ECON EXAM 3
Which of the following are included in the expenditure approach to measuring GDP?
consumption expenditure; government expenditure on goods and services; investment
Cost-push inflation is an inflation that begins with an increase in _____.
cost
Macroeconomic equilibrium occurs when the quantity of _____ demanded equals the quantity of _____ supplied at the point of intersection of the _____ curve and the _____ curve.
real GDP; real GDP; AD; AS
M1 consists of currency held by _____ and _____, _____, and _____ owned by individuals and businesses.
individuals; businesses; traveler's checks; checkable deposits
Aggregate supply is the relationship between the quantity of _____ supplied and the _____ when all other influences on production plans remain the same.
real GDP; price level
The table shows the amounts held as the various components of M1 and M2. Calculate the value of M1 and M2.
The value of M1 is $150 billion. The value of M2 is $1015 billion.
The table gives information about items on a bank's balance sheet. Calculate the bank's deposits that are part of M1, deposits that are part of M2, and the bank's loans, securities, and reserves. The bank's deposits that are part of M1 equal ______ million. The bank's deposits that are part of M2 equal ______ million. The bank's loans are ______ million and the bank's securities are ______ million. The bank has reserves of ______ million.
$500 million $1600 million $1050 ; $500 $50
The table provides some data for an economy in 2016 and 2017. Calculate labor productivity in 2016 and 2017. Labor productivity in 2016 is _____ an hour. Labor productivity in 2017 is ______ an hour.
1.92
The table provides some data on real GDP and the population of Eastiana in 2018 and 2019. What is the economic growth rate in Eastiana in 2019? What is the growth rate of Eastiana's standard of living in 2019? The economic growth rate in Eastiana in 2019 is _______ percent. The growth rate of Eastiana's standard of living in 2019 is ______ percent.
10.2 6
The table sets out an economy's aggregate demand and aggregate supply schedules. What is the macroeconomic equilibrium? If potential GDP is $600 billion, what is the type of macroeconomic equilibrium? How do real GDP and the price level adjust in the long run? Price level Real GDP demanded Real GDP supplied (GDP price index) (billions of 2012 dollars) 90. 900. 600 100. 850. 700 110. 800. 800 120. 750. 900 130. 700 1,000 The macroeconomic equilibrium occurs at a price level of ________ and real GDP of $_______ billion. If potential GDP is $600 billion, the economy is _______.
110; 800 above full employment and has an inflationary gap aggregate supply decreases, the price level rises, and real GDP decreases to potential GDP
The tables set out information about the economy of Athabasca. Calculate the quantity of labor employed, the real wage rate, and potential GDP. The quantity of labor employed is ______ million hours. The real wage rate is $_______ an hour. Potential GDP is $______ million.
3 22 69
Hyperinflation is inflation at a rate that exceeds _____ percent a month (which translates to _____ percent per year).
50; 12,875
Classify each of the following items as a final good or an intermediate good, and classify the expenditure on each final good as consumption expenditure or investment: Item 1. A DVD bought by a household Item 2. New cars bought by Hertz, the car rental firm Item 3. New aircraft bought by Southwest Airlines Item 4. Cardboard boxes bought by Amazon.com Item 1 is _______ and item 2 is _______. Item 3 is _______ and item 4 is _______.
A FINAL GOOD THAT IS CONSUMPTION EXPENDITURE; A FINAL GOOD THAT IS INVESTMENT A FINAL GOOD THAT IS INVESTMENT; AN INTERMEDIATE GOOD
What is a good that is used as a component of a final good? Is the value of intermediate goods included in the measure of GDP? _______ good is used as a component of a final good. We _______ add the value of intermediate goods produced to the value of final goods to measure GDP.
AN INTERMEDIATE; DO NOT
Table 1 Production Function and Demand for Labor Schedules Quantity of labor demanded (billions of hours per year) 0 2 4 Real GDP (billions of 2012 dollars) 0 105 150 Real wage rate (2012 dollars per hour) 75 45 15 Table 2 Supply of Labor Schedule Quantity of labor supplied (billions of hours per year) 0 2 4 Real wage rate (2012 dollars per hour) 15 45 75 Use the information in the schedules above to draw this economy's production function. Label it. Draw a point to show equilibrium employment and potential GDP. At the full-employment quantity of labor, what is the real wage rate?
