Econ 3
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.
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
At the new short run equilibrium, the unemployment rate will ___compared to the unemployment rate at the initial equilibrium, prior to the increase in exports.
be lower
There is an increase in the quantity of capital goods. Because this is a change in____the LRAS will _____
he productive capacity of the economy shift to the right
The interest rate effect refers to the fact that a higher price level results in
higher interest rates and lower investment.
In the new short-run equilibrium, the unemployment rate is_____the unemployment rate in the initial equilibrium prior to the increase in the price of oil.
higher than
The non-farm business sector output per hour during April of 1996 was
71.56
The most important determinant of consumption spending is
current personal disposable income.
An increase in what the price level is expected to be in the future will______the SRAS curve because this is a change in _______
decrease (shift leftward) expectations about future prices
Congress provides more funds for low-interest loans to college students. It is likely that the rate of economic growth will
increase
The new short-run macroeconomic equilibrium occurs at
point B
The U.S. economy experiences 4 percent inflation. Because this is a change in ____it will cause a ____ the aggregate demand curve.
the price level movement along
The price level increases. Because this is a change in______ the LRAS curve will_______
the price level not change
What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between
the price level and the quantity of real GDP demanded by households, firms, and the government.
To have growth without inflation, which of the following must be true?
AD, SRAS, and LRAS must increase by the same amount.
These four categories of spending are represented in the GDP formula by
C + I + G + NX.
In most countries, political stability has little to do with economic growth.
False
Explain whether you agree with the following statement: Some economists claim that the recession of 2007minus−2009 was caused by a decline in spending on residential construction. This can't be true. If there had just been a decline in spending on residential construction, the only firms hurt would have been home builders and firms selling lumber and other goods used in building houses. In fact, many firms experienced falling sales during that recession, including automobile, appliance, and furniture firms.
I disagreelong dash—the commentator ignores the additional rounds of spending that make up the multiplier process.
How would an increase in interest rates affect investment?
Real investment spending declines.
Given the changes in real GDP and the GDP implicit price deflator, briefly explain what happened to short-run aggregate supply from 1973 to 1975?
Short-run aggregate supply decreased and shifted to the left.
The diagram on the right shows the relationship betwen consumption and income for the years 1960 through 2012. Use the diagram to help identify which of the following statements regarding the marginal propensity to cosume (MPC) are true. Click anywhere in the diagram and then choose a year to plot to identify levels of real consumption at a particular date.
The MPC during this time period was about 0.92.
Year Actual Real GDP Potential Real GDP Unemployment Rate 1969 $4.71 trillion $4.63 trillion 3.5% 1970 $4.72 trillion $4.80 trillion 4.9% Sources:U.S. Bureau of Labor Statistics; and U.S. Bureau of Economic Analysis. a. In 1969, actual real GDP was greater than potential real GDP. Which of the following best explains this?
The economy can produce a level of GDP above potential GDP in the short run.
Have poor countries been catching up to rich countries?
There has been catch-up by some poor but industrialized countries.
Which of the following is usually the cause of stagflation?
a supply shock as a result of an unexpected increase in the price of a natural resource
Stagflation occurs when
a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
Some economists argue that that the "new economy" has led to an increase in U.S. productivity growth since 1995. What caused the development of the "new economy"?
advances in information technology
The multiplier effect is the process by which:
an increase in autonomous expenditure leads to a larger increase in real GDP.
Which of the following scenarios would lead to an increase in the price level (i.e., a short-run inflation)?
an increase in oil price that decreases short-run aggregate supply
An increase in inventories in January is an indicator that
businesses are expecting higher demand in the future.
How can government policies shift the aggregate demand curve to the right?
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
Comparing the Chinese economy today and the Soviet economy in the 1980s, it can be seen that both countries had a history of
central planning and have introduced market systems, but have experienced problems in making the transition that have, and will continue to, hinder future growth.
A movement from point A to point C could be the result of a
change in the expectations of households.
A movement from point A to point B on AD1 could be the result of a
change in the price level.
Consider the short-run aggregate supply curves in the graph at right. A movement from point A to point B on SRAS1 could be the result of a
change in the price level.
According to an article in the Economist, "Four main types of spending drive GDP...." What are the four main types of spending and in what sense do they "drive" GDP?The four components of aggregate demand are
consumption, investment, government purchases, and net exports.
Which countries grow faster?
countries that have a strong rule of law
The most important determinant of consumption is
current disposable income.
The price level that is currently higher than expected willl____the SRAS curve because this is a change in
decrease (shift leftward) an adjustment to past errors in expectations about future prices
An unexpected increase in the price of an important raw material will _____the SRAS curve because this is a change in______
decrease (shift leftward) the price of an important natural resource
For the range of initial Real GDP per capita from 0 to Real GDP per capita1, the figure ______ support the catch-up prediction, because in the figure on the right, for the range of initial Real GDP per capita from 0 to Real GDP per capita1, ______ a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
does there exists
In the figure to the right, each dot represents a country with its initial real GDP per capita and its growth rate of real GDP per capita. a. For the range of initial Real GDP per capita from 0 to Real GDP per capita2, the figure ____ support the economic growth model's prediction of catch-up because in the figure on the right, for the range of initial Real GDP per capita from 0 to Real GDP per capita2, ____ consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
does not there does not exist
If the MPC equals zero, then the change in GDP after an increase in autonmous expenditures would be
equal to the change in autonomous expenditure.
Most of the poor countries experience slow growth because of all the following reasons except
excellent public health and education.
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall; increase
At the beginning of a recession, aggregate expenditure___ GDP As a result, firms____ large amounts of unplanned inventory and GDP and employment ____
falls short of accumulate decrease
If firms accumulate excess inventories and then spending quickly returns to its normal levels, firms usually do not sell their excess inventories before returning to producing at normal levels.
false
The Austrian school is best known for arguing the superiority of government economic planning over the market system.
false
In the United States, what is a key source of funds for start-up firms bringing new technologies to market?
funding from venture capital firms
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." Source: Vivek Dehejia, "Has Globalization Helped India's Poor?" New York Times, October 7, 2011. The term "integration into the global economy" means
globalization and more integration of trade.
Inventories refer to
goods that have been produced but have not yet been sold.
What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that
in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
For each of the following policies, indicate whether it will or will not increase the rate of economic growth in the United States. a. 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
An increase in the labor force will______ the SRAS curve because this is a change in_______
increase (shift rightward) the productive capacity of the economy
How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports? An increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) will
increase U.S. net exports by increasing exports to these countries.
If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports.
increase; decrease; increases
Economist Robert Gordon of Northwestern University has argued that: My interpretation of the [information] revolution is that it is increasingly burdened by diminishing returns. The push to ever-smaller devices runs up against the fixed size of the human finger that must enter information on the device. Most of the innovations since 2000 have been directed to consumer enjoyment rather than business productivity, including video games, DVD players, and iPods. iPhones are nice, but the ability to reschedule business meetings and look up corporate documents while on the road already existed by 2003. Source: Robert J. Gordon, "U.S. Productivity Growth over the Past Century with a View of the Future, "National Bureau of Economic Research Working Paper 15834, March 2010. 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.
This greater flexibility in labor markets and greater efficiency in financial markets
lead to increases in productivity that contribute to rapid growth in real GDP per capita for the United States.
