Final exam study guide

How would a Keynesian economist use fiscal policy to fix a recession or inflation?

A Keynesian economist will use an expansionary fiscal or monetary policy to fix a recession, or use a contractionary fiscal or monetary policy to fight inflation. Specifically, a Keynesian would lower taxes are raised government spending (expansionary fiscal policy) or raise the money supply (expansionary monetary policy) to battle a recession, or raise taxes are lower government spending (contractionary fiscal policy) or decrease money supply (contractionary monetary policy) to fight inflation.

What does a depreciation of the exchange rate (say US dollar) mean? What does that mean for US exports?

A depreciation of exchange rate makes once currency more competitive in the international market. That is if the U.S. dollar depreciates with respect to the British pound that means the dollar has become cheaper for British people who want to import American Products or who want to travel to the USA - in which case they can get more dollars for the same pound. In other words the dollar price of the British pound has fallen. Or, the price of a British pound expressed in dollars is less now. This will tend to cause the British to import more from the United States, again, because the dollar is cheaper for the British. This means that United States exports will increase.

The price of tomatoes at a local market will fall because of the following event

A summer of prime tomato-growing weather resulting in a large harvest of tomatoes

What is the difference between a tariff and a quota, and what does the term "dumping" mean, in international trade?

A tariff is a tax on imports, a quota is a limit on imports and dumping means selling a product abroad cheaper than you sell it in your own country (assuming that the price of the product in your country and abroad are originally the same).

What is the difference between absolute versus comparative advantage?

Absolute advantage is when a country uses fewer resources to produce the same good that the other country produces, whereas comparative advantage is where one country has a lower opportunity cost in making the product compared the other country.

What are four things that cause the Aggregate Demand curve to shift?

C, I, G, NX, Ms, e, T. That is, Consumption, Investment, Government Spending, Net Exports, Money Supply, Exchange Rates (independently), Taxes.

What are four things that cause the Aggregate Supply to shift?

Costs, Resources, Shocks, Technology

True or False? Net foreign factor income = +25 means that US resources earned more (25) in other countries than others (foreigners) earned in the US.

False

True or False? in measuring GDP if intermediate goods and services were included, the accountant would be correctly estimating the value of GDP.

False

What is the difference between microeconomics versus macroeconomics?

Microeconomics studies individual units, such as the theory of the consumer, theory of costs, theory of the producer / theory of the firm. Macroeconomics, looks at economic aggregates. Such as GDP, inflation, the overall unemployment rate, money and banking.

Suppose that nominal GDP was $1200 billion in 1978 and $1,400 billion in 1985 and that the relevant price index was 120 in 1978 and 140 in 1985. What happened to real GDP between 1978 and 1985?

Stayed the same

What are the three main types of unemployment

Structural, Frictional and Cyclical.

If the price of cotton used in making blue jeans increases, which of the following will occur?

The supply curve for jeans will shift inward (leftward)

What are the three tools of monetary policy? How would a Keynesian economist use monetary policy to fix a recession or inflation?

The three tools of monetary policy are: the reserve ratio, the discount rate and open market operations. In a period of a recession, a Keynesian economist would use an expansionary monetary policy - that is, raising the money supply by decreasing the reserve ratio, decreasing the discount rate or buying bonds. On the other hand, in an inflationary environment the opposite would occur - the money supply would be lowered by increasing the reserve ratio, increasing the discount rate or selling bonds.

"The government ought to cut taxes in order to stimulate the economy." This statement is an example of normative economics True False

True

True or False? Firewood received by a music teacher in return for violin lessons would not be included in GDP.

True

the opportunity cost of an action is the most valued / next-best alternative you give up to take that action. Selected Answer: True False

True

Gross domestic product is defined as, in a country, the monetary value of

all final goods and services produced in one year.

Monentary policy involves.. altering the money supply to influence the level of economic activity manipulating the levels of government spending and taxation. avoiding government intervention in the economy. government policies to make wages and prices more flexible.

altering the money supply to influence the level of economic activity.

Under a system of flexible exchange rates, a decision by Americans to purchase more Japanese cars would.

increase the dollar price of Japanese yen (the price of yen stated in dollars).

Demand-pull inflation is caused by.. -increases in the level of total spending in the economy. -increases in the cost of raw materials. reductions in aggregate supply. -demands for wage increases in excess of productivity gains. -reductions in the demand for consumer goods.

increases in the level of total spending in the economy.

Define Frictional unemployment.

is the time period between jobs when a worker is searching for, or transitioning from one job to another.

What are the types and payments to the four types of economic Resources?

land, labor, capital and entrepreneurship.

Economics is the study of how to use

limited resources to satisfy unlimited wants as completely as possible

fiscal policy involves

manipulating the levels of government spending and taxation.

True or False? if the economy were experiencing high unemployment, a Keynesian would favor an increase in taxes to help pay the increased claims for unemployment compensation.

false

true or false? Natural Rate of Unemployment usually means zero unemployment, i.e. no frictional, structural or cyclical unemployment.

false

Define structural unemployment

form of unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers

Supporters to the theory of rational expectations believe that Keynesian monetary and fiscal policies for combating unemployment

tend to be ineffective and counterproductive.

