ECO 202 Cumulative Final Exam

Neutron​ Inc., is one of the leading electric car manufacturers in​ Northbay, a developing economy.​ Neutron's sales increased by more than 20 percent this year compared to the previous​ year, which started a debate within the company about whether the firm should increase prices. Among those in favor of a price hike is Eric​ Johnson, the operations head at Neutron. Eric is of the opinion that given the high demand for​ Neutron's cars, the firm should increase price to improve profits. Mike​ Wilson, the CEO of the​ firm, however, feels that a price increase would adversely affect the demand for​ Neutron's products because he thinks consumers in this industry are more price conscious than brand loyal. Which of the​ following, if​ true, will support​ Eric's view? A. The economy of Northbay is expected to grow at a remarkable pace of 9% in the upcoming year. B. The current rate of unemployment in Northbay is high at 10%. C. Northbay's aggregate imports decreased by 2% this year. D. The marginal propensity to consume is approximately 0.3 for an average household in Northbay. E. A recent market research report reveals that consumer confidence is low.

A. The economy of Northbay is expected to grow at a remarkable pace of 9% in the upcoming year.

Paul Schumer and Jim​ Miller, two analysts at a research​ institute, discuss the rising costs of higher education in their country. Paul feels that escalating tuition fees in colleges and universities are indicative of a bubble in the higher education market. According to​ Jim, however, the rising costs are the result of better quality education being provided by the institutions in recent years. Which of the​ following, if​ true, will strengthen​ Jim's claim? A. The gap between the earnings of college graduates and nongraduates is increasing. B. The demand for student loans has fallen in the last few years. C. The number of colleges offering PhD programs has declined in the last decade. D. Salary levels in the education sector have remained more or less unchanged over the last few years. E. Students in most colleges complain of bad infrastructure.

A. The gap between the earnings of college graduates and nongraduates is increasing.

Which of the following is NOT included in the calculation of total government purchases? A. Unemployment insurance benefits paid for by the federal government. B. The salaries of high school teachers paid for by state government. C. A new interstate highway purchased by the federal government. D. A local government installs a new stop sign.

A. Unemployment insurance benefits paid for by the federal government.

Which of the following is NOT one of the monetary policy goals of the Federal Reserve ("the Fed")? A. a high foreign exchange rate of the U.S. dollar relative to other currencies B. high employment C. stability of financial markets D. price stability

A. a high foreign exchange rate of the U.S. dollar relative to other currencies

In August 2015, which of the following demographic groups had a higher rate of unemployment than the unemployment rate for the total population? A. high school dropouts B. college graduates c. whites D. Asians

A. high school dropouts

Which of the following policy tools is the Federal Reserve LEAST likely to use in order to actively change the money supply? A. reserve requirements B. discount loans C. open market operations D. discount rate

A. reserve requirements

Which of these variables are the main monetary policy targets of the Fed? A. the money supply and the interest rate B. the inflation rate and the unemployment rate C. real GDP and the price level D. economic growth and productivity

A. the money supply and the interest rate

The aggregate expenditure model can be written in terms of four spending categories. What is this formula?

AE = C + I + G + NX

Formula for the average growth rate

AGR = (sum of the growth rate from years evaluated)/number of years evaluated

The BLS uses the establishment survey to collect information on employment in the economy. Indicate one drawback of the establishment survey compared to the current population and indicate one advantage. A. It includes complete information about unemployment. B. It is based on unverifiable, self-reported survey responses. C. It is based on company payroll and not on unverifiable answers. D. It does not include information about self-employed people.

Advantage C. It is based on company payroll and not on unverifiable answers. Disadvantage D. It does not include information about self-employed people.

What is an exchange rate system?

An agreement between countries on how exchange rates should be determined.

Suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short run?

An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.

The United States produces computers and sells them to Mexico. At the same time Mexico produces cars and sells them to the United States. Suppose there is an appreciation in the dollar. This will cause:

An increase in imports into the United States and a decrease in exports to Mexico, which will cause a decreases in aggregate demand and real GDP.

Which of the following is an example of an expansionary fiscal policy? A. An increase in investment spending B. A decrease in taxes C. An increase in the money supply D. A decrease in government spending

B. A decrease in taxes

In the long run, government tax policy can affect private investment which impacts the production function and factors of production. In other words, aggregate supply may be impacted by different types of taxes the government can use. Which of the following is NOT true in terms of potential long run impacts of tax policies? A. The government decides to reduce the corporate income tax rate, thereby, increasing the returns to firms for investment which creates more investment and increases aggregate supply. B. A tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply. C. Taxes on dividends for individuals are eliminated, which increases the return of investing for shareholders and thus creates more investment and an increase in aggregate supply. D. A reduction in individual income tax rates will increase the incentives for starting new businesses and aggregate supply will increase. E. All of the above are true statements.

B. A tax rebate given one year will cause people to have more money and therefore they will spend more which will cause an increase in aggregate supply.

As of August 2015, which of the following demographic groups has the highest unemployment rate? A. Hispanics B. African Americans C. Whites D. Asians

B. African Americans

Which of the following is not a policy tool the Federal Reserve uses to manage the money supply? A. Open market operations B. Changing income tax rates C. Reserve requirements D. Discount policy

B. Changing income tax rates

The Federal Reserve cannot affect the price level indirectly; therefore, the Fed typically uses the following as its policy target: A. Taxes B. Interest rates C. Government expenditures D. Inflation

B. Interest rates

Which of the following is responsible for the upward shifts in the per-worker production function? A. Increases in capital B. Technological change C. Efficiency wages D. Increases in labor

B. Technological change

The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic growth, the economic growth model focuses on the causes of increases in long-run labor productivity. What are the key factors that determine labor productivity? A. Efficiency wages B. Technological change C. Trade D. Quantity of capital per hour worked

B. Technological change D. Quantity of capital per hour worked

An economics student raises the following objection: "The textbook said that a higher interest rate lower investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following? A. Investment is not related to the interest rate. B. The student is confusing saving with investment. C. Savings accounts do not earn interest. D. Higher interest rates are bad for savers.

B. The student is confusing saving with investment.

Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate? A. The unemployment rate increases and the inflation rate increases during expansions. B. The unemployment rate increases and the inflation rate falls during recessions. C. The unemployment rate falls and the inflation rate falls during recessions. D. The unemployment rate increases and the inflation rate falls during expansions.

B. The unemployment rate increases and the inflation rate falls during recessions.

Which of the following explains why fluctuations in real GDP have become less volatile in the United States since 1950? A. Services have become a smaller fraction of GDP since the 1950s. B. Unemployment insurance and other government transfer programs are more prevalent since the 1950s. C. The government has become more reluctant to intervene when real GDP declines and unemployment rises since the 1950s. D. Both B and C

B. Unemployment insurance and other government transfer programs are more prevalent since the 1950s.

Which of the following causes the short-run aggregate supply curve to shift to the right? A. a decrease in the capital stock B. a positive technological change C. an increase in the expected price of an important natural resource D. a higher expected future price level

B. a positive technological change

Government policy can increase the accumulation of knowledge capital in all the following ways except by: A. subsidizing education B. investing in capital accumulation C. protecting intellectual property with patents and copyrights D. subsidizing research and development

B. investing in capital accumulation

Which of the following changes will ensure that an economy experiences sustained economic growth? A. increasing the amount of capital B. technological change C. increasing the amount of raw materials D. increasing the amount of labor

B. technological change

Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?

Because contracts between workers and firms make some wages and prices "sticky." Because firms are often slow to adjust wages. Because menu costs make some prices "sticky."

How can government policies shift the aggregate demand curve to the right?

By increasing personal income taxes, by increasing business taxes, or by increasing government purchases.

How does the dynamic model of aggregate supply and aggregate demand explain inflation?

By showing that if total spending in the economy grows faster than total production, prices will rise.

If you think of the aggregate expenditure function as a line on the​ 45°-line diagram, the intercept would be

C + I + G + NX (all with bars over them)

Which of the following is an example of an expansionary policy? A. An increase in the money supply. B. An increase in investment spending. C. A decrease in taxes. D. A decrease in government spending.

C. A decrease in taxes.

Firms that act as financial intermediaries match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provider to savers and lenders? A. Offers fixed and stable interest rates. B. Insures assets up to $500,000. C. Allows savers to spread their money among many financial investments. D. Collects and communicates information about borrowers to savers. E. Provides an easy method of exchanging a financial security for money. F. Insures investments against decreasing in value.

C. Allows savers to spread their money among many financial investments. D. Collects and communicates information about borrowers to savers. E. Provides an easy method of exchanging a financial security for money.

Consider the importance of growth in GDP, particularly real GDP per capita, to the quality of life of a country's citizens. Indicated whether you agree or disagree with each of the following statements. 1. Increases in real GDP per capita do not increase the amount of goods and services available to a country's citizens. 2. Increases in real GDP per capita increase life expectancy at birth. 3. Increases in real GDP per capita mean people will have a lower portion of leisure time over the course of their lives.

1. Disagree 2. Agree 3. Disagree

Indicate whether each of the following transactions represents the purchase of a final good. 1. The purchase of tires from Bridgestone tire company by an automobile manufacturer. 2. The purchase of two new elementary school buildings by the state government. 3. The purchase of French wine by a U.S. consumer. 4. The purchase of a new machine tool by the Ford Motor Company.

