Exam 2- Macro

In 2015, India's real GDP grew by 7.3 percent a year and its population grew by 1.3 percent a year. If these growth rates are sustained, in what years would 1. Real GDP be twice what it was in 2015? 2. Real GDP per person be twice what it was in 2015

1. rule of 70: 70/7.3= ~10 yrs RGDP will double in the yr 2025 2. growth rate of RGDP/person is 7.3-1.3= 6% # of yrs to double is 70/6= ~12 yrd RGDP/person will double in the yr 2027

If the population growth rate is 2 percent, real GDP per person will double in 7 years if real GDP grows by ________ percent per year. A. 7 B. 10 C. 12 D. 14

12% rule of 70= 70/10= 7 yrs to double if 10 was growth rate of rGDP/per is 10. Growth rate is 12% b/c 12-2=10

An increase in expected future income increases ________. A. consumption expenditure, which increases current aggregate demand B. investment, which increases current aggregate supply C. the demand for money, which decreases current aggregate demand D. future consumption expenditure and has no effect on current aggregate demand

A. consumption expenditure, which increases current aggregate demand

Macroeconomic equilibrium occurs when the quantity of real GDP ________ equals the quantity of ________. A. demanded; real GDP supplied B. demanded; potential GDP C. supplied; potential GDP D. demanded; real GDP supplied and potential GDP

A. demanded; real GDP supplied

Saving equals ________. A. income minus consumption expenditure minus net taxes B. income minus net taxes C. total income minus total expenditure D. net taxes minus government expenditure

A. income minus consumption expenditure minus net taxes

Saving equals ________. A. income minus consumption expenditure minus net taxes B. income minus net taxes C. total income minus total expenditure D. net taxes minus government expenditure

A. income minus consumption expenditure minus net taxes

The following statements about the business cycle are correct except ________. A. it is a regular predictable cycle in real GDP around potential GDP B. from the peak to the trough, the economy is in a recession C. from the trough to the peak, the economy is in an expansion D. it is a periodic movement in economic activity including employment

A. it is a regular predictable cycle in real GDP around potential GDP A The business cycle fluctuations around potential GDP are irregular and difficult to predict

Aggregate supply increases when ________. A. the price level rises B. the money wage rate falls C. consumption increases D. the money price of oil increases

A. the price level rises

The aggregate demand curve illustrates the relationship between Question 30 options: A) the price level and the quantity of goods supplied by firms. B) the price level and the potential demand for real GDP. C) the price level and the potential quantity demanded of real GDP. D) the price level and the quantity of goods demanded by households, firms, government, and foreigners. E) the real wage rate and the hours of labor demanded by firms.

AD shows realtionship between price and real gdp output.

When potential GDP increases, ________. A. aggregate demand increases B. aggregate supply increases C. both aggregate demand and aggregate supply increase D. the price level rises

B. aggregate supply increases When PGDP increases with increase in price, the AS of G and S increases

The increase in real GDP per hour of labor that results from an increase in capital per hour of labor ________. A. is constant and independent of the quantity of capital B. is larger at a small quantity of capital than at a large quantity of capital C. is smaller at a small quantity of capital than at a large quantity of capital D. decreases as technology advances

B. is larger at a small quantity of capital than at a large quantity of capital explanation: when the amt of cap is small, and increase in cap brings a large increase in output (GDP), and when amt of cap is large, increase at a decreasing rate. Explains, as the Q of cap becomes larger, economy experiences diminishing returns. An increase in rGDP/hr of labor results in an increase in capital per hour of labor is HIGHER when the Q of cap is SMALLER

Real GDP per person is not an accurate measure of the standard of living because it ________. A. includes the goods and services that governments buy B. omits the goods and services that people produce for themselves C. includes goods and services bought by firms D. omits the goods and services imported from other countries

B. omits the goods and services that people produce for themselves

Real GDP per person is not an accurate measure of the standard of living because it ______. A. includes the goods and services that governments buy B. omits the goods and services that people produce for themselves C. includes goods and services bought by firms D. omits the goods and services imported from other countries

