Macro final
The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money.
M1 and M2; are
Which of the following statements illustrate monetary policy?
The Fed has raised the federal funds rate by 0.3 percent.
Which of the following statements illustrate fiscal policy?
The US government has proposed a hike in the corporate tax rate.
Suppose that yesterday, the U.S. dollar was trading on the foreign exchange market at 0.75 euros per U.S. dollar and today the U.S. dollar is trading at 0.80 euros per U.S. dollar. Which of the two currencies (the dollar or the euro) has appreciated and which has depreciated today?
The dollar appreciated and the euro depreciated.
Sarah takes out a loan today for $20,000 at an interest rate of 5 percent a year. She plans to repay the loan after 5 years. How much will he have to pay?
25526
When operating on its PPF, a country can produce 2 tons of butter and 200 cars OR 3 tons of butter and 150 cars. The opportunity cost of 1 ton of butter is ________ cars per ton of butter.
50
________ increases households' saving.
A tax cut that increases disposable income
The table shows the amounts held as the various components of M1 and M2.
The value of M1 is $150 billion. The value of M2 is $1090 billion.
This infrastructure spending is fiscal stimulus.
True
What makes the supply of U.S. dollars change? An increase in U.S. demand for imports ______ the supply of U.S. dollars. A fall in the U.S. interest rate differential ______ the supply of U.S. dollars.
Increases; Increases
Yesterday, the current exchange rate was $0.95 Canadian per U.S. dollar and traders expected the exchange rate to remain unchanged for the next month. Today, with new information, traders now expect the exchange rate next month to rise to $1 Canadian per U.S. dollar. Explain how the revised expected future exchange rate influences the demand for U.S. dollars, or the supply of U.S. dollars, or both in the foreign exchange market. The revised expected future exchange rate ______ the demand for U.S. dollars and ______ the supply of U.S. dollars.
Increases; decreases
The effect of the United States returning millions of workers to their home countries is _____ Mexico's aggregate production function and _____ in potential GDP.
a movement up along; an increase
Does inflation result from increases in aggregate demand, short-run aggregate supply, or long-run aggregate supply? Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply
The best forecast available, which is based on all the relevant information is called _______.
a rational expectation
If the real interest rate is below the equilibrium real interest rate,
a shortage of of loanable funds will cause the real interest rate to rise.
A macroeconomic equilibrium in which real GDP exceeds potential GDP is _____ equilibrium. And one in which real GDP is less than potential GDP is _____ equilibrium.
an above full-employment; a below full-employment
How does demand-pull inflation begin? A demand-pull inflation begins with _______.
an increase in aggregate demand
Give some examples of fiscal policy that increase aggregate demand. Examples of fiscal policy that increase aggregate demand include ______.
an increase in government expenditure, a decrease in taxes, and an increase in transfer payments
According to the quantity theory of money, in the long run
an increase in the quantity of money creates an increase in prices but no additional increase in real GDP. Your answer is correct.
Complete the following sentence. If, as Stephen's income decreases, his demand for pasta sauce increases, then for Stephen, pasta sauce is _______.
an inferior good
If aggregate demand grows faster than potential GDP, ______ gap emerges and if it grows more slowly than potential GDP, ______ gap emerges.
an inflationary; a recessionary
Discouraged workers ________ counted as officially unemployed because they ________.
are not; are not actively seeking work
Which of the following is money?
checking deposits
The consumer price index (CPI)
compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.
Cost-push inflation causes stagflation because it occurs when _______.
costs increase
A rise in the expected future exchange rate ______ the supply of U.S. dollars. An increase in the world demand for U.S. exports ______ the supply of U.S. dollars.
decreases; does not change
Paychecks in Kansas are growing, according to the U.S. Department of Labor. Jacqueline Midkiff, with the department's office in Kansas City, says the average overall increase across the board through the Midwest, is 1.9 percent over this time last year, while inflation grew at 1.4 percent for the same time period. Source: Kansas Public Radio, August 1, 2012 Explain how "the average overall increase across the board" wage increase will influence aggregate supply. The "average overall increase across the board" wage increase _______.
decreases short-run aggregate supply because it increases firms' costs
Such spending is _______ fiscal policy.
discretionary
If the price level and the money wage rate rise by the same percentage, what happens to the quantity of real GDP supplied? Along which aggregate supply curve does the economy move? If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
What will happen to equilibrium employment and the equilibrium before-tax and after-tax wage rates and why? Because the tax ______ , the equilibrium level of employment will ______ , the before-tax wage rate will ______, and the after-tax wage rate will ______.
drives a wedge between the take-home wage and the cost of labor; decrease; rise; fall
New growth theory predicts that
economic growth can last indefinitely.