. 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
Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment insurance? The existence of unemployment insurance makes it_____that consumption will fluctuate over the business cycle.
less likely
Many people have difficulty borrowing as much money as they would like, even if they are confident that their incomes in the future will be high enough to pay it back easily. For example, many students in medical school will earn high incomes after they graduate and become physicians. If they could, they would probably borrow now in order to live more comfortably while in medical school and pay the loans back out of their higher future income. Unfortunately, banks are usually reluctant to make loans to people who currently have low incomes, even if there is a good chance their incomes will be much higher in the future. If people could always borrow as much as they would like, consumption would be likely to become______to changes in current income.
less sensitive
At point C, planned aggregate expenditure is ____ GDP.
less than
More people in high-income countries than in low-income countries tend to believe that rapid rates of economic growth are not desirable. Recall the concept of a "normal good." Some people in_____ -income countries are _____with certain consequences of rapid economic growth, such as a higher standard of livinga higher standard of living.
low satisfied
According to an article on the U.S. economy in March 2013: "Businesses are restocking after a cutback in the pace of inventory building in the fourth quarter that weighed on economic growth." The article further notes that: "Inventories in the U.S. rose in January by the most since May 2011 as companies replenished warehouses and shelves amid signs demand will pick up." A cutback in the pace of inventory building in the fourth quarter would slow down economic growth because
lower inventory building means lower production.
Milton Friedman argued that the Federal Reserve should adopt a ________ to reduce fluctuations in real GDP, employment, and inflation.
monetary growth rule
onsider each of the following events and then figure out how each of these events will affect the aggregate demand curve. a. An increase in the price level will cause a____ the aggregate demand curve.
movement up along
The new long-run macroeconomic equilibrium occurs at ____
point C
Which of the following are explanations economists have offered for the U.S. productivity slowdown of the middash-1970s to middash-1990s?
problems in measuring productivity accurately a decline in labor quality problems in measuring improvements in the environment and in health and safety All of the above.
Productivity growth rates matter because
productivity growth rates have a big impact on future economic growth.
Economist George Ayittey, in an interview on PBS about economic development in Africa, states that of the 54 African countries, only eight have a free press. For Africa's economic development, Ayittey argues strongly for the establishment of a free press. Source: George Ayittey, "Border Jumpers," Anchor Interview Transcript, WideAngle, PBS.org, July 24, 2005. A free press will be vital for enhancing
property rights and the rule of law and controlling corruption.
On a 45 degrees45°-line diagram (or Keynesian Cross), the horizontal axis measures _____while the vertical axis measures
real GDP real aggregate expenditure
On the graph of the consumption function, the horizontal axis measures _______, while the vertical axis measures _______.
real national income or real GDP; real consumption spending
If Bardhan is correct, in the future, the Chinese economy might
realize slower economic growth.
When the economy returns to long-run equilibrium again
real GDP, the unemployment rate, and the price level will be the same as the initial equilibrium values prior to the increase in the price of oil.
When potential real GDP is equal to 70, this economy is in
recession
Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left. The SRAS curve will_____if there is______ The SRAS curve will____ if there is _____ The SRAS curve will____if there is ______ The SRAS curve will____if there is ______
shift to the right an increase in the labor force or capital accumulation shift to the right an increase in productivity shift to the right a technologica change shift to the left an increase in the expected price of an important natural resource shift to the left an increase in the adjustment of workers' and firms' prior underestimation of the price level shift to the left an increase in expected future prices
Economic growth will
slow down or stop if more capital per hour is used because of diminishing returns to capital.
The labor markets in the United States have greater flexibility and the financial system in the United States has greater efficiency than other higher-income countries, such as those in Europe, because in
the United States, labor markets have less government regulations so workers have job mobility to better match their skills with jobs and the financial markets provide better legal protection and liquidity to investors.
A curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called
the aggregate demand curve.
The migration of highly educated and successful individuals from developing countries to high-income countries is called
the brain drain.
Which of the following does the aggregate expenditure macroeconomic model seek to explain?
the business cycle
Consider the following information about menu costs. Menu costs are
the costs to firms of changing prices.
The 2007-2009 recession was a clear example of
the effect that a decrease in aggregate demand can have on the economy.
All of the following are true as the economy adjusts to a new equilibrium except that
the initial increase in income or GDP leads to a further increase in investment and aggregate expenditure.
A movement from point A to point C could be the result of a change in
the labor force.
What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP supplied by firms.
Consider the information in the following table for the first two years of the Great Depression (the values for real GDP and potential GDP are in 2009 dollars): Year Actual Real GDP Potential Real GDP Price Level 1929 $1,005.6 billion $1,006.3 billion 10.6 1930 $965.8 billion $1,094.1 billion 10.2 Sources: U.S. Bureau of Labor Statistics; and U.S. Bureau of Economic Analysis. a. The information in the table is different from what we would expect to have happened in a recession in the past 50 years because
the price level decreased.
Consider the information in the following table. Actual Real GDP Potential Real GDP Price Level 1974 $5.39 trillion $5.42 trillion 28.7 1975 $5.38 trillion $5.61 trillion 31.4 Source: U.S. Bureau of Economic Analysis The values for the price levels in the above table are well below 100. This information indicates that
the price levels are less compared to the price level in the base year.
Technological change occurs. Because this is a change in_____ the LRAS will _______
the productive capacity of the economy shift to the right
The labor force increases. Because this is a change in___ the LRAS will
the productive capacity of the economy shift to the right
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
the relationship between aggregate expenditure and real GDP. how macroeconomic equilibrium is determined in the aggregate expenditure model. how the level of aggregate expenditure and GDP are determined in the economy. All of the above.
What has contributed to the slow growth in employment in recent years?
the severity of the 2007-2009 recession the number of baby-boomers reaching retirement age
Aggregate expenditure is:
the sum total of consumption, planned investment, government purchases, and net exports.
The value of the multiplier is larger when
the value of the MPC is larger.
If menu costs were eliminated, the short-run aggregate supply curve will be____because of ______
upward sloping wage price stickiness and slow wage adjustment by firms
The lower birthrate in China
will shrink its labor force, which will include mostly less educated and less healthy older workers, resulting in a slower growth in its real GDP per capita.
The primary explanation for this is because:
with unemployment insurance, current disposable income fluctuates less over the business cycle.
Suppose that workers and firms could always predict next year's price level with perfect accuracy. Under these circumstances, the SRAS curve
would be the same as the LRAS
What is the MPC for the consumption function Upper C1?
zero
Use the following data to answer the question: Y = $8,000 C = $6,200 I = $1,500 G = $1,500 NX = -$500 The unplanned change in inventories is ________ and real GDP will ________.
-$700; increase
From 1960 to 20162016, what happened to long-run aggregate supply?
Long-run aggregate supply shifted to the right.
If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion of disposable income?
$90 billion
If the multiplier had a value of 2, how large must the change in autonomous expenditure have been ΔAo = $
-139
Year Consumption Investment Exports Real GDP Unemployment Rate 1929 $781 billion $124 billion $40 billion $1,056 billion 2.9% 1933 $638 billion $27 billion $22 billion $778 billion 20.9% If the multiplier had a value of 4 in 1929, then how large must the change in autonomous expenditure Ao have been to cause the decline in real GDP between 1929 and 1933 shown in the table? Ao = $
-69.50
In the above example, the marginal propensity to save is
.20
The MPC is equal to
.5
The MPC is
.80
n the above example, the marginal propensity to consume is
.80
A positive technological change occurs
1
All countries for which statistics are available, 1960-2010
1 -
The non-farm business sector output per hour during January of 2017 was
107.48
The equilibrium level of real GDP is
$10,000
Suppose that initially the economy is at point A. Then aggregate demand increases from AD1 to AD2. The new short-run equilibrium will be at point
D
An increase in real GDP that increases the price levelthe price level will cause the value of the multiplier to
be smaller
If the Roman Empire had been able to bring about sustained economic growth, it is likely that the standard of living today would
be substantially higher
China has experienced
high rates of growth in the short run by spending heavily on physical capital, infrastructure, and property but their lack of democracy can slow growth in the long run.
