Macro Final Exam
The main policy making body of the Federal Reserve System is the
Federal Open Market Committee
The growth rate of real GDP equals
[(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.
Is there a relationship between a financial asset and its interest rate? The interest rate on a financial asset _______.
falls as the asset price rises
The figure shows the U.S. economy in the most recent quarter (the third quarter of 2020). If there is no change in either aggregate demand or potential GDP, the money wage rate will ______, which brings ______ in aggregate supply, a ______ in the price level, and ______ in real GDP.
fall; an increase;fall; an increase Because potential GDP is greater than real GDP, there is a recessionary gap. The money wage rate will fall, aggregate supply will increase and the AS curve will shift rightward. The price level will fall and real GDP will increase.
Classical macroeconomics _______.
fell into disrepute during the Great Depression
The distinction between physical and financial capital is that
financial capital is used to purchase and operate physical capital.
A commodity or token is money if it is _______.
generally accepted as means of payment
Open market operations are when the Fed buys or sells
government securities from banks or some other business.
The substantially larger real GDP per worker in the United States than in Europe is explained by
greater production per hour, better U.S. technology, longer work hours.
The total amount spent on new capital goods is called
gross investment.
For a government to add to the supply of loanable funds, it must
have a budget surplus.
The crowding−out effect is the tendency for
higher government budget deficits to decrease investment.
One effect of inflation is that it is a tax that redistributes goods and services from
households and businesses to the government.
The supply of loanable funds is from
households and the government if it has a budget surplus.
High inflation
makes money function less well as a store of value.
Banks create money by
making loans and creating deposits, a process that is limited by the size of banks' excess reserves.
Banks earn a profit by
making loans at a higher interest rate than the rates that they offer on their deposits.
Which of the following plays a role in new growth theory?
many people can use discoveries at the same time, and physical activities can be replicated
What are markets a necessary precondition for economic growth? Markets are a necessary precondition for economic growth because _______.
market prices send signals to buyers and sellers that create incentives
The Classical macroeconomic model proposes that
markets work efficiently to produce the best macroeconomic outcomes.
The functions of money are
medium of exchange, unit of account, and store of value.
If the economy is at macroeconomic equilibrium, then real GDP
might be equal to, greater than, or less than potential GDP
The proposition that in the long run when real GDP equals potential GDP, an increase in the quantity of money leads to an equal percentage increase in the price level is the called the quantity theory of
money.
The Keynesian macroeconomic model states that
the economy is inherently unstable and government intervention is required to maintain continued economic growth.
The benefit to the firm of hiring another worker is
the extra output produced by the worker.
During 2019, Simon's Recording Studio spent $40,000 on new machines. During the year, depreciation was $6,000. What was Simon's net investment in 2019?
$34000
Real GDP is $700 billion, average hours worked per week is 42 and aggregate hours 150 billion hours. What is the economy's labor
$4.67
During 2020, Simon's Recording Studio spent $35,000 on new machines. Simon's net investment on the machines at the end of the year was $27,000. What was Simon's depreciation on the machines in 2020?
$8,000 (35,000-27,000)
The currency drain ratio is 0.2 and the desired reserve ratio is 0.4. What is the money multiplier?
(1 + 0.2)÷(0.4+0.2) =2
The table provides some data for an economy in 2017 and 2018. Calculate labor productivity in 2017 and 2018. >>> Answer to 2 decimal places. (a)Labor productivity in 2017 is $______ an hour. (b)Labor productivity in 2018 is $______ an hour.
(a and b) divide real gdp by Aggregate hours
The table provides some data for an economy in 2017 and 2018. Calculate labor productivity in 2017 and 2018. What is the growth rate of labor productivity in 2018? (a)Labor productivity in 2017 is $______ an hour. (b)Labor productivity in 2018 is $______ an hour. (c)The growth rate of labor productivity in 2018 is ____ percent.
(a and b) divide real gdp by Aggregate hours (c) The growth rate of productivity in 2018= [(Labor productivity in 2018−Labor productivity in 2017)÷Labor productivity in 2017]×100
(a)The U.S. economy is at full employment when there is an increase in expected future inflation. Explain the effects of an increase in expected future inflation on the U.S. macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment. The graph shows the U.S. economy in long-run equilibrium. Draw a curve that shows the effect of an increase in expected future inflation on the U.S. macroeconomic equilibrium in the short run. Label it. Draw a point at the new short-run macroeconomic equilibrium. (b)The automatic adjustment path back to full employment (no change in fiscal or monetary policy) begins with a _______ in the _______. (c)Aggregate _______ will _______.
(a) Draw line AD1 above existing AD0 line Plot point at new point at new equilibrium (b)rise;money wage rate (c)supply;decrease
(a)The U.S. economy is at full employment when there is a global recession. Explain the effects of a global recession on the U.S. macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment. The graph shows the U.S. economy in long-run equilibrium. Draw a curve that shows the effect of a global recession on the U.S. macroeconomic equilibrium in the short run. Label it. Draw a point at the new short-run macroeconomic equilibrium. (b)The automatic adjustment path back to full employment (no change in fiscal or monetary policy) begins with a _______ in the _______. (c)Aggregate _______ will _______.
(a) Draw line AD1 below existing AD0 line Plot point at new point at new equilibrium (b)fall;money wage rate (c)supply;increase
Lori is a student who teaches golf on the weekend and in a year earns $20,000 after paying her taxes. At the beginning of 2019, Lori owned $4,000 worth of books and golf clubs and she had $4,000 in a savings account at the bank. During 2019, the interest on her savings account was $280 and she spent a total of $10,000 on consumption goods and services. The market value of her books and golf clubs did not change. How much did Lori save in 2019? What is her wealth at the end of 2019?
(a) In 2019, Lori saved $10,280(20,000-10,000+280) (b)Lori's wealth at the end of 2019 is $18,280(10,280+4,000+4,000)
The graph shows the productivity curves in year 1 and year 2 for an economy. (a)Draw a point to show real GDP per hour of labor in year 1 if capital per hour of labor is $30. Label it 1. Draw a point to show real GDP per hour of labor in year 2 if capital per hour of labor is $40. Label it 2. (b)Describe what happened in the economy. The upward shift of the productivity curve is due to _______, and the increase in capital per hour of labor is due to _______.
(a) Put point 1 on PC1 at 30 Put point 2 on PC2 at 40 (b)an increase in human capital or a technological advance; an increase in saving or an increase in investment in physical capital
Suppose the CPI rises. What is the effect on the production function, the demand for labor, and the supply of labor? In what direction do the changes occur? (a)When the CPI rises, there is _______ in the U.S. production function, and _______ in the U.S. demand for labor. (b)There is _______ in the U.S. supply of labor.
(a) no shift;no change (b)no change
During the past 50 years, Singapore has seen huge changes: rapid population growth and the introduction of newer and newer technologies. Singapore has modest unemployment benefits, no minimum wage, and weak labor unions. Does Singapore's unemployment arise mainly from job search or job rationing? (a)Unemployment in Singapore mainly arises from job _______. (b)But some job _______ might arise from _______.
(a) search (b)rationing; efficiency wages
Calculate the change in the number of years it will take for real GDP per person in China to double if China's economic growth rate increases from 10.6 percent to 12.0 percent a year and its population growth rate changes from 1 percent to 2 percent a year. >>> Answer to 1 decimal place. (a)When China's economic growth rate is 10.6 percent a year and its population growth is 1 percent a year, real GDP per person doubles in _____ years. (b)When China's economic growth rate is 12.0 percent a year and its population growth is 2 percent a year, real GDP per person doubles in ____ years. (c)When China's economic growth rate increases from 10.6 percent to 12.0 percent a year and its population growth rate changes from 1 percent to 2 percent a year, real GDP per person doubles in _______.
