ECON FINAL REVIEW PART 3

If the required reserve ratio is 10 percent, an increase in bank reserves of $1,000 can support an increase in checking account deposits (including the original deposit) in the banking system as a whole of up to

$10,000

Refer to Figure BELOW. Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP?

$100 million

Refer to Figure BELOW. If the economy is at point L, what will happen?

Inventories have risen above their desired level, and firms decrease production.

If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will decline, and GDP and employment will rise.

If aggregate expenditure is less than GDP, how will the economy reach macroeconomic equilibrium?

Inventories will rise, and GDP and employment will decline.

Refer to Figure above. According to the figure above, at what point is aggregate expenditure greater than GDP?

J

The Federal Reserve's narrowest definition of the money supply is

M1

Technological change is the key to sustaining economic growth.

True

The Fed can change the money supply more quickly by using open market operations as compared to discount policy.

True

The larger the MPS, the smaller the value of the multiplier.

True

In the long run, a country will experience an increasing standard of living only if it experiences

continuous technological change

Which of the following is not counted in M1?

credit card balances

Corruption

curtails economic growth

In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services.

equals

The ratio of the increase in ________ to the increase in ________ is called the multiplier.

equilibrium real GDP; autonomous expenditure

During a(n) ________ many firms experience increased profits, which increases ________ and investment spending.

expansion; cash flow

An economic growth model

explains changes in real GDP per capita in the long run

Creative destruction means that

firms develop new products that replace old products in the economy, thereby encouraging economic growth.

The purchase or building by a corporation of a facility in a foreign country is called

foreign direct investment

The purchase by an individual or firm of stock or bonds issued in another country is called

foreign portfolio investment.

When firms benefit from the results of research and development they didn't pay for, we say firms

free ride.

Which of the following policies is designed specifically to directly promote technological change in an economy?

government subsidization of research and development

From 1990-2014, productivity growth in the United States was ________ the growth rates of other high-income countries.

greater than

Countries that are more globalized tend to have

higher growth rates in real GDP per capita.

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is aggregate expenditure?

$25 million

A series of bank runs in a country should have no effect on M1 as money simply moves from checking deposits to currency.

False

Aggregate expenditure includes consumption spending, unplanned investment spending, government purchases, and net exports.

False

An economy without money would have no exchanges of goods and services.

False

An increase in the price level in the United States will reduce imports and increase exports.

False

Economies cannot function without money.

False

Human capital refers to the percentage of the working-age population in the labor force.

False

Liquidity increases as we move from the M1 to the M2 definition of the money supply.

False

Over the last three decades in the United States, services have become a smaller fraction of GDP relative to goods.

False

The difference between consumer surplus and producer surplus in a market is equal to the deadweight loss.

False

The marginal propensity to consume measures the average amount of wealth that a consumer spends in a given period of time.

False

The purchase of stocks and bonds issued in another country is known as foreign direct investment.

False

When net exports equal zero, the economy is in macroeconomic equilibrium.

False

Globalization is defined as the process of countries becoming ________ open to foreign trade and ________ open to foreign investment.

more; more

Paul Romer, an economist at Stanford University, is most closely associated with what economic theory?

new growth theory

The small group of East Asian countries that experienced high rates of growth in the 1980s and 1990s are referred to as

newly industrializing countries.

Credit card balances are

not part of the money supply

The three main monetary policy tools used by the Federal Reserve to manage the money supply are

open market operations, discount policy, and reserve requirements.

In the United States, currency includes

paper money and coins in circulation

Decreases in the price level will

raise consumption because real wealth increases.

On the 45-degree line diagram, the 45-degree line shows points where real aggregate expenditure equals

real GDP.

Commodity money is a good

used as money that also has value independent of its use as money.

The consumer price index implicitly assumes that the demand curve for each good and service in the representative market basket is

vertical

Which of the following is an example of an economic trade-off that a firm has to make?

whether it is cheaper to produce with more machines or with more workers

A person's wealth is the same as his income.

False

Suppose the reserve ratio is RR. Then,

C) required reserves = RR × deposits.

