final exam macro asu

Objectives of the FED

1. a high level of employment in the economy 2. economic growth 3. price stability 4. interest rate stability 5. financial market stability 6. exchange rate stability

Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?

300 billion and 270 billion

Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2013. The price index was 17.6 in 1944 and 218.4 in 2013. In real terms, Sue Holloway's income amounts to about what percentage of Josh Holloway's income?

70.9 percent

Inflation

A general and progressive increase in prices

Fed and money supply

Fed will buy or sell government bonds from/to banks to change money supply they have and what they can loan.

fiscal policy

Government policy that attempts to manage the economy by controlling taxing and spending.

monetary policy

Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.

GDP

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

Scarcity

Limited quantities of resources to meet unlimited wants

increases in the capital stock

More output; outward shift of PPF

natural resources

Raw materials supplied by nature

Productivity

The value of a particular product compared to the amount of labor needed to make it.

research and development

a set of activities intended to identify new ideas that have the potential to result in new goods and services

Which of the following would cause prices and real GDP to rise in the short run?

aggregate demand shifts right

physical capital

all human-made goods that are used to produce other goods and services; tools and buildings

Which of the following events would shift money demand to the right?

an increase in the price level

Economists equate money with

assets people use regularly to buy goods and services

Changes in Nominal GDP reflect

both changes in prices and changes in the amounts being produced

Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, then

both the unemployment rate and labor force participation would be higher

According to the quantity theory of money, a 3 percent increase in the money supply

causes the price level to rise by 3 percent

Which of the following events must cause equilibrium price to fall?

demand decreases and supply increases

The classical dichotomy refers to the idea that the supply of money

determines nominal variables, but not real variables

The unemployment rate is computed as the number of unemployed

divided by the labor force, all times 10

Total output in an economy increases when each person specializes because

each person spends more time producing that product in which he or she has a comparative advantage

Productivity is defined as the quantity of

goods and services produced from each unit of labor input

The producer that requires a smaller quantity of inputs to produce a certain amount of a good relative to the quantities of inputs requires by other producers to produce the same amount of that good,

has an absolute advantage in the production of that good

population growth

increase in the number of people who inhabit a territory or state

an open market purchase

increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public

When the Fed decreases the money supply, we expect

interest rates to rise and stock prices to fall.

free trade

international trade free of government interference

The federal reserve

is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.

The source of the supply of loan able funds

is saving and the source of demand for loanable funds is investment

technological knowledge

knowledge about how the world works that is used to produce goods and services

what is money

medium of exchange

The consumer price index is used to

monitor changes in the cost of living over time

Monetary Policy Tools

open market operations, discount policy, and reserve requirements

in the short run an increase in the costs of production makes

output fall and prices rise

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?

output will rise but by less than it did when the previous unit was added

Law of Supply

producers offer more of a good as its price increases and less as its price falls

Functions of the Federal Reserve

provide financial services, supervise and regulate banking institutions, maintain the stability of the financial system, conduct monetary policy

The model of aggregate demand and aggregate supply explains the relationship between

real GDP and the price level

The market demand curve

represents the sum of the quantities demanded by all the buyers at each price of the good

aggregate supply shifters

resource prices, actions of the government, productivity

An economic expansion caused by a shift in aggregate demand causes prices to

rise in the short run and rise even more in the long run

If the price level falls , the real value of a dollar

rises, so people will want to buy more

A bond buyer is a

saver, long term bonds have more risk than short term bonds

The quantity supplied of a good is the amount that

sellers are willing and able to sell

classical dichotomy

separation of real and nominal variables

An increase in government purchases will

shift aggregate demand from AD1 to AD2.

long-run aggregate supply curve

shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible

Which of the following shifts aggregate demand to the left

stock prices fall for some reason other than a change in price level

Dollars bills, rare paintings and emerald necklaces are all

stores of value

shocks

sudden, unexpected changes in demand or supply

Monetary policy is determined by

the Federal Reserve and involves changing the money supply.

comparative advantage

the ability to produce a good at a lower opportunity cost than another producer

absolute advantage

the ability to produce a good using fewer inputs than another producer

purchasing power

the ability to purchase goods and services

aggregate demand

the amount of goods and services in the economy that will be purchased at all possible price levels

money multiplier

the amount of money the banking system generates with each dollar of reserves

money demand

the amount that households and firms want to hold in currency and deposits

open market operations

the buying and selling of government securities to alter the supply of money

the long-run aggregate supply curve shifts right if

the capital stock increases

nominal wages

the dollar amount of the wage paid

muliplier effect

the idea that every one dollar of spending creates more than one dollar in economic activity

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1

People choose to hold a larger quantity of money if

the interest rate falls, which causes the opportunity cost of holding money to fall

market for loanable funds

the market in which those who want to save supply funds and those who want to borrow to invest demand funds

model of aggregate demand and aggregate supply

the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend

real interest rate

the nominal interest rate minus the inflation rate

During a certain year, the consumer price index increased from 120 to 132 and the purchasing power of a person's bank account increased by 4 percent. For that year,

the nominal interest rate was 14 percent

Fiscal policy is determined by

the president and Congress and involves changing government spending and taxation.

The sticky wage theory of the short run aggregate supply curve says that the quantity of output firms supply will increase if

the price level is higher than expected making production more profitable

education

the process through which academic, social, and cultural ideas and tools, both general and specific, are developed

Real GDP

the production of goods and services valued at constant prices

Nominal GDP

the production of goods and services valued at current prices

catch-up effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich

diminishing returns

the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases

money supply

the quantity of money available in the economy

production function

the relationship between quantity of inputs used to make a good and the quantity of output of that good

Economic Fluctuations

the rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles

human capital

the skills and knowledge gained by a worker through education and experience

Liquidity Preference Theory

the theory that investors demand a risk premium on long-term bonds

GDP is defined as the

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

The opportunity cost of an item is

what you give up to get that item

Which of the following statements about real and nominal interest rate is correct?

when the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest

The quantity demanded of a good is the amount buyers are

willing and able to purchase

market equilibrium

a situation in which quantity demanded equals quantity supplied

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

aggregate demand shifters

consumer spending, investment spending, government spending, net exports

Law of Demand

consumers buy more of a good when its price decreases and less when its price increases