the complete ap econ review guide

Cyclical Unemployment

Unemployment that is caused by a decline in total spending

As a component of aggregate demand, investment refers to the

purchase of new equipment and additional inventories

The narrowest definition of money, M1, includes which of the following

savings accounts

Banks create money when

they make loans

Economies of Scale

Reductions in per-unit production costs that result from increase in output levels

Demand Factor

States that to achieve the higher production potential created by the supply factors, households, businesses, and government must purchase the economy's expanding output of goods and services

The table gives the value of selected assets and liabilities of a commercial bank's T-account. assets/ Liabilities required Reserves 20000//Demand Deposits 100000 excess Reserves 10000// Loans 70000// What is the maximum amount of new loans the bank could lend with the given amounts of reserves?

$10000

A bank has $200 million in demand deposits and $150 million in reserves. The reserve ratio is 20 percent. What is the maximum amount of loans the bank can make from its reserves?

$110 million

Troubled Asset Relief Program (TARP)

Allocated $700 billion to the U.S. Treasury to make emergency loans to critical financial and other U.S. firms

Legal Tender

Indicates that a piece of paper money is a valid and legal means of payment of any debt that was contracted in dollars

Token Money

Indicates that the face value of any piece of currency is unrelated to its intrinsic value

Supply Factors

Changes in physical and technical agents of production that enable an economy to expand its potential GDP

Modern Economic Growth

Characterized by sustained and ongoing increases in living standards that can cause dramatic increases in the standard of living within less than a single human lifetime

Restrictive Monetary Policy

This policy will increase the interest rate to reduce borrowing and spending, which will curtail the expansion of aggregate demand and hold own price level increases

Expansionary Monetary Policy

This policy will lower the interest rate to bolster borrowing and spending, which will increase aggregate demand and expand real output

Which of the following is a defining characteristic of a fractional reserve banking system?

The fact that banks retain an amount of bank reserves that is less than the amount of customer demand deposits

Productivity

A measure of the relationship between a nation's level of real output and the amount of resources used to produce that output (Total output/total inputs)

Menu Costs

Additional costs arising from the lowering of prices in response to a recession

Personal Income (PI)

Includes all income received, whether it is earned or unearned

Demand-Pull Inflation

Inflation produced by excess demand bidding up the prices of the limited output

Human Capital

The knowledge and skills that make a worker productive

Securitization

The process of slicing up and bundling groups of loans, mortgages, corporate bonds, or other financial debts into distinct new securities

Federal Funds Rate

The rate of interest that banks charge one another on overnight loans made from temporary excess reserves

Anderson Q6 on 4.1-4.3 Based on the data provided, what is the value of total reserves held by depository institutions?

$2500 million

Assume that Linda deposits in her checking account the $1,000 cash she was keeping at home for an emergency. If the required reserve ratio is 0.20, what is the maximum change in the money supply from her deposit?

$4000

If the required reserve ratio is 0.2, a $1 billion increase in bank reserves can lead to an increase in M1 of at most

$5 Billion

Money Demand (MD)

1. Price Level (PL) 2. Income (I) 3. Technology (T) PL increase --> MD increase I increase --> MD increase T increase --> MD increase

Money Supply (MS)

1. Reserve Requirements (RR) 2. Discount Rate (D%) 3. Open Market Operations (OMO) - (buying and selling bonds) RR increase --> MS decrease D% increase --> MS decrease OMO - buy bonds --> MS increase OMO - sell bonds --> MS decrease

according to the graph above which of the following will necessarily result in a decrease in output

2&5

Assume the nominal interest rate on a 15-year fixed-rate mortgage loan is 5 percent. If the expected inflation rate is 2 percent, the expected real interest rate is

3%

Assume that the nominal interest rate is 10 percent. If the expected inflation rate is 5 percent, the real interest rate is

5%

In the country of Agronomia, banks charge 10 percent interest on all loans. If the general price level has been increasing at the rate of 4 percent per year, the real rate of interest in Agronomia is

6%

Which of the following measures the opportunity cost of holding currency?

The forgone interest on alternative assets

Political Business Cycle

Swings in overall economic activity and real GDP resulting from election-motivated fiscal policy, rather than from inherent instability in the private sector

Demand Curve

Taste Related Good Income Buyers Expectation - (TRIBE)

Budget Surplus

Tax revenues in excess of government spending

Real GDP per capita

The amount of real output per person in a country (Real GDP/ Population)

Per Unit Production Costs

The average cost of a particular level of output

Network Effects

Increases in the value of a product to each user, including existing users, as the total number of users rises

Discount Rate

The interest rates charged by the Federal Reserve Banks on loans granted to commercial banks

Suppose that the prices of labor and inputs to production are fixed in the short run but not in the long run. What is a consequence of this flexibility in the long run?

The long-run aggregate supply curve is vertical and there is no trade-off between inflation and unemployment in the long run.

Consumer Price Index

The main measure of inflation in the United States, compiled by the Bureau of Labor Statistics (BLS)

Which of the following will happen when interest rates increase in an economy?

The opportunity cost of holding money will increase.

Nominal Interest Rate

The percentage increase in money that the borrower pays the lender, including that resulting from the built-in expectations of inflation, if any

Unemployment Rate

The percentage of the labor force unemployed

Labor-Force Participation Rate

The percentage of the working-age population actually in the labor force

Real Interest Rate

The precentage increase in purchasing power that the borrow pays the lender

Commercial Banks

The primary depository institutions

Reserve Ratio

The ratio of the required reserves the commercial bank must keep to the bank's own outstanding checkable-deposit liabilities

Which of the following is a determinant of the amount of money the commercial banking system can create?

The reserve requirement

Net Domestic Product (NDP)

The result of subtracting consumption of fixed capital (depreciation) from GDP

Country X is currently in long-run macroeconomic equilibrium. If the country's economy experiences a significant increase in the price of energy, a major input in production, which of the following will occur in the short run?

The short-run aggregate supply curve will shift to the left, and the actual rate of unemployment will exceed the natural rate of unemployment.

Moral Hazard

The tendency for financial investors and financial services firms to take on greater risks because they assume they are at least partially insured against losses

National Income

The total of all sources of private income (employee compensation, rents, interest, proprietors' income, and corporate profits) plus government revenue from taxes on production and imports

Core Inflation

The underlying increaes in the CPI after volatile food and energy prices are removed

Full-Employment rate of unemployment/ Natural Rate of Unemployment (NRU)

The unemployment rate that is consisten with full employment (still less than 0 percent)

Services

The work done by lawyers, hair stylists, doctors, mechanics, and other service providers

Long-Run Aggregate Supply Curve

Vertical line because, in the long run, the economy will produce the full-employment output level no matter what the price level is (both input and output prices are flexible)

Pat deposits a portion of her wages into a personal savings account every week. The saved money can be considered to be primarily a

store of value

an increase in which of the following will increase the value of the spending multiplier

the marginal propensity to consume

Assume that in a banking system in which banks hold no excess reserves, the public holds part of its money in cash and the rest in checking accounts. If the required reserve ratio is 10 percent, actual reserves are $10 million, and currency in circulation is equal to $20 million, M1 will be equal to

$120 million

A bank has $800 million in demand deposits and $100 million in reserves. If the reserve requirement is 10 percent, the bank's excess reserves equal

$20 million

Assume a country's banking system has limited reserves. Suppose that the central bank buys $400 billion worth of government securities from the public. If the required reserve ratio is 20 percent, the maximum increase in the money supply is

$2000 billion

Assume that Atlantic National Bank has demand deposits of $100,000 and no excess reserves, and that the reserve requirement is 10 percent. A customer withdraws $5,000 from the bank. To meet the reserve requirement, the bank must increase its reserves by

$4500

If the required reserve ratio is 10 percent, what is the maximum change in the money supply from John's deposit of $50,000 cash into his checking account?