(a)10.6-1=9.6 70/9.6 = 7.3 (b)12-2=10 70/10 = 7 (c)7.3-7 = 0.3 fewer years
Calculate the change in the number of years it will take for real GDP per person in India to double if real GDP per person increases from 8 percent a year to 10 percent a year. >>> Answer to 1 decimal place. (a)When real GDP per person grows at 8 percent a year, real GDP per person in India doubles in ______ years. (b)When real GDP per person grows at 10 percent a year, real GDP per person in India doubles in _____years. (c)When the growth rate of real GDP per person increases from 8 percent to 10 percent a year, real GDP per person will double ____ years earlier.
(a)70/8 =8.75 (b)70/10=7 (c)8.75-7=1.75
The table shows the quantities of M1, M2, and their components in September 2020. M2=18,648.1 Money market funds=1,100.5 Small time deposits=345.3 Savings deposits=11,699.9 M1=5,502.4 Checkable deposits=3,571.3 Currency and traveler's checks=1,931.1 (a)What is the largest component of M1? (b)What is the largest component of M2?
(a)Checkable deposits (b)Savings deposits
(a)Draw a demand for labor curve. Label it LD. (b)What is the reason for the slope of the demand curve? The slope of the demand for labor curve occurs because _______.
(a)Draw a negative curve(start on left top and end on bottom right) and label it LD (b)each additional hour of labor produces less additional output than the previous hour
(a)Draw an aggregate supply curve. Label it. (b)What happens as an economy moves up along its aggregate supply curve?
(a)Draw a positive line Label it AS (b)The money wage rate and the money prices of other resources remain constant
(a)The U.S. economy is at full employment when the world oil price falls. On an AS-AD graph, show the effect of the world oil price fall on the U.S. macroeconomic equilibrium in the short run. Explain the adjustment process that restores the economy to full employment. The graph shows the U.S. economy at a full-employment equilibrium. Draw a curve to show the effect of a fall in the world price of oil. Label it either AD1 for a new AD curve or AS1 for a new AS curve. Draw a point at the new short-run macroeconomic equilibrium. (b)Along the adjustment path back to full employment with no change in monetary policy or fiscal policy, the money wage rate will _______ and aggregate _______.
(a)Draw line AS1 under existing AS0 line Plot point at new point at new equilibrium (b)rise;supply will decrease
(a)The graph shows an economy's aggregate demand curve. Draw a curve to show the effect on aggregate demand today of an increase in expected future profit. Label it. (b)An increase in expected future income _______ aggregate demand today, and an increase in the expected future inflation rate _______ aggregate demand today.
(a)Draw same line above existing line and label AD1 (b)increases,increases
Karrie is a golf pro, and after she paid taxes, her income from golf and interest from financial assets were $2,000,000 in 2018. At the beginning of 2018, she owned $700,000 worth of financial assets. The market value of her financial assets did not change during 2018. At the end of 2018, Karrie's financial assets were worth $1,600,000. How much did Karrie save during 2018 and how much did she spend on consumption goods and services?
(a)During 2018 Karrie saved $900,000(1,600,000-700,000) (b)During 2018 Karrie consumed $1,100,000(2,000,000-900,000)
Frank takes a summer job in telephone sales. During the summer, he earns an after-tax income of $1,500 and he spends $2,500 on goods and services. What was Frank's saving during the summer and the change, if any, in his wealth?
(a)Frank's saving during the summer is -1000 dollars. (b)The change in Frank's wealth is - 1,000 dollars.
Table 1 Production Function and Demand for Labor Schedules Quantity of labor demanded (billions of hours per year) 0 2 4 Real GDP (billions of 2012 dollars) 0 140 200 Real wage rate (2012 dollars per hour) 100 60 20 Table 2 Supply of Labor Schedule Quantity of labor supplied (billions of hours per year) 0 2 4 Real wage rate (2012 dollars per hour) 20 60 100 Use the information in the schedules above to draw this economy's production function. Label it. (a)Draw a point to show equilibrium employment and potential GDP. (b)At the full-employment quantity of labor, what is the real wage rate? The real wage rate is ______ an hour.
(a)Graph a curve on points (0,0), (2,140), and (4,200). label that curve PF Place point at (2,140) (b)$60
Who published The General Theory of Employment, Interest, and Money? In what year was it published? What was his theory? (a)_______ published The General Theory of Employment, Interest, and Money in _______. (b)His theory was that _______.
(a)John Maynard Keynes; 1936 (b)too little private spending is the cause of depression and recession
What type of macroeconomics holds the view that the market economy is inherently unstable and needs active government intervention to achieve full employment and sustained economic growth? (a)_______ macroeconomics is the view that the market economy is inherently unstable and needs active government intervention to achieve full employment and sustained economic growth. (b)According to Keynes, _______.
(a)Keynesian (b)too little private spending is the cause of depression and recession
Michael is an Internet service provider. On December 31, 2018, he bought an existing business with servers and a building worth $400,000. During 2019, he bought new servers for $300,000. The market value of his older servers fell by $100,000. What was Michael's gross investment, depreciation, and net investment during 2019? What is Michael's capital at the end of 2019?
(a)Michael's gross investment during 2019 was $300,000 (b)Michael's depreciation during 2019 was $100,000 (c)Michael's net investment during 2019 was $200,000 (d)Michael's capital at the end of 2019 was $600,000
It's time to start worrying about the National Debt The budget deficit this year is expected to reach $1 trillion. The government is financing this gap between its outlays and tax revenue by selling Treasury bills and bonds to American and international investors. Source: Valerie Ramey, The Wall Street Journal, August 23, 2019 Draw a graph of the loanable funds market to illustrate the situation described in the article. How will selling Treasury bills and bonds to American and international investors change the real interest rate and the quantity of saving in the United States? The graph shows the U.S. market for loanable funds. (a)Draw a point at the market equilibrium. Label it 1. Suppose that the U.S. government finances its deficit by selling Treasury bills and bonds in the loanable funds market. Draw a curve to show the effect of the government's action in the loanable funds market. Label it. Draw a point to show the new equilibrium real interest rate and equilibrium quantity of loanable funds. Label it 2. (b)When the U.S. government borrows in the loanable funds market, the quantity of U.S. saving _______ and the U.S. real interest rate _______.
(a)Plot point 1 at the intersection already there Plot the line DLF 1 above the line DLF Plot point 2 at the new intersection (b)increases; rises
In the most recent quarter (the third quarter of 2020), U.S. real GDP was $18.6 trillion, potential GDP was $19.3 trillion, and the price level measured by the GDP deflator was 113.8. (a) 1. Illustrate the state of the U.S. economy in the third quarter of 2020 by drawing a point that shows real GDP and the price level. 2. Draw an aggregate supply curve for the third quarter of 2020. Label it AS. 3. Draw a line that shows potential GDP in the third quarter of 2020. Label it Potential GDP. (b)In the third quarter of 2020 real GDP was ______ potential GDP.
(a)Plot point at 113.8 and 18.6 Draw positive line through that point and label AS Draw upwards line at 19.3 label Potential GDP (b)below
What is economic growth? (a)Economic growth _______. (b)Does the standard of living increase whenever real GDP increases?
(a)is a sustained expansion of production possibilities (b)No, the growth rate of the population must be less than the growth rate of real GDP
The velocity of circulation is constant, real GDP is growing at 4 percent a year, the real interest rate is 2 percent a year, and the nominal interest rate is 4 percent a year. Calculate the inflation rate, the growth rate of money, and the growth rate of nominal GDP. (a)The inflation rate is ______percent a year. (b)The growth rate of money is _____ percent a year. (c)The growth rate of nominal GDP is ______ percent a year.