The net exports line has a
negative slope because as domestic GDP or income increases, imports increase while exports remain the same leading to a reduction in net exports.
Explain how each of the following events would affect the short-run aggregate supply curve. An increase in the price level will_____the SRAS curve because this is a change in ______
not change the price level
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals
one
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
The slope of the aggregate expenditure line equals
the slope of the consumption function.
The inflation rate in year 2 is
1.79
The multiplier is equal to
2
The equilibrium value of real GDP is $___
12 trillion
The dollar value of the decline in real exports between the second quarter of 2008 and the first quarter of 2009 was $
231
A decrease in the expected future price level
3
Which of the following statements is correct?
Actual investment will equal planned investment only when there is no unplanned change in inventories.
Given the change in the GDP implicit price deflator, did aggregate demand grow more or less than long-run aggregate supply?
Aggregate demand grew more than long-run aggregate supply. This is the correct answer.
After the adjustment of aggregate supply is complete, the economy returns to equilibrim at
A
Use the graph on the right to answer the following questions. a. Which of points A, B, C, or D can represent a long-run equilibrium?
A AND C
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.
The aggregate demand curve slopes downward for all of the following reasons except:
A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports.
Which of the following would cause a decrease in real GDP and, if large enough, a recession?
A reduction in consumer confidence that causes aggregate demand to fallaggregate demand to fall.
Which of the following scenarios would lead to a reduction in real GDP and may even cause a recession?
A reduction in the growth rate in foreign countries compared to the United States that causes aggregate demand to fallaggregate demand to fall.
The long-run equilibrium point will be at point
C
Refer to the table to the right. Why has productivity growth in the United States been faster than in most other industrial countries?
Efficient financial markets Flexible labor markets
Which of the following equalities is correct?
Disposable income is equal to national income minus net taxes.
Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
Stagflation is a
combination of inflation and recession
At point B, planned aggregate expenditure is ____ GDP.
equal to
Government policy can increase the accumulation of knowledge capital in all the following ways except by
investing in capital accumulation.
Year Real GDP Per Capita (2009 prices) 2007 $49,571 2008 $48,951 2009 $47,041 2010 $47,772 2011 $48,282 *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. The percentage change in real GDP per capita between 2007 and 2011 was The average annual growth rate in real GDP per capita between 20072007 and 20112011 was
-2.60% -0.63%
Andover Bank and Lowell Bank each sell one-year certificates of deposit (CDs). The interest rates on these CDs are given in the table below for a three-year period. Bank 2014 2015 2016 Andover Bank 3% 4% 14% Lowell Bank 7% 7% 7% Suppose you deposit $10,000 in a CD in each bank at the beginning of 2014. At the end of 2014, you take your $10,000 and any interest earned and invest it in a CD for the following year. You do this again at the end of 2015. At the end of 2016, the interest over this three-year period at Andover Bank is $_____ At the end of 2016, the interest over this three-year period at Lowell Bank is $ At the end of 2016, you will have earned more on your____Bank CD, because
2211.68 2250.43 Lowell even a modest increase in the interest rate compounded over time will make the earnings higher.
Use the data for the country of New Finlandia in the following table to calculate the following: YEAR REAL GDP PER CAPITA (2005 PRICES) 2006 $41,829 2007 42,729 2008 42,333 2009 43,425 2010 43,292 (HINT: Remember from the previous chapter that the average annual growth rate for relatively short periods can be approximated by averaging the growth rates of those years.) a. The percentage increase in real GDP per capita between 2006 and 2010 is
3.65% 0.87%
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from
AD 0 to AD 1
According to the dynamic AD-AS model, what is the most common cause of inflation?
AD increases by more than LRAS. Total spending increases faster than total production. The U.S. Mint prints too much currency. All of the above.
The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?
AE = C + I + G + NX
How does an increasean increase 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.
Which of the following statements about compounding is correct?
Compounding magnifies even small differences in interest rates or growth rates over long periods of time.
We can use the diagram to the right to compare movements in real consumption between 1979 and 2012. Use the diagram to help identify which of the following statements are true. Click anywhere in the diagram and then choose a year to plot to identify levels of real consumption at a particular date. Note: The values are seasonally adjusted at an annual rate.
Consumption follows a smooth, upward trend.
Consider the figure to the right. Why does the short-run aggregate supply curve (SRAS) slope upward?
Contracts keep wages "sticky". Prices of final goods rise more quickly than the prices of inputs. Firms and workers fail to predict changes in the price level. All of the above.
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.
Consider the choices below. All of these except one truly represent the record of productivity growth in the United States from 1800 to the present. Find the one that does not belong. Which one of the following does not explain the slowdown in productivity growth from the mid-1970s to the mid-1990s? All of the following contributed to an increase in productivity growth from 1996 to the present except an
GDP per capita fell rapidly between 1900 and 1950. Workers lacked incentives to work hard as their job security was at its lowest. improvement in workers' skills due to better education and training.
We can use the diagram to the right to compare movements in real government purchases between 1979 and 2006. Use the diagram to help identify which of the following statements are true. Click anywhere in the diagram and then choose a year to plot to identify levels of real consumption at a particular date. Note: The values are seasonally adjusted at an annual rate.
Government purchases grew steadily for most of the period shown, with the exception of the mid-1990s.
The role of the entrepreneur becomes much more important in the new growth theory. long dash—the endogenous growth modellong dash—than in the traditional economic growth model because
In the new growth theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.
According to the figure at the right, productivity increased after 1995 almost as quickly as it slowed after 1972, leading many economists to discuss a "new economy." The "new economy" emerged as a result of what?
Innovations in information technology Improvements in data processing Increased use of the Internet All of the above
Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)?
Interest rate effect Wealth effect
What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?
Inventories decrease, GDP increases, and employment increases.
The figure to the right illustrates the relationship between weak and strong rule-of-law countries and economic growth. 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 Inability to borrow money needed for investment Shortage of childhood vaccinations All of the above
Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C.
Lower taxes Decrease in the U.S. exchange rate relative to other currencies Increased consumer optimism Lower interest rates
New growth theory suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge capital?
Patents Public education Subsidies All of the above
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
Refer to the graph to the right. According to the economic concept of catch-up, which of the following is CORRECT?
Poorer countries should grow more quickly and will be at point A.
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
A reform of the Chinese school system results in more highly trained workers. This will cause a _____China's per-worker production function.
Shift of
Consider the figure to the right. Which of the following is responsible for the upward shifts in the per-worker production function?
Technological change
How does technological change affect the per-worker production function? In the long run, a country will experience an increasing standard of living only if
Technological change shifts the per-worker production function up. the country experiences continuing technological change.
Country 2009 2010 2011 2012 Brazil $1,034 $1,112 $1,142 $1,152 Mexico 8,378 8,823 9,168 9,530 Thailand 4,263 4,596 4,600 4,896 Note: All values are in billions of domestic currency at constant prices. Source: International Monetary Fund, World Outlook Database, April 2013. The country that experienced the highest rate of economic growth during 2010 is ______with a growth rate of _____ The country that experienced the highest average annual growth rate between 2010 and 2012 is______with an average annual growth rate of Since each country's real GDP is measured in a different currency, before one can compare the real GDPs of different countries, it is necessary to use
Thailand 7.81% Thailand 4.78% the purchasing power parities (PPPs) as a currency converter.
We can use the diagram to the right to compare movements in real net exports between 1979 and 2006. Use the diagram to help identify which of the following statements are true. Click anywhere in the diagram and then choose a year to plot to identify levels of real consumption at a particular date. Note: The values are seasonally adjusted at an annual rate.
The United States has imported more goods and services than it exported during most of the years shown.
