Econ 1 Chapters 21, 23, 24, 25, 26, 27

Which of the following will result in an increase in labor​ productivity?

an increase in technology

An increase in inventories in January is an indicator that

businesses are expecting higher demand in the future.

From the 1960s to​ 2012, transfer payments

have risen from about 25 percent to 46 percent of federal government expenditures.

The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy.

Suppose Warren Buffet withdraws​ $1 million from his checking account at Chase Manhattan Bank. If the reserve requirement ratio is .2 what is the maximum change in deposits in the banking​ system?

- $ 5 Million

Find equilibrium GDP using the following macroeconomic​ model: C = 1,000 + 0.8Y Consumption function I = 500 Investment function G = 600 Government spending function NX = -100 Net export function Y=C ​+ I​ + G​ + NX Equilibrium condition

10,000

Suppose the reserve requirement is 5​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$60 ​billion?

$1,200 billion increase

Suppose booming economies in the BRIC nations​ (Brazil, Russia,​ India, and​ China) causes net exports​ (NX) to rise by ​25 billion in the United States. If the MPC is 0.9​, the change in equilibrium GDP will be $_____ billion.

$250 Billion

If the required reserve ratio is 0.05​, the maximum increase in checking account deposits that will result from an increase in bank reserves of ​$20,000 is ​$ ________.

$400,000

If the consumption function is defined as C​ = 5,500​ + 0.9Y, what is the autonomous level of consumption​ expenditure?

$5,500

If the required reserve ratio is 0.15​, or 15 ​percent, and Wells Fargo currently has no excess​ reserves, the maximum loan Wells Fargo can make as result of this transaction is ​$_________.

$85,000

Suppose you deposit ​$2,400 cash into your checking account. By how much will the total money supply increase as a result when the required reserve ratio is 0.20? The change in the money supply​ is: ​$______

$9,600

While serving as the president of the Federal Reserve Bank of St.​ Louis, William Poole​ stated, ​"Although my own preference is for zero inflation properly​ managed, I believe that a central bank consensus on some other numerical goal of reasonably low inflation is more important than the exact​ number." ​Source: William​ Poole,"Understanding the​ Fed," Federal Reserve Bank of St. Louis Review​, Vol.​ 89, No.​ 1, January/February​ 2007, p. 4. Which of the following are benefits that the economy might gain from an explicit inflation target even if the target chosen is not a zero rate of​ inflation?

-Improved accountability for the Fed -Better communication between the Fed and the public -More accurate expectations of future inflation *All of the above*

Which of the following factors brought on the recession of 2007−​2009?

-The financial crisis. -The end of the housing bubble. -A rapid increase in the price of oil. *All of the above.*

Which of the following are views new classical macroeconomists​ hold?

-Wage and price stickiness is not important for explaining fluctuations in real GDP. -Workers and firms have rational expectations. -The economy will normally be at potential real GDP. *All of the above.*

​[Related to Solved Problem ​#6​] The federal​ government's budget surplus was​ $263.2 billion in 2000 and​ $128.2 billion in 2001. A decrease in the federal​ government's budget surplus can be the result of

-a recession. -a decrease in taxes. -an increase in government purchases. *All of the above*

The introduction of Fannie Mae and Freddie Mac into the​ mortgage-backed securities market by the government

-assisted in separating mortgage loans from​ credit-worthiness standards because banks could sell the loans to Fannie Mae and Freddie Mac instead of keeping them on their balance sheets. -allowed the secondary mortgage market to expand greatly by getting funds from investors and using them to purchase mortgages from banks. -created additional moral hazard problems as banks could make riskier loans because they could simply sell loans to Fannie Mae and Freddie Mac as soon as the loans were made. *All of the above.*

Given the equations for C​, I​, G​, and NX​ below, what is the marginal propensity to​ save? C​ = 1,000​ + 0.8Y I​ = 1,500 G​=1,250 NX​ = 100

0.2

What are the names of the following events in a business​ cycle? 1) The high point of economic activity is called 2) The low point of economic activity is called 3) The period between the high point of economic activity and the following low point is called 4) The period between the low point of economic activity and the following high point is called

1) A Peak 2) A Trough 3) A Recession 4) An Expantion

As the recession persisted into​ 2009, the unemployment rate in the United States rose to​ ________, the highest rate since the recession of 1981dash-1982 and the second highest since the Great Depression.

10 percent

If real GDP equals​ $11,567 billion in 2006 and​ $11,916 billion in​ 2007, and assuming population is constant over those two​ years, how many years will it take for real GDP per capita to​ double?

23.2 years

During the expansion and deflation of the housing​ bubble, housing prices rose by

60 percent between January 2000 and July 2005 and then fell by 80 percent between July 2005 and May 2010.

According to the dynamic​ AD-AS model, what is the most common cause of​ inflation?

A and B only. -Total spending increases faster than total production. -AD increases by more than LRAS.

The aggregate demand curve slopes downward for all of the following reasons​ except:

A lower price level makes imports from other countries less​ expensive, and U.S. citizens buy more imports.

Which of the following would cause a decrease in real GDP​ and, if large​ enough, a​ recession?

A reduction in consumer confidence that causes aggregate demand to fall

Which of the following would cause an increase in the price level​ (i.e., a​ short-run inflation)?

A reduction in taxes that increases aggregate demand

Which of the following scenarios would lead to a reduction in real GDP and may even cause a​ recession?

A reduction in the growth rate in foreign countries compared to the United State that causes aggregate demand to fall

Suppose the economy is initially in​ long-run equilibrium. The Fed decides to sell bonds. In the​ short-run, this contractionary monetary policy will​ cause:

A shift from AD2 to AD1 and a movement to point​ D, with a lower price level and lower output.

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP​ falls?

AD did not shift and SRAS shifted to the left.

Refer to the figure to the right. Ceteris​ paribus, a decrease in government spending would be represented by a movement from

AD2 to AD1.

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending​ categories?

AE​ = C​ + I​ + G​ + NX

Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply​ model?

