macro exam 2
% rate of growth
#of yrs to double real GDP= 70/% rate
Which of the following will shift the aggregate supply curve to the right?
The government passes a law doubling all manufacturing wages, A new networking technology increases productivity all over the economy, Business taxes fall, and the price of oil rises substantially.
An appropriate fiscal policy for severe demand-pull inflation is
a tax rate increase
What term do economists use to describe this second outcome?
deflation
Fiscal policy refers to
deliberate changes in government spending and taxes to promote economic growth, full employment, and price level stability
The type of inflation that is more likely to be associated with a positive GDP gap is
demand-pull inflation
The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the
determinants of aggregate demand
ladies in work force
discrimination persists, 78 cents for every dollar earned by men
productivity slowdowns
high debt levels, overcapacity, free internet apps, slowdown in technological progress
real GDP per capita increased by
more than fourfold, and 2% per yr
An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the
multiplier effect
supply determinants of real output formula
size of employed labor force x labor productivity= real GDP
More labor inputs can explain _________ in real GDP over the last 65 years or so.
some increases
prices downward are..
sticky
institutional structures of growth causes
strong property rights, patents, and copyright, efficient financial institutions, literacy and education, free trade, the competitive market system
Hundreds of New York legal jobs permanently disappear when a lot of legal work gets outsourced to lawyers in India.
structural unemployment
Thousands of bus and truck drivers permanently lose their jobs to self-driving vehicles.
structural unemployment
The federal budget deficit is found by
subtracting government tax revenues from government spending in a particular year
The Bureau of Labor Statistics (BLS) calculates the inflation rate from one year to the next by
subtracting the CPI of the previous year from the CPI of the most recent year, and then dividing by the CPI of the previous year.
To say "money is what money does" means that
whatever performs the functions of money extremely well is considered to be money.
Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. By how much would government spending have to rise to shift the aggregate demand curve rightward by $25 billion? Expenditure multiplier = 1/(1 − MPC) = 1/(1 − 0.8) = 1/0.2 = 5. How large a tax cut would be needed to achieve the same increase in aggregate demand? ΔAD = expenditure multiplier × Δgovernment spending. Rearranging: ΔGovernment spending = ΔAD/expenditure multiplier. ΔGovernment spending = $25 billion/5 = $5 billion. Thus, we should increase government spending by $5 billion.
$5 billion tax cut= $6.25 billion
In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year's inflation rate? If the CPI was 110 last year and is 108 this year, the inflation rate is approximately -1.8 percent = [(108 - 110)/110) × 100].
-1.8%
Assume that Jimmy Cash has $2,000 in his checking account at Folsom Bank and uses his checking account debit card to withdraw $200 of cash from the bank's ATM machine. By what dollar amount did the M1 money supply change as a result of this single, isolated transaction?
0
Suppose that the economy is experiencing a recession with an estimated recessionary gap of $10 billion. Congress is considering the use of fiscal policy to ease the recession, but due to current political sentiments, it has determined that the maximum spending increase the government is willing to support is $3 billion. It wants to make up the remainder of the recessionary gap using tax cuts. If a spending increase of $3 billion is approved and the MPC is 0.6, by how much will tax need to be reduced to close the remainder of the recessionary gap? If the MPC is 0.6, then the theoretical spending multiplier can be found by the formula, Multiplier = 1/(1 − MPC) = 1/(1 − 0.6) = 1/0.4 = 2.5. Thus, the approved spending increase of $3 billion will have a total impact of increasing real GDP by $7.5 billion (= 2.5 × $3 billion). Since the total recessionary gap is $10 billion, tax cuts will need to make up for the remaining gap of $2.5 billion (= $10 billion − $7.5 billion). Because the MPC is 0.6, for every dollar of taxes cut, $0.60 will be spent on consumption, with the remainder going to savings. Since the spending multiplier is 2.5, each dollar of the tax cut will increase real GDP by $1.50 (= $0.60 × 2.5). In order to close the remaining recessionary gap of $2.5 billion, the government will need to decrease taxes by $1.67 billion (= $2.5 billion/$1.50).
1.67 billion
Suppose that a small country currently has $4 million of currency in circulation, $6 million of checkable deposits, $200 million of savings deposits, $40 million of small-denominated time deposits, and $30 million of money market mutual fund deposits.
