Macro Exam 2

Expenditures Multiplier Formula

1/(1-MPC)

The money multiplier equals:

1/reserve requirement.

The Federal Reserve System consists of Federal Reserve Banks in geographic regions or districts. (The answers should be in the numerical format)

12; 12;

Suppose the reserve requirement is 15 percent. For every $100 on deposit, the bank needs to hold $ as reserves. (Enter a number in the blank.)

15

President Woodrow Wilson signed the Federal Reserve Act in (Add only the year for the answer do not add the whole date. Please do not name any place as the answer).

1913

Suppose the reserve requirement is 20 percent. For every $100 on deposit, the bank needs to hold $ as reserves. (Add only a number; the dollar sign has been provided for you.)

20

Today, the the Federal Deposit Insurance Corporation insures accounts up to $. (Provide an amount; the dollar sign has already been provided for you.)

250000

Brazil and Colombia can both produce either bananas or coffee. Brazil can produce either 16 pounds of coffee and 0 pounds of bananas or 64 pounds of bananas and 0 pounds of coffee. Colombia can produce either 20 pounds of coffee and 0 pounds of bananas or 40 pounds of bananas and 0 pounds of coffee. The opportunity cost of producing 1 pound of coffee for Brazil is ______ pounds of bananas. The opportunity cost of producing 1 pound of bananas for Colombia is ______ pounds of coffee.

4 divide the amount of bananas brazil can produce by the amount of coffee. Because the coffee will equal 1 when divided by itself 64/16 and 16/16 0.5 Same logic just divide coffee by bananas for Columbia 20/40 = 0.5

Suppose you are working in Moscow and are paid in rubles. You are planning a trip back to the United States and will purchase an air ticket that costs $675 (U.S. dollars). The exchange rate is 59.44 rubles per dollar. What will the ticket cost you in rubles?

40122 rubles

Suppose you are working for a small start up as a purchasing agent. You are purchasing a product that requires that you pay in bitcoins. The product costs 1.75 bitcoins. The exchange rate is 0.0035 bitcoins per dollar. What will the product cost you in U.S. dollars?

500 $1 = 0.0035x x = 500

Suppose you are travelling in Japan and you want to purchase an electronic device that costs 6774.35 yen. The exchange rate is 123.17 yen per U.S. dollar. In U.S. dollars, this device would cost:

55 6774.35 / 123.15 = 55

Assume the country of South Africa was closed to international trade, and existed in a state of autarky. In the market for gasoline, equilibrium will occur at a price of ______ rand per liter and ______ million liters of gasoline traded.

5;40 where demand = supplied

The United States and India both produce two goods: tractors and rice. The United States can produce either 8 tractors or 16 pounds of rice. India can produce either 4 tractors or 20 pounds of rice. Suppose that, currently, both the United States and India spend half of their resources producing tractors and half of their resources producing rice. There will be ______ and ______ produced in total.

6 tractors; 18 pounds of rice

Suppose the Federal Reserve has set the reserve requirement at 12%. What is the money multiplier?

8.33

Consider the domestic market for oil shown in the graph. Suppose the world price of oil is $40 per barrel. With a tariff of $40 per barrel, the tariff revenue collected by the government is $______ million. ______ is generated by the tariff.

80; Deadweight loss

Consider the market for pineapples in Costa Rica shown below where pineapples are in abundant supply. Suppose a lack of transportation means Cost Rica cannot trade with other countries. The consumer surplus for domestic pineapple consumers is represented by area(s) ______. In the absence of international trade, the producer surplus for domestic pineapple producers is represented by area(s) ______.

A + B + C; E + F

Which of the following policies involves decreasing government purchases and/or increasing taxes?

A contractionary fiscal policy

Price level increasing, causing a movement along the aggregate demand curve, can be explained by:

A decrease in net exports

Comparisons of the value of goods relative to everything else are easy when money is used as:

A unit of account

Which of the following policies involves increasing government purchases and/or decreasing taxes?

An expansionary fiscal policy

What might lead to an expansion in the business cycle?

An increase in SRAS

We construct the total demand for money by adding the and demands at each interest rate.

Asset; transaction;

Suppose you are travelling in France, and you want to purchase a botte of wine that costs 20 euros. The exchange rate is 0.90 euros per dollar. In U.S. dollars this wine would cost:

$22

If the reserve requirement is 7% and we want to increase the money supply by $50 billion, how much does the Fed need to increase reserves?

$3.5 billion

If the reserve requirement is 10% and we want to increase the money supply by $50 billion, how much does the Fed need to increase reserves?

$5 billion

tax multiplier formula

-MPC/(1-MPC)

Which of the following statements about demand and aggregate demand are true?

-We use demand to talk about the price and quantity of a single good or service produced in a specific market. We use aggregate demand to describe the overall or total demand for all final goods and services produced in an economy.

Which of the following are the tools of fiscal policy? Taxation Open Market Operations Interest Rate Changes Government Purchases

1 and 4

Both the United States and India produce two goods: tractors and rice. The United States can produce either 8 tractors or 16 pounds of rice. India can produce either 4 tractors or 20 pounds of rice. Suppose that both countries open up to trade, and the United States and India decide to trade 1 tractor for 3 pounds of rice (1T = 3R) and that India needs 3 tractors. India's gains from trade are ______. The United States' gains from trade are ______.

1 tractor and 1 pound of rice; 1 tractor and 1 pound of rice You have to calculate how much of an item the country could have made and take the difference with how much it gains in the trade The US could have made 2 pounds of rice and 1 tractor, but with the deal they make a tractor and get 3 pounds of rice. 3-2 = 1 and 1 tractor

______ determine(s) the level of real GDP.

aggregate expenditures

The relationship between the price level and the amount of real GDP supplied in the economy is called:

aggregate supply. short-run aggregate supply.

The Federal Deposit Insurance Corporation:

allows depositors to get some of their deposits back if a bank fails.

The U.S. money supply refers to the:

amount of dollar bills in circulation.

The supply of dollars in the foreign exchange market is the:

amount of dollars that Americans are willing to exchange for foreign currency so that they can purchase foreign goods, services, and assets.

What is the effect of a successful contractionary fiscal policy on price level and output?

Both decrease.

What is the effect of a successful expansionary fiscal policy on price level and output?

Both increase.

Interest rates and prices are often determined:

By the amount of money in an economy

banks do not make loans to you, to other households, or to businesses other than banks. (Fill in the blank with a one-word general term that is applicable to all countries.)

Central

A(n) is an instruction to transfer funds from your account to another persons account.

Check

Which of the following is considered money?

Checkable deposits

Consider the two production possibilities frontiers (PPFs) shown in the graphs. If the two countries do not specialize, Country A would likely ______.

Choose point Ma

dichotomy refers to the idea that real variables are independent from nominal variables.

Classical

When a check and money is transferred out of a checking account, it is the transfer of funds that constitutes the actual payment for the good and service.

Clears

Specialization is based on __ advantage not necessarily on whether one country can produce more of a good than another country.

Comparative

The application of fiscal policy to decrease aggregate demand is called a(n) fiscal policy.