All of the above are correct statements about the two models. -In the dynamic​ model, expansionary policy would be used when demand does not grow​ sufficiently; in the basic​ model, expansionary policy would be used when demand falls. -The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. -If the economy is below full​ employment, expansionary fiscal policy will cause an increase in the price level in both models.

All of the following are arguments against an explicit inflation targeting rule for monetary policy except​:

An explicit target is easier to understand by households and firms which makes monetary policy more transparent.

Which of the following scenarios would lead to an increase in the price level​ (i.e., a​ short-run inflation)?

An increase in oil prices that decreases short-run aggregate supply

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses​ increasing, ​ ________ occurred.

a housing bubble

How would this action​ "pump money into the financial system to support​ lending"?

Banks can make more loans.

What has contributed to the slow growth in employment in recent​ years?

Both A and B. -the number of​ baby-boomers reaching retirement age -the severity of the​ 2007-2009 recession

In the graph of the money market shown on the​ right, what could cause the money demand curve to shift from MD1 to MD2?

Both​ (a) and​ (c). -An increase in the price level -An increase in real GDP.

The situation in which​ short-term interest rates are pushed to​ zero, leaving the central bank unable to lower them further is known as

a liquidity trap.

The general algebraic version of the aggregate expenditure model can be written as​ follows, where letters with​ "bars" represent fixed or autonomous values. If you think of the aggregate expenditure function as a line on the​ 45°-line diagram, the intercept would be

C+I++G+NX

How does an increase in the price level affect the quantity of real GDP supplied in the long​ run?

Changes in the price level do not affect the level of GDP in the long run.

Two years​ back, the Republic of​ Terbia, a developed​ economy, experienced a massive boom in the information technology​ (IT) industry. The rapid expansion of credit to the firms in this industry resulted in a significant increase in employment and prices in the economy.​ However, due to overvaluation and speculation in the​ market, stock prices of these firms fell sharply. IT being one of the most important​ sectors, this downturn affected the economy​ adversely, leading to a recession. Alicia​ White, an industry​ expert, suggests that expansionary monetary policy by the central bank is necessary to induce greater spending in the economy.​ However, Jaime​ Russell, a teacher at a community​ college, disagrees. According to​ him, increasing the supply of money would not help. The only possible impact of a fall in the interest rate would be an increase in aggregate supply.​ This, in​ turn, will reduce prices and profits further.​ Instead, the government should use expansionary fiscal policies to boost aggregate demand. Which of the​ following, if​ true, will weaken​ Alicia's view?

Commercial banks are reluctant to lend at the current interest rates due to the increased possibility of default by firms and households.

Which of the following is NOT a reason why the aggregate expenditures fall when the price level increases.

Consumers substitute from higher minus priced goods to lower-priced goods.

Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the second quarter of​ 2013?

Consumption increased steadily but investment​ fluctuated, and during the​ mid-to-late 90s, investment increased very strongly before declining sharply in​ 2001, only to rise again during the​ mid-2000s and decline sharply again during the 2007minus−2009 recession.

Which of the following statements about the Social​ Security, Medicare, and Medicaid programs is​ true?

Costs are being driven up by the fact that Americans are living longer and medical costs are rising substantially.

These four categories of spending are represented in the GDP formula by

C​ + I​ + G​ + NX.

An increase in real GDP that increases imports will cause the value of the multiplier to

be smaller

The recession of 2007minus−2009 began in​ ________, with the end of the economic expansion that had begun in​ ________.

December​ 2007; November 2001

Following a long period of slow​ growth, the government of country X decided to open its economy and reduce trade barriers in order to boost economic growth. This provided the expected impetus to the economy as competition increased and the efficiency of domestic firms improved. A decade after opening the​ economy, the​ country's GDP is now growing at an average of​ 7-8 percent annually. A group of economists claim that the standard of living of the people has improved substantially during this period. They also expect this impressive growth to continue over the next five years. Which of the​ following, if​ true, will indicate that the standard of living has actually improved since the economy was​ opened?

Discretionary spending by domestic consumers increased during this time.

Borrowing is a bad idea to pay for _________ but a good idea to pay for __________.

current expenses; long-lived capital goods

If consumption is defined as C​ = 2,000​ + 0.8Y, then the marginal propensity to save is 0.8.

False

The Austrian school is best known for arguing the superiority of government economic planning over the market system.

False

The real business cycle model focuses on changes in the quantity of money to explain fluctuations in real GDP.

False

Which of the following statements is most accurate regarding fiscal policy and monetary​ policy?

Fiscal policy includes changes in government spending and taxes and is controlled by the federal government. Monetary policy includes changes in the money supply and interest rates and is controlled by the Federal Reserve. Both policies are intended to achieve macroeconomic objectives.

Suppose that the economy is currently at potential​ GDP, and the federal budget is balanced. If the economy moves into​ recession, what will happen to the federal​ budget?

If the budget is balanced at potential GDP and the economy moves into​ recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

Which of the following is a reason why we should consider the federal national debt a​ problem?

If the debt drives up interest​ rates, crowding out will occur.

Find out which one of the following is not one of the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model.

In the dynamic​ AD-AS model, the economy does not experience​ long-run growth, whereas in the basic​ AD-AS model, the economy experiences both continuing inflation and growth.

What changes should they make if they decide a contractionary fiscal policy is​ necessary?

In this​ case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is​ necessary, what changes should they make in government spending or​ taxes?

In this​ case, Congress and the president should enact policies that increase government spending and decrease taxes.

Which of the following is a monetary policy target used by the​ Fed?

Interest rate.

What is the Taylor​ rule?

It is a rule that links the​ Fed's target for the federal funds rate to the current inflation​ rate, real equilibrium federal funds​ rate, inflation gap and output gap.

What are the largest asset and the largest liability of a typical​ bank?

Loans are the largest asset and deposits are the largest liability of a typical bank.

What is a​ "subprime mortgage," and would a subprime borrower be likely to pay a higher or a lower interest rate than a borrower with a better credit​ history?