$450000

If the marginal propensity to save is .25, a $15 billion increase in government spending will lead to an increase in national income by a maximum of

$60 billion

Assume that the required reserve ratio is 10 percent, banks keep no excess reserves, and borrowers deposit all loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit it in your checking account. As a result of your deposit, the money supply can increase by a maximum of

$900

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

$900

Assume that the reserve requirement is 10 percent. Marwa deposits $1 million in cash into her checking account at First Bank. The deposit will initially increase excess reserves at First Bank by

$900000

Aggregate Demand (AD)

- AD=GDP=C+I+G+Xn C: Consumer spending I: Investments G: Government Spending Xn: Imports and Exports

Production Possibility Curve (PPC)

1. Change in resource quality and quantity 2. Change in technology 3. Change in trade

The table gives the value of selected assets and liabilities of a commercial bank's T-account. assets/ Liabilities required Reserves 20000//Demand Deposits 100000 excess Reserves 10000// Loans 70000// What is the money multiplier?

5

The annual inflation rate is expected to be 5 percent over the next 3 years. Juan plans to take out a 3-year loan to purchase an automobile. If Juan decides not to take out the loan if the real interest rate exceeds 3 percent, the highest nominal interest rate he is willing to pay is

8%

Aggregate Demand-Aggregate Supply (AD-AS) model

A "variable price-variable output" model that allows both the price level and level of real GDP to change

Nominal GDP

A GDP based on the prices that prevailed when the output was produced is called unadjusted GDP, or...

Fractional Reserve Banking System

A banking system in which only a portion (fraction) or checkable deposits are backed up by reserves of currency in bank vaults or deposits at the central bank

Cyclical Deficit

A byproduct "deficit" of the economy's slide into recession, not the result of discretionary fiscal actions by the government

Which of the following represents an appropriate fiscal policy for the given economic conditions?

A contractionary fiscal policy is appropriate to reduce inflation when there is an inflationary gap.

A contractionary supply shop would most likely result in

A decrease in employment

Money Market Mutual Fund (MMMF)

A fund offered by a mutual fund company that use the combined funds of individual shareholders to buy interest-bearing short-term credit instruments such as certificates of deposit and U.S. government securities

According to the expenditure multiplier, if the marginal propensity to consume is greater than zero, a one-dollar change in autonomous expenditures will result in which of the following?

A greater-than-one-dollar increase in aggregate demand for goods and services

Council of Economic Advisers (CEA)

A group of three economists appointed by the president to provide expertise and assistance on economic matters

Real-Balances Effect

A higher price level reduces the real value or purchasing power of the public's accumulated savings balances (specifically the real value of assets with fixed money values) that in turn, causes the public to be poorer in real terms and reduce spending

Immediate-Short-Run Aggregate Supply Curve

A horizontal line with output prices fixed and firms selling however much customers want to purchase at those fixed prices

Real Income

A measure of the amount of goods and services nominal income can by; it is the purchasing power of nominal income, or income adjusted for inflation

Price Index

A measure of the price of a specified collection of goods and services, called a "market basket" in a given years as compared to the price of an identical (or highly similar) collection of goods and services in a reference year

Assume economy produces two goods, capital goods and consumer goods. If the production of capital goods increases in the current period, which of the following will occur for the current and future production possibilities curve (PPC) for consumer and capital goods?

A movement along the current PPC and a rightward shift of future PPC.

Aggregate Supply

A schedule or curve showing the relationship between a nation's price level and the amount of real domestic output that firms in the economy produce

Aggregate Demand

A schedule or curve that shows the amount of a nation's output (real GDP) that buyers collectively desire to purchase at each possible price level

Increasing Returns

A situation in which a given percentage increase in the amount of inputs a firm uses leads to an even larger percentage increase in the amount of output the firm produces

Which of the following is NOT a function of fiat money?

A source of intrinsic value

Progressive Tax System

A tax system in which the average tax rate (tax revenue/GDP) rises with GDP

Regressive Tax System

A tax system in which the average tax rate falls as GDP rises

Proportional Tax System

A tax system in which the average tax rate remains constant as GDP rises

Expenditures Approach

A way of viewing GDP as the sum of all the money spent in buying it; also known as the output approach

Income Approach

A way of viewing GDP in terms of income derived or created from producing it

A leftward shift of the supply curve for computers could be caused by which of the following in the short run? A) A decrease in the number of computer manufacturers B) A decease in taxes on computer manufacturers C) A decrease in the price of computers D) A decrease in the price of components used to assemble computers E) An increase in the price of mobile devices, a substitute good

A) A decrease in the number of computer manufacturers

The diagram above shows two demand curves for video games identified as D1 and D2. Which of the following changes will most likely cause a shift of the demand curve from D1 to D2 as shown in the diagram? A) An increase in consumers' income, assuming that video games are a normal good B) An increase in the price of game consoles, a complementary good C) A decrease in the price of mobile games, a substitute good D) A decrease in the number of buyers in the market E) A decrease in the price of video games

A) An increase in consumers' income, assuming that video games are a normal good

If there is a decrease in the price of the coffee beans used to make brewed coffee, how will this affect the equilibrium price and quantity of brewed coffee? A) Equilibrium price will decrease and equilibrium quantity will increase B) Equilibrium price will decrease and equilibrium quantity will not change C) Equilibrium price will decrease and equilibrium quantity will decrease D) Equilibrium price will increase and equilibrium quantity will decrease E) Equilibrium price will increase and equilibrium quantity will not change

A) Equilibrium price will decrease and equilibrium quantity will increase

Built-In Stabalizer

Anything that increases the government's budget deficit (or reduces its budget surplus) during a recession and increase its budget surplus (or reduces its budget deficit) during an expansion without requiring explicit action by policymakers

Store of Value

Aspect of money that enables people to transfer purchasing power from the present to the future

Recession

At this phase of the business cycle, there is a period of decline in total output, income, and employment

Term Auction Facility

Auctions conducted by the Federal Reserve at which banks bid for the right to borrow reserves for 28-day and 84-day periods

Which of the following will cause a movement along the demand curve for chicken, a normal good, resulting in an increase in the quantity demanded? A) An increase in consumers' income B) An increase in the price of fish, a substitute good C) An increase in the price of barbecue sauce, a complementary good D) A decrease in the price of chicken E) A decrease in the number of consumers of chicken

D) A decrease in the price of chicken

Which of the following describes scarcity? A) Wants are limited. B) Wants exceed resources. C) Resources are unlimited. D) Resources are fully employed. E) Resources are allocated efficiently.

B) Wants exceed resources.

Structural Unemployment

Describes workers that find it hard to obtain new jobs without retraining, gaining additional education, or relocating

Public Debt

Essentially defined as the accumulation of all past Federal deficits and surpluses

Hyperinflation

Extraordinarily rapid inflation; can have a devastating impact on real output and employment

U.S. Securities

Financial instruments issued by the Federal government to borrow money to finance expenditures that exceed tax revenues

Total Demand for Money

Found by horizontally adding the asset demand to the transactions demand

Excess Reserves

Found by subtracting a bank's required reserves from its actual reserves

Balance Sheet

Functions for a commercial bank or thrift as a statement of assets-things owned by the bank or owed to the bank-and claims on those assets; includes both liabilities and net worth

Time Deposits

Funds from these accounts become available at their maturity (ex. CD)

Interest-Rate Effect

Given a fixed supply of money, an increase in money demand will drive up the price paid for its use (Interest Rate)

Bank A Assets- Actual Reserves, 1000. Loans $4000 Liabilities- Demand Deposits $5000 Bank B Assets- Actual Reserves $100, Loans $500 Liabilities- Demand Deposits $600 Bank C Assets- Actual Reserves $10, Loans $90 Liabilities- Demand Deposits $100 Based on the balance sheets above for three different banks, which of the following is true, if the reserve requirement is 10 percent?