How might the growth rates in the figure be different if they were calculated for real GDP per capita instead of per hour worked? (Hint:How do you think the number of hours worked per person has changed in the United States since 1900?)
The growth rate of real GDP per capita would be higher than the growth rate of real GDP per hour
Indicate which of the following is correct about the multiplier effect.
The larger the MPC, the more additional consumption that occurs. A decrease in autonomous spending decreases real GDP by a multiple of the change. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. All of the above.
In the figure at right, a $20 trillion increase in planned investment increased the AE line from AE 1AE1 to AE 2AE2. However, real GDP increased by $40 trillion. Why?
The multiplier effect.
An article in the Wall Street Journal observes: "For 2008, productivity grew an astounding 2.8% from 2007 even as the economy suffered through its worst recession in decades." Source: Brian Blackstone, "Productivity Proves Resilient," Wall Street Journal, April 29, 2009. How is it possible for labor productivitylong dash—output per hour workedlong dash—to increase if outputlong dash—real GDPlong dash—is falling?
The "new economy" is based on information technology. Business record-keeping is now faster and more accurate due to computer technology. Faster and less expensive computers have made communication and data processing faster and easier. Laptop computers and wireless Internet allow people to work while they are away from their jobs. All of the above.
Growth rates matter because living standards may stagnate in an economy that grows too slowly.
True
This Making the Connection argues that a key difference between market economies and centrally planned economies, like the former Soviet Union, is that "In market economies, decisions about which investments to make and which technologies to adopt are made by entrepreneurs and managers with their own money on the line. In the Soviet system, these decisions were usually made by salaried bureaucrats trying to fulfill a plan formulated in Moscow." But in large corporations, investment decisions are often made by salaried managers who do not, in fact, have their own money on the line. These managers are spending the money of the firm's shareholders rather than their own money. The investment decisions of salaried managers in the United States tend to be better for the long-term growth of the economy than were the decisions of salaried bureaucrats in the Soviet Union because:
U.S. managers are driven by incentives of higher profits, leading them to adopt new technologies.
Which of the following is NOT included in the calculation of total government purchases?
Unemployment insurance benefits paid for by the federal government
The figure above shows the levels of GDP per capita around the world in 2012. GDP is measured in U.S. dollars, corrected for differences across countries in the cost of living. Use the figure to help indentify which one of the following statements is true:
Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.
In the late 1930s, Harvard economist Alvin Hansen argued that the United States had entered a period of secular stagnation, by which he meant
a prolonged period of slow economic growth.
An increase in the expected price of an important natural resource is indicated by
a shift from B to A
We say that the economy as a whole is in macroeconomic equilibrium if
aggregate expenditure equals total production. total spending equals total production. aggregate expenditure equals GDP. total spending equals GDP. all of the above.
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.
Some economies are able to maintain high growth rates despite diminishing returns to capital by using
better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns.
Consider the per-worker production function to the right. Equal increases in the quantity of capital per hour worked lead to _______increases in output per hour worked.
diminishing
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.
In the 1980s and 1990s, a small group of countries experienced high rates of growth. These countries are sometimes called the newly industrializing countries. Where are most of these countries located?
in east Asia
The movement from point A to point B represents: The movement from point B to point C represents: The movement from point A to point C represents:
more capital per hour worked technological change technological change and more capital per hour worked
Capital per hour worked increase from 5 million per hour to 6 million per hour worked. This will cause a ___ China's per-worker production function.
movement along
A change in the price level causes a _______the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point _____
movement along A to B
A change in any other factor causes a ______the SRAS curve. In the figure, this is shown by moving from point ______
shift in B to C
Chinese businesses switch to an improved inventory method that increases output per worker worked. This will cause a ___ China's per-worker production function
shift of
Compared to the period between 1950 and 1972, the productivity of U.S workers between 1973 and 1994
slowed by more than one percentage point per year.
The new growth theory differs from the growth theory developed by Robert Solow, since
the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.
Healthier, more educated workers tend to be more productive. Greater overall productivity per hour worked is a fundamental component of long-term economic growth. However, many very successful individuals often find few opportunities in their own developing countries, and leave them for industrial countries. 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.
Recently, economists Carol Shiue and Wolfgang Keller of the University of Texas at Austin published a study of "market efficiency" in the eighteenth century in England, other European countries, and China. If the markets in a country are efficient, a product should have the same price wherever in the country it is sold, allowing for the effect of transportation costs. If prices are not the same in two areas within a country, it is possible to make profits by buying the product where its price is low and reselling it where its price is high. This trading will drive prices to equality. Trade is most likely to occur, however, if entrepreneurs feel confident that their gains will not be seized by the government and that contracts to buy and sell can be enforced in the courts. Therefore, the more efficient a country's markets were, the more its institutions would have favored long-run growth. Shuie and Keller found that in 1770, the efficiency of markets in England was significantly greater than the efficiency of markets elsewhere in Europe and in China. Source: Carol H. Shiue and Wolfgang Keller, "Markets in China and Europe on the Eve of the Industrial Revolution," American Economic Review, Vol. 97, No. 4, September 2007, pp. 1189-1216. This finding supports Douglas North's argument concerning why the Industrial Revolution occurred in England because
the efficient market system thrived due to a stable British parliament and an independent court system.
Complete the following table to indicate what effect an increasean increase in each of the consumption components will have on consumption.
the price level decrease consumption. household wealth increase consumption. expected future income increase consumption. current disposable income increase consumption. the interest rate decrease consumption
According to Joseph Schumpeter, which of the following factors provides entrepreneurs with the most important incentive to bring the factors of production together to start new firms and to introduce new goods and services?
the profits entrepreneurs hope to earn
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. Source: William Easterly, The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good, New York: The Penguin Press, 2006, p. 241. 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.
When potential real GDP is equal to 70, this economy is in recession . The amount of the shortfall in planned aggregate expenditure is equal to
the vertical distance between AE and the 45° line at the level of potential real GDP.
If there is an increase in technology, holding constant the quantity of capital per hour worked, then
there is a movement from A to C.
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." Source: Gur Ofer, "Soviet Economic Growth, 1928-1985," Journal of Economic Literature, December 1987, p. 1,784. This turned out to be a very poor growth strategy because
there were diminishing returns to capital.
Economist Charles Kenny of the World Bank has argued that: The process technologieslong dash—institutions like laws and inventory management systemslong dash—that appear central to raising incomes per capita flow less like water and more like bricks. But ideas and inventionslong dash—the importance of ABCs and vaccines for DPTlong dash—really might flow more easily across borders and over distances. Source: Charles Kenny, Getting Better, New York: Basic Books, 2011, p. 117. 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 improvment 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.
What is the effect on real GDP of a $150 billion change in planned investment if the MPC is.75?
$600 billion
Real GDP (Y) Consumption (C) Planned Investment (I) Gov't Purchases (G) Net Exports (NX) Planned Aggregate Expenditure Unplanned Change in Inventories
$8,000 $6,200 $1,500 $1,500 −$500 $8700 $−700 9,000 6,850 1,500 1,500 −$500 9,350 −350 10,000 7,500 1,500 1,500 −$500 10000 00 11,000 8,150 1,500 1,500 −$500 10,650 350 12,000 8,800 1,500 1,500 −$500 11,300 700
Consider the figure to the right. This economy is in macroeconomic equilibrium at what level of real GDP?
$80 billion
The growth rate of real GDP from year 1 to year 2 is
1.15
The non-farm business sector output per hour during July of 1991 was
66.13
Complete the following table.
An increase in... will (increase/decrease) net exports. the U.S. price level relative to other countries' price levels decrease net exports. the growth rate of U.S. GDP relative to other countries' decrease net exports. the exchange rate between the dollar and other currencies decrease net exports.
