ECON

The Expenditure Method for Measuring GDP

All final buyers of goods and services, which make up GDP, come from households, firms, governments or the foreign sector.

Okun's Law

Each extra percentage point of cyclical unemployment is associated with about a 2 percentage point increase in the output gap, measured in relation to potential output.

Pay rates determined by a governmental planning agency provide workers with the incentive to work hard. (Centralized governmental planning agencies, because of the complexity of economies, have done a poor job of setting proper pay rates. Most economists agree that par rates based on performance provides much better incentives to work hard.)

Each of the following statements describes how the political and legal environment encourages productivity EXCEPT: A. Well-defined property rights encourage production and saving. B. Political stability promotes economic growth. C. Price changes in markets provide suppliers incentives to supply goods to markets. D. Pay rates determined by a governmental planning agency provide workers with the incentive to work hard.

increase; weaker (Easy monetary policy lowers domestic interest rates which cause domestic currency to flow outward. This causes a deprecation of the dollar, which increases net exports as Americans buy fewer imports and foreigners buy more American goods.)

Easy monetary policy will ______ net exports as a result of a ______ currency. A. increase; stronger B. increase; weaker C. decrease; weaker D. decrease; stronger

human capital. (Human capital is the talents, training, and education of workers)

Economists refer to the talents, training, and education of workers as: A. human capital. B. physical capital. C. average labor productivity. D. labor supply.

Final Goods or Services

Goods or services consumed by the ultimate user; because they are the end products of the production process, they are counted as part of GDP

Intermediate Goods or Services

Goods or services used up in the production of final goods and services and therefore not counted as part of GDP

Three Important Labor Market Trends

The decade of the 1960's, and spilling into the 70's, saw large increases in average real wages.

Portfolio Allocation Decision

The decision about the forms in which to hold one's wealth.

credibility

The degree to which the public believe the central bank's promises to keep inflation low, even if doing so may impose short-run economic costs, is the ________________ of monetary policy

Credibility of Monetary Policy

The degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run economic costs.

Outside Lag (of Macroeconomic Policy)

The delay between the date a policy change is implemented and the date by which most of its effects on the economy have occurred.

Decreases

The demand for labor will decrease if the real price of workers' output

Trade Surplus

The difference between the buyer's reservation price and the seller's reservation price

Output Gap

The difference between the economy's actual output and its potential output at a point in time, (Y-Y*)/Y*

Cyclical unemployment

The difference between total unemployment, u, and u*. Recessionary gaps have u > u* and Expansionary gaps have u < u*

Fractional-Reserve Banking System

a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent

fractional-reserve banking system

a banking system in which bank reserves are less than deposits so that the reserve-deposit ratio is less than 100 percent

Unit of Account

a basic measure of economic value

A share of stock (or equity) is

a claim to partial ownership of a firm

Stock (or Equity)

a claim to partial ownership of a firm

aggregate demand curve

a curve that shows the amount of output consumers, firms, government, and customers abroad want to purchase at each inflation rate, holding all other factors constant

short-run equilibrium

a situation where the AD and AS curves intersect at a level of real GDP that is above or below potential

inflation shock

a sudden change in the normal behavior of inflation, unrelated to the nation's output gap

Consumption function

an equation showing how an individual household's consumer spending varies with the household's current disposable income

Real Interest Rate

annual percentage increase in purchasing power of financial assets = nominal interest rate - inflation - r = i - π

Money

any asset that can be used in making purchases

Intermediate goods and services

are used up in the production of final goods Not included in GDP to avoid double counting

Money

is any asset that can be used in purchases

Federal Reserve System

is charged with conducting monetary policy and overseeing financial markets.

GDP

is conventionally an annual measure. However, when production takes longer than a year, the price of the final product is divided into the amount of value added each year for national accounting purposes.

Savings

is current income - spending on current needs

National Saving

is current income - spending on current needs - private savings + public savings - current income is GDP or Y - current needs: exclude all investment spending, most consumption and government spending is the current needs** - S = Y- C - G

Stock Value

is defined at a point in time - wealth - debt

Flow Value

is defined per unit of time - income - saving - wage

Nominal Interest Rate

is determined by the intersection of the money supply and money demand curves.

National Saving

is done by all the spending units of the economy, which include households, businesses, and governments.

Precautionary saving

is for protection against setbacks Ex: Loss of job, Medical Emergency

Private saving

is household plus business savings

Structural Unemployment

is long term chronic unemployment in a well functioning economy

high rate of savings

lead to an improved standard of living in the future

Expansionary Gap

leads to demand for output that exceeds firms' capacity and drives up prices.

Induced Expenditure

The portion of planned aggregate expenditure that depends on output Y.

Frictional Unemployment

occurs when workers are between jobs - Short duration, low economic cost - May increase economic efficiency

Consumption Function

shows a positive relationship between consumption and disposable income. This means that disposable income and consumption move in the same direction

nominal interest rate

the annual percentage increase in the dollar value of an asset most commonly stated rates

real interest rate

the annual percentage increase in the purchasing power of a financial asset

Federal funds rate

the interest rate that commercial banks charge each other for very short-term (usually overnight) loans; because the Fed frequently sets its policy in this term, this rate is closely watched in financial markets

Short-run equilibrium

the level of output at which planned spending is equal to output

The demand for labor depends on ______ and _______.

the marginal product of labor; the price of output produced

GDP is

the market value of all final goods and services produced within a country in a given period of time

Compound Interest

the payment of interest not only on the original deposit but on all previously accumulated interest

frictional employment

the short-term unemployment associated with the process of matching workers with jobs

Demand Curve for Labor

Hire an extra worker if and only if the VMP exceeds the wage paid. The lower the wage, the more workers employed

ok

If prices adjusted immediately for all goods and services, inventories would stay at their desired level and output gaps would not exist. (Answer=ok)

ok

If savings rates are high and the annual earnings on those savings are high, it results in large accumulation of wealth over time. (answer=ok)

A flow value is defined per unit of time (4)

Income, spending, saving, wage

shows the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output. Ex. Initial planned expenditure = 960 + 0.8Y. New planned expenditure = 950 + 0.8Y. The equilibrium changed from $4800 to $4750. The $10 change caused a $50 change in output so the multiplier is 5. The larger the mpc, the greater the multiplier.

Income-expenditure multiplier (or multiplier)

7%

If the nominal interest rate is 10% and the inflation rate is 3%, then the real interest rate equals: A. 3% B. 7% C. 10% D. 13%

5% (The real interest rate = the nominal interest rate - the inflation rate. So to find the inflation rate, subtract the real interest rate from the nominal interest rate.)

If the nominal interest rate is 8% and the real interest rate is 3%, then the inflation rate equals: A. 3% B. 5% C. 8% D. 11%

there is an expansionary gap. (When the output gap is positive, the economy is producing beyond its potential. This is called an expansionary gap.)

If the output gap equals 1.8 percent, then A. cyclical unemployment equals the sum of structural and frictional unemployment. B. there is an expansionary gap. C. there is no cyclical unemployment. D. potential GDP is less than actual GDP.

Left

If the price level decreases, people needs less money for transactions and they desire less money at all nominal interest rates. The money demand curve shifts to the

Shifts in Labor Demand

Increase in Labor Demand: - Higher price of final product - Higher productivity of workers Decrease in Labor Demand: - Lower price of final product - Lower productivity of workers

ok

More generous tax treatment on new capital investment will encourage investment and shift the demand curve to the right. (answer=ok)

coupon payments

regular interest payments mande to the bondholder

You expect a share of EconNews.Com to sell for $64 a year from now. If you are willing to pay $64.42 for one share of the stock today, and you require a return of 6 percent, what dividend payment must you expect to receive from the stock?

$4.28

Taylor has the following assets and liabilities: What is the value of Taylor's assets?

$419,000

Costs of Unemployment

- the increase in the crime rate that might accompany higher unemployment - the stress and loss of self-esteem that might be experienced by the unemployed worker

Firms demand for labor depends on

- the productivity of workers - the price of the workers output (this is the workers output not their wage)

Two factors determine the demand (VMP) for labor

- the relative price of the company's output - the productivity of the workers

cyclical unemployment example

- usually short duration - economic cost is the decline in real GDP

Based on the information in the table, what is the unemployment rate?

13.5 percent

Inflation Shock

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap

10.7%

According to BLS website, what is the Labor Union membership rate in 2017?

increases; two (Okun's law states that each extra percentage point of cyclical unemployment is associated with about a 2 percent widening of a negative output gap, measured in relation to potential output.)

According to Okun's Law, when cyclical unemployment increases by one percentage point, the recessionary gap ______ by ______ percentage point(s). A. increases; one B. increases; two C. decreases; one D. decreases; two

4.1%

According to the BLS website, what is the U.S. unemployment rate in January 2018?

The Determinants of Average Labor Productivity

Although new technologies generally improve average labor productivity, technological additions are still subject to diminishing returns to capital.

Real GDP

Gross domestic product (GDP) adjusted for changes in prices

ok

High GDP correlates with many favorable non-economic conditions. Conversely, low GDP correlates with many unfavorable non-economic conditions. (Answer=ok)

decrease; increase (An increase in the real exchange rate means a country's currency can buy more in foreign markets. Thus, exports decrease and imports increase when the real exchange rate rises.)

An increase in the real exchange rate will tend to ____ exports and to ______ imports. A. increase; decrease B. increase; increase C. decrease; decrease D. decrease; increase

aggregate supply falls.

As the quality of available resources becomes worse: A. aggregate demand falls. B. aggregate demand rises. C. aggregate supply falls. D. aggregate supply rises.

for every 1% by which the actual unemployment rate exceeds the natural rate there will be a negative output gap of 2%

Okun's Law suggests:

ok

Older workers are less likely to be unemployed than are younger workers, and more efficient labor markets are better at matching workers to jobs. Both of these tend to reduce the natural rate of unemployment. (Answer=ok)

Market Value for Good

Price of good x * Quantity produced

Reserve Requirements

Set by the Fed, the minimum values of the ratio of bank reserves to bank deposits that commercial banks are allowed to maintain

Inside Lag (of Macroeconomic Policy)

The delay between the date a policy change is needed and the date it is implemented.

Short-Run Equilibrium Output

The level of output at which output Y equals planned aggregate expenditure PAE; the level of output that prevails during the period in which prices are predetermined.

Structural Unemployment

The long-term and chronic unemployment that exists even when the economy is producing at a normal rate

ok

The slope of the consumption function is based on disposable income, whereas the vertical intercept of the consumption function is based on other factors (e.g., wealth and expectations). (Answer=ok)

equals the marginal propensity to consume

The slope of the consumption function:

conduct monetary policy; oversee financial markets

The two main responsibilities of the Federal Reserve System are to_______________ and to_______________.

Real GDP per Person

To find this, multiply the average output each worker produces times the percentage of population employed.

Real GDP

To measure physical production we have to take out changes that are only due to inflation. This means comparing historical real values with current real values.

production.

Total spending on final goods and services in an economy must equal total: A. profits. B. production. C. revenues from all transactions. D. investment.

Average Tax Rate

Total taxes divided by total before-tax income

T/F Autonomous consumption captures the effects of interest rates on consumption

True

T/F production of durable goods is more volatile than services and non-durable goods during a recession

True

ok

When market interest rates fall, existing bond prices rise. This is because previously issued bonds offer a greater reward than newly issued ones. (Answer=ok)

Anchored Inflationary Expectations

When people's expectations of future inflation do not change even if inflation rises temporarily

Demand for Labor

When prices fall for the goods and services produced by workers, the demand for what falls?

A bond is

a legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon payments

Bond

a legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments

velocity

a measure of the speed at which money changes hands in transactions involving final goods and services, or nominal GDP divided by the stock of money. (P*Y)/M

Human Capital

an amalgam of factors such as education, training, experience, intelligence, energy, work habits, trustworthiness, and initiative that affects the value of worker's marginal product

Store of Value

an asset that serves as a means of holding wealth

Medium of Exchange

an asset used in purchasing goods and services

Labor Force

employed + unemployed

labor force =

employed + unemployed

Net exports

equal exports minus imports Exports are goods and services produced domestically and sold abroad Imports are purchases in the U.S. of goods and services produced abroad

Value of the Marginal Product of Labor

equals the marginal product of labor times the price of output.

Real Exchange Rate

equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P) ÷ Pf. All else equal, when the domestic price level, P,rises, this increases.

The period in which the economy is growing at a rate significantly above normal is an

expansion

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) ________ gap and inflation will ________.

expansionary; increase

If short-run equilibrium output equals 30,000 and potential output (Y*) equals 25,000, then this economy has a(n) ________ gap that can be closed by ________.

expansionary; increasing taxes

Trade deficit

exports < imports

Trade surplus

exports > imports

Value of the Marginal Product of Labor

extra revenue gained by hiring an additional worker

Value of Marginal Product (VMP)

extra revenue that an added worker generates

Hyperinflation

extremely high rate of inflation

The ________ _____ rate is the interest rate commercial banks charge each other on short-term loans

federal funds

•Capital goods are treated as ________ goods and, therefore, are ________ GDP.

final; included in

Financial Intermediaries

firms that extend credit to borrowers using funds raised from savers

financial intermediaries

firms that extend credit to borrowers using funds raised from savers

Financial Intermediaries are

firms that extend credit to borrowers using funds raised from savers Ex: commercial banks, investment banks, stockbrokers, pooled investment funds, and stock exchanges.

•When the Federal Reserve reduces its target rate of inflation, it will set a _____ real interest rate at every inflation rate and the aggregate demand curve will _____.

higher; shift to the left

Fractional Reserve Banking

holds less bank reserves than deposits -the reserve deposit ratio is less than 100%

Private saving is

household plus business saving

Economists refer to the talents, training, and education of workers as:

human capital.

Getting a college degree is an example of investing in:

human capital.

nominal interest rate (formula)

i = r + pi

Diminishing Returns to Capital

if the amount of labor and other inputs employed is held constant, then the greater the amount of capital already in use, the less an additional unit of capital adds to production

In the labor market Price

if the real wage paid to workers

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 5 percent. The nominal price of gasoline ________, and the real price of gasoline ________.

increased; increased

Indexing

increases a nominal quantity each period by the percentage increase in a specified price index Indexing prevents the purchasing power of the nominal quantity from being eroded by inflation

Capital Gains

increases in the value of existing assets

The increase in wage inequality resulting from globalization can be reversed through:

increases in worker mobility.

In an open economy, a decrease in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

increases; decreases

In an open economy, a decrease in capital inflows ______ the equilibrium domestic real interest rate and ______ the quantity of domestic investment.

increases; decreases.

A government policy to build bridges and dams is an example of a policy to promote economic growth by:

increasing physical capital.

The ________ ________ curve shows the relationship between the aggregate quantity of money demanded (M) and the nominal interest rate

money demand

The quantity equation states that (definition + formula)

money stock times velocity equals nominal GDP M x V = P x Y (M) Money stock (V) Velocity (P) Price Level (Y) Real GDP

Capital inflows mean

more investment and lower interest rates

NX

net exports

divide a ______ quantity by its price index to express the quantity in real terms

nominal

The real interest rate =

nominal interest rate - inflation rate

One shortcoming of real GDP as an indicator of society's social well-being is that it fails to take into account the

non-market production.

Exogenous changes in spending refer to changes in planned spending:

not caused by changes in output or changes in the inflation rate.

Diminishing Returns to Capital

occurs if an addition of capital with other inputs held constant increases output by less than the previous increment of capital --Assumption: all inputs except capital are held constant --Result: output increases at a decreasing rate

Frictional Unemployment

occurs when workers are between jobs

simple interest

only pays interest on the original deposit, same amount of interest each year

Open-Market Operations

open-market purchases and open-market sales

Jim Brown would like to work, but has not looked for work in the past four weeks because he does not believe any jobs are available. In the official employment statistics, Jim is classified as:

out of the labor force.

Average Labor Productivity

output per employed worker

average labor productivity

output per employed worker

Average labor productivity

output per employed worker = tot. output/# of people employed (Y/N)

Price Index

seeks to compare prices of goods and services while keeping the quality of goods and services constant. But products are always changing and usually changing for the better. It is common for both prices and quality to go up at the same time.

The Federal Open Market Committee

reviews economic conditions and sets monetary policy

Managers

run the business but often do not bear the business risks.

If the Fed wishes to increase nominal interest rates, it must engage in an open market ________ of bonds that ________ the money supply.

sale; decreases

saving rate

saving divided by income

life-cycle saving

saving to meet long-term objectives such as retirement, college attendance, or the purchase of a home

Investment in new capital goods =

savings plus net capital flows In a closed economy S = I In an open economy S + KI = I

Law of One Price

says that goods will fetch the same price worldwide so long as transportation costs are low.

Decrease in Autonomous Expenditure

shifts the PAE line downward, which results in lower equilibrium output. For an economy with output equal to its potential, a decrease in short-run equilibrium output creates a recessionary output gap.

Demand

shifts when value of marginal product of worker changes

Business Cycle

short-term fluctuations in GDP and other variables

The introduction of word processing software that increases the demand for workers with computer skills relative to those without such skills is an example of:

skill-biased technological change.

Because a decrease in the nominal interest rate reduces the opportunity costs of holding money, the money demand curve:

slopes downward.

Labor supply curve

slopes up because at a higher real wage, more people are willing to work

Autonomous consumption

spending not related to the level of disposable income

Diversification is

spreading one's wealth over a variety of investments to reduce risk

price index measures

the average price of a given quality of goods and services relative to the price of the same goods and services in a base year

Labor Income

the biggest category of earned income.

Federal Reserve System (or the Fed)

the central bank of the United States

Menu costs

the costs of changing prices such as determining the new price, incorporating prices into the business, and informing consumers of new prices. Technology reduces these costs.

Maturation Date

the date at which the principal of a bond will be repaid

maturation date

the date at which the principal of a bond will be repaid

reserve requirement is the minimum percentage of bank deposits that must be held in reserves

the minimum percentage of bank deposits that must be held in reserves

Real interest rate

the nominal interest rate - the rate of inflation

The difference between the economy's actual output and its potential output, relative to potential output, is known as

the output gap

Induced expenditure

the part of spending that depends on output(Y). Ex. 0.8Y

Autonomous expenditure

the part of spending that is independent of output

natural rate of unemployment

the part of the total unemployment that is attributable to frictional and structural unemployment, u*

participation rate

the percentage of the working-age population in the labor force, either employed or looking for work

Coupon payments

the periodic interest payments to the bondholder

If policymakers deem inflation as being too high, then the policy response should be monetary _____, which shifts aggregate demand _____.

tightening; left

bequest saving

to leave an inheritance -mainly higher income groups

Unemployment Rate

unemployed / labor force

long-term unemployment

unemployed have been out of work for 6 months or longer

unemployment rate =

unemployed/labor force

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

Unit of account

unit of measurement

Fiscal policy

uses changes in government spending, transfers, or taxes

Monetary policy

uses changes in the money supply

Central bank

an institution designed to oversee the banking system and regulate the quantity of money in the economy (federal reserve)

Nominal Interest Rate

annual percentage increase in dollar value of an asset - most commonly stated rates

Money

any asset that can easily be used to purchase goods and services

Assets are

anything of value one owns

Assets

anything of value that one owns

Assets

are anything of value that one owns

Final Goods and Services1

are consumed by the ultimate user

Liabilities

are debts one owes -debt - credit card balance

Bubbles

are hard to identify. It can be argued that the Federal Reserve is no better at identifying bubbles than financial professionals.

Shoe Leather Costs of Inflation

are the inconveniences that occur in dealing with cash during times of high inflation.

Banks

are the primary entities through which the economy's payments system operates

Wealth

assets - liabilities

Reserve-Deposit Ratio

bank reserves divided by the deposits

Excess reserves:

bank reserves in excess of required reserves

Compared to the 1960 and 1973 period, average real earnings of workers ________ from 1973 to 1995 and then ________ from 2007 to 2016.

declined; slowed again

Contractionary policies __________ planned expenditure

decrease

Contractionary policies

decrease planned expenditure

Refer to the given figure where the nominal interest rate equals 6 percent, and the money supply equals 600. - If the Federal Reserve wants to raise the interest rate to 8 percent, it must ________ the money supply to ________.

decrease; 400

Refer to the given figure where the nominal interest rate equals 6 percent, and the money supply equals 600. If the Federal Reserve wants to raise the interest rate to 8 percent, it must ________ the money supply to ________.

decrease; 400

3 Components of Consumption

durable goods, non durable goods and services

A downward shift in the Fed's policy reaction function is a(n) ________ of monetary policy, and the aggregate demand curve ________.

easing; shifts right

I shift demand side

§ Change in price of production inputs go up (dislike) § Change in technology (positive) § Taxes paid by firms (decrease) § Change Price of out put (positive) § Something that changes the value of

Non- Binding Minimum wage

•Firms and workers ignore the minimum wage. -Firms are willing to pay $10 for 100 workers -100 workers are willing to work for $10. •Firms will hire 100 workers for $10 per hour.

Duration

The length of an unemployment spell

Autonomous Expenditure

The portion of planned aggregate expenditure that is independent of output.

Frictional Unemployment

The short-term unemployment associated with the process of matching workers with jobs

GDP

measures the market value of goods and services sold to their final user as a means of avoiding double counting.

Real GDP

measures the physical volume

N

# of ppl employed

Marginal Product =

# of units with current workers - # of units with pervious workers

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process: What is the value added of Fulton Family Farm?

$0.50

Bank C promises to pay a compound annual interest rate of 6 percent, while Bank S pays a 10 percent simple annual interest rate on deposits. If you deposit $1,000 in each bank, after 10 years, your deposit in Bank C equals ________, while your deposit in Bank S equals ________.

$1,791; $2,000

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process: - What is the value added of Friendly Groceries?

$1.50

Taylor has the following assets and liabilities:

$111,000

Assume an economy produces only footballs and baseballs and the base year is 2016. Given the data in the table above, what is the value of real GDP in 2017?

$12,000

If the principal amount of a bond is $2,000,000, the coupon rate is 6 percent , and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is:

$120,000.

The CPI equals 1.00 in year one and 1.15 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

$17.25

The following provides data for an economy in a certain year. - Given the data, compute the value of GDP.

$2,500

There is $5,000 of currency in Econland, all held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is 0.25, then the money supply equals:

$20,000

If the marginal propensity to consume is 0.7, then a $300 increase in disposable income leads to a ______ increase in consumption •

$210

POP = 95 million ALP = $60,000 Share of pop = 50% Real GDP?

$30,000

The country of Southland produced $2,000 billion of output in one year. The population of Southland was 100 million, of whom 60 million were employed. What was average labor productivity in Southland?

$33,333

national savings

(Y-C-T) + (T-G)

The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate of inflation between 1930 and 1931 was ________ percent.

-11.8

Output gap = (formula)

-2 x (Cyclical unemployment) ((Y-Y*)/(Y*) x 100 = -2 x (u-u*)

Psychological costs of unemployment

-Individual self-esteem -Family stress of decreased income and increased uncertainty

Real Value

-Is measured in physical terms --Quantities of goods and services

Economic costs of unemployment

-Lost wages and production -Decreased taxes and increased transfers

Output gaps arise for two main reasons

-Markets require time to reach equilibrium price and quantity -Changes in total spending at preset prices affects output levels

The main tools used by the fed to control the money supply is ____________ and _________

-Open-market Operations -Discount window lending

Frictional unemployment example

-Short duration, low economic cost -May increase economic efficiency

Responsibilities of the Federal Reserve (2)

-conduct monetary policy -oversee and regulate financial markets

Things that shift investment curve (6)

1. Anything that changes VMP of capital (+) 2. Change in price of production of goods (-) 3. Change in price of new capital goods (-) 4. Change in technology (+) 5. Change in taxes paid by firms (-) 6. Change in relative price of a firms output (+)

Things that change S + KI curve: (3 things)

1. Change in capital inflows (+) 2. Change in real interest rates abroad (-) 3. Change in national savings (+)

Things that shift a savings curve (3)

1. Change in government budget (+) 2. Change in national savings (+) 3. Change in household savings (+)

Shifts in Labor Supply

1. Change in the working-age population - Baby Boom - Higher net immigration - Increasing age at retirement 2. Change in the share of working-age population willing to work - Women's participation in the labor force has increased in the last 50 years

During a banking panic (3)

1. Depositors rush to withdrawal funds 2. Everyone tries to withdrawal before the bank runs out of money 3. Banks have inadequate reserves to meet demand because they are lending some deposits

Why is a low rate of national saving associated with a trade deficit? (4)

1. Low savings implies high spending 2. High spending includes more spent on imports 3. High domestic spending leaves less available for export 4. High imports and low exports

Macroeconomic policies

1. Monetary policy 2. Fiscal policy 3. Structural policy

MM=

1/ Desired reserve deposit ratio

If real GDP equals 3,500, nominal GDP equals 5,250, and the price level equals 1.5, then what is velocity if the money stock equals 2,100?

2.5

Based on the labor market diagram below, if the minimum wage is set at $10 per hour, there will be ________ unemployed worker

22

If potential output equals $8 billion and actual output equals $10 billion, then this economy's output gap should be expressed as:

25 percent.

If there is 4 percent frictional unemployment, 2 percent structural unemployment, and the actual rate of unemployment equals 9 percent, then the cyclical unemployment must be

3 percent.

Suppose the following information describes the economy: Consumption 6,000 Investment 2,000 Government purchases 2,000; Net exports 0 Government transfers and interest payments 600 Government tax collections 1,500 Private saving equals ____; public saving equals ______; national saving equals ____.

3,100; -1,100; 2,000

According to the Taylor rule, if there is an expansionary gap of 2 percent of potential output and inflation is 3 percent, what real interest rate will the Fed set?

3.5 percent

The following table provides information about production at the XYZ-TV Company. How many workers will XYZ-TV Company hire if the going wage for TV production workers is $28,000?

4

Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium output will equal:

400.

Refer to the accompanying figure. - Based on the figure, if autonomous spending falls from 400 to 200, then the new short-run equilibrium

400.

The data below describe the economy of Econland: Public saving in Econland equals:

5

In Barbados total output is $8,000,000,000 population equals 150,000 people, and of these, 100,000 are employed workers. Output per person in Barbados equals _______ and average labor productivity equals ______.

53,333; 80,000

Suppose that average labor productivity in Country B is $6,000, and that Countries B and C have the same real GDP per capita. Based on the information in the table, what must be the average labor productivity in Country C?

6,600

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 34,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

7 percent

Years to double =

72/interest rate

If the CPI equaled 1.43 in 2008 and 1.56 in 2009, then between 2008 and 2009, inflation was ________ percent.

9.09

Value Addeda

= Revenue - Cost of Inputs

stock variables- wealth

= assets - labiates

0.867

A British-made automobile is priced at E20,000. A comparable U.S.-made car costs $26,000. One pound trades for $1.50 in the foreign exchange market. Find the real exchange rate from the perspective of the United States ( when dollar is the domestic currency and pound is the foreign currency).

legal promise to repay a debt.

A bond is a(n): A. regular payment made to owners of a firm. B. claim to partial ownership of a firm. C. agreement issued by a financial intermediary linking savers and investors. D. legal promise to repay a debt.

varies according to the supply and demand for the currency in the foreign exchange market. (A "flexible exchange rate" is one whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market.)

A flexible exchange rate is an exchange rate whose value: A. is determined by the law of one price. B. varies according to the supply and demand for the currency in the foreign exchange market. C. is established annually by the International Monetary Fund. D. reflects the comparative advantage of the home country versus other foreign countries

per unit of time. (A flow is a measure defined per unit of time.)

A flow is a measure defined: A. per unit of time. B. at a point in time. C. in real terms. D. in nominal terms.

if either average labor productivity and/or the share of population employed increase.

A nation's standard of living, as measured by real GDP per person, increases: A. only if average labor productivity increases. B. only if the share of population employed increases. C. only if both average labor productivity and the share of population employed increase. D. if either average labor productivity and/or the share of population employed increase.

Skill-Biased Technological Change

A new technological change is biased toward skilled workers, which means that it raises their marginal productivity relative to unskilled workers.

Depression

A particularly severe or protracted recession

1 (The law of one price says that goods will fetch the same price worldwide so long as transportation costs are low, this means the real exchange rate will be equal to 1.)