Bank B can increase its loans by $40.

Federal Reserve Banks

Blend private and public control to collectively serve as the nation's "central bank"

Assume a country's banking system has limited reserves. In the short run, which of the following would occur to the price of previously issued bonds and interest rates if a central bank bought bonds through open-market operations?

Bond Prices, Increase. Interest Rates, Decrease

Assume that a country's government increases borrowing. What will most likely happen to the prices of previously issued bonds and the price level in the short run?

Bond prices, decrease/ Price level Increase

Which of the following is true for bonds but not for stocks?

Bonds are interest-bearing assets.

Suppose a nation opened its borders to the free flow of workers from other nations. How would this event likely affect the long-run aggregate supply (LRAS) curve and the production possibilities curve of the nation?

Both curves would shift to the right.

Assume that stock prices and home values have increased, raising household wealth. At the same time, productivity increased due to new technology. What is the likely short-run impact on the economy?

Both the aggregate demand (AD) and the short-run aggregate supply (SRAS) curves shift right, resulting in a higher real output level and indeterminate price level.

M2

Broader definition of the money supply that includes M1 along with several other relatively liquid account balances (near-monies)

Near-Monies

Certain highly liquid financial assets that do not function directly or fully as a medium of exchange but can be readily converted into currency or checkable deposits

Determinants of Aggregate Demand

Changes in consumer spending, changes in investment spending, changes in government spending, and changes in net export spending

Fiscal Policy

Changes in government spending and tax collections designed to achieve full employment, control inflation, and encourage economic growth

Determinants of Aggregate Supply

Changes in input prices, changes in productivity, and changes in the legal-institutional envrionment

Financial Services Industry

Consist mainly of commercial banks, thrifts, insurance companies, mutual fund companies, pension funds, security firms, and investment banks

Monetary Policy

Consists of deliberate changes in the money supply to influence interest rates and thus the total level of spending in the economy

Labor Force

Consists of people who are able and willing to work

Frictional Unemployment

Consists of search employment and wait employment; used to describe workers who are either searching for jobs or waiting to take jobs in the near future

Federal Reserve System

Control the lending activity of the nation's banks and thrift institutions; major goal is to control the money supply, but also works to assure the stability of the banking system

Government purchases

Government consumption expenditures and gross investment including expenditures for goods and services that government consumes in providing public services and expenditures for publicly owned capital such as schools and highways, which have long lifetimes

Public Investments

Government spending that increases the economy's future production capacity (ex. highways, mass transit systems, and electric power facilities, education, job training, health)

The graph above shows the macroeconomic conditions of Wattsonia. many economists estimate that the natural rate of unemployment is 6%. If this is true of the current rate of unemployment is 5.1%, in what range of real gross domestic product is the economy currently producing

Greater than Y2

Subprime Mortgage Loans

High-interest-rate loans to home buyers with higher-than-average credit risk

Infrastructure

Highways and bridges, public transit systems, wastewater treatment centers, water systems, airports, educational facilities, and so on

Gross Private Domestic Investment

Include the following items: all final purchases of machinery, equipment, and tools by business enterprises; all construction; changes in inventories

Taxes On Production and Imports

Includes general sales taxes, excise taxes, business property taxes, license fees, and customs duties

Net Private Domestic Investment

Includes only investment in the form of added capital

Multiple Counting

Including the value of intermediate goods; distorts the value of GDP

Suppose an economy is operating above full employment. Which of the following fiscal policy actions and resulting changes in aggregate demand will move the economy back towards full employment?

Increasing taxes, which will shift the AD curve leftward.

Okun's law

Indicates that for every 1 percentage point by which the actual unemployment rate exceeds the natural rate, a negative GDP gap of about 2 percent occurs

Unit of Account

Indicates that money is able to be counted and gauged in dollars

Medium of Exchange

Indicates that money is usable for buying and selling goods and services

Cost-Push Inflation

Inflation arising on the supply, or cost side of the economy. Expalins rising prices in terms of factors that raise per unit production costs at each level of spending

Federal funds rate

Interest rate paid on overnight loans

Which of the following is true of the quantity of money demanded?

It falls when interest rates rise, because the opportunity cost of holding money increases.

Which of the following best describes the aggregate demand curve?

It is a curve that shows the level of spending by consumers, businesses, the government, and the foreign sector at different price levels.

What is an automatic stabilizer?

It is a program or policy that counteracts the business cycle without any new government action required.

Which of the following is true about the expected real interest rate?

It is negative if the expected inflation rate exceeds the nominal interest rate.

Which of the following accurately describes the state of the macro-economy if it is operating at the intersection of the AD1 and SRAS2 curves?

It is operating below full employment and is in a short-run but not a long-run equilibrium.

An increase in taxes on businesses in the United States will likely have what impact on the short-run aggregate supply SRAS curve in the United States?

It will cause the SRAS curve to shift leftward.

Assume that the economy is in equilibrium. If aggregate demand increases, nominal interest rates and bond prices will most likely change in which of the following ways?

Nominal Interest Rates, increase. Bond Prices, Decrease

An increase in inflationary expectations will most likely affect nominal interest rates and bond prices in which of the following ways in the short run?

Nominal Interest rates, Increase/ Bond Prices, Decreases

Assume an economy is currently at full employment. Which of the following best describes the long-run adjustments that will occur in the economy following a negative aggregate demand shock with no government intervention?

Nominal wages will decrease and short-run aggregate supply will increase until full employment is restored in the long run.

If the natural rate of unemployment exceeds the actual rate of unemployment, which of the following will occur in the long run in the absence of government intervention?

Nominal wages will increase.

Equilibrium Price Level and Equilibrium Real Output

Occur at the intersection of the aggregate demand curve AD and the aggregate supply curve AS

Which of the following would be true if the actual rate of inflation were less than the expected rate of inflation?

People who borrowed funds at the nominal interest rate during this time period would lose.

Contractionary Fiscal Policy

Policy consists of government spending reductions, tax increases, or both, designed to decrease aggregate demand and therefore lower or eliminate inflation

Expansionary Fiscal Policy

Policy that consists of government spending increases, tax reductions, or both, designed to increase aggregate demand and therefore raise real GDP

Durable Goods

Products that have expected lives of three years or more

Nondurable Goods

Products with less than three years of expected life

Short Run Aggregate Supply (SRAS)

R: Change in resource prices A: Change in actions of government (not spending) P: Change in productivity - RAP

Follower Countries

Real GDP in these poorer countries can grow much faster because they can simply adopt existing technologies from richer leader countries

Leader Countries

Real GDP per capita in these richer countries typically grows by an average annual rate of just 2 or 3 percent per year

Assume the marginal propensity to consume is 0.75. What will happen if government spending increases by $100 billion?

Real output will increase by a maximum of $400 billion.

Ms. Smith withdraws $1,000$1,000 from her safe and deposits the money in a bank. If the bank holds no excess reserves and the reserve requirement is 1010 percent, how will this deposit increase the bank's required reserves and the bank's loans?

Required Reserves, $100. Loans $900

assets// Liabilities reserves100000// Checkable deposits 400000 Required 80000 excess 20000// Loans 300000// The table above shows the current entries in the T-account of XYZ Bank. Kim purchases a bond issued by the central bank for $50,000 and pays for the bond by drawing on her company's account at XYZ Bank. What is the effect of Kim's purchase of the bond on the required and excess reserves of XYZ Bank and the total money supply?

Required, Decrease. Excess, decrease. Money Supply, Decrease

Sam pays monthly installments on a five-year fixed interest rate auto loan. If the expected inflation rate increases, which of the following will happen?