Contractionary

Currently remains less than half of M1, but comprises twice the share of M1 as it did in 1960.

Currency

Andy deposits $100 of currency in his checking account. What effect does this transaction have on M1?

Currency decreases, checkable deposits increase, and M1 remains constant.

in active circulation includes money in everyone's pockets and is part of

Currency; M1

Which of the following describes the balance of payments identity?

Current Account + Financial Account + Capital Account = 0

The goal of automatic stabilizers during an undesired economic boom is to:

Decrease consumption spending and aggregate demand. Reason: The goal of automatic stabilizers is to move the economy toward full employment output. During a period of undesired expansion, such as demand-pull inflation, the goal of automatic stabilizers is to reduce consumption spending and reduce aggregate demand toward the full employment level of output.

Use the graph above to answer the question. Suppose there is a decrease in income in the United States. What will happen to the exchange market for the Indian rupee?

Demand decreases Reason: If incomes in the US decrease, American have less money to spend. Because consumers purchase some imported, and less is purchased, imports will decrease. This means part of this will be a decrease in demand for Indian goods. This, in turn, would mean there is a decrease in the demand for the rupee.

Active fiscal policy calls for reducing government purchases in case of:

Demand-pull inflation

Aggregate Expenditures

Determine the level of real GDP

The interest rate at which banks can borrow money directly from the Federal Reserve is called the:

Discount rate

The majority of the Federal Reserve banks are in the half of the country.

East

The mathematical identity that states that money supply times the velocity of money is equal to the price level times the real GDP is known as the of .

Equation; Exchange

reserves held at the Fed earn very little interest.

Excess

If the supply of Euros decreases, what will happen to the exchange rate between Euros and US Dollars?

Exchange rate increases Reason: A decrease in the supply of euros will shift the supply of Euros curve to the left, causing the exchange rate between dollars and euros to increase.

Actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment is monetary policy.

Expansionary

Consider the foreign exchange market between the U.S. Dollar (USD) and the Japanese Yen (JPY). Under a fixed exchange rate system, what action would the Japanese Central bank have to take if the demand for Japanese products increased?

Expansionary Monetary Policy Reason: Expansionary Monetary Policy would increase the supply of Yen, causing the supply curve to increase, reducing the exchange rate back to its fixed level.

This policy involves increasing government purchases and/or decreasing taxes.

Expansionary fiscal policy

All U.S. states have set specific maximum interest rates. (True or False)

False

The Federal Reserve is commonly called the

Fed

When banks in the US need additional currency for customers, they get it from the Reserve. (Enter one word in the blank.)

Federal

The entity that determines and implements the nation's monetary policy and controls the money supply to promote stable prices and economic growth in the U.S. economy is the:

Federal Open Market Committee

The Board of Governors is also known as the:

Federal Reserve Board

The entity that oversees research into domestic and international financial conditions and investigates the health of the economy, the effect of banking laws, and other issues that consumers and businesses face is the:

Federal Reserve Board of Governors.

The primary entity charged with supervision and regulation of member banks to prevent banking panics or disruptions is called the bank.

Federal reserve bank

The supply of money in an economy is largely determined by a central monetary authority. In the United States, that authority is the bank.

Federal reserve bank

Changes in government purchases and/or taxes designed to achieve full employment and low inflation is called:

Fiscal Policy

During a recession, Congress decides to enact legislation changing the tax system, reducing tax rates across all tax brackets. This is an example of:

Fiscal policy

_____ are generally used to settle international transactions and conduct exchange rate policy.

Foreign reserves

Trade between nations without barriers such as regulations, tariffs, or quotas is called:

Free trade

Aggregate demand relates the price level to real _____

GDP

Taxes are revenues collected by the from individuals and firms. (Enter the general term applicable to all countries.)

Government

If the money supply increases, while prices and velocity remain constant, real GDP will:

Increase

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, government purchases would need to:

Increase by 25 m

If the demand for a currency increases under a fixed exchange rate, what must a country do to maintain the fixed rate?

Increase the supply of its currency

Which is an example of an automatic stabilizer that pulls an economy out of an undesired recession?

Increases in transfer payments that increase consumption spending. Reason: Transfer payments are an example of automatic stabilizers. During a recession the number of households qualifying for these payments increases and as a result consumption spending will increase.

At each round of the money-creation process, banks must hold on to some portion of the increase in reserves (required reserves) and can lend out the rest. Every time this lending cycle occurs, the increase in loans becomes smaller and smaller. Both of these processes are mathematically expressed as an:

Infinite geometric series

Monetary policy affects rates charged on loans and paid on savings.

Interest

is the payment made to agents that lend or save money.

Interest

Suppose the Federal Reserve decides to increase the money supply. Describe the effect on the bond market.

Interest rates will decrease and demand for bonds will increase.

In 2017, Solana imported $110,000 worth of goods and $60,000 worth of services from foreign producers. At the same time, foreign consumers purchased $80,000 worth of goods and $80,000 worth of services from producers in Solana. What is the condition of the current account?

It is in a deficit. The balance on the current account balance is exports (X) minus imports (M), or $160,000 -$170,000 = -10000.

What is a downside to a country adopting a fixed exchange rate?

It is very difficult to maintain a fixed exchange rate.

Kate has a 20-square-foot plot of land in her backyard that she uses to grow tomatoes and lettuce. Every square foot of land can produce either 5 tomatoes or 3 heads of lettuce each summer. Her neighbor, Jim, has a 30-square-foot plot of land that has a lot more shade than Kate's, which is better for lettuce but worse for tomatoes. Every square foot of Jim's land can produce either 3 tomatoes or 6 heads of lettuce. If Kate and Jim decide to specialize, ______ should produce lettuce and ______ should produce tomatoes.

Jim; Kate

The economist that argued for the use of fiscal policy to stabilize economic output during the Great Depression was

John Maynard Keynes

Because the average recession lasts only one year due to the (legislative/implementation) lag, the economy may have already fixed itself by the time a policy is put in place.

Legislative

M1 consists of the most forms of money.

Liquid

defines the degree to which assets can be easily converted into cash.

Liquidity

A change in any one of the components of will directly affect the money supply. (Put in the measure which is relatively broad.)

M2

Small denomination time deposits are part of which definition of the money supply?

M2

represents the total supply of money in the United States from liquid forms like checkable deposits and currency to less liquid forms like small time deposits.

M2

contains everything in plus assets that are slightly less liquid. (Add one word in each blank)

M2; M1

Which of the mathematical identities depicts the equation of exchange?

MV=PY

Banks can influence the money supply by

Making loans

When used as an asset that is commonly used to facilitate trade between buyers and sellers, money is:

Medium of exchange

policy affects interest rates charged on loans and paid on savings, thereby influencing the price of goods services and resources.

Monetary

By facilitating trade, facilitates specialization.

Money

Since we can't use stocks and bonds for daily transactions, people hold some of their savings as instead of putting it all in stocks or bonds.

Money

Using as a means of exchange in our economy makes it easier for people to make transactions with each other.

Money

The money is the amount by which a $1 change in reserves will change the money supply.