Loans granted to borrowers with flawed credit​ histories; a higher interest rate.

​________ of unemployment during​ ________ make it easier for workers to​ ________ wages.

Low​ levels; an​ expansion; negotiate higher

Which of the following provides healthminus−care coverage to people age 65 and​ over?

Medicare

Which can be changed more​ quickly: monetary policy or fiscal​ policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

Consider the figure to the right. Can the Fed achieve a​ $900 billion money supply​ (MS) AND a​ 5% interest rate​ (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

In response to already low interest rates doing little to stimulate the​ economy, the Fed announced a new program in September 2011 under which it would purchase​ long-term Treasury securities while selling an equal amount of​ shorter-term Treasury securities. This policy was known as

Operation Twist.

Even though real GDP in 1970 was slightly greater than real GDP in​ 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not​ change?

Potential GDP increased​ significantly, but actual GDP did​ not, and thus there is unemployment.

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too​ late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the​ recession, the poor timing caused another​ problem: inflation. This is an example of what type of​ policy?

Procyclical policy

Consider the following choices. Which one of the following choices is​ correct?

Recessions were more severe and lasted longer in the first half of the twentieth century and became shorter and milder in the second half.

Inflation in the developing country of Terbia has been rising over the last few years and is currently at a very high level. Two stock market​ analysts, Stanley Durro and Michelle​ Thompson, are discussing the possible causes of inflation. Michelle thinks that the real reason why prices are rising is because​ Terbia's economy is expanding. Stanley disagrees. He argues that the inflation is not demand​ driven; on the​ contrary, too much money in the economy is increasing the price level. Which of the following statements are Michelle and Stanley most likely to disagree​ with?

Removing supply bottlenecks is the key to reducing inflation in Terbia.

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not​ rise?

SRAS and AD do not shift.

Suppose the economy is at a short−run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential​ GDP?

Short−run aggregate supply will shift to the left.

The formula for the simple deposit multiplier is

Simple Deposit Multiplier = 1/RR

Why would securitization give mortgage borrowers access to a deeper pool of​ capital?

Since banks could resell mortgages to​ investors, they had access to more funds than just their own deposits.

Why would this be the​ case?

Since current consumption is a function of future​ income, one would borrow against higher expected future income to smooth current consumption.

The country Murell is in the midst of a recession. Firms have cut back on investment and consumer spending has fallen. Larry​ Summers, a market​ analyst, is discussing the​ economy's grim prospects with his journalist friend Michael Philips. Larry says that the recent open market purchases by the central bank will have a positive impact on consumer demand. Michael does not agree. He thinks that monetary policy will not be very effective and that policy makers should instead focus on fiscal policy measures to boost the economy. Which of the​ following, if​ true, would strengthen​ Larry's argument?

The Consumer Confidence Index compiled by a leading investment bank in Murell is now at its highest level since the recession began.

The text explains that the United States has a ​"fractional reserve banking system" Why do most depositors seem to be unworried that banks loan out most of the deposits they​ receive?

The FDIC insures deposits up to​ $250,000.

In the graph of the money market shown on the​ right, what could cause the money supply curve to shift from MS1 to MS2​?

The Fed decreases the money supply by deciding to sell U.S. Treasury securities.

Refer to the table above. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy.Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in​ 2015?

The Fed should lower the target for the federal funds rate.

The budget deficit of the government of​ Lyria, an open​ economy, has persistently remained higher than 6 percent of GDP. Murphy​ Smith, a​ banker, feels that a high budget deficit is detrimental to economic growth. In his​ opinion, there should be a law that makes it mandatory for the government to balance the budget. Dorina​ Shaw, a business​ analyst, however, disagrees. According to​ her, this budget deficit by itself need not be a problem. Governments usually run fiscal deficits even when their economies are at full employment. Which of the​ following, if​ true, would suggest that making it mandatory for the Lyrian government to balance its budget will benefit the​ economy?

The Lyrian government largely controls monetary policy decisions made by the​ country's central bank.

What does the article mean by​ "heavy public​ debts"?

The public debt is considered to be heavy when it as a percentage of GDP debt is rather high. .

Monetary policy is defined​ as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

What is the cyclically adjusted budget deficit or​ surplus?

The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal​ government's budget if the economy were at potential GDP.

What is the​ long-run effect of a permanent increase in government​ spending?

The decline in​ investment, consumption, and net exports exactly offsets the increase in government​ spending; therefore, real GDP remains unchanged.

Economic growth over the past decade in the country Tarragon has been very low. As a​ result, the unemployment level has remained high. While discussing possible measures to improve the​ situation, Jane​ Watson, an associate at a leading research​ institute, says that the government should lower personal income tax rates.​ This, she​ believes, will induce people to work​ more, which in turn will raise output. Martina​ Allen, an editor of a reputed​ newspaper, disagrees. According to​ her, the income tax rates in Tarragon are not very high and are in fact similar to comparable countries. In her​ opinion, the government should lower the corporate tax rates to encourage investment by firms. Which of the​ following, if​ true, will weaken the claim that it would be more effective to lower corporate taxes to increase aggregate supply than to reduce personal income tax​ rates?

The domestic​ firms' unplanned inventories have increased by more than 25 percent this year.

In​ 1969, actual real GDP was greater than potential real GDP. Which of the following best explains​ this?

The economy can produce a level of GDP above potential GDP in the short run.

Neutron​ Inc., is one of the leading electric car manufacturers in​ Northbay, a developing economy.​ Neutron's sales increased by more than 20 percent this year compared to the previous​ year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric​ Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for​ Neutron's cars, the firm should increase price to improve profits. Mike​ Wilson, the CEO of the​ firm, however, feels that a price increase would adversely affect the demand for​ Neutron's products because he thinks consumers in this industry are more price conscious than brand loyal. Which of the​ following, if​ true, will support​ Eric's view?

The economy of Northbay is expected to grow at a remarkable pace of 9 percent in the upcoming year.

Which of the following would be classified as fiscal​ policy?

The federal government cuts taxes to stimulate the economy.