Sam will pay a lower real interest rate.

Crowding-Out Effect

The effect that an expansionary fiscal policy (deficit spending) may increase the interest rate and reduce investment spending, thereby weakening or canceling the stimulus of the expansionary policy

Actual Reserves

Found by adding a bank's excess reserves and required reserves

In the long run, a fully anticipated increase in the inflation rate will

increase the nominal interest rate

Vault Cash

Cash held by a bank

Federal Reserve Notes

Paper money issued by the Federal Reserve System

Labor Productivity

Measured as real output per hour of work

Budget Deficit

Government spending in excess of tax revenues

Inflation

A rise in the general level of prices

Start-Up Firms

New enterprises that advanced various aspects of the new information technology

Deflation

Price Level Declines

Asset Demand for Money

The demand for the holding of money as an asset

Interest

The price paid for the use of money

Suppose that the real interest rate is equal to seven percent and the expected inflation rate is currently three percent. If an oil crisis in the Middle East increases the expected inflation rate to four percent, the new nominal interest rate is equal to

11%

Real GDP

A GDP that has been deflated or inflated to reflect changes in the price level is called adjusted GDP, or...

A commercial bank's ability to create money depends on which of the following?

A fractional reserve banking system

Assume the economy of Country A is in long-run equilibrium. Which of the following will happen in the short run in Country A if one of its major trading partners, Country B, experiences a recession?

Aggregate demand will decrease and the price level will decrease.

Federal Open Market Committee (FOMC)

Aids the board of governors in conducting monetary policy; made up of 12 individuals

Business Cycles

Alternating rises and declines in the level of economic activity, somtimes over several years.

Taylor Rule

Assumes that the Fed has a 2 percent "target rate of inflation" that it is willing to tolerate and that the FOMC follows three rules when setting its target for that Federal funds rate

Which of the following explains the relationship between the price level and real output along the aggregate demand curve?

At a lower price level, domestic goods will become less expensive compared to foreign goods, which causes an increase in spending on domestic goods.

Potential Output

At the natural rate of unemployment (NRU) the economy is said to be producing at this level

Peak

At this phase of the busines cycle, business activity has reached a temporary maximum.

Trough

At this phase of the business cycle, output and employment "bottom out" at their lowest levels

Expansion

At this phase of the business cycle, real GDP, income, and employment rise

Mortgage-Backed Securities

Bonds backed by mortgage payments

Reserve Ratio

Can be manipulated in order to influence the ability of commercial banks to lend

Unanticipated Inflation

Causes real income and wealth to be redistributed, harming some and benifiting others

Personal Consumption Expenditures

Covers all expenditures by households on goods and services

The economy of Fisherland is at full employment for which year in the above diagram? A) 2009 B) 2010 C) 2013 D) 2015 E) 2017

D) 2015 Correct. In 2015 the economy is at full employment because actual real GDP is equal to potential real GDP.

Which of the following is an example of a factor of production? A) A want B) A bank C) A bond D) Capital E) Stock

D) Capital

Use the table to answer the question below. Price of Quantity Quantity Candy Bar Demanded Supplied $1.00 1000 0 $2.00 775 100 $4.00 525 250 $5.00 375 525 $6.00 200 700 $7.00 50 1200 When the price of a candy bar is $6.00, which of the following is true? A) The market does not clear because the price is lower than the equilibrium price and there will be a surplus in the market. B) The market does not clear because the price is lower than the equilibrium price and there will be a shortage in the market. C) The market clears because buyers and sellers are in agreement on the price. D) The market does not clear because the price is higher than the equilibrium price and there will be a surplus in the market. E) The market does not clear because the price is higher than the equilibrium price and there will be a shortage in the market.

D) The market does not clear because the price is higher than the equilibrium price and there will be a surplus in the market.

Net Exports

Equal to exports minus imports

Which of the following is true about the equilibrium real output in the aggregate demand-aggregate supply (AD-AS) model in the short run?

Equilibrium real output can be above, equal to, or below full employment.

Wall Street Reform and Consumer Protection Act

Law passed by Congress in mid-2010 designed to prevent many of the errors that lead to the 2007-2008 financial crisis

Fred Jones withdraws $1,000 in cash from his savings account. What immediate effect does this transaction have on the monetary aggregate measures of M1 and M2 ?

M1 will not change; M2 will not change

Using the disposable income and consumption data in the table above, calculate the value of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS).

MPC=0.60 , MPS=0.40

National Income Accounting

Measures the economy's overall performance - does for the economy as a whole what private accounting does for the individual firm or for the individual household

Disposable Income (DI)

Personal income less personal taxes

Supply Curve

Price of Resources Technology Tax/Subsidies Expectations of Seller Number of Sellers - (ROTTEN)

Final Goods

Products that are purchased by their end users

Intermediate Goods

Products that are purchased for resale or further processing or manufacturing

Anticipated Inflation

Situations in which people see an inflation coming in advance, people are able to avoid or lessen the redistriubtion effects associated with this type of inflation

Consumption of Fixed Capital

The allowance for capital that has been "consumed" in producing the years' GDP

Liquidity

The ease with which an asset can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power

In the aggregate demand aggregate supply model which of the following is true

The economy is in a recessionary gap when the short-run equilibrium real output is below the long run equilibrium output

Which of the following is true when an economy is operating at the intersection of the AD2 and SRAS2 curves?

The economy is in short-run and long-run equilibrium.

Value Added

The market value of a firm's output less the value of the inputs the firm has bought from others

Which of the following is illustrated by the long-run aggregate supply (LRAS) curve and the production possibilities curve (PPC)?

The maximum sustainable capacity

ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25%25% and banks in Country X keep no excess reserves. If Maria deposits $1,000$1,000 in cash at ABC Bank, what will happen to the money supply after all adjustments are made in the banking system?

The money supply will increase by a maximum of $3,000.

M1

The narrowest definition of the U.S. Money Supply; includes currency and checkable deposits

The amount of money that the public wants to hold is $10 billion. With a monetary base of $2 billion and a money multiplier of 4, which of the following will most likely occur?

The nominal interest rate will increase.

Nominal Income

The number of dolalrs received as wages, rent, interest, or profit

The government of Euroland is considering increasing government spending to avoid a recession. What is the most likely effect on aggregate demand (AD) in Euroland?

There will be a rightward shift in the ADAD curve.

In an economy where wages and prices are sticky, which of the following will happen as a result of an increase in the price level?

There will be an upward movement along the short-run aggregate supply curve to a higher real output level.

How will automatic stabilizers affect the economy during a recession?

They will shift the aggregate demand curve to the right, increasing real output.

Rule of 70

This tells us that we can find the number of years it will take for some measure to double, given its annual percentage increase, by dividing that percentage increase by a certain number

On the island of Mabera, the local money is called "favoli." The price of every good in Mabera is expressed as the number of favolis needed to buy the good. The use of favolis to express the price of goods describes which function of money?

