Macroeconomic FINAL

Maria's Pizza offers one slice for $2, two slices for $3.50, three slices for $4.50, and four slices for $5.00. Gil orders two slices. From this information, we know that the marginal benefit to Gil of a second slice is at least _____, and the marginal benefit to Gil of a third slice is less than _____.

$1.50; $1.00

An automobile manufacturer installs a conveyor belt system for $670,000. The depreciation rate is 10% at the end of next year. The real interest rate is 6%. What is the user cost of the conveyor belt system for one year?

$107,200

It is a beautiful afternoon, and you are considering taking a leisurely stroll through the park. Your alternatives to walking are streaming a movie that you value at $5, taking a nap that you value at $7, or reading a new book that you value at $12. What is the opportunity cost to you of taking the stroll through the park?

$12

If the interest rate is 4%, what is the approximate future value of $15,000 in 10 years?

$22,204

Janelle loves sashimi. Her first piece of sashimi normally gives her a marginal benefit of $5. Each additional piece yields a marginal benefit that declines by $0.25 per piece. If her favorite sushi bar charges $2.75 per piece of sashimi, how many pieces should she eat?

10

If a country has a working-age population of 200 million, 135 million people with jobs, 10 million people who are unemployed and have given up looking for a job, and 5 million people who are unemployed and seeking employment, then its labor force is _____ million.

140

You open an investment account that earns a nominal interest rate of 4.2% a year. The current consumer price index is 108. In one year, the consumer price index is expected to go to 112. What is your expected real rate of return?

4.2%

A fixed nominal interest rate of _____ with _____ inflation will yield the highest real rate of return for a lender.

7%; 2%

If the price level at the end of year 1 is 110, and the price level at the end of year 2 is 120, the inflation rate in year 2 is _____.

8.3%

Overnight Loans

A loan between banks that lend each other money for very short periods of time.

Unemployment rates are usually highest for:

African American teenagers.

multiplier effect

An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

expansionary fiscal policy

An increase in government purchases of goods and services, a decrease in net taxes, or some combination of the two for the purpose of increasing aggregate demand and expanding real output

The Federal Reserve System is made up of the:

Board of Governors and 12 Federal Reserve district banks.

A growing number of utility companies are using drones for site inspections. What is the effect of these changes on the equilibrium price and quantity, in the market for drones?

Both the equilibrium price and the equilibrium quantity will rise.

According to the _____, the target federal funds rate should be positively related to the _____ rate and _____ related to the unemployment rate.

Fed rule-of-thumb; inflation; negatively

GDP

Gross Domestic Product- the total market value of all final goods and services produced annually in an economy

The Fed model combines the _____ curve, the _____ curve, and the ____ curve to link interest rates, the output gap, and inflation.

IS; MP; Phillips

What is the relationship between lower interest rates and aggregate expenditure?

Lower interest rates boost aggregate expenditure.

How do interest rates affect investment in the economy?

Lower interest rates lower the cost of borrowing for firms, and so investment rises.

Which of the following scenarios does NOT depict a rational seller?

Main Street Bakery calculates the marginal cost of a multilayer red velvet cake sd $9 and sells it for $8

Which of the following is an investment?

Marios builds a new house.

How is monetary policy different from fiscal policy?

Monetary policy adjusts interest rates, whereas fiscal policy adjusts government spending and taxes.

Which of the following causes shifts in the IS curve?

Spending shocks occur.

How do overnight reverse repurchase agreements work?

The Open Market Trading Desk sells bonds to banks and agrees to purchase the bonds back the next day at higher prices. This implicitly sets the floor for the federal funds rate.

Why does the Federal Reserve target inflation rather than unemployment?

The inflation rate is directly related to monetary policy and is thus an easier target to maintain.

How does the law of diminishing marginal utility relate to changing income?

The marginal benefit of an extra dollar of income falls as income rises.

open market operations

The monetary policy tool whereby the Federal Reserve buys and sells government bonds

Which of the following is not a demand shifter?

The price of the product.

Which statement is TRUE, according to standard economic theory?

The true cost of a choice is what you must give up when choosing between alternatives.