(a)The inflation rate is 2 percent a year. (nominal interest rate-real interest rate) (b)The growth rate of money is 6 percent a year.(nominal interest rate+real gdp-real interest rate) (c)The growth rate of nominal GDP is 6 percent a year.(real gdp+inflation rate)
The Bureau of Economic Analysis reported that the U.S. capital stock was $57.3 trillion at the end of 2016, $59.8 trillion at the end of 2017, and $62.9 trillion at the end of 2018. Depreciation in 2017 was $3.2 trillion, and gross investment during 2018 was $3.8 trillion. Calculate U.S. net investment and gross investment during 2017.
(a)U.S. net investment during 2017 was $2.5 trillion.(59.8-57.3) (b)U.S. gross investment during 2017 was $5.7 trillion.(3.2+2.5)
The Bureau of Economic Analysis reported that the U.S. capital stock was $57.3 trillion at the end of 2016, $59.8 trillion at the end of 2017, and $62.9 trillion at the end of 2018. Depreciation in 2017 was $3.2 trillion, and gross investment during 2018 was $3.8 trillion. Calculate U.S. net investment and depreciation during 2018.
(a)U.S. net investment during 2018 was $3.1 trillion.(62.9-59.8) (b)Depreciation during 2018 was $. 7 trillion.(3.8-3.1)
The table provides some data on real GDP and the population of Atlantis in 2017 and 2018. What is the economic growth rate in Atlantis in 2018? What is the growth rate of Atlantis's standard of living in 2018? (a)The economic growth rate in Atlantis in 2018 is _____percent. (b)The growth rate of Atlantis's real GDP per person in 2018 is ____.
(a)Use [(Real GDP in current year−Real GDP in previous year)÷Real GDP in previous year]×100 (b) Divide real gdp by corresponding population, then plug that into same formula
What is the fraction of a bank's total deposits that it holds in reserve? What is the ratio of reserves to deposits that a bank wants to hold? What is the effect of a larger desired reserve ratio? (a)The fraction of a bank's total deposits that it holds in reserve is the _______, and the ratio of reserves to deposits that a bank wants to hold is its _______. (b)The greater the desired reserve ratio, _______.
(a)actual reserve ratio; desired reserve ratio (b)the smaller the money multiplier
What does the production function separate? What does the shape of the production function illustrate? (a)The production function separates _______. (b)The production function _______.
(a)attainable combinations of labor hours and real GDP from unattainable combinations (b)displays diminishing returns
What do loanable funds finance? What is the source of loanable funds? (a)Loanable funds are used to finance _______. (b)Loanable funds come from _______.
(a)business investment, a government budget deficit, and international investment or lending (b)private saving, a government budget surplus, and international borrowing
What is the effect of an open market sale of $1 million of securities by the Fed? (a)The quantity of money _______ by $1 million multiplied by _______. (b)Desired reserve ratio = R/D; Currency drain ratio = C/D; Monetary base = MB; Quantity of money = M. The formula used to calculate the money multiplier is _______. (c)The sign of the money multiplier is _______. (d)The quantity of money _______.
(a)decreases;the money multiplier (b)(1 + C/D)/(R/D)+ (C/D) (c)positive (d)decreases
According to classical growth theory, when does the population grow? (a)According to classical growth theory, when real GDP per person _______, the population grows. (b)What is the prediction of Malthusians? According to Malthusians, _______.
(a)exceeds the subsistence level (b)if today's global population reaches 11 billion by 2200, we will return to a primitive standard of living
The table sets out an economy's aggregate demand and aggregate supply schedules. (a)What is the macroeconomic equilibrium? (b)If potential GDP is $600 billion, what is the type of macroeconomic equilibrium? (c)How do real GDP and the price level adjust in the long run?
(a)find where Real GDP demanded and Real GDP supplied are equal (b)above full employment and has an inflationary gap (c)aggregate supply decreases, the price level rises, and real GDP decreases to potential GDP
Explain the effect of each of the following events on Mexico's aggregate demand. (a)If the government of Mexico cuts income taxes, Mexico's aggregate demand _______. (b)Mexico trades with the United States. When the United States experiences strong economic growth, Mexico's aggregate demand _______. (c)When the Mexican government relaxes its environmental standards, so that factories are no longer required to upgrade their production facilities, investment in Mexico decreases and Mexico's aggregate demand _______.
(a)increases,and the aggregate demand curve shifts rightward (b)increases because its exports to the United States increase. Mexico'sAD curve shifts rightward (c)decreases. The AD curve shifts leftward.
What is the driving force of economic growth according to new growth theory? Why does it predict that economic growth will never end? (a)According to new growth theory, the driving force of economic growth is _______. (b)New growth theory predicts that economic growth will never end because _______.
(a)many people can use one discovery at the same time (b)our unlimited wants will lead us to make choices that will bring ever-greater productivity and perpetual economic growth.
What is the view of classical macroeconomics? (a)According to classical macroeconomics, _______. (b)Classical macroeconomics predicted that the Great Depression _______.
(a)no remedy by government can improve on the performance of the market (b)would eventually end but offered no method for ending it more quickly
Suppose U.S. labor unions negotiate wage hikes that affect all workers. What is the effect on the production function, the demand for labor, and the supply of labor? In what direction do the changes occur? (a)When U.S. labor unions negotiate wage hikes that affect all workers, there is ______ in the U.S. production function. (b)There is _______ in the U.S. demand for labor and _______ in the U.S. supply of labor.
(a)no shift (b)no change;no change
What is the demand for money? When the nominal interest rate rises, does the opportunity cost of holding money increase or decrease? Does the quantity of money demanded increase or decrease? (a)The demand for money is the relationship between the quantity of money demanded and the _______ when all other influences on the amount of money that people wish to hold remain the same. (b)When the nominal interest rate rises, the opportunity cost of holding money _______ and the quantity of money demanded _______.
(a)nominal interest rate (b)rises; decreases
What is the classical growth theory? (a)Classical growth theory _______. (b)Why does classical growth theory predict that economic growth will eventually end?
(a)predicts that the clash between an exploding population and limited resources will eventually bring economic growth to an end (b)A population explosion that leads to a fall in labor productivity and the return of real GDP per person to the subsistence level
If the Fed wants to increase the quantity of money, what actions does it take? What is the effect on reserves in the banking system, loans, bank deposits, and the quantity of money? (a)If the Fed wants to increase the quantity of money, it makes an open market _______. (b)Reserves in the banking system _______. Banks _______ loans. (c)Bank deposits _______ and the quantity of money _______.
(a)purchase (b)increase;make more (c)increase;increase
People's Bank of China boosts liquidity with open market operations People's Bank of China, China's central, conducted an open market operation that injected 270 billion yuan into China's banking system. Explain how the open market operation described in the news clip will change the quantity of money in China. (a)The Bank of China makes an open market _______. (b)Reserves in the banking system _______. Banks _______ loans. (c)Bank deposits _______ and the quantity of money _______.
(a)purchase (b)increase; make more (c)increase; increases
What is the economic growth rate? How is it calculated? (a)The economic growth rate is the annual percentage change of _______. (b)Real GDP growth rate = _______.
(a)real GDP (b)[(Real GDP in current year−Real GDP in previous year)÷Real GDP in previous year]×100
f the Fed wants to decrease the quantity of money, what actions does it take? What is the effect on reserves in the banking system, loans, bank deposits, and the quantity of money? (a)If the Fed wants to decrease the quantity of money, it makes an open market _______. (b)Reserves in the banking system _______. Banks _______ loans. (c)Bank deposits _______ and the quantity of money _______.