1. Is not the purchase of a final good 2. Is the purchase of a final good 3. Is the purchase of a final good 4. Is the purchase of a final good

What is the formula for the multiplier?

1/(1 - MPC)

Suppose an economy is given by the following: Population = 232 million Labor force = 149 million Number of people employed = 134.1 million Number of people unemployed = 14.9 million Given the information above, the unemployment rate is ____.

10%

If real GDP equals $11,567 billion in 2006 and $11,916 billion in 2007, and assuming population is constant over those two years, how many years will it take for real GDP per capita to double?

23.2 years

Real GDP per capita in the country of Arcadia grew from about $4818 in 1900 to about $38,689 in 2008, which represents an annual growth rate of 1.95 percent. If Arcadia continues to grow at this rate, calculate the number of years when its real GDP per capita will double.

36 years

If the money supply is growing at a rate of 10% per year, real GDP (real output) is growing at a rate of 3% per year, and velocity is constant, what will the inflation rate be?

7%

In an economy, the working-age population is 200 million. Of this total, 160.0 million workers are employed 6.0 million workers are unemployed 28.0 million workers are not available for work (homemakers, full-time students, etc.) 4.0 million workers are available for work but are discouraged and thus are not seeking work 2.0 million workers are available for work but are not currently seeking work due to transportation or childcare problems. The labor force participation rate in this economy is ____.

83.0%

In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic"?

A bank run involves one bank; a bank panic involves many banks.

In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer fro the London-based newspaper The Telegraph, is quoted as saying: "Deflation has... insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." What is price deflation? What is meant by Professor Spencer's statement? Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?

A fall in the price level. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.

Would a larger multiplier lead to more severe recessions or less severe recessions?

A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.

An International Monetary Fund Factsheet makes the following observation regarding sound financial systems: "A country's financial system... provide[s] a framework... [for] supporting economic growth." Do you agree with this observation? Briefly explain.

A weak financial system might make economic growth difficult, since capital investment, essential for rapid economic growth, is often financed by borrowed funds and an unstable financial system leads to difficulty attracting loanable funds.

Typically, when will the National Bureau of Economic Research (NBER) announce that the economy is in a recession?

A year or more after the recession has begun

Which of the following is NOT a function of money? A. Acceptability B. Store of value C. Medium of exchange D. Unit of account

A. Acceptability

Which of the following is NOT one of the main sets of factors that cause the supply and demand curves in the foreign exchange market to shift. A. Changes in the U.S. supply of oil and changes in the foreign supply of oil. B. Changes in the demand for U.S.-produced goods and services and changes in the demand for foreign-produced goods and services. C. Changes in the desire to invest in the U.S. and changes in the desire to invest in foreign countries. D. Changes in the expectations of currency traders about the likely future value of the dollar and the likely future value of foreign currencies.

A. Changes in the U.S. supply of oil and changes in the foreign supply of oil.

Which of the following equals the amount of public saving? A. Government tax revenue minus the sum of government purchases and transfer payments to households. B. The sum of government tax revenue, government purchases, and government transfer payments to households. C. Government transfer payments to household minus the sum of government tax revenue and government purchases. D. The sum of government purchases and government tax revenue, minus transfer payments to households.

A. Government tax revenue minus the sum of government purchases and transfer payments to households.

Which of the following statements is true? A. In the long run, changes in the price level do not affect the level of real GDP. B. In the long run, changes in the price level may either increase or decrease real GDP. C. In the long run, increases in the price level result in a decreases in real GDP. D. In the long run, increases in the price level result in an increase in real GDP.

A. In the long run, changes in the price level do not affect the level of real GDP.

Almora, a developing open​ economy, is experiencing an economic boom since it discovered oil reserves off its coast two years ago. Bill​ Hudson, an economist with the Finance Ministry of​ Almora, said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with​ Hudson's view. In one of his recent articles in the​ country's leading business​ daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. Which of the​ following, if​ true, will support​ Robin's argument? A. The construction sector has expanded by 20% in the last two years. B. Employment in the country's oil industry reported an annual growth of 15% this year. C. Almora's agriculture and manufacturing sectors have become less competitive in the world market. D. The government of Almora is expected to have a budget surplus of $2 billion in the current financial year. E. Almora reduced its petroleum imports this year.

C. Almora's agriculture and manufacturing sectors have become less competitive in the world market.

Which of the following best describes the difference between crowding out in the short run and in the long run? A. In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. B. In the short run and the long run, most economists believe than an increase in government purchases will result in complete crowding out of private expenditures. C. In the long run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the short run, most economist believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. D. In the short run and the long run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand.

A. In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

When the economy reaches a trough in a business cycle, which of the following will occur? A. Income, production and employment will begin to rise. B. Income, production, and employment will continue to fall. C. Income and production will rise, but employment will continue to fall. D. Employment rises, but income and production will continue to fall.

A. Income, production and employment will begin to rise.

Indicate whether each of the following is a final good, and intermediate good, or neither. A. Coffee beans purchased by a coffee shop B. One share of Google stock C. A new pick-up truck purchased by a consumer D. A new home purchased by a family

A. Intermediate good B. Neither C. Final good D. Final good

Which of the following is a factor explaining why low-income countries have not experienced rapid economic growth? A. Low-income countries often fail to enforce the rule of law B. Low-income countries are generally expected to grow more slowly than high-income countries. C. Low-income countries have started to grow too late and can never catch up to rich countries. D. Low-income countries have governments that prefer more simple standards of living.

A. Low-income countries often fail to enforce the rule of law.

Which of the following can give an early warning of future increases in the price level? A. Producer price index B. GDP deflator C. Consumer price index D. All of the above

A. Producer price index

Which of the following would be included in the gross national product (GNP) of the United States? A. Production from a U.S. firm that operates in Mexico. B. Production from an Hungarian citizen who works in Denver, CO. C. Production from a Canadian firm that operates in Montana. D. All of the above are included in the GNP of the U.S.

A. Production from a U.S. firm that operates in Mexico.

Which of the following is a problem of unanticipated inflation? A. Redistribution of income for lenders to borrowers B. Redistribution of income from borrowers to lenders C. Increases in cyclical unemployment D. Costs to firms or changing prices

A. Redistribution of income from lenders to borrowers

The text states that "the globalization of financial markets has helped increase growth and efficiency in the world economy." Which of the following is a reason why globalization has increased growth in the world economy? A. Savings around the world can be channeled into the most productive investments. B. The U.S. government can more easily finance its budget deficit. C. All savings will flow to the United States, which is the highest-growth economy in the world. D. Savers earn a higher rate of return on their funds.

A. Savings around the world can be channeled into the most productive investments.

Which of the following statements is correct? A. During periods of recession, the ability of firms to finance spending on new factories or machinery and equipment increases. B. Changes in tax laws have no effect on investment spending. C. An increase in the corporate income tax decreases the after-tax profitability of investment spending. D. All of the above are correct.

C. An increase in the corporate income tax decreases the after-tax profitability of investment spending.

The behavior of consumption and investment over time can be described as follows: A. Both consumption and investment fluctuate significantly over time. B. Investment follows a smooth, upward trend, but consumption is subject to significant fluctuations. C. Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations. D. Neither consumption nor investment fluctuates significantly over time.

C. Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations.

Which of the following European countries does NOT use the euro as its currency? A. France B. Luxembourg C. Denmark D. Belgium E. Germany

C. Denmark

Which of the following is NOT a shortcoming of GDP as a measure of well-being? A. GDP is not adjusted for crime and other social problems. B. GDP does not include the value of leisure. C. GDP only counts final goods and services and not intermediate goods. D. GDP is not adjusted for the effects of pollution caused by the production of goods and services.

C. GDP only counts final goods and services and not intermediate goods.

Consider the choices below. All of these EXCEPT one truly represent the record of productivity growth in the United States from 1800 to present. Find the one that does not belong. A. There was a rapid rise in the growth rate of per capita GDP between 1950 and 1973. B. Growth of per capita real GDP slowed down considerably between 1974 and 1995. C. GDP per capita fell rapidly between 1900 and 1950. D. Productivity growth since 2006 has fallen to an even lower rate than during the period of slow growth from the mid-1970s to the mid 1990s.

C. GDP per capita fell rapidly between 1900 and 1950.

The Fed's strategy of increases the money supply and lowering interest rates in order to increase real GDP is called

expansionary monetary policy.

At the beginning of a recession, aggregate expenditure _____ GDP. As a result, firms _____ large amounts of unplanned inventory and GDP and unemployment _____.

falls short of accumulate decrease

The interest rate that banks charge each other for overnight loans is called

federal funds rate.

The German firm Bayer reported that is pharmaceutical group experienced a 21% increase in profit for the second quarter of 2015. The firm stated that the increase was partly the result of "favorable currency effects." The reference to "favorable currency effects" means the value of the euro Favorable currency effects increase Bayer's profits because the firm's If all of the firm's production and sales were within Europe, these effects would

fell, so that it takes fewer units of foreign currency to buy one euro, encouraging exports. international sales rise, which increases revenue. not have raised Bayer's profits, because there would have been no "currency effects".