Paul Schumer and Jim​ Miller, two analysts at a research​ institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to​ Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the​ following, if​ true, will strengthen​ Jim's claim?

The gap between the earnings of college graduates and nongraduates is increasing.

Which of the following is NOT a determinant of consumption question mark?

The growth rate of GDP relative to growth rates in other countries

If the​ short-run aggregate supply curve​ (SRAS) were a horizontal​ line, what would be the impact on the size of the government purchases and tax multipliers?

The impact of the multiplier would be larger if the SRAS curve is horizontal.

By​ 2011, why might some people have considered the Great Moderation to have been a​ delusion?

The recession that began in December 2007 was the longest and most severe since the Great Depression of the 1930s.

Explain whether you agree with the following​ statement: ​"The dynamic aggregate demand and aggregate supply model predicts that a recession caused by a decline in AD will cause the inflation rate to fall. I know that the 2007minus−2009 recession was caused by a fall in​ AD, but the inflation rate was not lower after the recession. The prices of most products were definitely higher in 2008 than they were in​ 2007, so the inflation rate could not have​ fallen."

The statement is wrong because it is confusing the price level with the inflation rate.

Suppose an economy experiences technological progress and this causes a shift in the LRAS curve. Which of the following should not​ occur?

There will be an increase in government purchases as the economy has more income.

The following is from an article on community​ banks: ​"Their commercial-lending​ businesses, funded by their stable deposit​ bases, make them steady​ earners." ​Source: Karen​ Richardson,"Clean Books Bolster Traditional​ Lenders," Wall Street Journal​, April​ 30, 2007, p. C1. What is commercial​ lending?

This is when banks make loans to businesses.

Why does a​ $1 increase in government purchases lead to more than a​ $1 increase in income and​ spending?

Through the government purchases​ multiplier, the​ $1 increase in government spending will lead to an increase in aggregate demand and national​ income, which will lead to an increase in induced spending.

In response to problems in financial markets and a slowing​ economy, the Federal Open Market Committee​ (FOMC) began lowering its target for the federal funds rate from 5.25 percent in September 2007. Over the next​ year, the FOMC cut its federal funds rate target in a series of steps. Writing in the New York Times​, economist Steven Levitt​ observed, ​"The Fed has been pouring more money into the banking system by cutting the target federal funds rate to 0 to 0.25 percent in December​ 2008." ​Source: Steven D.​ Levitt, "The Financial Meltdown Now and​ Then," New York Times​, May​ 12, 2009. What is the relationship between the federal funds rate falling and the money supply​ increasing?

To decrease the federal funds​ rate, the Fed must increase the money supply.

How does lowering the target for the federal funds rate​ "pour money" into the banking​ system?

To increase the money​ supply, the Fed buys bonds on the open​ market, which increases bank reserves.

In October​ 2008, Congress passed the​ ________, under which the Treasury provided funds to banks in exchange for stock.

Troubled Asset Relief Program​ (TARP)

Evaluate the following​ statement: ​"The reason that the aggregate demand curve slopes downward is that when the price level is​ higher, people cannot afford to buy as many goods and​ services." This statement​ is:

True

Few economists believe the federal government should attempt to balance its budget every year.

True

If the multiplier is​ 5, the marginal propensity to consume must be 0.8.

True

One factor which brought on the recession of 2007−2009 was the financial crisis in 2008.

True

The larger the MPS​, the smaller the value of the multiplier.

True

We can say that loans are funded by deposits because deposits give banks financial​ capital, which can be loaned out so banks can make a profit.

True

Open market operations refer to the purchase or sale of​ ________ to control the money supply.

U.S. Treasury securities by the Federal Reserve

In a closed​ economy, which of the following components of GDP is not​ included?

net exports

Suppose you decide to withdraw​ $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your​ bank's balance sheet.

Your​ bank's balance sheet shows a decrease in reserves by​ $100 and a decrease in deposits by​ $100.

A government that collects more in taxes than it spends experiences

a budget surplus.

Which of the following would increase the size of the government purchases​ multiplier?

a decrease in the amount saved by households from an increase in income

Congress and the president enact a temporary cut in payroll taxes. This is an example of

a discretionary fiscal policy.

The table does not give the inflation rates for 1969 and 1970. If the inflation rate for 1970 is greater than the inflation rate for​ 1969, it is likely that the recession was caused by __________________ rather than ______________________.

a negative supply shock; an increase in aggregate demand

An increase in the expected future price level causes

a shift from B to A

An increase in the expected price of an important natural resource is indicated by

a shift from B to A

The difference between aggregate expenditure and aggregate demand is​ that:

aggregate demand shows the relationship between the price level and the level of aggregate expenditure when all other factors that affect aggregate expenditure are held​ constant; aggregate expenditure is a point on the aggregate demand curve at a specific price.

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of

an automatic stabilizer.

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of

an automatic stabilizer.

What is the purpose of the Taylor​ rule? The Taylor rule is used to

analyze and predict how the Fed targets the federal funds rate.

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called

automatic stabilizers.

An increase in the marginal propensity to consume will cause the value of the multiplier to

be larger

The Federal Reserve sells Treasury securities. This is an example of

not a fiscal policy.

If the Federal Reserve targets the interest rate and the money demand curve shifts to the​ left, then the Fed

can maintain the interest rate​ target, but at a lower quantity of the money supply.

[Related to the Making the​ Connection] The Making the Connection gives examples of firms that prospered by expanding during recessions. As we have​ seen, some firms prosper by expanding during recessions. When firms expand during​ recessions, they

cannot be certain when recovery will occur and know they could experience prolonged losses.

An increase in the money supply in the U.S. will not

cause the value of investing in U.S. financial assets to become more desirable to foreign investors.

By​ repercussions, Keynes means that an initial increase in autonomous expenditures will

change production by an amount greater than the initial increase in autonomous expenditures.

The​ long-run aggregate supply curve is vertical because in the long​ run,

changes in the price level do not affect potential​ GDP, as potential GDP depends on the size of the labor​ force, capital​ stock, and technology.

