption spending
current disposable income, household wealth, expected future income, price level, and interest rate
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall, increase
Congress and the president carry out fiscal policy through changes in
government purchases and taxes
National saving equals
income - consumption - government spending
If people assume that future rates of inflation will ___, they are said to have adaptive expectations.
follow the pattern of inflation rates in the past
If the Fed pursues expansionary monetary policy,
aggregate demand will rise(shift to the right), and the price level will rise
Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ___ through changing ___.
aggregate supply; taxes
The theory that, in the long run, fiscal policy is self-destructive is defined as:
crowding out
The government purchases multiplier equals change in (blank) divided by the change in (blank)
equilibrium real GDP; government purchases
The tax multiplier equals the change in (blank) divided by the change in (blank)
equilibrium real GDP; taxes
The tax multiplier equals the change in ___ divided by the change in ___.
equilibrium real GDP; taxes
what are the 4 functions of money
exchange, unit of account, store value, and deffered payment
Refer to the Article Summary. When Fed Chair Janet Yellen announced that a rate increase would be warranted by the end of the year, she was referring to the
federal funds rate
* The Taylor rule helps explain the relationship between the Fed's _____ and ____.
federal funds target; economic conditions
Fiscal policy refers to
federal taxes and purchases that are intended to achieve macroeconomics policy objectives
A barter economy is an economy where
goods and services are exchanged for other goods and services
Falling interest rates can
increase a firm's stock price, which causes firms to issue more stock shares, and thus increase funds for investments
Refer to Figure 16-4. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?
increase government spending
A countercyclical policy is one that
is used to attempt to stabilize the economy.
The dynamic AD-AS model assumes
potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.
The aggravated demand curve shows the relationship between what?
price level and quantity of real GDP demanded by households, firms, and the government
The Federal Reserve System's four monetary policy goals are
price stability, high employment, economic growth, and stability of financial markets and institutions
money serves as a unit of account when
prices of goods and services are stated in terms of money
Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?
reserve requirements
The Fed seeks to promote stability of financial markets because
resources are lost when there is not an efficient matching of savers and borrowers
When the United States sends money to the Philippines to help typhoon survivors, the transaction is recorded in
the current account
* If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would be to increase by _____ to restore the economy to potential real GDP
$250 billion
If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by _____ to restore the economy to potential real GDP
$250 billion
If a country experiences a real GDP growth rate of 1 percent and population growth of 2 percent, then the growth rate of real GDP per person is A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent. E) -1 percent.
-1 percent
U.S. real GDP in 2007 was $13.25 trillion and U.S. real GDP in 2008 was $13.31 trillion. What was the economic growth rate of the United States during this period? A) $1.8 trillion B) 0.45 percent C) 18 percent D) 6.9 percent E) -1.36 percent
0.45 percent
Suppose a transaction changes a bank's balance sheet as indicated in the following T - account, and the required reserve ratio is 10 percent ________________________ Assets | Liabilities | Reserves +2000 | Deposits +2000 ------------------------------------------ As a result of the transaction, the bank can make a maximum loan of
1,800
What causes shifts in the aggregate demand curve?
1. Changes in government policies 2. Expectations of households and firms. 3. Changes in foreign variables
Why does the short-run aggregate supply curve slope upward?
1. Contracts keep wages "sticky." 2. Firms are slow to adjust wages in an attempt to maximize profits. 3. Menu costs keep prices "sticky."
Borrowers are ____ of loanable funds, and lenders are _____ or loanable funds? Demanders or Suppliers
1. Demanders 2. Suppliers
What causes an inverse effect (or downward sloping) aggregate demand curve?
1. Wealth effect 2. Interest rate effect 3. International-trade effect
If real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? A) -1.5 percent B) 1.5 percent C) 2.1 percent D) $0.2 trillion E) 15.0 percent
1.5 percent
How to calculate value of the multiplier?
1/(1-MCP)
What is the multiplier formula?
1/(1-MPC)
the formula for simple deposit multiplier is
1/RR or ratio of deposits by amount of new reserves
* Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account ______________________ Assets | Liabilities | Reserves +1000 | Deposits +1000 -------------------------------------- At this point, what percentage of the new deposits does Well Fargo hold in reserves?
100 percent
What years did the rate of real GDP per hour worked slow in the United States?
1974-1995 and 2006-2016
If an economy's growth rate of real GDP is 3 percent per year and the growth rate of the population is 2.5 percent per year, the growth rate of real GDP per person is A) [(2.5 - 3) ÷ 3] × 100 = 16.6 percent per year. B) 3 - 2.5 = 0.5 percent per year. C) 2.5 - 3 = -0.5 percent per year. D) 3 + 2.5 = 5.5 percent per year. E) [(3 - 2.5) ÷ 2.5] × 100 = 20 percent per year.
3 - 2.5 = 0.5 percent per year.
If Country A's real GDP grows at a rate of 14 percent per year, about how many years will it take for Country A's real GDP to double? A) 30 B) 10 C) 5 D) 14 E) 7
5
What is the stable unemployment rate?
5%
16-1. Suppose the economy is in a recession and expasionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to B
16-1. Suppose the economy is in the short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to B
Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to B
Refer to figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from
A to B
Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from
A to E
According to the dynamic AD-AS model, what is the most common cause of inflation?
A. AD increases by more than LRAS. B. Total spending increases faster than total production.
The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?
A. AE = C + I + G + NX
Firms that act as financial intermediaries match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provide to savers and lenders? (Mark all that apply.)
A. Collects and communicates information about borrowers to savers B. Allows savers to spread their money among many financial investments. C. Provides an easy method of exchanging a financial security for money.
We can use the diagram to compare movements in real consumption between 1979 and 2017.
A. Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions.
Why might the unemployment rate continue to rise during the early stages of a recovery?
A. Employment growth may be slow relative to the growth in the labor force. C. Some firms continue to operate well below their capacity even after a recession has ended.
The figure to the right illustrates the relationship between weak and strong rule-of-law LOADING... countries and economic growth. In addition to a country's failure to enforce rule-of-law, what else explains why more low-income countries do NOT experience rapid growth as the catch-up line predicts?
A. Lengthy civil wars B. Shortage of childhood vaccinations C. Inability to borrow money needed for investment
New growth theory suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge capital?
A. Public education B. Subsidies C. Patents
Indicate which of the following is correct about the multiplier effect.
A. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. B. The larger the MPC, the more additional consumption that occurs. C. A decrease in autonomous spending decreases real GDP by a multiple of the change. D. All of the above.
Which of the following is NOT included in the calculation of total government purchases?
A. Unemployment insurance benefits paid for by the federal government (Transfer Payments)
In the aggregate expenditure model, when is planned investment greater than actual investment?