The U.S. dollar can best be described as

fiat money

The financial system of a country is important for long-run economic growth because

firms need the financial system to acquire funds from households.

Technological change is more important to long-run economic growth than changes in capital. The easiest way for firms to gain access to new technology is through

foreign direct investment.

The term "integration into the global economy" means

globalization and more integration of trade.

Historically, under the gold standard, a country's currency consisted of

gold coins and paper currency that could be redeemed for gold.

Aggregate demand (AD) is comprised of expenditure components that include

government spending, consumption, investment and net exports.

Crowding out occurs when

governments must borrow funds which causes interest rates to rise and thus private investment is reduced.

Monetary policy has a (greater/lesser) impact on aggregate demand in an open economy than in a closed economy.

greater

Potential real GDP

grows over times.

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investment.

Gross domestic product understates the total production of final goods and services because of the omission of

household production

Credit cards are

included in neither the M1 definition of the money supply nor in the M2 definition.

An article in the Economist magazine noted that: "the economy's potential to supply goods and services [is] determined by such things as labour force and capital stock, as well as inflation expectations." The list of the determinants of potential GDP is

incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.

Consider the following statement: "The Fed has an easy job. Say it wants to increase real GDP by $200 billion. All it has to do is increase the money supply by that amount." The statement is _____ because an increase in the money supply _____ affect real GDP directly.

incorrect; does not

A decrease in the interest rate will (increase/decrease) consumption.

increase

A decrease in the price level will (increase/decrease) consumption.

increase

Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state taxes they pay. It is likely that the rate of economic growth will _____.

increase

Congress passes an investment tax credit, which reduces a firm's taxes if it installs new machinery and equipment. It is likely that the rate of economic growth will _____.

increase

Congress provides more funds for low-interest loans to college students. It is likely that the rate of economic growth will _____.

increase

During the expansion phase of the business cycle, production, employment and income _____. During the recession phase of the business cycle, production, employment and income _____.

increase decrease

An increase in the labor force will _____ the SRAS curve because this is a change in the productive capacity of the economy.

increase (shift rightward)

If you move $100 from your savings account to your checking account, then M1 will _____ and M2 will _____.

increase by $100; remain the same

A depreciation in the domestic currency will

increase exports and decrease imports, thereby increasing net exports.

Assume the tax multiplier is estimated to be 1.5 and the aggregate supply curve has its usual upward slope. Suppose the government lowers taxes by $88 million. Aggregate demand will (increase/decrease) by _____ million.

increase; $132.0

Suppose the government increases expenditures while holding taxes the same. This will (increase/decrease) deficits or (increase/decrease) surpluses.

increase; decrease

With an expansionary monetary policy, investment, consumption, and net exports all _____, which results in the aggregate demand curve shifting to the _____, increasing real GDP and the price level.

increase; right

Since the 1950s, total government expenditures, as a percentage of GDP, have _____ and total government purchases, as a percentage of GDP, have _____. The major cause of these trends is

increased; decreased there has been a major increase in the amount of transfer payments the government makes through programs such as Social Security and unemployment insurance.

Expansionary fiscal policy is less effective in an open economy because

increases in government spending can increase interest rates, which increases the value of the dollar and crowds out net exports.

An article in the Toronto Star discussed the Canadian teams that play in the National Hockey​ League, the National Basketball​ Association, Major League​ Baseball, and Major League Soccer. The article​ noted, "Under their collective agreements players get paid in U.S. dollars. The majority of​ [team] revenue,​ however, is in Canadian​ currency." Canadian professional sports teams are better off when the value of the Canadian dollar relative to the U.S. dollar

increases, because one Canadian dollar will buy more U.S. dollars, so paying the players will be less expensive.

Even though individuals earn interest on financial investments such as bonds, mutual funds, and certificates of deposits, they may still hold wealth in checking accounts because

individuals need money that is available to be spent on goods and services.

Expansionary monetary policy is more effective in an open economy because

interest rate decreases also reduce the value of the dollar, which increases net exports and further increases aggregate demand.

Pranab Bardhan, an economist at the University of California, Berkeley, argues: "China may be close to exhausting the possibilities of technological catch-up with the West, particularly in manufacturing." When Bardhan refers to "technological catch-up," he means that China _____. If Bardhan is correct, in the future, the Chinese economy might _____. Comparing the Chinese economy today and the Soviet economy in the 1980s, it can be seen that both countries had a history of _____.

is experiencing diminishing returns to investments in technology. realize slower economic growth rate. central planning and have introduced market systems, but have experienced problems in making the transition that have, and will continue to, hinder future growth.

When one currency is "pegged" against another currency, its value

is fixed in terms of that currency.

The computation of the average annual growth rate of real GDP

is more complex when examining date for a long period of time than when examining data for only a few years.

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves.

It is impossible to know whether a particular nominal interest rate is "high" or "low" because

it all depends on the inflation rate

The Federal Reserve Bank of New York is always a voting member of the FOMC because

it carries out the policy directive of the FOMC.

Writing in 2016, economist Robert Gordon of Northwestern University stated his views on the effects of information technology on the economy: "We don't eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the 1950s, and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety... Most of the economy has already benefited from the Internet and web revolution, and in this sphere of the economic activity, methods of production have been little changed over the past decade... The revolutions in everyday life made possible by e-commerce and search engines were already well established [by 2004]. If Gordon's observations about the information revolution are correct, that implies

it will be difficult to sustain high growth rates in U.S. labor productivity in the future.

If the economy moves into recession, monetarists argue that the the Fed should

keep the money supply growing at a constant rate.

Firms are likely to underinvest in research and development, which slows the accumulation of knowledge capital, slowing economic growth, because

knowledge capital is both nonrival and nonexcludable; other firms can freely access the research and development of one particular firm.

A study by the McKinsey Global Institute reported that labor productivity increased at an average annual rate of 5.8 percent between 1999 and 2013 in Mexico's large companies, but fell at an average annual rate of 6.5 percent over the same period for Mexico's smaller firms, such as family-owned stores and bakeries. Productivity growth would be much higher for Mexico's largest companies than for its smaller companies because the

larger companies have greater access to better technology which stimulates productivity growth.

If a large amount of production within a country takes place at foreign owned facilities, then it is likely that the country's GDP will be (larger than/smaller than/same as) GNP.

larger than

An increase in interest rates will cause a _____ the aggregate demand curve.

leftward shift of

An increase in state income taxes will cause a _____ the aggregate demand curve.

leftward shift of

The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up

less than 10% of federal government expenditures.

As a result of crowding out in the short run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

The economic growth model predicts that the

level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.

The ease with which a financial security can be exchanged for money is referred to as

liquidity

During the last half of the twentieth century, the U.S. economy experienced

long expansions, interrupted by relatively short recessions.

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _____, so the quantity of money demanded will be _____.

low; high

The unemployment rate in the United States is usually _____ than the unemployment rates in most other high-income countries, partly because the United States has _____ requirements for the unemployed to receive government payments.

lower more stringent

The United Kingdom decided not to join with other European Union countries and use the euro as its currency. One opponent of adopting the euro​ argued, ​"It comes down to economics. We just​ don't believe that​ it's possible to manage the entire economy of Europe with just one interest rate policy. How do you alleviate recession in Germany and curb inflation in​ Ireland?" To alleviate recession in Germany, it would be desirable to _____ interest rates, while to curb inflation in Ireland, it would be desirable to _____ interest rates.

lower; raise

The theory of purchasing power parity states that the long-run level of the exchange rate must The theory of purchasing power parity (does/does not) explain exchange rates well in the long run.

make it possible to buy equivalent bundles of goods in either country. does not

The amount of U.S. currency outstanding averages to about $2800 per person in the U.S. This large amount of currency per person can be partially explained because

many U.S. dollars are held outside of the country by foreigners.

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)? A. Stable financial markets B. Higher living standards C. Low prices D. Low unemployment

C. Low prices

Which of the following is included in M2 but not M1? A. Checking account deposits at banks B. Traveler's checks C. Money market deposit accounts in banks D. Currency

C. Money market deposit accounts in banks

The Federal Reserve has multiple economic goals for monetary policy to achieve. However, it can be difficult to manage all of the goals at once. Which of the following is NOT true regarding the multiple goals of the Fed? A. Having dual goals of high employment and economic growth does not create many issues because most of the time when the economy experiences economic growth, the economy also achieves higher rates of employment. B. Achieving the goals of price stability and economic growth can be difficult because often the forces that lead to economic growth also can make prices increase at a rate higher than the Fed would desire. C. The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money. D. As the Fed tries to ensure economic growth, it can also focus on financial market stability because efficient financial markets make it easier for investment to occur and create additional economic growth.

C. The goal of financial market stability means that the Fed tries to ensure that asset prices, such as stock prices, increase at a very high rate so investors can make more money.

According to the quantity theory of money, inflation results from which of the following? A. The money supply grows slower than real GDP. B. The money supply grows at the same rate as GDP. C. The money supply grows faster than real GDP.

C. The money supply grows faster than real GDP.

All of the following are expected benefits of the creation of the euro, except which? A. Having a common currency allow firms to sell across borders. B. The creation of the euro should reduce costs. C. The participating countries are no longer able to conduct independent monetary policies. D. The creation of the euro would allow Western European countries to more closely integrate their economies.