Along the downward-sloping catch-up line, a country near the top of the line is
a poor country growing rapidly.
The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in ____it will cause a____ the aggregate demand curve.
consumption shift to the left in
Aggregate expenditure, or the total amount of spending in the economy, equals
consumption spending plus planned investment spending plus government purchases plus net exports.
Workers and firms often enter into contracts that fix prices or wages, sometimes for years at a time. If the price level turns out to be higher or lower than was expected when the contract was signed, one party to the contract will lose out. Despite knowing this, workers and firms still sign long-term contracts because
contracts are common in the unionized sectors of the economy, as they are seen as protection from unanticipated inflation.
The unemployment rate in year 2 is___ in year 1
greater than
A rise in stock prices and housing prices
increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.
According to the paradox of thrift, a simultaneous increase in saving without any change in income leads to
lower real GDP in the short run but higher real GDP in the long run.
Suppose that the economy grows from 2015 to 2016 without inflation. Which of the following graphs correctly shows this situation?
middle right
Conventional trade statistics may no longer be as reliable as they once were because
once goods and services cross borders several times, double counting may occur.
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." Employers are hesitant to cut workers' salaries because wage cuts
upset workers and lower their productivity.
By 2012, General Motors (GM) had established 12 joint ventures and employed more than 55,000 workers in China. In 2013, GM announced that it would invest an additional $11 billion to increase production of its vehicles in China. Source: Colum Murphy, "GM to Build Cadillac Plant in China," Wall Street Journal, May 7, 2013. GM would choose to invest in China rather than to export vehicles to China from the United States because
wages are lower, growth is higher, and transport costs are lower.
When is the economy in a recession?
when the aggregate expenditure line intersects the 45o 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.
What is the value of unplanned changes in inventories when real GDP has each of the following values? (Enter your responses rounded to one decimal place and include a minus sign if necessary.) GDP Unplanned Inventories $10 trillion ________ $12 trillion ______ $14 trillion _________
-1 0 1
An increase in the expected price level ii. An increase in households' expectations of their future income iii. A decrease in the price of an important natural resource iv. A decrease in firms' expectations of the future profitability of investment spending
1 4 2 3
The economy experiences a recession ii. The economy experiences short-term inflation iii. The economy experiences stagflation
1,3 1,4 1
$8,000 $6,400 ______ $9,000 $7,200 ______ $10,000 $8,000 ____ $11,000 $8,800 ___ $12,000 $9,600 ____
1,600 1,800 2,000 2,200 2,400
What was Apple's actual investment spending?
1.4 million Iphones
Suppose Apple plans to produce 15.6 million iPhones this year. It expects to sell 14.1 million and add 1.5 million to the inventories in its stores. Suppose that at the end of the year, Apple has sold 14.2 million iPhones. What was Apple's planned investment spending?
1.5 million Iphones
The formula for the multiplier is
1/(1-MPC)
Which of the following is the formula for the multiplier?
1/1-MPC
What is the level of planned investment?
10 billion
Find equilibrium GDP using the following macroeconomic model (the numbers, with the exception of the MPC, represent billions of dollars): C = 750 + 0.75Y Consumption function I = 1,000 Planned investment function G =1,000 Government spending function NX =−250 Net export function Y = C + I + G + NX Equilibrium condition The equilibrium level of GDP is $
10,000
Find equilibrium GDP using the following macroeconomic model: C = 1,000 + 0.8Y Consumption function I = 500 Investment function G = 600 Government spending function NX = -100 Net export function Y = C + I + G + NX Equilibrium condition
10,000
Suppose that autonomous consumption is 400, government purchases are 500, planned investment spending is 2,000, net exports are −250, and the MPC is 0.75. Equilibrium GDP is equal to $
10,600
Real GDP (Y) Consumption (C) Planned Investment (I) Government Purchases (G) Net Exports (NX) $11,000 $9,900 $1,100 $1,300 −$275 $12,000 $10,800 $1,100 1,300 −$275 $13,000 ______ $1,100 1,300 −$275 $14,000 ______ $1,100 1,300 −$275 $15,000 ____ $1,100 1,300 −$275
11,700 12,600 13,500
The manufacturing sector output per hour during January of 2017(shown as 2017−01−01 in FRED) was
119.17
Real GDP (Y) Consumption (C) Planned Investment (I) Government Purchases (G) Net Exports (NX) Planned Aggregate Expenditure (AE) Unplanned Change in Inventories $11,000 $9,900 $1,100 $1,300 −$275 _________ __________ $12,000 $10,800 $1,100 1,300 −$275 ________ ________
12,025 -1,025 12,925 -925
Real GDP (Y) Consumption (C) Planned Investment (I) Government Purchases (G) Net Exports (NX) $12,000 $10,100 $1,000 1,800 −$500 $13,000 $10,900 $1,000 $1,800 −$500 $14,000 $11,700 $1,000 $1,800 −$500 $15,000 $12,500 $1,000 $1,800 −$500 $16,000 $13,300 $1,000 $1,800 −$500 The equilibrium level of GDP is $
14,000 billion
Consider the figure on the right. It shows growth rates in real GDP per hour worked in the United States for various periods from 1900 onward. According to the figure, economic growth (as measured by growth in real GDP per hour worked) in the United States was slowest during the period from
1974 to 1995.
Which of the following periods in U.S. economic history had the slowest growth rate, as measured by the average annual increase in real GDP per hour worked?
1974-1995
Workers and firms adjust to having previously underestimated the price level
2
United States, Western Europe, Canada, and Japan, 1990-2012
2 \
A $400 billion increase in net exports leads to a change in spending of $____billion, so the new level of GDP will be $____billion.
2,000 16,000
By how much will it increase equilibrium real GDP? Equilibirum real GDP will increase by $____
2,000 billion
Suppose the economy moves from point A in year 1 to point B in year 2. a. The growth rate of potential GDP from year 1 to year 2 is
2.30
What was Apple's actual investment spending?
2.4 million Iphones
Suppose Apple plans to produce 16.4 million iPhones this year. It expects to sell 13.9 million and add 2.5 million to the inventories in its stores. Suppose that at the end of the year, Apple has sold 14.0 million iPhones. What was Apple's planned investment spending?
2.5 million Iphones
Current high income countries, 1960-2010
3 /
Suppose booming economies in the BRIC nations (Brazil, Russia, India, and China) causes net exports (NX) to rise by $75 billion in the United States. If the MPC is 0.75, the change in equilibrium GDP will be $___
300
Consider the macroeconomic model shown below: C = 1,000 + 0.90Y Consumption function I = 2,000 Planned investment function G =1,250 Government spending function NX = −250 Net export function Y = C + I + G + NX Equilibrium condition Fill in the following table. (Enter your responses as integers.) GDP Aggregate Expenditures (AE) Unplanned Change in Inventories $36,000 $_______ __________ $44,000 $_______ ________
36,400 -400 43,600 400
If the marginal propensity to consume is 0.75, by how much will an increase in planned investment spending of $500500 billion shift up the aggregate expenditure line? If planned investment spending increases by $500 billion, it will shift the aggregate expenditure line up by $______
500 Billion
The manufacturing sector output per hour during1July of 1991 (shown as1991−07−01 in FRED) was
52.21
The manufacturing sector output per hour during July of 1994 (shown as 1994−07−01 in FRED) was
57.72
The manufacturing sector output per hour during April of 1996 (shown as 1996−04−01 in FRED) was
61.62
The non-farm business sector output per hour during July of 1994 was
68.87
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from____ The new short-run macroeconomic equilibrium occurs at______ Long-run adjustment will shift the SRAS curve from ____as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at______
AD0toAD1 Point B SPAS0 to SPAS1 point C
Briefly explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.