According to the theory of purchasing power parity, the real exchange rate between two currencies will equal ______ in the long run. A. the nominal exchange rate B. the ratio of the rates of inflation of the two currencies C. 0 D. 1

Positive analysis

Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable

Normative analysis

Addresses the question of whether a policy should be used; normative analysis inevitably involves the values of the person doing the analysis

emphasize inflation (When central banks announce a numerical inflation target they must stick to the target to ensure credibility. Sticking with the target reduces consideration of other policy alternatives, like output stabilization the expense of output stabilization)

An argument against a central bank policy of announcing numerical inflation targets is that inflation targeting policies: A. enhance central bank credibility. B. anchor inflationary expectations. C. emphasize inflation at the expense of output stabilization. D. increase uncertainty.

Structural Unemployment

An auto worker in Michigan loses his job because the company relocated the plant to another country

ok

An economy with an expansionary gap sees the bidding up of wages and production costs. This causes a leftward shift in AS which results in higher inflation and decreased output. (answer=ok)

Discouraging Economic Growth

Bank credit is allocated well by private markets, based on the risk-reward trade-off, whereas credit allocated by governments tends to be faulty because of corruption and strong political influence.

Bank deposits=

Bank reserves/ desired reserve deposit ratio

ok

Because most investment spending requires financing, a higher real interest rate decreases investments. But because higher interest rates encourage savings, they also decrease consumption. (answer=ok)

Keynesian model

Building block for current theories of short-run economic fluctuations and stabilization policies. Firms typically set a price and meet the demand at that price in the short run. They then change prices when the marginal benefits exceed the costs.

PAE formula

C + I + G + NX or C* + (mpc)(Y - T) + I + G + NX

consumption function

C = C(auto) +mpc(Y-T)

The consumption function (formula)

C = C* + (mpc) (Y - T), where C* is autonomous consumption spending and mpc is the change in consumption for a given change in disposable income

1

CPI for the base year is always

CPI bias 2

CPI uses a fixed basket of goods and services When the price of a good increases, consumers buy less and substitute other goods Failing to account for substitution overstates inflation

Net Capital Inflows

Capital inflows minus capital outflows

ok

Centralized governmental planning agencies, because of the complexity of economies, have done a poor job of setting proper pay rates. Most economists agree that par rates based on performance provides much better incentives to work hard. (answer=ok)

Demand Shocks

Changes in planned spending that are not caused by changes in output or the inflation rate.

13; 31 times larger

Compared to the level of real GDP per person in 1870, by 2008, real GDP in the U.S was ______ times larger, while real GDP per person in Japan was _______. A. 13; smaller B. 13; 13 times larger C. 13; 31 times larger D. 31; 13 times larger

real GDP. (To measure physical production we have to take out changes that are only due to inflation. This means comparing historical real values with current real values.)

Comparisons of economic activity over time should be made using: A. nominal GDP adjusted for unemployment. B. nominal GDP per capita. C. current-dollar GDP. D. real GDP.

Autonomous Consumption

Consumption spending that is not related to the level of disposable income.

lower; higher

Countries with high real GDP tend to have ______ infant mortality rates and ______ literacy rates than countries with low real GDP. A. higher; higher B. higher; lower C. lower; higher D. lower; lower

reduce investment spending. ("Crowding out" means that government has competed for investment funds with the private sector, thereby reducing the supply of savings available for private investment. A leftward shift of supply will bid up interest rates and the quantity of investment spending.)

Crowding out is the tendency for increased government deficits to: A. reduce investment spending. B. increase investment spending. C. reduce consumption spending. D. increase consumption spending.

M1

Currency + Demand Deposit + Checkable Deposits + Traveler's Check

Saving

Current income minus spending on current needs

Jack is a server at a restaurant in New Orleans. When businesses shut down due to Covid-19, the restaurant he worked for was unable to operate and ended up shutting down for good, and Jack became unemployed. Jack would be considered _________ unemployed

Cyclical

Starting from long-run equilibrium at point C, a tax increase that decreases aggregate demand from AD1 to AD will lead to a short-run equilibrium at point _____ and eventually to a long-run equilibrium at point _____, if left to self-correcting tendencies.

D; B

1.0 billion

Data for an economy shows that the unemployment rate is 10%, the participation rate 80 percent, and 200 million people 16 years or older are not in the labor force. How many people are in the working-age population in this economy? A. 250 million B. 800 million C. 1.0 billion D. 1.6 billion

Fiscal Policy

Decisions about how much the government spends and how much tax revenue it collects

better education, health and life expectancy. (High GDP correlates with many favorable non-economic conditions. Conversely, low GDP correlates with many unfavorable non-economic conditions.)

Despite some problems with equating GDP with economic well-being, higher real GDP per person does imply greater economic well-being because it tends to be positively associated with: A. crime, pollution, and economic inequality. B. better education, health and life expectancy. C. poverty, depletion of nonrenewable resources, and congestion. D. unemployment, availability of goods and services, and better education.

Monetary policy

Determination of the nation's money supply Controlled by the central bank or, in the U.S., the Federal Reserve System (Fed)

Increasing Wage Inequality: Technological Change

Developments in automobile production are a case in point. The advent of mass production techniques in the 1920s provided highly paid work for several generations of relatively low-skilled autoworkers. But in recent years automobile production, like the automobiles themselves, has become considerably more sophisticated. The simplest production jobs have been taken over by robots and computer-controlled machinery, which require skilled operatives who know how to use and maintain the new equipment. Consumer demands for luxury features and customized options also have raised the automakers' demand for highly skilled craftspeople. Thus, in general the skill requirements for jobs in automobile production have risen.

Computer models suggest growth is not sustainable

Did not adequately treat new and better products Greater income can pay for better environmental quality Ignored the market's response to increasing scarcity High prices trigger a response Strong response to energy crisis in mid 1970s

The ________ rate is the rate the fed charges banks to borrow reserves

Discount

human capital

Economists refer to the talents, training, and education of workers as:

at "middle-income" (Middle-income countries, like Mexico, are between the rich industrialized countries and the abject poor countries. Middle-income countries tend to have pollution problems because they are developed enough for industry but not rich enough to afford clean air and waterways.)

Empirical studies indicate that the maximum amount of air pollution occurs ______ levels of real GDP per person. A. at the highest B. at the lowest C. at "middle-income" D. equally at all

Consumption

Empirically, this is always the largest component of planned aggregate expenditure

Three Important Labor Market Trends

Employment grew rapidly in the post-1970's, but peaked in 2000. Since then the share of the population holding or actively looking for jobs have steadily decreased.

final goods and services

End products of production Included in GDP

assigning workers to jobs. (Entrepreneurs take risks when they start new business enterprises whereas managers run the business but often do not bear the business risks.)

Entrepreneurs contribute to increased average labor productivity in each of the following ways EXCEPT by: A. introducing new production methods. B. implementing new technological processes. C. developing new products. D. assigning workers to jobs.

Net Exports

Exports - Imports

__________ policy uses changes in government spending, transfers or taxes

Fiscal

Exchange Rate Determination in the Short Run

Foreign exchange markets operate on the same principals as other markets: as the price of a dollar (the dollar exchange rate) rises, suppliers increase the number of dollars they bring to market and demanders decrease the number of dollars they want to buy.

Income approach (formula)

GDP = labor income + capital income

National Saving and its Components

Household saving is a sub-category of private saving. If consumption spending goes up with income constant, then household saving must go down.

111

If short-run equilibrium output equals 10,000, the mpc equals 0.9, and potential output (Y*) equals 9,000, then taxes must be increased by approximately _________________ to eliminate any output gap.

Increase

If the real price of output that workers produce increases, then the demand for labor will

-2%

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then the output gap equals (use Okun's law):

ok

In recent decades the United States has seen increasing wage dispersion: the rich are getting richer. (Answer=ok)

a greater than $5 billion decrease

In the Keynesian model, a $5 billion decrease in autonomous planned investment leads to ______ in short-run equilibrium output. A. a $5 billion increase B. a greater than $5 billion decrease C. no change D. a $5 billion decrease

higher; lower (In industries where U.S. foreign competition is weak, workers see increasing wages due to increased demand for such workers with globalization. Conversely, in industries where foreign competition is strong, U.S. workers see falling real wages due to decreased demand for such workers. This phenomenon increases wage inequality.)

Increasing wage inequality results when international trade leads to ______ wages for workers in exporting industries and ______ wages for workers in importing industries. A. higher; higher B. higher; lower C. lower; no change in D. lower; higher

coincident

Industrial production, total sales, nonfarm employment, and after-tax household income are examples of ______ indicators of economic activity. A. coincident B. preceding C. lagged D. real

used up in the process of; are not

Intermediate goods and services are ______ production and ______ counted in GDP. A. the end products of; are B. the end products of; are not C. used up in the process of; are D. used up in the process of; are not

Human Capital Investment

Investments to develop worker skills

not counted as unemployed.

Involuntary part-time workers are: A. chronically unemployed. B. considered out of the labor force. C. short-term unemployed workers. D. not counted as unemployed.

The rate of inflation in 2018 was around 1.4%. The rate of inflation in 2019 was around 1.4%. What happened to the aggregate price level in 2019, when compared to 2018?

It increased

Domestic Real Interest Rate

It is determined by the interaction of savers and investors. In an open economy, it is determined by domestic saving, domestic investment and net capital inflows from abroad.

an unemployment spell can end.

Leaving the labor force or finding a job are two ways that: A. a person can become a discouraged worker. B. a person can become an involuntary part-time worker. C. an unemployment spell can begin. D. an unemployment spell can end.

Underground Economy

Legal production for which income is unreported in order to evade taxes generally takes place in what is known as the

Which of the following is an example of the life-cycle motive for saving?

Leslie puts $400 per month in her 401(k)-retirement account

the debts one owes.

Liabilities are: A. current income minus spending on current needs. B. the debts one owes. C. saving minus investment. D. anything of value one owns.

Structural unemployment

Long-term chronic unemployment in normal conditions - perhaps skills are outdated

technological progress; a modernized capital stock

Long-term increases in productivity that have increased the demand for labor and the real wages of labor have resulted primarily from ______ and _____. A. technological progress; a modernized capital stock B. technological progress; an increased labor supply C. a modernized capital stock; skill-biased technological change D. a modernized capital stock; an increased labor supply

M2

M1 + Money Market Mutual Funds + Saving Account Deposits + Small Denomination Time Deposit

Value of Marginal Product=

Marginal Product x Price

political instability (Political instability creates an undesirable business climate because firm owners cannot anticipate when the government might change the rules.)

Most political scientists and economists agree that ______ is detrimental to economic growth. A. a set of well-defined property rights B. the free and open exchange of ideas C. political instability D. a just-in-time inventory system

Share of tot. pop working (formula)

N/POP

households, businesses, and governments. (National saving is done by all the spending units of the economy, which include households, businesses, and governments.)

National saving is done by: A. only households. B. only businesses. C. only governments. D. households, businesses, and governments.

Trade balance is another term for

Net Exports

velocity.

Nominal GDP divided by the money stock equals: A. real GDP. B. the value of transactions. C. the price level. D. velocity.

Velocity=

Nominal GDP/ Money Stock

Velocity formula =

Nominal GDP/Money stock (Nominal GDP = price level x real gdp)

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time. - Which of the following periods was an expansion?

November 1970 through November 1973

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time. Which of the following periods was an expansion?

November 1970 through November 1973

0 (The real rate of interest equals the nominal rate of interest minus inflation. In this case, the real rate was 0% because the inflation rate was 5% from 2008 to 2009: (1.68 - 1.60) / 1.6 = 0.05 or 5%.)

On January 1, 2004, Anna invested $5,000 at 5% interest for one year. The CPI on January 1, 2004 stood at 1.60. On January 1, 2005, the CPI was 1.68. The real rate of interest earned by Anna was ______ percent. A. -5 B. 0 C. 5 D. 8

if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.

One of the serious drawbacks of the deposit insurance system instituted in the United States is that: A. bank failures continue to occur regularly. B. the system took away the Federal Reserve's ability to conduct open-market operations. C. the system took away the Federal Reserve's ability to change reserve requirements. D. if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses.

final goods and services (which include capital goods)

Only ________________________________ are counted in GDP, since they are the only goods and services that directly benefit final users.

Price at maturity formula =

Principal(1 + C) = Price at maturity

Each bond specifies (4 things)

Principle amount, maturation date, coupon payments, and coupon rates

increase (Anticipating liquidity shortages as a result of Y2K problems, there was a rightward shift in the money demand curve. This increases nominal interest rates if the Fed takes no offsetting actions.)

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. If the Fed took no actions to offset this increase in money demand, then nominal interest rates would _____. A. increase B. decrease C. remain constant D. equal the real interest rates

price; quality (The price index seeks to compare prices of goods and services while keeping the quality of goods and services constant. But products are always changing and usually changing for the better. It is common for both prices and quality to go up at the same time.)

Product improvements make it difficult for the statisticians who construct the CPI to distinguish between ______ changes and ______ changes. A. price; quality B. quantity; price C. quantity; quality D. income; price

GDP can be measured three ways

Production Approach - Market value of final goods & services Expenditure Approach - total spending for final goods less value of imports Income Approach

Automatic Stabilizers

Provisions in the law that imply automatic increases in government spending or decreases in taxes when real output declines

Government Purchases

Purchases by federal, state, and local governments of final goods and services; don't include transfer payments, which are payments made by the government in return for which no current goods or services are received, nor do they include interest paid on the government debt

government purchases

Purchases by federal, state, and local governments of final goods and services; government purchases do NOT include transfer payments, which are payments made by the government in return for which no current goods or services are received, nor do they include interest paid on the government debt

Capital Inflows

Purchases of domestic assets by foreign households and firms.

Capital Outflows

Purchases of foreign assets by domestic households and firms

International Capital Flows

Purchases or sales of real and financial assets across international borders.

A negative output gap is a

Recessionary gap

a recessionary gap; increase the money supply (The economy is currently experiencing a recessionary gap because Y* > Y1. A correct monetary policy response is to increase the money supply, which will lower interest rates and ultimately increase output.)

Refer to the figure above. Suppose the economy is in a short-run equilibrium at output Y1 and inflation rate π2. The economy is currently experiencing ______, and the correct monetary policy response to this situation, to return the economy to potential GDP, is to ______. A. a recessionary gap; raise taxes B. an expansionary gap; cut taxes C. a recessionary gap; increase the money supply D. an expansionary gap; decrease the money supply

recessionary; A (This economy has a recessionary gap because Y* > Y1. Equilibrium is at point A because that is where the AD curve intersects the AS curve.)

Refer to the figure above. The economy pictured in the figure has a(n) ______ gap with a short-run equilibrium indicated by point ___. A. recessionary; A B. recessionary; B C. recessionary; C D. expansionary; A

Okun's law (formula)

Relates cyclic unemployment changes to changes in the output gap. Output gap percent = -2 x cyclical unemployment percent or (Y - Y*) / Y* x 100 = -2 x (u - u*)

Wage is greater than

Reservation wage

The _________ ____________ is the minimum value of the reserve-deposit ratio that must be held in reserves

Reserve requirement

Public Saving formula (S public) =

S = T - G (T) Net taxes (G) Public sector spending on current needs

either the AD curve or the AS curve (Shifts in either the AD or AS curves can return the economy to long-run equilibrium.)

Shifts in ______ can return the economy to long-run equilibrium. A. the AD curve only B. the AS curve only C. either the AD curve or the AS curve D. the PAE line only

Frictional unemployment

Short-term unemployment related to matching of workers and jobs

expansionary; higher; potential (In the short run, a large increase in government purchases stimulates the economy, creating an expansionary gap and higher inflation. In the long run, the economy will correct as AS shifts leftward and output falls back to its potential level.)

Starting from long-run equilibrium, a large increase in government purchases will result in a(n) ______ gap in the short-run and ____ inflation and ____ output in the long-run A. expansionary; higher; potential B. expansionary; lower; potential C. expansionary; higher; higher D. expansionary; higher; lower

recessionary; decrease

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will generate a(n) _____ gap and inflation will _____. A. recessionary; increase B. recessionary; decrease C. expansionary; decrease D. expansionary; increase

aggregate demand; a recessionary output gap (If consumers become less confident about the future they will decrease spending and the aggregate demand curve shifts leftward. Output falls and this generates a recessionary output gap.)

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will shift the ______ curve to the left and generate ______. A. aggregate demand; a recessionary output gap B. aggregate supply; a recessionary output gap C. aggregate demand; an expansionary output gap D. aggregate supply; an expansionary output gap

Stocks and Bonds

Stock and bond markets are closely connected. When market interest rates rise, newly issued bonds become more attractive compared to stocks, so stock prices fall as savers choose to move funds from stocks to bonds.

Lisa lost her job when the typewriter factory shut down 9 years ago and has been unemployed ever since. Lisa would be considered __________ unemployed

Structural

a positive inflation shock

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

25%; $0

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. If the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. There is a 50% chance that it will be colder than average next year, and a 25% chance that it will be warmer than average. If you purchase two shares of XYZ stock and no shares of ABC stock, there is a ______ chance that your gain will be $40. Otherwise, your gain will be ______. A. 50%; $30 B. 25%; $0 C. 75%; $20 D. 50%; $20

a fixed basket of goods and services. (In the computation of the Consumer Price Index, the basket of goods and services is fixed.)

The Consumer Price Index measures the cost of: A. a fixed basket of goods and services. B. a changing basket of goods and services. C. all goods and services purchased by consumers. D. goods and services required to live above the poverty level.

Quantitative Easing (QE)

The Fed buys financial assets, lowering the yield or return of those assets while increasing the money supply.

Interest on reserves

The Fed can offer interest on its reserves to give banks a reason to keep money at the Fed.

ok

The Fed does not desire to pursue accommodating policy whereas it does desire improving market functioning, making business planning easier and reducing resources devoted to managing inflation risks. (Answer=ok)

Forward Guidance

The Fed gives indications of its future policies so that markets will react

decrease; decrease (Older workers are less likely to be unemployed than are younger workers, and more efficient labor markets are better at matching workers to jobs. Both of these tend to reduce the natural rate of unemployment.)

The aging of the labor force in the U.S. is likely to ______ the natural rate of unemployment; an increase in the efficiency of the labor market is likely to ______ the natural rate of unemployment. A. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase

Marginal Propensity to Consume (MPC)

The amount by which consumption rises when disposable income rises by $1; we assume that 0 < mpc <1

the amount of wealth an individual chooses to hold in the form of money.

The demand for money is: A. unlimited, since people want to hold as much money as possible. B. limited by the amount of currency printed by the government. C. the amount of wealth an individual chooses to hold in the form of money. D. the amount of income an individual chooses to hold in the form of money.

(Inventory) Investment

The difference between end-of-year inventories and beginning-year inventories is counted as a change in

Nonmarket Economic Activities

The fact that these unpaid services are left out of GDP does not mean that they are unimportant. The problem is that, because there are no market prices and quantities for unpaid services, estimating their market values is very difficult. They are important in poor economies. Because they are not counted in official statistics, GDP data may substantially understate the true amount of economic activity in the poorest countries

The Effect of Skill-Biased Technological Change on Wage Inequality

The figure shows the effects of a skill-biased technological change that increases the marginal product of skilled workers and reduces the marginal product of skilled workers and reduces the marginal product of unskilled workers. The resulting increase in the demand for skilled workers raises their wages (b), while the decline in demand for unskilled workers reduces their wages (a). Wage inequality increases.

intermediaries; markets

The financial system consists of financial _____, such as commercial banks, and financial _____, such as the stock market. A. markets; intermediaries B. allocations; investments C. intermediaries; markets D. markets; institutions

How many workers will Z-TV hire if the going wage for TV production workers is $34,000?

The firm will hire 1 worker. At that level, the value of marginal product is $35,000 whereas the cost is only $34,000. Note that a second worker would only add $33,000 of value but cost an additional $34,000.

70

The following provides data for an economy in a certain year. $50 consumption expenditure $40 imports $20 government purchases $30 construction of new homes and apts. $40 sales of existing homes and apts. $50 exports $10 government payments $20 household purchases of durable goods $10 beginning inventory $20 ending inventory $30 business fixed investment Given the data, compute the investment component of GDP.

13.33%

The following set of equations describe an economy: C= 14,400 + 0.5(Y- T) - 40,000r Ip= 8,000 - 20,000r G= 7,800 NX= 1,800 T= 8,000 Y*= 40,000 At what value should the Fed set the real interest rate to eliminate any output gap?

150

The following table provides data for an economy in a certain year. __ Given the data in the table, compute the value of GDP. A. 130 B. 140 C. 150 D. 160

0.629; 1.590 (To find the nominal exchange rate in zloty per rand, we must first find their values with respect to the U.S. dollar. The zloty is 4.367/dollar and the rand is 6.944/dollar, so the zloty to rand ratio is 4.367/6.944 = 0.629 zloty/rand. The reciprocal, 6.944/4.367 = 1.590, is the rate of rand per zloty.)

The following table provides nominal exchange rates for the U.S. dollar. Based on these data, the nominal exchange rate equals approximately ______ zloty per South African rand or, equivalently, ______ rand per Polish zloty. A. 1.590; 0.629 B. 0.629; 1.590 C. 0.021; 47.640 D. 47.640; 0.021

currencies (The "foreign exchange market" is the market on which currencies of various nations are traded for one another.)

The foreign exchange market is the market on which the ______ of various nations are traded for one another. A. goods and services B. stocks and bonds C. currencies D. international financial securities

more; shorter (Credibility about the direction of monetary policy helps the economy run more smoothly. This credibility leads to anchored inflationary expectations and shorter recessions.)

The greater the credibility of monetary policy, the ____ likely inflationary expectations are to be anchored and the _____ the recessions caused by adverse inflation shocks. A. more; shorter B. more; longer C. less; shorter D. less; longer

lower than it was from 1960 to 1973. (The U.S. growth rate of average annual earnings slowed in the early 1970's, and was negative until 1995.)

The growth rate of average annual earnings in the United States from 1973 to 1995 was: A. higher than it was from 1960 to 1973. B. lower than it was from 1960 to 1973. C. the same as it was from 1960 to 1973. D roughly equal to zero.

Trends in Real Wages and Employment

The long-term increase in real wages enjoyed by workers in industrial countries results primarily from large productivity gains, which have raised the demand for labor. Technological progress and an expanded and modernized capital stock are two important reasons for these long-term increases in productivity.

output produced by one more worker.

The marginal product of labor is the additional: A. wage paid for an additional hour of work. B. wage paid for an additional worker employed. C. labor employed to produce one more unit of output. D. output produced by one more worker.

Foreign Exchange Market

The market on which currencies of various nations are traded for one another

Gross Domestic Product (GDP)

The market value of the final goods and services produced in a country during a given period

indexing. (Indexing is the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index.)

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index is called: A. a substitution bias. B. the Fisher effect. C. deflating. D. indexing.

slowdown in productivity gains.

The slowdown in the growth of real wages in the United States since 1973 is consistent with a concurrent: A. slowdown in productivity gains. B. slowdown in the growth of the working age population. C. slowdown in immigration into the country. D. speedup in the rate of inflation.

Velocity is the measure of

The speed at which money changes hands in transactions for final goods and services

disposable income; factors other than disposable income (The slope of the consumption function is based on disposable income, whereas the vertical intercept of the consumption function is based on other factors (e.g., wealth and expectations).)

The two parts of the Keynesian consumption function are consumption that depends on ______ and consumption that depends on _____. A. disposable income; factors other than disposable income B. planned spending; unplanned spending C. real income; nominal income D. money; wealth

earn a return on their savings and to facilitate making payments.

Two reasons savers keep deposits at banks are to: A. secure mortgages and to purchase stocks. B. earn a return on their savings and to facilitate making payments. C. lower interest rates and to increase the money supply. D. equalize loan supply and demand and to earn interest.

8th

USA has the (blank) highest GDP

$419,000

Whats is the value of Taylor's assets? 15,000 two cars 400,000 house 300,000 mortgage 1,000 cash 5,000 car loans 3,000 checking account balance 3,000 credit card balance

Zero

When a firm hits its target inventory, its unplanned investment equals

decreases by less than $1,000,000

When the central bank sells $1,000,000 worth of government bonds to the public, the money supply:

A metal-stamping machine used to produce cars sold to an automaker

Which of the following is an example of a capital good? A. A new car sold to a family B. A metal-stamping machine used to produce cars sold to an automaker C. A new CD player sold to an automaker for installation in a car D. A new CD player sold to a teenager

A new CD player sold to an automaker for installation in a car

Which of the following is an example of an intermediate good?

chronically unemployed (Workers whose spells of unemployment are broken up by brief periods of employment or withdrawal from the labor force are referred to as chronically unemployed workers.)

Workers whose spells of unemployment are broken up by brief periods of employment or withdrawal from the labor force are referred to as ______ workers A. short-term unemployed B. discouraged C. long-term unemployed D. chronically unemployed

Aggregate income formula (Y)

Y = C + I + G + NX (C) Consumption expenditure (I) Investment Spending (G) Government purchases of goods and services (NX) Net Exports

the definition of production and income for the economy

Y = C + I + G + NX Y = aggregate income (must equal total expenditures) C= consumption expenditure I= investment spending G= government purchases of goods and services NX= net exports

Short-run equilibrium formula

Y = PAE Ex. Y = 960 + 0.8Y. 0.2Y = 960. Y = $4,800

Recessionary gap

a negative output gap; Y* > Y

A trade deficit is

a negative trade balance

A depression is:

a particularly severe and protracted recession

A depression is:

a particularly severe and protracted recession.

Expansionary gap

a positive output gap; Y* < Y

A trade surplus is

a positive trade balance

real quantity

a quantity that is measured in physical terms

nominal quantity

a quantity that is measured in terms of its current dollar value

If actual output equals potential output, unusually slow potential output growth would tend to result in:

a recession.

Dividend

a regular payment received by stockholders for each share that they own

A strong and long lasting expansion is a

boom

A shift in the labor curve is cause

by any change in the number of workers willing to work at each wage. - increase in the working age population - increase in the share of working age population willing to work

Fiscal Policy

can affect potential output because incentives to work are often reduced when tax rates or transfer payments increase. It also requires governmental approval which often takes a long time.

Nominal Values

can rise or fall simply as a result of changes in the price level

When an American buys stock in a French company, from the perspective of France, this is a(n):

capital inflow.

Net Capital inflows (KI) are

capital inflows minus capital outflows

demand shocks

changes in planned spending that are not caused by changes in output of the inflation rate

relative price

comparison of a specific good's price to the prices of other goods and services calculated as a ratio

P(1+i)^n

compound interest

Human Capital

comprises the talents, education, training, and skills of workers -this increases workers' productivity -Some of this your just born withSome of this you learn indirectly through socialization

C

consumption expenditure

autonomous consumption

consumption spending that is NOT related to the level of disposable income

The four components of planned aggregate expenditure are:

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

Long-Run Equilibrium

could occur under two conditions: if AS shifts to downward and to the right or if AD shifts to the right.

Long-Run Equilibrium

could occur under two conditions: if AS shifts upward and to the left or if AD shifts downward to the left.

Capital flows are not

counted as imports or exports since they refer to the purchase of existing assets rather than currently produced goods and services

Political Instability

creates an undesirable business climate because firm owners cannot anticipate when the government might change the rules.

Money Supply=

currency held by public + bank deposits

Money Supply =

currency held by the public + bank deposits

Saving =

current income - spending on current needs

flow variables- savings

current income- current spending

Banking Panics occurred when

customers believe one or more banking institutions might be bankrupt

The difference between the total unemployment and the natural rate of unemployment is

cyclical unemployment

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ________ their loans based on current deposits, and the money supply will ________.

decrease; decrease

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will ______ domestic net capital inflows and ______ the equilibrium domestic real interest rate..

decrease; increase

In the short-run Keynesian model where the marginal propensity to consume is 0.9, to offset a recessionary gap resulting from a $1,000 decrease in autonomous consumption, taxes must be

decreased by 1,111

In the short-run Keynesian model where the marginal propensity to consume is 0.9, to offset a recessionary gap resulting from a $1,000 decrease in autonomous consumption, taxes must be:

decreased by 1,111

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 million increase in autonomous expenditure, government spending must be __________ by $___________.

decreased; 1 million.