C. The participating countries are no longer able to conduct independent monetary policies.

Using GDP per capita in 2014 (measured in U.S. dollars, corrected for differences across countries in the cost of living), identify which one of these statements is true: A. Most of the countries of Africa, Asia, and Latin America are high-income countries. B. East Asian countries such as Singapore, South Korea, and Taiwan are high-income countries. C. Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries. D. All of the above are true.

C. Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.

Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurate shows the effect of this transaction on your bank's balance sheet? A. Your bank's balance sheet shows a decrease in reserves by $100 and an increase in deposits by $100 B. Your bank's balance sheet shows an increase in reserves by $100 and an increase in deposits by $100. C. Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100. D. Your bank's balance sheet shows an increase in reserves by $100 and a decrease in deposits by $100.

C. Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.

Which of the following is usually the cause of stagflation? A. a decline in net exports as a result of a change in the exchange rate B. a reduction in government purchases C. a supply shock as a result of an unexpected increase in the price of a natural resource D. an increase in investment as a result of a reduction in interest rates

C. a supply shock as a result of an unexpected increase in the price of a natural resource

Which of the following is the best example of human capital? A. a manager buys workers more personal computers B. a manager devotes more spending to research and development C. a worker gets a college degree D. a worker pays less taxes

C. a worker gets a college degree

Developing countries have benefited from globalization, because globalization can do all of the following EXCEPT A. take poor countries out of a low saving-investment trap by providing foreign direct investment and foreign portfolio investment B. help spread new and advanced technology and aid in capital accumulation in the developing world C. impose trade barriers and tariffs on imported goods so as to protect domestic industries D. open the developing countries' market to foreign trade and thus help create a more robust economy

C. impose trade barriers and tariffs on imported goods so as to protect domestic industries

Which of the following refers to the minimum fraction of deposit banks that are required by law to keep as reserves? A. the cash to deposit ratio B. the simple deposit multiplier C. the required reserve ratio D. the quantity equation

C. the required reserve ratio

How does a decrease in the price level affect the quantity of real GDP supplied in the long run?

Changes in the price level do not affect the level of GDP in the long run.

What is a contractionary fiscal policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

Suppose two countries, Country A and Country B, have a similar real GDP per capita. Country A has an average economic growth rate of 2% and Country B has an average economic growth rate of 3.3%. In the long run, what can we predict about living standards in the two countries?

Country B's living standards will increase much more rapidly in the long run.

What is meant by crowding out?

Crowding out is a decline in private expenditures as a result of increases in government purchases.

The aggregate demand curve slopes downward for all of the following reasons except: A. A lower price level increases the real wealth of households, thereby increasing household consumption. B. A lower price level makes U.S. exports less expensive, thereby increasing net exports. C. A lower price level decreases the rate of interest, which increases private investment and consumption. D. A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports.

D. A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports.

When the Thai government pegged the baht against the dollar, a surplus of baht flooded the foreign exchange markets. This occurred because the baht was pegged too high in value against the dollar. As a result, the Thai central bank did what? A. Borrowed dollars from the International Monetary Fund B. Increased interest rates C. Bought the surplus with dollar reserves D. All of the above

D. All of the above

Which of the following causes changes in the CPI to overstate the true inflation rate? A. Substitution bias B. Increase in quality bias C. New product bias D. All of the above

D. All of the above

Which of the following contribute(s) to shorter recessions, longer expansions, and less severe fluctuations in real GDP? A. Unemployment insurance B. A service-based economy C. Fiscal policy D. All of the above E. A and C only

D. All of the above

Why do economic growth rates matter? A. High levels of sustained economic growth reduce infant mortality. B. High growth rates coincide with improved living standards. C. When a country sustains high growth rates, life expectancy at birth increases. D. All of the above E. A and C only

D. All of the above

Which of the following are assertions made by opponents of globalization? A. Globalization has contributed to multinational firms moving production to low-income countries so they can pay their workers very low wages. B. Globalization has contributed to multinational firms moving production to low-income countries to avoid safety and environmental regulations that high-income countries require such firms to follow. C. Globalization has undermined the distinctive cultures of many countries. D. All of the above are assertions made by opponents of globalization.

D. All of the above are assertions made by opponents of globalization.

Which of the following is NOT a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model? A. In the dynamic model, expansionary policy would be used when demand does not grow sufficiently; in the basic model, expansionary policy would be used when demand falls. B. If the economy is below full employment, expansionary fiscal policy will cause an increase in the price level in both models. C. The dynamic model assumes that potential GDP is constantly growing while the basic model assumes that it is static. D. All of the above are correct statements about the two models. E. None of the above are correct statements about the two models.

D. All of the above are correct statements about the two models.

Which of the following statements about investment spending is correct? A. The optimism or pessimism of firms is an important determinant of investment spending. B. When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. C. A higher real interest rate results in less investment spending. D. All of the above are correct.

D. All of the above are correct.

Which of the following statements is correct? A. A majority of economists support the Fed's choice of the interest rate as its monetary policy target, but some economists believe the Fed should concentrate on the money supply instead. B. Changes in the federal funds rate usually will result in changes in both short-term and long-term interest rates on financial assets. C. The effects of a change in the federal funds rate on long-term interest rates is usually smaller than it is on short-term interest rates. D. All of the above are true.

D. All of the above are true.

In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports? Because they help us understand A. the relationship between aggregate expenditure and real GDP. B. how the level of aggregate expenditure and GDP are determined in the economy. C. how macroeconomic equilibrium is determined in the aggregate expenditure model. D. All of the above.

D. All of the above.

Indicate which of the following is correct about the multiplier effect. A. A decrease in autonomous spending decreases real GDP by a multiple of the change. B. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. C. The larger the MPC, the more additional consumption that occurs. D. All of the above.

D. All of the above.

The (FOMC) Federal Open Market Committee A. determines the target federal funds rate and the direction of open market operation policies. B. includes the Board of Governors and the presidents of the 12 Federal Reserve regional banks (though not all are voting members). C. makes decisions that are voted on by all 7 members of the Board of Governors but only 5 of the 12 regional bank presidents. D. All of the above. E. A and B only.

D. All of the above.

Which of the following factors brought on the recession of 2007-2009? A. The financial crisis. B. A rapid increase in the price of oil. C. The end of the housing bubble. D. All of the above.

D. All of the above.

Which of the following is a monetary policy tool used by the Federal Reserve Bank? A. Decreasing the rate at which banks can borrow money from the Federal Reserve. B. Buying $500 million worth of government securities, such as Treasury bills. C. Increasing the reserve requirement from 10% to 12.5%. D. All of the above.

D. All of the above.

Which of the following is true with respect to hyperinflation? A. It can be hundreds - even thousands - of percentage points per year. B. It is caused by central banks increasing the money supply at a rate much greater than the growth rate of real GDP. C. In the presence of hyperinflation, firms and households avoid holding money. D. All of the above.

D. All of the above.

Which of the following statements is true regarding international capital markets when interest rates in the United States decline? A. Foreign investors may sell U.S. securities. B. The value of the dollar will increase. C. The value of the dollar will decrease. D. Both A and C.

D. Both A and C.

Globalization entails all of the following EXCEPT A. Open trade and technology transfers between countries B. Foreign portfolio investment C. Foreign direct investment D. Cultural exchange between nations

D. Cultural exchange between nations

Which of the following is an example of cyclical unemployment? A. Workers at ski resorts in Colorado are laid off during the summer. B. Due to technological change, typewriter workers lose jobs and must retrain to find jobs in the other industries. C. A student graduates from college and searches for a first job. D. During a recession, aircraft assemblers are laid off but expect to be recalled as the economy improves.

D. During a recession, aircraft assemblers are laid off but expect to be recalled as the economy improves.

All of the following are correct except A. Gross domestic income is GDP calculated as the sum of income payments to households. B. Gross domestic income = Wages + Interest + Profits + Rent. C. Gross domestic income includes sales tax, depreciation and other items. D. Gross domestic income does not include health insurance benefits received by the employees.

D. Gross domestic income does not include health insurance benefits received by the employees.

Which of the following does NOT lead to long-run economic growth? A. Technological change B. Improved labor productivity C. Increase in the capital stock D. Increase in average wages

D. Increase in average wages

When low income countries begin to experience economic growth, they often do so at rates much higher than current growth rates of industrial nations. Which of the following does NOT provide an explanation of this phenomenon? A. Low income countries do not usually have large volume of capital. They can grow from technology improvements and capital investment, without facing diminishing returns until they reach much larger levels of income. B. Developing countries may not need to engage in large amounts of R&D as they can borrow technologies that have already been developed in industrial nations. C. As industrial countries are growing, they have high levels of capital and face diminishing returns from investment in capital. D. Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital.

D. Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital.

Which of the following is NOT a correct statement about M2? A. M2 includes savings accounts, small-denomination time deposits, and money market mutual funds. B. M2 is a broader definition of money compared to M1 and currency. C. M2 includes all of the assets in M1. D. M2 is the best definition of money as a medium of exchange.