Globalization is positively associated with

economic growth

Suppose that in 2016, real GDP grew in Estonia by 3% and the population increased by 5%. Therefore, in 2016, Estonia experienced

economic growth, but not an increase in living standards.

At macroeconomic equilibrium,

total spending equals total production.

If the MPC is 0.5, then a $10 million increase in disposable income will increase consumption by

$5 million

Refer to Table BELOW. Given the consumption schedule in the table above, the marginal propensity to save is

0.1

Refer to Table above. Given the consumption schedule in the table above, the marginal propensity to save is

0.4

Refer to Figure below. What is the opportunity cost of one dozen roses? (on y axis)

0.4 dozen orchids

The Federal Reserve was established in 1913 to

C) stop bank panics by acting as a lender of last resort.

A general formula for the multiplier is

1/MPS

During which of the following periods was growth in GDP per capita the strongest?

1900-2000 AD

Growth in real GDP per hour worked in the United States was slowest during what period of time?

2006-2014

If an economy is growing at a rate of 2.5% per year, how long will it take the economy to double in size?

28 years

According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be

4%

Net worth is

C) the difference between a firm's assets and liabilities.

If real GDP per capita in the United States is $8,000 in 2016, and if real GDP per capita is $12,000 in 2026, what is the total percent change in the growth rate of GDP per capita between 2016 and 2026?

50%

How can freedom of the press promote economic growth?

A free press can act as a watchdog for corruption, increasing chances for economic growth.

Banks can continue to make loans until their

A) actual reserves equal their required reserves.

Knowledge capital is ________ in production and ________. As a result, firms ________ free ride.

A) nonrival; nonexcludable; can

If households and firms decide to hold less of their money in checking account deposits and more in currency, then initially, the money supply

A) will not change.

Refer to Figure above. Based on the "catch-up line" drawn above, poorer countries are more likely to be at a point like ________, where growth in GDP is relatively ________, while richer countries are more likely to be at a point like ________, where growth in GDP is relatively ________.

A; high; B; low

Refer to Figure below. Technological change is illustrated in the per-worker production function in the figure above by a movement from

B to C.

Imagine that Kristy deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is 20%. As a result of Kristy's deposit, Bank A can make a maximum loan of

B) $8,000.

If the required reserve ratio is RR, the simple deposit multiplier is defined as

B) 1/RR.

A major source of inefficiency in barter economies is that they require

B) a double coincidence of wants in exchange.

The statement "This Dell laptop costs $1,200" illustrates which function of money?

B) unit of account

A central bank can help stop a bank panic by

C) acting as a lender of last resort

The M2 measure of the money supply equals

D) M1 plus savings account balances plus small-denomination time deposits plus non institutional money market fund shares.

In economics, money is defined as

D) any asset people generally accept in exchange for goods and services.

To increase the money supply, the Federal Reserve could

D) conduct an open market purchase of Treasury securities.

The Industrial Revolution began in

England around 1750

In a small economy in 2016, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was greater than anticipated in 2016.

The best measure of a country's standard of living is

GDP per capita

The economic growth model predicts that

GDP per capita of poor countries will grow more rapidly than in rich countries.

If planned aggregate expenditure is less than total production,

GDP will decrease.

In a small European country, it is estimated that changing the level of capital from $8 million to $10 million will increase real GDP from $2 million to $3 million. What level of GDP would you expect the economy to be able to reach if spending on capital continued to rise to $12 million, assuming no technological change and no change in the hours of work?

GDP would increase further, but by less than $1 million

Refer to Figure BELOW. If the U.S. economy is currently at point N, which of the following could cause it to move to point K?

Households expect future income to decline.

Which of the following is one of the most important benefits of money in an economy?

Money makes exchange easier, leading to more specialization and higher productivity.

Which of the following countries had the highest GDP per capita in 2014?

Qatar

If the slope of the per-worker production function is 1/2 in a given range, how will a $10,000 increase in capital per hour worked affect real GDP per hour worked in the same given range?

Real GDP per hour worked will increase by $5,000.

Which of the following is not a reason why the Industrial Revolution occurred when and where it did?

The British government was able to more easily seize wealth.

