Macroeconomics - 40% of assessment

How does inflation lead to a loss of purchasing power for individuals?

Wages that don't increase with inflation lead to a devaluation of the money (buying power decreases)

Which situation would cause the aggregate demand curve to shift to the right?

Lower chance of an upcoming recession

How does trade benefit the nation?

Trade enables consumption outside the PPF.

A __________ policy, such as a sale of government securities by the Fed, pushes interest rates up, investment down, and the aggregate demand curve to the left.

Contractionary

A country is experiencing an inflationary gap. Which type of fiscal policy should the government undertake?

Contractionary

During a period of inflation, a(n) __________ monetary policy is used.

Contractionary

What is the difference between a debt and a deficit?

- debt: it is the sum of all past deficits and surpluses. - deficit: when the federal government spends more money than it receives in taxes in a given year.

2 of the challenges to calculating the GDP.

1) Only counting the final good 2) Only counting the final goods within the year specified

What are three benefits of specialization?

1. Greater efficienc 2. Consumer benefits (from lower prices and a greater quantity of goods 3. Opportunities for competitive sectors (firms gain access to the whole world market, which allows them to grow bigger and benefit further from economies of scale 4. Gains from trade (allows countries to consume more)

What are three problems with specialization?

1. Threats to uncompetitive sectors (some parts of the economy may not be able to compete with cheaper or better imports.) 2. Risk of overspecialization (global demand may shift so there is no longer a demand for the goods or services produced by a country.) 3. Strategic vulnerability (Relying on another country for vital resources makes one country dependent on another. This reliance can be exploited politically or economically.) 4. Workers who lose their job due to specialization and trade do not receive retraining or assistance with finding jobs in other sectors. 5. Another disadvantage of specialization and trade is that increasing returns to scale can cause specific industries to settle in a geographical area where there is no comparative advantage.

What is the unemployment rate in a country with 14 million people unemployed and a labor force of 350 million people?

14 million / 350 million = 4%

What is the labor force participation rate in a country with a labor force of 350 million and a population of 500 million people?

350 million / 500 million = 70%

A government imposes a 2.5% tariff on the market value of imported furniture. Which type of tariff is the government enacting?

Ad valorem

Why does a change in government purchases have more of an impact on aggregate demand than a similar change in tax levels or transfer payments?

Any change in government purchases goes directly into the economy and is magnified by the multiplier effect.

Identify the factors that shift the SRAS curve.

Anything that affects the LRAS will cause the SRAS to shift in the same direction

Which of these is not a tool of fiscal policy?

Bank loans

Which groups benefit from inflation?

Borrowers benefit because the value of the money they pay back is less.

The Federal Reserve has a primary goal of curbing inflation or reducing economic stagnation or recession. Which action is authorized for the Federal Reserve?

Buy securities

Which action helps the Federal Reserve increase the money supply?

Buying securities from banks

Identify the factors that shift the LRAS curve.

Changes to real GDP due to productivity increases and decreases

Which of these is not part of the M2 money supply?

Coins and currency in circulation

Some economists believe strongly in having gold to back up all the currency that exists. Which approach is being supported by these economists?

Commodity-backed

Which institution is primarily responsible for creating and implementing fiscal policy in the U.S.?

Congress

What is the largest component of GDP?

Consumption

What are menu costs?

Costs incurred by a business when it changes its prices (cost to change price)

Country A provides domestic manufacturers with an export subsidy to incentivize international trade, which allows its companies to sell to Country B at below cost. Country B imposes tariffs on Country A's imports to protect its domestic manufacturers from any unfair trade practices. Which type of trade barrier is Country B enacting?

Countervailing duty

Which action is taken by the Federal Reserve to increase the money supply?

Decrease the discount rate

Identify a factor that can shift the demand for money.

Demand for money

Commodity-backed currencies

Dollar bills or other currencies with values backed up by gold or another commodity held at a bank

Under what economic conditions would you expect a budget deficit to increase?

Economic downturn and rising unemployment

Which situation is achieved when the quantity demanded and the quantity supplied of money are the same?

Equilibrium

A country is experiencing a recessionary gap. Which type of fiscal policy should the government undertake?