Aggregate expenditure is the relationship between spending and income, while aggregate demand is a relationship between output and the price level.
From April 2016 to July 2016, business inventories increasedincreased by $7 billion. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need?
Aggregate expenditure was less thanless than GDP in this quarter.
Which of the following would cause an increase in the price level (i.e., a short-run inflation)?
An increase in governmennt purchases that increases aggregate demandincreases aggregate demand.
Which of the following statements is correct?
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:
Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations.
,The general algebraic version of the aggregate expenditure model can be written as follows, where letters with "bars" represent fixed or autonomous values. Upper C equals Upper C overbar plus MPC left parenthesis Upper Y right parenthesisC = C + MPC (Y) Upper I equals Upper I overbarI = I Upper G equals Upper G overbarG = G NX equals NX overbarNX = NX If you think of the aggregate expenditure function as a line on the 45°-line diagram, the intercept would be
C+i+G+NX
Into which category of aggregate expenditures would the following transaction fall? The Jones family buys a new car.The Jones family buys a new car.
Consumption expenditure
Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the second quarter of 2013?
Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007minus−2009 recession.
In a speech in 2009, President Barack Obama made the following observations: "I know that for many, the face of globalization is contradictory...Trade can bring new wealth and opportunities, but also huge disruptions and change in communities." Source: "Obama's Speech in Cairo," Wall Street Journal, June 4, 2009. How does trade bring "new wealth and opportunities"?
Countries that are more open to foreign trade and investment are more likely to receive foreign direct investment (FDI). Countries that are more open to foreign trade and investment are more likely to receive foreign portfolio investment. a and b only
Globalization entails all of the following except:
Cultural exchange between nations.
Which of the following is not a main determinant of net exports?
Expectations of future profitability in the United States.
What are the four main determinants of investment?
Expectations of future profitability, interest rates, taxes and cash flow.
The manufacturing sector has been shrinking relative to the size of the economy in the United States and other advanced economies. What do your results imply about future labor productivity growth in advanced economies?
Future labor productivity growth will slow since the manufacturing sector, the component of the non-farm business sector that has seen fairly rapid growth in productivity, will become a smaller share of overall economic activity.
Which of the following are assertions made by opponents of globalization?
Globalization has contributed to multinational firms moving production to low-income countries so they can pay their workers very low wages. Globalization has undermined the distinctive cultures of many countries. 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. All of the above are assertions made by opponents of globalization.
Why do economic growth rates matter?
High levels of sustained economic growth reduce infant mortality. When a country sustains high growth rates, life expectancy at birth increases. High growth rates coincide with improved living standards. All of the above.
Which of the following statements does not correctly describe the effect of an increase in price on the components of aggregate expenditure?
If the price level increases, government tax receipts fall and consequently government expenditure declines.
Which of the following statements is correct if real GDP in the United States declined by more during the 2007minus−2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
Find out which one of the following is not one of the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model.
In the dynamic AD-AS model, the economy does not experience long-run growth, whereas in the basic AD-AS model, the economy experiences both continuing inflation and growth.
Which of the following statements is true?
In the long run, changes in the price level do not affect the level of real GDP.
Which of the following will increase planned investment spending on the part of firms?
Increased optimism about future demand for its product A lower real interest rate Increases in the corporate income tax All of the above
An opinion column in the Economist argued, "Globalization, far from being the greatest cause of poverty, is its only feasible cure." Source: Clive Crook, "Globalisation and Its Critics," Economist, September 27, 2001. Globalization reduces poverty by all of the following except:
Installing high tariff barriers.
Which has increased more since 1987, labor productivity in manufacturing or in the non-farm business sector?
Labor productivity in the manufacturing sector has increased more since 1987 because the manufacturing sector output index has a steeper slope.
If you think of the aggregate expenditure function as a line on the 45°-line diagram, the slope would be
MPC
The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as
MPC + MPS = 1. MPS = 1minus−MPC. MPC = 1minus−MPS. All of the above.
Which of the following is not correct?
MPS=1-(C/YD)
n early 2009, Christina Romer, who was then the chair of the Council of Economic Advisers, and Jared Bernstein, who was then an economic adviser to Vice President Joseph Biden, forecast how long they expected it would take for real GDP to return to potential GDP, assuming that Congress passed fiscal policy legislation proposed by President Obama: It should be understood that all of the estimates presented in this memo are subject to significant margins of error. There is the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress. But, there is the more fundamental uncertainty that comes with any estimate of the effects of a program. Our estimates of economic relationships . . . are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity. Source: Christina Romer and Jared Bernstein, The Job Impact of the American Recovery and Reinvestment Plan, January 9, 2009. Why would the causes of a recession and its severity affect the accuracy of forecasts of when the economy would return to potential GDP?
Models used for forecasting are based on historical experience and the relationships in the model can change.
The relationship that Raymond Fisman and Edward Miguel found between the extent of corruption in a country and the number of parking violations committed by the country's United Nations delegates in New York isn't perfect. For example, "Ecuador and Colombia both have perfectly clean parking slates, despite the experts' view of them as fairly corrupt places." Source: Raymond Fisman and Edward Miguel, Economic Gangsters, Princeton, NJ: Princeton University Press, 2009, p. 89. Does this observation invalidate Fisman and Miguel's conclusions about whether the parking violations data provide evidence in favor of there being a culture of corruption in some countries?
No, because their conclusions are generalized and may not apply to every country.
In a Federal Reserve Board publication, the following observation was made: "The impact of inventory increases on the business cycle depends upon whether the increases are planned or unplanned." Which of the following is a correct statement about planned inventory increases?
Planned inventory increases are likely to indicate business optimism and correspond with upturns in the business cycle.
The graph shown at right contains two aggregate expenditure functions. Consider a movement from point A to point B, and a movement from point B to point C. Which movement shows a change in autonomous expenditure?
Point A to point B because the change does not depend on the level of GDP.
Which movement shows a change in induced expenditure?
Point B to point C because the change depends on the level of GDP.
Refer to the graph to the right. According to the economic concept of catch-up , which of the following is CORRECT?
Poorer countries should grow more quickly and will be at point A.
Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not change?
Potential GDP increased significantly, but actual GDP did not, and thus there is unemployment.
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.
A free press could help reduce corruption, which would then promote growth, by all of the following except:
Publishing gossip columns about a politician's personal matter.
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?
Quantity of capital per hour worked Technological change
Long-run adjustment will shift the SRAS curve from ________ as workers adjust to lower-than-expected prices.
SRAS 0 to SRAS 1
Which of the following best explains how the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will decrease (shift leftward) as firms and workers adjust to the new price level.
Which of the following best explains how and why the economy will adjust back to long-run equilibrium?
Short-run aggregate supply will increase (shift rightward) as the recession makes firms and workers willing to accept lower wages and prices.
Why would this be the case?
Since current consumption is a function of future income, one would borrow against higher expected future income to smooth current consumption.
In the graph to the right, the economy is initially in equilibrium at point A. Aggregate expenditure and real GDP both equal $9.6 trillion. Suppose there is an increase in investment spending of $100 billion that increases aggregate expenditure to $9.7 trillion. Which of the following best describes the initial impact of the increase in investment?
The aggregate expenditure line shifts up by $100100 billion. Initially, real GDP rises by $100100 billion. The economy is no longer in equilibrium. All of the above.
Which of the following factors brought on the recession of 2007minus−2009?
The end of the housing bubble. The financial crisis. A rapid increase in the price of oil. All of the above.
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?
The formula ignores the impact of an increase in GDP on consumption.
Which one of the following is not a determinant of consumption spending?
The growth rate in the United States relative to the growth rates in other countries.