CURVED LINE: (0,0) (2,35) (4,50) POINT: (2,35) $15 an hour
Table 1 Production Function and Demand for Labor Schedules Quantity of labor demanded (billions of hours per year) 0 3 5 Real GDP (billions of 2012 dollars) 0 48 60 Real wage rate (2012 dollars per hour) 24.00 12.00 4.00 Table 2 Supply of Labor Schedule Quantity of labor supplied (billions of hours per year) 0 3 5 Real wage rate (2012 dollars per hour) 6.00 12.00 16.00 Use the information in the schedules above to draw this economy's production function. Label it. Draw a point to show equilibrium employment and potential GDP. At the full-employment quantity of labor, what is the real wage rate?
CURVED LINE: (0,0) (3,48) (5,60) POINT: (3,48) $12 an hour
What is U.S. gross domestic product? U.S. gross domestic product is the market value of all the _______ produced _______ in a given time period.
FINAL GOODS AND SERVICES; WITHIN THE UNITED STATES
Real-Time Data Analysis Exercise* The table shows the levels of nominal GDP and real GDP for the fourth quarter of 2022 (the most recent quarter for which data are available). Which had the faster growth rate, nominal GDP or real GDP? Why did nominal GDP have the faster growth rate?
From the fourth quarter of 2021 to the fourth quarter of 2022, nominal GDP increased by 7.3 percent. From the fourth quarter of 2021 to the fourth quarter of 2022, real GDP increased by 2.2 percent. nominal GDP because prices increased
Real-Time Data Analysis Exercise* The table shows the levels of consumption expenditure, investment, government expenditure, net exports, and GDP for the fourth quarter of 2022 (the most recent quarter for which data are available). Comparing the data for the fourth quarter of 2022 with that for the second quarter of 2011 in Table 21.1 in your textbook, how has GDP changed? Comparing the data for the fourth quarter of 2022 with that for the second quarter of 2011 in Table 21.1 in your textbook, how has consumption expenditure changed as a percentage of GDP? Consumption expenditure as a percentage of GDP has _______.
GDP has increased decreased
The table shows some of the items in a country's National Income and Product Accounts in 2018. Use the expenditure approach to calculate GDP in 2018.
GDP in 2018 using the expenditure approach is $11.7 trillion. (sum of all the components in GDP)
Expansion remains slow The Commerce Department reported that retail sales increased 1.3 percent in June. Net exports were up 0.8 percent in the first quarter and inventories held by businesses rose by 0.3 percent in June. Total sales by businesses rose 0.3 percent. What is the effect of the rise in net exports on GDP? The rise in net exports _______.
INCREASES GDP
An economy produces only two final goods: fish and berries. The table shows the quantities produced and the prices of these final goods in 2020 and 2021. The base year is 2020. By what percentage did real GDP change in 2021?
In 2021, real GDP changed by 7.8 percent.
Suppose that the United States is at full employment. Explain the effect of each of the following events on aggregate supply: Union wage settlements push the money wage rate upward by 10 percent; the price level increases; potential GDP increases. Union wage settlements push the money wage rate upward by 10 percent. Draw a curve to show the effect of this event on aggregate supply. Label it AS1. If the price level increases, _______. If potential GDP increases, _______.
LINE: (19,100) - (21,120) the quantity of real GDP supplied increases the AS curve shifts rightward
The graph shows an economy's aggregate demand curve. Draw a curve to show the effect on aggregate demand today of an increase in expected future profit. Label it. What is the effect of an increase in expected future income and an increase in the expected future inflation rate on aggregate demand today? An increase in expected future income _______ aggregate demand today, and an increase in the expected future inflation rate _______ aggregate demand today.
LINE: shifts rightward (19.0, 130) - (21.5, 100) increases; increases
The U.S. economy is close to full employment when the government increases government expenditure. What are the effects of this action on the macroeconomic equilibrium in the short run? Explain the adjustment process that returns the economy to full employment. The graph shows the U.S. economy at full employment. Show the effect of an increase in government expenditure. Draw either a new aggregate demand curve labeled AD1 or a new aggregate supply curve labeled AS 1. Draw a point at the new macroeconomic equilibrium. To restore full employment, the money wage rate will _______. The price level _______.
LINE: shifts rightward for supply rise and aggregate supply decreases; rises
Draw the potential GDP line when potential GDP is $19.5 trillion. Label it. Do any costs remain constant as we move up along the potential GDP line? As we move up along the potential GDP line, _______.
LINE: vertical line at 19.5 the real wage rate remains constant
Sara withdraws $1,500 from her checking account at Bank of America, keeps $300 in cash, and deposits the balance in her small time deposit account at Citibank. What is the immediate change in M1 and M2?
M1 decreases by $1200 and there is no change in M2
M2 consists of _____ plus _____ and _____ deposits, _____, and other deposits.