Money multiplier

MV=PY

Money supply; Velocity of money;

Sticky prices and wages that require time for the economy to reach a new equilibrium is a characteristic of New economics, whereas rapid adjustments is a characteristic of New economics.

New Keynesian New Classical

Fiscal policy relies on three assumptions: Recognizing the start of a recession. Government quickly determines effective policy. The policy is immediately effective. Which of these assumptions hold in the real world?

None of the assumptions hold in the real world. Reason: In the real world there are three lags associated with fiscal policy: the recognition lag, legislative lag, and implementation lag.

The cost of keeping more reserves than the fraction required instead of lending these funds out is the cost of the forgone interest the funds would have earned.

Opportunity

loans have fallen under much scrutiny because of high interest rates and fees charged on loans.

Payday

Which of the following is a primary role of the Federal Reserve?

Providing banking services to the federal government.

reserves are equal to deposits times the reserve requirement.

Required

When a bank makes a loan, it hands over some of its to the person who borrowed the money.

Reserves

The practice of producing a single good or service rather than producing multiple goods or services is called . (Enter one word in the blank.)

Specialization

Generally changes to social institutions that inhibit production decrease aggregate:

Supply

Kisho works for a technology company in Japan. His company is sending him on a business trip to the United States to recruit new workers. Does this describe the supply or demand for yen (Japanese currency)?

Supply Reason: Kisho uses yen in his daily life and needs to exchange yen for U.S. dollars for his trip. Thus, he is part of the supply side of the market for yen.

A(n) is a situation in which the quantity supplied is greater than the quantity demanded at the current market price.

Surplus

Which of the following are tools of fiscal policy?

Taxation and government purchases

How does the infrastructure plan (IP) (proposed by former-president Donald Trump) differ from the American Recovery and Reinvestment Act (ARRA) (created by former-president Barack Obama)?

The ARRA is a stabilization policy.

Which of the following Federal Reserve policies will cause a reduction in the demand for bonds?

The Fed decreases money supply.

Which of the following statements is true concerning the Federal Reserve System?

The Fed is independent within the government.

What group was tasked with advising the president on the level of fiscal policy during the Great Recession?

The White House Council of Economic Advisors

Which of the following describes short-term fluctuations experienced in an economy due to changes in the levels of economic activity?

The business cycle

The entity responsible for overseeing the monetary system for a nation is:

The central bank

This organization or person can change the money supply by increasing or decreasing the amount of reserves in the banking system:

The fed

Which of these serves as the bank to the federal government?

The fed

Directing monetary policy and supervising member banks is done by:

The federal reserve

Which of the following is the primary entity charged with supervision and regulation of member banks to prevent banking panics or disruptions?

The federal reserve bank

Which argument would most likely be given by an economist advocating for New Keynesian economics?

The government has a role in offering active stabilization policies.

money demand is the demand for money to be used to purchase goods and services.

Transaction

Because checks are immediately convertible, they are highly liquid and go into

Travelers; M1

Airline passengers who fly on aircraft benefit from the specialization and trade that occurs between plane manufacturers since airlines can offer more routes at lower prices.

True

As of 2016, more than 15% of all goods and services consumed in the United States were produced abroad.

True

As of 2018, more than 15% of all goods and services consumed in the United States were produced abroad.

True

During a recession, more people begin to receive unemployment payments, food stamps, Medicaid, and payments from other government programs causing government spending to automatically increase. (True or False)

True

Knowing how much money an economy has matters because it helps determine interest rates and prices. (True or False)

True

Most foreign exchange markets are characterized by flexible exchange rates.

True

Most of the money in the economy is not currency. (True or False)

True

One of the major themes in economics is that international trade creates gains.

True

The Federal Reserve Chair is so powerful that statements made can affect stocks halfway around the world.

True

The euro is derived from the demand for goods services and assets produced in countries that use the euro.

True

We usually do not have certainty about the state of the economy on any given day. (True or False)

True

When you borrow money, you'll pay a certain interest rate; when you save, you'll earn a different interest rate. (True or False)

True

In the foreign exchange market, the exchange rate is measured as:

U.S. dollar/unit of foreign currency.

laws that ban charging interest or that set a maximum interest rate go back as far back as Biblical times.

Usury

The of refers to the number of times, on average, each dollar of the money supply is used to make purchases in a given period.

Velocity of money

__ is/are generally found by comparing changes in consumer and producer surplus.

Welfare effects

A decrease in transfer payments has the same basic effect on aggregate demand as:

a decrease in government purchases.

The path to recovery using contractionary fiscal policy involves:

a jump start of decreased government spending followed by multiple rounds of decreased consumer spending.

A market in which savers determine the supply of loanable funds is called:

a loanable funds market.

A market in which the Federal Reserve or another country's central bank determines the supply of money is called:

a money market.

One key principle of monetarism is

adaptive expectations.

The idea that people slowly incorporate new information into the decisions they make is known as

adaptive expectations.

Once an expansion occurs as nominal wages and the costs of other resources rise, eventually:

the aggregate supply curve shifts to the left, the price level rises, and real GDP returns to the full employment level.

The extent to which crowding out results in reduced private investment depends on:

the availability of loanable funds. Reason: The availability of loanable funds and whether other countries have available funds determines the extent to which crowding out occurs.

Fiscal policy is:

the changes in government purchases and/or taxes designed to achieve full employment and low inflation.

The rate or price at which one currency can be exchanged for another is called:

the exchange rate.

When the price level rises, people need more money to make the same number of purchases, so the demand for money increases. As a result, interest rates rise, which lowers consumption and investment causing the quantity of real GDP demanded to decrease. This describes the:

the interest rate effect

The payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved is called:

the interest rate.

Select all that apply Some economists say the United States should not even try to produce its own clothing because:

the labor and capital that the U.S. uses to produce expensive goods could be used to produce other goods that the U.S. can produce more efficiently. other countries can produce clothing much more inexpensively than the United States.

Full-employment GDP refers to:

the level of real GDP produced in an economy when it is operating at the natural rate of unemployment.

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP is called

the multiplier effect

The concept that an additional dollar of expenditures will result in the creation of more than one dollar's worth of real GDP is called: Multiple choice question.

the multiplier effect.

Opportunity cost is:

the value of the opportunity that you give up when you choose one activity instead of another.

The pressure on prices and nominal wages that results when an economy produces beyond its full-employment level of output is called:

an inflationary gap.

refers to the unpredictable human emotions that can lead to panics. (Enter one word in each blank.)

animal spirits

The unpredictable human emotions that can lead to panics is referred to as

animal spirits.

In economics, the word "money" means:

any item that both buyers and sellers will generally accept in exchange for goods and services.

As long as the terms of trade:

are between both countries' opportunity costs, trade will benefit both countries.

Money and bonds are different types of

assets

When people save for future expenses, they typically choose a mix of different that meets their needs and balances their tolerance for risk versus return.

assets

If someone deposits money into a checking account, the bank's:

assets and liabilities both increase.

A situation in which a country is closed to any international trade due to self-sufficiency is referred to as:

autarky.

Institutions can make small transfers (like Social Security payments, corporate payments to vendors, and payroll deposits) using:

automated clearinghouse services.