(a)sale (b)decrease;call in (c)decreases;decreases
If the Fed doubled the quantity of money and nothing else changed, what would happen to the price level in the short run and the long run? What would happen to the inflation rate? (a)If the Fed doubled the quantity of money and nothing else changed, the price level would _______ in the short run. (b)In the long run, the price level would _______ and the inflation rate would be _______ percent.
(a)start to rise (b)double; 100
What are the three types of financial markets? What is financial capital? (a)The three types of financial markets are _______. (b)Financial capital is _______.
(a)stock markets, bond markets, and loans markets (b)the funds used to buy physical capital
What is the Ricardo-Barro effect? (a)The Ricardo-Barro effect is the proposition that _______. (b)The graph shows the supply of loanable funds and the demand for loanable funds in an economy. Suppose the government has a budget deficit of $0.2 trillion and the Ricardo-Barro effect holds. Draw the new demand for loanable funds curve. Label it. Draw the new supply of loanable funds curve. Label it. Draw a point that shows the equilibrium quantity of loanable funds and interest rate.
(a)the budget deficit has no effect on the real interest rate or investment (b)Plot the line DLF 1 above the line DLF Plot the line SLF 1 to the right of the SLF line Plot the point at the new intersection of SLF 1 and DLF 1
Cash is more popular than bonds Money in the bank earns almost nothing. Even so, in the second half of 2015 an additional $208 billion was added to bank deposits and money market funds and billions of dollars were moved from bonds. What is the opportunity cost of holding money? If people move out of bonds and into money, how will the demand for money and the interest rate change? (a)The opportunity cost of holding money is _______ (b)When people move out of bonds and into money, the demand for money _______ and the interest rate on bonds _______.
(a)the interest rate forgone on an alternative asset (b)increases; rises
What to do with $50,000 now A good strategy: Put about two-thirds of the money into bonds of developed nations and the rest into riskier emerging- market bonds. What is the opportunity cost of holding money? If lots of people put their money into bonds, how will the demand for money and the interest rate change? (a)The opportunity cost of holding money is _______. (b)When lots of people followed this advice and put their money into bonds, the demand for money _______ and the interest rate on bonds _______.
(a)the interest rate forgone on an alternative asset (b)decreases; falls
On January 1, 2020, Sophie's Internet Cafe owned 10 computer terminals valued at $8,000. During 2020, Sophie's bought 5 new computer terminals at a cost of $1,250 each, and at the end of the year, the market value of all of Sophie's computer terminals was $10,000. What was Sophie's gross investment, net investment, and depreciation?
(a)Sophie's gross investment during 2020 was $6250(1250x5) (b)Sophie's net investment during 2020 was $2000.(10000-8000) (c)Sophie's depreciation during 2020 was $4250.(6250-2000)
On January 1, 2019 Terry's Towing Service owned 7 tow trucks valued at $630,000. During 2019, Terry's bought 10 new trucks for a total of $1,000,000. At the end of 2019, the market value of all the firm's trucks was $1,441,000. What was Terry's gross investment? Calculate Terry's depreciation and net investment.
(a)Terry's gross investment during 2019 was $1,000,000 (b)Terry's depreciation during 2019 was $189,000($630,000+$1,000,000−$1,441,000) (c)Terry's net investment during 2019 was $811,000(1,000,000-189,000)
What is the effect of an increase in disposable income on the supply of loanable funds? What is the effect of the adoption of new technology that increases expected profit on the demand for loanable funds? If both of these events occur simultaneously, does the equilibrium real interest rate change? (a)An increase in disposable income will _______ the supply of loanable funds and the adoption of new technology that increases expected profit will _______ the demand for loanable funds. (b)
(a)increase; increase (b)rises, falls, or remains unchanged
The demand for loanable funds
****increases in an expansion and decreases in a recession.
According to the Ricardo−Barro effect, an increase in the government budget deficit
***does not change the real interest rate.
If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of circulation is
1.5
Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's net investment is ________ mowers.
10
Sally has a credit card balance of $1,000. The credit card company charges a nominal interest rate of 14 percent a year on unpaid balances. The inflation rate is 5 percent a year. Calculate the real interest rate that Sally pays the credit card company. The real interest rate that Sally pays the credit card company is ______percent a year.
14-5 9 percent a year
The graph describes the labor market on Sandy Island. In addition, not shown in the graph, a survey tells us that when Sandy Island is at full employment, people spend 2,000 hours a day in job search. If the government introduces a minimum wage of $13 an hour, how much unemployment is created by job rationing? The amount of job rationing unemployment created by the minimum wage is _____ hours per day.
2,000 hours $12 would be the median, $13 is the new minimum wage Take 13-11=2
Suppose the nominal interest rate on a savings bond is 7 percent a year and the inflation rate is 4.5 percent a year. How much is the real interest rate?
2.5 percent
Assume the population growth rate is 2 percent and the real GDP growth rate is 5 percent. The change in standard of living, as measured by
3 percent
The graph describes the labor market on Sandy Island. In addition, not shown in the graph, a survey tells us that when Sandy Island is at full employment, people spend 1,000 hours a day in job search. If the government introduces a minimum wage of $22 an hour, how much unemployment is created by job rationing? The amount of job rationing unemployment created by the minimum wage is ______ hours per day.
4,000 hours The median is $20, the new minimum wage is $22 Take 22-18=4
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?
5
Annualized inflation in Venezuela soars to 1,000 percent Inflation in Venezuela hit a monthly rate of 23.3 percent in June and it was feared that it would soon move into unstoppable hyperinflation. The country faced constant looting and social unrest. What is hyperinflation? Is Venezuela in a hyperinflation? Hyperinflation is an inflation rate that exceeds _______. In 2016, Venezuela is _______ a hyperinflation.
50 percent a month; not in
The above table has the demand and supply schedules for money. What is the equilibrium nominal interest rate?
9 percent
Explain why, other things remaining the same, a country with a well-educated population has a faster economic growth rate than a country that has a poorly educated population.
A country with a well-educated population has more human resources to invest in expanding human capital, which can develop new and more productive technologies.
The table shows the quantities of M1, M2, and their components in September 2020 but with two items missing. What are the missing items? M2=18,648.1 Money market funds=1,100.5 A=345.3 Savings deposits=11,699.9 M1=5,502.4 B=3,571.3 Currency and traveler's checks=1,931.1
A is Small time deposits B is Checkable deposits
According to Ricardo-Barro, what is the effect of a government budget deficit in the loanable funds market?
According to the Ricardo-Barro effect, rational taxpayers know that a budget deficit today means that future taxes will be higher and future disposable incomes will be smaller.
Which of the following items are examples of fiscal policy that increase aggregate demand?
An increase in government expenditure, a decrease in taxes, and an increase in transfer payments.
Which of the following events increases the amount of job-rationing unemployment?
An increase in the efficiency wage rate
Businesses paid workers twice a day during the hyperinflation in Germany after World War I and workers spent their incomes as soon as they were paid. Which statement explains these facts?
Businesses paid workers twice a day so that employees would not leave their jobs and search for employment elsewhere. Workers spent their incomes as soon as they were paid to minimize the loss in value of their income.
_______ macroeconomics is the view that the market economy works well, that aggregate fluctuations are a natural consequence of an expanding economy, and that government intervention cannot improve the efficiency of the market economy.
Classical
Draw a demand for money curve. Label it MD0. Draw a demand for money curve that shows the effect of a decrease in real GDP. Label it MD1. Draw a demand for money curve that shows the effect of new financial technology that decreases the demand for money and that follows the decrease in real GDP. Label it MD2. What is the effect in the money market of a decrease in real GDP? When real GDP decreases, _______.