Unit of account

Cyclically Adjusted Budget

Used by economists to adjust actual Federal budget deficits and surpluses to account for the changes in tax revenues that happen automatically whenever GDP changes; measures what the Federal budget deficit or surplus would have been under existing tax rates and government spending levels if the economy had achieved its full-employment level of GDP

Efficiency Wages

Wages the elicit maximum work effort and thus minimize labor costs per unit of output

Foreign Purchases Effect

When the U.S price level rises relative to foreign price levels, given constant exchange rates, foreigners buy fewer U.S. goods and Americans buy more foreign goods; causing U.S exports to fall and U.S imports to rise which in turn reduces the quantity of U.S. goods demanded as net exports

According to the graph above which of the following is true about the long run equilibrium of the economy depicted

as wages increase, the SRAS curve will shift to the left to restore long-run equilibrium

Assume that the public holds part of its money in cash and the rest in checking accounts. The banking system has limited reserves. If the central bank lowers the reserve requirement from 16 percent to 8 percent, the money supply will

increase by less than double

A barter economy is different from a money economy in that a barter economy

involves higher costs for each transaction

Assume that the economy is at full employment equilibrium in the diagram showing above which of the following would lead to stagflation

leftward shift of SRAS curve only

Banks expand the money supply when

making loans

If the central bank raises the required reserve ratio in a banking system with limited reserves, the money multiplier and the money supply will change in which of the following ways?

money multiplier, decrease. Money Supply, Decrease

an increase in energy cost the most likely cause the price level and real gross Gross domestic product a change in which of the following ways

price level increase RGDP decrease

The real value of the United States dollar is determined by

the goods and services it will buy

Assume that banks hold no excess reserves. A decrease in the required reserve ratio will cause total reserves in banks, the money multiplier, and the money supply to change in which of the following ways?

total reserves, No change. Money Multiplier, Increase. Money supply, Increase

Thrift Institutions

Describes the savings and loan associations, mutual savings banks, and credit unions that supplement the commercial banks

The table shows that Home Nation can produce five autos or one hundred computers using all its available resources in a year. Foreign Nation can produce five autos or fifty computers using all its available resources in a year. Home Nation | Foreign Nation Annual Annual Production | Production Possibilities Autos | Computers | Autos | Computers | 5 100 5 50 Based on the information provided above, which of the following must be true? A) Home Nation has an absolute advantage in the production of computers. B) Foreign Nation has an absolute advantage in the production of autos. C) Home Nation has a comparative advantage in the production of autos. D) Foreign Nation has a comparative advantage in the production of computers. E) Neither nation has a comparative advantage.

A) Home Nation has an absolute advantage in the production of computers.

Country X is a major buyer of Country Y's grains. Assume Country X's government announced an increase in taxes on its imports of Country Y's grains effective next month. How will this news likely affect consumers' demand for grains in Country X? A) It will increase now because the tax on imported grains will increase the future price of grains. B) It will decrease now because the tax on imported grains will increase the future price of grains. C) It will not change now because the tax on imported grains will increase the future price of grains. D) It will increase now because the tax on imported grains will increase the current price of grains. E) It will decrease now because the tax on imported grains will increase the current price of grains.

A) It will increase now because the tax on imported grains will increase the future price of grains.

Which of the following describes the relationship between price and quantity supplied according to the law of supply? A) Positive relationship, illustrated by an upward-sloping supply curve B) Positive relationship, illustrated by a downward-sloping supply curve C) Positive relationship, illustrated by a horizontal supply curve D) Negative relationship, illustrated by an upward-sloping supply curve E) Negative relationship, illustrated by a downward-sloping supply curve

A) Positive relationship, illustrated by an upward-sloping supply curve

Which of the following is the correct calculation of Real Gross Domestic Product (GDP) ? A) Real GDP = Nominal GDP/GDP deflator B) Real GDP = GDP deflator/Nominal GDP C) Real GDP = Nominal GDP × GDP deflator D) Real GDP = Nominal GDP + GDP deflator E) Real GDP = Nominal GDP - GDP deflator

A) Real GDP = Nominal GDP/GDP deflator Correct. Nominal GDP = Real GDP × GDP Deflator

Which of the following illustrates the effect of a decrease in an economy's resources using a production possibilities curve (PPC)? A) The economy's PPC will shift inward and to the left. B) The economy's PPC will shift outward and to the right. C) The economy's PPC will become steeper. D) The economy's PPC will become flatter. E) The economy's PPC will remain the same.

A) The economy's PPC will shift inward and to the left.

Suppose the consumer price index (CPI) was 100 on January 1st, 2017 and 110 on January 1st, 2018 with no changes in nominal wages. Which of the following is definitely true about the economy between January of 2017 and January of 2018? A) The inflation rate was 10 percent. B) The inflation rate was -10 percent. C) Real wages increased by 10 percent. D) There was disinflation of 10% E) Nominal GDP decreased by 10 percent.

A) The inflation rate was 10 percent. Correct. The inflation rate is the percentage change in the CPI = (CPI in 2018 - CPI in 2017)/(CPI in 2017)×100 = (110-100)/100×100 = 10%.

When an economy is at the trough of the business cycle, which of the following is then true about the state of the economy? A) There is a recessionary gap. B) There is an inflationary gap. C) The economy is producing at its potential output level. D) The economy is producing above its potential output level. E) The unemployment rate is lower than the natural rate of unemployment.

A) There is a recessionary gap. Correct. At the trough of a business cycle, there is a recessionary gap because, at the trough, actual output is below potential output.

An economy is a full employment equilibrium. if the consumers and firms become more optimistic about future income and profits which of the following will occur in the short run

AD with shift right, increased out put and price level

Growth Accounting

Advisors use this system to assess that relative importance of the supply-side elements that contribute to changes in real GDP. This system groups these elements into two main categories: increases in hour of work and increases in labor productivity

Monetary Multiplier

Also called checkable deposit multiplier; defines the relationship between any new excess reserves in the banking system and the magnified creation of new checkable-deposit money by banks as a group

Savings Account

An account from which a depositor can withdraw money if transferred to a checkable account

Required Reserves

An amount of funds equal to a specific percentage of the bank's own deposit liabilities that must be kept in deposit with the Federal reserve Bank in a given district or as cash in the bank's vault

An economy is operating at a point Inside its production possibilities curve. Which of the following would most likely caused the economy to move toward the current PPC in the short run

An increase in employment

If nominal wages are fixed by labor contracts, then which of the following explains why the aggregate supply curve is upward sloping?

An increase in the price level will increase profits and production.

Money Market Deposit Account (MMDA)

An interest-bearing account containing a variety of interest-bearing short-term securities

Suppose Miguel wants to know the value of real gross domestic product (GDP) for 2011 in terms of the base year 1984 dollars. In 1984 nominal GDP was $10 billion. In 2011 nominal GDP was $15 billion and the price deflator was 200. Real GDP in 1984 dollars would be equal to which of the following? A) $5 billion B) $7.5 billion C) $10 billion D) $20 billion E) $30 billion

B) $7.5 billion Correct. To obtain Real GDP from nominal GDP and the GDP deflator requires the following calculation: Real GDP = Nominal GDP/(GDP deflator in hundredths). In this problem we are asked for 2011 Real GDP converted into 1984 dollars. Therefore we need to divide the 2011 Nominal GDP by the GDP deflator (in hundredths) to deflate 2011 dollars down to 1984 dollars. 2011 Real GDP in 1984 dollars = 2011 Nominal GDP/GDP deflator in hundredths = $15 billion/(200/100) or $7.5. The incorrect answers all use some combination of incorrect values in the numerator or denominator.