10 million, and 280 million
If real GDP grows at 7 percent per year, then real GDP will double in approximately __________ years. use rule of 70
10 years
Suppose the CPI was 110 last year and is 121 this year. What is this year's inflation rate? If the CPI was 110 last year and is 121 this year, the inflation rate is 10 percent = [(121 - 110)/110) × 100].
10%
Zion's nominal income will go up by 10 percent next year. Inflation is expected to be -2 percent next year. By approximately how much will Zion's real income change next year? Percentage change in real income = percentage change in nominal income - percentage change in price level
12%
Suppose that the nominal interest rate is 4 percent and the inflation premium is 2 percent. What is the real interest rate? Real interest rate = nominal interest rate - inflation premium
2%
real GDP 1950-2018 increased by what
3.1% per yr, and more than eightfold
Suppose a country's real GDP is $18 trillion and the population is 400 million. Now suppose that during the next 10 years, real GDP doubles and the population triples. At the end of this 10-year period, what will be its real GDP per capita?
30,000
Suppose a country's real GDP is $18 trillion and the population is 400 million. What is this country's real GDP per capita? Real GDP per capita/population
45,000
Alternatively, assume that the real interest rate is 1 percent and the nominal interest rate is 6 percent. What is the inflation premium? Inflation premium = nominal interest rate - real interest rate.
5%
Kaitlin has $10,000 of savings that she may deposit with her local bank. Kaitlin wants to earn a real rate of return of at least 4 percent, and she is expecting inflation to be exactly 3 percent. What is the lowest nominal interest rate that Kaitlin would be willing to accept from her local bank? 4 percent real interest rate + 3 percent expected rate of inflation
7%
What percentage of the average U.S. firm's costs is accounted for by wages and salaries?
75%
What effects would each of the following have on aggregate demand or aggregate supply, other things equal? A widespread fear by consumers of impending economic depression.
Aggregate demand will decrease
A reduction in interest rates
Aggregate demand will increase
The general expectation of coming rapid inflation
Aggregate demand will increase
In which of the following sets of circumstances can we confidently expect inflation?
Aggregate supply decreases and aggregate demand increases
A new national tax on producers based on the value added between the costs of the inputs and the revenue received from their output
Aggregate supply will decrease
The group of three economists who provide fiscal policy recommendations to the president is the
Council of Economic Advisers
Suppose that Alpha and Omega have identically sized working-age populations but that total annual hours of work are much greater in Alpha than in Omega. What are two possible reasons for this difference?
Omega's labor force is underemployed, or workers in Omega place a higher value on leisure than those in Alpha
What type of tax system would have the most built-in stability?
Progressive tax system, because it increases at an increasing rate as incomes rise, thus having more of a dampening effect on rising (or falling) incomes
Who measures the labor force, and how is it defined?
The U.S. Bureau of Labor Statistics (BLS) measures the labor force as people over 16 years of age who are employed and those who are actively seeking work.
if you write a check on a bank to purchase a used Honda Civic, you are using money primarily as
medium of exchange
In January, the interest rate is 5 percent and firms borrow $50 billion per month for investment projects. In February, the federal government doubles its monthly borrowing from $25 billion to $50 billion, driving the interest rate up to 7 percent. As a result, firms cut back their borrowing to only $30 billion per month. Which of the following is true?
There is a crowding-out effect of $20 billion.
Which one of the following would not shift the aggregate demand curve?
a change in price level
An appropriate fiscal policy for a severe recession is
a decrease in tax rates
The explanation for a downsloping aggregate demand curve differs from the explanation for the downsloping demand curve for a single product because
a downsloping, single-product demand curve assumes constant money income such that a lower price causes a substitution of the now relatively cheaper product for those whose prices have not changed
Economic growth means
a higher average standard of living, provided that the population does not grow even faster
The economy is in a recession. A congresswoman suggests increasing spending to stimulate aggregate demand and raising taxes simultaneously to pay for the increased spending. Her suggestion to combine higher government expenditures with higher taxes is:
a mediocre and contradictory combination of tax and expenditure changes
The phase of the business cycle in which real GDP declines is called
a recession
The crowding-out effect is
a reduction in investment spending caused by an increase in interest rates arising from an increase in government spending
Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. Politicians recognize a sudden recession, but it takes many months of political deal-making before they finally approve a stimulus bill.
administrative lag
what is something the feds do not function
advising congress on fiscal policy
In the United States, the rate of unemployment is highest for
african-american teenagers
Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.