Capital Losses

decreases in the value of existing assets

Capital losses

decreases the value of existing assets

The ___________ for money is the amount of wealth held in the form of money

demand

Firms and Other employers

demand labor, they are the buyers

Can growth be sustained?

depletion of some natural resources and environmental damage and global warming

A severe recession is known as a

depression

Monetary Policy

determination of the nation's money supply

Value added

for any firm, the market value of its product or service minus the cost of inputs purchased from other firms

Bequest saving is saving:

for the purpose of leaving an inheritance

Short-term unemployment that is associated with the process of matching workers with jobs is called ________ unemployment.

frictional

Banks help savers find productive uses for their funds because banks are specialized in:

gathering information about and evaluating potential borrowers.

Open-market sale of

government bonds by the Fed to the public decreases reserves and money supply

Open-market purchases of

government bonds from the pubic by the Fed increases bank reserves and the money supply

Stabilization policies

government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

G

government purchases of goods and services

A government is running a budget deficit if government revenue exceeds government spending. government revenue is less than government spending. exports exceed imports. imports exceed exports.

government revenue is less than government spending

Balanced Budget occurs when

government spending equals net tax receipts

Han pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 7 percent coupon rate. One year later, after receiving the first coupon payment, Han sells the bond. If the current one-year interest rate on government bonds is 6 percent, then the price Han receives is

greater than $10,000.

Francesca pays $5,000 for a newly issued two-year government bond with a $5,000 face value and a 8 percent coupon rate. One year later, after receiving the first coupon payment, Francesca sells the bond. If the current one-year interest rate on government bonds is 6 percent, then the price Francesca receives is

greater than $5,000.

If the nominal interest rate is below the equilibrium value, then the quantity demanded of money is ________ than the quantity supplied of money, bond prices will ________, and the nominal interest rate will ________.

greater; fall; increase

Unanticipated inflation

helps borrowers and hurts lenders

When a U.S. restaurant purchases Japanese cars and the Japanese car company uses the proceeds to buy U.S. government debt, U.S. ______ and there is a capital ______ the United States..

imports increase; inflow to

Increases in Average Labor Productivity

in the long run, what do increases in output per person primarily arise from?

Total Business Revenue

include previously sold goods as well as new goods, plus intermediate goods, so this overstates GDP.

"True" Costs of Inflation

include reduced efficiency of the market system as inflation makes it difficult to distinguish relative price changes from changes in the general level of prices.

Disposable income

income after taxes. (Y - T) or output + gov. transfers - taxes

Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop). This type of behavior is ________.

inconsistent with the key assumption upon which the basic Keynesian model is built

Expansionary policies _________________ planned expenditure

increase

Increasing the capital stock will

increase GDP

Automatic stabilizars

increase government spending or decrease taxes when real output declines

Automatic stabilizers

increase government spending or decrease taxes when real output declines

Expansionary policies

increase planned expenditure

The introduction of a new technology that raises the marginal product of new capital will:

increase real interest rates and the equilibrium quantity of saving supplied and demanded.

Capital gains

increase the value of existing assets

If the Fed's monetary policy reaction function does not change, then when inflation increases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.

increasing; decreases; decreases

Real GDP Per Capita

indicates how much the average person produces and thus, how much goods and services are available to the typical person.

The part of spending that depends on output is

induced expenditure

When real output decreases, planned aggregate expenditures decrease because

induced expenditures decrease.

When real output decreases, planned aggregate expenditures decrease because:

induced expenditures decrease.

Investments flow between countries on

international financial markets

I

investment spending

A mutual fund is

is a financial intermediary that sells shares in itself to the public, then uses the funds raised to buy a wide variety of financial assets

capital good

is a long-lived good used in the production of other goods and services Houses, apartments, and motels Stoves in restaurants, cooking schools Delivery vehicles and taxis Money is not a capital good

Price Level

is a measure of overall prices at a particular point in time.

Nominal Interest Rate

is the annual increase in the dollar values of a financial asset.

Alpha has $40,000 of capital per worker, while Beta has $5,000 of capital per worker. In all other respects, the two countries are the same. According to the principle of diminishing returns to capital, an additional unit of capital will increase output ________ in Alpha compared to Beta, holding other factors constant.

less

Fractional Reserve banking holds

less bank reserves than deposits

Mo's current income is $100 more per month than his current consumption needs. He decides to use the $100 to reduce his credit card debt. As a result, his:

liabilities will decrease and his wealth will increase.

Easy Monetary Policy

lowers domestic interest rates which cause domestic currency to flow outward. This causes a deprecation of the dollar, which increases net exports as Americans buy fewer imports and foreigners buy more American goods.

Reservation wage

lowest wage a worker would accept for a given job

Flaws of Real GDP

maximizing GDP will not necessarily maximize national well-being or quality of life Does not value Leisure Time Omits nonmarket economic activities and the underground economy No adjustment is made for environmental quality or resource depletion Does not account for intangibles people value Does not capture the effects of income inequality

Frictional Unemployment

may be desirable because job search may lead to better matches between workers and jobs, leading to higher output

Inflation Hawk

may get better macroeconomic results because he/she has gained credibility. This credibility has created stable, anchored inflationary expectations.

Increase in the Real Exchange Rate

means a country's currency can buy more in foreign markets. Thus, exports decrease and imports increase when the real exchange rate rises.

Crowding Out

means that government has competed for investment funds with the private sector, thereby reducing the supply of savings available for private investment. A leftward shift of supply will bid up interest rates and the quantity of investment spending.

GDP

measure the value of goods produced in a nation

nominal quantity

measured in terms of its current dollar value

Nominal GDP

measures the current dollar value

Suppose manufacturers introduce a new model car to replace a car currently included in the CPI basket. The price of the new car is 10 percent higher than the discontinued model, but the new car has additional safety features and amenities. In this situation the CPI will tend to ________ inflation as a result of ________ bias.

overstate; quality adjustment

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation, the CPI will tend to ______ inflation as a result of ______ bias. overstate; substitution understate; substitution accurately measure; substitution overstate; quality adjustment

overstate; substitution

Inflation-protected bonds

pay a real interest rate of interest plus the inflation rate

Transfer Payments

payments the government makes to the public for which it receives no current goods or services

capital income

pays for physical capital and intangibles Profits for business owners Interest for bond holders Rent for land Royalties Measured before taxes

compound interest

pays interest on the original deposit and all previously accumulated interest

The beginning of a recession cycle is called the

peak

Entrepreneurs

people who create new economic enterprises

discouraged workers

people who say they would like to have a job but have not made an effort to find one in the past four weeks

A flow is a measure defined:

per unit of time

Participation Rate

percentage of working age population in the labor force

Luddite

person who is opposed to the introduction of new technologies

_______ ________ _______ describes how the action a policymaker takes depends on the state of the economy

policy reduction function

Among economists today, the most widely accepted cause of the Great Depression is:

poor economic policymaking.

POP

population

"The plan to create private accounts in Social Security will reduce benefits for some workers," is an example of a _____ statement, while "Social Security will be better if the private accounts are allowed" is an example of a _____ statement. monetary policy; fiscal policy positive; normative structural policy; fiscal policy normative; positive

positive; normative

Social costs of unemployment

potential increases in crimes and social problems

The amount originally lent by a bondholder is called the:

principle amount

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes

production levels to meet the demand

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes:

production levels to meet the demand.

money supply formula

public currency + Bank Reserves/ Reserve-Deposit ratio. The Fed affects the money supply by affecting these three things.

The money supply in Erebor is currently 4,800, bank reserves are 500, currency held by public is 800, and banks' desired reserve-deposit ratio is 0.5. Assuming the values of the currency held by the public and the desired reserve-deposit ratio do not change, if the Central Bank of Erebor wishes to increase the money supply to 7,500, then it should conduct an open-market ______ government bonds.

purchase of $1,350

Capital inflows are

purchases of domestic assets by foreign households and firms

Capital Outflows are

purchases of foreign assets by domestic households and firms

International capital flows are

purchases or sales of real and financial assets across international borders

CPI biases

quality adjustment and substitution

To compare values over time, use _______ quantities

real

Y

real GDP

real interest rate (formula)

real interest rate = nominal interest rate - inflation r = i - pi

Taylor Rule

real interest rate= 0.01 + 0.5(output gap) +0.5(inflation rate)

Medium of Exchange

receiving dollars in exchange

A period in which the economy is growing at a rate significantly below normal is a

recession

Okun's Law

states that each extra percentage point of cyclical unemployment is associated with about a 2 percent widening of a negative output gap, measured in relation to potential output.

Gross Domestic Product

statistic that measures an economy's output

Tax Cut

stimulates the economy by increasing consumption, which increases short-run equilibrium output.

Entrepreneurs

take risks when they start new business enterprises

Disposable income

the after-tax amount of income that people are able to spend (Y-T)

marginal propensity to consume

the amount by which consumption rises when disposable income rises by $1

marginal tax rate

the amount by which taxes rise when before-tax income rises by one dollar

Actual output, Y,

the amount of output (GDP) that an economy produces. Moves at a variable rate due to technical innovation, capital formation, weather conditions, etc.

The equilibrium interest rate equates:

the amount of saving with the investment funds demanded

Demand for investment (I) is

the amount of savings borrowed at each possible real interest rate (The quantity demanded is inversely related to r)

Supply of savings (S) is

the amount of savings that would occur at each possible real interest rate (r) (the quantity supplied increases are r increases

Public saving is

the amount of the public sector's income that is not spent on current needs (Public sector income is net taxes)

Public Savings

the amount of the public sectors income that is not spent on current needs

demand for money

the amount of wealth an individual or firm chooses to hold in the form of money

Principal Amount

the amount originally lent

Principle amount

the amount originally lent

output gap

the difference between the economy's actual output and its potential output, relative to potential output, at a point in time. Recessionary gaps mean output and employment are less than their sustainable level and Expansionary gaps lead to inflation.

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

the direct changes in spending change the income of producers which leads to additional changes in spending.

Barter

the direct trade of goods or services for other goods or services

income-expenditure multiplier

the effect of a one unit increase in autonomous expenditure on short-run equilibrium output; 1/(1-mpc)

The income-expenditure multiplier shows

the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output

Government budget surplus is

the excess of government net tax collections over spending

Government budget deficit is

the excess of government spending over net tax collections

government budget deficit

the excess of government spending over tax collections

Government Budget Deficit

the excess of government spending over tax collections (G-T)

Government Budget Surplus

the excess of government tax collections over government spending (T-G); equals public saving

cyclical unemployment

the extra unemployment that occurs during periods of recession

Marginal propensity to consume (mpc)

the increase in consumption spending when disposable income increases by $1

monetary; fiscal

the inside lag is relatively shorter for ____________ policy; the outside lag is relatively shorter for ______________ policy.

Coupon Rate

the interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond

Coupon Rates

the interest rate that is applied to the principal to determine the coupon payments

Indexing

the practice of increasing a nominal quantity each period by an amount equal to the percentage increase in CPI; prevents the purchasing power of the nominal quantity from being eroded by inflation

Diversification

the practice of spreading one's wealth over a variety of different financial investments to reduce overall risk

Deflating

the process of dividing a nominal quantity by CPI to express the quantity in real terms

GDP per capita

the product of output per worker (Y/N) and the share of the tot. population that is working

Open-Market Purchase

the purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply

open-market purchase

the purchase of government bonds from the public by the Fed for the purpose of increasing the supply of bank reserves and the money supply

federal funds rate

the rate commercial banks charge each other on short-term (usually overnight) loans

A risk Premium is

the rate of return investors require to hold risky assets minus the rate of return on safe assets

Risk Premium

the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

risk premium

the rate of return that financial investors require to hold risky assets minus the rate of return on safe assets

discount rate

the rate the Fed charges banks to borrow reserves

Open-Market Sale

the sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply

open-market sale

the sale by the Fed of government bonds to the public for the purpose of reducing bank reserves and the money supply

M1

the same of currency outstanding and balances held in checking accounts

M1

the sum of currency outstanding and balances held in checking accounts

The natural rate of unemployment (u*) is

the sum of frictional and structural unemployment

Fisher effect

the tendency for nominal interest rates to be high when inflation is high and low when inflation is low

wealth effect

the tendency of changes in asset prices to affect household's wealth and thus their consumption spending

wealth effect

the tendency of changes in asset prices to affect households' wealth and thus their consumption spending

Crowding Out

the tendency of increased government deficits to reduce investment spending

labor force

the total number of employed and unemployed people in the economy

The main difference between regular open-market operations and quantitative easing (QE) is:

the type and term of the financial assets targeted.

Wealth

the value of assets minus liabilities

Real wage

the wage paid to workers measured in terms of purchasing power; calculated by dividing the nominal wage by the CPI for that period

Store Value

using money to onto value over time

wealth

value of assets minus liabilities

Nominal GDP

values output in the current year using prices from the current year current dollar value of production

Real GDP

values output in the current year using the prices from the base year The base year is a reference year that changes infrequently measures the physical volume of production

Labor income consists of

wages, salaries, benefits, and incomes of the self-employed About ⅔ of GDP

Federal Reserve Act

was designed to encourage Fed independence but the act did not explicitly prohibit legislative interference in monetary policy.

Great Recession

was the result two negative demand shocks: the bursting of the housing bubble which lowered housing prices, and the 2008 financial panic which caused a credit crunch.

Recessionary Gap

wastes resources because workers and capital are not producing output.

The tendency of changes in asset prices to affect household's wealth and thus their consumption spending is known as the

wealth effect

A stock value is defined at a point in time (2)

wealth, debt

price levels and inflation

what does spending influence in the long run?

trade surplus

when exports exceed imports

trade deficit

when imports exceed exports

Quantitative Easing

when the Fed buys longer-term financial assets, lowering the yield or return of those assets while controlling the money supply

The FED wants to change the money supply an open market sale of government bonds

will decrease the money supple

The fed wants to change the money supply an open marker purchase of government bonds

will increase the money supply

MM

Money Multiplier

If bank reserves are 500, the public holds 300 in currency, and the desired reserve-deposit ratio is 0.1, the deposits are ______ and the money supply is _____.

$5,000; $5,300

Inflation Hawk

Someone who is committed to achieving and maintaining low inflation, even at some short-run cost in reduced output and employment

inflation hawk

Someone who is committed to maintaining low inflation even at the short-run cost of reduce output and employment is called a(n):

inflation dove. (An "inflation dove" is someone who is not strongly committed to achieving and maintaining low inflation.)

Someone who is not strongly committed to achieving and maintaining low inflation is called a(n): A. anchored central banker. B. inflation dove. C. inflationary central banker. D. inflation hawk.

Inflation Dove

Someone who is not strongly committed to achieving and maintaining low inflation.

total output.

GDP is a measure of an economy's: A. domestic price level. B. level of unemployment. C. total output. D. domestic productivity.

the value of leisure. (Since leisure time is not traded in conventional markets, it is not measured in GDP even though leisure time is very important.)

GDP would be a better measure of economic well-being if it included: A. the costs of education. B. the total value of intermediate goods. C. the market value of final goods. D. the value of leisure.

Hire Additional Workers

Generally, if the value of the marginal product of labor is greater than the wage rate, the firm should

human capital. (Investments to develop worker skills is "human capital investment.")

Getting a college degree is an example of investing in: A. human capital. B. physical capital. C. technology. D. research and development.

ok

Gifts and charity are not counted in GDP because nothing was directly produced. These transactions are called "transfer payments." However, when an individual buys items in a market, such as paper and crayons, their value is always included in GDP regardless of whether the person uses them herself or donates them to others. (answer=ok)

ok

Goods and services are added to GDP when they are sold to their final buyer. Intermediate transactions are not counted in GDP. (answer=ok)

included in GDP at cost.

Goods and services provided by state and local governments are: A. included in GDP at market prices. B. included in GDP at cost. C. excluded from GDP because they are not sold in markets. D. excluded from GDP because they are publicly provided.

has been more rapid since 1950 than before 1950. (In the post-WWII period, standards of living have growth quickly in most industrialized countries)

The rise in average living standards experienced by most industrialized countries: A. has been continuous over the course of human history. B. was more rapid before 1870 than after 1870. C. has been more rapid since 1950 than before 1950. D. has resulted primarily from an increase in population worldwide.

rising or falling prices. (The mechanism by which output gaps are eliminated is changing prices. These changes can occur in goods and services markets or factor markets, or both.)

The self-correcting property of the economy means that output gaps are eventually eliminated by: A. rising or falling prices. B. falling prices only. C. increasing or decreasing potential output. D. government policy.

Market Value

The selling prices of goods and services in the open market

the lost purchasing power of cash. (The "shoe leather" costs of inflation are the inconveniences that occur in dealing with cash during times of high inflation.)

The shoe leather costs of inflation include all of the following EXCEPT: A. the lost purchasing power of cash. B. the extra costs incurred to avoid holding cash. C. the cost of more frequent trips to the bank. D. the installation of a new cash management system.

smaller; smaller

The smaller the mpc, the ______ the income-expenditure multiplier and the ______ the effect of a change in autonomous spending on short-run equilibrium output. A. larger; larger B. larger; smaller C. smaller; smaller D. smaller; larger

the public's expectations of how the Federal Reserve will act.

The speed at which an economy returns to potential following an adverse inflation shock depends on: A. the Federal Reserve's target inflation rate. B. the Federal Reserve's target real interest rate. C. the level of potential output. D. the public's expectations of how the Federal Reserve will act.

Trends in Real Wages and Employment

The stagnation in real wage growth that began in the 1970s resulted in part from the slowdown in productivity growth (slower growth in labor demand) that occurred at about the same time. Increased labor supply, arising from such factors as the increased participation of women and the coming of age of the baby-boom generation, depressed real wages further while also expanding employment. In the latter part of the 1990s, resurgence in productivity growth was accompanied by an increase in real wage growth. However, real wages remained exactly the same in 2012 as in 1970.

Purchasing Power Parity (PPP)

The theory that nominal exchange rates are determined as necessary for the law of one price to hold

A fiscal policy action to close a recessionary gap is to?

increase transfer payments.

Business Cycles

short-term fluctuations in GDP and other variables

business cycles

short-term fluctuations in GDP and other variables

Net Tax (T)

total taxes - transfer payments - government interest payments

average tax rate

total taxes divided by total before-tax income

The end of a recession is a

trough

Peak

The beginning of a recession; the high point of economic activity prior to a downturn.

the foreign currency that one unit of the domestic currency will buy

A country's nominal exchange rate, e, is defined as the number of units of:

When an American buys stock in a Japanese company, from the perspective of the United States this is a(n)

capital outflow.

Bank Reserves are

cash or similar assets held by banks

Bank Reserves

cash or similar assets held by commercial banks for the purpose of meeting depositor withdrawals and payments

flow of saving

causes the stock of wealth to change

Inflation reduces economic efficiency because it does each of the following except

change relative prices.

Minimum Wage Laws

distort the efficient working of labor markets by keeping wages above market-clearing levels. Thus, these laws contribute to structural unemployment.

fiscal policy

decisions about how much the government spends and how much tax revenue it collects

Based on the accompanying labor-market diagram, if the minimum wage is increased from $7 to $9 per hour, the number of unemployed workers will _______ by __ workers.

decrease : 20

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ________ to eliminate any output gap.

decrease by 100

increasing physical capital. (Government policy of building infrastructure, like bridges and dams, promotes physical capital that is essential to economic growth.)

A government policy to build bridges and dams is an example of a policy to promote economic growth by: A. increasing human capital. B. increasing physical capital. C. improving technology. D. improving the social and legal environment

increasing physical capital. (Government policy of building infrastructure, like bridges and dams, promotes physical capital that is essential to economic growth.)

A government policy to build bridges and dams is an example of a policy to promote economic growth by: A. increasing human capital. B. increasing physical capital. C. improving technology. D. improving the social and legal environment.

decreases; decreases (Because most investment spending requires financing, a higher real interest rate decreases investments. But because higher interest rates encourage savings, they also decrease consumption.)

A higher real interest rate ______ investment spending and ______ consumption spending. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

a positive inflation shock

A large decrease in oil prices is an example of:

Expenditure Line

A line showing the relationship between planned aggregate expenditure and output.

Capital Good

A long-lived good that is used in the production of other goods and services

real GDP.

A measure of GDP in which quantities produced are valued at the prices of a fixed base year is called: A. real GDP. B. nominal GDP. C. base GDP. D. current GDP.

Nominal GDP

A measure of GDP in which the quantities produced are valued at current-year prices; it measures the current dollar value of production

Real GDP

A measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; it measure the actual physical volume of production

the price level. (The price level is a measure of overall prices at a particular point in time.)

A measure of overall prices at a particular point in time is called: A. a relative price. B. the price level. C. a real price. D. inflation.

price index.

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year is called a: A. real price. B. real quantity. C. rate of inflation. D. price index.

Price Index

A measure of the average price of a given quality of goods or services relative to the price of the same goods or services in a base year

price level

A measure of the overall level of prices at a particular point in time Measured by a price index such as the CPI

Price Level

A measure of the overall level of prices at a particular point in time as measured by a price index such as the CPI

Supply-Side Policy

A policy that affects potential output.

Accommodating Policy

A policy that allows the effects of a shock to occur

Expansionary Gap

A positive output gap, which occurs when actual output is higher than potential output (Y>Y*)

Economic Growth

A process of steady increases in the quantity and quality of the goods and services the economy can produce

Real Quantity

A quantity that is measured in physical terms-for example, in terms of quantities of goods and services

Nominal Quantity

A quantity that is measured in terms of its current dollar value

Diminishing returns to labor

-adding on worker increases output but by less than the pervious workers added. -assumes non-labor inputs are held constant

Based on the following information, the value of the M1 measure of the money supply is ________ and the value of the M2 measure of the money supply is ________.

$530 billion; $4,230 billion

If 30 percent of the population in a country is employed and average labor productivity equals $20,000, then real GDP per person equals

$6,000.

Dave's Mirror Company expects to sell $1,000 worth of mirrors and to produce $1,250 worth of mirrors in the coming year. The company purchases $300 worth of new equipment during the year. Sales for the year turn out to be $900. Actual investment by Dave's Mirror Company equals ________ and planned investment equals ________.

$650; $550

Technological

(BLANK) change can be a source of increasing wage inequality -occurs if these changes favor higher-skilled or better educated workers

Relationship between current stock price and stock price in one year =

(Current Price)(1 + i) = Future Price + Dividend (i) interest rate + risk premium

allow firms to react more quickly to negative demand shocks, and avoid the large output reductions that frequently result in higher unemployment.

(Last Word) Computerized inventory tracking has been credited with reducing the number and severity of recessions because these tracking systems: A. effectively eliminate negative demand shocks. B. allow firms to react more quickly to negative demand shocks, and avoid the large output reductions that frequently result in higher unemployment. C. have eliminated the need for government macroeconomic policy. D. require firms to change prices much more quickly than before.

National Saving

(S) equals Y - C - G. Since Y = C + I + G, we can substitute for Y in the equation, and S = C + I + G - C - G = I, so S = I.

Output gap formula

(Y - Y*)/Y* or (actual output - potential output) / potential output

output gap

(Y-Y*)/Y*

Financial assets

- Cash - Checking Accounts - Stocks - Bonds

Trend 3: Wage Inequality

- Globalization causes prices of output to change - The direction of that change depends on comparative advantage -- American clothing manufacturers face more competition, lower prices -- American software developers have more buyers, higher prices

Final Goods and Services

- Goods and services consumed by the final suer - End products of production - Included in GDP

Trend 3

- Increased wage inequality in U.S -- Not the same at wealth inequality - Between 1960 and 2010 -- Average real weekly earnings of production workers decreased -- Best-educated, highest-skilled workers' real wages increased - Income with an advanced college degree is -- Three times the income of a high school graduate -- Four times the income of a worker who did not graduate from high school

Trend 1: Increasing Real Wage

- Industrialized countries have had sustained growth in productivity in the 20th century -- Increases demand for labor -- Both real wages and employment increased - Productivity increases were due to -- Technological progress -- Increases in capital

Demand for Labor (Firms)

- Labor Demand curve is downward sloping -- Inverse relationship between wage and employees demanded (job openings) -- Diminishing returns to labor: adding a new worker increases output, but by less than the previous worker -- Value of Marginal Product (VMP) is the additional revenue that an added worker generates

Shifting the Demand for Labor

- Labor Demand depends on the VMP -Two factors affect VMP, and thus can shift the labor demand curve: 1. The price of the company's output -- An increase in market demand 2. The productivity of the workers -- Better technology, more capital -- Organizational change -- Training and education

The three most important monthly indicators used to date recessions are

- Real personal consumption expenditures -Non-farm employment -Real after-tax household income

Determinates of labor supply

- Size in working age population - Immigration - Emigration - Birthrate

Trend 3: Increased Wage Inequality in U.S.

- Technological change can be a source of increasing wage inequality -- Occurs if technical change favors higher-skilled or better-educated workers - Some innovation renders old skills less valuable -- Addition and the calculator and computer - Skill-biased technological change affects the marginal products of higher skilled workers differently from those of lower-skilled workers -- Recent changes favor higher skilled workers -- Automobile production lines increasingly use robots

Demand for Investment

- The amount of savings borrowed at each possible real interest rate - The quantity demanded is inversely related to r

Real Assets

- house - Jewelry - consumer durables - valuable collectibles

increase in productivity

- increases VMP - demand curve shifts right

structural unemployment example

- lack of skills or employer discrimination - high economic, psychological and social cost

change in worker productivity positive in relation to demand

- technology - training and education - change in relative price of output

Name the two things CPI measures

-The cost of a standard basket of goods and services in a given year -Relative to the cost of the same basket of goods and services in the base year

The following table provides information about production at the XYZ-TV Company. The price of a TV is $1,000. How many workers will XYZ-TV Company hire if the going wage for TV production workers is $34,000?

1

Okun's Law

1 percent more unemployment results in 2 percent less output

If the natural rate of unemployment equals 5 percent and the actual rate of unemployment equals 6 percent, then cyclical unemployment equals:

1 percent.

Based on the information in the table, what is the size of the population 16 and older? - Size of Labor Force 836,000 Participation Rate 75% Employed Workers 710,000

1,114,667

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals:

1,160.

Major Macroeconomic issues

1. economic growth and living standards 2. productivity 3. recessions and expansions 4. unemployment 5. inflation 6. economic interdependence among nations

Money has three principal uses

1. medium of exchange 2. unit of account 3. store of value

Discouraged Workers

1. people who quit looking for a job because they cannot find one 2. understated unemployed added workers in labor force until primary earner finds work (stay at home mom to work force until dad finds work)

2 Factors Determine Demand for Labor

1. price of company's output - increase in market demand 2. productivity of workers - greater quantity of non labor inputs - organizational change - training and education

3 GDP Approaches

1. production: market value of final goods and services 2. expenditure: consumption, investment, gov. purchases, net exports 3. income: labor income, capital income

Suppose that the total expenditures for a typical household in 2015 equaled $2,500 per month, while the cost of purchasing exactly the same items in 2017 was $3,000. If 2015 is the base year, the CPI for 2017 equals:

1.20

The table below gives the quantities and prices for 2005 and 2015 for an economy that produces just two goods: sailboats and coconuts. For this economy that produces just sailboats and coconuts, and with 2005 as the base year, real GDP was approximately ________ times larger in 2015 than it was in 2005.

1.77

Six factors determine average labor productivity

1.Human capital 2.Physical capital 3.Land and other natural resources 4.Technology 5.Entrepreneurship and management 6.Political and legal environment

Multiplier Formula

1/(1-mpc)

Isabella is lending Manish $1,000 for one year. The CPI is 1.50 at the time the loan is made. They expect it to be 1.62 in one year. If Isabella and Manish agree that Isabella should earn a 2 percent real return for the year, the nominal interest rate on this loan should be ______ percent.

10 percent.

Based on the labor market diagram below, if the minimum wage is increased from $10 to $12 per hour, the numbered of unemployed workers will increase by ________ workers.

13

A consumer expenditure survey reports the following information on consumer protein spending: - Using 2016 as the base year, by how much does a "cost of protein" index increase between 2016 and 2017?

13.4 percent

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Planned aggregate expenditure equals:

900 + 0.80Y.

the average level of prices is 34 percent higher in 2005 than in the base year. (A CPI of 1.34 means that prices on average have risen 34 percent since the base year.)