B. omits the goods and services that people produce for themselves B In less developed nations, GDP is a poor measure of the standard of living because much of a person's consumption is produced by the person themselves

Over the past decade, the demand for goods produced in China has brought a sustained increase in the demand for China's exports that has outstripped the growth of supply. As a result, China has experienced a ________. A. period of stable prices and sustained economic growth B. rising price level and demand-pull inflation C. rising price level and cost-push inflation D. rising price level and a falling real wage rate

B. rising price level and demand-pull inflation if AD> AS then inflation occurs due to an increase in price= demand pull inflation

When using the income approach to measure GDP at market prices, in addition to summing all factor incomes it is necessary to ________. A. subtract depreciation because profit is not reported as net profit B. add depreciation because capital depreciates when goods are manufactured C. add indirect taxes less subsidies to convert aggregate income from factor cost to market prices D. add a statistical discrepancy which is the sum of depreciation and indirect taxes less subsidies

C. add indirect taxes less subsidies to convert aggregate income from factor cost to market prices

When using the income approach to measure GDP at market prices, in addition to summing all factor incomes it is necessary to ________. A. subtract depreciation because profit is not reported as net profit B. add depreciation because capital depreciates when goods are manufactured C. add indirect taxes less subsidies to convert aggregate income from factor cost to market prices D. add a statistical discrepancy which is the sum of depreciation and indirect taxes less subsidies

C. add indirect taxes less subsidies to convert aggregate income from factor cost to market prices

If the economy is at full employment and the Fed increases the quantity of money, ________. A. aggregate demand increases, a recessionary gap appears, and the money wage rate starts to rise B. aggregate supply increases, the price level starts to fall, and an expansion begins C. aggregate demand increases, an inflationary gap appears, and the money wage rate starts to rise D. potential GDP and aggregate supply increase together and the price level does not change

C. aggregate demand increases, an inflationary gap appears, and the money wage rate starts to rise If there's an increase in Q of money at the full employment level of an economy, then the AD will increases= inflationary gap. In inflationary gap there is a labor SHORTAGE and money wage rates will increase.

The expenditure approach to measuring U.S. GDP equals ________. A. the sum of U.S. consumption expenditure and U.S. investment B. U.S. government expenditure minus taxes paid by Americans C. all expenditure on final goods and services produced in the United States in a given time period D. all expenditure by Americans on goods and services produced in the United States in a given time period

C. all expenditure on final goods and services produced in the United States in a given time period

Gross domestic product is the market value of all the ________ in a given time period. A. goods and services bought by Americans B. goods and services produced by American companies in all countries C. final goods and services produced by all firms located in the United States D. U.S.produced goods and services bought in the United States

C. final goods and services produced by all firms located in the United States

Gross domestic product is the market value of all the ________ in a given time period. A. goods and services bought by Americans B. goods and services produced by American companies in all countries C. final goods and services produced by all firms located in the United States D. U.S.produced goods and services bought in the United States

C. final goods and services produced by all firms located in the United States

A ________ is a final good and ________ is an intermediate good. A. new car bought by a student; a used SUV bought by a dealer B. new textbook; a used textbook C. new iPhone bought by a student; a new computer bought by Walmart D. tank of gasoline bought by you; jet fuel bought by Southwest Airlines

C. new iPhone bought by a student; a new computer bought by Walmart

The quantity of real GDP demanded increases if ________. A. the buying power of money increases B. the money wage rate rises C. the price level falls D. the nominal interest rate fall

C. the price level falls When AD increases, RGDP increases so price would lower

The expenditure approach to measuring U.S. GDP equals ________. A. the sum of U.S. consumption expenditure and U.S. investment B. U.S. government expenditure minus taxes paid by Americans C. all expenditure on final goods and services produced in the United States in a given time period D. all expenditure by Americans on goods and services produced in the United States in a given time period

D. all expenditure by Americans on goods and services produced in the United States in a given time period

An economy can achieve faster economic growth without ________. A. markets and property rights B. people being willing to save and invest C. incentives to encourage the research for new technologies D. an increase in the population growth rate

D. an increase in the population growth rate Pop growth does NOT cause faster economic growth compared to advancement in tech and growth in human cap or investment in physical cap.