A. When there is an unplanned decrease in inventories.
Which of the following is usually the cause of stagflation?
A. a supply shock as a result of an unexpected increase in the price of a natural resource
The long-run aggregate supply curve is vertical because in the long run
A. changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may
All are correct. Raise interest rates and reduce consumer expenditures on automobiles and new houses, make domestic business less competitive in international markets as the dollar appreciates in value, and reduce investment in new capital.
If net exports are equal to net foreign investment,
All are true. The current account balance is equal to the negative of the financial account balance, the balance of payment is zero, and net capital inflows are equal to imports minus exports.
Which of the following is a function that money serves? (store of value, unit of account, medium of exchange, or all of the above)
All of the above
Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy?
All. Private investment, consumption, and net exports
How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade?
An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade
The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model What would be the Fed's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06? That is, what step will the Fed likely take to control inflation in the second period?
An open market sale of government securities.
What is the Fed doing to increase the credibility of its policies?
Announcing the federal funds target rate. Whenever a change in policy is announced, the change actually takes place.
The economic definition of money is:
Any asset that people are generally willing to accept in exchange for goods and services
A shift in the aggregate demand curve is caused by?
Any factor other than price change like... 1. Increases in labor and in the capital stock. 2. Technology 3. Expected changes in the future price level 4. Adjustments to past errors in expected price level 5. Unexpected change in the price of an important natural resource
According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labor in the economy D) Both A and C are correct answers.
B
If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from A) 23.3 years to 20.6 years. B) 23.3 years to 17.5 years. C) 11.2 years to 10.8 years. D) 28.0 years to 21.0 years
B
If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be A) increased as aggregate real income and output rise in the long run. B) less than it would be without the supply-side effects. C) unaffected by shifting long-run aggregate supply curve. D) dependent upon the impact of this tax change on consumer disposable income.
B
In a closed economy, private saving is equal to which of the following? A) Y-C-T B) Y+TR-C-T C) Y-G-T D) Y-G-T+TR
B
In a closed economy, which of the following components of GDP is not included? A) consumption B) net exports C) investment D) government spending
B
In a closed economy, which of the following equations reflects investment? A) Y-T+TR B) Y-C-G C) Y-C-T D) C+G-T
B
Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) decrease; decrease further B) increase; decrease C) increase; increase further D) decrease; increase
B
The period of expansion ends with a ________ and the period of recession ends with a ________. A) business cycle peak; business cycle peak B) business cycle peak; business cycle trough C) business cycle trough; business cycle trough D) business cycle trough; business cycle peak
B
The response of investment spending to an increase in the government budget deficit is called A) private dissaving. B) crowding out. C) expansionary investment. D) income minus net taxes
B
Under which of the following circumstances would the government be running a deficit? 19) ______ A) G = $7 trillion T= $7 trillion TR = $0 B) G = $5 trillion T = $5 trillion TR = $1 trillion C)G = $7 trillion T = $10 trillion TR = $3 trillion D) G = $5 trillion T = $7 trillion TR= $1 trillion
B
Which of the following would you expect to increase the equilibrium interest rate? A) a change from an income tax to a consumption tax B) an increase in the budget deficit C) a decrease in the profitability of investment projects firms are considering D) an increase in the percentage of income after net taxes that households save
B
Year |Potential Real GDP |Real GDP |Price Level 2011 | $14 trillion |$14 trill | 150 2012 | 14.5 trillion |14.2 trill | 152 Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2011 and in 2012 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2012, they should A) increase the level of interest rates. B) decrease income taxes. C) decrease government purchases. D) decrease the money supply.
B
Refer to Figure 16-1. An increase in taxes would be depicted as a movement from (blank), using the static AD-AS model in the figure above
B to A
The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic growth, the economic growth model focuses on the causes of increases in long-run labor productivity. What are the key factors that determine labor productivity?
B. Quantity of capital per hour worked C. Technological change
The financial system-either financial markets or financial intermediaries-provides savers and borrowers with
B. The financial system provides liquidity to savers by giving them the opportunity to buy and sell their financial securities. C. The financial system provides savers with facts and information about borrowers and about expected returns on their financial investments. D. The financial system provides risk sharing to savers by giving them the opportunity to diversify their funds among different investment choices.
Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason?
B. The formula ignores the impact of an increase in GDP on consumption.
Aggregate demand (AD) is comprised of expenditure components that include:
B. government spending, consumption, investment, and net exports.
Potential GDP
B. increases over time as technological change occurs. C. increases over time as the labor force grows.
The aggregate demand curve shows the relationship between
B. the price level and the quantity of real GDP demanded by households, firms, and the government.
What is the general relationship between the business cycle and unemployment and inflation?
B. During an expansion, unemployment falls and inflation increases.
What can low-income countries do in order to increase the amount of loanable funds available to firms for investment projects such as new factories or improved technology?
B. Provide savings incentives
Using GDP per capita in 2016 (measured in U.S. dollars, corrected for differences across countries in the cost of living), identify which one of the following statements is true?
B. Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.
Technological change is more important to long-run economic growth than changes in capital. The easiest way for firms to gain access to new technology is through
B. foreign direct investment
* In figure (15.10), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?
Buy treasury bills
A(n) ________ in private expenditures as a result of a(n) ________ in government purchases is called crowding out. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease
C
According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%? A) less than 1 year B) 5 years C) 14 years D) 35 years
C
Automatic stabilizers refer to A) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. B) the money supply and interest rates that automatically increase or decrease along with the business cycle. C) government spending and taxes that automatically increase or decrease along with the business cycle. D) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
C
Expansionary fiscal policy actions ________ savings public, _________ the supply of loanable funds, and ______ the real interest rate. A) increase, increase, decrease B) decrease, increase, decrease C) decrease, decrease, increase D) increase, increase, increase
C
Fiscal policy refers to changes in A) federal taxes and purchases that are intended to fund the war on terrorism. B) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.
C
If consumers decide to be more frugal and save more out of their income, then this will cause A) a movement to the right along the supply curve for loanable funds. B) a movement to the left along the supply curve for loanable funds. C) a shift in the supply curve for loanable funds to the right. D) a shift in the supply curve for loanable funds to the left.
C
If real GDP in a small country in 2010 is $8 billion and real GDP in the same country in 2011 is $8.3 billion, the growth rate of real GDP between 2010 and 2011 A) is 3.0%. B) is 3.6%. C) is 3.75%. D) cannot be determined from the information given
C
If real GDP per capita measured in 2000 dollars was $6,000 in 1950 and $48,000 in 2010, we would say that in the year 2010, the average American could buy ________ times as many goods and services as the average American in 1950. A) 1/8 B) 4 C) 8 D) 12
C
In a closed economy public saving plus private saving is equal to A) taxes minus transfers. B) the budget deficit. C) investment. D) the budget surplus
C
Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long -run economic growth in the economy. A) increases; increases B) decreases; increases C) decreases; decreases D) increases; decreases
C
Liquidity refers to A) the number of shares of stock a corporation issues. B) the number of times a dollar changes hands in the creation of GDP in an economy. C) the ease with which a financial security can be traded for cash. D) the ease with a stock can be traded for a bond.