Use the table to answer the question below. Trucks Coffee (in tons) China 250 50 Malaysia 300 100 The table above shows the daily production possibilities for China and Malaysia in producing trucks and coffee using the same amount of resources. Based on the data provided, which of the following terms of trade are mutually beneficial for the two countries? A) 1 ton of coffee for 3 trucks B) 1 ton of coffee for 4 trucks C) 1 ton of coffee for 5 trucks D) 1 truck for 1 ton of coffee E) 1 truck for 5 tons of coffee

B) 1 ton of coffee for 4 trucks

The diagram above shows the production possibilities curve for the production of peaches and apples in Fruitland. Between points X and Y on the PPC, the opportunity cost of one unit of peaches is which of the following? A) 2 units of apples B) 1 unit of apples C) 2 units of peaches D) 1 unit of peaches E) 10 units of apples

B) 1 unit of apples

The diagram above shows two demand curves for video games identified as D1 and D2. Which of the following changes will most likely result in a movement from point X to point Y along the demand curve D1? A) A decrease in the number of buyers B) A decrease in the price of video games C) A decrease in the expected future price of video games D) An increase in the negative effects of video games on players E) An increase in the use of video games for educational purposes

B) A decrease in the price of video games

Assume an economy produces two goods, capital goods and consumer goods. If the production of capital goods increases in the current period, which of the following will occur for the current and future production possibilities curve (PPC) for consumer goods and capital goods? A) A movement along the current PPC and a leftward shift of the future PPC B) A movement along the current PPC and a rightward shift of the future PPC C) A rightward shift of the current PPC and a leftward shift of the future PPC D) A rightward shift of the current PPC and a rightward shift of the future PPC E) A movement along the current PPC with no shift of the future PPC

B) A movement along the current PPC and a rightward shift of the future PPC

Which of the following changes will increase the demand for bicycles? A) An increase in the price of bicycle helmets, a complementary good B) An increase in the price of scooters, a substitute good C) A decrease in the price of bicycles D) A decrease in consumers' income E) A decrease in the number of buyers

B) An increase in the price of scooters, a substitute good

Which of the following terms describes a slowdown in the rate of increase in the consumer price index? A) Deflation B) Disinflation C) Hyperinflation D) Inflation E) Stagflation

B) Disinflation Correct. Disinflation refers to a slowdown in the rate of increase in the consumer price index or inflation.

Which of the following describes a difference between nominal gross domestic product (GDP) and real GDP? A) Nominal GDP uses constant prices to measure the value of final output, while real GDP uses current prices. B) Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices. C) Nominal GDP measures how much output is produced within the borders of a country, while real GDP measures how much output is produced around the world by domestic companies. D) Nominal GDP includes sales of used goods while real GDP does not. E) Nominal GDP takes into account the size of the population while real GDP does not.

B) Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices. Correct. Nominal GDP uses current prices to measure the value of final output, while real GDP uses constant prices.

All societies face a trade-off for every decision for which of the following reasons? A) A decision entails zero opportunity cost. B) Resources are scarce. C) Some resources are always unemployed. D) Resources have no alternative uses. E) Resources are not allocated efficiently.

B) Resources are scarce.

Which of the following is classified as a discouraged worker? A) Javier earned a degree in business and is actively seeking a job in the financial sector. B) Sara has been unable to find a job and abandoned her job search. C) Raphael decided to be a stay-at-home dad after he lost his job. D) Ida was laid off during a downturn in the economy and is looking for a new job. E) Zack volunteers at the local elementary school all year long.

B) Sara has been unable to find a job and abandoned her job search. Correct. Sara is a discouraged worker because she gave up looking for jobs.

Allie is shopping when she finds a pair of running shoes priced at $90. When Allie uses her debit card to pay, it is declined because her balance is insufficient to cover the cost of the running shoes. Allie's situation best illustrates which economic concept? A) Opportunity cost B) Scarcity C) Unlimited resources D) Trade-offs E) Trade

B) Scarcity

The output gap is measured by which of the following? A) The difference between nominal and real GDP. B) The difference between actual and potential GDP. C) The difference between the expenditure side of GDP and the income side of GDP. D) The difference between the actual rate of unemployment and the natural rate of unemployment. E) The difference between the GDP deflator and the consumer price index in a given year.

B) The difference between actual and potential GDP. Correct. The output gap is measured by the difference between actual and potential GDP.

If the wage rate of workers producing a good decreases, then which of the following will most likely occur? A) The demand curve will shift to the right. B) The supply of the good will increase. C) The quantity supplied of the good will decrease. D) Demand for the good will increase E) Quantity demanded for the good will decrease.

B) The supply of the good will increase.

The table shows that Home Nation can produce five autos or one hundred computers using all its available resources in a year. Foreign Nation can produce five autos or fifty computers using all its available resources in a year. Home Nation | Foreign Nation Annual Annual Production | Production Possibilities Autos | Computers | Autos | Computers | 5 100 5 50 Based on the information provided above, which of the following are mutually beneficial terms of trade at which both Home and Foreign Nation will be willing to specialize and exchange? A) 1 auto for 1 computer B) 1 auto for 10 computers C) 1 auto for 17 computers D) 1 auto for 20 computers E) 1 auto for 25 computers

C) 1 auto for 17 computers

Calculate Country X's nominal gross domestic product (GDP) for 2017 using the expenditures approach. A) 14 billion dollars B) 18 billion dollars C) 19 billion dollars D) 20 billion dollars E) 21 billion dollars

C) 19 billion dollars Correct. The expenditure approach to calculating GDP sums consumption spending, government spending, investment spending, and net exports. Using the numbers provided in the table, the country's nominal GDP for 2017 is therefore 13+3+4+(−1)=19 billion dollars.

Use the given production possibilities curve (PPC) to answer the following question. A city government received a $1 million grant to build swimming pools and skating rinks for youth. Based on the data provided in the graph, what is the opportunity cost of building one swimming pool? A) 0.50 skating rink B) 0.50 swimming pool C) 2 skating rinks D) 2 swimming pools E) 5 skating rinks

C) 2 skating rinks

Which of the following will increase the market supply for new automobiles? A) An increase in the price of steel, an input in the production of automobiles B) An increase in taxes on automobile manufacturers C) An increase in subsidies to automobile manufacturers D) An increase in consumers' income E) An increase in the price of gasoline, a complementary good

C) An increase in subsidies to automobile manufacturers

If two nations specialize according to their individual comparative advantages and engage in trade, then which of the following must be true? A) Nations would be better off if they were self-sufficient. B) If one nation gains from trade with the other nation, then the other nation will lose. C) Both nations can consume beyond their individual production possibilities. D) Both nations can consume only what they produce. E) Both nations will lose from trade.

C) Both nations can consume beyond their individual production possibilities.

Which of the following describes a limitation of gross domestic product (GDP) ? A) It overstates the value of output by counting non-market transactions such as mowing your neighbor's lawn. B) It understates the value of output by accounting for negative environmental side effects of production. C) It does not account for the distribution of income in a nation or income inequality. D) It overstates economic well-being by including all do-it-yourself activities. E) It fails to make adjustments for the value of services consumed for free such as browsing on the Web.

C) It does not account for the distribution of income in a nation or income inequality. Correct. GDP measures the final output produced by a nation but does not account for the distribution of income or income inequality

Last year, Myron purchased a $10,000 certificate of deposit with a 3% rate of interest from his bank. The government reported that prices, on average, have fallen by 5% during the current year. Which of the following can be concluded as a result of this transaction? A) Myron loses, while the bank gains. B) Myron gains, while the bank remains unaffected. C) Myron gains, while the bank loses. D) Both Myron and the bank equally gain. E) The bank gains, while Myron remains unaffected.

C) Myron gains, while the bank loses. Correct. Prices have fallen by 5% on average, which results in an increase in the real interest rate (real interest rate = nominal interest rate - inflation). Myron is better off because the dollars that Myron will receive back from the bank when the certificate of deposit matures will buy more goods and services than when Myron purchased the certificate of deposit. And conversely, the money that the bank pays back to Myron when the certificate of deposit matures is worth more than that money was worth during the time the bank had this money.

Matcha green tea is primarily cultivated by Japanese farmers. Suppose that Matcha green tea grows in popularity as its health benefits, namely its lower caffeine content, become known, and at the same time the government reduces taxes imposed on Japanese tea farmers. What is the likely effect on the equilibrium price and quantity in the Japanese Matcha tea market? A) Price increases, and quantity increases. B) Price decreases, and quantity decreases. C) Price is indeterminate, and quantity increases. D) Price is indeterminate, and quantity decreases. E) Price decreases, and quantity is indeterminate.