A ________ is a final good and ________ is an intermediate good. A. new car bought by a student; a used SUV bought by a dealer B. new textbook; a used textbook C. new iPhone bought by a student; a new computer bought by Walmart D. tank of gasoline bought by you; jet fuel bought by Southwest Airlines

D. tank of gasoline bought by you; jet fuel bought by Southwest Airlines

When the Fed raises the federal funds​ rate, the​ long-term real interest rate​ ______. A. *rises about one year later B. falls about one year later C. *rises within a few months D. rises the same day or the next day The​ long-term interest rate fluctuates​ _______ than the​ short-term interest rate because​ _______. A. ​more; long-term loans are riskier than​ short-term loans B. ​less; the Fed sets the federal funds​ rate, which is a​ short-term interest rate C. ​less; it is influenced by expectations about future​ short-term interest rates as well as current​ short-term interest rates D. ​more; it is difficult to know what will happen in the economy in the long run

It rises within a few months. When Fed increases the federal funds rate, both ong term and short term interset rate rises. Movements in the federal funds rate are passed on to other short-term interest rates that influence borrowing costs for firms and households. Movements in short-term interest rates also influence long-term interest rates--such as corporate bond rates and residential mortgage rates--because those rates reflect, among other factors, the current and expected future values of short-term rates. In addition, shifts in long-term interest rates affect other asset prices, most notably equity prices and the foreign exchange value of the dollar. For example, all else being equal, lower interest rates tend to raise equity prices as investors discount the future cash flows associated with equity investments at a lower rate. Or Rises about one year later more; long-term loans are riskier than short term loans

equations & definitions: Labor productivity Growth rate of RGDP rule of 70 RGDP/person

LP= Q of RGDP produced by 1 hr of labor; RGDP/Aggregate HRs Growth rate of RGDP= Tells you how rapidly the total economy is expanding; (RGDP current- RGDP previous)/previous * 100 70= # of yrs it takes to double the annual % growth rate of the variable; 70/% growing rate RGDP/person= It's used to compare the standard of living between countries and over time; GDP/person

2015= Q of Apples: 60 at $.50; Q of Oranges: 80 at $.25 2016= Q of Apples: 160 at $1; Q of Oranges: 220 at $2 What is the economies NOMINAL GDP and REAL GDP in 2016?

Nominal= (160x1 apples) + (220x2 oranges)= $600 rGDP= Apples 160x.50 + oranges 220x.25= $135

Consider the ripple effects of monetary​ policy, and then choose the option that is correct. A. ​Short-term interest rates are slow to change in response to a change in the federal funds rate. B. The economy does not always respond in the same way to a given policy change. C. On​ average, in response to the Fed taking an action to change the course of the​ economy, real GDP begins to change within one month. D. The Fed is helped in its monetary policy decisions by the fact that the monetary policy transmission process is extremely predictable. E. The​ long-term real interest rate that influences spending plans is linked tightly to the federal funds rate.

The Fed is helped in its monetary policy decisions by the fact that the monetary policy transmission process is extremely predictable. Because ripple effect means when interest rate decrease ,consumer plans to borrow more and that increases countries demand. Therefore federal is help in taking their monetary policy which ultimately impacted on country's employment, price and income.

Which of the following statements is correct? Question 29 options: A) The lower the price level, the more the aggregate demand curve shifts rightward. B) The higher the price level, the more the aggregate demand curve shifts rightward. C) The price level does not affect the level of real GDP demanded. D) The lower the price level, the greater the quantity of real GDP demanded. E) The lower the price level, the more the aggregate demand curve shifts leftward.