C
Purchases of which of the following goods would be dramatically reduced during a recession? A) tomatoes B)ink pens C) refrigerators D) gasoline
C
Technological advances generally result in A) increased average number of hours worked per day. B) increased infant mortality rates. C) increased life expectancy. D) decreased incomes
C
The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A) by the same amount as B) sometimes by more than and other times by less than C) by more than D) by less than
C
The natural rate of unemployment equals A) structural plus frictional plus cyclical unemployment. B) the rate of unemployment we observe in any given period of measurement. C) structural plus frictional unemployment. D) the rate of structural unemployment.
C
There is a government budget surplus if A) G > TR B) G > T C) T - TR > G D) TR < T
C
Which of the following increases labor productivity? A) decreases in the availability of computers and factory buildings B) a decline in the health of the population C) inventions of new machinery, equipment, or software D) an increase in the aggregate hours of work
C
Which of the following is a government expenditure, but is not a government purchase? A) The Federal government pays to support research on Aids. B) The federal government pays the salary of an FBI agent. C) The federal government pays out an unemployment insurance claim. D) The federal government buys a Humvee.
C
Why should government policymakers be worried about a housing bubble?
C. A housing bubble would deflate housing prices, which would decrease household wealth, which would decrease aggregate demand, which could cause a recession.
What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?
C. Inventories decrease, GDP increases, and employment increases.
Which one of the following is not true when the economy is in macroeconomic equilibrium?
C. When the economy is at long-run equilibrium, firms will have excess capacity.
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
C. a recession in the short run and a decline in the price level in the long run.
If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.
C. an increase; an increase
"Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else."
C. incorrect. The supply of loanable funds is determined by household saving.
To have growth without inflation, which of the following must be true?
C. AD, SRAS, and LRAS must increase by the same amount.
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
Fiscal policy is determined by
Congress and the president
Which of the following is considered contractionary fiscal policy
Congress increases the income tax rate
The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is
Constant
Globalization entails all of the following except:
Cultural exchange between nations.
One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase
Current income
Contractionary monetary policy will result in A) reduced rates of inflation. B) a decrease in aggregate demand. C) higher interest rates. D) All of the above are correct.
D
Some economies are able to maintain high growth rates despite diminishing returns to capital by using
D. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns.
The financial system of a country is important for long-run economic growth because
D. firms need the financial system to acquire funds from households.
How does the fed conduct expansionary fiscal policy?
Decrease taxes Increase government spending
In the figure to the right, the opportunity cost of holding money ___________ when moving from Point A to Point B on the money demand curve.
Decreases
If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $133.33 billion increase in GDP B) a $30 billion increase in GDP C) a $133.33 billion decrease in GDP D) a $300 billion increase in GDP E) a $300 billion decrease in GDP
E
Refer to figure 17-1. Suppose the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true?
Equilibrium GDP at point C must be above potential GDP
The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: Potential real GDP: Price level: Unemployment:
Expansionary monetary policy Increases Does not change Increases Decreases
Why did the Fed help JP Morgan Chase buy Bear Stearns?
Failure of Bear Stearns would lead to a larger investment bank failure, Commercial banks would be reluctant to lend to investment banks.
According to many economists and policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?
Following a discretion strategy. Following the Taylor rule. Following a rules strategy.
What is the difference between federal government purchases (spending) and federal government expenditures?
Government purchases are included in government expenditures.
What is the goal of fiscal policy?
High employment, price stability, high growth rates
The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:
High unemployment.
* If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?
If the required reserve ratio is 10 percent, then a bank must hold 10 percent of its deposits as reserves. Therefore required reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 or $4,000). This is the maximum that the bank can loan out.
During the expansion phase of the business cycle, production, employment, and income
Increase
How does the fed conduct contractionary monetary policy?
Increase discount rate, increase in reserve requirement and conduct open market purchase of government securities
What is expansionary monetary policy?
Increase in price level and real GDP.
In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS 2?
Increase interest rates Open market sale of government securities Contractionary policy
Decreases in price level, household wealth, expected future income, current disposable income, and interest rates do what to consumption?
Increase, decrease, decrease, decrease, increase
In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?
Increased demand for Treasury securities drives up their prices. Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives down their interest rate.
What is crowding out?
Increased government spending leads to borrowing more which means interest rates go up and this leads to a decrease in investment when an increase in government spending decreases a component of GDP (most likely investment)
How does the fed conduct contractionary fiscal policy?
Increasing taxes on individuals and businesses Decreasing government spending on goods and services
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be
Inflation
Refer to figure 17-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur?
Inflation will accelerate in the long run
What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar?
Interest rates and exchange rates decrease
The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The curve, shown at the right, indicates what type of relationship between the two variables?
Inverse relationship
What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?
It shifts up such that a given level of unemployment occurs at a higher price level.
As a result, when AD shifts to the right, in reality the change in real GDP will be ________ it would be if the price level were constant.
Less than
Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?
Low prices
The quantity equation states that
M(money supply) x V(velocity of money) = P(price level) x Y(real output)
The narrowest official definition of the money supply is
M1
Suppose you decide to withraw $100 in currency from your checking account.?
M1 remains unchanged
According to the multiplier effect, an initial decrease in government purchases decreases real GDP by ___________ the initial decrease in government purchases.
More than
Do price changes affect long run GDP?
No
Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?
No. The Fed cannot target both the money supply and the interest rate simultaneously.
After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?
No. The increase in defense spending after that date was designed to achieve homeland security objectives.
Where is long-run macroeconomic equilibrium?
Occurs at a point where the AD curve and the SRAS curve intersect at a point on the LRAS curve
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?
Open market purchase of government securities.
In the long run, increases in government purchases result in
Partial crowding out
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
Potential GDP is forecasted to be higher than equilibrium GDP
What is the goal of monetary policy?
Price stability, full employment, and economic growth
What are the monetary goals of the Fed?
Price stability, high employment, economic growth, stable financial markets
Which of the following best explains how the Federal Reserve acts to help prevent banking panics?
The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors
The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them
Can the Fed, therefore, eliminate recessions?
The Fed can only soften the magnitude of recessions, not eliminate them.
Which of the following characterizes the Fed's ability to prevent recessions?
The Fed is able to keep recessions shorter and milder than it would be otherwise be
In which of these following situations would the Fed conduct contractionary monetary policy?
The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.
The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?