The figure in the window on the right shows average annual growth rates in real GDP per hour worked in the United States. Based on the data from the figure on the right which one of the following statements is false?
The growth rate of real GDP per hour worked has continually accelerated over time.
The graph on the right shows the relationship between country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth are true:
The industrial countries such as Ireland and Japan that had the lowest incomes in 1960 grew the fastest between 1960 and 2004.
Which of the following statements about investment spending is correct?
The optimism or pessimism of firms is an important determinant of investment spending. A higher real interest rate results in less investment spending. When the economy moves into a recession, many firms will postpone buying investment goods even if the demand for their own product is strong. All of the above are correct.
Based on the graph, how similar is the experience of the United Kingdom to the experience of the United States?
The real GDP growth rates, the inflation rates, and the unemployment rates for the UK and US follow each other very closely.
The figure in the window on the right shows how growth rates of real GDP per capita for the entire world have changed over long periods. Based on the data from the figure on the right which one of the following statements is false?
The smallest acceleration in growth occurred during the twentieth century as the average annual growth rate increased from 1.3 percent per year to 2.3 percent per year.
"The equilibrium level of GDP is determined by the level of aggregate expenditure. Therefore, GDP will decline only if households decide to spend less on goods and services."
The statement is wrong because household spending is only one part of aggregate expenditures.
Explain whether you agree with the following statement: "The dynamic aggregate demand and aggregate supply model predicts that a recession caused by a decline in AD will cause the inflation rate to fall. I know that the 2007−2009 recession was caused by a fall in AD, but the inflation rate was not lower after the recession. The prices of most products were definitely higher in 2008 than they were in 2007, so the inflation rate could not have fallen."
The statement is wrong because it is confusing the price level with the inflation rate.
An economics student raises the following objection: "The textbook said that a higher interest rate lowers 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?
The student is confusing saving with investment.
"An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1." Which of the following is a correct statement about the student's analysis?
The student is incorrect because the aggregate demand curve does not shift because of the price level change.
The adjacent figure shows the effect of a reduction in equilibrium GDP when government purchases decline. Which of the following is not true about the multiplier effect of such a change in government purchases ?
The value of the multiplier is −$5 billion.
Over the past 20 years, other high-income countries have actually fallen further behind the United States in terms of real GDP per capita.
True
When incomes rise faster in the United States than in other countries,
U.S. net exports will fall.
Which of the following is a correct statement about unplanned inventory increases?
Unplanned inventory increases are likely to indicate that aggregate expenditures are low and correspond with downturns in the business cycle.
The graph shown at right shows two hypothetical consumption functions Upper C1 and Upper C2. Which consumption function has the higher marginal propensity to consume (MPC)?
Upper C2 because the MPC is the slope of the consumption function and UpperC2 has a larger slope.
Which of the following are views new classical macroeconomists hold?
Wage and price stickiness is not important for explaining fluctuations in real GDP. The economy will normally be at potential real GDP. Workers and firms have rational expectations. All of the above.
Which one of the following is not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity.
In the aggregate expenditure model, when is planned investment greater than actual investment?
When there is an unplanned decrease in inventories.
Are your calculations consistent with a positive supply shock after 1995?
Yes, a positive supply shock would represent a rightward shift of the AS curve and a decrease in the price level and thus inflation.
Economics arrives at the conclusion that economic growth will always improve economic well-being. Do you agree?
Yes, economic growth increases living standards, improves health and education, and builds a corruption-free society.
If the multiplier is 2.0, holding everything else constant, this change in exports would cause
a change in GDP of −$462 billion.
Which of the following factors does not cause the aggregate demand curve to shift?
a change in the price level
Which of the following is the definition of the new growth theory? When are additions to knowledge capital subject to diminishing returns? Which of the following is not a government policy that will increase the accumulation of knowledge capital?
a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives when we look only at their effect on an individual firm encouraging the growth of labor unions
What is the effect of an increase in the price level on the short-run aggregate supply curve?
a movement up along a stationary curve
The table does not give the inflation rates for 1969 and 1970. If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by____rather than-----
a negative supply shock an increase in aggregate demand
Which of the following causes the short-run aggregate supply curve to shift to the right?
a positive technological change
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.
An increase in the expected future price level causes
a shift from B to A
A supply shock is
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve.
Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
an increase in the number of workers in the economy the accumulation of more machinery and equipment technological change All of the above.
The difference between aggregate expenditure and aggregate demand is that:
aggregate demand shows the relationship between the price level and the level of aggregate expenditure when all other factors that affect aggregate expenditure are held constant; aggregate expenditure is a point on the aggregate demand curve at a specific price.
What is the meaning of the 45° line in the 45°-line diagram? In the 45°-line diagram, the 45° line shows
all the points where aggregate expenditure equals real GDP.
In a speech in late 2011, President Barack Obama argued that: "Probably the single greatest cause of the financial crisis and this brutal recession has been the housing bubble that burst four years ago." Source: Laura Meckler, "Obama Says Plan Will Cut Mortgage Payments for Millions," Wall Street Journal, October 24, 2011. By "housing bubble" President Obama referred to an increase in the price of housing caused by
an increase in the demand for housing based on the expectation that prices will continue to increase.
Which of the following causes the short-run aggregate supply curve to shift to the left?
an increase in the expected price of an important natural resource
Which of the following causes saving to increase?
an increase in the interest rate
Country Real GDP per Capita in 1960 Growth in Real GDP per capita, 1960-2010 China $331 6.33% Uganda 657 1.04 Madagascar 1,051 −0.80 Ireland 7,223 3.20 United States 15,398 2.00 These statistics_____consistent with the economic growth model's predictions of catch-up, because although there has been catch-up among _____,there____ catch-up among _____
are not the industrialized countries has not been all the countries in the world
Information on current sales can help predict future production of automobiles because
as more cars are ordered by retail sellers, more cars need to be produced.
Upper A decrease in individual income tax ratesA decrease in individual income tax rates will cause the value of the multiplier to
be larger
Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
because menu costs make some prices "sticky" because firms are often slow to adjust wages because contracts between workers and firms make some wages and prices "sticky" All of the above.
Why do many low-income countries have low growth rates?
because of poor public education and health because of wars and revolutions because of low rates of saving and investment All of the above are reasons why some low-income countries have low growth rates.
We saw in the Making the Connection that Intel hopes to increase sales of microprocessors used in tablets and smartphones. During a recession, spending on these products would be more stable than spending on computers because these products are
becoming more of a necessity and are replaced more frequently than computers.
Recall that the Great Depression began due to increased pessimism of households and firms, causing a fall in aggregate expenditures. Which of the following dynamic aggregate demand and supply graphs best shows this situation, as based on the information shown in the table?
bottom left, middle
Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve? A change in the price level
causes a movement along the aggregate demand curve.
Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line? A change in the price level
causes a shift of the aggregate expenditure line.
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
Which countries have experienced faster economic growth?
countries that have been generally more open to foreign trade and investment
The widespread use of computers and the Internet has____menu costs.
decrease
Consider the per-worker production function to the right. Equal increases in the quantity of capital per hour worked lead to ____________ increases in output per hour worked.
diminishing
For the range of initial Real GDP per capita11 to Real GDP per capita2, the figure ____ support the catch-up prediction, because in the figure on the right, for the range of initial Real GDP per capita11 to Real GDP per capita2, ______ a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
does not there does not exist
"It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy." This statement is false because the aggregate demand curve is
downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.
The aggregate demand curve slopes downward _______and the demand curve for an individual product slopes downward________
due to the wealth effect, the interest-rate effect, and the international-trade effect due to consumers substituting the more expensive product for cheaper goods
The real business cycle model focuses on changes in the quantity of money to explain fluctuations in real GDP.
false
Investment tax credits allow
firms to deduct from their taxes some fraction of the funds they have spent on investment.