In the long​ run, most economists agree that a permanent increase in government spending leads to​ ________ crowding out of private spending.

complete

In the long​ run, increases in government purchases result in

complete crowding out.

The Federal Reserve acting as the lender of last resort to prevent a bank panic

constitutes offering discount loans to distressed​ banks, but the​ "bail out of the​ banks" involved providing funds to the banks in exchange for ownership in those banks.

A decrease in​ ________ can put your job at risk if aggregate expenditures fall.

consumer confidence

Which of the following is not a reason that the economy is considered to have been more stable in the 1950-2007 period than in other​ periods?

continually falling oil prices

The most important role of the Federal Reserve in​ today's U.S. economy is

controlling the money supply to pursue economic objectives.

From an initial longminus−run macroeconomic​ equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than longminus−run aggregate​ supply, then the Federal Reserve would most likely

decrease interest rates.

From an initial long−run macroeconomic​ equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long−run aggregate​ supply, then the Federal Reserve would most likely

decrease interest rates.

To combat a recession with discretionary fiscal​ policy, Congress and the president should

decrease taxes to increase consumer disposable income.

Which of the following will not occur as the result of a decrease in net​ taxes?

decreased household saving

A​ bank's largest liability is its

deposits of its customers.

Congress passed legislation to create the Federal Reserve System in 1913 in order to

end the instability created by bank panics by acting as a lender of last resort.

In a closed​ economy, aggregate expenditure is

equal to consumption plus investment plus government spending.

From 1991 until​ 2001, the United States was in a period of

expansion.

At the beginning of a​ recession, aggregate expenditure _______ GDP. As a​ result, firms _______ large amounts of unplanned inventory and GDP and employment _______.

fall short of; accumulate; decrease

Inventories refer to

goods that have been produced but have not yet been sold.

At point A in the graph to the​ right, planned aggregate expenditure is _____ GDP. At point B​, planned aggregate expenditure is ______ GDP. At point C​, planned aggregate expenditure is _______ GDP.

greater than; equal to; less than

The​ short-run aggregate supply curve slopes upward because of all of the following reasons except

in the short​ run, an unexpected change in the price of an important resource can change the cost to firms.

An article in the Economist magazine noted​ that: ​"the economy's potential to supply goods and services​ [is] determined by such things as labour force and capital​ stock, as well as inflation​ expectations." ​Source:"Money's Muddled​ Message" Economist​, May​ 19, 2009. This list of the determinants of potential GDP is

incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.

Evaluate the following​ statement: ​"Saving money is not lending. How can it​ be? When I save my​ money, I put it in a bank. I​ don't loan it out to someone​ else." The statement is

incorrect. The supply of loanable funds is determined by household saving.

How might heavy public debts lead to crowding​ out? Heavy public debt will

increase interest rates and crowd out the interest sensitive spending such as​ investment, consumption and net exports and will decrease aggregate output.

In the short​ run, an increase in aggregate demand ______________________, whereas in the long​ run, an automatic mechanism brings __________________________.

increases the price level and actual GDP beyond potential GDP the economy back to potential GDP but the price level remains higher​

The three categories of federal government​ expenditures, in addition to government​ purchases, are

interest on the national​ debt, grants to state and local​ governments, and transfer payments.

​[Related to the Chapter​ Opener] According to an article in the Wall Street Journal about​ FedEx: ​"The world's largest​ air-cargo shipper by revenue and its rivals have been wrestling with a shift by clients toward cheaper and slower delivery​ services, such as ocean​ freight." ​Source: Bob​ Sechler, "FedEx​ Earnings: Hurt by Restructuring​ Charges," Wall Street Journal​, June​ 19, 2013. This information implies that the ​"FedEx ​indicator" discussed in the chapter opener

is not very useful to predict changes in future GDP when prices do not remain the same.

The Fed uses policy targets of interest rate​ and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect​ unemployment, GDP​ growth, and the price level.

Keynes appears unconcerned if government spending is wasteful because

it will still lead to an increase in production and employment.

The federal government changes the required gasoline mileage for new cars. This is an example of

not a fiscal policy.

According to the National Bureau of Economic​ Research, the recession that began in December 2007

lasted 18 months.

Which of the following would not be considered an automatic​ stabilizer?

legislation increasing funding for job retraining passed during a recession

Since​ 1950, the average length of a recession in the United States has been

less than a year.

During the last half of the twentieth​ century, the U.S. economy experienced

long​ expansions, interrupted by relatively short recessions.

Suppose real GDP is​ $12.1 trillion and potential GDP is​ $12.6 trillion. To move the economy back to potential​ GDP, Congress should

lower taxes by an amount less than​ $500 billion.

Milton Friedman argued that the Federal Reserve should adopt a​ ________ to reduce fluctuations in real​ GDP, employment, and inflation.

monetary growth rule

The Federal Reserve cannot target both the money supply and the interest rate because it does not control

money demand.

If government purchases increase by​ $100 billion and lead to an ultimate increase in aggregate demand as shown in the graph to the​ right, the difference in real GDP between point A and point B will be

more than​ $100 billion.

Problems of credit availability would affect a homebuilder such as Hovnanian Enterprises because

most potential homeowners need mortgages to buy homes.

In The General Theory of​ Employment, Interest, and Money​, John Maynard Keynes wrote​ this: ​"If the Treasury were to fill old bottles with​ banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town​ rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment​ and, with the help of the​ repercussions, the real income of the community...would probably become a good deal greater than it​ is." In this​ statement, Keynes is discussing the important macroeconomic effect called the ________ effect.

multiplier

During the recession of 2007−2009 in the United​ States, ________ relative to potential GDP.

net export spending rose and consumption spending declined

When the article refers to​ "credit availability," it means the ability of

people to obtain credit.