The Fed lent investment banks Treasury securities in exchange for mortgage - backed securities
Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?
The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule
Monetary policy is defined as:
The actions the Federal Reserve takes to manage the money supply and interest rates.
If weak aggregate demand is pushing the economy into recession, which of the following must be true?
The economy is at an equilibrium that is not on the long-run Phillips curve
Refer to figure 17-2. Suppose the economy is at point B in the figure above. Which of the following is true?
The expected rate of inflation is 3%.
As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?
The federal funds rate
Which of the following would be classified as fiscal policy
The federal government cuts taxes to stimulate the economy
The federal funds rate is what?
The interest rate banks charge each other for overnight loans
What is the federal funds rate?
The interest rate banks charge each other for overnight loans
What is the discount rate?
The minimum interest rate set by the Federal Reserve for lending to other banks.
What are the Fed's main monetary policy targets?
The money supply and interest rates
How does moving up and down the demand curve affect the opportunity cost of holding money?
The opportunity cost is the interest rate. Interest rate decreases, so does opportunity cost
ow does the quantity theory provide an explanation about the cause of inflation?
The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
What is affected by changes in interest rates and, as a result, impacts aggregate demand?
The value of the dollar, Business investment projects, Consumption of durable goods
The growth rate of real GDP equals A) [(real GDP in previous year - real GDP in current year) ÷ real GDP in previous year] × 100. B) (real GDP in current year - real GDP in previous year) × 100. C) [(real GDP in current year - real GDP in previous year) ÷ real GDP in current year] × 100. D) [(employment in the current year - employment in previous year)/employment in previous year] × 100. E) [(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.
[(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.
Which of the following are goals to monetary policy? ([A]price stability, economic growth, and maximizing the value of the dollar relative to other currencies; [B]price stability, maximizing the value of the dollar relative to other currencies, and high employment; [C] price stability, money growth, and high employment; [D] maximizing the value of the dollar relative to other currencies, economic growth, and high employment)
[C] price stability, money growth, and high employment
If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant?
a $300 billion decrease in GDP
The international-trade effect refers to the fact that an increase in the price level will result in
a decrease in exports and an increase in imports.
Refer to Figure 16-2. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?
a decrease in income taxes
According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following?
a decrease in the unemployment rate to 3.0%
Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented
a permanent trade-off between unemployment and inflation.
If actual inflation is higher than expected inflation, the wages...
actual real wage is less than the expected real wage: unemployment falls.
Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
an increase in government purchases
Which of the following would cause a decrease in real GDP and, if large enough, a recession?
an increase in interest rates that causes aggregate demand to fall
Which of the following scenarios would lead to a reduction in real GDP and may even cause a recession?
an increase in oil prices that causes short run aggregate supply to fall
If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy
an increase in taxes
If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see?
an increase in the exchange rate
In the figure (15.2), a movement from point A to point B would be caused by
an increase in the interest rate
Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?
an increase in the marginal income tax rate
In the figure (15.4), the movement from point A to point B in the money market would be caused by
an increase in the price level
* In the figure (15.6), suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
an open market purchase of Treasury bills
In the figure (15.7), suppose the economy is initially at point A. The movement of the economy to point as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?
an open market sale of Treasury bills
In the figure (15.3), the movement from point A to point B in the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve
The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that that the government collects in taxes when the economy goes into a recession is an example of
automatic stabilizers
If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to
be below potential GDP
Suppose real GDP is $14 trillion and potential real GDP is $14 trillion. An increase in government purchases of $400 billion would cause real GDP to ____ potential real GDP (assuming a constant price level).
be more than
When the Fed embarked on a policy known as quantitive easing, they
bought longer-term securities than are usually bought in open market operations
Tax cuts on business income increase aggregate demand by increasing
business investment spending
Tax increases on business income decrease aggregate demand by decreasing
business investment spending
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to
buy U.S treasure securities form the public
* The primary tool the Federal Reserve uses to increase the money supply is
buying U.S. Treasury securities
The aggregate demand curve will shift to the left (blank) the initial decrease in government purchases
by more than
Expansionary fiscal policy
can be effective in the short run
If money demanded is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will
change very little and investment and consumer spending will change very little
The _______ school of economics states that leaving the economy alone will keep it stable.
classical
Although the Federal Reserve had traditionally made discount loans only to _____, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.
commercial banks
Which of the following best explains the difference between commodity money and fiat money?
commodity money is a good used as money where flat money is just money through central bank
In an open economy, expansionary monetary policy will cause
consumption, investment, and net exports to rise
Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to
decrease
If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially
decrease M1 and not change M2
What are the three expansionary fiscal policy actions?
decrease taxes, increase purchases, increase transfer payments
Suppose the Fed purchases Treasury Securities. Interest rates in the United States will ____ and the U.S. dollar will ____ against foreign currencies?
decrease; depreciate
A(n) ____ in private expenditures as a result of a(n) _____ in government purchases is called crowding out
decrease; increase
Following a decrease in government spending, as the price level falls we would expect the level of interest rates to _____ and investment to _____.
decrease; increase
An economic expansion tends to cause the federal budget deficit to ___ because tax revenues ___ and government spending on transfer payments ___.
decrease; rise; falls
The portion of ___ that a bank does not loan out or spend on securities is known as ____
deposits; reserves
* Active changes in tax and spending by government intended to smooth out the business cycle are called ____, and changes in taxes and spending that occur passively over the business cycle are called _____.
discretionary fiscal policy; automatic stabilizers
What is the rule of 70?
divide 70 by the real GDP growth rate to find the number of year for an economy to double in size
A nation's annual growth rate of real GDP per person is 2 percent. Its standard of living will A) double in 10 years. B) double in 50 years. C) fall because of its population growth. D) double in 35 years. E) not change because its population is growing.
double in 35 years.
During the twentieth century, the largest budge deficits as a percentage of GDP occured
during World Wars I and II
An increase in government purchases will increase aggregate demand because
government expenditures are a component of aggregate demand
If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in
government purchases
Which of the following is an objective of fiscal policy
high rates of economic growth
Refer to Figure 16-5. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use to move the economy to point C?
increase government spending
Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy?
increase in inflation
Refer to Figure 16-7. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use
increase income taxes
* Lowering the interest rate
increase investment projects by firms
* A Canadian oil company hires geological survey services form the United State. If all else remains equal, this will
increase net exports
Refer to Figure 16-6. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP?
increase taxes
* If New Yorkers decrease their purchases of French champagne, assuming all else remains constant, this will _____ of the United States
increase the balance of trade
Increases in the price level
increase the quantity of money needed for buying and selling
Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to _____. I.e., the dollar ____ in value against the yen.
increase; appreciates
In international exchange markets, a rise in interest rates in the United States will cause the demand for dollars to ____ and the supply of dollars to _____
increase; decrease
Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.
increase; increase
If the Fed pursues an expansionary monetary policy, investment in the United States will ________ and net exports will ________.
increase; increase
Tax reduction and simplification should ____ long - run aggregate supply and ____ aggregate demand
increase; increase
A rise in stock prices and housing prices
increases household wealth which increases consumption which leads to UPWARD shift of the consumption function.