The new growth theory states that
firms will add to an economy's stock of knowledge capital by engaging in research and development or by contributing to technological change.
Suppose that exports become more sensitive to changes in the price level in the United States. That is, when the price level in the United States rises, exports decline by more than they previously did. This change makes the aggregate demand curve
flatter
When a corporation purchases or builds a facility in a foreign country, it is called
foreign direct investment.
The government policy that does not increase economic growth is
foreign trade policy that favors imposing a high tariff on imported high-tech goods.
Other high-income countries have had trouble completely closing the gap in real GDP per capita with the United States because the United States has
greater flexibility in labor markets and greater efficiency in the financial system.
At point A in the graph to the right, planned aggregate expenditure is ____ GDP.
greater than
In a speech to a conference of government trade officials, Angel Gurría, secretary general of the Organization for Economic Cooperation and Development, made the following observation: "As goods and services cross borders several times at different stages of processing, conventional trade statistics may not tell the whole story." Source: Angel Gurra', "Understanding Global Value Chains," speech delivered at the G20 trade ministers conference in Puerto Vallarta, Mexico, 19 April 2012, www.oecd.org/about/secretary-general/g20understandingglobalvaluechains.htm. When Gurría refers to "conventional trade statistics," he means statistics that have
historically been publically available and commonly used.
Edward Leamer of UCLA has argued that "housing is the business cycle." Spending on housing is likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because
housing is very sensitive to interest rate changes, which are cyclical.
Developing countries have benefited from globalization, because globalization can do all of the following except
impose trade barriers and tariffs on imported goods so as to protect domestic industries.
The short-run aggregate supply curve slopes upward because of all of the following reasons except
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
"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." This 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.
Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state sales taxes they pay. It is likely that the rate of economic growth will
increase
Suppose a major U.S. furniture manufacturer is forecasting demand for its products during the next year. How will the forecast be affected by the following? Upper A decrease in real interest rates.A decrease in real interest rates. Demand is expected to
increase
In the short run, an increase in aggregate demand____whereas in the long run, an automatic mechanism brings
increases the price level and actual GDP beyond potential GDP the economy back to potential GDP but the price level remains higher
Suppose the per-worker production function was shaped as shown in the graph at right. If a country was accumulating increasing quantities of capital per hour worked, this country would experience
increasing labor productivity and higher levels of economic growth.
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be
inflation
Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in______it will cause a _____the aggregate demand curve.
investment shift to the right in
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." Source: Pranab Bardhan, "The Slowing of Two Economic Giants," New York Times, July 14, 2013. When Bardhan refers to "technological catch-up," he means that China
is experiencing diminishing returns to investments in technology.
According to an article in the Wall Street Journal about FedEx: "The world's largest air-cargo shipper by revenue and its rivals have been wrestling with a shift by clients toward cheaper and slower delivery services, such as ocean freight." Source: Bob Sechler, "FedEx Earnings: Hurt by Restructuring Charges," Wall Street Journal, June 19, 2013. This information implies that the "FedEx indicator" discussed in the chapter opener
is not very useful to predict changes in future GDP when prices do not remain the same.
f the marginal propensity to consume (MPC) equals zero, the multiplier
is one
An article in the Wall Street Journal about the automobile industry noted that: "Inventory levels dropped recently because the pace of sales was higher than the pace at which cars were restocked." Source: Josh Mitchell and Eric Morath, "Auto Makers Diverge from Weakening Factory Sector," Wall Street Journal, June 11, 2013. A car is "restocked" in this context when a car
is sold and another is delivered to replace it.
At the macro-economy level,
knowledge capital exhibits increasing returns and physical capital exhibits decreasing returns.
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.
If the Chinese need to "work off this excess supply," this will result in
less manufacturing, less production, less employment and slower economic growth.
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.
One of the lessons from the economic growth model presented in this chapter is that technological change is
more important than increases in physical capital in explaining long-run growth.
In the diagram to the right, moving from point A to point B is called a _______ the AD curve.
movement along
The average annual growth rate is the ______ between 2003 and 2013, and the total percentage increase in real GDP is the_______
rate at which GDP must grow on average each year percentage increase in real GDP between the two years 2003 and 2012
At the new long-run equilibrium,
real GDP and the unemployment rate will remain the same, but price level will be higher compared to the initial equilibrium, prior to the increase in exports.
In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be
recession
Consider the table on the right, which shows the change in inventories for each quarter from 2007:I to 2010:IV measured in billions of 2009 dollars. Provide a macroeconomic explanation for this pattern. (Hint: When did the recession during this period begin and end?) The negative growth of invenories indicates a period of
recession because demand was met by drawing down past inventories and production did not increase.
Inaccurate trade statistics cause problems because they
reduce the accuracy of export and import information.
The end of the housing bubble can bring on a recession because
reduced demand for housing lowers investment, which in turn lowers aggregate demand and income
Integration into the global economy has
reduced poverty in India by increasing the growth rate of the economy and a higher rate of economic growth generally results in faster poverty reduction.
Usually at the beginning of a recession, inventories _____, but at the beginning of an expansion, inventories_____-_
rise fall
For most of the 1979-2013 period, real government purchases
rose steadily.
An improvement in technology is shown as a
shift from A to B
An increase in the labor force or capital stock is illustrated as a
shift from A to B
Moving from point A to point C is referred to as a ______the AD curve.
shift in
Upper A technological changeA technological change will cause the long-run aggregate supply curve to
shift to the right
When a firm increases output by either replacing existing capital with more productive capital or by reorganizing how production takes place, that firm is experiencing
technological change.
Which of the following events marks the beginning of significant economic growth in the world economy?
the Industrial Revolution in England
The amount of the shortfall in planned aggregate expenditure is equal to
the vertical distance between AE and the 45degrees° line at the level of potential real GDP.
At point A, the unintended change in inventories can be shown on the graph by:
the vertical distance between point A and the 45° line.
An article on the Chinese economy in 2012 notes that business inventories had been increasing. As a result, the author argued: "China's growth rate will not be as robust as it has been over the past few years, as the economy needs to work off this excess supply." When the article refers to the need to "work off this excess supply," it means that
there are currently more goods and services that have been produced than have been needed.
Consider the per-worker production function graph on the right. If there is an increase in capital per hour worked, holding technology constant, then
there is a movement from A to B.
If the price level increases, then
there will be a movement up along a stationary aggregate demand curve.
What term describes the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant? Along the per-worker production function, what happens to real GDP per hour worked as capital per hour worked increases?
the per-worker production function Real GDP per hour worked increases at a decreasing rate.
Increases in the value of the dollar relative to foreign currenciesIncreases in the value of the dollar relative to foreign currencies will make the aggregate demand curve shift
to the left
Increases in firms' expectations of their future profitability and investment spendingIncreases in firms' expectations of their future profitability and investment spending will make the aggregate demand curve shift
to the right
Increases in households' expectations of their future incomesIncreases in households' expectations of their future incomes will make the aggregate demand curve shift
to the right
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP.
Karl Marx's critique of the free market system had relatively little influence on the thinking of mainstream economists in the United States.
true
"The reason that the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services." This statement is:
true
The Roman Empire lasted from 27 B.C. to 476 A.D. The empire was wealthy enough to build such monuments as the Roman Coliseum. Roman engineering skill was at a level high enough that aqueducts built during the empire to carry water long distances remained in use for hundreds of years. Yet the growth rate of income per capita during the empire was very low, perhaps zero. Consider the following list of preconditions for economic growth. Which one of the following reasons seems the most likely explanation for why the Roman Empire was unable to bring about sustained economic growth?
wars and revolutions.