A CPI that equals 1.34 in 2005 (when 2000 is the base year) means that: A. prices in 2005 are 34 percent higher than in 2004. B. the CPI equals $1.34 in 2005. C. the inflation rate in 2005 is 134 percent. D. the average level of prices is 34 percent higher in 2005 than in the base year.

inflation; a change in a relative price

A change in the average price level is called _____, while a change in the price of a specific good in comparison with other goods and services is called _______. A. a quality adjustment; a substitution bias B. a change in a relative price; inflation C. inflation; a change in a relative price D. a price level adjustment; a quality adjustment

13.4% (First, note that in the computation of the CPI, the basket of goods and services is fixed - so the quantities remain the same as in the base year. The protein cost in 2005 was (5*$5) + (10*$3) + (7*$6) = $97. Protein cost in 2006 was (5*$7) + (10*$4) + (7*$5) = $110, so the protein price index is 1.134, or an increase of 13.4 percent.)

A consumer expenditure survey reports the following information on consumer protein spending: Using 2005 as the base year, by how much does a "cost of protein" index increase between 2005 and 2006? A. 5.2% B. 8.6% C. 13.4% D. 14.3%

Aggregate Demand (AD) Curve

A curve that shows the amount of output consumers, firms, government , and customers abroad want to purchase at each inflation rate, holding all other factors constant

Money Demand Curve

A curve that shows the relationship between the aggregate quantity of money demanded M and the nominal interest rate i; because an increase in the nominal interest rate increases the opportunity cost of holding money, which reduces the quantity of money demanded, the money demand curve slopes down.

Aggregate Supply Curve

A curve that shows the relationship between the amount of output firms want to produce and the inflation rate, holding all other factors constant

Recessionary Output Gap

A decrease in autonomous expenditure shifts the PAE line downward, which results in lower equilibrium output. For an economy with output equal to its potential, a decrease in short-run equilibrium output creates a

shift the demand for investment curve to the right.(More generous tax treatment on new capital investment will encourage investment and shift the demand curve to the right.)

A decrease in the capital gains tax on income generated through investment in new capital will: A. shift the demand for investment curve to the left. B. shift the demand for investment curve to the right. C. shift the supply of saving curve to the left. D. shift the supply of saving curve to the right.

Depreciation

A decrease in the value of a currency relative to other currencies

not caused by changes in output or changes in the inflation rate.

A demand shock is a change in planned spending that is: A. caused by changes in output. B. caused by changes in the inflation rate. C. caused by changes in output and changes in the real interest rate. D. not caused by changes in output or changes in the inflation rate.

the value of the marginal product of labor is greater than or equal to the wage rate

A firm will hire a worker if and only if

Value Added

A firm's revenue from selling its product minus the cost of inputs purchased from other firms

value added. (A firm's revenue from selling its product minus the cost of inputs purchased from other firms is called value added.)

A firm's revenue from selling its product minus the cost of inputs purchased from other firms is called: A. profits. B. investment. C. value added. D. production costs.

taylor rule

A modern monetary rule that would stipulate exactly how much the Federal Reserve should change real interest rates in response to divergences of real GDP from potential GDP and divergences of actual rates of inflation from a target rate of inflation.

current; current needs (Saving equals current income minus current spending.)

A nation's saving equals its ______ income less its spending on _______. A. real; investment B. current; current needs C. nominal; investment D. nominal; net taxes

Boom

A particularly strong and protracted expansion

Unemployment Spell

A period during which an individual is continuously unemployed

Expansion

A period in which the economy is growing at a rate significantly above normal.

Recession (or Contraction)

A period in which the economy is growing at a rate significantly below normal

the price of a specific good in comparison to the prices of other goods and services.

A relative price is: A. the rate of inflation. B. a measure of overall prices at a particular point in time. C. the percentage change in a price index such as the CPI. D. the price of a specific good in comparison to the prices of other goods and services.

$27.47 (The real wage in 2000 was $20.71($35/1.69). This real wage is 98 percent, or (0.98), of the real wage in 1990. So the real wage 2000 = real wage 1990 * 0.98, or 20.71 = real age 1990 * 0.98. We solve for the real wage in 1990, by dividing each side with 0.98: $20.71 / 0.98 = 21.13. Finally we can obtain the nominal wage for 1990 by multiplying the real wage in 1990 with the CPI in 1990: 21.13 * 1.3 = $27.47.)

A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000. If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990? A. $21.13 B. $26.40 C. $26.92 D. $27.47

Monetary Policy Rule

A rule that describes how a central bank, like the Fed, takes action in response to changes in the state of the economy.

Change in Aggregate Demand

A shift of the AD curve

Change in Aggregate Supply

A shift of the AS curve

Banking Panic

A situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositors to rush to withdraw their funds

Long-Run Equilibrium

A situation in which the AD and AS curves intersect at potential output Y*.

Hyperinflation

A situation in which the inflation rate is extremely high

Deflation

A situation in which the prices of most goods and services are falling over time so that inflation is negative

Deflating (a Nominal Quantity)

A situation where the AD and AS curves intersect at a level of real GDP that is above or below potential

Short-Run Equilibrium

A situation where the AD and AS curves intersect at a level of real GDP that is above or below potential

Aggregate Demand Curve

A sudden decrease in business confidence, and the resultant decrease in planned investment spending, is a negative shock to the AD curve, shifting the curve to the left.

Aggregate Demand Curve

A sudden increase in consumer wealth is a positive shock to the aggregate demand curve, causing consumer spending to rise and shifting the AD curve to the right.

positive; right (A sudden increase in household wealth, and the resultant increase in planned consumption spending, is a positive shock to the AD curve, shifting the curve to the right.)

A sudden increase in household wealth is an example of a ______ demand shock, which would shift the AD curve to the ______. A. negative; left B. positive; left C. negative; right D. positive; right

Aggregate Demand Curve

A sudden increase in household wealth, and the resultant increase in planned consumption spending, is a positive shock to the AD curve, shifting the curve to the right.

Deposit Insurance

A system in which the government guarantees that depositors will not lose any money even if their bank goes bankrupt

increases; decreases; increases (U.S interest rates rise during tight monetary policy and U.S. investments become more attractive to foreign investors, which increases demand for dollars on foreign exchange markets. At the same time, tight monetary policy decreases the supply of dollars and, therefore, increases the equilibrium value of the dollar.)

A tight monetary policy raises the real interest rate which _____ the demand for dollars, _____ the supply of dollars, and ____ the equilibrium value of the dollar. A. increases; increases; increases B. decreases; decreases; decreases C. increases; decreases; increases D. decreases; increases; increases

in the 1970s and 1980s. (There was a worldwide productivity slowdown of the 1970s and 1980, arguably due to higher oil prices.)

A worldwide slowdown in productivity growth occurred: A. before 1950. B. in the 1950s and 1960s. C. in the 1960s and 1970s. D. in the 1970s and 1980s.

is positive. (When the output gap is negative, cyclical unemployment is positive because the actual unemployment rate exceeds the natural unemployment rate.)

According to Okun's Law, when the output gap is negative, cyclical unemployment: A. equals structural unemployment. B. equals frictional unemployment. C. is negative. D. is positive.

increases output at a decreasing rate.

According to the principle of diminishing returns to labor, if the amount of capital and other inputs are held constant, employing additional workers: A. increases output at an increasing rate. B. increases output at a constant rate. C. increases output at a decreasing rate. D. decreases output at an increasing rate.

speedup in productivity growth since 1995. (The invention and diffusion of the Internet and related technologies has caused a burst of productivity growth since 1995.)

Advances in information and communication technology are the principal factors cited for the: A. slowdown in productivity growth between 1973 and 1995. B. speedup in productivity growth between 1973 and 1995. C. slowdown in productivity growth since 1995. D. speedup in productivity growth since 1995.

Federal Reserve System

After many different U.S. banking arrangements over time, this was created in 1914.

rise. (If Asian restaurants reduce their demand for French champagne and switch to U.S. wine, the restaurants need fewer euros and more dollars. This increases world demand for dollars and the exchange rate for the U.S. dollar will rise.)

All else being equal, if Asian restaurants switch from serving French champagne to serving California wines, then the market equilibrium value of the exchange rate for the U.S. dollar will: A. rise. B. fall. C. become fixed. D. either rise or fall depending on whether the supply or demand for dollars changes more.

fall

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will:

fall. (As the Federal Reserve eases monetary policy, it lowers domestic interest rates. This discourages foreign investment and causes a decrease in the exchange rate for the U.S. dollar.)

All else being equal, if the prospect of a recession leads the Federal Reserve to ease monetary policy, the equilibrium value of the exchange rate for the U.S. dollar will: A. rise. B. fall. C. remain fixed. D. either rise or fall depending on whether the supply or demand for dollars changes more.

fall. (If U.S. stocks are perceived to have become riskier, foreign investors will look to other countries to make financial investments. This reduces the world demand for dollars and the exchange rate for the U.S. dollar will fall.)

All else equal, if U.S. stocks are perceived to have become riskier compared to financial investments in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will: A. rise. B. fall. C. become fixed. D. be equal to the value chosen by the Federal Reserve.

the Federal Reserve Act does not explicitly prohibit legislative interference in monetary policy. (The Federal Reserve Act was designed to encourage Fed independence but the act did not explicitly prohibit legislative interference in monetary policy. So while this answer choice is a true statement, it is not an example of independence.)

All of the following are examples of the independence of the U.S. Federal Reserve System EXCEPT that: A. the Federal Reserve Act does not explicitly prohibit legislative interference in monetary policy. B. Federal Reserve Governors are appointed for 14-year terms. C. the Federal Reserve controls its own budget. D. the Federal Reserve is under no obligation to finance the national deficit.

United States Federal Reserve System.

All of the following central banks have announced numerical targets for inflation EXCEPT the: A. United States Federal Reserve System. B. Bank of Canada. C. Bank of England. D. Central Bank of Brazil.

growing wage equality in the United States in recent decades. (In recent decades the United States has seen increasing wage dispersion: the rich are getting richer.)

All of the following describe trends in labor markets EXCEPT: A. growing wage equality in the United States in recent decades. B. a slowdown in real wage growth since the 1970s. C. substantial growth in the level of employment in the United States. D. over-sixteen population growth rates that fall short of the growth rate of new jobs in the United States.

over-sixteen population growth rates that exceed the growth rate of new jobs in the United States. (Employment grew rapidly in the post-1970's, but peaked in 2000. Since then the share of the population holding or actively looking for jobs have steadily decreased.)

All of the following describe trends in labor markets EXCEPT: A. growing wage inequality in the United States in recent decades. B. a slowdown in real wage growth since the 1970s. C. substantial growth in the level of employment in the United States. D. over-sixteen population growth rates that exceed the growth rate of new jobs in the United States.

M2

All the assets in M1 plus some additional assets that are usable in making payments but at greater cost or inconvenience than currency or checks

ok

American workers face lower marginal taxes than their Western European counterparts. For that reason, U.S. workers generally work more hours per year. (Answer=ok)

appreciation. (An "appreciation" is an increase in the value of a currency relative to other currencies.)

An increase in the value of a currency relative to other currencies is called a(n): A. evaluation. B. devaluation. C. appreciation. D. overvaluation.

$1.0 billion (Investment is the amount of computers purchased by businesses (300,000) plus the amount of computers added to inventory (200,000), so investment is 500,000*$2,000 = $1.0 billion.)

An economy produces 1,000,000 computers valued at $2,000 each. Households purchase 200,000 computers, of which 100,000 are imported. Businesses purchase 300,000 domestically produced computers, the government purchases 300,000 domestically produced computers, and 100,000 domestically produced computers are sold abroad. The unsold computers at the end of the year are held in inventory by the computer manufacturers. What is the value of the investment component of GDP? A. $0.6 billion B. $0.8 billion C. $0.9 billion D. $1.0 billion

$0.8 billion (Investment is the value of computers sold to business and the net change in inventory. In this case, 300,000 computers are sold to business and 100,000 computers are unsold and added to inventory, so 400,000* $2,000 = $0.8 billion goes into investment.)

An economy produces only 1,000,000 computers valued at $2,000 each. Of these, 200,000 are sold to consumers, 300,000 are sold to businesses, 300,000 are sold to the government, and 100,000 are sold abroad. No computers are imported. At the end of the year, the computer manufacturers hold the unsold computers in inventory. What is the value of the investment component of GDP? A. $0.3 billion B. $0.4 billion C. $0.6 billion D. $0.8 billion

$25 million (Investment is the value of tables sold to business and the net change in inventory. In this case, 200,000 tables are sold to business and 50,000 tables are unsold and added to inventory, so 250,000* $100 = $25 million goes into investment.)

An economy produces only 500,000 tables valued at $100 each. Of these, 100,000 are sold to consumers, 200,000 are sold to businesses, 100,000 are sold to the government, and 50,000 are sold abroad. No tables are imported. The unsold tables at the end of the year are held in inventory by the table manufacturers. What is the value of the investment component of GDP? A. $2 billion B. $10 million C. $20 million D. $25 million

increase; decrease (An economy with an expansionary gap sees the bidding up of wages and production costs. This causes a leftward shift in AS which results in higher inflation and decreased output.)

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease

a significant rise in oil prices.

An example of an negative inflation shock is: A. an increase in interest rates. B. an increase in government purchases. C. a significant rise in oil prices. D. a tax increase.

flexible (A "flexible exchange rate" is one whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market.)

An exchange rate that varies according to the supply and demand for the currency in the foreign exchansge market is called a ______ exchange rate. A. real B. nominal C. fixed D. flexible

Flexible Exchange Rate

An exchange rate whose value is not officially fixed but varies according to the supply and demand for the currency in the foreign exchange market.

Fixed Exchange Rate

An exchange rate whose value is set by official government policy

Quantitative Easing (QE)

An expansionary monetary policy in which a central bank buys financial assets from private financial institutions, thereby lowering the yield or return of those assets while increasing the money supply.

hyperinflation

An extremely high rate of inflation is called _____. A. super inflation B. deflation C. disinflation D. hyperinflation

increase; reduces (Stock and bond markets are closely connected. When market interest rates rise, newly issued bonds become more attractive compared to stocks, so stock prices fall as savers choose to move funds from stocks to bonds.)

An increase in interest rates results in a(n) ______ in the required rate of return to hold stocks and ______ current stock prices. A. increase; reduces B. increase; raises C. decrease; raises D. decrease; reduces

reduces the opportunity cost of leisure (not working).

An increase in marginal tax rates A. increases a worker's hourly after-tax wage. B. increases the opportunity cost of leisure (not working). C. reduces the opportunity cost of leisure (not working). D. increases incentives to work more.

Expansionary Output Gap

An increase in planned investment shifts the PAE line upward, which results in higher equilibrium output. For an economy with output equal to its potential, an increase in short-run equilibrium output creates an

Appreciation

An increase in the value of a currency relative to other currencies

hawk; anchored inflationary expectations (An inflation hawk may get better macroeconomic results because he/she has gained credibility. This credibility has created stable, anchored inflationary expectations.)

An inflation _____ may be more likely to stabilize output as well as inflation because they have established credibility and _____. A. dove; lowered the core rate of inflation B. hawk; reduced inside lags C. dove: anchored inflationary expectations D. hawk; anchored inflationary expectations

increase bank reserves, and the money supply will increase. (When the Federal Reserve buys government bonds in the open market, there is new currency in the hands of the banking community, which increases bank reserves and increases the money supply.)

An open-market purchase of government securities by the Fed will: A. increase bank reserves, and the money supply will increase. B. decrease bank reserves, and the money supply will increase. C. increase bank reserves, and the money supply will decrease. D. decrease bank reserves, and the money supply will decrease.

an individual is continuously unemployed. (An unemployment spell is a period during which an individual is continuously unemployed.)

An unemployment spell is a period during which: A. the unemployment rate is less than 10 percent. B. the unemployment rate exceeds 15 percent. C. an unemployed individual leaves the labor force and then returns. D. an individual is continuously unemployed.

do not change if inflation rises temporarily.

Anchored inflationary expectations are people's expectations of future inflation that: A. increase if inflation rises temporarily. B. are based on the unemployment rate. C. do not change if inflation rises temporarily. D. are based on the level of potential output.

eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks. (Even when inflation targets are announced, central bankers still face the tradeoff between maintaining output and tolerating inflation in the event of adverse inflationary shocks.)

Announced numerical inflation targets are advocated for all of the following reasons EXCEPT that inflation targets: A. reduce inflation uncertainty. B. anchor inflationary expectations. C. enhance central bank credibility. D. eliminate the tradeoff between maintaining output or inflation in the event of adverse inflationary shocks.

more unemployment and less economic growth

Anti-inflationary monetary policy might be politically unpopular because it leads to

ok

Anticipating liquidity shortages as a result of Y2K problems, there was a rightward shift in the money demand curve. This increases nominal interest rates if the Fed takes no offsetting actions. (answer=ok)

fewer; appreciation (As U.S. real GDP falls, many households will desire to buy fewer foreign goods and assets. This decreases the supply of dollars to foreign exchange markets and causes appreciation of the U.S. dollar.)

As U.S. real GDP falls, poorer households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar. A. more; appreciation B. more; depreciation C. fewer; appreciation D. fewer; depreciation

ok

As U.S. real GDP rises, many households will desire to buy more foreign goods and assets. This increases the supply of dollars to foreign exchange markets and causes depreciation of the U.S. dollar. (answer=ok)

fewer; appreciation (As U.S. real GDP rises, many households will desire to buy more foreign goods and assets. This increases the supply of dollars to foreign exchange markets and causes depreciation of the U.S. dollar.)

As U.S. real GDP rises, wealthier households may decide to buy ______ foreign goods and assets, which would cause a(n) ______ of the U.S. dollar. A. more; appreciation B. more; depreciation C. fewer; appreciation D. fewer; depreciation

increases. (The consumption function shows a positive relationship between consumption and disposable income. This means that disposable income and consumption move in the same direction)

As disposable income increases, consumption: A. increases. B. decreases. C. may either increase or decrease depending on the wealth effect. D. may either increase or decrease depending on the mpc.

ok

As tax rates rise, investors realize lower returns on investment. Thus, investors are less inclined to invest. (Answer=ok)

Exchange Rate Determination in the Short Run

As the Federal Reserve eases monetary policy, it lowers domestic interest rates. This discourages foreign investment and causes a decrease in the exchange rate for the U.S. dollar.

falls; fall (As the U.S. dollar becomes stronger, the dollar price of imports to the U.S. falls making foreign goods more desirable. Import growth causes both net exports and GDP to fall.)

As the U.S. dollar appreciates relative to other currencies, the dollar price of goods imported to the U.S. _____, causing net exports and GDP to ______. A. rises; rise B. rises; fall C. falls; rise D. falls; fall

ok

As the U.S. dollar becomes stronger, the dollar price of imports to the U.S. falls making foreign goods more desirable. Import growth causes both net exports and GDP to fall. (answer=ok)

decreases; increases (Foreign exchange markets operate on the same principals as other markets: as the price of a dollar (the dollar exchange rate) falls, suppliers decrease the number of dollars they bring to market and demanders increase the number of dollars they want to buy.)

As the dollar exchange rate, e, decreases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

increases; decreases (Foreign exchange markets operate on the same principals as other markets: as the price of a dollar (the dollar exchange rate) rises, suppliers increase the number of dollars they bring to market and demanders decrease the number of dollars they want to buy.)

As the dollar exchange rate, e, increases, the quantity of dollars supplied in the foreign exchange market ____, and the quantity of dollars demanded in the foreign exchange market ____. A. increases; increases B. increases; decreases C. decreases; increases D. decreases; decreases

Increasing Wage Inequality: Technological Change

As the pay differential between skilled and unskilled work increases, unskilled workers will have a stronger incentive to acquire education and skills, to everyone's benefit.

increases; decreases (As real wages decrease, firms desire more employees. Conversely, as real wages decrease, fewer people find it worthwhile to work or workers desire fewer hours.)

As the real wage decreases, the quantity of labor demanded ______ and the quantity of labor supplied _______. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

Real Wage

As this decreases, firms desire more employees. Conversely, as this decreases, fewer people find it worthwhile to work or workers desire fewer hours.

U.S. Real GDP

As this falls, many households will desire to buy fewer foreign goods and assets. This decreases the supply of dollars to foreign exchange markets and causes appreciation of the U.S. dollar.

increase; not change (Union contracts that exceed the market-clearing wage cause unemployment. If labor supply increases, unemployment will increase because wages cannot fall. The number of workers employed will not change as the demand for labor and wages both stay the same.)

Assume the union contract wage exceeds the market-clearing wage. If there is an increase in the labor supply, then the number of unemployed workers will ______ and the number of employed workers will _______. A. increase; increase B. increase; decrease C. increase; not change D. decrease; increase

Trends in Real Wages and Employment

Attempting to block either globalization or technological change is not the best response to the problem of wage inequality. To some extent, worker mobility (movement of workers from low-wage to high-wage industries) will offset the inequality created by these forces. Where mobility is not practical, transition aid- government assistance to workers whose employment prospects have worsened- may be the best solution.

real GDP per person. (To find real GDP per person, multiply the average output each worker produces times the percentage of population employed.)

Average labor productivity times the proportion of the population employed equals: A. real GDP. B. real GDP per person. C. real GDP per worker. D. output per worker.

$1,791; $2,000 (Bank C uses the formula: FV = PV (1 + i)^n, where i is the interest rate and n the number of years, so that your deposit after 10 years =$1,000*(1.06)^10 = $1,791. Bank S uses the formula: FV = P + I, where I is the sum of all the interest payments (here 10 times $100), so that our deposit after 10 years = $1,000 + $1,000 = $2,000.)

Bank C promises to pay a compound annual interest rate of 6 percent, while Bank S pays a 10 percent simple annual interest rate on deposits. If you deposit $1,000 in each bank, after 10 years, your deposit in Bank C equals _____, while your deposit in Bank S equals ______. A. $1,060; $1,100 B. $1,600; $2,000 C. $1,600; $2,594 D. $1,791; $2,000

why do banks exist at all?

Banks can channel funds from savers to spenders so efficiently that they can give the saver a greater return and the borrower a lower cost, than either would receive through direct finance, and still cover all bank costs including a profit

gathering information about and evaluating potential borrowers.

Banks help savers find productive uses for their funds because banks have specialized in: A. gathering information about and evaluating potential borrowers. B. obtaining preferential tax treatment for savers. C. securing government guarantees for loans. D. evaluating the riskiness of stocks.

The Federal Reserve conducted open-market sales of U.S. government bonds. (We see the public held more currency and the desired reserve-deposit ratio increased, meaning that banks made fewer loans. Additionally, the Federal Reserve injected reserves into the banking system. Although the money supply decreased, there is no evidence the Fed made open-market sales of U.S. government bonds.)

Based on the information in the table, we can conclude that, in 1932, each of the following events occurred EXCEPT: A. The public increased the amount of currency it held. B. Banks were keeping more of their deposits in reserves, and making fewer loans. C. The Federal Reserve conducted open-market sales of U.S. government bonds. D. The Federal Reserve injected reserves into the banking system.

$0.30 billion (The Federal Reserve injected reserves of $0.30 billion. Some of this ($0.23 billion) was held as currency ($4.82 billion - $4.59 billion) and some ($0.07 billion) was held as bank reserves ( $3.18 billion - $3.11 billion).)

Based on the information in the table, what quantity of reserves did the Federal Reserve inject into the economy in 1932? A. $0.30 billion B. $0.23 billion C. $0.16 billion D. $0.07 billion

15,000

Based on the table below and the principle of diminishing returns to capital, then total packages wrapped when a fourth machine is installed must be less than ______ packages. A. 3,000 B. 4,000 C. 12,000 D. 15,000

ok

Because the causes of recessions are not always clear, they are unpredictable and their depth and length vary. (Answer=ok)

Federal Reserve leaders are appointed to the

Board of directors by the president. (14 year term)

$21,000 (Bob's contribution to nominal GDP was: (3,000*$7) = $21,000.)

Bob's Barber Shop cut 3,000 heads of hair in 2009 and 3,100 in 2010. The price of a haircut was $7 in 2009 and $8 in 2010. If 2009 is the base year, what was Bob's contribution to nominal GDP in the year 2009? A. $21,000 B. $21,700 C. $24,000 D. $24,800

Which of the following transactions would be included in the GDP of the United States?

Boeing builds a plane in Seattle that is sold to Air Canada.

Inflation-Protected Bonds

Bonds that pay a nominal interest rate each year equal to a fixed real rate plus the actual rate of inflation during that year

Trends in Real Wages and Employment

Both globalization and skill-biased technological change contribute to wage inequality. Globalization raises the wages of workers in exporting industries by raising the demand for those workers, while reducing the wages of workers in importing industries. Technological change that favors more-skilled workers increases the demand for such workers, and hence their wages, relative to the wages of less-skilled workers.

Fiscal policy

Decisions that determine the government's budget, including the amount and composition of government expenditures and government revenues Spending vs tax revenue, Deficit or Surplus

To close a recessionary gap, the Federal Reserve must ________ real interest rates by ___________ the money supply.

Decrease; Increasing

exhaust natural resources. (Those who believe there are limits to economic growth tend to worry that the world is running out of natural resources.)

Defenders of limits on economic growth are concerned that continued economic growth will eventually: A. raise interest rates. B. reduce the rate of technological progress. C. exhaust natural resources. D. make plant and equipment obsolete.

Policy reduction function

Describes how the action a policymaker takes depends on the state of the economy.

GDP Per Capita

Does not account for Inequality Puts no value on leisure (time spent not working) Does not measure Environmental Costs

and then raise the price at which they are willing to sell their output.

Due to menu costs, many firms in the economy will increase their output: A. only after they raise the price at which they are willing to sell their output. B. and then raise the price at which they are willing to sell their output. C. instead of raising the price at which they sell their output. D. or raise the price at which they sell their output, but never both.

usually negative, but can be positive. (Sometimes recessions have a "blip" of positive growth within the context of negative GDP growth.)

During recessions, the change in real GDP is: A. always positive. B. always negative. C. usually positive, but can be negative. D. usually negative, but can be positive.

Production Approach

Estimate the number of goods and services and their prices, then find the total market value

Interest on Reserves

Even at an interest rate of zero, the Fed can offer interest on its reserves to give banks a reason to keep money at the Fed

Announced Numerical Inflation Targets

Even when inflation targets are announced, central bankers still face the tradeoff between maintaining output and tolerating inflation in the event of adverse inflationary shocks.

lower marginal tax rates encourage more work hours. (American workers face lower marginal taxes than their Western European counterparts. For that reason, U.S. workers generally work more hours per year.)

Evidence from work hours and marginal tax rates in different countries suggests that A. higher marginal tax rates encourage more work hours. B. lower marginal tax rates encourage more work hours. C. marginal tax rates are not related to work hours. D. higher average tax rates encourage more work hours.

Adverse Inflation Shock

Example is a large, unanticipated rise in oil prices, reduces economic activity. To avoid a recession, the Federal Reserve must increase aggregate demand, which will increase the target inflation rate.

A positive output gap is a

Expansionary gap

Net Exports

Exports minus imports

T/F inflation generally decreases prior to a recession

F

discount window lending

Fed offers lending facility to banks. If a bank needs reserves, it can borrow from the Fed at the discount rate.

The _________ _______ ______ is the interest rate banks charge each other for overnight loans

Federal funds rate

Opportunity cost of producing more capital goods

Fewer consumer goods People may be willing to forego present consumption to have more in the future Reduced leisure time Possible risks of health and safety from rapid capital production The cost of research and development (R&D) to improve technology The cost of education to develop and use new capital

the end products of; are (Goods and services are added to GDP when they are sold to their final buyer. Intermediate transactions are not counted in GDP.)

Final goods and services are ______ production and ______ counted in GDP. A. the end products of; are B. the end products of; are not C. used up in the process of; are D. used up in the process of; are not

Which of the following would be expected to increase the demand for money in the U.S.?

Financial investors become concerned about increasing riskiness of stocks.

Short term unemployment possible outcomes

Find a permanent job after searching a few weeks Economic costs are low Leave the labor force Short-term or temporary job that leads to unemployment again These chronically unemployed have costs similar to the long-term unemployed

negative; left (A sudden decrease in business confidence, and the resultant decrease in planned investment spending, is a negative shock to the AD curve, shifting the curve to the left.)

Firms suddenly becoming pessimistic about future business prospects is an example of a ______ demand shock, which would shift the AD curve to the ______. A. negative; left B. positive; left C. negative; right D. positive; right

both aggregate demand and potential output

Fiscal policy can shift

tax policy and government expenditures.

Fiscal policy includes A. tax policy only. B. government expenditures only. C. tax policy and government expenditures. D. tax policy, government expenditures, and monetary policy.

slowly; grew more rapidly (The U.S. growth rate of average annual earnings started to decline in the early 1970's, and declined annually until 1995. Average annual earnings started growing again after 1996, in part because of the Internet, but at a rate lower than seen in the 1960s.)