According to RBC theory, what is the source of the business cycle? What is the role of fluctuations in the rate of technological change? According to RBC theory, the source of the business cycle is _______, which result mainly from _______
fluctuations in productivity; fluctuations in the pace of technological change
The Fed is the lender of last resort, which means _______.
if depository institutions are short of reserves, they can borrow from the Fed
How can the federal government use discretionary fiscal policy to stimulate the economy? An economy is experiencing a recessionary gap. The government can ______.
increase expenditure or cut taxes to increase aggregate demand
It is unlikely that the United States is on the "wrong" side of this curve because, if it were, a decrease in the tax rate would ______ .
increase tax revenue
An increase in the demand for computers and a decrease in the number of sellers of computers will ________.
increase the price of a computer
By itself, an increase in exports
increases GDP.
An increase in expected future profits _______.
increases aggregate demand today
An increase in expected future income _______. An increase in the expected future inflation rate _______.
increases aggregate demand today; increases aggregate demand today
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap.
increases real GDP above potential GDP; an inflationary
Why might fiscal stimulus crowd out investment? Fiscal stimulus that increases an existing government budget deficit ______ loanable funds, which ______ investment.
increases the demand for; increases the real interest rate and decreases
An open market purchase of securities by the Fed
increases banks' reserves and decreases banks' securities.
Compared to a balanced budget, when the government runs a budget deficit,
interest rates rise, and firms' private investment decreases.
Because of the biases in calculating the CPI, actual inflation is
less than the measured inflation rate.
In any year, real GDP
might be greater or less than potential GDP.
In calculating GDP, household production is
not included because there is no market transaction.
Why does the aggregate demand curve slope downward? The aggregate demand curve slopes downward because _______.
of the wealth effect and the substitution effect
What are the Fed's three policy tools? The Fed's three policy tools are _______.
open market operations, last resort loans, and the required reserve ratio
Because pollution reduces economic welfare, on this count real GDP
overstates economic welfare.
An international substitution effect arises because when the U.S. price level rises, _______.
people spend less on the more expensive U.S.-made items and they spend more on the less expensive foreign-made items
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
Explain the mainstream theory of the business cycle. The mainstream business cycle theory is that ______ grows at a steady rate while ______ grows at a fluctuating rate.
potential GDP; aggregate demand
The term "crowding out" relates to the decrease in
private investment from a government budget deficit.
In RBC theory, the lower the real interest rate, other things remaining the same, the ______ today.
smaller is the supply of labor
Real GDP is calculated by _______.
summing together the value of the year's production using the prices of the reference base year
What is the Laffer curve and why is it unlikely that the United States is on the "wrong" side of it? The Laffer curve is the relationship between the ______ and the ______ .
tax rate; amount of tax revenue collected
An assumption of neoclassical growth theory is that
technological change is random.
If the Fed sets a target exchange rate that is higher than the current exchange rate, then
the Fed must buy dollars.
When the price level, the money wage rate, and other factor prices rise by the same percentage, there is a movement along ______. Potential GDP ______.
the LAS curve; does not change
When the price level rises but the money wage rate and other factor prices remain the same, there is a movement along ______. The quantity of real GDP supplied ______.
the SAS curve; increases
A bank's reserves include
the cash in its vault plus its deposits held at a Federal Reserve bank.
Generational imbalance is ______ .
the division of the fiscal imbalance between the current and future generations, assuming that the current generation will enjoy the existing levels of taxes and benefits
Tax cuts will not pay for themselves if ______.
the economy lies to the left of the maximum point on the Laffer curve
When there is a shortage of dollars in the foreign exchange market, ______.
the forces of supply and demand pull the foreign exchange market into equilibrium
The required reserve ratio is the
the minimum percentage of deposits that depository institutions are required to hold as reserves
A financial decision should be pursued when
the net present value is positive.
The opportunity cost of holding money balances rather than holding other assets is
the nominal interest rate.
Using the figure, suppose that roses are a normal good. If incomes decrease while simultaneously there is an increase in the price of the resources used to produce roses, then
the quantity will definitely decrease below 10 dozen roses
The nominal interest rate approximately equals which of the following?
the real interest rate plus the inflation rate
An automatic fiscal policy is a fiscal policy action that is triggered by _____. A discretionary fiscal policy is a fiscal policy action that is initiated by _____.
the state of the economy; an act of Congress
Which of the following tools is NOT a policy tool of the Fed?
the tax rate on interest income
If the price of chocolate chip cookies falls, then
there is a movement downward along the supply curve of chocolate chip cookies.