M1; savings deposits; small time; money market funds
The table shows an economy's total production and the prices of the final goods it produced in 2020 and 2021. Calculate nominal GDP in 2020 and nominal GDP in 2021.
Nominal GDP in 2020 is $460 Nominal GDP in 2021 is $1035 (multiply quantity x price & add together)
How is total expenditure in the United States calculated? Total expenditure in the United States is equal to consumption expenditure plus investment _______.
PLUS GOVERNMENT EXPENDITURE ON GOODS AND SERVICES PLUS NET EXPORTS
The table shows an economy's total production and the prices of the final goods it produced in 2020 and 2021. The base year is 2020. Calculate real GDP in 2020 and real GDP in 2021.
Real GDP in 2020 is $380 Real GDP in 2021 is $460
What can the Fed do to increase the quantity of money and keep the monetary base constant? Explain why the Fed would or would not do each of the following. Change the currency drain. Change the required reserve ratio. Change the discount rate. Conduct an open market operation.
The Fed cannot change the currency drain. It is determined by households and firms. The Fed could decrease the required reserve ratio and increase the money multiplier. The Fed would most likely not change the discount rate because it doesn't directly affect the money multiplier. The Fed would not conduct an open market operation because such an operation would change the monetary base.
Real-Time Data Analysis Exercise* *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. The table shows the quantities of M1, M2, and the monetary base in February 2023. What are the values of the M1 money multiplier and the M2 money multiplier in February 2023?
The M1 money multiplier is 6.2 The M2 money multiplier is 6.8
A bank holds $8 for every $100 in deposits. The bank wants to hold $6 for every $100 in deposits. The bank holds excess reserves of $19,000 and actual reserves of $10,000. What is the actual reserve ratio, the desired reserve ratio, and the desired reserves?
The actual reserve ratio is .08 The desired reserve ratio is .06 The desired reserves are $9000
The desired reserve ratio is 5 percent, and the currency drain ratio is 25 percent of deposits. The central bank makes an open market purchase of $4 million of securities. Calculate the change in the monetary base and the change in its components. When the central bank makes an open market purchase of $4 million of securities, the component of the monetary base that changes is _______.
The change in the monetary base is an increase of $4 million. bank reserves
In 2014, U.S. exports of goods and services are $2,335 billion and imports of goods and services are $2,899 billion . What is the value of net exports?
The value of net exports in 2014 is -564 billion dollars. (EXPORTS - IMPORTS)
Mitsubishi Heavy Industries makes the wings of the new Boeing 787 Dreamliner in Japan. Toyota assembles cars for the U.S. market in Kentucky. Where do these activities appear in the National Income and Product Accounts of Japan?
The value of the wings appear as Japanese exports in the expenditure approach to measuring Japan's GDP and Japan's GNP.
In the United States today, which of the following items are money? In the United States today, money includes _______.
U.S. dollar bills in your wallet and the funds in GM's checking account
In the graph, the economy is initially at point B. The initial aggregate supply curve is AS Subscript 0 and the initial aggregate demand curve is AD Subscript 0. Some events change aggregate demand from AD Subscript 0 to AD Subscript 1. Describe two possible events. What is the new equilibrium point? If potential GDP is $1 trillion, describe the type of macroeconomic equilibrium. Some events that could have changed aggregate demand from AD Subscript 0 to AD Subscript 1 are _______. Following the change in aggregate demand, the new equilibrium is at _______. If potential GDP is $1 trillion, the economy has _______ gap.
a decrease in taxes or an increase in the quantity of money point C; an inflationary
What function does money serve? Money serves the function of being _______.
a medium of exchange, which means that it is generally accepted in return for goods and services
The gap in the graph is _______ because _______.
a recessionary gap; potential GDP exceeds real GDP
In the graph, the economy is initially at point B. The initial aggregate supply curve is AS Subscript 0 and the initial aggregate demand curve is AD Subscript 0. Some events change aggregate supply from AS Subscript 0 to AS Subscript 1. Describe two possible events. What is the new equilibrium point? If potential GDP is $1 trillion, does the economy have an inflationary gap, a recessionary gap, or no gap? The events which could have changed aggregate supply from AS Subscript 0 to AS Subscript 1 are _______. Following the change in aggregate supply, the new macroeconomic equilibrium is at _______. If potential GDP is $1 trillion, the economy has _______ gap.
a rise in the money wage rate or a rise in the money price of any other factor of production point A; a recessionary
The table describes labor productivity in an economy. What must have occurred in this economy during year 1? During year 1, _______.
advances in technology or an increase in human capital could have occurred
Demand-pull inflation is an inflation that starts because _____.