The lower the price level, the greater the quantity of real GDP demanded.

which is correct

The true tax rate on interest income is higher than that on labor income because of the way in which inflation and taxes on interest income interact. When both government expenditure and taxes decrease by​ $1, aggregate demand decreases.

When the government imposes a tax on labor​ income, ______ the production function occurs and potential GDP​ ______.

a leftward movement​ along; decreases

New Growth Theory

a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives and so is determined by the working of the market system driving force is persistent pursuit of profit that is the incentive to innovate along with an absence of diminishing returns. New growth predicts economic growth will never end because unlimited wants that will lead to an increase of productivity and economic growth

Induced taxes​ ______ during a recession. ​Needs-tested spending​ ______ during a recession. A. ​decrease; increase B. ​increase; increase C. ​increase; decrease D. ​decrease; decrease Induced taxes and​ needs-tested spending​ _______ the multiplier effects of changes in autonomous expenditure. A. increase B. decrease C. do not influence D. sometimes increase and sometimes decrease

a. ​decrease; increase b. decrease

​An economy is in a below​ full-employment equilibrium. Fiscal stimulus that returns the economy to full employment​ ______ aggregate demand and real​ GDP, and the price level​ ______. A. ​increases; rises B. does not​ change; does not change C. ​decreases; falls D. ​increases; falls The fiscal stimulus that returns the economy to full employment from a below​ full-employment equilibrium​ _______. A. could be a decrease in government expenditure and an equal decrease in taxes B. could be an increase in government expenditure and an equal increase in taxes C. must be an increase in government expenditure D. must be a decrease in taxes

a. ​increases; rises b. could be an increase in government expenditure and an equal increase in taxes

A recessionary gap occurs when ________ so that real GDP is ________ potential GDP. Question 28 options: A) aggregate demand decreases; less than B) aggregate supply decreases; less than C) aggregate demand increases; greater than D) aggregate supply increases; less than E) potential GDP decreases; greater than

aggregate demand decreases; less than

The government expenditure multiplier is used to determine the Question 20 options: A) amount aggregate demand is affected by a change in government expenditure. B) extra scrutiny government action receives. C) amount aggregate supply is affected by a change in government expenditure. D) extent to which automatic stabilizers must be changed in order to avoid recessions.

amount aggregate demand is affected by a change in government expenditure.

When the Fed fights​ recession, ______. A. an increase in the supply of loanable funds lowers the​ long-term interest rate and increases investment B. an open market sale increases the federal funds rate C. an increase in monetary base increases the demand for money D. an increase in the federal funds rate increases aggregate demand

an increase in the supply of loanable funds lowers the​ long-term interest rate and increases investment When the Fed fights the recession they increase the money supply which increases the loanable funds in the market and decreases the long-term interest rate which will increase the investment. At a higher investment, there is more economic activity and firms employ more leading to increased income and higher demand and the economy comes out of recession.

A tax cut that increases the budget deficit results in ________ in the ________ loanable funds. Question 7 options: A) an increase; supply of B) an increase; demand for C) a decrease; demand for D) a decrease; supply of E) no change; either the demand for or the supply of

an increase; demand for

If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP less than potential GDP, there is Question 27 options: A) a recessionary gap. B) an above full-employment equilibrium. C) a falling real GDP. D) a rising price level. E) an inflationary gap.

an recessionary gap.

A document that promises to pay specified sums of money on specified dates and is a debt to the issuer is called

bond

Goods and services such as environmental quality, leisure time, and household production are not included in GDP because they are not Question 1 options: A) for consumption. B) made for profit. C) productive activities. D) really durable goods. E) bought in markets.

bought in markets.