A decrease in individual income taxes ________ disposable income, which ________ consumption spending.
increases; increases
Expansionary fiscal policy involves
increasing government purchases or decreasing taxes
A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.
increasing; increasing
The multiplier effect refers to the series of
induced increases in consumption spending that result from an initial increase in autonomous expenditures
If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then
inflation will be higher than if the Fed had not acted.
What is a monetary policy target used by the Fed?
interest rate and money supply
Refer to Figure 18-1. Which of the following events below cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?
interest rates rise in England
A country will likely experience an increase in poverty if A) its real GDP per person growth rate increases over time. B) its inflation rate decreases or slows over time. C) it does not receive foreign aid. D) its population decreases over time. E) its real GDP growth rate decreases or slows over time.
its real GDP growth rate decreases or slows over time.
Which of the following would NOT be considered an automatic stabilizer
legislation increasing funding for job retraining passed during a recession
Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by
less than $500 billion
If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be
less than it would be without the supply - side effects
The Taylor rule predicted a federal funds rate which was ___ that set when Paul Volcker was chairman of the Fed, and a rate which was ___ that set when Arthur Burns chaired the Fed.
less than; greater than
The economic growth model predicts that the
level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.
When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.
low, high
Those who are constantly unemployed accept _______ pay rates.
lower
Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should
lower government purchases by an amount less than $200 billion
In figure (15.8), if the economy in Year 1 is at point A and expected to Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to
lower interest rates
Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)
lower;lower
Rising prices erode the value of money as ____ and as a ____
medium of exchange; store of value
Rising prices erode the value of money as a ___ and as a ___.
medium of exchange; store of value
Which of the following is included in M2 but not M1?
money market deposit accounts in bank
It is ____ difficult to effectively time fiscal policy than monetary because ____.
more; fiscal policy takes longer to implement
If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 million, then the economy
must be blow potential real GDP
If net exports are negative,
net foreign investments are also negative
If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially
not change M1 and not change M2
What can the Federal Reserve do to increase the natural rate of unemployment?
nothing
The Rule of 70 can be used to calculate the A) economic growth rate per month. B) 70 percent level of the economic growth rate. C) number of years it would take for the level of any variable to double. D) population growth rate per year. E) economic growth rate per year.
number of years it would take for the level of any variable to double.
nuts
nuts
What are the policy tools the Fed uses to control the money supply?
open market operations, discount policy, and reserve requirements
Money serves as a standard of deferred payment when
payments agreed to today but can be payed in future in terms of money
What are the goals of monetary policy?
price stability, high employment, finaincial markets, economic growth
Crowding out refers to a decline in (blank) as a result of an increase in (blank)
private expenditures; government purchases
If the Federal Reserve raises or lowers interest rates too late, it could result in a ___ policy that destabilizes the economy.
procyclical
* A federal budget deficit _____ interest rates, which ____ exchange rates (foreign currency per domestic currency), and _____ the balance of trade
raises; raises; reduces
When individuals use all available information about an economic variable to make a decision, expectations are
rational
Economic growth is a sustained expansion of production possibilities, as measured by the increase in ________ over time. A) inflation B) employment C) population D) the price level E) real GDP
real GDP
Refer to Table 15-3. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2015 and in 2015 if the Federal Reserve does not sue monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, which of the following will be higher than if the Fed had taken no action?
real GDP and the inflation rate
Refer to Table 16-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?
real GDP and the inflation rate
Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if
real GDP increased
Growth in the standard of living is measured by the increase in A) employment. B) the Rule of 70. C) real GDP. D) consumption. E) real GDP per person.
real GDP per person
Suppose India wants to measure how much the standard of living has changed over the last decade. Which piece of data should India use? A) inflation B) real GDP C) real GDP per person D) population E) wages
real GDP per person
Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called
real business cycle models.
If an output gap exists, a _______ exists.
recession
If the Fed raises the interest rate, this will ____ inflation and ___ real GDP in the short run.
reduce; lower
Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets.
rise; appreciate
During recessions, government expenditure automatically
rises because of programs such as unemployment insurance and medicaid
If tax reduction and simplification are effective, then
saving and investment in new capital will increase
* M2 includes M1 plus
savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non-institutional money market fund shares
Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2014 and 2015 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2015, it should
sell Treasury securities
* If the Federal Open Market Committee wants to decrease the money supply through open market operations it will
sell U.S. Treasury securities
Refer to figure 17-1. What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?
sell treasury bills
Which of the following is not a major function of the Federal Reserve System? (lender of last resort, clearing checks between banks, controlling the money supply, or setting interests rates)
setting income tax rates
* Expansionary fiscal policy will
shift the aggregate demand curve to the right
Economic growth will
slow down or stop if more capital per hour is used because of diminishing returns to capital
The majority of dollars spent by government prior to the Great Depression was spending at the ____ level. In the post World War II period, two - thirds to three quarters of all dollars spent by government in the United States are spend at the ____ level.
state and local; federal
The federal funds rate is very important for the Feds monetary policy because..
the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations
If, in the long run, real GDP returns to its potential level, then in the long run,
the Phillips curve is vertical.
The quantity theory of money implies that the price level will be stable (no definition or deflation) when the growth rate of the money supply equals
the growth rate of real GDP
If government spending and the price level increase, then
the interest rate increases, consumption declines, and investment spending declines
The federal funds rate is
the interest rate that banks charge each other for overnight loans.
The use of fiscal policy to stabilize the economy is limited because
the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way
If the price level decreases,
the money demand curve shifts to the left
If real GDP increases,
the money demand curve shifts to the right
The Fed's two main monetary policy targets are
the money supply and interest rate
* Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rates to purpose its economic purposes
According to the quantity theory of money, inflation is caused by
the money supply is growing faster than real GDP
When the Federal Reserve decreases the required reserve ratio
the money supply will increase
If the Fed pursues expansionary monetary policy then
the money supply will increase, interest rates will fall, and the real GDP will rise
Crowding out will be greater
the more sensitive investment spending is to changes in the interest rate
What relationship is shown by the aggregate supply curve?
the price level and the quantity of real GDP supplied by firms.
When the Federal Reserve purchases Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank reserves increase.
If Country A's real GDP per person is growing at 6 percent and Country B's real GDP per person is growing at 3 percent, then A) the standard of living is growing more rapidly in Country A. B) the standard of living is higher in Country B. C) the standard of living is higher in Country A. D) We cannot say whose standard of living is growing more rapidly without knowing the population growth rate. E) We cannot say whose standard of living is growing more rapidly without knowing the growth rate of real GDP.
the standard of living is growing more rapidly in Country A.