D. M2 is the best definition of money as a medium of exchange.

Which of the following is NOT correct? A. MPS = 1 - (ΔC/ΔYD) B. MPS + MPC = 1 C. 0 < MPS < 1 D. MPS = 1 - (C/YD)

D. MPS = 1 - (C/YD)

Which of the following statements is NOT correct about the effects of the euro? A. The euro is used as currency in Germany, France, and Italy. B. The euro helped economic growth in euro zone countries by making it easier for consumers and firms to buy and sell across borders. C. The euro reduced costs and increase competition. D. The euro increased the ability of participating countries to run independent monetary policies.

D. The euro increased the ability of participating countries to run independent monetary policies.

Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason? A. The formula ignores the impact of an increase in GDP on the interest rate. B. The formula ignores the impact of an increase in GDP on inflation. C. The formula ignores the impact of an increase in GDP on imports. D. The formula ignores the impact of an increase in GDP on consumption.

D. The formula ignores the impact of an increase in GDP on consumption.

Which one of the following is NOT true when the economy is in macroeconomic equilibrium? A. When the economy is at long-run equilibrium, actual GDP = potential GDP. B. When the economy is at long-run equilibrium, total unemployment = frictional unemployment + structural unemployment. C. When the economy is at long-run equilibrium, SRAS = AD = LRAS. D. When the economy is at long-run equilibrium, firms will have excess capacity.

D. When the economy is at long-run equilibrium, firms will have excess capacity.

Which of the following factors does NOT cause the aggregate demand curve to shift? A. a change in the expectations of households and firms B. a change in government monetary or fiscal policies C. a change in foreign variables D. a change in the price level

D. a change in the price level

Which of the following are categories of federal government expenditures? A. transfer payments B. interest on the national debt C. grants to state and local governments D. all of the above

D. all of the above

Which of the following events would cause the supply curve in the foreign exchange market to shift? A. increase in foreign interest rates B. increased demand for foreign goods and services C. changes in expectation of the future value of foreign currencies D. all of the above

D. all of the above

Which of the following factors case both the demand curve and the supply curve for dollars in the foreign exchange market to shift? A. changes in the desire of investors to invest in the United States and changes in the desire of investors to invest in foreign countries B. changes in the expectations of currency traders about the likely future value of the dollar and the likely future value of foreign currencies C. changes in the demand for U.S.-produced goods and services and changes in the demand for foreign produced goods and services D. all of the above

D. all of the above

Which of the following factors will cause the long-run aggregate supply curve to shift to the right? A. technological change B. an increase in the number of workers in the economy C. the accumulation of more machinery and equipment D. all of the above

D. all of the above

The use of money A. reduces the transaction costs of exchange. B. eliminates the double coincidence of wants. C. allows for greater specialization. D. all of the above.

D. all of the above.

Which of the following causes the short-run aggregate supply curve to shift to the left? A. a positive technological change B. an increase in productivity C. an increase in the labor force D. an increase in the expected price of an important natural resource

D. an increase in the expected price of an important natural resource

Which of the following changes DOES NOT cause an increase in the quantity of goods and services that can be produced by one worker, or in one hour of work? A. an increase in the quantity of capital per hour worked B. technological change C. an increase in the literacy rate D. an increase in the number of workers

D. an increase in the number of workers

Which of the following is NOT a reason that the economy is considered to have been more stable in the 1950-2007 period than in other periods? A. the establishment of unemployment insurance programs B. the use of active government policies to stabilize the economy C. the increasing importance of services and the declining importance of goods D. continually falling oil prices

D. continually falling oil prices

Which of the following is the largest liability of a typical bank? A. reserves B. Treasury bills C. loans D. deposits

D. deposits

Increases in the minimum wage will A. increase unemployment among workers whose market wage is higher than the new minimum wage. B. have a large effect on the unemployment rate in the United States. C. increase the level of unemployment for all groups of workers. D. increase unemployment among teenagers.

D. increase unemployment among teenagers

Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy.

Debt-spending on research and development. Debt-spending on education. Debt-spending on highways and ports.

Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half was wealthy as the government statistics indicate."

Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.

Indicate whether you agree or disagree with the following statement: "In years when people buy few shares of stock, investment will be low and, therefore, so will gross domestic (GDP)."

Disagree: Investment as a component of GDP refers to the purchase of physical and human capital and inventory, not stock purchases.

What is the general relationship between the business cycle and unemployment and inflation?

During an expansion, unemployment falls and inflation increases.

Which of the following will increase planned investment spending on the part of firms? A. Increased optimism about future demand for its product. B. A lower real interest rate. C. Increases in the corporate income tax. D. All of the above. E. A and B only.

E. A and B only

According to the dynamic AD-AS model, what is the most common cause of inflation? A. AD increases by more than LRAS. B. Total spending increases faster than total production. C. The U.S. Mint prints too much currency. D. All of the above. E. A and B only.

E. A and B only.

Which of the following is true with respect to Irving Fisher's quantity equation, M * V = P * Y? A. P = the GDP deflator B. M = M1 definition of the money supply C. V = (P * Y)/M D. V = Average number of times a dollar is spent on goods and services E. All of the above

E. All of the above

Potential GDP A. measures the maximum that a firm is capable of producing. B. increases over time as the labor force grows. C. increases over time as technological change occurs. D. All of the above. E. B and C only.

E. B and C only

We say that the economy as a whole is in macroeconomic equilibrium if A. total spending equals GDP B. aggregate expenditure equals GDP C. total spending equals total production D. aggregate expenditure equals total production E. all of the above

E. all of the above

Why might the unemployment rate continue to rise during the early stages of a recovery?

Employment growth may be slow relative to the growth in the labor force. Some firms continue to operate well below their capacity even after a recession has ended.

What is an expansionary fiscal policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

What are the four main determinants of investment?

Expectations of future profitability, interest rates, taxes, and cash flow

True/False: During 2005, the FOMC was concerned that the inflation rate would begin to accelerate due to the continued boom in the housing market, so the Fed started decreasing the target for the federal funds rate.

False

True/False: The multiplier effect is only a consideration for increases in government purchases.

False

Evaluate the following statement: Banks use deposits to make consumer loans to households and commercial loans to businesses. Banks will loan out every penny of their deposits in order to make a profit.

False. Banks must hold a fraction of their deposits as vault cash or with the Federal Reserve.

In the U.S., gross domestic product (GDP) and gross national product (GNP) are close in value. Under what circumstances would GNP be much larger than GDP?

Few foreign firms maintain facilities in the U.S. while many U.S. firms are currently operating abroad. Many U.S. citizens currently work in foreign countries while few foreign citizens currently work in the U.S. Few foreign citizens currently work in the U.S. and few foreign firms maintain facilities in the U.S.

What is fiscal policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

When the economy is at full employment, which types of unemployment remain?

Frictional and structural

Suppose John Q. Worker is currently unemployed. Each day, John Q. Worker spends the entire day searching available job openings for an appropriate position given his set of skills, abilities, and interests. If someone asks John Q. what he does for work, he tells them that he is currently "in-between jobs." Which of the following best classifies John Q.'s unemployment status?

Frictionally unemployed

Which of the following is considered to be a problem in using GDP as a measure of national well-being?

GDP is not adjusted for changes in the environment.

Scott is a woodworker and charges $125 an hour for his time manufacturing custom-made wood products. For his wife's birthday, he designs and creates an intricate birdseye maple jewelry box that takes him 15 hours to complete. By how much and in what direction does GDP change as a result of his efforts?

GDP is not affected by Scott's production of the jewelry box.

What happens if we measure GDP by adding up the value of every good and service produced in the economy?

GDP is overestimated because of double counting.

What is nominal GDP?

GDP measured in current prices

What is real GDP?

GDP measured using the quantities of the current year evaluated with the prices of the base year.

National income is

GDP minus depreciation

Nominal income is

GDP minus depreciation

If Americans still worked 60-hour weeks, as they did in 1890,

GDP would be much higher than it is, but the well-being of the typical person would not necessarily be higher.

What could be an effect of hurricane Katrina on GDP?

GDP would increase reflecting the costs of cleanup.

How does the size of a country's GDP affect the quality of life of the country's people?

Generally, the more goods and services people have, the better off they are.

Which one of the following is not a measure of the price level?

Government Price Index: an average of the prices paid by the government for goods and services used only by different government agencies.

In addition to the U.S. Federal Reserve Bank, what other economic actors influence the money supply?

Households, firms, and banks

Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?

If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

Which of the following is a problem that can result from pegging a country's currency?

If the pegged value is above the market value, there may be a speculative run on the currency.

How does the U.S. economy create and destroy millions of jobs each year?

In the market system, new firms are constantly entering and exiting various industries. Some businesses are expanding, which others are contracting.

If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes? What changes should they make if they decide a contractionary fiscal policy is necessary?

In this case, Congress and the president should enact policies that increase government spending and decrease taxes. In this case, Congress and the president should enact policies that decrease government spending and increase taxes.

Evaluate the following statement: "Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else." The statement is (incorrect/correct).

Incorrect. The supply of loanable funds is determined by household saving.

Evaluate the following statement: "Saving money is not lending. How can it be? When I saw my money, I put it in a bank. I don't loan it out to someone else." The statement is (correct/incorrect).

Incorrect. The supply of loanable funds is determined by household saving.

When planned aggregate expenditure is less than real GDP, what happens to firms' inventories?

Inventories accumulate if production is not scaled back.

What is the effect on inventories, GDP, and emploment when aggregate expenditure (total spending) exceeds GDP?