All of the following increase labor productivity except ________. A. the accumulation of skill and knowledge B. an increase in capital per hour of labor C. an increase in consumption D. the employment of a new technology

c. an increase in consumption an increase in consumption does not increase the saving and investment in physical capital or the expansion of human capital or advancement of technologies. If the real GDP/hour of labor is not increased, then the labor productivity does not increase

When the Fed raises the federal funds​ rate, _______. A. the​ long-term real interest rate rises until it equals the​ short-term interest rates B. the exchange rate falls within a day because the U.S. interest rate differential rises immediately C. consumption​ expenditure, investment, and net exports decrease up to one year later d. aggregate demand increases up to a year later but it takes 2 years before the inflation rate decreases

consumption​ expenditure, investment, and net exports decrease up to one year later

Find the growth rate of RGDP/person: RGDP is 8.4 trillion, pop is 202 million in the current year. RGDP was 8 trillion and pop 200 million in the previous year

current year RGDP= 8.4/202= $41,584 previous= 8/200= 40,000 growth rate of RGDP/person= (41,584-40,000)/40,000*100= 4% growth

If real GDP increases from $5 billion to $5.25 billion and the population increases from 2 million to 2.02 million, real GDP per person increases by ________ percent. A. 5.0 B. 1.0 C. 2.5 D. 4.0

d. 4 1) growth rate of RGDP= (5.25-5)/5*100= 5% 2) growth rate of pop= (2.02-2)/2*100= 1% *3) RGDP/per= growth rate of rGDP - growth rate of pop= 5-1= 4%

An increase in the income tax rate is an example of​ ______. A. increasing the government deficit B. discretionary fiscal policy C. automatic fiscal policy D. increasing the government debt

discretionary fiscal policy

what are the 3 preconditions for economic growth?

economic freedom private property rights markets

If a surplus of loanable funds exists in the loanable funds market, the real interest rate ________ and the quantity of saving ________. Question 5 options: A) falls; decreases B) rises; increases C) falls; does not change D) falls; increases E) rises; decreases

falls; decreases

Other things remaining the​ same, the lower the real interest​ rate, the​ ______ is the amount of consumption expenditure and the​ ______ is the amount of saving. A. ​smaller; smaller B. ​smaller; greater C. ​greater; greater D. ​greater; smaller Other things remaining the​ same, the lower the interest​ rate, _______. A. the higher is the exchange rate B. the greater are exports and the smaller are imports C. the smaller is aggregate demand D. the less likely equilibrium occurs in the loanable funds market

greater; smaller Lower real interest rate discourage savings and because income can either be spent or saved thus consumption increases and savings decreases. the higher the exchange rate At low rates, people will incest outside the country this will cause depreciation in the currency and increase the exchange rates.

Activities that encourage faster growth are Question 10 options: A) taxes on saving that serve to encourage more spending and less saving. B) limiting property rights so that everyone can use any invention. C) high levels of consumption and low levels of savings. D) high levels of saving and investment in human capital. E) imposing trade barriers to limit international trade and thereby protect national industries.

high levels of saving and investment in human capital.

The supply of loanable funds schedule shows that the Question 25 options: A) lower the real interest rate, the greater the quantity of loanable funds supplied. B) higher the real interest rate, the lower the profit from making new investment. C) higher the real interest rate, the greater the quantity of loanable funds supplied. D) higher the real interest rate, the greater the opportunity cost of supplying loanable funds. E) higher the real interest rate, the more the supply of loanable funds curve shifts rightward.

higher the real interest rate, the greater the quantity of loanable funds supplied. This is because supply of loanable fund curve shows us the different combination of interest rate and quantity saved. So, this curve is upward, as higher interest rate leads to higher quantity of loanable funds supplied.

If government expenditures on goods and services increases by $20 billion, then aggregate demand Question 21 options: A) decreases by more than $20 billion. B) increases by less than $20 billion. C) decreases by $20 billion.

increase government expenditure on goods and services by $20 billion.