When a country is opening up to trade, resources in the economy flow:

away from the goods for which producers do not have a comparative advantage.

A collection of national income accounts that summarize the flow of international trade between one country and all other countries is called of payments.

balance

are businesses that provide financial services to the marketplace and try to make a profit along the way. (Enter one word in the blank.)

banks

can affect the money supply by increasing or decreasing the number of loans they make.

banks

With fractional reserve banking,:

banks have to keep a fraction of deposits on hand.

A(n) to is any policy that is designed to reduce the competitiveness of foreign producers that wish to sell their goods or services in the domestic market.

barrier to trade

Any policy that is designed to reduce the competitiveness of foreign producers who wish to sell their goods or services in the domestic market is a:

barrier to trade.

Because people and businesses sometimes oppose international trade, governments create trade

barriers

Graphically, total economic surplus is the entire area the supply and demand curves from a quantity of zero to the quantity traded.

between

are sold in markets by people who want to borrow money today and are purchased by people who want the money payments the bonds promise in the future.

bonds

Suppose the U.S. specializes in producing lumber and its neighbor Canada specializes in producing steel. When they trade with each other:

both countries will likely consume more lumber and steel.

The short-term fluctuations experienced in an economy due to changes in the levels of economic activity refers to the cycle.

business

If you believe that the Federal Reserve will soon increase the money supply, you will want to bonds because you believe they will in value.

buy; increase;

Monetarism assumes the best way to recover from a recession is

by using monetary policy, whereas new classical economic models assume markets will self correct.

In an economy of two goods, a country cannot have the advantage in both goods.

comparative

Trade between people in different countries is driven by advantage.

comparative

When people specialize and produce the goods for which they have a(n) advantage, total output in the economy will increase.

comparative

advantage is the foundation of establishing the benefits of trade.

comparative

Given the option of being self-sufficient or trading with others as long as a(n) exists, there will be potential for trade to make both parties better off.

comparative advantage

Gains from trade can be measured by:

comparing the levels of consumption available before and after the trade.

The path to recovery using fiscal policy involves a jump start of increased government spending followed by multiple rounds of increased spending as the economy recovers and incomes rise.

consumer

surplus can be thought of as the wealth that trade creates for consumers in a market.

consumer

When there are barriers to trade,:

consumers suffer producers gain and total wealth decreases.

Actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation is monetary policy.

contractionary

Price level and output both decrease from a successful ___________ fiscal policy.

contractionary

In economics we state that trade

creates wealth

An account entry that records the value of a good service financial asset or other asset that is exported from one country to another is called a(n):

credit

The process by which an increase in government borrowing results in less borrowing by businesses and consumers for private investment is called

crowding out

The interaction of the supply of and the demand for a Blank______ determines the equilibrium exchange rate.

currency

An account within the balance of payments that summarizes international trade in goods services and income payments is called the account.

current

While on a vacation in Europe, you use the U.S. dollars to buy $500 worth of souvenirs. This transaction is a $500 debit in the account.

current

A trade surplus is also called:

current account surplus

The value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium is the loss.

deadweight

Macroeconomists tend to

debate policy recommendations based on their beliefs.

Policy recommendations are

debated based on the assumptions made by the economists.

Which of the following is an account entry that records the value of a good, service, financial asset or other assets that is imported from other countries?

debit

While on a vacation in Europe you use U.S. dollars to buy $500 worth of souvenirs. This transaction is a $500 in the current account.

debit

During the Great Depression, the money multiplier greatly __, resulting in a(n) __ in the money supply.

decreased; decreased;

When taxes increase, AD:

decreases

As the economy expands, reliance on transfer payments that fund programs (increases/decreases). Government spending (rises/falls) since the government is now paying for (less/more) medical care food and housing.

decreases falls less

The amount by which a country's imports of goods and services (M) are greater than its exports of goods and services (X) is called a trade

deficit

A decrease in the money , all else equal, causes the interest rate to fall.

demand

In the short run, in order to stimulate aggregate and avoid falling output and prices, the government could reduce taxes.

demand

You are going on a trip to the United Kingdom in a few months and need British pounds to use during your travels. This represents the for British pounds.

demand

Suppose income in the U.S. falls. This will affect the side of the foreign exchange market and cause exchange rates to .

demand decrease

An increase in inflation in the foreign economy will cause foreign currency to decrease and foreign currency to increase resulting in of the foreign currency.

demand supply depreciation

An increase in inflation in the foreign economy will cause foreign currency:

demand to decrease foreign currency supply to increase and result in depreciation of the foreign currency.

The actual interest rate the buyer of the bond earns:

depends on how much the buyer paid relative to the face value.

When the dollar , foreign goods and services become more expensive to U.S. consumers and fall.

depreciates imports

If the purchasing power of the U.S. dollar decreases relative to other currencies, it is known as the of the U.S. dollar.

depreciation

The demand for foreign currencies is:

derived demand

Changes in the price level, changes in real GDP, and uncertainty about the future are all considered:

determinants of money demand.

The availability of loanable funds and whether they can be borrowed from other countries:

determines the extent to which crowding out occurs.

Income minus taxes gives us the value for income.

disposable

In the United States, when we talk about the value of a good or service, we speak in dollars. This means that it is the currency of the United States.

domestic

In the small-country model, the price equals the world price if the country is open to trade.

domestic

The price of a good, service, or resource that prevails in the domestic market is the price.

domestic

The currency or money used in the domestic country is called:

domestic currency.

Total money demand is:

downsloping as a result of asset demand.

Sticky wages refers to the fact that wages do not adjust

downward in the short run.

In comparing rational expectations theory to Keynesian macroeconomics, rational expectations theory is seen as more

dynamic and Keynesian economics is seen as more static.

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment is called full GDP.

employment

The exchange rate that is determined by the interaction of the demand for and supply of the currency is known as the exchange rate.

equilibrium

The exchange rate that is determined by the interaction of the demand for and supply of the currency is the:

equilibrium exchange rate.

The Federal Reserve Act of 1913:

established the Federal Reserve System.

The rate is the rate or price at which one currency can be exchanged for another. (Use one word for the blank.)

exchage

rates can help you determine the flow of exports and imports and asset prices.

exchange

As an economy , the number of people who rely on government programs such as Medicaid, food stamps, and housing assistance fall reducing government expenditures.

expands

Price level and output both increase from a successful __ fiscal policy.

expansionary

The application of fiscal policy to increase aggregate demand is called a(n) fiscal policy.

expansionary

The application of fiscal policy to increase aggregate demand is called fiscal policy.

expansionary

When aggregate demand falls too much to increase aggregate demand, we can use monetary policy.

expansionary

The American Recovery and Reinvestment Act is a(n) __________ fiscal policy designed to ________ the economy.

expansionary; stabilize

The equilibrium level of real GDP is found at the intersection of the aggregate _____ schedule and the equilibrium line.

expenditures

A decrease in consumer confidence causes aggregate demand to

fall

Consider the market for pineapples in Costa Rica shown below where pineapples are in abundant supply. suppose that Costa Rica opens its market to international trade and that the world price, Pw, is greater than the domestic price, Pe. The consumer surplus for domestic pineapple consumers ______, while the producer surplus for domestic pineapple producers ______.

falls; rises;

The manages the supply of currency.

fed

The serves as the bank for the federal government. (Enter one word in the blank.)

fed

A lower exchange rate means that people who hold euros receive:

fewer dollars for each euro exchanged making goods priced in dollars more expensive to them.