Federal Reserve Board Chairmen Paul​ Volcker, Alan​ Greenspan, and Ben Bernanke all have focused on which of the following as their main goal of monetary​ policy?

price stability

Although the Federal Reserve had traditionally made discount loans only to commercial​ banks, in response to to the financial crisis in 2008 the Fed made​ ________ eligible for discount loans as well.

primary dealers

In the figure​ above, if the economy in Year 1 is at point A and expected in Year 2 to be at point B​, then the appropriate monetary policy by the Federal Reserve would be to

raise interest rates.

Consider the hypothetical information in the table above for potential real​ GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in​ 2014, which of the following will be lower than if the Congress and the president had taken no​ action?

real GDP and the inflation rate

Consider the hypothetical information in the table above for potential real​ GDP, real GDP and the price level in 2014 and in 2015 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in​ 2015, which of the following will be higher than if the Fed had taken no​ action?

real GDP and the inflation rate

The ability of the Federal Reserve to use monetary policy to affect economic variables such as real GDP ultimately depends upon its ability to affect

real interest rates.

Consider the table on the​ right, which shows the change in inventories for each quarter from​ 2007:I to​ 2010:IV measured in billions of 2009 dollars. Provide a macroeconomic explanation for this pattern.​ (Hint: When did the recession during this period begin and​ end?) The negative growth of invenories indicates a period of

recession because demand was met by drawing down past inventories and production did not increase.

When the​ People's Bank of China​ "cut the amount of cash that banks must set aside as​ reserves," the monetary policy tool they used was a change in the

required reserve ratio.

Due to the American Recovery and Reinvestment Act of 2009—the stimulus package—the effect on federal government

revenue and expenditures was highest in 2010 but both effects declined in 2011.

In the figure​ above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C​?

sell Treasury bills

To reassure investors who were unwilling to buy mortgages in the secondary​ market, the U.S. Congress used two government sponsored​ enterprises, Fannie Mae and Freddie​ Mac, to stand between investors and banks that grant mortgages. Fannie Mae and Freddie Mac

sell bonds to investors and use the funds to purchase mortgages from banks.

An improvement in technology is shown as a

shift from A to B

An increase in the labor force or capital stock is illustrated as a

shift from A to B

The _______________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

A former Federal Reserve official argued that at the​ Fed, ​"the objectives of price stability and low​ long-term interest rates are essentially the same​ objective." ​ Source:William Poole,​ "Understanding the​ Fed," Federal Reserve Bank of St. Louis Review​, Vol.​ 89,No. 1,​ January/February 2007, p. 4. This is true because

stable prices make it easier to plan for the​ future, so expectations can be​ stable, which makes it less costly to make loans.

Suppose the federal budget deficit for the year was​ $100 billion and the economy was in a recession. If the economy had been at potential​ GDP, it is estimated that tax revenues would have been​ $60 billion higher and government spending on transfer payments​ $50 billion lower. Using these​ estimates, the cyclically adjusted budget

surplus was​ $10 billion.

There may be some truth in the​ columnist's argument, but an economist might argue that

taxpayers in one year should not have to pay for a project that will benefit other taxpayers well into the future.

Congress broadened the​ Fed's responsibility since

the 1930s as a result of the Great Depression.

The values for the price levels in the above table are well below 100. This information indicates that

the price levels are less compared to the price level in the base year.

If the Fed raises its target for the federal fund​ rate, this indicates that

the Fed is pursuing a contractionary monetary policy.

When the Federal Reserve sells Treasury securities in the open​ market,

the buyers of these securities pay for them with checks and bank reserves fall.

Hovnanian was suffering losses because

the economy was slowing down and about to head into a severe recession.

The cyclically adjusted budget surplus is the surplus in the federal​ government's budget​ if:

the economy were at potential GDP.

The​ 2007-2009 recession was a clear example of

the effect that a decrease in aggregate demand can have on the economy.

As the tax rate​ increases,

the multiplier effect decreases.

The information in the table is different from what we would expect to have happened in a recession in the past 50 years because

the price level decreased.

Ceteris paribus​, in the long​ run, a negative supply shock causes

the price level to rise​ initially, and then return to its lower level.

When the Federal Reserve purchases Treasury securities in the open​ market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

An article on how the Zimbabwean economy had recovered after the end of the hyperinflation notes the following fact as being​ important: "Bank deposits increased by​ 31% last​ year, to​ $4.4 billion." ​ Source: "In Dollars They​ Trust," Economist​, April​ 27, 2013. Bank deposits are important to the Zimbabwean economy because

these funds enable banks to make loans.

How can investment banks be subject to liquidity​ problems? Investment banks can be subject to liquidity problems because

they often borrow short​ term, sometimes as short as​ overnight, and invest the funds in​ longer-term investments.

Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary​ policy, but not until after the economy has passed the peak of the boom. Then

the​ Fed's contractionary policy will result in too large of a decrease in GDP.

Workers and firms both expect that prices will be​ 2.5% higher next year than they are this year. As a​ result,

the​ short-run aggregate supply curve will shift to the left as wages increase.

When Congress established the Federal Reserve in​ 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors.

When the economy is experiencing a recession automatic stabilizers will​ cause:

transfer payments to increase and tax revenues to decrease.

The fastest growing category of government expenditure is

transfer payments.

If consumption is defined as C​ = 1,350​ + 0.6Y​, then the marginal propensity to consume is 0.6.

true

Inflation is generally the result of total spending growing faster than total production.

true

After an unexpected​ ________ in the price of​ oil, the​ long-run adjustment decreases the price level and​ ________ the unemployment rate as they return to their original levels.

​increase; decreases

Using the Taylor​ rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential​ GDP, then the federal funds target rate​ ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.

will be greater than

Tax cuts on business income​ ________ aggregate demand.

would increase

Forecasts made by White House economists and economists at the Congressional Budget Office in 2011 projected that real GDP

would not return to potential GDP until 2016.

According to an article in the Economist​, ​"Four main types of spending drive​ GDP...." What are the four main types of spending and in what sense do they​ "drive" GDP? ​ Source: ​ "Double-Dip Trouble," Economist​, April​ 28, 2012. The four components of aggregate demand are

​ consumption, investment, government​ purchases, and net exports.