C) Price is indeterminate, and quantity increases.

Which statement is true about the circular flow diagram of an economy? A) The market for goods and services connects household spending to government spending. B) The market for factors of production connects household spending to goods produced by firms. C) The market for factors of production connects spending by firms to household income. D) The market for goods and services connects labor income to firms as employers. E) The market for goods and services connects labor income to household spending.

C) The market for factors of production connects spending by firms to household income. Correct. The market for factors of production connects spending by firms to household income.

The supply (S) and demand (D) for a good are shown in the diagram above. At a price of P2 in the diagram above which of the following will happen in the market? A) There will be a surplus of 30 units and 90 units will be exchanged. B) There will be a surplus of 90 units and 30 units will be exchanged. C) There will be a surplus of 60 units and 30 units will be exchanged. D) There will be a shortage of 90 units and 30 units will be exchanged. E) There will be a shortage of 30 units and 90 units will be exchanged.

C) There will be a surplus of 60 units and 30 units will be exchanged.

Which of the following will happen when the actual inflation rate exceeds the expected inflation rate? A) This will benefit lenders with fixed-interest rate loans. B) This will harm lenders with variable-interest rate loans. C) This will harm lenders with fixed-interest rate loans. D) This will harm borrowers with fixed-interest rate loans. E) This will benefit borrowers with variable-interest rate loans.

C) This will harm lenders with fixed-interest rate loans. Correct. When the actual inflation rate exceeds the expected inflation rate, lenders will receive lower real interest rates than expected. Therefore, this will harm lenders with fixed-interest rate loans.

The diagram above shows the production possibilities curve for the production of peaches and apples in Fruitland. The production possibilities curve illustrates which of the following relationships? A) The production of peaches decreases as apple production decreases. B) The production of peaches increases as apple production increases. C) The opportunity cost of peach production decreases as apple production decreases. D) Fruitland cannot produce a combination of 5 units of peaches and 10 units of apples. E) Fruitland can produce only the combinations of peaches and apples illustrated by points X and Y.

D) Fruitland cannot produce a combination of 5 units of peaches and 10 units of apples.

The shape of a PPC illustrates the type of opportunity costs involved in production. What type of costs do PPC1 and PPC2 illustrate? A) PPC1 illustrates constant opportunity costs and PPC2 illustrates increasing opportunity costs. B) PPC1 illustrates constant opportunity costs and PPC2 illustrates decreasing opportunity costs. C) PPC1 illustrates increasing opportunity costs and PPC2 illustrates decreasing opportunity costs. D) PPC1 illustrates increasing opportunity costs and PPC2 illustrates constant opportunity costs. E) PPC1 illustrates decreasing opportunity costs and PPC2 illustrates constant opportunity costs.

D) PPC1 illustrates increasing opportunity costs and PPC2 illustrates constant opportunity costs.

The table below shows the landscaping productivity of Simone and Irina during an eight hour workday. Simone can mow twelve lawns or trim twenty four trees in eight hours. Irina can mow nine lawns or trim twelve trees in eight hours. Mow Lawns Trim Trees Simone 12 24 Irina 9 12 Based on the information in the table, which of the following is true? A) Irina has an absolute advantage in mowing lawns. B) Irina has an absolute advantage in trimming trees. C) Irina has a comparative advantage in trimming trees. D) Simone has an absolute advantage in trimming trees and mowing lawns. E) Simone has a comparative advantage in trimming trees and mowing lawns.

D) Simone has an absolute advantage in trimming trees and mowing lawns.

Given the labor market data above, what are the labor-force participation rate (LFPR) and the unemployment rate (UR) ? A) The LFPR is 60% and the UR is 6.0%. B) The LFPR is 54% and the UR is 6.0%. C) The LFPR is 54% and the UR is 10.0%. D) The LFPR is 60% and the UR is 10.0%. E) The LFPR is 60% and the UR is 3.3%.

D) The LFPR is 60% and the UR is 10.0%. Correct. The civilian labor force is 150;(Employed + Unemployed=135+15=150). The labor-force participation rate is 60%;(=[Civilian Labor Force/Civilian non-institutional population]×100=[150/250]×100=60%), and the unemployment rate is 10%;(=[Unemployed/Civilian Labor Force]×100=(15/150)×100=10%)

As a measure of economic performance, the United States gross domestic product (GDP) accounts for which of the following? A) The use of open-source, free Web browsers B) A parent's care of children in the home C) The street sale of illegal substances D) The cleanup of an oil spill E) The production of vegetables grown in the backyard and consumed by the family

D) The cleanup of an oil spill Correct. The cleanup of an oil spill is a measurable production activity that would be accounted for in GDP.

The supply (S) and demand (D) for a good are shown in the diagram above. At a price of P0 in the diagram above, which of the following is true? A) The existing surplus in the market will cause upward pressure on prices until equilibrium is reached at 75 units. B) The existing surplus in the market will cause downward pressure on prices until equilibrium is reached at 60 units. C) The existing shortage in the market will cause upward pressure on prices until equilibrium is reached at 30 units. D) The existing shortage in the market will cause upward pressure on prices until equilibrium is reached at 60 units. E) The existing shortage in the market will cause downward pressure on prices until equilibrium is reached at 45 units.

D) The existing shortage in the market will cause upward pressure on prices until equilibrium is reached at 60 units.

Two nations sign a trade agreement expecting to enjoy mutual gains from the trade of a certain good. How will this event likely affect the supply of the good in the two nations? A) This event will likely cause a decrease in the quantity supplied of the good in both nations. B) This event will likely cause an increase in the quantity supplied of the good in both nations. C) This event will likely cause a decrease in the supply of the good in both nations. D) This event will likely cause an increase in the supply of the good in both nations. E) This event will likely have no effect on the good in either nation.

D) This event will likely cause an increase in the supply of the good in both nations.

The government of Olympia is considering a fiscal policy action to slow the economy and curb inflation. If the marginal propensity to consume is 0.8, which of the following responses correctly identifies a policy action that would help the government achieve its goals and the impact of that action on Olympia's real gross domestic product (GDP)?

Decreasing government spending by $10 billion decreases real GDPGDP by a maximum of $50 billion.

Economic Growth

Defined as either an increase in real GDP occurring over some time period or an increase in real GDP per capita occurring over some time period

Gross Domestic Product (GDP)

Defines aggregate output as the dollar value of all final goods and services produced within the borders of a country during a specific period of time, typically a year

Checkable Deposits

Deposits that can be transferred from one person to another through the use of checks (makes up about 49% of the M1 money supply)

Cyclical Asymmetry

Describes the fact that monetary policy may be highly effective in slowing expansions and controlling inflation but may be much less reliable in pushing the economy from a severe recession

Learning by Doing

Describes the observation that tasks that initially may have taken firms hours may take them only minutes once the methods are perfected

Liquidity Trap

Describes the phenomenon that adding more liquidity to banks has little or no additional positive effect on lending, borrowing, investment, or aggregate demand

Which of the following describes the law of supply? A) An increase in the price of a good will decrease the quantity demanded. B) The price of a good will increase if production input costs increase. C) An increase in taxes will decrease the supply of a good. D) An increase in the number of sellers will increase the supply of a good. E) An increase in the price of a good will increase the quantity supplied.

E) An increase in the price of a good will increase the quantity supplied.

Which of the following is true about gross domestic product (GDP)? A) Calculations of GDP include the monetary value of non-market production activities such as households preparing own meals at home. B) Calculations of GDP do not include the monetary value of production activities involving negative environmental side effects such as pollution. C) Calculations of GDP include the monetary value of illegal production activities such as drug cartels. D) Calculations of GDP include the sale of used goods. E) Calculations of GDP include the unsold inventories of goods produced within the borders of the country.