Spending Shock

Unplanned expenses that you do not see coming. This includes things like car repairs, fixing a broken computer, or replacing lost/stolen items.

Which of the following tax systems is progressive? Corinne pays a 10% tax on the first $10,000 she earns plus _____ tax on any additional income.

a 25%

You have saved $747. Where should you go if you want to open a checking account?

a commercial bank

The difference between a budget deficit and government debt is that:

a deficit is the amount by which government spending exceeds tax revenues, whereas debt is the sum of money the government owes.

When using the Fed model to diagnose the economy, if a shock causes the real interest rate to fall, then the economy has been hit by _____ shock.

a financial

A debt crisis occurs when:

a government cannot repay its loans.

aggregate price

a measure of the overall level of prices in the economy

When using the Fed model to diagnose the economy, if the output gap has shifted without much movement in the real interest rate, then the economy has been hit by _____ shock.

a spending

If you see a newspaper headline that says "Oil prices rise sharply," this is an example of _____ shock.

a supply

When using the Fed model to diagnose the economy, if inflation rises even though the economy is weak or if it falls even though the economy is strong, then the economy has been hit by _____ shock.

a supply

Efficiency wages are:

above-equilibrium wages designed to encourage better performance.

Once you have identified the unexpected inflation from the Phillips curve

add the expected inflation rate to get the actual inflation rate

Monetary Policy

adjustment of interest rates to influence economic conditions.

A spending shock is any change in

aggregate expenditure at a given interest rate and level of income.

tax rate you pay if you earn another dollar.

amount of your income that you pay taxes on.

Transfer payments:

are a redistribution of funds from one individual to another individual.

Surpluses always occur

at prices above the equilibrium price.

The federal funds rate is the interest rate at which

banks borrow from other banks with excess reserves.

When inflation rises unexpectedly, borrowers will _____, and lenders will _____.

benefit; be hurt

In periods of unexpected inflation:

borrowers benefit, since they repay their loans in dollars whose real value has declined.

A financial shock is any change in

borrowing conditions that changes the real interest rate at which people can borrow.

The poverty line is adjusted each year to reflect:

changes in the cost of living.

Depreciation refers to the:

decline in capital due to wear and tear, obsolescence, accidental damage, and aging.

Deflation is a:

decreasing aggregate price level.

The Affordable Care Act is an example of:

discretionary spending

Which of the following is consistent with the view that "fairness" means equality of outcomes?

equal incomes

Automatic stabilizers are government spending and taxation changes that cause fiscal policy to be _____ when the economy contracts.

expansionary

The risk premium is the:

extra interest charged by lenders to account for risk.

You go to Starbucks and see that the price of your favorite tall vanilla latte has gone up by 25 cents. All sizes of the vanilla lattes are now more expensive. As a result of this price increase, you would expect to see a

fall in the quantity demanded of vanilla lattes.

Loans of reserves from one bank to another are made in the _____ market.

federal funds

The third step in analyzing a macroeconomic shock is to

find the output gap

You are considering whether you should go out to dinner at a restaurant with your friend. The meal is expected to cost you $50, you typically leave a 20% tip, and a round-trip Uber ride will cost you $15. You value the restaurant meal at $30 and the time spent with your friend at $50. You should ____ to dinner with your friend because the benefit of doing so is _____ than the cost.

go;greater

Social insurance programs are:

government programs intended to protect families against economic hardships.

A budget surplus occurs when:

government revenue exceeds government spending.

A budget deficit occurs when:

government spending exceeds government revenue.

Consumer spending will likely rise if:

government transfers rise.

Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 3%, then the Fed will want the new real interest rate to be:

higher than the neutral interest rate.

The first step in analyzing a macroeconomic shock is to

identify the shock and shift the curve.

Purchases of foreign-produced goods and services are:

imports.

In the long run, an increase in saving will generally:

increase the rate of economic growth.

If overall spending declines, causing the economy to contract, the government could counter this by:

increasing government spending.

If the economy is in short-run macroeconomic equilibrium above potential output, there is a(n) _____ gap, and _____ fiscal policy is appropriate.

inflationary; contractionary

The construction of new housing is considered part of:

investment spending.