If real GDP in a closed economy is​ $40 billion, consumption is​ $20 billion, and government purchases are​ $10 billion, what is​ investment?

​$10 billion

Consumption spending is​ $5 million, planned investment spending is​ $8 million, unplanned investment spending is minus−​$2 ​million, government purchases are​ $10 million, and net export spending is​ $2 million. What is​ GDP?

​$23 million

Equations for C​, I​, G​, and NX are given below. If the equilibrium level of GDP is​ $32,000, what will the new equilibrium level of GDP be if government spending increases to​ 2,500? C​ = 5,000​ + ​(MPC​)Y I​ = 1,500 G​ = 2,000 NX​ = minus−500

​$34,000

In the diagram​ above, LRAS1 and SRAS1 denote LRAS and SRAS in year​ 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year​ 1, what is the growth rate in potential GDP in year​ 2?

​10%

​If, between 2003 and​ 2013, the​ economy's real GDP grew from​ $20 billion to​ $40 billion, what was the average annual growth rate in the​ economy?

​7%

​[Related to​ Don't Let This Happen to​ You] Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not​ increase?

​Yes, because fiscal policy and monetary policy are separate things.

A decrease in investment causes the price level to​ ________ in the short run and​ ________ in the long run.

​decrease; decrease further

An increase in aggregate demand results in​ a(n) ________ in the​ ________.

​expansion; short run

A decrease in the tax rate will​ __________ the disposable income of households and​ ___________ the size of the multiplier effect.

​increase; increase

Since​ 1990, real GDP per capita has​ ___________ and this measure​ ___________the actual growth in standards of living in the U.S. over this time.

​increased; understates

When people became​ ________ concerned with the underlying value of their houses and became​ ________ with the expectations of the prices of their houses​ increasing, a housing bubble occurred.

​less; more

When interest rates on Treasury bills and other financial assets are​ low, the opportunity cost of holding money is​ _________, so the quantity of money demanded will be​ _________.

​low; high

Inflation targeting refers to conducting​ ________ policy so as to commit the central bank to achieving a​ ________.

​monetary; publicly announced level of inflation

Policy that is specifically designed to affect aggregate supply and increase incentives to​ work, save, and start a​ business, by reducing the tax wedge is called

​supply-side economics.

Suppose a bank has​ $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve raises the required reserve ratio to 12​ percent, then the bank will now have excess reserves of

−​$2,000.

The larger the​ MPC, the smaller the value of the multiplier.

False

Suppose Apple plans to produce 17.2 million iPhones this year. It expects to sell 15.7 million and add 1.5 million to the inventories in its stores. Suppose that at the end of the​ year, Apple has sold 15.8 million iPhones. What was​ Apple's planned investment​ spending?

1.5 Million IPhones

If the consumption function is defined as C​ = 5,500​ + 0.9Y​, what is the value of the​ multiplier?

10

If the consumption function is defined as C​ = 5,500​ + 0.9Y​, what is the​ multiplier?

10

Consider the importance of growth LOADING... in​ GDP, particularly real GDP per​ capita, to the quality of life of a​ country's citizens. Indicate whether you agree or disagree with each of the following statements. 1) Increases in real GDP per capita do not increase the amount of goods and services available to a​ country's citizens. 2) Increases in real GDP per capita increase life expectancy at birth. 3) Increases in real GDP per capita mean people will have a lower portion of leisure time over the course of their lives.

1) Disagree 2) Agree 3) Disagree

What was​ Apple's actual investment​ spending?

1.4 Million IPhones

​Centrally-planned economies tend to grow more quickly than market economies.

False

The​ ________ model focuses on the relationship between total spending and real GDP in the short​ run, assuming the price level is constant.

aggregate expenditure

Given the equations for C​, I​, G​, and NX​ below, what is the equilibrium level of​ GDP? C​ = 2,000​ + 0.9Y I​ = 2,500 G ​= 3,000 NX​ = 400

$79,000

Which of the following​ contribute(s) to shorter​ recessions, longer​ expansions, and less severe fluctuations in real​ GDP? ​(Mark all that​ apply.)

*All of the above* -A​ service-based economy -Social Security benefits -Monetary policy

Why might the unemployment rate continue to rise during the early stages of a​ recovery?

*Because both​ (a) and​ (c) are true.* -Employment growth may be slow relative to the growth in the labor force. -Some firms continue to operate well below their capacity even after a recession has ended.

Which of the following equals the amount of public​ saving?

Government tax revenue minus the sum of government purchases and transfer payments to households.

Use the graph to help determine which one of the following statements regarding flucuations in real GDP is​ true:

In the first half of the twentieth​ century, real GDP had much more severe swings than in the second half of the twentieth century.

Panel​ (a) above shows an idealized business cycle. Panel​ (b) shows an actual business cycle by plotting fluctuations in real GDP during the period from 1999 to 2002. Use the graphs to help determine which one of the following statements is NOT​ true:

Inconsistent movements in real GDP around the business cycle peak can mean that the beginning and ending of a recession are​ clear-cut.

Which of the following is a correct​ statement?

Inflation is measured as the percent change in the CPI.

What is the effect on​ inventories, GDP, and employment when aggregate expenditure​ (total spending) exceeds​ GDP?

Inventories​ decrease, GDP​ increases, and employment increases.

Given the economy is at point A in year​ 1, what will happen to the price level in year​ 2?

It will rise.

If you think of the aggregate expenditure function as a line on the​ 45°-line diagram, the slope would be

MPC

What is the name of the organization that defines business cycle peaks and troughs in the United​ States?

National Bureau of Economic Research

​[Related to​ Don't Let This Happen to​ You] ​"Real GDP in 2012 was​ $15.5 trillion. This value is a large number.​ Therefore, economic growth LOADING... must have been high during​ 2012." Do you agree or disagree with this​ statement?

No, I do not agree

Many economists agree that this difference is due to all of the following reasons​ except:

Since the​ 1950s, people have become more rational and control their spending behavior countercyclically.