Following the 1960 and 1973 period, average real earnings of workers grew more ______ from 1973 to 1996 and then ______ from 1996 to 2004. A. slowly; grew more rapidly B. slowly; slowed even more C. slowly; grew at about the same rate D. rapidly; slowed

increases

For a given domestic and foreign price level, an increase in the nominal exchange rate _____ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in

aggregate demand curve; right (A sudden increase in consumer wealth is a positive shock to the aggregate demand curve, causing consumer spending to rise and shifting the AD curve to the right.)

For a given inflation rate, if a rise in the stock market makes consumers more willing to spend, then the ______ shifts _____. A. aggregate demand curve; right B. aggregate demand curve; left C. aggregate supply curve; upward D. aggregate supply curve; downward

decreases (The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P) ÷ Pf. All else equal, when the domestic price level,P,falls, the real exchange rate decreases.)

For a given nominal exchange rate and foreign price level, a decrease in the domestic price level _____ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in

increases (The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P) ÷ Pf. All else equal, when the domestic price level, P,rises, the real exchange rate increases.)

For a given nominal exchange rate and foreign price level, an increase in the domestic price level ______ the real exchange rate. A. increases B. decreases C. may either increase or decrease D. offsets any change in

recessionary output gap. (A decrease in autonomous expenditure shifts the PAE line downward, which results in lower equilibrium output. For an economy with output equal to its potential, a decrease in short-run equilibrium output creates a recessionary output gap.)

For an economy starting at potential output, a decrease in autonomous expenditure in the short run results in a(n): A. expansionary output gap. B. recessionary output gap. C. increase in potential output. D. decrease in potential output.

expansionary output gap. (An increase in planned investment shifts the PAE line upward, which results in higher equilibrium output. For an economy with output equal to its potential, an increase in short-run equilibrium output creates an expansionary output gap.)

For an economy starting at potential output, an increase in planned investment in the short run results in a(n): A. expansionary output gap. B. recessionary output gap. C. increase in potential output. D. decrease in potential output.

Value Added

For any firm, the market value of its product or service minus the cost of inputs purchased from other firms

Consumer Price Index (CPI)

For any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year

ok

For government expenditure to be added to GDP, they must be purchases of final goods and services. (Answer=ok)

wasted resources; a tendency for inflation to develop (A recessionary gap wastes resources because workers and capital are not producing output. An expansionary gap leads to demand for output that exceeds firms' capacity and drives up prices.)

For policymakers the problem with a recessionary gap is ______ and the problem with an expansionary gap is _____. A. a tendency for inflation to develop; wasted resources B. wasted resources; a tendency for inflation to develop C. an increase in cyclical unemployment; an increase in structural unemployment D. an increase in structural unemployment; an increase in cyclical unemployment

ok

Foreign and domestic saving is nearly absent in the poorest countries of the world because savers worry their money cannot be protected by contract law. With low saving there is little investment into new capital or technology. (Answer=ok)

Exchange Rate Determination in the Short Run

Foreign exchange markets operate on the same principals as other markets: as the price of a dollar (the dollar exchange rate) falls, suppliers decrease the number of dollars they bring to market and demanders increase the number of dollars they want to buy.

total business revenues. (Total business revenues include previously sold goods as well as new goods, plus intermediate goods, so total business revenues overstate GDP.)

GDP can be measured as each of the following EXCEPT: A. the market value of production. B. total expenditure on final goods and services. C. incomes of capital and labor. D. total business revenues.

$10,000; 4%; four years (The principal is the original amount borrowed, i.e., $10,000 in this case. The annual payment is $400, which is the principal times the annual interest rate. At maturity, which is after four years, the bondholder gets his/her money back plus the annual interest payment.)

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ___, the coupon rate is ____, and the term of this bond is _____. A. $400; 40%; four years B. $10,000; 4%; four years C. $10,000; $400; 4% D. $10,400; 4%; four years

Shannon is a highly skilled software engineer who recently left her job because she wanted to move closer to her family. She has been searching for a job for two weeks and has had three offers she is considering but has not yet accepted. Shannon would be considered ________ unemployed.

Frictional

Short-term unemployment related to matching of workers and jobs is

Frictional unemployment

it is national saving, not household saving, that allows an economy to accumulate new capital. (U.S. household savings rates have fallen in the past 20 years. But if government or business saving picks up the slack, the national saving rate could be unaffected by falling household saving.)

From a macroeconomic perspective, the problem of low household saving has probably been overstated because: A. household saving is not related at all to an economy's ability to accumulate new capital. B. household saving has been increasing steadily over the last three decades. C. it is national saving, not household saving, that allows an economy to accumulate new capital. D. household saving represents a smaller share of national saving than does public saving.

Consumption expenditure (formula)

GDP = consumption + investment + government expenditure + exports - imports.

Real GDP

GDP calculated using prices from base year vs. current year prices

final goods and services. (For government expenditure to be added to GDP, they must be purchases of final goods and services.)

Government expenditures include spending by federal, state, and local governments on: A. consumer durables, nondurables, and services. B. stocks, bonds, and other financial instruments. C. capital goods, residential housing, and changes in inventories. D. final goods and services.

Structural policy

Government policies aimed at changing the underlying structure, or institutions, of the nation's economy

Stabilization Policies

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps

Contractionary Policies

Government policy actions designated to reduce planned spending and output.

Expansionary Policies

Government policy actions intended to increase planned spending and output

Physical Capital

Government policy of building infrastructure, like bridges and dams, promotes _________________ that is essential to economic growth.

decrease the demand for labor. (If government regulations increase, e.g., like requiring drug testing for all workers, it decreases demand for workers. Businesses sometimes replace workers with machines as a result.)

Government regulations that increase the cost to the employer of hiring workers will: A. increase the demand for labor. B. decrease the demand for labor. C. increase the supply of labor. D. decrease the supply of labor.

market value; goods and services

Gross Domestic Product (GDP) equals the (BLANK) of final (BLANK) produced within a country during a given period of time.

measures the value of the aggregate production of goods and services in a country during a given time period.

Gross domestic product A) includes all the goods and none of the services produced in an economy in a given time period. B) measures the value of the aggregate production of goods and services in a country during a given time period. C) measures the value of labor payments generated in an economy in a given time period. D) is generally less than federal expenditure in any time period.

market value of all final goods and services

Gross domestic product is the total ________ produced within a country in a given time period. A) market value of all final and intermediate goods and services B) market value of all goods and services C) amount of final and intermediate goods and services D) market value of all final goods and services

Congress created the Federal Deposit Insurance Corporation (FDIC) in 1934 to

Guarantee the repayment of deposits equal to or less than 250,000

increase; increase (Increased Mexican real GDP increases Mexican demand for American goods and increases the demand for dollars in the foreign exchange market as Mexicans trade pesos for dollars. This increases the exchange rate of pesos per dollar.)

Holding all else constant, an increase in Mexican real GDP will ______ the demand for dollars in the foreign exchange market and ______ the equilibrium Mexican peso/U.S. dollar exchange rate. A. increase; increase B. increase; decrease C. decrease; decrease D. decrease; increase

decrease investment. (As tax rates rise, investors realize lower returns on investment. Thus, investors are less inclined to invest.)

Holding other factors constant, an increase in the tax rate on revenue generated by capital will: A. increase national saving. B. decrease national saving. C. increase investment. D. decrease investment.

increase; increase

Holding other factors constant, if computers allow factory workers to manufacture more products per hour, then the real wages of factory workers will ______ and employment of factory workers will _____. A. increase; increase B. increase; decrease C. decrease; not change D. decrease; increase

decrease; decrease

Holding other factors constant, if food prices decline relative to the prices of other products, then the real wages of agricultural workers will ______ and employment of agricultural workers will _____. A. increase; increase B. increase; decrease C. decrease; not change D. decrease; decrease

increase; increase (If oil prices rise, then producers of oil will be more inclined to hire workers and there will be more demand for oil workers (demand shifts right). As a result, wages and employment will increase.)

Holding other factors constant, if oil prices rise relative to the prices of other products, then the real wages of oil workers will ______ and employment of oil workers will _____. A. increase; increase B. increase; decrease C. decrease; not change D. decrease; increase

decrease; increase

Holding other factors constant, if terrorist attacks increase the desire for precautionary saving, then the real interest rate will ______ and the equilibrium quantity of saving and investment will _______. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase

increases; increases

Holding other factors constant, technological progress ______ the real wage and ______ employment. A. increases; increases B. increases; decreases C. increases; does not change D. decreases; increases

from 2001 to 2006; from 2007 to 2009 (A bubble emerged in the U.S. housing market from 2001-2006. This bubble burst in 2006 and housing prices fell dramatically.)

House prices in the U.S. increased dramatically _____, and decreased dramatically ______. A. from 2001 to 2006; from 2007 to 2009 B. from 2007 to 2009; from 2001 to 2006 C. from 2001 to 2009; from 2006 to 2007 D. from 2006 to 2009; from 2001 to 2006

is low relative to other countries and has been declining since the mid-1980s.

Household saving in the U.S.: A. is low relative to previous periods, but approximately equal to the rate in other countries. B. is low relative to other countries, but has increased during the 1990s. C. had decreased since the 1960s, but, because the economy was so strong during the 1990s, has recently increased. D. is low relative to other countries and has been declining since the mid-1980s.

Four users of final goods

Households Firms Government Foreigners

-Fed sells bonds to the public. -Supply of bonds increases. -Price of bonds decrease. -Interest rate increases.

How does the Fed decrease the money supply?

-Fed buys bonds from the public. -Demand for bonds increases. -Price of bonds increase. -Interest rate decreases.

How does the Fed increase the money supply?

-Interest rates go down. -Consumption and Investment go up. -PAE goes up. -Y (output) goes up via the multiplier.

How to fix a recessionary gap.

-Interest rates go up. -Consumption and Investment go down. -PAE goes down. -Y (output) goes down via the multiplier.

How to fix an expansionary gap.

Real wage and employment decrease

How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? A sharp increase in the price of gas causes many commuters to switch to mass transit.

Real wage and employment increase

How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? Demand for the type of car made by the plant increases.

Six Determinants of Average Labor Productivity

Human capital Physical capital Land and other natural resources Technology Entrepreneurship and management Political and legal environment

an extremely high rate of inflation.

Hyperinflation is: A. frequently experienced in the United States. B. very erratic inflation. C. an extremely high rate of inflation. D. an extremely low rate of inflation.

$15,000.

If 50 percent of the population in a country is employed and average labor productivity equals $30,000, then real GDP per person equals: A. $15,000. B. $30,000. C. $50,000. D. $60,000.

leave importing industries and find jobs in exporting industries

If international trade lowers the wages of workers in importing industries and increases the wages of workers in exporting industries then this creates an incentive for workers to

Exchange Rate Determination in the Short Run

If Asian restaurants reduce their demand for French champagne and switch to U.S. wine, the restaurants need fewer euros and more dollars. This increases world demand for dollars and the exchange rate for the U.S. dollar will rise.

Exchange Rate Determination in the Short Run

If U.S. stocks are perceived to have become riskier, foreign investors will look to other countries to make financial investments. This reduces the world demand for dollars and the exchange rate for the U.S. dollar will fall.

$7 (Just the value of the final good, the $7 pizza, is included in GDP.)

If a pizza maker pays $1 for tomatoes, $1 for cheese, $2 for sausage, and sells the pizza made with these ingredients for $7, then each pizza sold contributes how much to GDP? A. $3 B. $4 C. $7 D. $11

the actual unemployment rate equals the natural rate of unemployment.

If actual GDP equals potential GDP, then: A. the actual unemployment rate is greater than the natural rate of unemployment. B. the actual unemployment rate equals the natural rate of unemployment. C. the actual unemployment rate is less than the natural rate of unemployment. D. there is a recessionary gap.

output gaps would not exist. (If prices adjusted immediately for all goods and services, inventories would stay at their desired level and output gaps would not exist.)

If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services: A. output gaps would not exist. B. output gaps would be positive more often than they would be negative. C. cyclical unemployment would be positive. D. potential GDP would rise much more quickly.

$20,000 (Just the value of the final good, the $20,000 car, is included in GDP.)

If an automobile manufacturer pays $200 for a car windshield, $400 for four car tires, $100 for a car CD player, and sells cars made with these parts for $20,000, then each car the automobile manufacturer sells contributes how much to GDP? A. $19,300 B. $20,000 C. $20,200 D. $20,700

neither the borrower nor the lender are hurt (When inflationary expectations are fulfilled, neither the lender nor the borrower is hurt by inflation.)

If both the lender and borrower agree on an 8% interest rate, both expect a 4% inflation rate, and inflation turns out to be 4%, then ______ by the inflation. A. the borrower is hurt and the lender gains B. the borrower gains and the lender is hurt C. neither the borrower nor the lender are hurt D. both the borrower and lender are hurt

increased by $15 billion. (The difference between end-of-year inventories and beginning-year inventories is counted as change in (inventory) investment.)

If business inventories equal $40 billion at the beginning of the year and $55 billion at the end of the year, then, assuming no other changes, GDP must have: A. decreased by $15 billion. B. increased by $15 billion. C. increased by $40 billion. D. increased by $55 billion.

ok

If consumers become less confident about the future they will decrease spending and the aggregate demand curve shifts leftward. Output falls and this generates a recessionary output gap. (Answer=ok)

private saving decreases. (Household saving is a sub-category of private saving. If consumption spending goes up with income constant, then household saving must go down. In this case, private saving goes down by $10 million.)

If consumption spending increases by $10 million with no changes in net taxes, then: A. public saving increases. B. public saving decreases. C. private saving increases. D. private saving decreases.

Real Costs of Inflation to Society

If inflation is unanticipated, parties to long-term contracts are uncertain about the value of repaid dollars, so these contracts are sometimes not written. Note that income will only lose purchasing power if it is not adequately adjusted for inflation.

is no longer available to stabilize the domestic economy.

If monetary policy is used to set the market equilibrium value of the exchange rate equal to the official value, it A. is no longer available to stabilize the domestic economy. B. will be unable to stabilize the market equilibrium value of the exchange rate. C. will simultaneously stabilize the domestic economy. D. will increase the rate of growth in the economy.

Supply and Demand in the Labor Market

If oil prices rise, then producers of oil will be more inclined to hire workers and there will be more demand for oil workers (demand shifts right). As a result, wages and employment will increase.

0.05

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 35,000, what real interest rate must the Federal Reserve set to bring the economy to full employment? A. 0.02 B. 0.03 C. 0.04 D. 0.05

3%

If planned aggregate spending in an economy can be written as PAE = 15,000+0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full-employment?

increased; 250 (There is an expansionary gap of 1,000, the amount by which equilibrium output exceeds Y*. An mpc of 0.8 means that households will reduce autonomous spending by only 80 percent of any increase in taxes. To close the output gap, autonomous expenditure must decrease by 1,000 ÷ 5 = 200, so the increase in taxes that is needed is 200 ÷ 0.80 = 250.)

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, the mpc equals 0.8, and potential output (Y*) equals 9,000, then taxes must be ______ by approximately ______ to eliminate any output gap. A. decreased; 250 B. decreased; 200 C. increased; 250 D. increased; 200

overstates; underestimated (The Boskin Commission said the CPI overstates the "true" inflation rate. Since real wages are calculated by dividing nominal wages by the CPI, then the calculated real wages are too low if the CPI is too high.This underestimates living standards.)

If the Boskin Commission's conclusion that the CPI ______ the "true" inflation rate is correct, then the true improvement in living standards over time has been _____. A. understates; overestimated B. understates; underestimated C. overstates; underestimated D. measures; overestimated

decreased.

If the CPI equaled 1.00 in 1995 and 1.65 in 2005 and a typical household's income equaled $35,000 in 1995 and $40,000 in 2005, then between 1995 and 2005, real household income: A. increased. B. decreased. C. was constant. D. may have either increased or decreased.

fewer; increase

If the Federal Reserve is currently paying 1% interest on bank reserves, but then reduces that interest rate to 0.5%, banks may decide to hold ______ reserves, and the money supply may _____. A. more; increase B. more; decrease C. fewer; increase D. fewer; decrease

Diminishing Returns to Labor

If the amount of capital and other inputs in use is held constant, then the greater the quantity of labor already employed, the less each additional worker adds to production

real interest (The nominal rate is 7% and the inflation rate is 3%. The difference between these is the real interest rate of 4%.)

If the bank agrees to make a loan at a 7% interest rate and the inflation rate is 3%, then 4% is the ______ rate. A. nominal interest B. real interest C. hyperinflation D. disinflation

7 percent. (The "natural rate of unemployment" is the part of the total unemployment rate that is attributable to frictional and structural (not cyclical) unemployment only.)

If the cyclical rate of employment equals 1 percent and the actual rate of unemployment equals 8 percent, then the natural rate of unemployment must equal: A. -7 percent. B. 9 percent. C. 12.5 percent. D. 7 percent.

$40 million. (When reserves increase by $10 million, bank deposits will increase by a multiple determined by the desired reserve/deposit ratio. In this case, the multiplier is 1/0.25 = 4, so the $10 million supports a $40 million increase in bank deposits.)

If the desired reserve/deposit ratio is 0.25 and the banking system receives an additional $10 million in reserves, bank deposits will increase by: A. $10 million. B. $250 million. C. $40 million. D. $4 million.

appreciated; depreciated

If the exchange rate moves from 10 Mexican pesos per U.S. dollar to 8 Mexican pesos per U.S. dollar, then the Mexican peso has __________ and the U.S. dollar has _____________.

increase; decrease (If the work setting becomes more favorable outside of poultry processing plants, then the supply of workers will shift left and there will be more competition for the remaining poultry processing workers, causing wages will increase and employment to decrease.)

If the existence of alternative opportunities makes people become less willing to work in poultry processing plants, then the real wage of unskilled workers in poultry processing plants is predicted to ______ and the employment of unskilled workers in poultry processing plants is predicted to ______. A. increase; increase B. increase; decrease C. increase; not change D. decrease; decrease

7%. (The natural rate of unemployment is the part of the total unemployment rate that is attributable to frictional and structural unemployment; in this case it is 3 + 4 = 7 percent.)

If the frictional rate of unemployment equals 3 percent, the structural rate of unemployment equals 4 percent, and the cyclical rate of unemployment equals -2 percent, then the natural rate of unemployment equals: A. 1%. B. 5%. C. 6%. D. 7%.

increasing; 2.0

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by _____________ the real interest rate by ____________ percent

increasing; 2.0 (To eliminate a 1,000 unit expansionary gap when the income-expenditure multiplier is 2.5, a reduction in autonomous spending of 400 units is needed. If each percent rise in real interest rates decreases autonomous spending by 200 units, then a 2 percent increase is needed.)

If the income-expenditure multiplier equals 2.5 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ______ the real interest rate by ______ percentage points. A. increasing; 2.5 B. increasing; 4.0 C. increasing; 2.0 D. decreasing; 2.0

more; demand for (When the interest rate in the U.S. rises, foreigners become more interested U.S. financial assets which results in higher demand for U.S. currency.)

If the interest rate in the U.S. rises, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will rise. A. more; demand for B. more; supply of C. less; demand for D. less; supply of

higher-skilled; lower-skilled

If the introduction of computers increases the marginal product of higher-skilled workers relative to that of lower-skilled workers relative to that of lower-skilled workers, then the demand for ________________ workers will increase relative to the demand for _______________ workers

Structural Unemployment Decrease

If the minimum wage is decreased, employers will want to hire more workers or increase the quantity of labor demanded. This opens job opportunities for those who are looking for work.

0.712

If the nominal exchange rate is 4 Israeli shekels per U.S. dollar, and 0.178 Jordanian dinars per Israeli shekel, then there are _____________ Jordanian dinars per U.S. dollar

demand for labor by the XYZ-TV Company decreases. (When prices fall for the goods and services produced by workers, the demand for labor falls too.)

If the price of TVs produced by the XYZ-TV Company falls from $1,000 to $750 per TV set, then the: A. supply of labor to the XYZ-TV Company increases. B. supply of labor to the XYZ-TV Company decreases. C. demand for labor by the XYZ-TV Company increases. D. demand for labor by the XYZ-TV Company decreases.

$700,000. (The coupon rate is not directly connected to the inflation rate. In this case, the annual coupon payment is $700,000, which is the principle times the annual interest rate, i.e., $10,000,000*0.07 = $700,000.)

If the principal amount of a bond is $10,000,000, the coupon rate is 7%, and the inflation rate is 4%, then the annual coupon payment made to the holder of the bond is: A. $70,000. B. $300,000. C. $400,000. D. $700,000.

sell; fall; rise (When the quantity supplied of money is less than the quantity demanded, people sell bonds to raise cash. This lowers bond prices and causes nominal interest rates to rise.)

If the quantity supplied of money is less than the quantity demanded of money, people will ______ bonds which will cause bond prices to ______ and the nominal interest rate to ______ until the quantity demanded and quantity supplied of money are equal. A. sell; fall; rise B. sell; fall; fall C. sell; rise; fall D. buy; fall; rise

increased by 14 percent.

If the total expenditures of a typical family equaled $35,000 per year in 2000 and the exact same basket of goods and services cost $40,000 in the year 2005, the family's cost of living: A. increased by 14 percent. B. decreased by 12.5 percent. C. decreased by 14 percent. D. increased by 12.5 percent.

Supply and Demand in the Labor Market

If the work setting becomes more favorable outside of poultry processing plants, then the supply of workers will shift left and there will be more competition for the remaining poultry processing workers, causing wages will increase and employment to decrease.

ok

If there is no output gap, the economy is at full-employment equilibrium. In this case there is no tendency for the price level to change. (answer=ok)

Government Regulations

If this increases, e.g., like requiring drug testing for all workers, it decreases demand for workers. Businesses sometimes replace workers with machines as a result.

Law of One Price

If transportation costs are relatively small, the price of an internationally traded commodity must be the same in all locations

The average number of hours worked per week in each country

If you knew that two countries had the same level of real GDP per person, what additional piece of information would help you determine in which country people had a better standard of living? A. The total physical volume of output for each country B. The population of each country C. The average number of hours worked per week in each country D. The average level of prices in each country

Trends in Real Wages and Employment

Improvements in productivity, which raise the demand for labor, account for the bulk of the increase in U.S. real wages over the last century. The stagnation in real wage growth that has occurred in recent decades is the result of slower growth in labor demand, which was caused in turn by a slowdown in the rate of productivity improvement, and of more rapid growth in labor supply. Rapid growth in labor supply, caused by such factors as immigration and increased labor force participation by women, also has contributed to the continued expansion of employment. Recently, however overall labor force participation, has dramatically decreased

0.80Y. (Induced expenditure is expenditure which is directly related to income. In this case, because C = 700 + 0.80(Y - T), we have PAE = C + I + G + NX = [700 + 0.80(Y - 50)] + 100 + 100 + 40 = 700 + 0.80Y - 40 + 100 + 100 + 40 = 900 + 0.80Y. Induced expenditure is 0.80Y.)

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Induced expenditure equals: A. 0.20Y. B. 990 + 0.20Y. C. 0.80Y. D. 900 + 0.80Y.

$21,000-to-$31,500 (The inflation rate between 2005 and 2006 was: (1.26 - 1.20) / 1.20 = 0.05 or 5%, so the tax bracket needs to be adjusted by that amount: $20,000*1.05 = $21,000 and $30,000*1.05 = $31,500.)

In Econoland in 2005, people with incomes between $20,000 and $30,000 paid 12% of their income in taxes and people with incomes between $30,001 and $40,000 paid 15%. In 2005, the CPI in Econoland equaled 1.20, and it increased to 1.26 in 2006. If the government of Econoland wants to keep households with a given real income from being pushed up into a higher tax bracket by inflation, the $20,000-to-$30,000 bracket will be changed in 2006 to: A. $15,873-to-$23,810 B. $21,000-to-$31,500 C. $24,000-to-$37,800 D. $25,200-to-$37,800

recessionary; -4 ((Since Macroland's actual GDP is less than its potential GDP, it has a recessionary gap. The size of the gap is [(Y - Y*) ÷ Y*] ×100, or [($19.2 billion - $20 billion) ÷ $20 billion] ×100 = -4 percent.))

In Macroland potential GDP equals $20 billion and real GDP equals $19.2 billion. Macroland has a(n) ______ gap equal to ______ percent of potential GDP. A. expansionary; 8 B. expansionary; 4 C. recessionary; -8 D. recessionary; -4

$50,000,000; $55,000,000

In Macroland there is $10,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10%, deposits in Macroland equal ______ and the money supply equals _______. A. $50,000,000; $60,000,000 B. $55,000,000; $55,000,000 C. $50,000,000; $55,000,000 D. $100,000,000; $100,000,000

increase to 4,667

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ___________ econs, assuming that the public does not wish to change the amount of currency it holds.

(790 - 700r)

In a certain economy, the components of planned spending are given by: C= 500 + 0.8(Y - T) - 300r Ip= 200 - 400r G= 200 NX= 10 T= 150 Given the information about the economy above, which expression below gives autonomous expenditures

Induced expenditures would not change

In a certain economy, the components of planned spending are given by: C= 500+0.8(Y-T) - 300r Ip= 200 - 400r G= 200 NX= 10 T= 150 Given the information about the economy above, what would be the impact on induced expenditures of a one-percentage point increase in the real interest rate?

Autonomous expenditures would decrease by 7 units. (Recall that PAE = C + Ip + G + NX. Substituting into the equation gives PAE = 500 + 0.8(Y - 150) - 300r + 200 - 400r + 200 + 10. Collecting terms yields PAE = [790 -700r] + 0.8Y. Autonomous expenditures are those that are independent of Y: [790 - 700r]. Thus, a one-percentage-point increase in r would decrease PAE by 700 × (0.01) = 7.)

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300 Ip = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, what would be the impact on autonomous expenditures of a one-percentage-point increase in the real interest rate? A. Autonomous expenditures would increase by 35 units. B. Autonomous expenditures would decrease by 70 units. C. Autonomous expenditures would decrease by 35 units. D. Autonomous expenditures would decrease by 7 units.

[790 - 700r] + 0.8Y (Recall that PAE = C + Ip + G + NX. Substituting into the equation gives PAE = 500 + 0.8(Y - 150) - 300r + 200 - 400r + 200 + 10. Collecting terms yields PAE = [790 -700r] + 0.8Y.)

In a certain economy, the components of planned spending are given by: C = 500 + 0.8(Y - T) - 300r Ip = 200 - 400r G = 200 NX = 10 T = 150 Given the information about the economy above, which expression below gives planned aggregate expenditure (PAE)? A. [790 - 700r] + 0.8Y B. [790 - 700r] C. [910 - 700r] D. [910 - 700r] + 0.8Y

output; prices (In the short run, total spending can influence real variables like output. In the long run, however, total spending can only influence nominal variables like prices.)

In the short-run total spending affects ____, and in the long-run total spending affects ______. A. prices; output B. prices; unemployment C. output; prices D. output; unemployment

raise; expansionary

In an economy where planned aggregate spending is given by PAE = 5,500 + 0.6Y - 20,000r, the interest rate is currently 2 percent. If potential output equals 8,000, the central bank must ______________ the interest rate to close the _____________ gap.

national (National saving (S) equals Y - C - G. Since Y = C + I + G, we can substitute for Y in the equation, and S = C + I + G - C - G = I, so S = I.)

In an economy without international trade, investment must equal ______ saving. A. national B. private C. public D. life-cycle

real interest rate; exchange rate

In an open economy with flexible exchange rates, monetary policy affects consumption and investment by changing the _____ and affects net exports by changing the _____. A. inflation rate; unemployment rate B. exchange rate; real interest rate C. growth of domestic real GDP; growth of foreign real GDP D. real interest rate; exchange rate

domestic saving, domestic investment, and net capital inflows. (The real interest rate is determined by the interaction of savers and investors. In an open economy, the real interest rate is determined by domestic saving, domestic investment and net capital inflows from abroad.)

In an open economy, the domestic real interest rate is determined by: A. domestic saving, domestic investment, and net capital inflows. B. domestic investment. C. domestic saving and domestic investment. D. domestic saving and net capital inflows.

sells; decreases (When the Federal Reserve sells government bonds in the open market, there is less currency in the hands of the banking community as some money must be used buy these bonds. As a consequence the amount of bank reserves decreases.)