Draw line MD0 as a normal negative line Draw line MD1 directly under MD0 Draw line MD2 under MD1 a decrease in the demand for money occurs
The graph shows a demand for money curve. Draw a new demand for money curve that shows the effect of a decrease in real GDP. Label it MD1. Draw a demand for money curve that shows the effect of a decrease in the number of families that have a credit card. Draw this demand for money curve in relation to the original demand for money curve, MD0. Label the new curve MD2.
Draw line MD1 under the line already there. Draw line MD2 over the line already there.
In October 2020, the quantity of M2 was $18,812 billion and the nominal interest rate was 0.10 percent. In the graph to the right, draw a point that shows the money market in October 2020 and label it A. Draw and label the M2 demand curve in October 2020. Draw and label the M2 supply curve in October 2020.
Draw line MS straight up and down on 18,812. Plot point A at the intersection, that corresponds to 10% Draw line MD at a negative slope going through the point
The tables set out information about the economy of Athabasca. Calculate the quantity of labor employed, the real wage rate, and potential GDP. The quantity of labor employed is nothing million hours.
Find the middle number of all categories
Which of the following describe the "invention" of banking?
Goldsmiths in the sixteenth century issued gold receipts which entitled its owners to reclaim their gold on demand.
Suppose that potential GDP and the velocity of circulation are constant. What is the change in the price level in the long run if the quantity of money increases by 3 percent a year? If the quantity of money increases by 3 percent a year, the change in the price level is ______ percent a year in the long run.
If the quantity of money increases by 3 percent a year, the change in the price level is 3 percent a year in the long run.
The table shows the quantities of the components of M1 and M2 in September 2020. In September 2020, M1 was $_____ billion. Money market funds=1,100.5 Small time deposits=345.3 Savings deposits=11,699.9 Checkable deposits=3,571.3 Currency and traveler's checks=1,931.1 In September 2020, M1 was $_____ billion. In September 2020, M2 was $______ billion
In September 2020, M1 was $5502.4 billion.(add checkable deposits and currency and traveler's checks) In September 2020, M2 was $18,648.1 billion.( add everything)
Which of the following statements about inflation is true?
Inflation is a tax on holding money.
Sara withdraws $1,500 from her checking account at Bank of America, keeps $200 in cash, and deposits the balance in her small time deposit account at Citibank. What is the immediate change in M1 and M2?
M1 decreases by $1,300 and there is no change in M2.
Philip takes $900 from his checking account and deposits the $900 in his savings account. What is the immediate change in M1 and M2?
M1 decreases by $900 and M2 does not change.
Pam buys $1,000 worth of American Express traveler's checks and pays for her purchase using funds from her savings account. What is the immediate change in M1 and M2? The immediate effect on M1 and M2 is _______.
M1 increases by $1,000 and M2 does not change
Which growth theory sees the economy as a perpetual motion machine? _______ sees the economy as a perpetual motion machine.
New growth theory
Which of the following statements about potential GDP is correct?
On average over the business cycle, real GDP equals potential GDP.
The table shows aggregate demand and short-run aggregate supply in Japan. Potential GDP is 600 trillion yen. What is the short-run macroeconomic equilibrium? Does Japan have an inflationary gap or a recessionary gap and what is its magnitude? Use the data to draw the aggregate demand curve and the aggregate supply curve. Label the curves. Draw the potential GDP line and label it. Draw a point at the short-run equilibrium.
Picture in phone 1
Show the effect on the real interest rate and equilibrium quantity of loanable funds of a decrease in the demand for loanable funds and a smaller decrease in the supply of loanable funds. Draw a demand for loanable funds curve. Label it DLF0. Draw a supply of loanable funds curve. Label it SLF0. Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1. Draw a curve that shows a decrease in the demand for loanable funds. Label it DLF1. Draw a curve that shows a smaller decrease in the supply of loanable funds. Label it SLF1. Draw a point at the new equilibrium real interest rate and quantity of loanable funds. Label it 2.
Plot SLF 1 (top) and SLF 0(bottom) at a positive upward slope Plot DLF 0(top) and DLF 1(bottom) and a negative downward slope a lil spaced out from each other Plot point 1 at the intersection of DLF 0 and SLF 0 Plot point 2 at the intersection of DLF 1 and SLF 1
The figure shows the demand for money curve. Draw the supply of money curve if the quantity of money is $5.9 trillion. Label it MS. Draw a point at the equilibrium quantity of money and nominal interest rate. What is the equilibrium nominal interest rate?
Plot a line downwards on 5.9 and plot a point on the intersection. The equilibrium nominal interest rate is 6 percent a year. (whatever number is on the left at the intersection)
Show how a decrease in the supply of loanable funds and an increase in the demand for loanable funds can raise the real interest rate and leave the equilibrium quantity of loanable funds unchanged. Draw a demand for loanable funds curve. Label it DLF0. Draw a supply of loanable funds curve. Label it SLF0. Draw a point at the equilibrium real interest rate and quantity of loanable funds. Label it 1. Now draw a curve that shows an increase in the demand for loanable funds. Label it DLF1. Draw a curve that shows a decrease in the supply of loanable funds. Label it SLF1. Draw this curve in such a way that the equilibrium quantity of loanable funds does not change. Draw a point at the new equilibrium real interest rate and quantity of loanable funds. Label it 2.
Plot line DLF 0 (bottom)and DLF 1 (top)at a negative downward slope Plot line SLF 1(top) and SLF 0(bottom) at a positive upwards slope Point 2 should be at the intersection of SLF 1 and DLF 1 Point 1 should be at the intersection of SLF 0 and DLF 0
In the most recent quarter (the third quarter of 2020), U.S. real GDP was $18.6 trillion and the price level measured by the GDP deflator was 113.8. 1. Draw a point that shows real GDP and the price level in the third quarter of 2020. 2. Draw an aggregate demand curve for the third quarter of 2020 and label it AD. 3. Draw an aggregate supply curve for the third quarter of 2020 and label it AS.
Plot point at 113.8,18.6 Draw line AS upwards through point Draw line AD downward through point
In 2010, the Lee family had disposable income of $90,000, wealth of $360,000, and an expected future income of $90,000 a year. At a real interest rate of 2 percent a year, the Lee family saves $15,000 a year; at a real interest rate of 4 percent a year, they save $20,000 a year; and at a real interest rate of 6 percent, they save $25,000 a year. Draw a point to show the quantity of loanable funds supplied by the Lee family when the real interest rate is 1) 2 percent a year. Label it 1. 2) 4 percent a year. Label it 2. 3) 6 percent a year. Label it 3. Draw the Lee family's supply of loanable funds curve through the points. Label it.
Plot points at (2,15), (4,20) and (6,25) Plot at line through (2,15) and (6,25)
First Call, Inc. is a wireless service provider. It plans to build an assembly plant that costs $12 million if the real interest rate is 5 percent a year. If the real interest rate is 4 percent a year, First Call will build a larger plant that costs $14 million. And if the real interest rate is 6 percent a year, First Call will build a smaller plant that costs $10 million. Draw points to show the quantity of loanable funds demanded when the real interest rate is 1) 6 percent a year. Label the point 1. 2) 5 percent a year. Label the point 2. 3) 4 percent a year. Label the point 3. Draw First Call's demand for loanable funds curve through the points. Label it.
Plot points at (6,10), (5,12), and (4,14) Plot a line at (6,10) and (4,14)
Everything is identical in the countries of Qumar and Rohan except that Qumar has a smaller quantity of capital than the Rohan. Both countries increase their capital by the same amount. Which country experiences the greater increase in production?
Qumar has the greater increase in production.
Which statement most accurately describes the effect financial technology has had on the demand for money in the United States?
Some advances in financial technology have increased the demand for money while others have decreased it.