The​ long-term interest rate​ ______. A. is generally a bit higher than the​ short-term interest rate because​ long-term loans are riskier than​ short-term loans B. is not influenced by expectations about future​ short-term interest rates because expectations change in the long run C. is generally a bit higher than the​ short-term interest rate because banks prefer to make​ short-term loans D. fluctuates more than the​ short-term rate because people borrow long term and lend short term E. is not influenced by current​ short-term interest rates because people borrow long term

is generally a bit higher than the​ short-term interest rate because​ long-term loans are riskier than​ short-term loans The long-term interest rates are generally a bit higher than the short term because long-term loans are riskier than short term. Generally, it is believed that in the long term i.e. a year and above the situation is unpredictable so the risk is higher.

Inflation targeting​ _______. A. usually sets inflation rate targets between​ -1 percent a year and 1 percent a year B. is used by the Bank of​ England, the Bank of​ Canada, and the Reserve Bank of New Zealand C. has been used by the Fed since the​ 2008-2009 recession D. requires that central banks move the inflation rate target when the actual inflation rate moves out of the 1 percent to 3 percent range

is used by the Bank of​ England, the Bank of​ Canada, and the Reserve Bank of New Zealand

The objectives of monetary policy are​ ______. A. an unemployment rate below 5​ percent, an inflation rate between 1 and 3 percent a​ year, and​ long-term interest rates below 4 percent a year B. an unemployment rate below 5​ percent, an inflation rate between 1 and 3 percent a​ year, and​ long-term real GDP growth above 4 percent a year C. maximum​ employment, stable​ prices, and moderate​ long-term interest rates D. a labor force participation rate above 80​ percent, an inflation rate below 2 percent a​ year, and an exchange rate that fluctuates less than 3 percent a year

maximum​ employment, stable​ prices, and moderate​ long-term interest rates

law of diminishing marginal revenue

quantity of capital is small, an increase in capital brings a large increase in production; and if the quantity of capital is large, an increase in capital brings a small increase in production

The slope of the aggregate supply curve shows that, all else the same, the Question 19 options: A) price level remains constant as potential GDP increases. B) price level remains constant as real GDP increases. C) quantity of real GDP supplied remains constant as the price level increases. D) quantity of real GDP supplied decreases as the price level increases. E) quantity of real GDP supplied increases as the price level increases.

quantity of real gdp supplied increases as the price level increases

The productivity curve is a relationship between ________ and ________. Question 8 options: A) capital per hour of labor; labor per hour of capital B) real GDP; capital C) real GDP per hour of labor; capital per hour of labor D) real GDP; hours of labor E) real GDP per hour of labor; capital

real GDP per hour of labor; capital per hour of labor

In order to help the economy recover from a recession using fiscal policy, the government can ________ so that aggregate demand increases. Question 36 options: A) cut taxes B) decrease the quantity of money C) raise interest rates D) cut government expenditure on goods and services E) raise taxes

reason fiscal policy will work only in recession if government cut the tax , increase spending and stop public borrowing

Nominal GDP vs. Real GDP

the production of goods and services valued at current prices (BOTH CURRENT YEAR) vs value of production using the prices of the BASE YEAR and the quantities produced in the CURRENT YEAR.

Classical Growth Theory

the view that the growth of real GDP per person is temporary and that when it rises above the subsistence level, a population explosion eventually brings it back to the subsistence level

GNP (Gross National Product)

total dollar value of goods & services produced by a nation at home or away value of production by factors of production supplied by the residents of a country

To calculate GDP it is necessary to A) use the market price to place a dollar value on each good produced. B) average the cost of producing a good with the price of the good to place a dollar value on all goods produced. C) add the total amounts of all the goods produced. D) use production cost to place a dollar value on all goods produced. E) use the average market price over the last five years to place a dollar value on all goods produced.

use the market price to place a dollar value on each good produced.

An increase in taxes when the economy is above full employment ​ ______ aggregate demand and real​ GDP, and the price level​ ______. A. ​increases; falls B. ​decreases; falls C. ​increases; rises D. does not​ change; does not change The magnitude of the tax multiplier is equal to​ _______. A. MPC B. the government expenditure multiplier divided by MPC C. the government expenditure multiplier D. MPC times the government expenditure multiplier

​decreases; falls MPC times the government expenditure multiplier