In an open-market sale the Federal Reserve ______ government bonds and the supply of bank reserves ____. A. buys; increases B. buys; decreases C. sells; increases D. sells; decreases

the entire economy. (The NBER Business Cycle Dating Committee looks for evidence from the entire economy, not just individual sectors.)

In determining the beginning of recessions, the NBER Business Cycle Dating Committee looks for evidence of decline in: A. specific sectors of the economy. B. the rate of inflation. C. the entire economy. D. the stock market.

Aggregate Supply Curve

In general, increases in aggregate demand allow firms to both sell their output at higher prices and sell more output.

Increases Wage Inequality

In industries where U.S. foreign competition is weak, workers see increasing wages due to increased demand for such workers with globalization. Conversely, in industries where foreign competition is strong, U.S. workers see falling real wages due to decreased demand for such workers. What does this result in?

disposable income.

In the Keynesian model, consumption depends on: A. whether the government has a budget surplus or deficit. B. potential output. C. the natural rate of unemployment. D. disposable income.

1960-1973. (The decade of the 1960's, and spilling into the 70's, saw large increases in average real wages.)

In the United Sates, the average annual rate of growth of real wages was fastest in the period: A. 1960-1973. B. 1960-1996. C. 1960-2001. D. 1973-1996.

declined; increased (Unskilled workers in the United States have lost ground to global competition whereas the highest skilled workers have gained.)

In the United States the real wages of the least-skilled, least educated workers have ______ and the wages of best-educated, highest skilled workers have ______. A. increased; increased B. declined; increased C. increased; declined D. declined; remained constant

increases short-run equilibrium output. (A tax cut stimulates the economy by increasing consumption, which increases short-run equilibrium output.)

In the basic Keynesian model, a tax cut: A. reduces short-run equilibrium output. B. increases short-run equilibrium output. C. reduces potential output. D. increases potential output.

reduces short-run equilibrium output.

In the basic Keynesian model, a tax increase: A. reduces short-run equilibrium output. B. increases short-run equilibrium output. C. reduces potential output. D. increases potential output.

Consumer Price Index

In the computation of this, the basket of goods and services is fixed.

in industrial countries including the United States. (The United States and most industrial countries around the world have seen substantial increases in average real wages over the past 100 years.)

In the twentieth century, average real wages have risen substantially: A. only in the United States. B. in industrial countries excluding the United States. C. in industrial countries including the United States. D. in neither the United States nor other industrial countries.

price adjustment mechanism

In the event of unemployment, prices, wages, and interest rates would fall which would increase consumption, production and investment and quickly return the economy back to its full employment equilibrium.

ok

In the long run, changes in total spending do not influence real variables like economic capacity, but only influence nominal variables like inflation. (Answer=ok)

inflation. (In the long run, changes in total spending do not influence real variables like economic capacity, but only influence nominal variables like inflation.)

In the long run, total spending only influences: A. actual output. B. potential output. C. productive capacity. D. inflation.

Price

In the market for labor, the _______ is the real wage paid to workers in exchange for their services.

real wage. (In the market for labor, the "price" is the real wage paid to workers in exchange for their services.)

In the market for labor, the price of labor is the: A. same as price of the product produced by the labor. B. real wage. C. marginal product of labor. D. number of hours employed per year.

The Self-Correcting Economy and Stabilization Policy

In the short run, a large increase in government purchases stimulates the economy, creating an expansionary gap and higher inflation. In the long run, the economy will correct as AS shifts leftward and output falls back to its potential level.

ok

In the short run, aggregate demand determines output. In the long run, however, the economy's ability to produce, or its potential output, determines output. (Answer=ok)

ok

In the short run, total spending can influence real variables like output. In the long run, however, total spending can only influence nominal variables like prices. (Answer=ok)

increased by $1.33 billion.

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be: A. increased by $1 billion. B. decreased by $1 billion. C. increased by $1.33 billion. D. decreased by $1.33 billion.

total spending; potential output (In the short run, aggregate demand determines output. In the long run, however, the economy's ability to produce, or its potential output, determines output.)

In the short-run ______ determines output, and in the long-run ______ determines output. A. potential output; prices B. potential output; total spending C. total spending; potential output D. total spending; prices

Saving

Increases wealth because it either adds to assets or reduces liabilities. Wealth is defined as assets minus liabilities. Therefore, increasing assets when liabilities are unchanged, or decreasing liabilities when assets are unchanged, will increase wealth

Labor Supply (Households)

Labor Supply curve is upward sloping - Positive relationship between wage and employees supplied - More people are willing to work at higher wages

two thirds (Labor income is, by far, the biggest category of earned income.)

Labor income in the U.S. equals approximately ______ of GDP. A. one third B. two fifths C. one half D. two thirds

M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1. (M2 is a broader measure of money than M1, thus it contains assets that are less liquid than M1. Note that everything included in M1 is by definition also included in M2, but the opposite is not true.)

M1 differs from M2 in that: A. M1 includes currency and balances held in checking accounts, which are not included in M2. B. M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1. C. M1 is a broader measure of the money supply than M2. D. the assets in M2 are more liquid than the assets in M1.

Transparency

Monetary policy credibility is enhanced by this. One way to achieve this is to tell the public what you intend to do, like announcing inflation targets.

M1 vs. M2

M2 is a broader measure of money than M1, thus it contains assets that are less liquid than M1. Note that everything included in M1 is by definition also included in M2, but the opposite is not true.

GDP per capita is positively associated with various measures of well-being, name them(3)

Material standard of living Health and life expectancy Education

Money has three Principles

Medium of exchange Unit of Account Store of Value

keeping wages above the market-clearing level. (Minimum wage laws distort the efficient working of labor markets by keeping wages above market-clearing levels. Thus, these laws contribute to structural unemployment.)

Minimum wage laws contribute to structural unemployment by: A. keeping wages above the market-clearing level. B. keeping wages below the market-clearing level. C. allowing unemployed workers to search longer or less intensively for jobs. D. forcing unemployed workers to take the first job offered to them.

_______ policy uses changes in the money supply

Monetary

ok

Monetary policy can be changed quickly by the Fed whereas fiscal policy often goes through slow-moving political discussion. But after monetary policy is made, sometimes it takes a long time to work because households and businesses are often slow to react to interest rate changes. (Answer=ok)

doing so presupposes that the Federal Reserve is better than financial-market professionals at identifying bubbles. ('Bubbles' are hard to identify. It can be argued that the Federal Reserve is no better at identifying bubbles than financial professionals.)

One problem with using monetary policy to address "bubbles" in asset markets is that: A. doing so presupposes that the Federal Reserve is better than financial-market professionals at identifying bubbles. B. monetary policy is well-suited for addressing the problem of inappropriately high asset prices. C. reducing the real interest rate to deal with the bubble could lead to inflation. D. the Federal Reserve is not interested in stabilizing output.

non-market production. (Real GDP does not measure things that are not traded in conventional markets, such as mowing your own lawn or cooking your own dinner.)

One shortcoming of real GDP as an indicator of society's social well-being is that it fails to take into account the: A. growth in productivity. B. increase in the quantity of goods. C. non-market production. D. change in the price level.

GDP

Only goods and services traded in regular markets are counted in

high; high (If savings rates are high and the annual earnings on those savings are high, it results in large accumulation of wealth over time.)

Other things equal, the combination of a ______ saving rate and a ______ real interest rate will result in the largest accumulation of wealth over time. A. high; high B. high; low C. high; zero D. low; high

Suppose we have a one-time doubling of the gas price

Overall price level and inflation increase by a small amount The increase in the relative price of gasoline is large

Autonomous expenditure + induced expenditure =

PAE

Quantity Equation

PY = MV

greater than $10,000.

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6 percent coupon rate. One year later, after receiving the first coupon payment, Pat sells the bond. If the current one-year interest rate on government bonds is 5 percent, then the price Pat receives is: A. $10,000. B. $500. C. greater than $10,000. D. less than $10,000.

Which of the following is an example of the life-cycle motive for saving?

Pat puts $400 per month in his 401(k) retirement account.

discouraged (Discouraged workers are people who say they would like to have a job but have not made an effort to find one in the past four weeks)

People who say that they would like to have a job, but have not made an effort to find a job in the past four weeks, are called ______ workers. A. unemployed B. involuntary part-time C. discouraged D. chronically unemployed

Discouraged Workers

People who say they would like to have a job but have not made an effort to find one in the past four weeks because they believe there are no jobs available for them

anchored

People's expectations of future inflation that do not change even if inflation rises temporarily are called _____ inflationary expectations. A. aggregate B. average C. anchored D. autonomous

Inflation Rate

Percent changes in the CPI is the most popular measure of the

slowly; large

Policymakers' use of stabilization policy to eliminate output gaps is more appropriate when an economy self corrects very _________ and when the output gap is very ____________.

The amount of output that an economy can produce when using its resources at normal rates is

Potential output (Y*)

physical volume; current dollar value (Real GDP measures the physical volume and nominal GDP measures the current dollar value.)

Real GDP measures the ______ of production; nominal GDP measures the ______ of production. A. current dollar value; physical volume B. current dollar value; current dollar value C. current dollar value; market value D. physical volume; current dollar value

if the share of population employed and/or average labor productivity increases.

Real GDP per person can increase: A. only if the share of the population employed increases. B. only if the share of the population employed decreases. C. only if average labor productivity increases. D. if the share of population employed and/or average labor productivity increases.

$9,080 (For Alpha, the future value equation is: Future GDP = $2,000*(1.01)^100 = $5,409.6. For Omega, the future value equation is: Future GDP = $2,000*(1.02)^100 = $14,489.3. The difference is $9,079.7 or $9,080.)

Real GDP per person in both Alpha and Omega is equal to $2,000. Over the next 100 years, real GDP per person grows at a 1 percent annual rate in Alpha and at a 2 percent annual rate in Omega. After 100 years, real GDP per person in Alpha is ______ smaller than real GDP per person in Omega. A. $2,000 B. $5,410 C. $9,080 D. $11,080

allowing the Fed to pursue accommodating policy. (The Fed does not desire to pursue accommodating policy whereas it does desire improving market functioning, making business planning easier and reducing resources devoted to managing inflation risks.)

Reduced macroeconomic variability in the U.S. since the 1981 has all of the following benefits EXCEPT: A. improving market functioning. B. making business planning easier. C. reducing resources devoted to managing inflation risks. D. allowing the Fed to pursue accommodating policy.

there is an expansionary gap. (Short-run equilibrium output occurs where PAE crosses the 45-degree line, at output level 4,000. Since potential output (Y*) is 3,000, there is an expansionary gap.)

Refer to the figure above. Based on the Keynesian cross diagram, at short-run equilibrium output, A. there is a recessionary gap. B. there is an expansionary gap. C. output equals potential output. D. firms will be producing more than they can sell.

an expansionary; raise (Along the r = 1% expenditure line, the equilibrium output is 7,000 which results in an expansionary gap of 2,000. To close this gap the Fed must raise real interest rates.)

Refer to the figure above. Based on the diagram, if potential output equals 5,000 and the real interest rate is 1%, then there is ______ gap and the Fed must ______ the real interest rate so that output will equal potential output. A. a recessionary; raise B. a recessionary; reduce C. an expansionary; reduce D. an expansionary; raise

no output; not change (Along the r = 3% expenditure line, the equilibrium output is 5,000 which results in no output gap. The Fed must not change real interest rates.)

Refer to the figure above. Based on the diagram, if potential output equals 5,000 and the real interest rate is 3%, then there is ______ gap and the Fed must ______ the real interest rate so that output will equal potential output. A. a recessionary; raise B. a recessionary; reduce C. no output; not change D. an expansionary; raise

a recessionary; reduce (Along the r = 5% expenditure line, the equilibrium output is 3,000 which results in a recessionary gap of 2,000. To close this gap the Fed must reduce real interest rates.)

Refer to the figure above. Based on the diagram, if potential output equals 5,000 and the real interest rate is 5%, then there is ______ gap and the Fed must ______ the real interest rate so that output will equal potential output. A. a recessionary; raise B. a recessionary; reduce C. no output; not change D. an expansionary; raise

a recessionary; reduce (Along the r = 6% expenditure line, the equilibrium output is 4,000 which results in a recessionary gap of 4,000. To close this gap, the Fed must reduce real interest rates.)

Refer to the figure above. Based on the diagram, if potential output equals 8,000 and the real interest rate is 6%, then there is ______ gap and the Fed must ______ the real interest rate so that output will equal potential output. A. a recessionary; raise B. a recessionary; reduce C. no output; not change D. an expansionary; raise

2. (The income-expenditure multiplier is the effect of a one-unit increase in autonomous expenditure on short-run equilibrium output. The diagram reveals that every increase in autonomous expenditures (the vertical intercept) of 200 leads to an increase in short-run equilibrium GDP of 400. This implies an income-expenditure multiplier of 2.)

Refer to the figure above. Based on the figure, the income expenditure multiplier equals: A. 0.5. B. 2. C. 5. D. 200.

A and C and E (Points A, C and E are local minimums in the business cycle, thus they are troughs.)

Refer to the figure above. Based on the figure, which point or points indicate troughs of the business cycle? A. A and C and E B. B and D C. only A D. only C

purchases; 900 (The nominal interest rate is determined by the intersection of the money supply and money demand curves. If the Fed wants the interest rate to be 1%, it must purchase securities to increase the money supply to 900.)

Refer to the figure above. If the Federal Reserve wants to set the nominal interest rate at 1%, it must conduct open market ______ to set the money supply at _____. A. purchases; 300 B. sales; 100 C. purchases; 900 D. sales; 900

could occur if AS shifts downward and to the right. (Long-run equilibrium could occur under two conditions: if AS shifts to downward and to the right or if AD shifts to the right.)

Refer to the figure above. Long-run equilibrium in this economy: A. will be impossible to achieve. B. could occur if AD shifts downward to the left. C. could occur if AS shifts downward and to the right. D. will occur only if AD shifts upward to the right.

could occur if AS shifts upward and to the left. (Long-run equilibrium could occur under two conditions: if AS shifts upward and to the left or if AD shifts downward to the left.)

Refer to the figure above. Long-run equilibrium in this economy: A. will be impossible to achieve. B. could occur if AD shifts upward to the right. C. could occur if AS shifts upward and to the left. D. will occur only if AD shifts downward to the left.

an expansionary gap (An increase in military spending shocks the economy by shifting AD to the right, from AD2 to AD1. This shift in AD creates an expansionary gap of Y3 - Y2.)

Refer to the figure above. Suppose that the economy is initially in equilibrium with output Y2 and inflation rate of π3. An increase in military spending will generate: A. a recessionary gap. B. an expansionary gap. C. disinflation. D. hyperinflation.

National Savings formula (S) =

S = Y - C - G (Y) Aggregate income (C) Consumption expenditure (G) Government purchases of goods and services

assuming NX = 0 and excluding I what is the formula for national savings? what effects does this formula have of national savings?

S = Y - C - G -Understates true national savings to the extent some of C & G are for longer lasting goods rather than immediate consumables (e.g. appliances, roads)

S(Private) =

S(Households) + S(Businesses)

increase wealth by $100. (Savings increases wealth because savings either adds to assets or reduces liabilities. Wealth is defined as assets minus liabilities. Therefore, increasing assets when liabilities are unchanged, or decreasing liabilities when assets are unchanged, will increase wealth)

Saving $100 will: A. increase wealth by $100. B. increase wealth by $100 only if the $100 is used to purchase an asset. C. increase wealth by $100 only if the $100 is used to repay a debt. D. decrease wealth by $100.

Saving Rate

Saving divided by income

Saving rate

Saving divided by income

Workers are

Sellers, they supply labor for payment (a wage)

ok

Short run changes in the money supply can be missed because it is hard to distinguish between a change in relative prices and a change in the price level. In the long run, changes in the price level are easier to distinguish. (answer=ok)

irregular; difficult (Because the causes of recessions are not always clear, they are unpredictable and their depth and length vary.)

Short-term economic fluctuations are ______ in length and severity and ______ to predict. A. regular; difficult B. regular; easy C. irregular; easy D. irregular; difficult

money demand curve

Shows the relationship between the aggregate quantity of money demanded, M, and the nominal interest rate. Higher nominal interest rates equal a higher opportunity cost of holding money (negative slope).

10 years. (Since 1925, the longest expansion in the United States began in 1991 and lasted 10 years.)

Since 1925, the longest expansion in the United States lasted: A. 10 years. B. 24 months. C. 43 months. D. 5 years.

ok

Since money flows freely between countries, when the U.S. interest rate rises people from many countries want to invest more in U.S. financial assets. (answer=ok)

Purchasing Power Parity

Since the law of one price says that a given good will fetch the same price worldwide, then nominal exchange rates are determined to uphold the law of one price.

Increases

Skilled-Biased Technological Change _________ the demand for higher-skilled workers relative to the demand for lower-skilled workers.

a slowdown in real wage growth; rapid employment growth (When both labor supply and labor demand rise at the same time, it is certain that quantity will increase but uncertain whether wages will rise or fall. If the demand shift was smaller than the supply shift there is downward pressure on real wages but an increase in employment.)

Slower growth in labor demand in combination with increases in labor supply explains ____________ accompanied by __________. A. a slowdown in real wage growth; a decline in employment B. a slowdown in real wage growth; rapid employment growth C. a slowdown in real wage growth; increasing wage inequality D. accelerated real wage growth; a decline in employment

slowdown in real wage growth since the 1970s despite rapid employment growth

Sluggish productivity growth since the 1970s combined with rapid increases in the supply of labor help explain the: A. slowdown in both real wage growth and employment growth since the 1970s B. acceleration in real wage growth since the 1970s combined with rapid increases in employment growth C. slowdown in real wage growth since the 1970s despite rapid employment growth D. increase in wage inequality since the 1970s

Investment

Spending by firms on final goods and services, primarily capital goods

Consumption Expenditure (or Consumption)

Spending by households on goods and services such as food, clothing, and entertainment

government policies that are used to affect planned aggregate expenditure are known as

Stabilization policies

increase the target inflation rate. (An adverse inflation shock, such as a large, unanticipated rise in oil prices, reduces economic activity. To avoid a recession, the Federal Reserve must increase aggregate demand, which will increase the target inflation rate.)

Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to avoid a recession. A. increase the target inflation rate. B. decrease the target inflation rate. C. maintain the initial target inflation rate. D. shift the short-run aggregate supply curve up.

increase the target inflation rate; recessionary gap

Starting from full-employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must __________ in order to avoid a ____________.

Long term chronic unemployment in normal conditions (perhaps skills are outdated) is

Structural Unemployment

labor unions. (Labor unions keep wages artificially above market-clearing levels. Because of this, unions add impede the smooth adjustment of markets to changing conditions.)

Structural unemployment is increased when the wage is kept above the market-clearing wage by: A. unemployment insurance. B. worker mobility. C. skill-biased technological change. D. labor unions.

the minimum wage is decreased.

Structural unemployment will decrease when: A. the minimum wage is increased. B. the minimum wage is decreased. C. unemployment insurance benefits are increased. D. union wages are increased.

$0.50 (The value added of the Corner Store is computed by subtracting the cost of purchased inputs from the revenues. So value added is $2.50 - 2.00 = $0.50.)

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store is produced by the following production process: What is the value added of The Corner Store? A. $0.50 B. $1.75 C. $2.00 D. $2.50

the opportunity cost of leisure has fallen

Suppose last year Moe faced a 25% marginal tax rate. This year tax rates increase and now Moe daces 30% marginal tax rate. Moe may choose to work fewer hours this year because:

Moe must work more hours to have the same after-tax income this year. (If Moe wants to maintain his after-tax income, he must work more hours since his marginal tax rate has risen.)

Suppose last year Moe faced a 25% marginal tax rate. This year tax rates increased and now Moe faces a 30% marginal tax rate. Moe chooses to work more hours this year because A. working hours tend to increase over a worker's life in the U.S. B. the opportunity cost of leisure - not working - has increased. C. the opportunity cost of leisure - not working - has fallen. D. Moe must work more hours to have the same after-tax income this year.

Skill-Biased Technological Change

Technological developments in recent decades appear to have favored more-skilled and educated workers

inconsistent with the key assumption upon which the basic Keynesian model is built.

Suppose that the owner of a local ice cream store, knowing that demand for ice cream is higher when the weather is warmer, always charges a price in cents for a scoop of ice cream that is equal to two times the current outdoor temperature, measured in Fahrenheit (so that if it is 90 degrees outside, the ice cream is $1.80 per scoop). This type of behavior is ______. A. exactly the type of behavior that Keynes believed most firms exhibit. B. known as meeting demand. C. inconsistent with the key assumption upon which the basic Keynesian model is built. D. free from menu costs.

overstate; substitution (When prices rise sharply for a product, consumers shift away from it. Since the CPI uses a fixed basket of goods and services, this switching between substitute products is often missed, resulting in "substitution bias" and overstatement of the CPI.)

Suppose that the price of chicken rises sharply compared to the price of turkey. In response, consumers buy more turkey and less chicken than they did in the CPI base year. In this situation the CPI will tend to ______ inflation as a result of ______ bias. A. overstate; substitution B. understate; substitution C. accurately measure; substitution D. overstate; quality adjustment

25.0 percent (To find real GDP per person, multiply the average output each worker produces times the percentage of population employed. In this case, average labor productivity in Country C is $25,000 and share of population employed is 0.50, so real GDP per person is $12,500. For Country D to also have real GDP per person of $12,500, then the share of population working * the average labor productivity of $50,000 must be $12,500. Solving for the share of population working, by dividing each side by the real GDP, we get $12,500 / $50,000 = .25 or 25 percent.)

Suppose that the share of population employed in Country C is 50 percent, and that Countries C and D have the same real GDP per capita. Based on the information in the table, what share of Country D's population must be employed? A. 12.5 percent B. 25.0 percent C. 75.0 percent D. 100.0 percent

output and inflation will increase

Suppose the economy is initially in long-run equilibrium and the government reduces the marginal tax rate. What will happen to output and inflation if the effects the tax cuts are stronger on aggregate demand than on potential GDP?

100; 100; 200 (Private saving is income (2,000) minus consumption (1,500) minus net taxes (400), which equals 100. Public saving is net taxes (400) minus government spending (300), which equals 100. National saving is private saving plus public saving.)

Suppose the following information describes the economy: Private saving equals ____; public saving equals ______; national saving equals ____. A. 100; 200; 100 B. 100; 100; 200 C. 200; 100; 300 D. 200; 100; 500

skill-biased (Technological change that affects the marginal products of high-skilled and low-skilled workers differently is called skill-biased technological change.)

Technological change that affects the marginal products of high-skilled and low-skilled workers differently is called ______ technological change. A. capital-labor B. skill-biased C. marginal-productivity D. high-low

Skill-Biased Technological Change

Technological change that affects the marginal products of higher-skilled workers differently from those of lower-skilled workers

T/F inflation generally decreases during a recession

T

Where Y is GDP, C is consumption, I is investment, (G ) is government spending, (T ) is net taxes, and there is no international trade, public saving equals:

T - G.

S(public)=

T-G

increase to $121,000; increase to $121,000

Taylor has the following assets and liabilities: Suppose that Taylor receives a $10,000 bonus from her employer. If she puts that money toward her mortgage, her wealth would ______; if she puts that money in her checking account, her wealth would ______. A. increase to $121,000; decrease to $101,000 B. increase to $115,000; decrease to $95,000 C. increase to $121,000; increase to $121,000 D. increase to $115,000; increase to $115,000

increase aggregate supply

Technological improvements:

reduced economic growth and efficiency. (The "true" costs of inflation include reduced efficiency of the market system as inflation makes it difficult to distinguish relative price changes from changes in the general level of prices.)

The "true" costs of inflation are: A. higher relative prices. B. lower relative prices. C. reduced economic growth and efficiency. D. a higher overall price level.

marginal propensity to consume (mpc) 0 < mpc < 1

The (BLANK), a fixed number, is the amount by which consumption rises when current disposable income rises by one dollar.

many firms raise their prices when aggregate demand has increased. (In general, increases in aggregate demand allow firms to both sell their output at higher prices and sell more output.)

The AS curve slopes upward because: A. firms generally sell their products at preset prices. B. relaxing the assumptions of the Keynesian model allows us to develop a more realistic model where firms no longer care about prices. C. many firms raise their prices when aggregate demand has increased. D. inflation is higher in goods-producing industries than service-producing industries.

$17.25 (To find the indexed wage in year two, take the nominal wage in year one and multiply it by the CPI, i.e., $15*1.15 = $17.25.)

The CPI equals 1.00 in year one and 1.15 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two? A. $15.00 B. $16.15 C. $17.25 D. $22.50

-6.7 (The percentage change in CPI is calculated as: (current price index - historic prices) / historic price index. In this case:(0.14 - 0.15) / 0.15 = -0.667, or a 6.7 percent decrease.)

The CPI in 1931 equaled 0.15. The CPI in 1932 equaled 0.14. The rate of inflation between 1931 and 1932 was ______ percent. A. -7.1 B. -6.7 C. 1.4 D. 6.7

the nominal interest rate cannot fall below zero. (The nominal interest rate minus the inflation rate equals the real interest rate. Nominal interest rates cannot fall below zero, but real interest rates can if the inflation rate is positive.)

The Fed cannot achieve a negative real interest rate if the inflation rate is zero or negative because: A. the nominal interest rate cannot fall below zero. B. inflation doves will not permit a negative real interest rate. C. zero or negative values of inflation can not be accurately measured. D. inflationary expectations are not anchored when the inflation rate is zero.

Forward Guidance

The Fed gives indications of its future policies so that markets will react.

2

The Federal Open Market Committee (FOMC) judges that inflation at the rate of ___________ percent is most consistent over the longer run with the Federal Reserve's mandate for price stability and maximum employment.

1914. (After many different U.S. banking arrangements over time, the Federal Reserve System was created in 1914.)

The Federal Reserve System first began operations in: A. 1789. B. 1865. C. 1914. D. 1934.

12; 7; 12

The Federal Reserve consists of _____________ regional banks, ________ governors on the Board of Governors, and ___________ voting members of the Federal Open Market Committee

two negative demand shocks. (The Great Recession was the result two negative demand shocks: the bursting of the housing bubble which lowered housing prices, and the 2008 financial panic which caused a credit crunch.)

The Great Recession was the result of: A. two negative demand shocks. B. a negative demand shock and a negative inflation shock. C. two positive inflation shocks. D. a negative demand shock and a positive inflation shock.

ok

The NBER Business Cycle Dating Committee looks for evidence from the entire economy, not just individual sectors. (Answer=ok)

1934.

The U.S. Congress instituted a system of deposit insurance for banks in: A. 1934. B. 1789. C. 1865. D. 1913.

Which of the following would increase the government purchases component of U.S. GDP?

The U.S. federal government pays $3 billion in salaries to soldiers in the military.

Three Important Labor Market Trends

The U.S. growth rate of average annual earnings slowed in the early 1970's, and was negative until 1995.

ok

The U.S. growth rate of average annual earnings started to decline in the early 1970's, and declined annually until 1995. Average annual earnings started growing again after 1996, in part because of the Internet, but at a rate lower than seen in the 1960s. (Answer=ok)

ok

The United States and most industrial countries around the world have seen substantial increases in average real wages over the past 100 years. (answer=ok)

Aggregation

The adding up of the individual economic variables to obtain economywide totals, but often obscures the fine detail of an economic situation. Aggregate measurements in dollar values allow economists to compare broad categories of goods and services, such as exports and imports.

peak

The beginning of a recession. High point of the business cycle.

Marginal Tax Rate

The amount by which taxes rise when before tax income rises by one dollar

Demand for Money

The amount of wealth an individual or firm chooses to hold in the form of money.

demand for money

The amount of wealth held in the form of money. Sometimes referred to as an individual's liquidity preference.

nominal interest rate. (The nominal interest rate is the annual increase in the dollar values of a financial asset.)

The annual increase in the dollar value of a financial asset is called the: A. real rate of return. B. inflation rate. C. real interest rate. D. nominal interest rate.

Nominal Interest Rate (or Market Interest Rate)

The annual percentage increase in the nominal value of a financial asset

Real Interest Rate

The annual percentage increase in the purchasing power of a financial asset; equals the nominal interest rate on that asset minus the inflation rate

Rate of Inflation

The annual percentage rate of change in the price level, as measured, for example, by the CPI

Slower; An Increase

The best explanation for the slowdown in real wage growth starting in the early 1970s despite rapid employment growth is __________ productivity growth combined with ______________ in the supply of labor

a legal and/or political environment unfavorable to economic growth. (Foreign and domestic saving is nearly absent in the poorest countries of the world because savers worry their money cannot be protected by contract law. With low saving there is little investment into new capital or technology.)