Which of the following statements about the Fed is correct?
The FOMC meets approximately every six weeks to review the state of the economy.
What is the Fed and what is the FOMC?
The Fed provides banking services to banks and governments and the FOMC meets approximately every six weeks to review the state of the economy.
The table shows the quantities of M1, M2, and the monetary base in October 2020. What are the values of the M1 money multiplier and the M2 money multiplier in October 2020? M1=5,579.9 M2=18,811.6 Monetary base=3,115.6 The M1 money multiplier is ______ The M2 money multiplier is _____
The M1 money multiplier is 1.8(5,579.9/3,115.6) The M2 money multiplier is 6(18,811.6/3,115.6)
What results in slow or absent economic growth? _______ results in slow or absent economic growth.
The absence of property rights
Calculate the approximate number of years it will take for real GDP per person to double if an economy maintains an economic growth rate of 12 percent a year and a population growth rate of 2 percent a year. It will take _______ years for real GDP per person to double.
The growth rate of real GDP per person equals the growth rate of real GDP minus the growth rate of the population. The growth rate of real GDP per person = 12 percent a year−2 percent a year, which is 10 percent a year. The Rule of 70 tells us that the number of years it takes for the level of any variable to double is approximately 70 divided by the annual percentage growth rate of the variable, which is 70÷10 = 7 years.
If the quantity of money grows at 14 percent a year, the velocity of circulation is constant, and potential GDP grows at 4 percent a year, what is the inflation rate in the long run?
The inflation rate in the long run is 10 percent a year. (14-4)
The economy is at full employment. The quantity of money grows at a rate of 14 percent a year, real GDP grows at 4 percent a year in the long run, and the velocity of circulation increases at 1 percent a year. What is the inflation rate in the long run?
The inflation rate in the long run is 11 percent a year. (14+1-4)
An economy has a recessionary gap. With no change in aggregate demand, how does the economy return to full employment?
The money wage rate falls, aggregate supply increases, and the price level falls
The equilibrium real wage rate is ________ and the equilibrium quantity of labor is ________ billions of hours per year.
The one where Quantity of labor demanded and Quantity of labor supplied are equal
What does the potential GDP line illustrate?
The potential GDP line is vertical because potential GDP is independent of the price level.
GDP is $20 billion and the velocity of circulation is 5. What is the quantity of money?
The quantity of money is $4 billion (20/5)
Consider aggregate supply and then choose the statement that is correct.
The quantity of real GDP supplied equals potential GDP at the price level at which the real wage rate is at its full-employment equilibrium level.
The rate of increase in velocity is 0 percent a year, the money growth rate is 18 percent a year, and the inflation rate is 16 percent a year. What is the real GDP growth rate?
The real GDP growth rate is 2 percent a year. (money growth rate-inflation rate + rate of increase in velocity)
In 2007, the United States was at full employment. The quantity of money was growing at 6.4 percent a year, the nominal interest rate was 4.4 percent a year, real GDP grew at 1.9 percent a year, and the inflation rate was 2.9 percent a year. Calculate the real interest rate.
The real interest rate was 1.5 percent a year. 4.4-2.9=1.5
Which of the following statements correctly describes the demand for labor?
The real wage rate influences the quantity of labor demanded because what matters to firms is how much output they must sell to earn the dollars they pay the workers.
The table shows the amounts held as the various components of M1 and M2. Calculate the value of M1 and M2. Savings deposits=400 Checking deposits=150 Small time deposits=220 Money market funds and other deposits=280 Currency and traveler's checks=140
The value of M1 is $290 billion. (add checking deposits and currency and travelers checks) The value of M2 is $1190 billion.(add all together)
In the fourth quarter of 2020, M2 was $18,322.1 billion, real GDP was $18,584.0 billion, and the price level was 113.8. What was the velocity of circulation of M2 in the fourth quarter of 2020? The velocity of circulation of M2 was ______
The velocity of circulation of M2 was 1.2
The table gives information about items on a bank's balance sheet. Calculate the bank's deposits that are part of M1, deposits that are part of M2, and the bank's loans, securities, and reserves. Checkable deposits=400 Savings deposits=500 Small time deposits=720 Loans to businesses=950 Government securities=600 Currency=30 Reserves at the Fed=40 The bank's deposits that are part of M1 equal ______ The bank's deposits that are part of M2 equal ______ The bank's loans are $____million and the bank's securities are $____million. The bank has reserves of $____ million.
The bank's deposits that are part of M1 equal $400 million.(checkable deposits) The bank's deposits that are part of M2 equal $1620 million.(checkable deposits plus savings deposits plus small time deposits) The bank's loans are $950 million and the bank's securities are $600 million. The bank has reserves of $70 million.(currency plus reserves at the fed)
The table gives information from a bank's balance sheet. Calculate the bank's loans, securities, and reserves. Checkable deposits=300 Savings deposits=400 Small time deposits=1240 Loans to businesses=1,150 Government securities=700 Currency=40 Reserves at the Fed=50
The bank's loans are $1150 million. The bank's securities are $700 million. The bank's reserves are $90 million. (currency plus reserves at the fed)
The money multiplier is 2.0 and the currency drain ratio is 0.2. What is the desired reserve ratio?
[(1 + 0.2)÷(2.0)]−0.2, =0.4.
According the Keynesian macroeconomic model, which of the following was responsible for starting the Great Depression?
Too little private spending.
Which countries have experienced a hyperinflation during recent times?
Zimbabwe
Your bank manager tells you that she does not create money; she just lends what is deposited. Explain why she is wrong and how she creates money. The banking system creates money because _______.
a bank that has excess reserves can make loans. When a bank creates a loan, the bank increases the balance of the borrower's account and that increase in deposits is new money
A document that promises to pay specified sums of money on specified dates and is a debt to the issuer is called
a bond.
Which of the following produces a movement along the aggregate demand curve and does not shift the aggregate demand curve?
a change in the price level
The change reflected in the figure might be a result of (AS1 shift downwards to AS2)
a decrease in the money wage rate.
Human capital refers to the
accumulated skills and knowledge of human beings
For the world, what period of time experienced the fastest growth rate of real GDP per person?
after about 1750 AD
What does the business cycle occur? The business cycle occurs because _______.
aggregate demand and aggregate supply fluctuate, but they don't always fluctuate by the same amount and in the same direction
What is the effect of an increase in investment? When investment increases, _______.
aggregate demand increases and income increases. The increase in income induces an increase in consumption expenditure so aggregate demand increases by more than the initial increase in investment
When potential GDP increases, ______.
aggregate supply increases
Demand−pull inflation starts with
an increase in aggregate demand.
In the figure, the shift in the aggregate demand curve from AD1 to AD2 could be the result of
an increase in government expenditures on goods and services.
In the United States between the 1970s and the 2000s, the productivity of labor increased. This increase led to
an increase in the demand for labor.
The change in potential real GDP and aggregate supply shown in the graph can be a result of (Potential GDP line shifts right)
an increase in the quantity of capital.
In the figure, the shift in the aggregate demand curve from AD1 to AD3 could be the result of
an increased expectation of a recession that lowers the expected rate of profit from investment.
If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP more than potential GDP, there is
an inflationary gap.
The demand for money increases if _______.
banks increase the interest rate on deposits
Holding money provides a benefit _______.
because it is a means of payment
Pam buys $1,000 worth of American Express traveler's checks and charges the purchase to her American Express card. What is the immediate change in M1 and M2? The immediate effect on M1 and M2 is _______.
both M1 and M2 increase by $1,000
Thomas Malthus was an economist who contributed to the ______ theory of growth.
classical
Because the Federal Reserve System is a central bank, it provides banking services to
commercial banks.
