macro final exam
The two loops in the circular-flow diagram represent the flow of
inputs and outputs and the flow of dollars
Transfer payments are
not included in GDP because they are not payments for currently produced goods or services
GDP
value of all final goods and services produced within a country in a given period of time.
Which of the following is not included in GDP?
vegetables grown in your garden
The circular-flow diagram is a
visual model of how the economy is organized
GDP equation (open economy)
Y = C + I + G + NX
If John receives an increase in his pay, we would expect
his demand for normal goods to increase
Economics is defined as the study of
how society manages its scarce resources
Which of the following demonstrates human capital and physical capital in that order?
For a restaurant: the chefs' knowledge about preparing food and the equipment in the kitchen
Relative to the no-trade situation, trade with the rest of the world results in
Guatemalan consumers paying a higher price for coffee
To raise productivity, policymakers could
increase spending on education provide tax credits to firms for capital improvements. fund research and development.
Guns and butter are used to represent the classic societal tradeoff between spending on
national defense and consumer goods
If U.S. net exports are negative, then net capital outflow is
negative, so foreign assets bought by Americans are greater than American assets bought by foreigners.
unemployment rate equation
number of unemployed/labor force x 100
The word "economy" comes from the Greek word oikonomos, which means
one who manages a household
The law of demand clearly states that
other things equal, when the price of a good falls, the quantity demanded of the good rises.
According to economic studies CPI
overstates inflation
The adage, "There is no such thing as a free lunch," is used to illustrate the principle that
people face trade-offs
When economists talk about growth in the economy, they measure that growth with the
percentage change in real GDP
An Italian company operates a pasta restaurant in San Francisco. The value of the output produced by this pasta restaurant is included in:
U.S. GDP only
How to find the growth rate
Use real GDP & subtract the percentages from the years
opportunity cost
What must be given up to obtain an item
When supply and demand both increase, equilibrium
price may increase, decrease, or remain unchanged
What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell?
price will fall and the effect on quantity is ambiguous
The "invisible hand" directs activity through
prices
The fact that different countries experience different standards of living is largely explained by differences in those countries'
productivity levels
what do banks do to increase the money supply
purchasing bonds on the open market, which would have lowered the value of money
In 2002 it looked like the Argentinean government might default on its debt (which eventually it did). The open-economy macroeconomic model predicts that this should have
raised Argentinean real interest rates and caused the Argentinean currency to depreciate.
A nation's standard of living is best measured by its
real GDP per capita
to solve for real interest rate
real ir= nominal-inflation
twin deficits
relationship between budget deficit and trade deficit
Stagflation occurs when the economy experiences
rising prices and falling output
A government can encourage growth and, in the long run, raise the economy's standard of living by encouraging
saving and investment
The problem of "gluts," or the idea that savings means that consumption cannot equal production, was a central debate between David Ricardo and Thomas Malthus. Which of the following economic "laws" argues gluts cannot exist systemically?
say's law
how to decrease money supply
sell bonds to banks
Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the long run, the change in price expectations created by the stock market boom shifts
short run aggregate supply left
A marginal charge is a
small, incremental change
Korea should
specialize in electronics production, export electronics, and import food
Suppose you make gold jewelry. An increase in the price of gold will cause
supply of gold jewelry to decrease
Which of the following examples of household spending is categorized as investment rather than consumption?
the purchase of a new house
The historical rise in living standards of American workers is primarily a result of
the rise in American productivity
The catch-up effect can help explain
the spectacular economic growth experienced by South Korea over the years 1960 to 1990
Scarcity exists when:
there is less of a good or resource available than people wish to have
If the current money supply is located at MS1,
there is no excess supply or excess demand if the value of money is 2.
Economists use the word "money" to refer to
those assets regularly used to buy goods and services
Ceteris Paribus
to identify the influence of a single variable, we need to treat all other factors as equal
Economists make assumptions
to make the world easier to understand
Wealth is redistributed from creditors to debtors when inflation is
unexpectedly high.