The biggest problem thwarting economic growth in the poorest countries, compared to the richest countries, is: A. insufficient human capital. B. outdated physical capital. C. no access to technology. D. a legal and/or political environment unfavorable to economic growth.

Classical vs Keynesian

The classical approach believes that the best cure for a recession is to leave the free market alone. Keynesians prescribe large-scale government expenditures to prime the economic pump.

Federal Open Market Committee (FOMC)

The committee that makes decisions concerning monetary policy

disposable income. (The "consumption function" shows the relationship between consumption spending and its determinants, in particular, disposable income.)

The consumption function is relationship between consumption and: A. planned aggregate expenditure. B. total spending. C. investment. D. disposable income.

CPI measures

The cost of a standard basket of goods and services in a given year relative to the cost of the same basket of goods and services in the base year Base year changes periodically

Menu Costs

The cost of changing prices

price of new capital goods; real interest rate (When firms consider new investments, they evaluate the cost or price of the new capital and the rate of interest on the loan taken to fund the capital investment.)

The costs of investment depend on the ______ and the _______. A. marginal product of capital; relative price of the firm's output B. price of new capital goods; real interest rate C. relative price of the firm's output; real interest rate D. taxes levied on the revenue generated; relative price of the firm's output

interest rates decrease. (The current price of stocks and market interest rates are negatively correlated. When market interest rates fall, newly issued bonds become less attractive compared to stocks, so stock prices increase as savers choose to move funds to stocks from bonds.)

The current price of a stock increases when: A. expected future dividends decrease. B. the expected future price of the stock decreases. C. interest rates decrease. D. the perceived riskiness of the stock increases.

ok

The current price of stocks and market interest rates are negatively correlated. When market interest rates fall, newly issued bonds become less attractive compared to stocks, so stock prices increase as savers choose to move funds to stocks from bonds. (answer=ok)

peak to trough. (Recessions start at the peak of the business cycle and end at the trough.)

The duration of a recession is from: A. peak to trough. B. trough to peak. C. peak to peak. D. trough to trough.

length of time a spell of unemployment lasts. (An unemployment spell is a period during which an individual is continuously unemployed.)

The duration of an unemployment spell is a measure of the: A. income lost while unemployed. B. length of time a spell of unemployment lasts. C. number of times during a year a worker becomes unemployed. D. number of workers unemployed during a specific period of time.

long-run self correcting mechanisms

The economy has (BLANK); tendency toward Y^ and U^ --Eventually, prices reach equilibrium (inflation rate stabilizes) and output gaps are eliminated --Eventually, production is at potential output levels and unemployment is at its natural rate (u^ or the NAIRU)

Self-Correcting Property

The economy has this because prices change to reflect changing supply and demand conditions. These changes can occur in goods and services markets or factor markets, or both.

ok

The economy is in short-run equilibrium at the output where the aggregate demand curve intersects the aggregate supply curve. If there is no output gap, then the economy is in long-run, not short-run, equilibrium. (answer=ok)

$10.0 trillion (Since the actual rate of unemployment in Omega equals the natural rate of unemployment, the economy is operating at its potential, so potential GDP is $10.0 trillion.)

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and real GDP equals $10 trillion. What is potential GDP in Omega? A. $9.0 trillion B. $9.5 trillion C. $10.0 trillion D. $10.5 trillion

Income-Expenditure Multiplier

The effect of a one-unit increase in autonomous expenditure on short-run equilibrium output.

the income-expenditure multiplier.

The effect on short-run equilibrium output of a one-unit increase in autonomous expenditure is called: A. the marginal propensity to consume. B. average labor productivity. C. Okun's law. D. the income-expenditure multiplier.

trough

The end of a recession. Low point of the business cycle.

Trough

The end of a recession; the low point of economic activity prior to a recover

market equilibrium value of the (The market equilibrium value of an exchange rate is the exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market.)

The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market is called the ______ exchange rate. A. real B. market equilibrium value of the C. target D. fixed

Market Equilibrium Value of the Exchange Rate

The exchange rate that equates the quantities of the currency supplied and demanded in the foreign exchange market.

Shoe Leather Costs

The extra costs incurred to avoid holding cash when there is inflation

shoe leather costs. (The extra costs incurred to avoid holding cash when there is inflation are called shoe leather costs.)

The extra costs incurred to avoid holding cash when there is inflation are called the: A. average costs of inflation. B. consumer price index costs. C. external costs. D. shoe leather costs.

Cyclical Unemployment

The extra unemployment that occurs during periods of recession

Self-Correcting Property

The fact that output gaps will not last indefinitely, but will be closed by rising or falling inflation

self-correcting property. (The economy has a self-correcting property because prices change to reflect changing supply and demand conditions. These changes can occur in goods and services markets or factor markets, or both.)

The fact that output gaps will not last indefinitely, but will be closed by rising or falling prices is the economy's: A. short-run equilibrium property. B. self-correcting property. C. income-expenditure multiplier. D. long-run equilibrium property.

Increasing Wage Inequality: Technological Change

The increasing wage inequality is ongoing technological change that favors more highly skilled or educated workers. New scientific knowledge and the technological advances associated with it are a major source of improved productivity and economic growth. Increases in worker productivity are in turn a driving force behind wage increases and higher average living standards. In the long run and on average, technological progress is undoubtedly the worker's friend

the Consumer Price Index. (Percent changes in the CPI is the most popular measure of the inflation rate.)

The inflation rate can be calculated as the percentage change in: A. real GDP. B. nominal GDP. C. the Consumer Price Index. D. the exchange rate.

monetary; fiscal (Monetary policy can be changed quickly by the Fed whereas fiscal policy often goes through slow-moving political discussion. But after monetary policy is made, sometimes it takes a long time to work because households and businesses are often slow to react to interest rate changes.)

The inside lag is relatively shorter for _____ policy; the outside lag is relatively shorter for _____ policy. A. monetary; fiscal B. monetary; monetary C. fiscal; monetary D. fiscal; fiscal

Federal Funds Rate

The interest rate that commercial banks charge each other for very short-term (usually overnight) loans; because the Fed frequently sets its policy in terms of this rate, this rate is closely watched in financial markets

Discount Rate (or Primary Credit Rate)

The interest rate that the Fed charges commercial banks to borrow reserves.

ok

The introduction of a new technology that raises productivity will shift the demand curve for loanable funds to the right. This increases real interest rates and the quantity of national savings and investment (Answer=ok)

increase real interest rates and the equilibrium quantity of saving supplied and demanded. (The introduction of a new technology that raises productivity will shift the demand curve for loanable funds to the right. This increases real interest rates and the quantity of national savings and investment)

The introduction of a new technology that raises the marginal product of new capital will: A. decrease real interest rates and increase the equilibrium quantity of saving supplied and demanded. B. decrease real interest rates and the equilibrium quantity of saving supplied and demanded. C. increase real interest rates and the equilibrium quantity of saving supplied and demanded. D. increase real interest rates and decrease the equilibrium quantity of saving supplied and demanded.

ok

The invention and diffusion of the Internet and related technologies has caused a burst of productivity growth since 1995. (answer=ok)

real GDP per person. (Real GDP per capita indicates how much the average person produces and thus, how much goods and services are available to the typical person.)

The key indicator of a country's living standard and economic well-being is: A. the interest rate. B. nominal GDP per person. C. real GDP. D. real GDP per person.

consumption. (Empirically, consumption is always the largest component of planned aggregate expenditure)

The largest component of planned aggregate expenditure is: A. consumption. B. investment. C. government purchases. D. exports.

price of an internationally traded commodity must be the same in all location. (The law of one price says that goods will fetch the same price worldwide so long as transportation costs are low.)

The law of one price states that if transportation costs are relatively small, then the: A. nominal exchange rates for every countries' currency must be equal. B. nominal exchange rate for a currency must equal the real exchange rate for that currency. C. price of an internationally traded commodity must be the same in all location. D. producer with the lowest opportunity cost should be the only producer any commodity.

Board of Governors

The leadership of the Fed, consisting of seven governors appointed by the president to staggered 14-year terms

Discount Window Lending

The lending of reserves by the Federal Reserve to commercial banks

the long run. (Short run changes in the money supply can be missed because it is hard to distinguish between a change in relative prices and a change in the price level. In the long run, changes in the price level are easier to distinguish.)

The link between the money supply and prices is strongest in: A. the long run. B. the short run. C. a recession. D. a boom.

households, firms, governments, and the foreign sector (All final buyers of goods and services, which make up GDP, come from households, firms, governments or the foreign sector.)

The market value of all domestically produced final goods and services is also equal to the total amount spent by ______________ less spending on imported goods and services. A. households and firms B. households, firms, and governments C. households, firms, and the foreign sector D. households, firms, governments, and the foreign sector

gross domestic product.

The market value of final goods and services produced within a country during a period of time is called: A. guaranteed direct prices. B. general domestic productivity. C. government documented production. D. gross domestic product.

Potential Output, Y* (or Potential GDP or full-employment output)

The maximum sustainable amount of output (real GDP) that an economy can produce.

consumer price index.

The measure of the cost of a standard basket of goods and services in any period relative to the cost of the same basket of goods and services in the base year is called the: A. cost-of-living indicator. B. consumption production index. C. consumer production index. D. consumer price index.

Self-Correcting Property

The mechanism by which output gaps are eliminated is changing prices. These changes can occur in goods and services markets or factor markets, or both.

the price level decreases. (If the price level decreases, people needs less money for transactions and they desire less money at all nominal interest rates. The money demand curve shifts to the left.)

The money demand curve will shift to the left if: A. the nominal interest rate increases. B. the nominal interest rate decreases. C. price level increases. D. the price level decreases.

gross domestic product. (The gross domestic product is the only statistic listed that measures an economy's output.)

The most commonly used measure of an economy's output is: A. the rate of employment. B. the rate of inflation. C. gross domestic product. D. the Dow Jones stock market index

Worker Mobility

The movement of workers between jobs, firms, and industries

annual percentage increase in the dollar value of a financial asset.

The nominal interest rate is the: A. annual percentage increase in the dollar value of a financial asset. B. annual percentage increase in the purchasing power of a financial asset. C. real rate of return on an asset. D. the real interest rate minus the inflation rate.

ok

The nominal interest rate minus the inflation rate equals the real interest rate. Nominal interest rates cannot fall below zero, but real interest rates can if the inflation rate is positive. (answer=ok)

Unemployment Rate

The number of unemployed people divided by the labor force

Natural Rate of Unemployment, u*

The part of the total employment rate that is attributable to frictional and structural unemployment; equivalently, the unemployment rate that prevails when cyclical unemployment has neither a recessionary nor an expansionary output gapsez

Participation Rate

The percentage of the working-age population in the labor force (that is, the percentage that is either employed or looking for work)

Indexing

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index. It prevents the purchasing power of the nominal quantity from being eroded by inflation

increased; also increased (The price of gasoline at the pump increased by more than the general level of prices increased, so both gasoline's nominal and real price increased.)

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 5 percent. The nominal price of gasoline _____, and the real price of gasoline _____. A. increased; also increased B. increased; decreased C. increased; did not change D. decreased; increased

Relative Price

The price of a specific good or service in comparison to the prices of other goods and services

Real Exchange Rate

The price of the average domestic good or service relative to the price of the average foreign good or service, when prices are expressed in terms of a common currency

money times velocity equals nominal GDP. (the Quantity Equation which says: PY = MV.)

The quantity equation states that: A. money times velocity equals nominal GDP. B. money times velocity equals real GDP. C. money times the average price level equals nominal GDP. D. money times the average price level equals real GDP.

Nominal Exchange Rate

The rate at which two currencies can be traded for each other.

Core Rate of Inflation

The rate of increase of all prices except energy and food

interference with long-term planning. (If inflation is unanticipated, parties to long-term contracts are uncertain about the value of repaid dollars, so these contracts are sometimes not written. Note that income will only lose purchasing power if it is not adequately adjusted for inflation.)

The real costs of inflation to society include: A. an increase in the general level of prices. B. lost purchasing power of income. C. higher relative prices. D. interference with long-term planning.

ok

The real exchange rate equals the nominal exchange rate times the domestic price level divided by the foreign price level: (e × P) ÷ Pf. All else equal, when the domestic price level,P,falls, the real exchange rate decreases. (Answer=ok)

Real Interest Rate

The real interest rate = the nominal interest rate - the inflation rate. So to find the inflation rate, subtract the real interest rate from the nominal interest rate.

annual percentage increase in the purchasing power of a financial asset. (The real interest rate is the annual percentage increase in the purchasing power of a financial asset.)

The real interest rate is the: A. market interest rate. B. annual percentage increase in the nominal value of a financial asset. C. annual percentage increase in the purchasing power of a financial asset. D. the interest rate charged on a loan in dollar terms.

Consumption Function

The relationship between consumption spending and its determinants, in particular, disposable income

Recessionary Gap

The relationship between consumption spending and its determinants, in particular, disposable income

natural rate of unemployment, u*

The sum of frictional and structural unemployment. Cyclical unemployment is not involved.

1.77 (First note that in order to find real GDP, we must use the prices from the base year in both commutations. So real GDP in 2000 was: (10 sailboats *$500) + (2,000 coconuts *$1) = $7,000. Real GDP in 2010 was (20sailboats * $500) + (2,400coconuts * $1) = $12,400. Thus, real GDP in 2010 was 1.77 times larger ($12,400/ 7,000) than in 2000.)

The table below gives the quantities and prices for 2000 and 2010 for an economy that produces just two goods: sailboats and coconuts. For this economy that produces just sailboats and coconuts, and with 2000 is the base year, real GDP was approximately ______ times larger in 2010 than it was in 2000. A. 1.34 B. 1.65 C. 1.77 D. 2.19

Fisher Effect

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low

Wealth Effect

The tendency of changes in asset prices to affect households' wealth and thus their consumption spending

purchasing power parity. (Since the law of one price says that a given good will fetch the same price worldwide, then nominal exchange rates are determined to uphold the law of one price. This relationship is called "purchasing power parity.")

The theory that nominal exchange rates are determined so that the law of one price holds is called: A. the fixed-exchange-rate rule. B. the equilibrium principle. C. the law of supply and demand. D. purchasing power parity.

serving as a medium of exchange, unit of account, and store of value. (Money does many things, but the things it does best are to facilitate trade, serve as a common yardstick to determine value and maintain its value for later use.)

The three functions of money are: A. spending for consumption, investment, and government purchases. B. measuring balance of payments, exchange rates, and interest rates. C. implementing monetary policy, fiscal policy, and structural policy. D. serving as a medium of exchange, unit of account, and store of value.

the inside lag in fiscal policy. (The "inside lag" of macroeconomic policy is the delay between the date a policy change is needed and the date it is implemented.)

The time between when Congress decides to cut taxes to stimulate aggregate demand and when the tax cuts are implemented is an example of: A. the outside lag in macroeconomic policy. B. the inside lag in macroeconomic policy. C. the outside lag in fiscal policy. D. the inside lag in fiscal policy.

Labor Force

The total number of employed and unemployed people in the economy

conduct monetary policy; oversee financial markets

The two main responsibilities of the Federal Reserve System are to ___ and to ___. A. apprehend counterfeiters; regulate the stock market B. enable banks to make affordable mortgages; control the exchange rate of the U.S. dollar C. insure bank deposits; print currency D. conduct monetary policy; oversee financial markets

technological progress and increases in the capital stock.

The two most important factors contributing to increased productivity in industrialized countries in the twentieth century were: A. higher relative prices and a larger labor supply. B. higher relative prices and technological progress. C. technological progress and increases in the capital stock. D. technological progress and increases in the labor supply.

Trade Balance (or Net Exports)

The value of a country's exports less the value of its imports in a particular period (quarter or year).

avoid double counting. (GDP measures the market value of goods and services sold to their final user as a means of avoiding double counting.)

The value of intermediate goods is excluded from the measurement of GDP in order to: A. adjust for inflation. B. avoid double counting. C. index economic activity. D. measure GDP in constant prices.

price of output. (The value of the marginal product of labor equals the marginal product of labor times the price of output.)

The value of the marginal product of labor equals the marginal product of labor times the: A. real wage. B. nominal wage. C. price of output. D. quantity of labor.

productivity of new capital increases.

The value of the marginal product of new capital increases when the: A. price of new capital goods increases. B. real interest rate increases. C. the price of the good the firm produces decreases. D. productivity of new capital increases.

is not; is (Only goods and services traded in regular markets are counted in GDP.)

The value of unpaid work by a homemaker ______ included in GDP and the value of housekeeping services sold in the market ______ included in GDP. A. is; is not B. is; is C. is not; is not D. is not; is

Real Wage

The wage paid to workers measured in terms of purchasing power; the real wage for any given period is calculated by dividing the nominal (dollar) wage by the CPI for that period.

Middle-Income

These countries, like Mexico, are between the rich industrialized countries and the abject poor countries. These countries tend to have pollution problems because they are developed enough for industry but not rich enough to afford clean air and waterways.

Standard of living

They degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable

Recessions

They sometimes have a "blip" of positive growth within the context of negative GDP growth.

ok

Those who believe there are limits to economic growth tend to worry that the world is running out of natural resources. (answer=ok)

production; income; expenditure (Whenever a good or service is produced and sold, the revenue from the sale is distributed to the workers and the owners of the capital involved in the production of the good or service.)

Three equivalent ways to measure GDP are total _____, total _____, and total ______. A. profits; production; saving B. expenditure; income; profits C. investment; consumption; saving D. production; income; expenditure

deflate both quantities by a common price index. (is the process of dividing a nominal value by a price index to obtain the real value.)

To compare the purchasing power of nominal wages in two different years, one must: A. compare the nominal values. B. deflate both quantities by a common price index. C. increase both quantities by the same percentage increase in a price index. D. adjust both quantities by the real interest rate.

indexed. (Indexing is the act of increasing nominal amounts by the inflation index to ensure that salaries keep up with inflation.)

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be: A. deflated. B. indexed. C. aggregated. D. hyperinflated.

Planned Aggregate Expenditure (PAE)

Total planned spending on final goods and services

True

True/False. The Fed cannot set the interest rate and the money supply independently

potential output; not flexible enough (Fiscal policy can affect potential output because incentives to work are often reduced when tax rates or transfer payments increase. Also, fiscal policy requires governmental approval which often takes a long time.)

Two drawbacks in using fiscal policy as a stabilization tool are that fiscal policy affects ______ as well as aggregate demand and fiscal policy is _______. A. consumption; too flexible B. potential output; not flexible enough C. consumption; offset by automatic stabilizers D. potential output; offset by automatic stabilizers

Trends in Real Wages and Employment

Two reasons for the increasing wage inequality in the United States are economic globalization and skill-biased technological change. Both have increased the demand for, and hence the real wages of, relatively skilled and educated workers. Attempting to block globalization and technological change is counterproductive, however, since both factors are important in promoting increased productivity. To some extent, the movement of workers from lower-paying to higher-paying jobs or industries will counteract the trend toward wage inequality. A policy of providing transition aid and training for workers with obsolete skills is a more useful response to the problem.

rises; falls

Typically unemployment ______ during a recession and ______ during an expansion. A. rises; rises even more B. rises; falls C. rises; does not change D. falls; rises

Tight Monetary Policy

U.S interest rates rise during this and U.S. investments become more attractive to foreign investors, which increases demand for dollars on foreign exchange markets. At the same time, this decreases the supply of dollars and, therefore, increases the equilibrium value of the dollar.

ok

U.S. household savings rates have fallen in the past 20 years. But if government or business saving picks up the slack, the national saving rate could be unaffected by falling household saving. (Answer=ok)

Union Contracts

Union contracts that exceed the market-clearing wage cause unemployment. If labor supply increases, unemployment will increase because wages cannot fall. The number of workers employed will not change as the demand for labor and wages both stay the same.

planned investment equals actual investment. (When a firm hits its target inventory, its unplanned investment equals zero)

Unplanned inventory investment equals zero when A. planned investment is greater than actual investment. B. planned investment is less than actual investment. C. planned investment equals actual investment. D. expected sales are greater than actual sales.

ok

Unskilled workers in the United States have lost ground to global competition whereas the highest skilled workers have gained. (Answer=ok)

Wealth =

Value of assets - liabilities

Which is a stock variable

Wealth

•Cyclical unemployment rises sharply during recessions •Production of durable goods is more volatile than services and non-durable goods •Inflation generally decreases during a business cycle

What are symptoms of business cycles?

-Consumption (C) by households (The largest component of PAE -Investment (I) is planned spending by domestic firms on new capital goods -Government purchases (G) are made by federal, state, and local governments -Net exports (NX) equal exports minus imports

What are the 4 components of planned aggregate expenditure (PAE)?

-Real personal consumption expenditures -Non-farm employment -Real after-tax household income

What are the three important monthly indicators used to date recessions?

Changes in factors other than the nominal interest rate. Ex. an increase in output, higher price levels, technological advances, etc.

What causes the money demand curve to shift?

Total Spending

What does Total Production equal?

-Nominal interest rate (i). The higher the interest rate, the lower the quantity of money demanded. -Real income or output (Y). The higher the level of income, the greater the quantity of money demanded. -The price level (P) The higher the price level, the greater the quantity of money demanded.

What does the demand for money depend on?

capital inflow. (From the perspective of the U.S., this was a foreign purchase of a domestic asset, or a capital inflow.)

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n): A. import. B. export. C. capital outflow. D. capital inflow.

physical capital. (When businesses invest in a new plant, equipment, and/or factories it is physical capital investment. These investments usually increase productivity.)

When a firm builds a new factory, this is an example of an investment in: A. human capital. B. physical capital. C. the market. D. research and development.

no; remain the same (If there is no output gap, the economy is at full-employment equilibrium. In this case there is no tendency for the price level to change.)

When actual output equals potential output, there is ___ output gap and the rate of inflation will tend to ___ A. an expansionary; increase B. an expansionary; decrease C. no; remain the same D. a recessionary; increase

no; be equal to the expected rate of inflation

When actual output equals potential output, there is ______ output gap and the inflation rate will ____. A. an expansionary; exceed the expected rate of inflation B. an expansionary; be lower than the expected rate of inflation C. no; be equal to the expected rate of inflation D. a recessionary; exceed the expected rate of inflation

ok

When the quantity supplied of money is less than the quantity demanded, people sell bonds to raise cash. This lowers bond prices and causes nominal interest rates to rise. (answer=ok)

a recessionary; be lower than the expected rate of inflation

When actual output is less than potential output, there is ______ output gap and the inflation rate will ____. A. an expansionary; exceed the expected rate of inflation B. an expansionary; be lower than the expected rate of inflation C. a recessionary; be lower than the expected rate of inflation D. a recessionary; exceed the expected rate of inflation

income adjustment mechanism

When an economy sinks into a recession, people's incomes fall. They spend and save less while businesses invest and produce less. This income adjustment mechanism drives the economy further into recession rather than back to full employment.

ok

When both labor supply and labor demand rise at the same time, it is certain that quantity will increase but uncertain whether wages will rise or fall. If the demand shift was smaller than the supply shift there is downward pressure on real wages but an increase in employment. (answer=ok)

Physical Capital Investment

When businesses invest in a new plant, equipment, and/or factories it is this type of investment. These investments usually increase productivity.

Central Bank Independence

When central bankers are insulated from short-term political considerations and are allowed to take a long-term view of the economy.

ok

When central banks announce a numerical inflation target they must stick to the target to ensure credibility. Sticking with the target reduces consideration of other policy alternatives, like output stabilization. (answer=ok)

Increase the Demand for U.S. Currency

When developing nations become less stable, investors sell foreign securities and looks for safe investments, and U.S. currency is one possibility.

price times the quantity of each item produced.

When economists use market values to aggregate output, they sum the: A. number of items produced. B. quantity of items produced. C. price times the quantity of each item produced. D. amount of each item produced.

Capital Investment

When firms consider new investments, they evaluate the cost or price of the new capital and the rate of interest on the loan taken to fund the

decreases; decreases

When housing prices decrease, household wealth _____, and consumption _____. A. increases; increases B. increases; decreases C. decreases; decreases D. decreases; increases

Trade Deficit

When imports exceed exports, the difference between the value of a country's imports and the value of its exports in a given period

ok

When inflationary expectations are fulfilled, neither the lender nor the borrower is hurt by inflation. (answer=ok)

ok

When market interest rates rise, existing bond prices fall. This is because new bonds are now available with a higher rate of return, requiring a discount for existing bonds. (Answer=ok)

diminishing returns to capital still hold. (Although new technologies generally improve average labor productivity, technological additions are still subject to diminishing returns to capital.)

When new technologies are applied to the production and distribution of goods and services: A. scarcity is eliminated. B. diminishing returns to capital no longer hold. C. diminishing returns to capital still hold. D. average labor productivity decreases.

Substitution Bias

When prices rise sharply for a product, consumers shift away from it. Since the CPI uses a fixed basket of goods and services, this switching between substitute products is often missed, resulting in this and overstatement of the CPI.

ok

When the Fed sells government bonds in the open market, there is less currency in the hands of the banking community, as some money must be used to buy these bonds. As a consequence the amount of bank reserves decreases. This contraction of reserves decreases the money supply by more than $1,000,000. (Answer=ok)

Open-Market Purchase

When the Federal Reserve buys government bonds in the open market, there is new currency in the hands of the banking community, which increases bank reserves and increases the money supply.

Open-Market Sale

When the Federal Reserve sells government bonds in the open market, there is less currency in the hands of the banking community as some money must be used buy these bonds. As a consequence the amount of bank reserves decreases.

decreases by more than $1,000,000. (When the Fed sells government bonds in the open market, there is less currency in the hands of the banking community, as some money must be used to buy these bonds. As a consequence the amount of bank reserves decreases. This contraction of reserves decreases the money supply by more than $1,000,000.)

When the central bank sells $1,000,000 worth of government bonds to the public, the money supply: A. decreases by more than $1,000,000. B. decreases by $1,000,000. C. decreases by less than $1,000,000. D. increases by $1,000,000.

increase. (When market interest rates fall, existing bond prices rise. This is because previously issued bonds offer a greater reward than newly issued ones.)

When the coupon rate on newly-issued bonds decreases from 6% to 5%, the prices of existing bonds: A. increase. B. decrease. C. remain unchanged. D. decrease only if the coupon rate is less than 5%.

decrease. (When market interest rates rise, existing bond prices fall. This is because new bonds are now available with a higher rate of return, requiring a discount for existing bonds.)

When the coupon rate on newly-issued bonds increases from 5% to 6%, the prices of existing bonds: A. increase. B. decrease. C. remain unchanged. D. increase only if the coupon rate is less than 6%.

either a recessionary or an expansionary (The economy is in short-run equilibrium at the output where the aggregate demand curve intersects the aggregate supply curve. If there is no output gap, then the economy is in long-run, not short-run, equilibrium.)

When the economy is in short-run equilibrium, there will be ______ output gap. A. no B. only a recessionary C. either a recessionary or an expansionary D. only an expansionary

falls; fall; the income-expenditure multiplier (When the inflation rate increases, household wealth falls which reduces PAE. In turn, national income falls by a multiple of the original change due to the income-expenditure multiplier.)

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______. A. falls; fall; the income-expenditure multiplier B. falls; rise; the income-expenditure multiplier C. rises; rise; the wealth effect D. rises; fall; the wealth effect

become more attractive to both foreign and domestic buyers. (Since money flows freely between countries, when the U.S. interest rate rises people from many countries want to invest more in U.S. financial assets.)

When the interest rate in the U.S. rises, U.S. financial assets: A. become less attractive to foreign buyers. B. become more attractive to both foreign and domestic buyers. C. become less attractive to both foreign and domestic buyers. D. become less attractive to domestic buyers and more attractive to foreign buyers.

Aggregate Demand Curve

When the interest rate in the U.S. rises, foreigners become more interested U.S. financial assets which results in higher demand for U.S. currency.

appreciated. (In this case, the dollar now buys more francs than before. This means the dollar has appreciated)

When the nominal exchange rate changes from 4 francs per dollar to 6 francs per dollar, the dollar has: A. appreciated. B. depreciated. C. become overvalued. D. become undervalued.