Expansionary

An __________ policy, such as a purchase of government securities by the Fed, tends to push interest rates down, increasing investment and aggregate demand.

Expansionary

During a period of recession, a(n) __________ monetary policy is used

Expansionary

When unemployment is below its natural rate, what changes occur to bring the economy back to the long-run Phillips curve?

Expansionary economic policies

How can the government use fiscal policy to address a recession?

Expansionary fiscal policy can be used to reduce unemployment, increase output, and move the economy toward a full-employment equilibrium.

What are two of the policies the FED used to address the problem of inflation?

Expansionary monetary policy ; Contractionary monetary policy

Some economists support the use of currency that provides governments and central banks with more control, even though it is not backed by any physical goods. Which form of money is supported by these economists?

Fiat money

What allows for the money creation process in the economy?

Fractional reserve banking system

Which is not one of the three types of unemployment?

Functional

An economy starts in a long-run equilibrium, and then there is a negative supply shock. Which economic outcome will result from this situation?

Higher price level and higher unemployment

How does imposing a tariff impact price, quantity and efficiency in the protected market?

Higher prices, lower QTY, less efficient

How would an increase in the demand for money change the interest rate?

Interest rates rise

Which statement accurately characterizes the long-run aggregate supply (LRAS) curve?

It is equal to full-employment GDP.

A government decision was made to spend 10 billion dollars on new technology to combat a serious problem in the country. What will happen to the aggregate demand curve?

It will shift to the right.

What is the relationship between the LRAS, potential GDP, and full-employment GDP?

LRAS (potential GDP) = when an economy is uses all labor and assets to their fullest; unemployment is low

What is the effect when there is a decrease in aggregate demand?

Lower price level and higher unemployment

Which is not an argument for implementing trade restrictions?

Market Distortion - protectionism can be an ineffective and costly means of sustaining jobs and supporting domestic economic growth

Which is not a types of tariff?

Market entry

What are the responsibilities of the Federal Reserve?

Monitor the money supply in the US

What is a cause of structural deficits?

Political decisions

Why is the population of a country not the same as its labor force? Explain.

Population counts everyone whereas the labor force only counts those who are working/want to work and does not count those retired/disabled/not looking for work.

Which is not one of the four functions of money?

Price mechanism

What is the natural rate of unemployment?

Rate that would result from counting economic, social, and political factors that exist at a specific time (assuming the enconomy is stable)

Why do economists use real GDP instead of nominal GDP when they want to compare one year's output to another year's output?

Real GDP accounts for inflation while nominal does not

When the Fed increases the money supply, the money supply curve shifts to the __________.

Right

Which of these is not part of the M1 money supply?

Savings deposits

Which is not one of the four policy actions the FED can take to increase the money supply.

Selling securities

Which effect does an increase in income have on the money demand curve?

Shifts to the right

Which situation reduces the effectiveness of using the Phillips curve as a policy menu?

Stagflation

Identify and explain two problems with the way inflation is measured.

Substitution bias, Quality and new Goods bias

What are the major policy tools used to direct fiscal policy?

Taxes and spending

The supply of money in the economy is controlled by __________ and is independent of the interest rate. As a result, the supply of money (SM) is __________.

The Fed ; Vertical

What is the relationship between inflation and unemployment shown by Phillip's curve?

The inverse relationship between the rate of unemployment and the rate of inflation in an economy. A nation could choose low inflation and high unemployment or high inflation and low unemployment, or anywhere in between.

What is a fractional reserve banking system?

The system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers.

What is the GDP and how is it calculated?

The value of all final goods and services produced in a country in a year. GDP = consumption + gross private investment + government investment + government spending + (exports - imports).

How is inflation measured in the U.S.?

Tracking how a basket of goods and services price changes over time

Explain the difference between absolute and comparative advantage.

absolute advantage: the capability to produce more of a given product using less of a given resource than a competing entity.comparative advantage: the ability of a party to produce a particular good or service at a lower opportunity cost versus another. Unlike comparative advantage, competitive advantage refers to a distinguishing attribute of a company or a product. It may or may not have anything to do with an opportunity cost or efficiency.