An account within the balance of payments that summarizes international trade in financial assets such as currencies stocks and bonds is called the account.

financial

In 2014, the United States imposed tariffs on nine different steel-producing countries because:

firms from these countries were selling their steel in the United States at a price below their average cost.

Government policy has limitations that reduce its effectiveness and may even cause the opposite of what was intended.

fiscal

Lags hamper the effectiveness of policy.

fiscal

Price level and output both increase from a successful expansionary policy.

fiscal

An exchange rate that is set at a specific value and maintained over time is a(n) exchange rate. (Use the definition.)

fixed

The aggregate supply curve slopes upward in the short run because input prices are ____ and take time to adjust.

fixed

exchange rates are notoriously difficult to maintain.

fixed

An exchange rate that changes as demand and supply for the currency change is a(n) exchange rate.

flexible

Most foreign exchange markets are characterized by exchange rates.

flexible

For a U.S. citizen, the euro is (foreign/domestic) currency.

foreign

The currency or money used for trade within foreign countries is called:

foreign currency.

A market in which people exchange one currency for another currency is the:

foreign exchange market.

A reserve requirement specifies the of checkable deposits that a bank must keep on hand.

fraction

Banks can create money by making use of:

fractional reserve banking.

Consider the market for bananas in Guatemala shown below where bananas are in abundant supply. The net benefit to Guatemala of ______ can be represented as the area ______.

free trade; D

The level of real GDP produced in an economy when it is operating at the natural rate of unemployment is called:

full-employment GDP.

The benefit or wealth that accrues to a buyer or a seller as a result of trading one good service or resource for another is the:

gains from trade.

The path to recovery using fiscal policy involves a jump start of increased spending followed by multiple rounds of increased consumer spending as the economy recovers and incomes rise.

government

Select all that apply Born during the Great Depression, macroeconomics:

grew from a need to understand the entire economy. sought to provide guidance on how to manage the entire economy.

The the reserve requirement, the smaller the money multiplier.

higher

When a country opens its markets to international trade, if the world price is than the domestic equilibrium price, domestic quantity supplied will rise.

higher

If the money supply increases, people will buy additional assets with:

higher returns and greater risk.

Explicitly raising taxes has the same basic effect on aggregate demand as:

higher tax revenues that result from higher incomes.

Barriers to trade reduce the amount of output that can be supplied by foreign companies and, as a result, cause prices in the market to be ______ than they would otherwise be. This results in consumers buying ______ output.

higher; less;

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $50 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.6, government purchases would need to:

increase by $20 billion. How to: Calculate Expenditures multiplier Find how much changed (50 b decrease) 50b = multiplier * change in G Solving for change in G If it says decrease -> increase

Keynes suggested the best way to recover from the Great Depression was to

increase government spending.

During an undesired recession, transfer payments will:

increase, causing consumption and aggregate demand to increase. Reason: During a recession the number of households qualify for transfer payments increases. This causes consumption to increase as well as aggregate demand.

When an individual deposits a check at the local bank, the bank's reserves . The bank can use most of those reserves to make . This the money supply.(Use one word for each of the blanks.)

increase; loans; increases;

Improved productivity causes aggregate supply to ___ shifting to the _____.

increase; right;

Europeans purchase wine produced in California and Argentina to have more choice. The benefit of international trade that applies in this case is:

increased variety of goods.

If the purchasing power of the U.S. dollar relative to other currencies, it is known as an appreciation of the U.S. dollar.

increases

When aggregate demand ______, there is higher inflation and lower unemployment.

increases

When government spending increases, AD:

increases

As the interest rate , people demand a lower quantity of money and choose to hold bonds and other interest-earning assets.

increases; more;

The Fed operates:

independently within the government, but not independent of it.

As output rises, income tax collections increase, which tends to dampen aggregate demand and thus help prevent

inflation

Some economists argue that fiscal policy is pro-cyclical because if the stimulus arrives after the economy has recovered, it could cause demand-pull .

inflation

Because the Federal Reserve fixes the money supply at a particular amount, changes in the rate do not cause a change in the quantity of money supplied.

interest

The demand and supply for money interact to determine the rate.

interest

The yield is the effective rate earned on a bond or other asset.

interest

is the payment made to agents that lend or save money. (Please add only one word for the blank)

interest

Banks play a crucial role in determining rates and the supply.

interest; money;

The model and concepts used to develop the economics of __ are similar to those used to illustrate the effects of:

international trade; trade between individuals.

There is a(n) relationship between bond prices and interest rates.

inverse

Foreign Exchange Market

is a market in which people exchange one currency for another currency.

The idea that government spending could help the economy recover from a recession

is consistent with Keynesian macroeconomics.

The interest rate:

is the price of money.

In the long run, the equilibrium price level is determined by the intersection of the:

long-run aggregate supply curve and the aggregate demand curve.

In the long run, the equilibrium price level is determined by the intersection of the ____-run aggregate supply curve and the aggregate ____- curve.

long; demand;

An increase in the money supply adds -risk, -return assets to the economy.

low; low;

Comparative advantage is defined as having a(n) relative opportunity cost than another producer.

lower

The United States, a high-cost producer of oil, imports roughly half of the oil needed to produce the nation's gasoline. The benefit of international trade that applies in this case is:

lower-cost goods.

When the year 2000 approached, the Federal Reserve was concerned that people would:

make large withdrawals of currency from banks.

Banks can influence the money supply by:

making loans

The financial world grew concerned about what would happen to anything running on computer software when the year 2000 came because:

many software programs used only a two-digit date for the year.

Politicians often argue about economic policies because:

many theories compete to explain how aggregate supply and demand actually work.

The difference between the price consumers are willing and able to pay for a good or service and the price that they actually pay is called consumer surplus.

maximum

Nominal variables are variables that are measured in:

monetary units while real variables are measured in numerical units.

Banks have every incentive to make as many loans as possible. This is because the more loans they make, the more they earn.

money

The market is a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances.

money

is good for storing wealth, but the interest rate it earns is usually low.

money

The idea that people focus only on the nominal value of their wealth, not the real value is known as

money illusion.

A deposit account that accepts deposits and purchases bonds and commercial debt that pay interest is a:

money market mutual funds.

The expenditures-multiplier process is similar to the effect described by the multiplier.

money multiplier

The overall change in the money supply given an initial change in reserves depends on the multiplier.

money multiplier

A money market is a market in which:

money supply and demand determine an interest rate.

Monetarism argues that nearly all economic fluctuations are caused by changes in

money supply.

Loanable funds refers to:

money that is available in an economy for the private sector and government to borrow

If a bond sells for than the face value, the interest rate the bond pays falls.

more

A higher exchange rate means that people who hold euros receive dollars for each euro exchanged, making goods priced in dollars expensive to them.

more less

A higher exchange rate means that people who hold euros receive:

more dollars for each euro exchanged making goods priced in dollars less expensive to them.