Which of the following is an example of discretionary fiscal policy?
the tax cuts passed by Congress in 2001 to combat the recession
If the long-run aggregate supply curve is vertical,
the trade-off between unemployment and inflation cannot be permanent
* The quantity theory of money assumes that
the velocity of money is constant
If the Fed believes the economy is about to fall into recession, it should
use an expansionary monetary policy to lower the interest rate and shift AD to the right.
Commodity money is a good
used as money that also has value independent of its use of money
A bank holds its reserves as ___ and ___
vault cash; deposits at the Federal Reserve
Governments sometimes allow hyperinflation to occur because
when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation
The wealth effect refers to the fact that
when the price level falls, the real value of household wealth rises, and so will consumption.
how do banks "create money"
when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands
In the aggregate expenditure model, when is planned investment greater than actual investment?
when there is an unplaned DECREASE in inventories
Cutting taxes
will raise disposable income and raise spending
* By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ____ and "Alt-A" borrowers _____.
with flawed credit histories; who did not document their incomes
Figure 6-4. In the graph above, the shift AD 1 to AD 2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B (blank) $50 billion
would be greater than
Tax cuts on business income (blank) aggregate
would increase
Each year that the federal government runs a deficit, the federal debt
Grows
Y = $12 trillion C = $8 trillion I = $2 trillion G = $2 trillion TR = $2 trillion T = $3 trillion Based on the information above, what is the level of private saving in the economy? A) $3 trillion B) $4 trillion C) $5 trillion D) $8 trillion
A
If the tax multiplier is -1.5 and $200 billion tax increase is implemented, what is the change in GDP , holding everything else constant? (Assume the price level stays constant)
A $300 billion decrease in GDP
Movement along the aggregate demand curve is caused by?
A change in price level
What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations?
A movement along the LR Phillips Curve
Why do economic growth rates matter?
A. High levels of sustained economic growth reduce infant mortality. B. When a country sustains high growth rates, life expectancy at birth increases. C. High growth rates coincide with improved living standards.
Which of the following does NOT lead to long-run economic growth?
A. Increase in average wages
Which of the following will increase planned investment spending on the part of firms?
A. Increased optimism about future demand for its product B. A lower real interest rate
The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as
A. MPC = 1minusMPS. B. MPS = 1minusMPC. C. MPC + MPS = 1. D. All of the above.
Strong rule-of-law countries grow more rapidly than weak rule-of-law countries. What factor will most likely improve economic growth in weak rule-of-law countries?
C. Political reform
What causes demand curve to shift?
Changes in real GDP or price level. Increase in real GDP and price level means buying and selling increases demand for money, shift to the right.
What is inflation targeting?
Committing the central bank to achieve an announced level of inflation.
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)
Open market purchase of government securities
*In figure (15.11), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?
Sell treasury bills
Which interest rate does the Fed target?
The federal funds rate
When is it considered "good policy" for the government to run a budget deficit?
When borrowing is used for long-lived capital goods.
What are the impact of a change in the money supply on interest rate?
When the Fed increases the money supply, the short-term interest rate must fall until it reaches a level at which firms and households are willing to hold the extra money.
What is a procyclical policy?
When the Fed recognizes a recession too late and tries to implement an expansionary monetary policy but instead causes inflation.
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
How do investment banks differ from commercial banks?
.Investment banks do not take deposits, Investment banks generally do not lend to households.
If it took 20 years for real GDP to double, what was the growth rate of real GDP? A) 3.0 percent B) 5 percent C) 3.5 percent D) 4 percent E) 4.5 percent
3.5 percent
If the marginal propensity to consume equals 0.90, the tax rate equals 0.20, what is the value of the government purchases multiplier?
3.57
In real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita? A. 4.7 B. 10.5 C. 15 D. 21
4.7
A good measure of the standard of living is A) real GDP per capita. B) total nominal GDP. C) nominal GDP per capita. D) total real GDP
A
According to the short-run Phillips curve, the unemployment rate and the inflation rate are A) negatively related. B) unaffected by monetary policy. C) unrelated. D) positively related.
A
An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) more than $200 billion. B) less than $200 billion. C) $200 billion. D) None of the above are correct. This policy shifts the long-run aggregate supply curve.
A
As the economy nears the end of a recession, which of the following do we typically see? A) increased spending on capital goods by firms B) further decreases in consumer spending C) increasing interest rates D) all of the above
A
If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true? A) Public saving is $100 million. B) The budget deficit is $500 mill ion. C) Public saving is $500 million. D) The budget deficit is $100 million
A
If labor productivity growth slows down in a country, this will A) slow down the increase in real GDP per capita. B) slow down the increase in nominal GDP. C) accelerate the increase in nominal GDP. D) accelerate the increase in real GDP per capita
A
If, in an economy experiencing inflation, the government decided to tax real interest income rather than nominal interest income, this change would cause the real interest rate to ________ and the equilibrium quantity of loanable funds to ________. A) fall; rise B) rise; rise C) fall; fall D) rise; fall
A
The curve showing the short-run relationship between the unemployment rate and the inflation rate is called A) the Phillips curve. B) the monetary policy curve. C) the Sargent curve. D) the unemployment curve.
A
The demand for durable goods A) declines by a greater percentage than does GDP during a recession. B) rises by a greater percentage than does GDP during a recession. C) declines by a smaller percentage than does GDP during a recession D) has decreased over time
A
The period between a business cycle peak and a business cycle trough is called A) recession. B) diffusion. C) recalculation. D) expansion
A
Which of the following transactions would be included in Germany's current account?
An American citizen purchases a new Volkswagen made in Germany
What can the Federal Reserve do to reduce the natural rate of unemployment? A) nothing B) follow contractionary monetary policy that will increase inflation C) follow expansionary monetary policy that will increase inflation D) follow expansionary monetary policy that will reduce inflation
A
What two factors are the keys to determining labor productivity? A) technology and the quantity of capital per hour worked B) the business cycle and the growth rate of real GDP C) the growth rate of real GDP and the interest rate D) the average level of education of the workforce and the price level
A
When the economy enters a recessionary phase of the business cycle, unemployment tends to A) increase. B) be unchanged. C) decrease. D) change in the same direction as the rate of inflation.
A
Which of the following is an example of human capital? A) a college education B) a software program C) a computer D) a factory building
A
Which of the following is most liquid? A) a dollar bill B) a government bond C) a mutual fund share D) a corporate bond
A
Which of the following would decrease net exports in the United States?