When aggregate expenditure is less than GDP, which of the following is true?

There was an unplanned increase in inventories.

"The distribution of income should be determined by the government" is an example of a normative economic statement.

True

A cash withdrawal reduces deposits, reserves, and excess reserves in the banking system.

True

A rising price level decreases consumption by decreasing the real value of household wealth.

True

If planned aggregate expenditure is less than real GDP, some firms will experience unplanned increases in inventories.

True

If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts a price deflation.

True

Macroeconomic equilibrium can occur at any point on the 45-degree line.

True

One drawback of the patent system is that firms must disclose to the public information about the product or process.

True

One reason why many low-income countries experience low rates of growth is because of low rates of saving and investment in those countries.

True

Which of the following is an example of human capital?

a college education

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending.

An unplanned increase in inventories results from

actual investment that is greater than planned investment.

An unplanned decrease in inventories results inactual investment that is less than planned investment.

actual investment that is less than planned investment.

Which of the following is not one of the three sources of technological change?

additional amounts of existing capital

The ________ illustrates the relationship between the price level and the quantity of planned aggregate expenditure, holding constant all other factors that affect aggregate expenditure.

aggregate demand curve

Which of the following advances contributed to the "new economy" of the mid-1990s?

all of the above

Which of the following will increase aggregate expenditure in the United States?

an increase in government purchases

If the price of prime rib falls, the income effect due to the price change will cause

an increase in the quantity of prime rib demanded.

If a decrease in income leads to an increase in the demand for macaroni, then macaroni is

an inferior good.

Economies where goods and services are traded directly for other goods and services are called ________ economies.

barter

Why do some firms choose not to file for a patent and instead try to keep the results of their research a trade secret?

because firms must disclose information about the product or process being patented in a patent application

A good can serve as money only if

citizens accept the good as a means of payment for transactions and debts.

Investment spending includes spending on

changes in business inventories.

Which of the following can explain why some countries have not experienced relatively high growth rates in real GDP per capita despite relatively low initial levels of real GDP per capita?

d. all of the above a. Many of these developing countries do not have a functioning court system that can enforce laws. b. Countries that are relatively poor are more likely to experience wars and revolutions. c. Countries that are relatively poor are likely to have a lower quality of health care.

The required reserves of a bank equal its ________ the required reserve ratio.

deposits multiplied by

When additions of input to a fixed quantity of another input lead to progressively smaller increases in output, we say we are facing

diminishing returns.

Which of the following is not a function of the Federal Reserve System, or the "Fed"?

insuring deposits in the banking system

Fiat money has

little to no intrinsic value and is authorized by the central bank or governmental body.

A commercial bank like Comerica creates money by

making loans

The additional cost to a firm of producing one more unit of a good or service is the

marginal cost.

The Industrial Revolution

marked the beginning of significant economic growth in the world.

An explanation for the productivity slowdown from 1974 through 1995 is

measurement problems.

Which of the following is not one of the four main categories of spending identified by John Maynard Keynes?

transfer payments

If the Federal Open Market Committee wants to decrease the money supply through open market operations it will

sell US Treasury Securities

The ________ the reserve ratio, the ________ the money multiplier.

smaller; larger

A car dealer sells you a car today in exchange for money in the future. This illustrates which function of money?

standard of deferred payment

Examples of assets that are included in household wealth would be

stocks, bonds, and savings accounts.

A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?

store of value

Which of the following functions of money would be violated if inflation were high?

store of value

According to new growth theory,

technological change is influenced by economic incentives.

Comparative advantage means

the ability to produce a good or service at a lower opportunity cost than any other producer.

The slope of the consumption function is equal to

the change in consumption divided by the change in disposable income.

U.S. net export spending falls when

the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.

Which of the following would you expect to result in faster economic growth?

the invention of new computers that increase labor productivity

Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time college students. This would cause

the labor force participation rate to decrease.

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure

All of the following are true statements about the multiplier except

the multiplier is a value between zero and one.

The more excess reserves banks choose to keep,

the smaller the deposit multiplier.

The quantity theory of money was derived from the quantity equation by asserting that

the velocity of money was fixed.