E) Calculations of GDP include the unsold inventories of goods produced within the borders of the country. Correct. The calculations of GDP do include the unsold inventories of goods produced within the borders of the country because these goods were produced during the year.

Jan works a 30-hour week for a minimum wage of $10 an hour. Suppose that last year is the base year for the Consumer Price Index (CPI). Which of the following is true about Jan's real wage if at the end of this year the CPI is 125 ? A) Jan's real wage at the end of this year is $10 an hour because the base year equals 100. B) Jan's real wage is $2.50 per hour at the end of the year due to inflation. C) Jan's real wage is 25% higher because the CPI increased from 100 to 125. D) Jan's real wages are equal to the nominal wages. E) Jan's real wage is $8 per hour at the end of the year.

E) Jan's real wage is $8 per hour at the end of the year. Correct. Jan's real wage is $8 per hour =Nominal wage/(CPI in hundredths)=$10/(125/100) at the end of the year.

Michael and Martha run a mechanic shop. In one hour Michael can perform eight oil changes or change ten tires. In one hour Martha can perform seven oil changes or change fourteen tires. Given this information which of the following is true? A) Martha has a comparative advantage in changing oil. B) Martha has an absolute advantage in changing oil. C) Michael has a comparative advantage in changing tires. D) Michael has an absolute advantage in changing tires. E) Michael has an absolute and a comparative advantage in changing oil.

E) Michael has an absolute and a comparative advantage in changing oil.

Which of the following describes the relationship between price and quantity demanded according to the law of demand? A) Positive relationship, illustrated by an upward-sloping demand curve B) Positive relationship, illustrated by a downward-sloping demand curve C) Negative relationship, illustrated by a horizontal demand curve D) Negative relationship, illustrated by an upward-sloping demand curve E) Negative relationship, illustrated by a downward-sloping demand curve

E) Negative relationship, illustrated by a downward-sloping demand curve

Which of the following contributes to the economic problem of scarcity? A) Human wants are insufficient. B) Resources are unlimited. C) Resources are efficient. D) Resources are expensive. E) Resources have alternative uses.

E) Resources have alternative uses.

Which of the following is not a scarce resource? A) Land B) Labor C) Capital D) Entrepreneurship E) Stocks

E) Stocks

What type of unemployment describes the situation of factory workers displaced by automation? A) Cyclical B) Frictional C) Natural D) Seasonal E) Structural

E) Structural Correct. Structural unemployment exists when there is a surplus of job-seekers in a particular labor market than there are jobs available at the current wage rate.

Assume household income has fallen dramatically in Country X and the cost of construction materials for building new houses has increased. How will these changes affect the equilibrium price and equilibrium quantity for new houses? A) The equilibrium price will increase, and the equilibrium quantity will decrease. B) The equilibrium price will decrease, and the equilibrium quantity will decrease. C) The equilibrium price will decrease, and the equilibrium quantity will increase. D) The equilibrium price will decrease, and the equilibrium quantity will be indeterminate. E) The equilibrium price will be indeterminate, and the equilibrium quantity will decrease.

E) The equilibrium price will be indeterminate, and the equilibrium quantity will decrease.

Which statement is true about the approaches used to measure the value of a nation's gross domestic product (GDP) ? A) The expenditure approach to calculating GDP sums the components of the supply side of the economy. B) The income approach to calculating GDP sums the income earned by the factors of production excluding profits. C) The value-added approach to calculating GDP sums the final monetary value of output at each stage of production. D) The expenditure approach to calculating GDP sums the market value of all final goods and services produced by foreigners in a given period of time. E) The expenditure approach to calculating GDP sums consumption spending, investment spending, government spending, and net exports.

E) The expenditure approach to calculating GDP sums consumption spending, investment spending, government spending, and net exports. Correct. The expenditure approach to calculating GDP sums the components of the demand side of the economy - consumption spending, investment spending, government spending, and net exports.

Labor unions negotiated a 3-year contract with employers in the automobile industry. They agreed to a 3 percent per year increase in pay over the 3 years. How would each group be affected by an actual inflation rate of 4% next year? A) Workers would be better off, and the employers would be worse off. B) Workers would be better off, and the employers would be unaffected. C) Workers and employers would be equally well off. D) Workers would be worse off, and the employers would be unaffected. E) Workers would be worse off, and the employers would be better off.

E) Workers would be worse off, and the employers would be better off. Correct. When the actual rate of inflation (4%) is greater than the expected inflation rate (3%), the real value of worker income is reduced, which means that workers are worse off and employers are better off.

A decrease in taxes will necessary result in an increase in which of the following

National gross domestic product

Short-Run Aggregate Supply Curve

Slopes upward because, with input prices fixed, changes in the price level will raise or lower real firm profits

Cost-of living adjustments (COLAs)

Some union workers recieve this in their pay when the CPI rises, although such increases rarely equal the full percentage rise in inflation

Efficiency Factor

States that to achieve its full production potential, an economy must achieve economic efficiency as well as full employment

Which of the following best explains how income taxes can moderate a business cycle during an expansion?

Tax revenues increase automatically as gross domestic product (GDP)(GDP) rises, which dampens consumption spending.

External Public Debt

The 29 percent of the U.S debt held by citizens and institutions of foreign countries (is an economic burden to Americans)

Suppose that the economy is in a recession. In the absence of government policy action to restore the economy to full employment, how will the economy adjust in the long run?

The SRAS2 curve shifts to the right as nominal wages decrease and full employment is restored.

When Stephanie took out a one-year fixed-rate loan, she expected to pay a real interest rate of 3 percent. At the end of the year, the real interest rate had fallen to 2 percent. Which of the following could have caused the decrease in the real interest rate?

The actual inflation rate was greater than the expected inflation rate.

Assume that the inflation rate is 10 percent and a bank account effectively yields a real rate of interest of negative 5 percent per year. Would a person be better off keeping money in the bank account or in cash?

The bank account, because the loss is less than it is when holding cash.

When purchasing her house, Ms. Jones took out a 15-year mortgage loan from a local bank at a fixed interest rate of 7 percent. The rate of expected inflation at the time was 3 percent. If the actual rate of inflation was 4.5 percent, which of the following is true?

The bank lost because the real rate of interest decreased by 1.5%

Prime Interest Rate

The benchmark interest rate used by banks as a reference point for a wide range of interest rates charged on loans to businesses and individuals.

Board of Governors

The central authority of the U.S money and banking system

Information Technology

The combination of the computer, fiber-optic cable, wireless technology, and the Internet constitutes a spectacular advance in this, which has been used to connect all parts of the world

Transactions Demand for Money

The demand for money as a medium of exchange

GDP Gap

The difference between actual and potential GDP (can be positive or negative)

Discouraged Workers

Workers, who after unsuccesffully seeking work for a time, becoe discouraged and drop out of the labor force; these workers are not counted in the unemployment rate

Which of the following will cause an increase in aggregate demand

a decrease in income taxes

a leftward shift of the supply curve for computers could be caused by which of the following in the short run

a decrease in the number of computer manufacturers

Given the graph of the short run aggregate supply long run aggregate supply curve is above which of the following is true

at point X the economy is experiencing a recessionary gap

A decrease in business taxes would lead to an increase in national income by increasing which of the following

both aggregate demand and aggregate supply.

Open-Market Operations

consist of buying government bonds (U.S. Securities) from or selling government bonds to commercial banks and the general public

A favorable supply shock, such as a decrease in energy prices, is most likely to have which of the following short run effects on the price level and output

decrease of price level and increase in output

A major advantage of automatic stabilizers and fiscal policy is that they

go into effect without passage of new legislation

All of the following are components of the money supply in the United States EXCEPT

gold bullion

An increase in which of the following will increase aggregate demand

government spending