AP Macroeconomics Final Review

which of the following schools of thought is the MOST likely to advocate the use of fiscal policy in fighting recessions?

Keynesian

suppose that the reserve ratio is 10% when the Fed buys $11,000 of the U.S. Treasury bills from the banking system. if the banking system does NOT want to hold any excess reserves, _______ will be added to the money supply.

$110,000

if the monetary authorities decide to increase the nominal money supply by 10% when the economy is at its full-employment level of output, in the long run the aggregate price level increases by _____ and real GDP _____.

10%; returns to the potential level of output

a survey reveals that on a small island 40 adults have jobs, 10 other adults are looking for jobs, and 30 are neither working nor looking for work. the unemployment rate on the island is:

20.0%

suppose a panel of economists is predicting that a nation's real GDP per capita will double in approximately 10 years. Based upon the Rule of 70, what must be the predicted annual growth rate of real GDP per capita?

7%

if the cost of a market basket is $150 in Year 1 and $200 in Year 2, the price index for Year 1 with a Year 2 base is:

75

if the British pound appreciates against the dollar, this will make:

British exports more expensive but lower the price of American exports to Britain.

in the U.S., the institution that is charged with determining the size of the monetary base and with regulating the banking system is the:

Federal Reserve

which of the following best represents the equation for GDP?

GDP = C + I + G + X - IM

which of the following statements describes a function of money? I. Money is a medium of exchange. II. Money is a store of value. III. Money is a unit of account. IV. Money is a factor of production.

I, III, and IV only

a price control is:

a legal restriction on how high or low a price in a market may go

diminishing returns to physical capital implies that, when human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to:

a smaller increase in productivity

a recessionary gap is when:

aggregate output is below potential output

the rule that governs a country's policy toward its exchange rate is known as:

an exchange rate regime

the demand curve for DVDs has shifted to the right. what could have caused it?

an increase in the incomes of buyers

which of the following statements is true?

an increase in the money supply lowers the equilibrium rate of interest

which of the following would likely cause the short-run aggregate supply curve to shift to the left?

an increase in the price of imported oil

an increase in demand, with no change in supply, will lead to _________ in equilibrium quantity and _________ in equilibrium price

an increase; an increase

the short-run Phillips curve shows:

an inverse relationship between unemployment and inflation

a negative output gap is associated with:

an unusually high unemployment rate

automatic stabilizers act like:

automatic expansionary fiscal policy when the economy is in a recession.

a bank run can "break a bank" because:

banks can not convert quickly illiquid loans into liquid assets without facing a large financial loss.

nearly all economists agree that central banks need to:

be independent

when the federal government finances a deficit, the government may:

borrow funds

the alternation between recessions and expansions is known as the:

business cycle

the circular-flow diagram illustrates how households ________ goods and services and _________ factors of production

buy; sell

use the "monetary policy and the AD-SRAS model" figure 31-8. if the economy is in a recessionary gap at point f, it could move to point g due to:

buying government securities in the open market

an illiquid asset:

cannot quickly be converted into cash.

real GDP is nominal GDP adjusted for:

changes in prices

the consumer price index reflects the:

changes in the prices of goods and services typically purchased by consumers.

from the standpoint of economic growth, banks are important to:

channel savings into investment

Adam is an economist who believes that in the long run, all prices are flexible and that any increase in the money supply will lead only to inflation, not an increase in aggregate output. because the economy would self-correct to long-run equilibrium output, there is no role for either fiscal or monetary policy. Adam is best described as a ______.

classical economist

the aggregate demand curve is negatively sloped in part because of the impact of interest rates on:

consumption and investment

after a hurricane devastates New Orleans, a Canadian charity sends $1 million to the U.S. to help the survivors rebuild their homes. in the U.S. balance of payments, this transaction would cause the balance on the _______ account to ________.

current; increase

deflation is a(n):

decrease in the average level of prices

if goods A and Z are complements, an increase in the price of good Z will:

decrease the demand for good A

consider the supply curve for cotton shirts. an increase in the price of cotton will:

decrease the supply of cotton shirts

expansionary monetary policy in the United States causes U.S. interest rates to _______ and the dollar to __________.

decrease; depreciate

a negative relationship between the quantity demanded and price is called the law of:

demand

in response to the Great Depression, the classical economists:

did not advocate any action because of the lack of general consensus about the consequences of policy.

suppose actual aggregate output is equal to the potential output; the actual unemployment rate is:

equal to the natural rate of unemployment

the U.S. dollar is an example of:

fiat money

the market in which foreign currencies are traded is known as the:

foreign exchange market

unemployment that occurs because it takes workers and employees time to find each other is called:

frictional unemployment

nominal GDP:

has not been adjusted for changes in prices over time

in the short run, an increase in aggregate demand from a position of full employment leads to:

higher prices and higher output

the term "human capital" describes:

improvement in the worker made possible by education, training and knowledge

sticky wages and price occur:

in the short run

to close a recessionary gap using monetary policy, the Fed should _______ the money supply to _________ investment and consumer spending, and shift the aggregate demand curve to the _________.