The equilibrium unemployment rate cannot be equal to zero because:

it is the sum of the frictional and structural unemployment rates.

The Federal Reserve's lender-of-last-resort function means that it

lends to financial institutions when they are having trouble getting loans.

The intersection of the IS curve and the MP curve determine:

macroeconomic equilibrium.

The threat of future inflation:

makes people reluctant to lend money for long periods.

The purpose of "Fedspeak" was to:

minimize market reactions from Federal Reserve statements.

A $100 million increase in government spending increases equilibrium GDP by:

more than $100 million.

The federal funds rate is the:

nominal interest rate that banks pay on overnight interbank loans.

The rate of unemployment is found by dividing the:

number of people not working but seeking work by the sum of the number of people not working but seeking work and the number of people employed.

Suppose that the price of rare earth metals is increasing (this is one of the main components of most smartphones). As a consequence, people expect the price of smartphones to rise next year. Therefore, people will MOST likely:

observe higher prices for smartphones this year.

Commercial banks

offer services, such as checking accounts, to the general public.

If unemployment is below its sustainable level, then the economy is:

operating above capacity, and inflation will likely rise.

In the IS-MP analysis in the Fed model, the intersection of the IS and MP curves determines the

output gap.

The inflation rate is the:

percentage change in the price level from one year to the next.

A supply shock is any change in

production costs that leads suppliers to change the prices they charge at any given level of output.

Among the factors that are important for modern economic growth are:

property rights

Quantitative easing is the

purchase of large quantities of longer-term government bonds and other securities in an effort to drive down longer-term interest rates.

A sales tax is a tax on:

purchases that is typically a percentage of the purchase price of goods and services.

The neutral interest rate is the rate at which

real GDP equals potential GDP.

In an economy whose aggregate real output is growing faster than the total population:

real GDP per capita is rising.

The _ interest rate ___.

real; can be zero, positive, or negative

If government expenditure rises by $40 billion and the multiplier in the economy is 2.5, then real GDP_____, and the IS curve shifts to the_____.

rises by $100 billion; right

Inflation is a(n):

rising aggregate price level.

Diminishing marginal product leads to

rising marginal costs for a seller.

In 1798, the English economist Thomas Malthus predicted that:

rising population growth would cause productivity per capita to fall.

In macroeconomics, the difference between saving and investment is that:

saving is the money left over after paying for spending, and investment is the purchase of new capital.

The study of economics arises because of the necessity of choice, and the necessity of choice arises because of the fundamental problem of:

scarcity

Investment refers to:

spending on physical capital.

If a government is using fiscal policy, this means that it is using _____ and _____ to attempt to stabilize the economy.

spending; tax policies

If the government's revenues are greater than its purchases of goods and services, then it has a budget:

surplus.

The New Deal was created to counter the effects from:

the Great Depression.

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

Who runs the Federal Reserve of the United States?

the chair of the Federal Reserve

The law of demand refers to

the inverse relationship between price and quantity demanded.

The law of supply refers to

the positive relationship between price and quantity supplied.

Cedar point amusement park reduces its entry fees. As a result of this price fall,

the quantity demanded will be higher.

The MOST important use of GDP is as a measure of:

the size of the economy.

The marginal tax rate is the:

the tax rate you pay if you earn another dollar

fricitional unemployment

the unemployment which exists in any economy due to people being in the process of moving from one job to another.

quantity theory

theory that too much money in the economy causes inflation

If the economy is below potential and interest rates are at the zero bound, how can the Federal Reserve still push long-term interest rates down?

through forward guidance and quantitative easing

The capital stock in an economy is the:

total quantity of capital at a point in time.

Government payments to households for which no good or service is provided in return are called:

transfer payments.

Medicaid, Medicare, and Social Security are examples of:

transfer payments.

An understanding of the state of the economy, projections on economic growth, the floor framework, and the way the Federal Reserve works allows you to:

understand which way interest rates might change.

A worker classified as frictionally unemployed is one who is:

unemployed while looking for a job that suits his or her skills.

Cyclinal unemployment

unemployment directly related to swings in the business cycle