aggregate demand increases
If the economy is at full employment and the Fed increases the quantity of money, ______.
aggregate demand increases, an inflationary gap appears, and the money wage rate starts to rise
The quantity of labor demanded is the total labor hours that _____ during a given time period at a given _____. The demand for labor is the relationship between the _____ and the _____ when all other influences on hiring plans remain the same.
all the firms in the economy plan to hire; real wage rate; quantity of labor demanded; real wage rate
The quantity of labor supplied is the total of labor hours that _____ during a given time period at a given _____. The supply of labor is the relationship between the _____ and the _____ when all other influences on work plans remain the same.
all the households in the economy plan to work; real wage rate; quantity of labor supplied; real wage rate
An economy produces only fun and food. The table shows the prices and the quantities of fun and food produced in 2020 and 2021. The base year is 2020. If potential GDP in 2020 was $270 and it grew by 1 percent in 2021, in which phase of the business cycle is the economy? The economy is in _______ because _______ between 2020 and 2021.
an expansion; real GDP is increasing
Investors snapping up US homes at record levels With confidence in the housing market and low mortgage interest rates, U.S. investors are buying new and existing homes at a record high rate. Where do sales and inventories of existing homes appear in the circular flow of expenditure and income? How does an increase in sales of existing homes and a low inventory of existing homes affect real GDP? Sales and inventories of existing homes _______ in the circular flow of expenditure and income. An increase in sales of existing homes and a low inventory of existing homes _______ GDP.
are not part of current expenditure, so they do not appear; does not influence
What does the production function separate? What does the shape of the production function illustrate? The production function separates _______. The production function _______.
attainable combinations of labor hours and real GDP from unattainable combinations displays diminishing returns
If the Fed makes an open market sale of $1 million of securities, who can buy the securities from the Fed? What initial changes occur if the Fed makes the open market sale to a bank? If the Fed makes an open market sale of $1 million of securities, _______ can buy the securities from the Fed. When the Fed makes an open market sale to a bank, the monetary base _______ and the Fed's assets _______. The bank's deposit with the Fed _______ and the bank's total assets _______.
banks or the public but not the government decreases; decrease decreases; are the same
If the Fed makes an open market sale of $1 million of securities, what is the process by which the quantity of money changes? What factors determine the change in the quantity of money? The bank's reserves _______ and its deposits _______. The change in the quantity of money is determined by _______. The bank _______.
decrease by $1 million; do not change the desired reserve ratio and the currency drain ratio; the larger the desired reserve ratio or the currency drain, the smaller is the decrease in the quantity of money is short of reserves so it calls in loans and deposits decrease by the same amount
The tables set out information about the economy of Athabasca. Suppose the labor force participation rate of Athabasca decreases. How do employment, the real wage rate, and potential GDP change? When the labor force participation rate of Athabasca decreases, employment _______. When the labor force participation rate of Athabasca decreases, potential GDP _______, and the real wage rate _______.
decreases decreases; increases
Democrats introduce bill to hike federal minimum wage to $15 per hour Democrats want to gradually raise the federal minimum wage to $15 per hour from the current $7.25. Explain how a gradual rise in the federal minimum wage will influence aggregate supply. The gradual rise in the federal minimum wage _______. If the rise in the minimum wage increases the natural unemployment rate, potential GDP ______ and aggregate supply ______.
decreases aggregate supply because the money wage rate increases and firms' costs increase decreases; decreases further
U.S. incomes fall for first time in 2 years Consumer spending rose 0.2 percent in August, down from 0.7 percent in July. Incomes fell 0.1 percent—the first decline since October 2009. Consumer spending accounts for 70 percent of economic activity. Explain the effect of these events in terms of the AS-AD model. The increase in consumer spending increases aggregate _______. Incomes decreased so _______.
demand; either the fall in incomes decreased the other components of aggregate demand or aggregate supply decreased
Which of the following are included in the income approach to measuring GDP?
indirect taxes less subsidies; interest; profit
What is the quantity of real GDP produced if the real wage rate is at the full-employment equilibrium level? If the real wage rate is at the full-employment equilibrium level, real GDP is _______.
equal to potential GDP; which is efficient but is not the most that can be produced
Which of the events in the table increase potential GDP and which decrease it? _______ will increase potential GDP. _______ will decrease potential GDP.
event 1; events 2 and 3
Which of the events in the table increase the equilibrium quantity of labor and which decrease the equilibrium quantity of labor? An increase in the equilibrium quantity of labor is a result of _______. A decrease in the equilibrium quantity of labor is a result of _______.