increase; increase; right

according to Keynesian economics, a tax cut will ______ aggregate demand and output by _______.

increase; increasing income and consumption

in the short run, a positive demand shock:

increases aggregate output and the aggregate price level

stagflation is a combination of:

increasing unemployment and increasing inflation

when the government invests in building roads, ports, and a reliable power grid, the government is investing in a nation's _______.

infrastructure

the money demand curve shows the relationship between the:

interest rate and the nominal quantity of money demanded

if the Fed decreases the quantity of money in circulation:

interest rates increase, investment decreases, and the aggregate demand curve shifts to the left

the multiplier process:

is limited with the total change in real GDP dependent upon the size of the marginal propensity to consume

long-run growth is sustainable if:

it can continue in the face of limited natural resources and the impact of growth on the environment.

suppose people in households decide to spend less.

it will decrease the level of income of other people since household spending becomes someone else's income

contractionary fiscal policy causes the aggregate demand curve to shift to the _________ and is used to close a(n) __________ gap.

left; inflationary

when inflation rises quickly:

lenders will be hurt and borrowers will benefit

if the Federal Reserve wants to increase the money supply, it will:

lower the reserve requirement

if banks were required to keep 100% of deposits in reserves, they could:

make no loans

A revaluation of a currency, holding everything else constant:

makes foreign produced goods more attractive to purchase in the domestic economy

the threat of future inflation:

makes people reluctant to loan money for long periods

discretionary fiscal policy may be counterproductive because:

of the various lags in fiscal policy, it may take effect when the economy has already recovered.

when the economy is in full employment,

only cyclical unemployment is zero

when a market is in equilibrium,

people have exploited all opportunities to make themselves better off.

actual investment spending equals:

planned investment plus unplanned investment.

when measuring a nation's standard of living, of the following, the best measure is:

real GDP per capita

suppose the MPC=0.8 and the government cuts taxes by $40 billion. which of the following will be the likely effect?

real GDP will expand by $160 billion

crowding out negatively affects the economy by:

reducing investment spending on physical capital

the concept of comparative advantage is based upon:

relative opportunity costs

the three main monetary policy tools are:

reserve requirements, the discount rate, and open-market purchases

we are forced to make choices because of:

scarcity

gains from trade arise because of:

specialization in production

the political business cycle refers to:

speeding the economy up in election years

an example of an intermediate good will be:

steel purchased by the aircraft manufacturers

a share in the ownership of a company held by a shareholder is considered a(n):

stock

Sam, who is 55 years old and has been a steelworker for 30 years, is unemployed because the steel plant in his town closed and moved to Mexico. Sam is experiencing:

structural unemployment

the loanable funds model focuses on the:

supply of funds from lenders and the demand for funds from borrowers

use the "short-run determination of the interest rate" figure 29-11. if the money supply is currently at MS1 and the central bank chooses to buy bonds, then the resulting short-run shift in the supply of savings (loanable funds) may be represented by a shift of the:

supply of loanable funds from S1 to S2 and a lower interest rate

use the "demand and supply of wheat" figure 6-4. if a price of $10 temporarily exists in this market, a:

surplus of 8,000 bushels will result

the government budget balance equals:

taxes - government purchases - government transfers.

when an economy is in an expansion, unemployment

tends to fall, and overall prices tend to rise

Keynesian economics propagates the economic ideas:

that argue that the government can help a depressed economy through fiscal and monetary policies

a government would be able to pay off its debt, if:

the GDP grows faster than the government's debt

the marginal propensity to consume is equal to:

the change in consumer spending divided by the change in aggregate disposable income

every year more and more purchases are made with credit cards on the internet. given this trend, all else equal, we would expect:

the money demand curve to shift inward.

the primary emphasis in macroeconomics is on:

the national economy

purchasing power parity refers to:

the nominal exchange rate for which a market basket would cost the same in each country.

in the market for beef, what would definitely cause a price increase?

the prices of grass and corn increase.

an inflation tax is:

the reduction in purchasing power due to printing money and inflation.

opportunity cost is:

the value of the best alternative forgone in making any choice

based on the "guns and butter" figure 3-1, if the economy were producing 8 units of guns and 12 units of butter per period:

this is a possible choice, but would involve unemployment and/or inefficiency.

the unemployment rate is the total number of individuals classified as ________ divided by the total ________ :

unemployed; number of those in the labor force

during a recession:

unemployment increases and the growth rate of real GDP decreases

if a government wants to increase the value of its currency in foreign exchange markets, it can:

use contractionary monetary policy

a liquidity trap is a situation in which:

using expansionary monetary policy is not effective because the nominal interest rate is almost zero

workers today are more productive than workers in the past because:

workers now have more physical capital embodying better technology to work with

one of the consequences of increasing the minimum wage has been:

workers offering to work "off the books" for less than minimum wage