Which of the following statements is FALSE? -An increase in income causes the demand curve for an inferior good to shift to the right. -A decrease in income causes the demand curve for a normal good to shift to the left. -An increase in income causes an increase in the demand for a normal good. -An increase in income causes a decrease in the demand for an inferior good.

-An increase in income causes the demand curve for an inferior good to shift to the right.

Which of the following is the best example of (physical) capital, as a resource? -mineral deposits -human effort -buildings and equipment that contribute to production -goods & services purchased by households for their enjoyment

-buildings and equipment that contribute to production

True or False .Fiscal policy involves altering the money supply to influence the level of economic activity.

False

The civilian labor force includes all persons over the age of

16 who are employed or actively seeking employment and who are not in the armed forces

If the price of apples goes down, then the demand for pears will?

Decrease if apples and pears are substitutes.

What is meant by expansionary monetary policy? What is meant by contractionary monetary policy?

Expansionary monetary policy means increasing the money supply while a contractionary monetary policy means decreasing the money supply.

What is the difference between fiscal and monetary policy? What is meant by expansionary fiscal policy? What is meant by contractionary fiscal policy? What is the impact of an expansionary fiscal policy on the budget, assuming we start from a balanced budget? What will the impact be on the national debt then?

Fiscal policy is when the government changes taxes on government expenditures to influence the level of economic activity. Monetary policy is when the Federal reserve bank attempts to influence the money supply in order to stabilize the economy. Expansionary fiscal policy is when the government lowers taxes or raises government spending. Contractionary fiscal policy is the opposite - when the government raises taxes or lowers government spending. Assuming we start from a balanced budget the impact of an expansionary fiscal policy would be to throw the budget into a deficit. This will tend to increase the national debt.

What are the main macroeconomic indicators?

GDP, unemployment and inflation.

What is true of the Keynesian theory? -Flexible prices & wages; Say's Law and savings depends on income. -Flexible prices & wages; Say's Law and savings depends on interest rates. -Inflexible prices (till full employment), invalid Say's Law and savings depends on interest rates. -Correct Inflexible prices (till full employment), invalid Say's Law and savings depends on disposable income.

Inflexible prices (till full employment), invalid Say's Law and savings depends on disposable income.

If the Euro appreciates relative to the American dollar, then

It will be less expensive than before for Europeans to travel in the United States.

What are the four stages of the business cycle?

Peak, recession, trough and expansion.

What is the difference between nominal versus real GDP?

Real GDP is nominal GDP adjusted for inflation. In other words real GDP takes into account a base year and looks at constant dollars whereas nominal GDP looks at GDP at that year and uses current dollars. That is why real GDP is sometimes called adjusted GDP while and nominal GDP is called unadjusted GDP.

f the dollar used to buy 360 Yen and now buys 100 Yen, there has been S

a depreciation of the Dollar.

Given an upward-sloping aggregate supply curve, a reduction in aggregate demand would tend to -increase the level of equilibrium GDP and the overall price level. -Correct decrease the level of equilibrium GDP and the overall price level. -increase the level of equilibrium GDP but decrease the overall price level. -decrease the level of equilibrium GDP but increase the overall price level

decrease the level of equilibrium GDP and the overall price level.

According to the "infant industry argument,"

new industries need protection from foreign competition until they become established

Does inflation always hurt everyone?

no, inflation does not necessarily hurt everyone. In the case of unanticipated inflation, debtors gain at the expense of creditors because they're paying the creditors' back with cheaper dollars. Also, it depends upon whether or not one has bargaining power. For example, a highly skilled neurosurgeon can always raise his fees above the inflation rate.

When an economic expansion has resulted in substantial inflationary pressures, the proper Keynesian fiscal policy would be to.. -reduce the size of the government's budget deficit. -increase the size of the government's budget deficit. -increase spending by the federal government. -reduce taxes but increase government spending

reduce the size of the government's budget deficit.

Supply-side policies are intended to.. -increase both aggregate demand and aggregate supply. -shift the aggregate supply curve to the left. -decrease both aggregate demand and aggregate supply. -shift the aggregate supply curve to the right.

shift the aggregate supply curve to the right.

According to the Keynesian model, the federal government.. - should incur surpluses during periods of inflation and deficits during periods of unemployment. -should incur deficits during periods of inflation and surpluses during periods of unemployment. -should always incur budget deficits. -should always incur budget surpluses.

should incur surpluses during periods of inflation and deficits during periods of unemployment.

Which of the following represents the basic functions of money? -standard of value, source of status, and medium of exchange -Correct standard of value, store of value, and medium of exchange -source of status, unit of barter, and medium of exchange -medium of exchange, standard of value, and source of status

standard of value, store of value, and medium of exchange

True or False ? Built-in stabilizers are also known as automatic fiscal policy.

true

Ceteris Peribus

with all things being constant, equal

Define Cynical unemployment

workers losing their jobs due to business cycle fluctuations in output, i.e. the normal up and down movements in the economy as it cycles through booms and recessions