aggregate demand curve would shift to the right
A major increase in spending for health care by the federal government.
aggregate demand will increase
Which of the following items is (are) not included in either M1 or M2? Checkable deposits Small-denominated (less than $100,000) time deposits Savings deposits Money market mutual fund balances held by businesses Money market mutual fund balances held by individuals Currency held by banks
all of the above
Which of the following would help a government reduce an inflationary output gap? lowering taxes raising taxes increasing government spending decreasing government spending
all of the above
Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?
appreciation of the U.S. dollar
In the United States, who is responsible for maintaining money's purchasing power?
board of governors of the federal reserve system
Who gains from inflation?
borrowers
Currency in circulation is part of
both M1 and M2
Recurring upswings and downswings in an economy's real GDP over time are called
business cycles
the nominal intrest rate..
minus the inflation rate is the real interest rate
In which of the following industries or sectors of the economy will business cycle fluctuations likely have the greatest effect on output?
capital goods
What is the largest component of M1?
checkable deposits
The Consumer Price Index (CPI) is determined each month by
comparing the value of a market basket of goods that consumers typically purchase to the value of the basket in a base year
During a severe recession, we would expect output to fall the most in
construction industry
The type of inflation that is more likely to be associated with a negative GDP gap is
cost-push inflation
If there is an increase in the unemployment rate, the size of the labor force
could increase or decrease
Which of the components of M1 is legal tender?
currency
A recession causes a local factory to lay off 30 workers.
cyclical unemployment
The aggregate demand curve is
downsloping because of the interest-rate, real-balances, and foreign purchases effects.
labor force consists of
employed and unemployed
The economy's long-run AS curve assumes that wages and other resource prices
eventually rise and fall to match upward or downward changes in the price level
In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates?
expansion
The determinants of aggregate demand
explain shifts in demand curve
True or False The total public debt is more relevant to an economy than the public debt as a percentage of GDP
false
True or False. Countries that currently have a low real GDP per capita are destined to always have lower living standards than countries that currently have a high real GDP per capita
false
True or False. If the price of oil suddenly increases by a large amount, AS will shift left, but the price level will not rise thanks to price inflexibility. price inflexibility only applies to falling prices.
false
True or False As a percentage of GDP, the total U.S. public debt is the highest such debt among the world's advanced industrial nations
false, there are a number of countries with a higher public debt as a percentage of GDP
True or False The Federal Reserve and federal government agencies hold more than three-fourths of the public debt.
false, they hold 37%
Paper money (currency) in the United States is issued by the
federal reserve banks
When economists say that the Federal Reserve Banks are quasi-public banks, it means that
feds are a blend of private ownership and public control
The losers from inflation are those with
fixed incomes in nominal terms
When the U.S. price level rises, Canadian consumers are more likely to buy cars made in Mexico than cars made in the United States.
foreign purchases effect
A significant difference between a monopolistically competitive firm and a purely competitive firm is that the
former sells similar, although not identical, products
Label each of the following scenarios as either frictional unemployment, structural unemployment, or cyclical unemployment. Tim just graduated from college and is looking for a job.
frictional unemployment
Assume that a hypothetical economy with an MPC of 0.8 is experiencing a severe recession. Determine one possible combination of government spending increases and tax increases that would accomplish the same goal without changing the amount of outstanding debt.
increase government spending by $25 billion
Which of the following represents the most expansionary fiscal policy?
increase in $10 billion gov. spending
supply factors
increase in quantity and quality of natural resources, human resources, supply of capital goods, improvement in technology
In a certain year, the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price-level stability under these conditions, the government should
increase tax rates and/or reduce government spending
modern economic growth caused..
industrial revolution, increase in living standard, time for leisure, social changes, democracy, and life span doubles
Discretionary fiscal policy refers to
intentional changes in taxes and government expenditures made by Congress to stabilize the economy.
A higher price level increases the cost of borrowing, which causes people to buy fewer cars.
interest rate effect
Discretionary fiscal policy is so named because it
involves specific changes in taxes and government spending undertaken expressly for stabilization at the option of Congress
Contractionary fiscal policy is so named because it
is aimed at reducing aggregate demand and thus achieving price stability
Expansionary fiscal policy is so named because it
is designed to expand real GDP
A decline in investment will shift the AD curve to the
left by a multiple of the change in investment.