What are the institutions that make up the banking system? The institutions that make up the banking system are _______.
commercial banks, money market funds, thrift institutions, and the Federal Reserve
An increase in expected future income increases ______.
consumption expenditure, which increases current aggregate demand
Which of the following is an example of money?
currency in your wallet
Other things remaining the same, what is the effect of a rise in the foreign exchange rate of the U.S. dollar? Other things remaining the same, a rise in the foreign exchange rate of the U.S. dollar _______.
decreases U.S. aggregate demand
A decrease in people's disposable income
decreases saving.
What is the effect of an increase in the income tax rate and more generous unemployment benefits on the labor market? An increase in the income tax rate _______ and more generous unemployment benefits _______.
decreases the supply of labor; decrease the supply of labor
All else the same, when real GDP increases the
demand for money increases.
The production function displays
diminishing returns.
If you deposit $1,000 in cash in your checkable deposit at your bank, the quantity of M1 immediately
does not change in size.
Why does much of Africa experience slow economic growth? Much of Africa experiences slow economic growth because it lacks _______.
economic freedom, private property rights that are enforced, and markets that function well
What are the preconditions for economic growth? The preconditions for economic growth are _______.
economic freedom, private property rights, and markets
The opportunity cost of holding money _______.
equals the nominal interest rate on bonds
Barter requires the
exchange of goods and services directly for other goods and services
In explaining economic growth, new growth theory stresses the role played by
human choices
Which of the following shifts the aggregate supply curve rightward?
increase in potential GDP
What is the effect of the spread of ATMs and the increased use of debit cards on the money market? The spread of ATMs and the increased use of debit cards _______ money. Everything else remaining the same, the nominal interest rate _______.
increase the demand for; rises
What is the effect of a decrease in wealth on the supply of loanable funds? A decrease in wealth will _______ the supply of loanable funds and _______.
increase; and shift the supply of loanable funds curve rightward
Close to 100 percent of Canada's unemployed receive generous benefits compared to 38 percent in the United States. How do you think the natural unemployment rate and potential GDP would change if the United States adopted the level of unemployment benefits that Canada has? If the United States adopted the level of unemployment benefits that Canada has, we would expect the U.S. natural unemployment rate to _______ and U.S. potential GDP to _______.
increase; decrease
In 2020 the fall in the value of the stock market decreased people's wealth. As a result of this change alone, the supply of loanable funds
increased.
The opportunity cost of holding money
increases as the nominal interest rate increases.
Phyllis transfers $3,000 from her savings account at the Bank of Idaho to her checking account. What is the immediate change in M1 and M2?
increases by $3,000; does not change
The natural unemployment rate _______.
increases if unemployment benefits become more generous
Sustained increases in real GDP per person depend on
increases in labor productivity
If the money multiplier is 3.0, a $1,000 increase in the monetary base
increases quantity of money by $3,000.
Job rationing _______.
increases the natural unemployment rate
What is an economy's business cycle? An economy's business cycle is a continuous series over time of different _______.
macroeconomic equilibriums
As the price level rises, how do firms respond in the short run to the change in the real wage rate? As the price level rises, firms respond in the short run to the change in the real wage rate by _______.
increasing production
Hyperinflation is defined as periods of
inflation over 50 percent per month.
Suppose that Australia has fully employed all of its resources. This situation means that Australia
is operating at its potential GDP.
Why is economic freedom crucial for achieving economic growth? Economic freedom is crucial for achieving economic growth because _______.
it allows people to make choices and gives the incentive to save, invest, expand human capital, and discover and apply new technologies
How does a bank maximize its stockholders' wealth? A bank maximizes its stockholders' wealth by _______.
lending for long terms at high interest rates and borrowing from depositors and others
Commercial banks' assets include _______.
loans to individuals and businesses and government securities
The largest category of commercial banks' assets is
loans.
What is the outcome of classical growth theory? According to classical growth theory, _______.
no matter how technology advances, real wage rates are always pushed back toward the subsistence level
If the quantity theory of money is correct and other things remain the same, an increase in the quantity of money increases _______.
nominal GDP and the price level
In the figure, as the price level increases the aggregate demand curve will (AD shift above(AD2) and below(AD3))
not shift.
What is predicted by new growth theory? According to new growth theory, _______.
our unlimited wants will lead us to ever greater productivity and perpetual economic growth
The law of diminishing returns states that
output decreases at a constant rate as more capital is added
According to the new growth theory, real GDP per person grows because
people make choices in pursuit of profits.
What type of output gap occurs when the economy is below full employment? The economy is below full employment. Draw the aggregate demand curve. Label it AD. Draw a point at the equilibrium. The gap in the graph is _______ because _______.
photo in phone 2 a recessionary gap; potential GDP exceeds real GDP
What is the effect of a rise in the price of oil on the U.S. economy? How does the economy return to its long-run equilibrium? What is stagflation? The graph shows the U.S. economy at a full-employment equilibrium. Draw a curve that shows the effect of a rise in the price of oil. Label it 1. Draw a point at the new macroeconomic equilibrium. Label it E1. Draw a curve that shows the economy returning to a full-employment equilibrium with no action by the central bank or the government. Label it 2. Draw a point at the full-employment equilibrium. Label it E2. Stagflation _______.
photo in phone 3 is a combination of recession and inflation.
In the most recent quarter (the third quarter of 2020), U.S. real GDP was $18.6 trillion, potential GDP was $19.3 trillion, and the price level measured by the GDP deflator was 113.8. 1. Draw a point that shows real GDP and the price level in the third quarter of 2020. 2. Draw an aggregate demand curve for the third quarter of 2020 and label it AD. 3. Draw an aggregate supply curve for the third quarter of 2020 and label it AS. 4. Draw a line that shows potential GDP for the third quarter of 2020 and label it Potential GDP. In the third quarter of 2020 the output gap was ______.
picture in phone 4 a recessionary gap
The figure shows the U.S. economy in the most recent quarter (the third quarter of 2020). 1. Draw a point to show the long-run equilibrium level of real GDP and the price level if neither aggregate demand nor potential GDP changes. 2. Draw the aggregate supply curve in long-run equilibrium. Label it ASLR.
picture in phone 5
In the graph, the economy is initially at point B. The initial aggregate supply curve is AS0 and the initial aggregate demand curve is AD0. Some events changed aggregate demand from AD0 to AD1 and aggregate supply from AS0 to AS1. What is the new macroeconomic equilibrium? Following the changes in aggregate demand and aggregate supply, the new macroeconomic equilibrium is at _______.
point D top center point
During the past five years, the quantity theory of money has been a _____ predictor of changes in the inflation rate because changes in the velocity of ciruclation have been ______ in comparison to changes in the quantity of money.
poor;large
The level of real GDP the economy produces at full employment is called
potential GDP.
What can government in Africa do to encourage economic growth and raise the standard of living in their countries? If governments in Africa _______ they will encourage economic growth and raise the standard of living.
protect private property
The production function shows that potential GDP increases when the
quantity of labor employed increases.
What is the effect of an increase in expected profit, other things remaining the same, in the market for loanable funds? An increase in expected profit, other things remaining the same, _______ the equilibrium real interest rate and _______ the equilibrium quantity of loanable funds.
raises; increases
What role do property rights play in encouraging economic growth? Property rights encourage economic growth by _______.
strengthening the incentive to work, save, invest, and accumulate human capital
Suppose India wants to measure how much the standard of living has changed over the last decade. Which piece of data should India use?
real GDP per person
For a household, the opportunity cost of not working is the
real wage rate.