event 1; events 2 and 3
Which of the events in the table raise the real wage rate and which of the events in the table lower the real wage rate? A rise in the real wage rate is a result of _______. A fall in the real wage rate is a result of _______.
events 1 and 3; event 2
A recessionary gap is a gap that exists when potential GDP _____ real GDP and that brings a _____ price level. An inflationary gap is a gap that exists when real GDP _____ potential GDP and that brings a _____ price level.
exceeds; falling exceeds; rising
A medium of exchange is an object that is generally accepted in return for _____. Barter is the direct exchange of goods and services for _____, which _____ a double coincidence of wants.
goods and services other goods and services; requires
The United States is at full employment when the Fed increases the quantity of money, other things remaining the same. Explain the effect of the increase in the quantity of money on aggregate demand in the short run. An increase in the quantity of money _______.
increases aggregate demand
As the price level rises, how do firms respond in the short run to the change in the real wage rate? As the price level rises, firms respond in the short run to the change in the real wage rate by _______.
increasing production
What is the effect of an open market purchase of $1 million of securities by the Fed? The quantity of money _______ by $1 million multiplied by _______. Desired reserve ratio = R/D; Currency drain ratio = C/D; Monetary base = MB; Quantity of money = M. The formula used to calculate the money multiplier is _______. The sign of the money multiplier is _______. The quantity of money _______.
increases; the money multiplier (1 + C/D)/(R/D + C/D) positive increases
Explain the Fed's policy tools and briefly describe how each works. The Fed uses its policy tools to _______. By increasing the required reserve ratio, the Fed forces banks to hold a _______ quantity of monetary base and the interest rate _______. By lowering the interest rate, the Fed makes it _______ costly for the banks to borrow monetary base and the interest rate _______. When the Fed sells securities in the open market, the monetary base _______ and the interest rate _______.
influence the interest rate and regulate the amount of money circulating the United States by adjusting the reserves of the banking system larger; rises less; falls decreases; rises
The federal funds rate is the _____ rate on _____ loans.
interest; interbank
Keynesian macroeconomics is the view that the market economy _____ and needs _____ to achieve full employment and sustained economic growth.
is inherently unstable; active government intervention
Fiat money are objects that are _____ because the law decrees or orders them to be _____.
money; money
Suppose the money wage rate rises from $35.00 to $36.04 an hour and consumer prices rises by 6 percent. What would be the effect in the labor market? We would expect _______ people to try to find a job and employed people to want to work _______ hours. The _______ would _______.
more; longer quantity of labor supplied; increase
In the graph, the economy is initially at point B. The initial aggregate supply curve is AS Subscript 0 and the initial aggregate demand curve is AD Subscript 0. Some events changed aggregate demand from AD Subscript 0 to AD Subscript 1 and aggregate supply from AS Subscript 0 to AS Subscript 1. What is the new macroeconomic equilibrium? Following the changes in aggregate demand and aggregate supply, the new macroeconomic equilibrium is at _______.
point D
If the Fed wants to increase the quantity of money, what actions does it take? What is the effect on reserves in the banking system, loans, bank deposits, and the quantity of money? If the Fed wants to increase the quantity of money, it makes an open market _______. Reserves in the banking system _______. Banks _______ loans. Bank deposits _______ and the quantity of money _______.
purchase increase; make more increase; increases
What is the economic growth rate? How is it calculated? The economic growth rate is the annual percentage change of _______ Real GDP growth rate = _______.
real GDP [(Real GDP in current year - Real GDP in previous year) / Real GDP in previous year] x 100
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
What does GDP calculated by the expenditure approach minus GDP calculated by the income approach equal? GDP calculated by the expenditure approach minus GDP calculated by the income approach equals _______.
statistical discrepancy
What is gross national product? Gross national product is _______.
the market value of all the final goods and services produced anywhere in the world in a given time period by the factors of production supplied by the residents of that country
Classical macroeconomics is the view that the market economy _____, that aggregate fluctuations are _____, and that government intervention _____ improve the efficiency of the market economy.
works well; a natural consequence of an expanding economy; cannot
Monetarist macroeconomics is the view that the market economy _____, that aggregate fluctuations are _____, but that fluctuations in the _____ generate the business cycle.
works well; a natural consequence of an expanding economy; the quantity of money
Investors snapping up US homes at record levels With confidence in the housing market and low mortgage interest rates, U.S. investors are buying new and existing homes at a record high rate. Where do new-home sales appear in the circular flow of expenditure and income? How does a surge in new home sales affect real GDP? New home sales appear in the _______ category of the U.S. National Income and Product Accounts. New home sales _______.
investment; increase GDP and the surge in new home sales this year make the increase in GDP greater than the previous year