The country that benefits from trade is the one that trades at or near the other country's opportunity cost.

most

If consumption, gross investment, or net exports are increasing because of a lower price level, there has been a:

movement along the AD curve

If net exports are increasing because of the lower price level, there will be a:

movement along the AD curve.

The path to recovery using expansionary fiscal policy involves:

multiple rounds of increased consumer spending. increased government spending.

A(n) ____ demand shock shifts the aggregate demand to the left.

negative

When there is a(n) _____ demand shock, real GDP falls below the full-employment level and unemployment is higher than the natural rate.

negative

Exports minus imports gives us exports.

net

In the context of international trade, the competitive equilibrium is the free-trade equilibrium with:

no barriers to trade.

As ____ wages and the costs of other resources rise during an expansion, aggregate supply shifts to the left.

nominal

If the price level increases, but the level of output remains the same from one year to the next,:

nominal GDP will increase, but real GDP will remain the same.

The majority of the money in the U.S. economy is:

nothing tangible you can hold, but is instead merely a computer entry.

The coins and paper money you use to buy goods and services can be printed:

only by the federal government.

The potential benefits that you miss when you choose one thing over another is known as .

opportunity cost

In the small-country model,:

opportunity cost is not constant.

Because you forgo interest earnings when you hold money, the interest rate is the:

opportunity cost of holding money.

Bond prices and bond yields always move in directions.

opposite

Improved productivity means that we can produce more ____ with fewer ______ .

output; inputs;

Monetarism assumes that consumers will adjust to market changes

over time, while rational expectations theory assumes the changes will occur immediately.

Trade allows the economy as a whole to consume previously impossible combinations of output so the:

overall benefits outweigh the costs.

When people specialize according to their comparative advantages,:

overall production rises.

Select all that apply The Federal Reserve Board of Governors:

oversees research into domestic and international financial conditions.; investigates the effect of banking laws.; investigates the health of the economy.

loans are a modern-day application of usury laws which limit the interest rate than can be charged on a loan.

payday

Interest is the:

payment made to agents that lend or save money.

In order to conduct daily transactions and have a stable asset for future purchases,:

people hold some of their savings as money.

New Classical economics is a model that assumes markets are

perfectly competitive and there are rapid adjustments to new economic equilibrium.

New Classical models of economics argues that the majority of markets are

perfectly competitive, while New Keynesian models argue they are monopolistically competitive.

The Federal Open Market Committee includes the Board of Governors, the of the New York Fed, and Federal Reserve bank presidents from other district banks who serve on a rotating basis. (Use one word for each blank)

president; four;

In the market for money, the equilibrium of money is the interest rate.

price

The equilibrium ____ level is determined by the intersection of the short-run aggregate supply curve and the aggregate demand curve.

price

The interest rate is the __ of borrowing money.

price

The supply of money is not influenced by its in this case the interest rate.

price

Some economists argue that fiscal policy is:

pro-cyclical meaning fiscal policy can make the business cycle worse.

Consider the two production possibilities frontiers (PPFs) shown in the graphs. If the two countries do specialize, Country A would likely ______, while Country B would likely ______.

produce at point CA; produce at point WB I think it's whatever one is closest to M

Increases in ___ means more output or real GDP can be produced at every price level.

productivity

A numerical limit on the amount of a good that can be imported is an import

quota

expectations is the idea that people assess all the information available to them, immediately update their expectations, and change their behavior as needed.

rational

Aggregate demand and aggregate supply are connected to the business cycle through ____ GDP.

real

Consumption (C) + Gross Investment (I) + Government Purchases (G) + Net Exports (NX) characterizes:

real GDP expenditures

An economic school of thought that emphasizes the importance of technological innovation and resource availability in determining aggregate supply and therefore the level of output in an economy is the:

real business cycle theory.

A decline in real output for at least two consecutive quarters is called a(n)

recession

A decline in real output for at least two consecutive quarters is called:

recession

A(n) occurs when an economy experiences a(n) in real GDP for at least two consecutive quarters or six months.

recession decrease

When an economy is producing above full employment, the goal of fiscal policy will be to:

reduce aggregate demand.

With demand-pull inflation, active fiscal policy calls for government purchases.

reducing

The Federal Reserve:

regulates member banks to promote stable prices and economic growth.

The main difference between fiscal policy and automatic stabilizers is fiscal policy:

requires active changes through legislation, automatic stabilizers do not. Reason: Fiscal policy requires new legislation to change government purchases or taxation. Automatic stabilizers adjust government purchases and taxation without active government involvement.

A(n) requirement specifies the fraction of checkable deposits that a bank must keep on hand.

reserve

Foreign are government holdings of foreign currencies.

reserves

If the bank keeps all of its deposits as __ ,the bank won't make any money. (Use one word for the blank.)

reserves

When a tariff is imposed on imports, the price in the market:

rises by the full amount of the tariff.

Consider the market for bottled water in France. France is the world's largest importer of bottled water, accounting for about one-quarter of global water imports. Given this situation, assume the world price of bottled water is below the domestic price in the French economy, as shown in the graph. Suppose France can import water from other countries. The consumer surplus ______, while the producer surplus ______.

rises; falls

An economic school of thought in which the best policy response to macroeconomic instability is to let the economy return to equilibrium without outside interference is the:

self-correction view.

The practice of "dumping" describes:

selling products in a foreign market at a price below average cost.

Asset money demand is a downward-sloping line because it is:

sensitive to interest rates.

Suppose the equilibrium interest rate is 13%, but the usury law prohibits charging more than 10%. In this case, the law:

serves as a binding price ceiling.

If there is a dramatic reduction in inputs such as electricity prices, there will be a:

shift of the AS curve.

Supply shocks cause a _____ the aggregate supply curve. A change in the price level would cause _____ the aggregate supply curve.

shift of; movement along

A change in the demand for money will:

shift the money demand curve.

Suppose change in banks' lending desires causes them to make more loans. The result is that money supply increases by $20 billion. The new money supply will:

shift to the right by $20 billion.

In the _____ run, input prices are fixed and do not adjust along with other prices in the economy.

short

The condition AD = AS refers to - equilibrium.

short-run

A(n) is a situation in which the quantity supplied is less than the quantity demanded at the current market price.

shortage

The model and concepts used to develop the economics of international trade are:

similar to those used to illustrate the effects of trade between two individuals.

When using the model, the domestic country is a price taker and its consumption and production do not affect the world price.

small-country

M2 has grown faster than M1 because of the growth of:

small-denomination time deposits and money market funds.

A relatively fraction of the money in an economy is issued by the Federal Reserve; the rest is created by the .

small; banks

The actual money multiplier tends to be than the one predicted by the money multiplier equation.

smaller

is based on relative opportunity cost not necessarily on whether one country can produce more of a good than another country. (Insert one word per blank)

specialization

Comparative advantage identifies the producer that has the low relative opportunity cost for a specific good in the market. The low-relative-cost producer in producing that good.

specializes

policy is a policy enacted by the government to avoid excessive unemployment or inflation.

stabilization

A policy enacted by a government to minimize business cycle fluctuations is known as

stabilization policy.