Inventories decrease, GDP increases, and employment increases.

Why is the unemployment rate, as measured by the Bureau of Labor Statistics, an imperfect measure of the extent of joblessness in the economy?

It fails to account for illegal activities. Underemployed people are considered employed. Discouraged workers are not considered unemployed. It does not account for inaccurate responses to the Current Population Survey.

What do economists mean by the demand for money?

It is the amount of money - currency and checking account deposits - that individuals hold.

Who developed a growth model that suggests new products unleash a "gale of creative destruction" that drives old products out of the market?

Joseph Schumpeter

If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and service sold during the year, would the total be larger or smaller than measured gross domestic product (GDP)?

Larger: The value of all goods and services sold would include intermediate goods.

In addition to a country's failure to enforce rule-of-law, what else explains why more low-income countries do NOT experience rapid growth as the catch-up line predicts?

Lengthy civil wars, shortage of childhood vaccinations, and inability to borrow money needed for investment

In 2008, the required reserve ratio for a bank's first $9.3 million in checking account deposits was zero. It was 3% on deposits between $9.3 million and $43.9 million, and 10% on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10% on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?

Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.

Suppose you withdraw $1000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?

M2 will not be affected, but M1 will increase.

If you think of the aggregate expenditure function as a line on the​ 45°-line diagram, the slope would be

MPC

Even perfectly anticipated inflation imposes costs. Why?

Menu costs Some wages will fail to keep up with anticipated inflation. Paper money loses its purchasing power by the rate of inflation.

Which can be changed more quickly: monetary policy or fiscal policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

What is the advantage of holding money?

Money can be used to buy goods, services, or financial assets.

In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: "The structure of the financial system changed fundamentally during the boom... [The] non-bank financial system grew to be very large... [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks." What did Geithner mean by the "non-bank financial system"? What is a "classic type of run"?

Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households. Many depositors simultaneously decide to withdraw their money from a bank.

What is the disadvantage of holding money?

Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

According to most economists, is it a serious shortcoming of GDP that it does not count household production or production in the underground economy?

Most economists would answer "no" because these types of production do not affect the most important use of GDP measure, which is to measure changes in total production over short periods of time.

The agency that identifies a recession is the

NBER - National Bureau of Economic Research

Between 2015 and 2016, if an economy's exports rise by $8 billion and its imports fall by $8 billion, by how much will GDP change between the two years, all else equal?

Net exports will increase GDP by $16 billion.

The English economist William Stanley Jevons described a world tour during the 1880s by a French​ singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society​ Islands, part of French Polynesia in the South Pacific. She performed for her usual​ fee, which was​ one-third of the receipts. This turned out to be three​ pigs, 23​ turkeys, 44​ chickens, 5000​ coconuts, and​ "considerable quantities of​ bananas, lemons, and​ oranges." She estimated that all of this would have had a value in France of 4000 francs. According to​ Jevons, "as Mademoiselle could not consume any considerable portion of the receipts​ herself, it became necessary in the meantime to feed the pigs and poultry with the​ fruit." Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?

No. The goods are not a store of value.

How do you calculate the GDP deflator?

Nominal GDP/Real GDP x 100

Strong rule-of-law countries grow more rapidly than weak rule-of-law countries. What factor will most likely improve economic growth in weak rule-of-law countries?

Political reform

In a closed economy, the values for GDP, consumption spending, investment spending, transfer payments, and taxes are as follows: Y = $11 trillion C = $8 trillion I = $2 trillion TR = $1 trillion T = $2 trillion Upon using the information above, what is the value of private saving and public saving?

Private saving equals $2 trillion and public saving equals $0 trillion.

Why does the short-run aggregate supply curve slope upward?

Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs.

What can low-income countries do in order to increase the amount of loanable funds available to firms for investment projects such as new factories or improved technology?

Provide savings incentives

How does real GDP deal with the problem inflation causes with nominal GDP?

Real GDP separates price changes from quantity changes. By keeping prices constant, we know that changes in real GDP represent changes in the quantity of output produced. Real GDP uses the prices of goods and services in the base year

How would an increase in interest rates affect investment?

Real investment spending declines.

Suppose the amount the federal government collects in personal income taxes increases, while the level of GDP remains the same. What will happen to the values of national income, personal income, and disposable personal income? National income will _______ Personal income will _______ Disposable personal income will _____

Remain the same Remain the same Decrease

The total value of saving in the economy must equal the total value of investment. Assume a closed economy where I = Investment S = Sprivate + Spublic Sprivate = Private Saving Spublic = Public Saving C = Consumption Expenditure G = Government Expenditure Y = GDP TR = Government Transfers What expression shows the investment-saving equality?

S = Y - C - G

Consider the following data for a closed economy: Y= $12 trillion C = $8 trillion G = $2 trillion Spublic = $-.50 trillion T = $2 trillion Now suppose that government purchases increase from $2 trillion to $2.75 trillion but the values of Y and C are unchanged. What must happen to the values of S and I?

S and I drop by $0.75 trillion.

What effect do labor unions have on the unemployment rate?

Since few non-government workers are unionized, there is no significant effect on the unemployment rate.

Suppose that Sally J. Society recently lost her job as an underwater welder. In looking for a new job, she discovers that the only available jobs are for economists and that there are no opening for underwater welders because the trade is now obsolete. If Sally J. Society decides to return to school to earn an Economics degree, what is the best classification of her unemployment status?

Structurally unemployed

If the CPI is currently 202, what does this tell you about inflation between last year and this year?

The CPI measures only the level of prices in a given year, not the percentage change in prices from one year to the next.

Why would the Fed intentionally use contractionary monetary policy to reduce real GDP?

The Fed intends to reduce inflation, which occurs if real GDP is greater than potential GDP.

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? If the Fed's policy is successful, what is the effect on the following indicators? Actual real GDP Potential real GDP Price level Unemployment

The Fed will pursue an expansionary monetary policy. increases does not change increases decreases

The Economist magazine observed the following: "In Argentina, many loans were taken out in dollars: this had catastrophic consequences for borrowers once the peg collapsed." What does it mean that Argentina's "peg collapsed"? Why was this catastrophic for borrowers in Argentina who had taken out dollar loans?

The central bank no longer had the dollar reserves to continue to buy pesos. Repaying the loans would now cost significantly more since the value of the peso had fallen.

Real GDP per capita is often used as a measure of general well-being. While increases in real GDP often do lead to increases in the well-being of the population, why is real GDP not a perfect measure of well-being?

The costs of pollution are not included. GDP does not include crime rates or income distribution. The value of leisure is not included.

What is the cyclically adjusted budget deficit or surplus?

The cyclically adjusted budget deficit or surplus is the deficit of surplus in the federal government's budget if the economy were at potential GDP.

Who is responsible for fiscal policy?

The federal government controls fiscal policy.

If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers?

The impact of the multiplier would be larger if the SRAS curve is horizontal.

Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the population's economic well-being?

The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP.

Why might increasing taxes as a fiscal policy be a more difficult policy than the use of monetary policy to slow down an economy experiencing inflation?

The legislative process experiences longer delays than monetary policy.

What are the Fed's main monetary policy targets?

The money supply and interest rates

Explain whether you agree with this argument: If the Fed actually ever carried out a contractionary monetary​ policy, the price level would fall. Because the price level has not fallen in the United States over an entire year since the​ 1930s, we can conclude that the Fed has not carried out a contractionary policy since the 1930s.

The statement is false. A contractionary policy could result in a lower rate of inflation rather than a fall in the price level.

Using the following information what is the velocity of money? Component Value Money supply $1700 Price level 1.07 Real GDP $12,000

The velocity of money is equal to 7.55.

Have poor countries been catching up to rich countries?

There has been catch-up by some poor but industrialized countries.

How do unemployment insurance payments in the United States and social insurance programs in other countries increase the unemployment rate?

They decrease the opportunity cost of job search.

Why did the countries that adopted the euro as their currency choose to do that?

To coordinate monetary policy in the European Union. To encourage economic growth. To reduce transaction costs resulting from currency exchange.

True or False: If inflation is unexpectedly high, borrowers will benefit and lenders will be harmed.

True

Indicate whether the following statement is true or false and why. "A wage rising slower than the rate of inflation is actually falling."

True. If wages are increasing slower than the average price of goods and services, purchasing power falls.

Velocity equation

V = (P * Y)/M

Which component of gross domestic income is the largest?

Wages

What are the four categories of income?

Wages, Interest, Rent, and Profit

What is the relationship between the unemployment rate and enacting or increasing a minimum wage?

When a minimum wage is enacted or increased across a country, the unemployment rate will increase some but the impacts will be much larger for some groups of workers.

When is it considered "good policy" for the government to run a budget deficit?

When borrowing is used for long-lived capital goods.

Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?

When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities.

When will the demand curve for dollars in exchange for yen shift to the right?

When speculators decide that the value of the dollar will rise relative to the value of the yen.

In the aggregate expenditure model, when is planned investment greater than actual investment?

When there is an unplanned decrease in inventories.

What is the equation that represents the relationship between GDP and the four major expenditure components? What are the four major components of expenditures in GDP?

Y = C + I+ G + NX Consumption, Investment, Government Purchases, and Net Exports

Does government spending every reduce private spending?

Yes, due to crowding out.