An American party planner purchases 350 piñatas from Mexico
Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy? A) growth in capital per hour accompanied by technological change B) a shift of workers in the economy from the agricultural sector to the non-agricultural sector C) increases in labor force participation rates as workers who are out of the labor force pursue rising wages D) an influx of immigrant labor into an economy without any accompanying technological change
A
If actual inflation is less than expected inflation, which of the following will be true? A) Real wages will fall. B) The Phillips curve will be a vertical line. C) Real wages will rise. D) The unemployment rate will fall.
A or D
What is a banking panic?
A situation in which many banks experience runs at the same time.
Which of the following would be considered a fiscal policy action?
A tax cut is designed to stimulate spending during a recession
Which of the following would be considered an active fiscal policy?
A tax cut is designed to stimulate spending passed during a recession.
Which of the following factors brought on the recession of 2007-2009?
A. A rapid increase in the price of oil. B. The end of the housing bubble. C. The financial crisis.
The short-run aggregate supply curve slopes upward because of all of the following reasons
A. in the short run, as prices of final goods and services increase, input prices react more slowly. B. in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. C. in the short run, prices of final goods and services adjust slowly due to the existence of menu costs.
We say that the economy as a whole is in macroeconomic equilibrium if
A. total spending equals GDP. B. aggregate expenditure equals GDP. C. total spending equals total production. D. aggregate expenditure equals total production. E. all of the above.
U.S. real net exports are typically
A. negative, and usually rise in recessions and fall in expansions.
Consider the choices below. All of these except one truly represent the record of productivity growth in the United States from 1800 to the present. Find the one that does not belong.
A. GDP per capita fell rapidly between 1900 and 1950.
The government policy that does not increase economic growth is
A. foreign trade policy that favors imposing a high tariff on imported high-tech goods.
Which of the following best explains how and why the economy will adjust back to long-run equilibrium?
Aggregate demand will increase, restoring the original equilibrium price and quantity
Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,
All are correct. Government transfer payments will be rising and tax receipts will be falling, this will result in a current budget deficit, and the cyclically adjusted budget will be balanced.
what constitutes M2?
All of M1 in addition to savings account, time deposits, money market, and noninstitutional money
Deflation refers to A) a decrease in the rate of inflation. B) a falling price level. C) Both A and B are correct. D) None of the above are correct.
B
How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy? A) Private saving will increase by the amount of increase in the budget surplus. B) Private saving will decrease by less than the amount of increase in the budget surplus. C) Private saving will decrease by the amount of increase in the budget surplus. D) Private saving will be unaffected by the increase in the budget surplus
B
If rational workers and firms know that the Federal Reserve is following an expansionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; decreases B) increase; remains unchanged C) increase; increases D) decrease; decreases
B
If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Fed's policies will be deflationary. B) The Fed's policies will be inflationary. C) The Fed will reduce the natural rate of unemployment. D) The rate of inflation will fall as the Fed tries to reduce the unemployment rate.
B
If the Federal Reserve chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see? A) a decrease in the long-run aggregate supply curve B) a downward shift of the short-run Phillips curve C) a reduction in the unemployment rate D) Both A and B are correct answers.
B
If the federal government's expenditures are less than its tax revenues, then A) a budget deficit results. B) a budget surplus results. C) the budget is balanced. D) No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays.
B
Matt's real wage in 2005 is $26.80. If the price level is 104, what is Matt's nominal wage? A) $30.80 B) $27.87 C) $26.80 D) $25.77
B
The effect of a recession on a company like Boeing Aircraft is such that A) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. B) sales decline more sharply for Boeing as compared to firms that do not produce durable goods. C) the decline in sales is more short lived as compared to firms that do not produce durable goods. D) profits fall less sharply as compared to firms that do not produce durable goods.
B
The federal budget deficit acts as an automatic stabilizer because A) Medicaid payments increase during expansionary periods. B) government tax revenues decrease during a recession. C) food stamp payments increase during expansionary periods. D) unemployment insurance payments decrease during a recession.
B
The federal government debt equals A) government spending minus tax revenues. B) the total value of U.S. Treasury bonds outstanding. C) the accumulation of past budget deficits. D) tax revenues minus government spending.
B
The only people without jobs at the natural rate of unemployment are the A) cyclically and structurally unemployed B) structurally and frictionally unemployed C) structurally, frictionally, and cyclically unemployed D) frictionally and cyclically unemployed
B
When the government runs a budget deficit, we would expect to see that A) public saving is positive. B) investment will fall. C) private saving will fall. D)G+ TR <T
B
Which of the following could increase unemployment and inflation simultaneously? A) a decrease in the real wage B) an increase in oil prices C) contractionary monetary policy D) expansionary monetary policy
B
Which of the following explains the cause of the change in the unemployment rate at the end of a recession? A) Firms rapidly hire new workers at the first sign of on an increase in demand for their goods. B) Firms are hesitant to rehire laid off workers as they continue to operate below capacity. C) Discouraged workers return to the labor force and this makes the unemployment rate fall. D) Discouraged workers leave the labor force and this makes the unemployment rate rise
B
Developing countries have benefited from globalization, because globalization can do all of the following except
B. impose trade barriers and tariffs on imported goods so as to protect domestic industries.
Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?
Business investment projects Consumption of durable goods The value of the dollar
How does the Federal Open Market Committee increase and decrease money supply?
By buying and selling U.S. Treasury securities
During a recession, spending on ________ tends to fall more dramatically than spending on ________. A) food; cars B) necessities; luxuries C) durable goods; nondurable goods D) nondurable goods; durable goods
C
Potential GDP refers to A) the extent to which real GDP is above or below nominal GDP. B) the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within any given year. C) the level of GDP attained when all firms are producing at capacity. D) the level of GDP attained by the country with the highest growth in real GDP in a given year.
C
16-1. Suppose the economy is in a short0run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using static AD-AS model in the figure above, this would be depicted as a movement from
C to B
16-1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a move from (blank) using the static AD-AS mode
C to B
Formula for Planned Aggregate Expenditures
C+I+G+NX
The equation for aggregate demand is...
C+I+G+Nx
Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; monetary policy B) discretionary fiscal policy; conscious fiscal policy C) automatic stabilizers; discretionary fiscal policy D) discretionary fiscal policy; automatic stabilizers
D
Actual real GDP will be above potential GDP if A) firms are producing at capacity. B) firms are producing below capacity. C) inflation is rising. D) firms are producing above capacity
D
All other factors held constant, increased growth in aggregate demand will A) move the economy to a higher point on the short-run Phillips curve. B) increase inflation. C) reduce unemployment. D) All of the above are correct.
D
Countries with high rates of economic growth tend to have A) low rates of technological advancement. B) a declining incidence of business cycle fluctuations. C) a lower life expectancy at birth. D) a labor force that is more productive
D
Crowding out will be greater A) the less sensitive consumption spending is to changes in the interest rate. B) the further equilibrium GDP is below potential GDP. C) if the economy is in recession, rather than at full employment. D) the more sensitive investment spending is to changes in the interest rate.