Graphically, cost-push inflation is shown as a
leftward shift of the AS curve
Most economists agree that the immediate determinant of the volume of output and employment is the
level of total spending
Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is
not in the labor force
Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. To fight a recession, Congress has passed a bill to increase infrastructure spending—but the legally required environmental impact statement for each new project will take at least two years to complete before any building can begin.
operational lag
Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. To fight a recession, the president orders federal agencies to get rid of petty regulations that burden private businesses—but the federal agencies begin by spending a year developing a set of regulations on how to remove petty regulations.
operational lag
The difference between a 2.5 percent and a 3.0 percent annual growth rate over several decades could be the difference between
output doubling in 28 years (2.5 percent growth) and 23 years (3.0 percent growth)
phases of business cycle
peak, recession, trough, growth
Rapid inflation can undermine money's ability to perform its functions. During periods of runaway inflation
people often revert to barter because money fails as a medium of exchange
A political business cycle is the idea that
politicians are more interested in reelection than in stabilizing the economy
What is the primary reason that changes in total spending lead to cyclical changes in output and employment?
prices are sticky in the short run
Demand-pull inflation occurs when
prices rise because of an increase in aggregate spending not fully matched by an increase in aggregate output.
increases in the federal budget deficit from 2007 to 2009 were caused
primarily by a combination of recession and expansionary fiscal policy
Monopolistic competition is characterized by firms
producing differentiated products
Under what circumstances do rates of economic growth understate the growth of economic well-being?
product quality has improved
Since at least 1995, the majority of increases in U.S. real GDP are from
productivity growth
A recession is defined as a period in which
real domestic output falls
The Great Recession that started in 2007 was triggered by shocks in which of the following economic sectors?
real estate and financial markets
A lower price level causes restaurants to become busier as more people purchase restaurant meals.
real-balance effect
Label each of the following scenarios as an example of a recognition lag, administrative lag, or operational lag. Distracted by a war that is going badly, politicians take no notice until inflation reaches 8 percent.
recognition lag
inflation..
reduces purchasing power of the dollar
The aggregate demand curve
shows the amount of real output that will be purchased at each possible price level.
Government's fiscal policy options for ending severe demand-pull inflation include
reducing government spending, increasing taxes, or both
Suppose that the economy is in the midst of a recession. Which of the following policies would most likely end the recession and stimulate output growth?
reduction in federal taxes on personal and corporate income
The effect of expansionary fiscal policy is shown as a
rightward shift of aggregate demand curve
Cost-push inflation occurs in the presence of
rising per-unit production costs
In the United States, business cycles have occurred against a backdrop of a long-run trend of
rising real GDP
The equilibrium price level and level of real output occur where
the aggregate demand and supply curves intersect
When economists say that the Federal Reserve Banks are central banks, it means that
the banks' policies are coordinated by the Federal Reserve Board of Governors
At the economy's natural rate of unemployment,
the economy achieves its potential output.
Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result,
the official unemployment rate will remain unchanged.
The short-run aggregate supply curve is relatively flat to the left of the full-employment output because
there are large amounts of unused capacity and idle human resources
The business cycle affects output and employment in capital goods industries and consumer durable goods industries more severely than in industries producing consumer nondurables because
these goods last, so purchases can be postponed
In defining money as M1, economists exclude time deposits because
they are not directly or immediately a medium of exchange.
When economists say that the Federal Reserve Banks are bankers' banks, it means that
they preform the same functions of the bank as banks preforms for public
The phase of the business cycle in which real GDP is at a minimum is called
trough
True or False An internally held public debt is like a debt of the left hand owing to the right hand
true
Official unemployment statistics
understate unemployment because discouraged workers are not counted as unemployed.
A $70 price tag on a sweater in a department store window is an example of money functioning as a
unit of account
If you are estimating your total expenses for school next semester, you are using money primarily as
unit of account
The shape of the short-run aggregate supply curve is
upsloping, because wages adjust more slowly than the price level
The length of a complete business cycle
varies greatly in duration and intensity
The economy's long-run aggregate supply curve
vertical
During the recession of 2007-2009, the U.S. federal government's tax collections fell from about $2.6 trillion down to about $2.1 trillion while GDP declined by about 4 percent. Does the U.S. tax system appear to have built-in stabilizers?
yes, it appears to have a tax system that collects more money when the economy is doing well and less money when the economy is doing poorly.