Okun's Law

When the output gap is negative, cyclical unemployment is positive because the actual unemployment rate exceeds the natural unemployment rate.

Expansionary Gap

When the output gap is positive, the economy is producing beyond its potential.

allocated to GDP in each year according to the value added in that year. (GDP is conventionally an annual measure. However, when production takes longer than a year, the price of the final product is divided into the amount of value added each year for national accounting purposes.)

When the production process extends over more than one year, the value of the final product is: A. included in GDP for the year in which production began. B. included in GDP for the year in which production was completed. C. allocated to GDP in each year according to the value added in that year. D. allocated equally to GDP in each year.

Inflation Rate Increases

When this happens, household wealth falls which reduces PAE. In turn, national income falls by a multiple of the original change due to the income-expenditure multiplier.

when real price rises. when real price falls.

When will the money demand curve shift to the left? When will the money demand curve shift to the right?

The Expenditure Method for Measuring GDP

Whenever a good or service is produced and sold, the revenue from the sale is distributed to the workers and the owners of the capital involved in the production of the good or service.

Increasing Wage Inequality: Technological Change

Whether a particular technological development is good for a particular worker depends on the effect of that innovation on the worker's value of marginal product and, hence, on his or her wage. For example, at one time the ability to add numbers rapidly and accurately was a valuable skill; a clerk with that skill could expect advancement and higher wages. However, the invention and mass production of the electronic calculator has rendered human calculating skills less valuable, to the detriment of those who have that skill.

net exports.

Which of the expenditure components of GDP can be negative? A. consumption spending on durables. B. government purchases of goods and services. C. consumption spending on services. D. net exports.

Gail buys paper and crayons to donate to poor children in need of school supplies (Gifts and charity are not counted in GDP because nothing was directly produced. These transactions are called "transfer payments." However, when an individual buys items in a market, such as paper and crayons, their value is always included in GDP regardless of whether the person uses them herself or donates them to others.)

Which of the following activities is most likely to be counted in GDP? A. Fran volunteers at the local veteran's hospital twice a month B. Stu gave $5 to a homeless man he met in the park C. Gail buys paper and crayons to donate to poor children in need of school supplies D. Bud works hard five hours each week to make sure his lawn always looks nice

Wealth

is a stock variable because it is measured at a specific time, such as today or on the first day of the year.

Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals.

Which of the following best explains why prices tend to be inflexible even when demand changes? A. Government regulations limit the number of times a firm can change prices in a year. B. In most industries the profit-maximizing price does not change even when demand changes. C. Production costs do not tend to change when a firm varies its level of output. D. Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals.

the central bank announces a numerical inflation target. (Monetary policy credibility is enhanced by "transparency." One way to achieve transparency is to tell the public what you intend to do, like announcing inflation targets.)

Which of the following characteristics of a central bank is expected to enhance monetary policy credibility? A. the central bankers short terms that coincide with the terms of the legislature. B. daily central bank actions are subject to the review and veto of the executive branch of the government. C. the central bank announces a numerical inflation target. D. the central bank is under the obligation to finance the national deficit.

Wealth (Wealth is a stock variable because it is measured at a specific time, such as today or on the first day of the year.)

Which of the following is a stock? A. Saving B. Income C. Consumption D. Wealth

Checking account balance (A checking account balance is something of value that one owns, so it is an asset.)

Which of the following is an asset of a family? A. Student loan B. Mortgage C. Unpaid credit card balance D. Checking account balance

A new CD player sold to an automaker for installation in a car (The new CD player is an intermediate good because it is a component part of the final good, the car.)

Which of the following is an example of an intermediate good? A.A new car sold to a family B.A metal-stamping machine used to produce cars sold to an automaker C.A new CD player sold to an automaker for installation in a car D.A new CD player sold to a teenager

The allocation of bank credit by the government rather than by markets (Bank credit is allocated well by private markets, based on the risk-reward trade-off, whereas credit allocated by governments tends to be faulty because of corruption and strong political influence.)

Which of the following is consistent with a political and legal framework that discourages economic growth? A. The allocation of bank credit by the government rather than by markets B. A speedy approval process for new businesses C. Agricultural prices that are allowed to vary according to market conditions D. Taxation and regulation that are not very burdensome

Replacing the income tax with a consumption tax

Which of the following policies would be expected to increase private saving? A. Replacing the income tax with a consumption tax B. Increasing the tax rate on capital gains C. Providing more generous Social Security retirement benefits D. Reducing the size of down payments needed to buy a house

construction worker (Some sectors are more adversely affected by recession than others. Construction workers are more likely to lose their jobs or work fewer hours during a recession, because construction projects can be delayed.)

Which of the following workers is most likely to lose his/her job during a recession? A. construction worker B. baker C. farmer D. barber

A new computer sold to a business firm. (A final good is one sold to its ultimate user, which can be an individual, a business or a government entity.)

Which of the following would be classified as a final good? A. New computer software sold to a computer manufacturer for installation in new computers. B. The services provided by lawyers to a computer manufacturer. C. Computer chips sold to a computer manufacturer for installation in new computers. D. A new computer sold to a business firm.

Political instability increases dramatically in developing nations. (When developing nations become less stable, investors sell foreign securities and looks for safe investments, and U.S. currency is one possibility.)

Which of the following would be expected to increase the demand for U.S. currency? A. Competition among brokers forces down the commission charge for selling bonds or stocks. B. The economy enters a recession. C. Political instability increases dramatically in developing nations. D. On-line banking allows customers to transfer funds between checking and stock mutual funds 24 hours a day.

You purchase a vacation at Disney World in Florida. (For national income accounting purposes, consumption is only done by households.)

Which of the following would increase the consumption component of U.S. GDP? A. You purchase a vacation at Disney World in Florida. B. A business purchases Disney World vacations as rewards for the firm's best salespeople. C. Disney World purchases tires for the monorail from a firm in Ohio. D. A French man purchases a vacation at a Disney theme park in France.

A laundry in Seattle purchases a new clothes-washing machine produced in the U.S. (Investment must be done by domestic businesses except for owner-occupied new housing.)

Which of the following would increase the investment component of U.S. GDP? A. You purchase a new clothes washing machine produced in the U.S. B. You purchase a new clothes washing machine produced in France. C. A laundry in Seattle purchases a new clothes-washing machine produced in the U.S. D. A laundry in Mexico purchases a new clothes-washing machine produced in the U.S.

The Fed controls the money supply with open-market operations. Open-market purchase of bonds by the Fed increases the money supply and open-market sales decrease the money supply.

Who controls the supply of money?

Jerome Powell

Who is the current Chairman of the Board of Governors of the Federal Reserve System?

-Public is not familiar with the size of the money supply. -Main effects of monetary policy on the economy work through interest rates. -Interest rates are easier to monitor than the money supply.

Why is the Fed policy announced in terms of interest rates?

Chronically Unemployed

Workers whose spells of unemployment are broken up by brief periods of employment or withdrawal from the labor force

National Savings

Y-C-G

Okun's Law

Y-Y*/Y* = -2(u-u*)

GDP per capita (formula)

Y/POP = Y/N * N/POP

production and income for the economy

Y= C+I+G+NX

GDP

______ is/are the market value of final goods and services produced within a country during a given period of time. A. GDP B. Consumption C. Value added D. Transfer payments

Mutual Fund

a financial intermediary that sells shares in itself to the public and then uses the funds raised to buy a wide variety of financial assets

Zero lower bound

a level, close to zero, below which the Fed cannot further reduce short-term interest rates

zero lower bound

a level, close to zero, below which the Fed cannot further reduce short-term interest rates

Balance Sheet

a list of an economic unit's assets and liabilities on a specific date

What is the primary cause of trade deficits

a low national savings rate

Velocity

a measure of the speed at which money changes hands in transactions involving final goods and services, or, equivalently, nominal GDP divided by the stock of money.

Stock

a measure that is defined at a point in time

stock

a measure that is defined at a point in time

Flow

a measure that is defined per unit of time

•Starting from a long-run equilibrium, an increase in potential output leads to ________ gap in the short run and to ________ rates of inflation in the long run.

a recessionary; lower

100 Percent Reserve Banking

a situation in which banks' reserves equal 100 percent of their deposits

banking panic

a situation in which news or rumors of the imminent bankruptcy of one or more banks leads bank depositor to rush to withdraw their funds

long-run equilibrium

a situation in which the AD and AS curves intersect at potential output Y*

Credibility

about the direction of monetary policy helps the economy run more smoothly. This leads to anchored inflationary expectations and shorter recessions

Skill-Biased Technological Change

affects the marginal products of higher skilled workers differently from those of lower-skilled workers

Skill-Biased Technological Change

affects the marginal products of higher-skilled workers differently from those of lower skilled workers -recent changes favor higher skilled workers

Private saving is

after-tax income (Y) - consumption (C)

Y

aggerate income

For a given level of inflation, if there is a greater reluctance by foreigners to purchase domestic goods, then the ________ shifts ________.

aggregate demand curve; left

M2

all the assets in M1 plus some additional assets that are usable in making payment but at greater cost or inconvenience than currency or checks

Portfolio Allocation decisions

allocate a person's wealth among alternative forms

Portfolio allocation decisions

allocate a person's wealth among alternative forms

Public Saving

amount of the public sectors income that is not spent on current needs - public sector income is net taxes - public sector spending on current needs is G - S(public) = T- G - national savings = private savings + public savings = S(private) + S(public) = (Y- T- C) + (T- G) or Y- C - G

Based on the diagram, if potential output equals 5,000 and the real interest rate is 1 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.

an expansionary; raise

Based on the diagram, if potential output equals 8,000 and the real interest rate is 2 percent, then there is ________ gap and the Fed must ________ the real interest rate so that output will equal potential output.

an expansionary; raise

Government purchases

are final goods and services bought by federal, state, and local governments Excludes transfer payments Transfer payments are made by government, but the government receives no current goods or services Excludes interest paid on government debt

Shares of Stock

are not money

involuntary part-time workers

are people who like to work full-time but cannot find a full-time job Counted as employed

Discouraged Workers

are people who say they would like to have a job but have not made an effort to find one in the past four weeks

Intermediate Goods and Services

are used up in the production of final goods Not included in GDP to avoid double counting

bank deposit also equal

bank reserves x MM

The reserve-deposit ratio is

bank reserves/total deposits

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ________ rate.

discount

Two groups of workers not counted as unemployed in the official unemployment statistics are ______ workers.

discouraged and involuntary part-time

Money

does many things, but the things it does best are to facilitate trade, serve as a common yardstick to determine value and maintain its value for later use.

As the real interest rate decreases, the supply of savings ______ and the quantity of the supply of saving ____.

does not change; decrease

Real GDP

does not measure things that are not traded in conventional markets, such as mowing your own lawn or cooking your own dinner.

If policymakers attempt to offset an adverse inflation shock with monetary ________, the resulting long-run equilibrium will be at ________ inflation rate compared to allowing the self-correcting mechanism return the economy to potential output.

easing; a higher

coincident indicators are

economic indicators that usually change at the same time as changes in overall business activity

Costs of unemployment

economic, psychological, social

Investment

must be done by domestic businesses except for owner-occupied new housing.

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired (and current) reserve/deposit ratio is 15 percent. If commercial banks borrow 100 econs in reserves from the Central Bank through discount window lending, then the money supply in Macroland will ________, assuming that the public does not wish to change the amount of currency it holds.

increase to 4,667 econs

Based on the accompanying labor-market diagram, if the minimum wage is increased from $12 to $14 per hour, the number of unemployed workers will _______ by ______ workers.

increase: 20

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ________ in the inflation rate, leading to a(n) ________ in output

increase; decrease

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset an expansionary gap resulting from a $1 billion increase in autonomous consumption, taxes must be:

increased by $1.33 billion.

If all prices, including the price of a gallon of gasoline at the pump increased by 8 percent. Then nominal price of gasoline ________, and the relative price of gasoline ________.

increased; did not change

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 5 percent. The nominal price of gasoline _____, and the real price of gasoline _____. increased; increased increased; decreased increased; did not change decreased; increased

increased; increased

If total output increases from $1,000 to $3,000 as population increases from 100 to 200, then output per person

increases, but by less than 100 percent.

Consumer Price Index (CPI)

is a measure of the cost of living during a particular period

consumer proce index (CPI)

is a measure of the cost of living during a particular period

Structural Unemployment

is long-term, chronic unemployment in a well-functioning economy - Lack of skills, language barriers, or discrimination - Structural shifts in production create a long-term mismatch between workers and market needs - Barriers to employment such as: Minimum wages, Unions, Unemployment Insurance - High economic, psychological, and social costs - Example: U.S. steel, telecommunications manufacturing

Leisure Time

is not traded in conventional markets, it is not measured in GDP even it is very important.

Final Good

is one sold to its ultimate user, which can be an individual, a business or a government entity

Investment

is spending by firms on final goods and services Business fixed investment is purchases of new capital goods Residential investment is construction of new homes and apartment buildings Inventory investment is the change in unsold goods to the company's inventory

Consumption expenditure

is spending by households for goods and services Consumer durables are long-lived consumer goods Consumer non-durable goods are shorter-lived goods Services are the largest component of consumer spending

Indexing

is the act of increasing nominal amounts by the inflation index to ensure that salaries keep up with inflation.

Marginal propensity to consume

is the change in consumption for a given change in disposable income

Cyclical Unemployment

is the increase in unemployment during economic slow downs

Cyclical Unemployment

is the increase in unemployment during economic slow-downs - Usually short duration - Economic cost is the decline in real GDP

Velocity

is the measure of the seed at which money changes hands in transactions for final goods and services

In the labor market Quantity

is the number of workers employed

Natural Rate of Unemployment

is the part of the total unemployment rate that is attributable to frictional and structural (not cyclical) unemployment only.

Deflating

is the process of dividing a nominal value by a price index to obtain the real value.

Precautionary savings

is the protection against setbacks -loss of job -medical emergency

CPI

is the ratio of the cost of the basket goods the current year to the cost in the base year

Human Capital

is the talents, training, and education of workers

Wealth

is the value of assets - liabilities

Bequest Saving

is to leave an inheritance (mainly higher income groups)

Life Cycle savings

is to meet long term objectives -retirement - purchase a home - childrens college attendance

Life-Cycle Saving

is used to meet long-term objectives. Ex: Retirement, purchase a home, and children's college attendance

CPI bias 1

its measurement of price changes but not quality changes adjusting for quality is difficult incorporating new goods is difficult

Labor Unions

keep wages artificially above market-clearing levels. Because of this, they add impede the smooth adjustment of markets to changing conditions.

Participation Rate

labor force / population 16+

participation rate =

labor force / population 16+

labor force participation rate equation

labor force / population of 16+

functions of money

medium of exchange unit of account store of value

A decision by the Federal Reserve to raise interest rates is an example of ________ policy

monetary

Quantity Equation

money times velocity equals nominal GDP

quantity equation

money times velocity equals nominal GDP: M*V = P*Y

An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a _____ the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a _____ the aggregate demand curve.

movement down; shift left of

Diminishing returns to capital

occurs if an addition of capital with other inputs held constant increases output by less than the previous increment of capital Assumption: all inputs except capital are held constant Result: output increases at a decreasing rate

"The plan to create private accounts in Social Security will reduce benefits for some workers," is an example of a ________ statement, while "Social Security will be better if the private accounts are allowed" is an example of a ________ statement

positive; normative

"U.S. exports will increase as a result of joined CAFTA," is an example of a ______ statement, while "The U.S. should join CAFTA," is an example of a _____ statement.

positive; normative

Unexpected inflation

redistributes wealth Suppose workers' salaries are not indexed and inflation is higher than anticipated Salaries lose purchasing power Employers gain at the expense of workers

To close a recessionary gap, the Fed ______ interest rates which ______ planned aggregate spending and ______ short-run equilibrium output.

reduces; increases; increases

Coupon Payments

regular interest payments made to the bondholder

Bequest Saving

saving done for the purpose of leaving an inheritance

Precautionary Saving

saving for protection against unexpected setbacks such as the loss of a job or a medical emergency

Life-Cycle Saving

saving to meet long-term objectives such as retirement, college attendance, or the purchase of a home

Law of One Price

says that goods will fetch the same price worldwide so long as transportation costs are low, this means the real exchange rate will be equal to 1

Psychological factors that may influence the saving rate are ________ and ________.

self-control problems; the demonstration effect

If the quantity supplied of money is less than the quantity demanded of money, people will ________ bonds which will cause bond prices to ________ and the nominal interest rate to ________ until the quantity demanded and quantity supplied of money are equal.

sell; fall; rise

Autonomous consumption is

spending not related to the level of disposable income

Recessions

start at the peak of the business cycle and end at the trough.

Liabilities

the debt one owes

Liabilities are

the debts one owes

outside lag

the delay between the date a policy change is implemented and the date by which most of its effects on the economy have occurred

inside lag

the delay between the date a policy change is needed and the date it is implemented

potential output

the maximum sustainable amount of output (real GDP) that an economy can produce

Potential output, Y*, also called full-employment output

the maximum sustainable amount of output that an economy can produce when using its resources at normal rates

Three macroeconomic factors that affect the demand for money are:

the nominal interest rate, real income, and the price level.

National Saving

the saving of the entire economy, equal to GDP less consumption expenditures and government purchases of goods and services, or Y-C=G

Public Saving

the saving of the government sector is equal to net tax payments minus government purchases (T-G)

Private Saving

the saving of the private sector of the economy is equal to the after-tax income of the private sector minus consumption expenditures (Y-T-C); can be further broken down into household saving and business saving

Planned aggregate expenditure

total planned spending on final goods and services

Planned aggregate expenditure (PAE)

total planned spending on final goods and services. Autonomous expenditure + Induced expenditure

If two countries are economically identical except that citizens in one country have more leisure time, then the level of GDP will be higher in the country with more leisure time. will be higher in the country with less leisure time. will be the same in both countries. will be greater than the level of economic well-being in each country.

will be the same in both countries

Worker Mobility

will reverse some of the inequality caused by international trade

If workers and employers agree to a three-year wage contract under the expectation of 2.5 percent inflation, and inflation turns out to be 10.4 percent, then

workers lose and employers gain.

discouraged workers

would like to have a job but they have not looked for work in the past four weeks because they believe they are no jobs available Counted as out of the labor force Could be counted as unemployed but they are not

o Shift in S (supply side)

§ Change in government budget · Deficit (decrease) · Surplus ( positive) Change in household savings (positive

Binding Minimum wage

•Quantity of jobs supplied (150) will be greater than quantity of jobs demanded (50). •50 workers will be employed instead of 100. •150 - 50 = 100 workers are unemployed. •Fewer workers are employed, but at a higher wage. Cost-benefit principal

According to Okun's law, when cyclical unemployment increases from 2 to 3 percent, the recessionary gap widens from ________.

−4 percent to −6 percent

$700

1,000 comsumption expenditures 600 imports 700 government purchases 500 construction of new homes and apts. 600 sales of existing homes and apts. 500 exports 200 government payments 300 household purchases of durable goods 500 beginning inventory 600 ending inventory 300 business fixed investment Given the data, compute the government purchases component of GDP.

800,000

1,000,000 Population of 16 and older 80% Participation Rate 720,000 Employed Workers Based on the information, how big is the labor force?

$13.73

A labor contract provides for a first-year wage of $12.00 per hour and specifies that the real wage will rise by 2 percent in the second year of the contract and by another 2 percent in the third year. The CPI is 1.00 in the first year, 1.05 in the second year, and 1.10 in the third year. What are the dollar wages that must be paid in the THIRD year of the contract?

capital good

A long-lived good that is used in the production of other goods and services

Real GDP

A measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices; measures the actual physical volume of production

the average price of a given class of goods or services relative to the price of the same goods and services in a base year

A price index measures:

$530 billion; $4,230 billion

Based on the following information, the value of the M1 measure of the money supply is ____________ and the value of the M2 measure of the money supply is_______________. Assets in terms of billions 20 currency 500 demand deposits 800 money market mutual funds 10 travelers checks 1800savings deposits 200 other checkable deposits 1100small denomination time deposits

$20,000

If you bought a house on 1/28/2018 and the price of this house is $200,000, the house was constructed in 1990. The commission you paid to the realtor is 10%. What is your contribution to 2018's GDP?

$650,000; $550,000

Dave's Mirror Company expects to sell $1,000,000 worth of mirrors and to produce $1,250,000 worth of mirrors in the coming year. The company purchases $300,000 worth of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals ____________ and planned investment equals____________.

Consumer price index (CPI)

For any period, a measure of the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year

consumption, investment, government purchases, and net exports

GDP can be expressed as the sum of four types of expenditure:

nominal GDP

GDP measured in terms of current-year prices is called

decrease; increase

Holding other factors constant, if a larger proportion of the population enters the labor force as a result of a growing social acceptance of women working, then the real wages of workers will ___________ and employment of workers will_______________.

does not change

If Alex uses $800 from her checking account to pay her credit card balance, wealth:

the lower share of population employed

If average labor productivity in two countries is the same, average living standards will be lower in the country with:

$150,000

If bountiful Orchard grows $100,000 worth of peaches, sells $50,000 worth of peaches to consumers and uses the rest to make jam that is sold to consumers for $100,000, Bountiful Orchard's contribution to GDP is:

25%

If potential output equals $8 billion and actual output equals $10 billion, then this economy's output gap should be expressed as

2

If the money supply equals 1,000, velocity equals 5, and real GDP equals 2,500, then the price level equals:

7%

If there is 3 percent frictional unemployment, 4 percent structural unemployment, and -2 percent cyclical unemployment, then the natural rate of unemployment equals:

a store of value

If you put a $20 bill in the pocket of your winter coat at the beginning of spring so that you will be surprised when you find it again next winter, you are using money as:

$3.17

In 1950, the minimum wage prescribed by federal law was $0.75 per hour. in 2013 it was $7.25 per hour. What's the real minimum wage in 2013? The CPI was 0.24 in 1950 and 2.29 in 2013.

900

In Econland, autonomous consumption equals 700, the marginal propensity to consume equals 0.8, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Autonomous expenditure equals:

$48,000,000; $54,000,000

In Macroland there is $12,000,000 in currency. The public hold half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5%, deposits in Macroland equal __________ and the money supply equals____________.

sells; decreases

In an open market sale, the Federal Reserve ____________ government bonds and the supply of bank reserves __________.

changes prediction levels to meet demand

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm:

price changes

In the long-run, output gaps are eliminated by:

changing prices

Menu costs are the costs of:

bequest saving

Saving done for the purpose of leaving an inheritance

precautionary

Saving for protection against unexpected setbacks such as the loss of a job or a medical emergency is called ____________ saving.

800; 200; 1,000

Suppose the following information describes the economy: 8000 consumption 1000 investment 1000 government purchases 0 net exports 500 government transfers and payments 1700 government tax collections Private saving equals_____________; public saving equals______________; national saving equals______________.

$4,428

Suppose when you are 21 years old, you deposit $1,000 into a bank account that pays annual compound interest, and you do not withdraw from the account until your retirement at the age of 65, 44 years later. How much more will be in your account if the interest rate is 6 percent rather than 5 percent?

36

Suppose you deposit some money in your saving account and the bank uses the compound interest rate. If the interest rate is 2 percent per year, it will take __________ years for the initial sum to double

$15

Suppose you have $200 with which you can buy shares of stock from two companies: ABC Hot Chocolate Company and XYZ Lemonade. Each company's stock currently sells for $100 per share. It the temperature next year is lower than average, the stock price for ABC will increase by $20, and the stock price for XYZ will not change. If the temperature next year is higher than average, the stock price for XYZ will increase by $20, and the stock price for ABC will not change. If the temperature next year does not change, there won't be any return. There is a 50% chance that it will be colder than average next year, a 25% chance that it will be warmer than average, and 25% chance of no temperature change. If you purchase one share of ABC stock and one share of XYZ stock, your expected gain will be:

$10,095

Sydney purchases a newly issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bond matures (after receiving the coupon payment for the first year). Syndey sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if newly issued one-year government bonds are paying a 5% coupon rate?

-6.7

The CPI in 1931 equaled 0.15. The CPI in 1932 equaled 0.14. The rate of inflation between 1931 and 1932 was _____________ percent.

$5,640

The Spends and the Thrifts are similar families. Spends save 5% of their income each year and the Thrifts save 20%. The two families began to save at the beginning of 1980. Both families earn $40,000 a year in real terms in the labor market, and both put their savings in a mutual fund that has yielded a real return of 8 percent per year. What's the consumption difference between these two families in the second year (at the end of 1981)?

intermediate goods and services

_________________________________, which are used up in the production of final goods and services, are not counted in GDP, nor are sales of existing assets.

Gross Domestic Product (GDP)

The basic measure of an economy's output is ________________, the market value of the final goods and services produced in a country during a given period.

length of time a spell of unemployment lasts

The duration of an unemployment spell is a measure of the:

trough

The end of a recession is called the:

government budget surplus

The excess of government tax collections over government spending; equals public saving

coupon rate

The interest rate promised when a bond is issued; the annual coupon payments are equal to the coupon rate times the principal amount of the bond

real GDP per person

The key indicator of a country's living standard and economic well-being is:

$8,000

The population of Alpha totals one million people, 40 percent of whom are employed. Average output per worker in Alpha is $20,000. Real GDP per person in Alpha totals:

increased

The price of a gallon of gasoline was $0.35 in 1972 when the CPI equaled 0.418. The cost of a gallon of gasoline was $2.25 in 2005 when the CPI equaled 1.68. The real cost of gasoline between 1972 and 2005:

core rate of inflation

The rate of increase of all prices except energy and food

the Fisher effect

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low is known as:

$255

The typical consumer's food basket in the base year 2015 is as follows: 30 chickens at $4 each 10 hams at $5 each 10 steaks at $8 each A chicken feed shortage causes the price of chickens to rise to $5.00 each in the year 2016. Hams rise to $7.00 each in 2016, and the price of steaks is unchanged. Suppose that consumers are completely indifferent between two chickens and one ham. After the substitution, what is the living cost in 2016?

decreased by 4.5%

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2008, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2009, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2008 and 2009, a typical family's cost of living:

indexed

To ensure that your salary maintains its real purchasing power from year to year, your nominal salary must be:

higher

To obtain a given real rate of return, lenders must charge a __________ nominal interest rate in the face of increasing inflation.

100

Using the following given information to construct the PAE function. Find out by how much would autonomous expenditure have to decrease to eliminate the output gap. C= 4,000+0.75(Y-T) Ip=2,000 G=3,500 NX=100 T=3,000 Y*=29,000

$4,095,100

We assume there is one commercial bank in this economy. This bank currently has the following T-bill, and it wants to keep a 10% reserve-deposit ratio. Citizens don't hold cash and put all their money in this bank. What is the total deposit of this bank has after it lends out the extra reserve to the borrowers, and the borrowers deposit the loan into the bank again (only ONE round of lending)? Assets Liabilities Bank Reserve: $1,000,000 Deposit: $3,439,000 Loan: $2,095,100

small time deposit

Which of the following does not belong to M1?

The United States GDP in 2016

Which of the following is a flow variable?

The number of tons of steel produced in 2005

Which of the following is a real quantity?

Hector looked for a job for five weeks after finishing college. He turned down several jobs that didn't fit his skills, but now has a job that requires the expertise he gained in college.

Which of the following is an example of frictional unemployment?

Construction worker

Which of the following workers is most likely to lose their job during a recession?

8.0%

You expect a share of EconNews.com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5%. How much is your risk premium?

$10

Your barber charges $10 for a haircut. In turn, the barber pays his assistant $2 per haircut in return for sharpening the scissors, sweeping the floor, and other chores. For each haircut given, what is the total contribution of the barber and his assistant, taken together, to GDP?

bond

a legal promise to repay a debt, usually including both the principal amount and regular interest, or coupon, payments

flow

a measure that is defined per unit of time

precautionary saving

saving for protection against unexpected setbacks such as the loss of a job or a medical emergency

structural unemployment

the long-term and chronic unemployment that exists even when the economy is producing at a normal rate

unemployment rate

the number of unemployed people divided by the labor force

national saving

the saving of the entire economy, equal to GDP minus consumption expenditures and government purchases, or Y - C- G

public saving

the saving of the government sector is equal to net tax payment minus government purchases (T-G)

private saving

the saving of the private sector of the economy is equal to the after-tax income of the private sector minus consumption expenditures (Y-T-C); can be further broken down into household saving and business saving