The opportunity cost of an item is
what you give up to get that item
Suppose the banking system currently has $400 billion in reserves, the reserve requirement is 8 percent, and excess reserves amount to $5 billion. What is the level of deposits?
$4,937.5 billion
Inflation Rate Formula
(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100
real exchange rate formula
(e x P)/P*
Civilian labor force participation equation
(labor force/adult population)*100
What was country A's GDP in 2019?
7253
In the absence of trade, total surplus in the Guatemalan coffee market amounts to
1650
With trade, total surplus in the Guatemalan coffee market amounts to
1870
Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs in the U.S. with the exception of which?
3% 5%
Which of the statements is true? AT (20:5) KA (8:4)
Australia has an absolute advantage in the production of both food and electronics
what is included in m2
M1, savings deposits, small time deposits, and money market mutual funds and other category
Which of the following is not a determinant of the long-run level of real GDP?
The Price Level
Which of the following is a correct way to measure productivity?
divide output by the number of hours worked
Just like models constructed in other areas of science, economic models
incorporate assumption that may contradict reality
Stagflation
increase in price level, decrease in output
The business cycle is the
irregular fluctuations in economic activity
If a nation has an absolute advantage in the production of a good,
it can produce that good using fewer resources then its trading partner.
if a country has a trade deficit
it has negative net exports and negative net capital outflow
A depreciation of the U.S. real exchange rate induces U.S. consumers to buy
more domestic goods and fewer foreign goods.
Long-term bonds are generally
more risky than short-term bonds and so pay higher interest
Cyclical unemployment refers to
year-to-year fluctuations of unemployment around its natural rate
Which of the following transactions added to U.S. GDP in 2010?
your friend bought a new house which, according to reliable estimates, could be rented for $1,500 a month
If the reserve ratio is 5 percent, then $500 of additional reserves would ultimately generate
$10,000 of money.
The M1 money supply is composed of
currency demand deposits traveler's checks other checkable accounts
what is included in m1
currency, demand deposits, traveler's checks, and other checkable deposits
What is the U-4 measure of labor underutilization?
6.9%
Consider the following scenario and its impact on Market Equilibrium for Coffee: If Columbia, an area of the world that produces Cocoa beans used in coffee and chocolate, experiences a drought, what would happen to the market for Coffee today?
A drought would result in an increase in demand today, increasing the price and the quantity in equilibrium.
Which of the following movements would be consistent with the government budget going from deficit to surplus and the simultaneous enactment of an investment tax credit?
A movement from Point B to Point F
Which of the following actions best illustrates adverse selection?
A person who has narrowly avoided many accidents applies for automobile insurance.
A problem that the Fed faces when it attempts to control the money supply is that
A problem that the Fed faces when it attempts to control the money supply is that
Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time.
Aggregate demand shifts right.
Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the short run what happens to the price level and real GDP?
Both the price level and real GDP rise.
The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the
CPI better reflects the goods and services bought by consumers.
How to find current salaries
Current Amount (old CPI/new CPI)
Market for loanable funds
describes the financial system
If Iowa's opportunity cost of corn is lower than Oklahoma's opportunity cost of corn, then
Iowa has a comparative advantage in the production of corn.
Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets.
It would appreciate in foreign exchange markets making U.S. goods more expensive compared to foreign goods.
Which of the following economists is associated with the monetarist explanation for the origins of the Great Depression (1929-1933)?
Milton Friedman
Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?
Net exports would fall which by itself would decrease U.S. aggregate demand. US Citizens are less likely to buy from foreign countries, so E>I
GDP deflator equation
Nominal GDP/Real GDP x 100
The curve becomes flatter as the amount of capital per worker increases because of
diminishing returns to capital.
Which of the following cases demonstrates the efficient markets hypothesis?
The drop in Morton Thiokol stock shortly after the Challenger Explosion
Imagine that in 2019 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time. In the long run, what happens to the expected price level and what impact does this have on wage bargaining?
The expected price level rises. New wage contracts are negotiated at higher wages.
Why is the LRAS curve vertical?