Economics arrives at the conclusion that economic growth will always improve economic well-being. Do you agree?

Yes, economic growth increase living standards, improves health and education, and builds a corruption-free society.

A government that collects more in taxes than it spends experiences

a budget surplus.

The international-trade effect refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports.

When the Federal Reserve increases the required reserve ratio as a part of a contractionary monetary policy, there is

a decrease in the money supply and an increase in the interest rate.

If the government cuts taxes in order to increase aggregate demand, the action is called

a discretionary fiscal policy.

When countries agree to keep the value of their currencies constant, there is

a fixed exchange rate system.

When a central bank intervenes into the foreign exchange market to set a country's exchange rate over long periods of time, it is called

a fixed exchange rate.

If South Korea enters into an agreement with other countries to keep the exchange rate among their currencies fixed it is taking part in:

a fixed exchange-rate system.

A country that allows demand and supply to determine the value of its currency has

a floating currency.

The high point of economic activity is called

a peak

The period between the high point of economic activity and the following low point is called

a recession

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes

a recession in the short run and a decline in the price level in the long run.

The low point of economic activity is called

a trough

Education and health care are important for economic growth because

a well-education and healthy workforce has higher productivity

When the economy is at full employment,

all remaining unemployment is either frictional or structural the unemployment rate is greater than zero the natural rate of unemployment prevails

An efficiency wage is

an above-market wage paid by a firm to maximize worker productivity

Under a fixed exchange rate system, exchange rates are determined by

an agreement between countries.

A country's rate of economic growth is important because

an economy that grows too slowly fails to raise the living standards of its citizens.

The period between the low point of economic activity and the following high point is called

an expansion

According to an article in the New York Times, an official at the Bank of Japan had the following explanation of why monetary policy was not pulling the country out of recession: "Despite recent major increases in the money supply, he said, the money stays in banks." In the quote, when the official says "the money stays in banks," he is referring to _____ in the reserves in banks. But the real problem was that banks were not _____ the reserves. The reason for this may have been a lack of _____.

an increase lending borrowers

The multiplier effect is the process by which

an increase in autonomous expenditure leads to a larger increase in real GDP.

The SRAS curve will shift to the left if there is

an increase in the expected price of an important natural resource, an increase in the adjustment of workers' and firms' prior underestimation of the price level, or an increase in expected future prices.

The SRAS curve will shift to the right if there is

an increase in the labor force or capital accumulation, an increase in productivity, or a technological change.

The aggregate demand curve is downward sloping because

an increase in the price level reduces real money holdings, which reduces the amount of expenditures.

When actual GDP is below potential GDP the budget deficit increases because of

an increase in transfer payment and a decrease in tax returns.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____ in real GDP in the short run and _____ in the price level in the long run.

an increase; an increase

If the equilibrium exchange rate changed from (yen)120 = $1 to (yen)150 = $1, we would say that the dollar

appreciated against the yen.

Currency _____ occurs when the market value of a country's currency rises relative to the value of another country's currency, while currency _____ occurs when the market value of a country's currency declines relative to value of another country's currency.

appreciation; depreciation

Household production and the underground economy (are/are not) accounted for in the Bureau of Economic Analysis' estimates of GDP.

are not

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

When the euro was introduced in January​ 1999, the exchange rate was​ $1.19 per euro. In September 2018​, the exchange rate was $ 1.17 per euro. For U.S. firms exporting goods and services to Europe, this change in the value was

bad news because one euro would buy few dollars, making U.S. goods more expensive for European buyers.

Reserve requirements are changed infrequently because

banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement.

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it _____ U.S. Treasury securities. If the FOMc wishes to decrease the money supply, it _____ U.S. Treasury securities.

buys sells

When the Fed conducts an open market purchase, the Fed _____ and the money supply _____.

buys securities from banks; increases

An initial decrease in a bank's reserves will decrease checkable deposits

by an amount greater than the decrease in reserves.

Adopting the euro is important to interest rate policy because

countries that use the euro as their currency will not be able to set their own independent monetary policies.

A decrease in current disposable income will (increase/decrease) consumption.

decrease

A decrease in expected future income will (increase/decrease) consumption

decrease

A decrease in household wealth will (increase/decrease) consumption.

decrease

An increase in the U.S. price level relative to other countries' price levels will (increase/decrease) net exports.

decrease

An increase in the exchange rate between the dollar and other currencies will (increase/decrease) net exports.

decrease

An increase in the growth rate of U.S. GDP relative to other countries' will (increase/decrease) net exports.

decrease

When the Fed conducts an open market purchase, the interest rate should _____.

decrease

An increase in what the price level is expected to be in the future will _____ the SRAS curve because this is a change in expectations about future prices.

decrease (shift leftward)

An unexpected increase in the price of an important raw material will _____ the SRAS curve because this is a change in the price of an important natural resource.

decrease (shift leftward)

The price level that is currently higher than expected will _____ the SRAS curve because this is a change in an adjustment to past errors in expectations about future prices.

decrease (shift leftward)

From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

decrease interest rates.

An article in BusinessWeek in 2013 reported that Fed Chairman Ben Bernanke testified to Congress​ that: ​"If we see continued improvement and we have confidence that that is going to be​ sustained, then we couldlong dashin the next few meetingslong dashwe could take a step down in our pace of​ purchases." According to the​ article, Bernanke also told Congress that​ "'premature tightening' could​ 'carry a substantial risk of slowing or ending the economic​ recovery.'" The purchases of Fed Chairman Bernanke is referring to are A "premature tightening" of the "pace of purchases" would slow down the economic recovery because this action would be

open market purchases of government securities. contractionary, reducing lending and economic activity.

M1 includes more than just currency because

other assets can also be used to make transactions to buy goods and services.

Inflation can affect the distribution of income because

people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power.

Disposable personal income is

personal income minus personal taxes

If the GDP deflator in 2012 has a value of 98.0, then

prices have decreased 2 percent between the base year and 2012

A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the

principle of double coincidence of wants.

Productivity growth rates matter because

productivity growth rates have a big impact on future economic growth.

On a 45 degree-line diagram (or Keynesian Cross), the horizontal axis measures _____, while the vertical axis measures _____.

real GDP; real aggregate expenditure

A columnist in the New York Times observes that, "many analysts agree that economic reform, of which integration into the global economy was a key element, has lifted millions of people out of poverty in India." Integration into the global economy has

reduced poverty in India by increase the growth rate of the economy and a higher rate of economic growth generally results in faster poverty reduction.

One advantage of a fixed exchange rate system is that it

reduces uncertainty for businesses about the value of a currency.

The four determinants of exchange rates in the long run are

relative price levels, relatively productivity growth, tastes, and trade barriers.

When compared to the Great Depression, the typical length of unemployment in the modern U.S. economy is

relatively brief.

An article in the Wall Street Journal reported in 2015 that the People's Bank of China, which is the central bank of China, "is freeing up cash by reducing the amount that banks must keep in reserve." The monetary policy tool that the People's Bank of China was using was changes to the This policy change would 'free up cash" because The People's Bank of China was hoping this policy action would

required reserve ratio. reserves that were required are now excess reserves available for lending. stimulate economic growth.

A faster income growth in other countries will cause a _____ the U.S. aggregate demand curve.

rightward shift of

An increase in government purchases will cause a _____ the aggregate demand curve.

rightward shift of

A change in any other factor than price level causes a _____ the SRAS curve.

shift in

A recession in the United States will

shift the supply curve of dollars to the left.

The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in consumption, it will cause a _____ the aggregate demand curve.

shift to the left in

Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in investment, it will cause a _____ the aggregate demand curve.

shift to the right in

A technological change will cause the long-run aggregate supply curve to

shift to the right.

If the price level decreases, the money demand curve

shifts to the left.

If real GDP increases, the money demand curve

shifts to the right.

The _____ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

Compared to the period between 1950 and 1973, the productivity of U.S. workers between 1974 and 1995

slowed by more than one percentage point per year.

Think about the relationship between economic prosperity and life expectancy. The size of the health care sector in a less developed country is _____ the size of the health care sector of a developed country. In particular, the size of the health care sector in a developing country ____.

smaller than grows with economic prosperity as life expectancy increases

In an open economy, a contractionary fiscal policy will have a _____ impact on aggregate demand and, therefore, will be _____ effective in slowing down an economy.

smaller; less

What are government purchases?

spending by the government on goods, services, and factors of production

Under a managed float system, exchange rates are determined by

supply and demand plus government intervention.

When the exchange rate (measured as foreign currency per dollar) is above the equilibrium exchange rate, there is a _____ of dollars and, consequently, _____ pressure on the exchange rate.

surplus; downward

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression.

Monetary policy is defined as

the actions the Federal Reserve takes to manage the money supply and interest rates.

By improving health and education, developing countries can generate economic growth and increase incomes. This will help combat the prevalence of educated people leaving their home countries for opportunities elsewhere. That is, it will combat _____.

the brain drain

The migration of highly education and successful individuals from developing countries to high-income countries is called

the brain drain.

What does the aggregate expenditure macroeconomic model seek to explain?

the business cycle

When the Federal Reserve sells Treasury securities in the open market,

the buyers of these securities pay for them with checks and bank reserves fall.