Which of the following measurements of inflation tracks the rate at which infrequently changed prices are changing?
the sticky-price CPI
Full employment occurs when the
unemployment rate equals the natural unemployment rate.
Business cycles are
unpredictable, but always have two phases and two turning points.
The tax wedge is the gap between the before-tax and after-tax ______.
wage rates
A rational expectation _______.
will often turn out to be wrong, but no other forecast that could have been made with the information available could do better
If tax revenues are $3,500 billion and the government's budget balance is a $720 billion deficit, calculate the government's outlays.
$4,220
The relationship between the tax rate and the amount of tax revenue collected is called the ______ curve. This curve shows that ______.
Laffer; tax cuts can increase tax revenue
Tax revenues ______ during a recession. Needs-tested spending ______ during an expansion.
decrease; decreases
What will happen to potential GDP, and why? Potential GDP will ______ because ______ .
decrease; employment decreases
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases; decreases real GDP below
If the price level rises and the money wage rate remains constant, what happens to the quantity of real GDP supplied? Along which aggregate supply curve does the economy move? If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short-run
When costs increase and the Fed wants to return the economy to full employment, the Fed responds by ______ the quantity of money. If the Fed continually responds to successive increases in costs, a ______ inflation evolves.
increasing; cost-push
If nothing else changes, the ________ the current exchange rate, the ________ is the expected profit from holding dollars, all other things remaining the same.
lower; larger
As the ________ interest rate increases, the quantity of loanable funds demanded ________.
real; decreases
A tax cut pays for itself if the economy lies to the ______ of the maximum point on the Laffer curve. This statement implies that the absolute value of the tax multiplier is ______.
right; greater than 1
What is stagflation and why does cost-push inflation cause stagflation? Stagflation is a combination of a ______ in the price level and ______ in real GDP.
rise; a decrease
In the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to a full-employment equilibrium.
rises; decreases
What are the defining features of classical macroeconomics and what policies do classical macroeconomists recommend? The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full employment
What are the defining features of monetarist macroeconomics and what policies do monetarist macroeconomists recommend? The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
When a tax is applied to labor income, the result is a ______ full-employment quantity of labor and a ______ potential GDP.
smaller; lower
Labor productivity is
real GDP per hour of labor.
During a year, a firm's net investment is $3,200 and depreciation is $800. What is the firm's gross investment? The firm's gross investment is ______.
$4,000
Joe has a term deposit that pays 6 percent a year and its value after two years will be $2,000. What is the present value of Joe's term deposit?
1779.99
Which of the following is an asset of the Fed?
Mortgageminus−backed securities
Facebook sold shares of stock for the first time in an IPO on May 18, 2012. The stock originally sold for $38 per share. As of October 19, 2012, a share of Facebook stock was valued at $19 per share. The decrease in the value of a share of Facebook purchased in May and still owned in October is called
a capital loss
Which of the following will shift the supply of loanable funds curve leftward?
a decrease in disposable income
Give some examples of monetary policy that decrease aggregate demand. Examples of monetary policy that decrease aggregate demand include ______.
a decrease in the quantity of money and an increase in interest rates
How does cost-push inflation begin? A cost-push inflation begins when an increase in the money wage rate or an increase in the money prices of raw materials brings ______ .
a decrease in short-run aggregate supply
If the money wage rate rises and potential GDP remains the same, does the LAS curve or the SAS curve shift or is there a movement along the LAS curve or the SAS curve? A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
The government is considering raising the tax rate on labor income. Explain the supply-side effects of such an action and use appropriate graphs to show the directions of change, not exact magnitudes. What will happen to the supply of labor and the demand for labor and why? The supply of labor will ______ and the demand for labor will ______.
decrease because the tax weakens the incentive to work; not change because labor productivity doesn't change
How does a tax on labor income influence the equilibrium quantity of employment? A tax on labor income ______. The equilibrium quantity of labor ______.
decreases the supply of labor; decreases
Aggregate expenditures include all of the following EXCEPT
purchases of intermediate goods.
What are the defining features of Keynesian macroeconomics and what policies do Keynesian macroeconomists recommend? The defining feature of the Keynesian view of macroeconomics is that the economy is ______.
rarely at full employment
The relationship between real GDP and potential GDP is that
real GDP fluctuates about potential GDP.