The price level does not affect the long-run determinants of real GDP
The consumption component of GDP includes spending on:
durables, non-durables and services
The "law of one price" states that
a good must sell at the same price at all locations
A weaker deamand together with a stronger supply would necessarily result in
a lower price
National Bureau of Economic Research (NBER) defines an economic expansion as:
a period between a trough and a peak
The term "market failure" refers to
a situation in which the market on its own fails to allocate resources efficiently
Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see
an increase in the demand for chocolate pudding
A construction company has built 50 houses so far this year at a total cost to the company of $8 million. If the company builds a 51st house, its total cost will increase to $8.18 million. Which of the following statements is correct?
all of the above
The law of supply clearly states that
an increase in price of the product leads to an increase in quantity supplied, other things equal
If the economy is at point b, a policy to restore full employment would be
an increase in the money supply
When the consumer price index rises, the typical family
has to spend more dollars to maintain the same standard of living
The natural unemployment rate includes
both frictional and structural unemployment and is the amount of unemployment that the economy normally experiences.
In economics, capital refers to
buildings and machines used in the production process
How to increase money supply
buy bonds from banks
When conducting an open-market purchase, the Fed
buys government bonds, and in so doing increases the money supply.
Marginal Propensity to Consume (MPC) formula
change in consumption/change in income Subtract the consumption Subtract the incomes Divide C/I
The value of housing service provided by the economy's stock of houses is
counted and is based on an estimate of its rental value
According to the principle of comparative advantage,
countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners
If inflation is higher then what was expected,
creditors receive a lower real interest rate than they had anticipated
A market is a
group of buyers and sellers of a particular good or service
The terms equality and efficiency are similar in that they both refer to benefits to society. However, they are different in that
equality refers to uniform distribution of those benefits and efficiency refers to maximizing benefits from scarce resources.
Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?
equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous
When the government implements welfare programs, which of the following is likely to occur?
equity is increased and efficiency is decreased
Real GDP
evaluates current production at the prices that prevailed in some specific year in the past
Productivity
explains all of the differences across countries in the standard of living
Market failure can be cause by
externalities and market power
Institutions in the economy that help to match one person's saving with another person's investment are collectively called the
financial system
In a market economy, who makes the decisions that guide most economic activity?
firms and households
Business cycles
fluctuations between periods of economic growth and recession, or periods of boom and bust
The CPI is a measure of the overall cost of
goods and services bought by a typical consumer
Large or persistent inflation is almost always caused by
government printing too much money
The production possibilities frontier is a
graph that shows the various combinations of output the economy can possibly produce given the available resources and technology
In the United States in recent years, the unemployment rate among teenagers (16-19 years of age) has been
greater than that of people ages 20 and over
Over the last few decades Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself,
increased measured GDP
According to Adam Smith, the success of decentralized market economies is primarily due to
individuals' pursuit of self interest
if a country had a trade surplus...
it has positive new exports and positive net capital outflow
Gross Domestic Product includes all
legal goods and services, but it excludes illegal goods and services
To increase the supply of money the Fed may
lower the discount rate
Which of the following is included in GDP?
medical marijuana purchased from a government-run pharmacy
Which of the following statements about economic models is correct?
models assume away irrelevant details
Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit your job at the bank. Which of the following should not be included in a calculation of your graduate program cost?
the $45,000 salary that you will be able to earn after having completed the program
An important difference between the GDP deflator and the consumer price index is that
the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by a typical consumer
The economy's two most important financial markets are
the bond market and the stock market
In most societies, resources are allocated by
the combined actions of millions of households and firms
Pizza is a normal good if
the demand for pizza rises when income rises.
Using the liquidity-preference model, when the Federal Reserve decreases the money supply,
the equilibrium interest rate increases.
When the money supply curve shifts from MS1 to MS2,
the equilibrium price level increases
At the Federal Reserve,
the nation's monetary policy is made by the Federal Open Market Committee
Canada and the U.S. both produce wheat and computer software. Canada is said to have comparative advantage in producing wheat if
the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.
The term "inflation" is used to describe a situation in which
the overall level of prices in the economy is increasing