D
During the expansion phase of the business cycle, which of the following eventually increases? A) employment B) income C) production D) all of the above
D
Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) interest rates; money supply B) taxes; the money supply C) taxes; interest rates D) taxes; expenditures
D
How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax? A) The equilibrium quantity of loanable funds would be unaffected. B) The equilibrium quantity of loanable funds may rise or fall based on whether household saving increases or decreases as a result of the change from an income tax to a consumption tax. C) The equilibrium quantity of loanable funds would fall. D) The equilibrium quantity of loanable funds would rise
D
If the economy experiences a negative supply shock, which of the following will be true? A) Inflation will fall, and real GDP will fall. B) Inflation will fall, and real GDP will rise. C) Inflation will rise, and real GDP will rise. D) Inflation will rise, and real GDP will fall.
D
If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money? A) 1 year and 3 months B) 2 years and 6 months C) 8 years D) 8 years and 9 months
D
In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is A) upward sloping. B) horizontal. C) vertical. D) downward sloping.
D
In conducting monetary policy, how has the Federal Reserve enhanced its credibility? A) by revealing the Fed's target for the federal funds rate B) by following through with changes it has announced C) by making the minutes of the open market committee meetings public D) All of the above have enhanced the Federal Reserve's credibility in conducting monetary policy.
D
Monetary policy can A) shift both the short-run and long-run trade-offs between inflation and unemployment if changes in policy are credible. B) shift the long-run trade-off between inflation and unemployment through changes in cyclical unemployment. C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation and unemployment. D) shift the short-run trade-off between inflation and unemployment if it affects expected inflation.
D
Since 1900, real GDP per capita has ________ and this measure ________ the actual growth in standards of living in the United States over this time. A) increased; overstates B)decreased; overstates C) decreased; understates D) increased; understate
D
What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at a trough in a business cycle B) any unemployment rate that is above the inflation rate C) an unemployment rate of 0% D) the unemployment rate that exists when the economy is at potential GDP
D
What is the key idea in the aggregate expenditure macroeconomic model?
D. in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
The growth in U.S. real government purchases
D. tends to be positive, but has fallen in recessions and in response to concerns about the size of budget deficits.
The short run aggregate supply curve shows the relationship in the short run between
D. the price level and the quantity of real GDP supplied by firms.
Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is
D. different, because consumers can substitute between individual products.
Suppose two countries, Country A and Country B, have a similar real GDP per capita. Country A has an average economic growth rate of 2% and Country B has an average economic growth rate of 3.3%. In the long run, what can we predict about living standards in the two countries?
D. Country B's living standards will increase much more rapidly in the long run.
Consider the figure to the right. Which of the following is responsible for the upward shifts in the per-worker production function?
D. Technological change
Have poor countries been catching up to rich countries?
D. There has been catch-up by some poor but industrialized countries.
A country's rate of economic growth is important because
D. an economy that grows too slowly fails to raise the living standards of its citizens.
By improving health and education, developing countries can generate economic growth, and increase incomes. This will help combat the prevalence of educated people leaving their home countries for opportunities elsewhere. That is, it will combat
D. the brain drain.
An increase in the U.S. price level relative to other countries' price levels, the growth rate of U.S. GDP relative to other countries', the exchange rate between the dollar and other currencies will do what to net exports?
Decrease
During the recession phase of the business cycle, production, employment, and income
Decrease
How does the fed conduct expansionary monetary policy?
Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities
How would the Fed enact an expansionary monetary policy?
Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities and vice versa
What is contractionary monetary policy?
Decrease in price level and real GDP.
* From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely
Decrease interest rate
The multiplier effect is only a consideration for increases in government purchases. True or False
False
Expansionary monetary policy refers to the ___ to increase real GDP.
Federal Reserve's increasing the money supply and decreasing interest rates
As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment?
Federal funds rate
How do investment banks differ from commercial banks?
Investment banks do not take deposits. Investment banks generally do not lend to households.
Suppose congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?
Real equilibrium GDP will rise
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be
Recession
What are the short-run and long-run effects of a decrease in aggregate demand?
Recession in the short-run. A decrease in price level in the long-run. SRAS curve shifts to the right as workers adjust to lower price level. The new long-run equilibrium is at AD1 and SRAS1
What are the gains to be had from simplifying the tax code?
Resources from the tax preparation industry freed up for other endeavors. Increased efficiency of households and firms. Greater clarity of the decisions made by households and firms.
Which of the following contribute(s) to shorter recessions, longer expansions, and less severe fluctuations in real GDP?
Service based economy, fiscal policy, unemployment insurance
Which interest rate is most relevant?
Short-term nominal interest rate because it is most affected by changes in money supply.
Each year that the federal government runs a surplus, the federal debt
Shrinks
The higher the tax rate, the __________ the multiplier effect.
Smaller
A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?
Store of value
Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called
Supply-side economics
Public Savings Formula
T-G-TR
In reality, the SRAS is
Upward sloping
GDP Formula
Y = C + I + G
Private Savings Formula
Y+TR-C-T
If the federal government's expenditures are less than its tax revenues, then
a budget surplus results
balls
balls
In 1913, Congress established the Federal Reserve system with the intention of putting an end to
bank panics
Crowding out, following an increase in government spending, results form (the exchange rate is the foreign exchange price of the domestic currency)
higher interest rates and a lower exchange rate
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investments
*Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ___ and real GDP to be ____
higher; higher
Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)
higher;higher
Very high rates of inflation are called
hyperinflation
If real GDP grows at a faster rate than does population, then the standard of living, as measured by real GDP per person, A) improves. B) cannot be measured. C) remains the same. D) worsens. E) either improves, worsens, or stays the same, depending on the size of the population and the actual level of real GDP.
improves
The Fed uses policy targets of interest rate and/or money supply because
it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level
the real world money multiplier is
smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash
Congress broadened the Fed's responsibility since
the 1930s as a result of the Great Depression.
When Congress established the Federal Reserve in 1913, its main responsibility was
to make discount loans to banks suffering from large withdrawals by depositors.
The largest and fastest-growing category of federal government expenditures is
transfer payments
If the Fed believes the inflation rate is about to increase, it should
use a contractionary monetary policy to increase the interest rate and shift AD to the left.
What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?
"Fannie Mae" and "Freddie Mac"
Why do poorer countries grow faster than richer countries on catch-up lines?
The lower the initial level of real GDP per capita, the higher the rate of growth in real GDP per capita. (By adding the same amount of new technology for example)
Does government spending ever reduce private spending?
Yes, due to crowding out.