Keynesian economics could not be used to explain

stagflation.

expectations is the idea that people do not incorporate new information into their expectations and do not adjust to new information.

static

The idea that people do not incorporate new information into their expectations is known as

static expectations.

Keynes argued that prolonged unemployment during the Great Depression was the result of

sticky wages.

Aggregate ______ illustrates how the total amount of goods and services produced in an economy relates to the price level.

supply

An increase in the money ,all else equal, causes the interest rate to fall.

supply

In the classical model of aggregate demand and aggregate supply, it is aggregate ____ that adjusts in the long run to return the economy to its long run equilibrium.

supply

Stagflation is caused by negative shocks such as rising input costs that shift aggregate _____ to the left.

supply

Suppose interest rates in the U.S. fall. This will affect the side of the foreign exchange market and cause exchange rates to .

supply increase

Suppose interest rates in the UK rise. This will affect the side of the foreign exchange market and cause exchange rates to

supply increase

The amount by which a country's exports of goods and services (X) are greater than its imports of goods and services (M) is called a trade

surplus

The difference between the price producers receive for a good or a service and the minimum price they are willing and able to accept is producer

surplus

When the United States imposes a(n) on foreign steel, any foreign producers who want to sell their steel in the United States have to pay an extra fee, making it more expensive for them to sell their products.

tariff

A change in aggregate demand equals the multiplier times the initial change in taxes.

tax

In the short run, in order to stimulate aggregate demand and avoid falling output and prices, the government could reduce

taxes

The money supply in an economy is largely determined by:

a central monetary authority.

A phase of the business cycle characterized by increasing real GDP income and employment is called:

An expansion

Consider the market for bottled water in France. France is the world's largest importer of bottled water, accounting for about one-quarter of global water imports. Given this situation, assume the world price of bottled water is below the domestic price in the French economy, as shown in the graph. Suppose France does not trade with other countries. The area that represents the consumer surplus in the absence of international trade is ______. The area that represents the producer surplus in the absence of international trade is ______.

A; B + E

expectations is the idea that people slowly incorporate new information and adapt to changes they observe in the economy.

Adaptive

____ demand includes the demand for goods and services as diverse as food, clothing, cars, health care, entertainment, and housing.

Aggregate

________ can be interpreted as the overall demand for real GDP from Consumption Gross Investment Government Purchases and Net Exports.

Aggregate Demand

Which of the following describes the financial account?

An account within the balance of payments that summarizes international trade in financial assets such as currencies stocks and bonds.

Which of the following describes the capital account?

An account within the balance of payments that summarizes international trade in non-financial and non-produced assets such as patents and copyrights.

Which of the following describes a fixed exchange rate?

An exchange rate that is set at a specific value and maintained over time.

is a state that exists whenever an entity can survive or continue its activities without external assistance or international trade. (Hint: This term is usually applied to political states or their economic systems.)

Autarky

The economy experiences a positive demand shock causing the economy to boom. Which is an example of an automatic stabilizer that will work to reduce the undesired expansion?

Average tax rates will automatically rise (Reason: If a positive demand shock occurs households will earn more income moving them into higher tax brackets. This increases the average tax rates and tax revenues increase.)

Comparative advantage refers to _______.

Being the lowest relative opportunity cost producer of a good.

Comparative advantage refers to:

Being the lowest relative opportunity cost producer of a good.

Which of the following statements is correct?

The interest rate paid on loans differs from the interest rate earned on savings.

in an economy is largely determined by a central monetary authority.

The money supply

Select all that apply Which of the following are likely to occur when someone deposits money into a checking account?

The money supply increases; M1 increases;

The total demand for money is:

The sum of the transactions of demand and the asset demand; down-sloping as a result of asset demand.

The number of times each dollar of the money supply is used to make purchases is known as the:

The velocity of money

When people deposit money, the bank provides valuable services in return:

Their money is available when needed, it's safe, and it might even earn interest.

Which of the following is a limitation of implementing fiscal policies during a recession?

There are lags that delay the effectiveness of fiscal policy. Reason: There are three lags that delay the effectiveness of lags: recognition lag, legislative lag, and implementation lag.

The Federal Reserve commonly called the Fed:

Tracks the money supply

demand depends on how much output people buy which is based on their incomes;

Transaction

money demand is independent of the interest rate.

Transaction

money demand is related to the level of nominal GDP.

Transaction

Institutions can transfer large amounts of money in a timely and efficient way using:

Wire transfers

If an economy experienced a negative demand shock, compared to an economist who follows New Keynesian models, a New Classical economist would argue for

a "hands-off" approach by the government.

A change in demand for money can be shown as:

a shift in the money demand curve.

If the Federal Reserve adopts a policy of lowering interest rates, some people:

can stay in homes that they might otherwise have had to sell; will continue to buy new homes despite the weak economy; can chose to refinance their loans;

A movement along the AD curve is due to:

changes in the price level

The idea that real variables are independent from nominal variables is known as:

classical dichotomy

Many factors contributed to the severity of the Great Depression, but an important one was the:

collapse of the banking sector.

Withdrawals and reduced lending the money supply.

decrease

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $100 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, government purchases would need to:

decrease by $20 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. An expansion occurs resulting from a $100 billion increase in aggregate demand. In order to restore the economy to full employment given a MPC of 0.75, government purchases would need to:

decrease by $25 billion.

Suppose that the economy is in a long-run equilibrium at a price level of 100 and full-employment real GDP of $500 billion. A recession occurs resulting from a $100 billion decrease in aggregate demand. In order to restore the economy to full employment given a MPC of 0.80, taxes would need to:

decrease by $25 billion. -100 b = -4 * tax tax = 25b since positive -> Decrease

Suppose an economy is in long-run equilibrium at a price level of 100 and a full-employment real GDP of $520 billion. A recession occurs because of a $120 billion decrease in aggregate demand. To restore the economy to full employment given an MPC of 0.75, taxes would need to:

decrease by $40 billion.

If the money supply decreases, while prices and velocity remain constant, real GDP will:

decrease.

Given the option of being self-sufficient or trading with others, there will be potential for trade to make both parties better off:

if a comparative advantage exists.

Unlike Keynesian macroeconomics, rational expectations theory assumes consumers will adjust

immediately

Now suppose South Africa opens up to trade, as in the small-country model. South Africa will ______ gasoline at a price ______.

import; between 4 and 5 rand per liter More supplied than demanded at these prices in the world

Tariff revenue equals a tariff times the quantity

imported

When a country opens up to trade, domestic industries that make products that can be:

imported will contract and industries that have products to export will expand.

Goods services or resources produced abroad and sold domestically are called

imports

Net exports is the difference between and .

imports exports

Higher U.S. incomes tend to increase U.S. and reduce net

imports; exports;

Friedman challenged the view of Keynesian macroeconomics on the relationship between

income and consumption.

If someone deposits money into a checking account, the bank's assets and liabilities

increase

If the economy is experiencing a recession, the goal of fiscal policy will be to:

increase aggregate demand.

Some economists argue that fiscal policy is pro-cyclical because of the:

lags

The self-correction view is sometimes referred to as a:

laissez faire approach.