An article in the Economist magazine refers to​ "The Great Delusion of a Great​ Moderation..." ​Source: "Lending a​ Hand," Economist​, September​ 10, 2011. What is the Great​ Moderation?

The absence of severe recessions in the United States since the​ mid-1980s.

An article in the Economist magazine refers to​ "The Great Delusion of a Great​ Moderation..." ​Source: "Lending a​ Hand," Economist​, September​ 10, 2011.'' What is the Great​ Moderation?

The absence of severe recessions in the United States since the​ mid-1980s.

Use the graph to help determine which one of the following statements regarding unemployment and business cycles is true.

The unemployment rate usually continues to rise even after the recession has ended.

We say that the economy as a whole is in macroeconomic equilibrium if

all of the above. -aggregate expenditure equals total production. -total spending equals GDP. -total spending equals total production. -aggregate expenditure equals GDP.

Which of the following describes the effect of the business cycle on the inflation rate and the unemployment​ rate?

The unemployment rate increases and the inflation rate falls during recessions.

Consumption is​ $5 million, planned investment spending is​ $8 million, government purchases are​ $10 million, and net exports are equal to​ $2 million. If GDP during that same time period is equal to​ $23 million, what unplanned changes in inventories​ occurred?

There was an unplanned decrease in inventories equal to​ $2 million.

Which of the following explains why fluctuations in real GDP have become less volatile in the United States since​ 1950?

Unemployment insurance and other government transfer programs are more prevalent since the 1950s.

Firm​ X, a leading manufacturer of rubber tires in country​ A, caters to almost​ one-third of the domestic tire market. The country was hit by a recession last year that caused the national output growth to be negative. Simon​ Reeds, the CEO of firm​ X, feels that these fluctuations in the business environment are​ short-lived and expects the economy to recover very soon. In spite of the​ recession, Simon feels that the firm can actually invest in expanding its facilities as it has sufficient cash flows to continue its operation during the crisis period. The​ firm's marketing​ head, Sandra​ Jones, counters this by saying that the firm is already losing sales due to the recession and they should not increase costs further by making​ large-scale investments in the present climate. Which of the following questions is most relevant to answer in order to determine the accuracy of the​ CEO's claim?

What are consumer expectations of future​ growth?

Private saving is defined as

Y​+TR−C− T.

Which of the following is most​ liquid?

a dollar bill

An insurance company is

a financial intermediary because they take premiums and use them to purchase financial securities.

Potential real GDP

grows over time.

As the economy nears the end of a​ recession, which of the following do we typically​ see?

increased spending on capital goods by firms

During the recession phase of the business​ cycle,

interest rates are usually falling.

When aggregate expenditure is greater than GDP​,

inventories fall comma and GDP and employment increase.

Many people have difficulty borrowing as much money as they would​ like, even if they are confident that their incomes in the future will be high enough to pay it back easily. For​ example, many students in medical school will earn high incomes after they graduate and become physicians. If they​ could, they would probably borrow now in order to live more comfortably while in medical school and pay the loans back out of their higher future income.​ Unfortunately, banks are usually reluctant to make loans to people who currently have low​ incomes, even if there is a good chance their incomes will be much higher in the future. If people could always borrow as much as they would​ like, consumption would be likely to become ________ to changes in current income.

less sensitive

According to an article on the U.S. economy in March​ 2013: "Businesses are restocking after a cutback in the pace of inventory building in the fourth quarter that weighed on economic​ growth." The article further notes​ that: "Inventories in the U.S. rose in January by the most since May 2011 as companies replenished warehouses and shelves amid signs demand will pick​ up." ​ Source: Michelle​ Jamrisko, "Business Inventories in U.S. Increase by Most Since May​ 2011," Bloomberg.com, March​ 13, 2013. A cutback in the pace of inventory building in the fourth quarter would slow down economic growth because

lower inventory building means lower production.

Purchases of Huggies diapers should

remain fairly constant over the business cycle.

Usually at the beginning of a​ recession, inventories ______ but at the beginning of an​ expansion, inventories _______.

rise; fall

A more cautious approach might be advisable in particular industries where

sales are particularly cyclical.

Aggregate expenditure represents

the amount of spending that occurs in an economy.

Which of the following does the aggregate expenditure macroeconomic model seek to​ explain?

the business cycle

Liquidity refers to

the ease with which a financial security can be traded for cash.

Potential real GDP is

the level of GDP attained when all firms are producing at capacity.

Country X is a growing economy located in southeast Asia. Although it has a large​ population, it also has a disproportionately high number of​ working-age people. A large​ English-speaking workforce and low labor costs make it a competitive outsourcing destination.​ However, as is the case with most growing​ economies, inflation is quite high in Country X. As a country that is poised to be an economic​ superpower, Country​ X's stock markets are booming. Real estate prices have been increasing by 20 percent every year. Salim Habib is a guest speaker at a talk organized by one of the leading universities in the country. He states that with high​ inflation, interest rates are bound to increase.​ Consequently, consumption and investment will fall. Ricky​ Cafrall, a​ student, is not convinced. He claims that the rally in housing and stock prices will actually increase household wealth and consumption. In claiming that household wealth and consumption will​ increase, Ricky is​ ignoring:

the real value of household wealth.

At point A​, the unintended change in inventories can be shown on the graph​ by:

the vertical distance between point A and the 45° line.

​Typically, as an economy begins to emerge from a recessionary phase of the business​ cycle,

unemployment continues to rise.

In the figure to the​ right, AD1​, LRAS1 and SRAS1 denote AD​, LRAS and SRAS in year​ 1, while AD2​, LRAS2 and SRAS2 denote AD​, LRAS and SRAS in year 2. Given the economy is at point A in year​ 1, what is the actual growth rate in GDP in year​ 2?

​7.3%

At the beginning of the recession of 2007−​2009, real GDP in the United States was​ ________ potential​ GDP, and in June​ 2009, real GDP was​ ________ potential GDP

​above; below

Inflation tends to​ ________ during the expansion phase of the business cycle and​ ________ during the recession phase of the business cycle.

​increase; decrease