Between 1916 and 2016, the average growth rate of real GDP per person in the United States was 2 percent a year. What information does this fact give us about the growth rates of other variables? During this period, _______ grew at a faster rate than _______.
real GDP; the population
What is the change in unemployment when the price level and the money wage rate rise by the same percentage? What is the change in unemployment and the quantity of real GDP supplied when the price level rises but the money wage rate remains unchanged?
remains the same decreases; increases
When a commercial bank receives a deposit, it must keep part of the deposit as cash reserves to satisfy its
required reserves.
In order to influence the interest rate, the Federal Reserve System can immediately adjust the
reserves of the banking system.
What does job rationing create? Job rationing creates a _______.
surplus of labor
What is a bank's balancing act? A bank must balance _______ against _______.
security for depositors; profit for stockholders
What is the effect of advances in technology and the growth of human capital on the productivity curve? Advances in technology and the growth of human capital _______.
shift the productivity curve upward and increase labor productivity
U.S. posts largest-ever monthly budget deficit in February The budget gap widened to $234 billion in February, compared with a gap of $215.2 billion a year earlier and surpassed the monthly record of $231.7 billion set seven years ago. Explain the effect of a large federal deficit and debt on economic growth. A large federal deficit and debt _______.
slows the growth of capital stock and labor productivity, and slows real GDP growth
A combination of recession and inflation is called
stagflation.
According to the Ricardo-Barro effect, what is the effect of a government budget deficit? According to the Ricardo-Barro effect, _______.
taxpayers increase their saving by an amount equal to the government budget deficit
Which of the following statements about a minimum wage is true? A minimum wage _______.
that is above the equilibrium wage rate creates unemployment from job rationing
If there is an increase in expected future income, then
the aggregate demand curve shifts rightward
Macroeconomic equilibrium occurs when
the aggregate quantity demanded is equal to the aggregate quantity supplied.
What is the role of the central bank of the United States? The central bank of the United States is _______.
the bank that provides services to commercial banks and governments and that regulates the banking system
The main sources of cost−push inflation are increases in
the money wage rate and the price of raw materials.
Aggregate supply increases when ______.
the money wage rate falls
What occurs in the labor market when the real wage rate is above the full-employment equilibrium level? When the real wage rate is above the full-employment equilibrium level, _______.
the natural unemployment rate increases
The quantity of real GDP demanded increases if ______.
the price level falls
What is an open market operation? An open market operation is _______.
the purchase or sale of government securities by the Federal Reserve System in the open market
The demand for labor curve shows the relationship between _______.
the quantity of labor businesses are willing to hire and the real wage rate
The labor market is in equilibrium whenever
the quantity of labor demanded equals the quantity of labor supplied.
On what does real GDP growth depend?
the quantity of labor growth and labor productivity growth
What is the outcome in a market with job rationing? In a market with job rationing, _______.
the quantity of labor supplied persistently exceeds the quantity demanded
Which of the following are examples of money in the United States today? In the United States today, money includes _______.
the quarters inside public phones and the funds in a student's checking account
The supply of labor is the relationship between _______.
the real wage rate and the quantity of labor supplied
Economic Growth is defined as
the sustained expansion of production possibilities
The "shoe−leather costs" of inflation are the costs from
time spent trying to spend money quickly.
The figure shows a nation's production function. Point A is
unattainable given the state of the economy.
The word "fiat" is
used to describe today's money because it is money set by law.
The average number of times in a year each dollar is used to buy goods and service is called
velocity of circulation.
The supply of money curve is
vertical because the quantity of money is fixed at any one moment
U.S. potential GDP is the value of the goods and services produced in the United States _______.
when the U.S. economy is at full employment
Suppose the price of a product is $4 and the nominal wage that the firm must pay is $20. Then the firm's real wage is
$5.
During 2009, Barbara earned $60,000 as a financial analyst, paid taxes of $5,000 and consumed $53,000. If Barbara's wealth was $4,000 at the beginning of 2009, at the end of 2009 Barbara's wealth was
$6,000.
Explain the effect of each of the following events on Mexico's aggregate demand. (a)If the government of Mexico raises income taxes, Mexico's aggregate demand _______. (b)Mexico trades with the United States. When the United States experiences negative economic growth, Mexico's aggregate demand _______. (c)When the Mexican government relaxes its environmental standards, so that factories are no longer required to upgrade their production facilities, investment in Mexico decreases and Mexico's aggregate demand _______.
(a)decreases, and the aggregate demand curve shifts leftward (b)decreases because its exports to the United States decrease. Mexico's AD curve shifts leftward (c)decreases. The AD curve shifts leftward.
The People's Bank of China, China's central, conducted an open market operation that injected 270 billion yuan into China's banking system. In the open market operation described in the news clip, explain whether the People's Bank of China buys or sells securities. The People's Bank of China _______ securities because _______. Suppose People's Bank of China buys 20 billion yuan of government securities from ICBC. Show how the transaction changes the balance sheets by filling in the numbers.
buys; money is being injected into the banking system Securities=20 Reserves of ICBC=20 Securities=−20 Reserves=20
What is the monetary base? The monetary base is the sum of _______.
coins, Federal Reserve notes, and banks' reserves at the Fed
Macroeconomic equilibrium occurs when the quantity of real GDP ______ equals the quantity of ______.
demanded; real GDP supplied
If an effective minimum wage were abolished, what do you predict would happen to the equilibrium real wage rate and the quantity of labor employed? If an effective minimum wage is abolished, the equilibrium real wage rate _______ and the quantity of labor employed _______.
falls; increases
Does an increase in real GDP change the demand for money? Do changes in financial technology change the demand for money? An increase in real GDP _______ the demand for money and changes in financial technology _______.
increases; can increase the demand for money or decrease the demand for money
When does the supply of loanable funds increase? When does the supply of loanable funds increases when disposable income _______ or wealth _______.
increases; decreases
Suppose that banks launch an aggressive marketing campaign to get everyone to use debit cards for every conceivable transaction. They offer prizes to new debit card holders and introduce a charge on using a credit card. How would the demand for money and the nominal interest rate change? The demand for money _______ and the nominal interest rate _______.
increases; rises
The slope of the production function becomes _______ steep as the quantity of _______ increases because of diminishing returns.
less; labor
What is the effect of a government budget surplus on the real interest rate and investment? A government budget surplus _______ the real interest rate and _______ investment.
lowers; increases
What is the effect of an increase in disposable income, other things remaining the same, in the market for loanable funds? An increase in disposable income, other things remaining the same, _______ the equilibrium real interest rate and _______ the equilibrium quantity of loanable funds.
lowers; increases
Graphene batteries may slash your phone recharge time to 15 minutes The world's first graphene battery pack puts more power in a smartphone and recharges in 13 to 15 minutes. Graphene also makes flexible screens possible, improves heart rate and fingerprint sensors, and holds the promise to revolutionize batteries for electric cars. Graphene is a new material that can be 1 atom thick. Which of the growth theories that you've studied in this chapter is best supported by this news clip? The _______ growth theory best corresponds to this news clip because _______.
new; it describes the manufacture of graphene as a perpetual motion machine
In the 2000s and 2010s, the quantity theory of money did a ________ job of predicting changes in the inflation rate because ________.
poor; velocity of circulation plunged
A fall in the real wage rate ________ firms' profits and leads to ________ in the quantity supplied.
raises; an increase
What is the effect of a government budget deficit on the real interest rate and investment? A government budget deficit _______ the real interest rate and _______ investment.
raises; crowds out
Suppose firms become more optimistic about the economy's ability to avoid a recession and hence the expected profit increases. As a result, the demand for loanable funds curve shifts ________ and the real interest rate ________.
rightward; rises
In an expansion, how does a change in expected profit influence the demand for loanable funds? In an expansion, expected profit _______ and, other things remaining the same, the demand for loanable funds _______.
rises; increases