In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States. In the short run, increases in federal spending will increase real GDP and employment if The federal government would not want to increase its spending, even if the result were to increase real GDP and employment in the short run, if President Trump was assuming than in 2017, the economy was

the economy is producing at less than its potential output and has some cyclical unemployment. it would lead to a greater federal deficit and an increase in the national debt. able to create more jobs and expand without increasing the inflation rate.

From a trough to a peak, the economy goes through

the expansionary phase of the business cycle

A double coincidence of wants refers to

the fact that for a barter trade to take place between two people, each person must want what the other one has.

The Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?

the federal funds rate

The "normal" underlying level of unemployment is the economy is

the full-employment rate of unemployment the sum of structural unemployment and frictional unemployment the natural rate of unemployment

India has been able to experience rapid economic growth since 1991 despite poor educational and health care systems because

the government scaled back central planning, reduced regulations, and introduced market-based reforms.

Capital can be differentiated between physical capital and human capital. Human capital is

the knowledge and skills workers acquire from education and training or from their life experiences.

Potential real GDP is

the level of GDP attained when all firms are producing at capacity.

An article in the Economist discussed the situation facing the U.S. economy in​ mid-2015: "The combination of​ weaker-than-expected CPI inflation and some dovish comments in the minutes of the Federal​ Reserve's July meeting have caused the dollar ... to fall. Inflation continues to languish close to zero due to cheap oil and the effect of a strengthening​ dollar." By​ "dovish comments," the article meant that some members of the​ Fed's Federal Open Market Committee did not believe that the target for the federal funds rate should be raised in the coming months. If investors come to believe that the Fed might not be increasing interest rates, the value of the dollar would decline because "Strengthening of the dollar" means that one dollar will buy A strengthening of the dollar would reduce the inflation rate in the United States because

the lower expected return on the U.S. dollar-denominated assets would decrease the demand for dollars. more foreign currency, or the dollar has appreciated. net exports and aggregate demand would fall, lowering the price level.

Gross domestic product is best defined as

the market value of all final goods and services produced in a country during a period of time, typically one year.

When the economy is at full employment, unemployment is equal to

the natural rate of unemployment

The real interest rate equals

the nominal interest rate minus the inflation rate

The position of the long-run aggregate supply (LRAS) curve is determined by

the number of workers, the amount of capital, and the available technology.

The unemployment rate shows ______ of the labor force that is considered unemployed.

the percentage

The aggregate demand curve shows the relationship between _____ and _____.

the price level; output demanded

Since each country's real GDP is measured in a different currently, before one can compare the real GDPs of different countries, it is necessary to use

the purchasing power parities (PPPs) as a currency converter.

One of the goals of the Federal Reserve is price stability. For the Fed to achieve this goal,

the rate of inflation should be low, such 1% to 3%, and should be fairly consistent.

When the Federal Reserve purchases Treasury securities in the open market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

In his book The White Man's Burden, William Easterly reports that "A vaccination campaign in southern Africa virtually eliminated measles as a killer of children. Routine childhood immunization combined with measles vaccination in seven southern Africa nations starting in 1996 virtually eliminated measles in those countries by 2000. A national campaign in Egypt to make parents aware of the use of oral rehydration therapy from 1982 to 1989 cut childhood deaths from diarrhea by 82 percent over that period." As a result of the near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt, _____. The near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt _____. The elimination of measles and childhood deaths from diarrhea will _____.

the standard of living for these low-income countries increased significantly. did not increase real GDP per capita, but increased productivity and human capital resulting in a higher standard of living. remove a major impediment to growth, increase productivity and should eventually lead to increases in real GDP per capita.

The natural rate of unemployment is

the sum of structural unemployment and frictional unemployment

Aggregate expenditure is

the sum total of consumption, planned investment, government purchases, and net exports.

The Gross National Product (GNP) of the United States is equal to

the value of final goods and services produced by U.S. factors of production.

The aggregate demand curve slopes downward due to _____, and the demand curve for an individual product slopes downward due to _____.

the wealth effect, the interest-rate effect, and the international-trade effect consumers substituting the more expensive product for cheaper goods

Shortly before the fall of the Soviet Union, the economist Gur Ofer of the Hebrew University of Jerusalem, wrote this: "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." This turned out to be a very poor growth strategy because

there were diminishing returns to capital.

The quantity theory of money is better able

to explain the inflation rate in the long run.

What is the best use of the rule of 70 among those listed below?

to judge how rapidly real GDP per capita is growing over long time periods

When Congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors.

Increases in government purchases will make the aggregate demand curve shift

to the right.

What do government expenditures represent?

total government spending including goods, services, grants to state and local governments, and transfer payments

Macroeconomic equilibrium occurs where

total spending, or aggregate expenditure, equals total production, or GDP.

When the economy is experiencing a recession automatic stabilizers will cause

transfer payments to increase and tax revenues to decrease.

The largest and fastest-growing category of federal expenditures is

transfer payments.

Historically, in order to rapidly expand the money supply, a country needed to abandon the gold standard because

under the gold standard the size of the money supply was dependent on the amount of gold that was available in the country and it was not possible to rapidly increase the availability of gold.

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.

When is the economy in a recession?

when the aggregate expenditure line intersects the 45 degree line at a level of GDP below potential GDP

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption.

Economist Charles Kenny of the World Bank has argued that: "The process technologies - institutions like laws and inventory management systems - that appear central to raising incomes per capita flow less like water and more like bricks. But ideas and inventions - the importance of ABCs and vaccines for DPT - really might flow more easily across borders and over distances." If Kenny is correct, these facts indicate that these low-income countries ____ As these countries become able to increase their standards of living, there ___

will have a healthier and more productive labor force as there is significant improvement in health, education, and civil and political liberties will be economic growth but in order to have sustainable growth, these countries need their incomes to increase.

A politician makes the following argument: "The economy would operate more efficiently if frictional unemployment were eliminated. Therefore, a goal of government policy should be to reduce the frictional rate of unemployment to the lowest possible level." Eliminated all frictional unemployment will (be good/not be good) for the economy since the presence of frictional unemployment increases economic efficiency.

will not

When Segolene Royal was running unsuccessfully for president of France, she proposed that workers who had lost their jobs would receive unemployment payments equal to 90 percent of their previous wages during their first year of unemployment. If this proposal were enacted, the unemployment rate in France

would have gone up as the opportunity cost of job search would have decreased.

Formula for change in equilibrium GDP

ΔY = [1/(1-MPC)] * Δ(NX)

According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Taitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." When sellers are willing to accept money in exchange for goods and services, money is acting as a _____. True/False: If coins could have been easily used to purchase goods and services in other areas, the coins would have some intrinsic value.

medium of exchange true

A change in the price level causes a _____ the short-run aggregate (SRAS) curve.

movement along

The U.S. economy experiences 4% inflation. Because this is a change in price level, it will cause a _____ the aggregate demand curve.

movement along

An increase in the price level will cause a _____ the aggregate demand curve.

movement up along

Personal income is

national income minus retained corporate earnings plus government transfer payments and interest on government bonds

One major component of GDP that can be negative is

net exports

An increase in the price level will _____ the SRAS curve because this is a change in the price level.

not change

Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals

$1.8 billion

Suppose the government increases expenditures by $20 billion and the marginal propensity to consume is 0.80. By how much will equilibrium GDP change?

$100.0 billion

Consider the macroeconomic model shown below: C = 1000 + 0.75Y I = 1250 G = 1250 NX = 200 Y = C +I +G + NX If GDP is at $11,100, what are the aggregate expenditures (AE) and unplanned change in inventories? If GDP is at $18,500, what are the AE and unplanned change in inventories?

$11,100 = AE of @12,025 and -925 in unplanned $18,500 = AE of $17,575 and 925 in unplanned

Suppose the reserve requirement is 5%. What is the effect on total checkable deposits in the economy if bank reserves increase by $60 billion?

$1200 billion increase

Suppose that autonomous consumption is 400, government purchases are 1500, planned investment spending is 1500, net exports are 1000, and the MPC is 0.75. Equilibrium GDP is equal to

$17,600

If the CPI was 207 in 2009 and 225 in 2013, what wage would someone who earned a $50,000 income in 2009 have to earn in 2013 in order to keep her purchasing power constant?

$54,348

Suppose booming economies in the BRIC nations (Brazil, Russia, India, and China) causes net exports (NX) to rise by $125 billion in the United States. If the MPC is 0.8, the change in equilibrium GDP will be _____ billion.

$625 billion

Your father earned $34,000 per year in 1984. To the nearest dollar, what is that equivalent to in 2014 if the CPI in 2014 is 215 and the CPI in 1984 is 104?

$70,288

What is the effect on real GDP of a $175 billion change in planned investment if the MPC is 0.75

$700 billion

The labor force participation rate is calculated by

(Labor force/Working-age population) * 100

Which formula does the Bureau of Labor Statistics use to calculate the unemployment rate?

(Number of unemployed/Number in labor force) * 100

If the inflation rate at 6 percent and the nominal interest rate is 4 percent, the the real interest rate is

-2 percent, which is the nominal interest rate minus the inflation rate

If a 3-month Treasury bill pays 5.5% and the change in the consumer price index (CPI) is 4.7%, what is the real interest rate (the true return to lending)?

0.8%

The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals

1