The lag occurs because active policy requires legislation to authorize an increase in government purchases or a decrease in taxes or both.

legislative fiscal

If foreign currency trades for more dollars, then vacations in the United States have become expensive; international tourists are likely to come to the U.S. and spend their money.

less more

Money that is available in an economy for the private sector and government to borrow is called funds

loanable

When the government borrows money so it can increase government spending or decrease taxes, it increases the demand for .

loanable funds

The condition Y = Yfull employment refers to - equilibrium.

long-run

Terms of trade that are beneficial to both parties are those terms or prices:

that are between the two parties' opportunity costs.

If foreign currency trades for more dollars, then U.S. firms:

that export their products would benefit.

the national banking system is overseen by:

the Board of Governors located in Washington D.C.

The economic models that assume markets are monopolistically competitive and adjustments to equilibrium take time due to sticky wages and prices is known as

the New Keynesian Model.

The Fed operates independently within the government, but not independent of it because new members are appointed by:

the President of the United States and confirmed by the Senate.

Absolute advantage refers to:

the ability to produce more output given similar resources than another producer.

reserves are the total amount of reserves that a bank has some of which it is required to keep on hand.

total

When two people specialize,:

total production between the two people increases.

Growth is the key to better consumption possibilities and one important key to better consumption possibilities is . (Use one word for the blank.)

trade

The model and concepts used to develop the economics of international are similar to those used to illustrate the effects of trade between two individuals.

trade

restrictions can also lead to retaliatory tariffs by the exporting country.

trade

When there is a recession, there is a decrease in nominal GDP and the demand for money falls.

transaction

The demand for money comes from two sources: demand and demand.

transaction demand; asset demand;

payments do not require the recipients to produce a good or service to receive the payments.

transfer

During a recession the demand for labor falls. The sticky wages theory suggests

unemployment will be greater than if the wage rate adjusted downward.

In the market for dollars, the exchange rate is measured as:

unit of foreign currency/U.S. dollar.

In the small-country model, each country has a(n) -sloping supply of a product and cost is not constant.

upward; opportunity

Deadweight loss is the:

value of the economic surplus that is forgone when a market is not allowed to adjust to its competitive equilibrium.

Because transaction money demand is independent of the interest rate, it is a line.

vertical

In many of the examples of specialization and trade, it sometimes seems that one country is getting a better deal than another but:

we don't know the overall increase in the wealth or well-being generated by the trade.

Consumer surplus can be thought of as the (one word) that trade creates for consumers in a market.

wealth

When trade occurs, is created.

wealth

The effects that a change in market conditions, usually price, has on the welfare or economic well-being of market participants are effects.

welfare

The price of a good, service, or resource that prevails in the world market is the:

world price

During the Great Recession, economic advisors:

would have encouraged more spending if they had known how bad the economy was.

We graph the supply of money with the interest rate on the axis and the quantity of money on the axis.

y; x;

The is equal to the net profit earned divided by the amount invested.

yield

Select all that apply Which of the following explain why the Aggregate Demand (AD) curve slopes downward?

The foreign-purchases effect The interest-rate effect The real-balances effect

There is a(n) _____ correction mechanism in our economy which operates through the aggregate supply.

automatic

In the short run, a shift of the aggregate supply curve to the right indicates _____ production at every price level.

increased

Holding the price level constant, an increase in net exports _____ the aggregate demand for real GDP

increases

Recessions and expansions can cause ____ or a general increase in the level of prices.

inflation

Suppose the full-employment level of real GDP is $12 trillion and the economy is actually producing $13 trillion. In this case, the economy is in a(n) ____ gap.

inflationary

If consumers increase the amount of spending, the aggregate demand curve shifts to the ____

right

The short-run equilibrium occurs where:

the AD and AS curves intersect.

Assume an economy starts out in equilibrium. When the price level rises:

1. The purchasing power of assets such as saving stocks and bonds decrease 2. Firms and consumers can purchase fewer goods and services. 3. The aggregate expenditures schedule downward

According to the interest rate effect, when the price level rises, people need more money to make the same number of purchases, so the demand for increases. As a result, interest rates _ , which _ consumption and investment, causing the quantity of real GDP demanded to _.

1. money 2. rise 3. lowers 4. decrease

_______ is found at the intersection of the aggregate expenditures schedule and the equilibrium line.

The equilibrium level of real GDP

Suppose that the price of oil falls worldwide. This will cause aggregate:

supply to increase, shifting the aggregate supply curve to the right.

Suppose there is an economy-wide decrease in business taxes. What can we expect to see in the business cycle model?

The business cycle enters an expansion.

During the Great Recession from 2007 to 2009, most countries increased government expenditures to boost aggregate demand. (True or False)

True

If firms are producing more output because of the higher price level, that's:

a movement along the aggregate supply.

Equilibrium in the aggregate demand and supply model consists of:

a price level and a quantity of real GDP.

If consumption or gross investment increase for any reason other than the price level, that's:

a shift of the aggregate demand.

If the amount of output firms are willing to produce at each possible price level increases, that's:

a shift of the aggregate supply.

Suppose there is a positive supply shock. In the short-run, the economy moves to a new equilibrium where real GDP is:

above the full-employment level and unemployment is lower than the natural rate.

The _____ demand and supply model can be used to describe changes in an economy's price level and real GDP in the short and the long run.

aggregate

Holding the price level constant, a(n) ______ in net exports causes the aggregate demand curve to shift to the left.

decrease

If consumers ______ the amount of spending, aggregate demand shifts to the left

decrease

Inflation that results from a(n) _____ in aggregate supply is called ______ inflation.

decrease; cost-push

A(n) in output increases as less labor is needed to produce the lower level of real GDP.

decrease; unemployment;

In the short run, a shift of the aggregate supply curve to the left indicates ______ production at every price level.

decreased

If the government ______ the amount of spending, the aggregate demand curve shifts to the left. (Enter one word in the blank.)

decreases

Changes in government purchases and net exports directly affect the aggregate ____ for real GDP.

demand

If consumers decrease the amount of goods and services they purchase, given constant prices, then aggregate ____ for real GDP decreases

demand

If consumers increase the amount of goods and services they purchase, given constant prices, then aggregate ____ for real GDP _____ .

demand; increases

We use _______ to talk about the price and quantity of a single good or service produced in a specific market. We use _______ to describe the overall, or total, demand for all final goods and services produced in an economy.

demand; aggregate demand

The aggregate demand curve is _____ sloping.

downward

Aggregate demand is:

downward sloping

Suppose there is a positive supply shock. In the long run wages and production costs:

fall the short-run aggregate supply curve to shift to the right; the price level falls; real GDP rises and eventually the economy returns to its full-employment level of real GDP.

According to the real-balances effect, when the price level rises, the real value of savings _____ and people are _____ willing or able to buy goods and services. ...... so consumption falls and the quantity of real GDP demanded ____ resulting in a(n) downward sloping aggregate demand curve.

falls; less drops; downward

The long-run aggregate supply curve is a vertical line originating at the ______-employment level of real GDP.

full

A(n) _____ in resource costs will shift the aggregate supply curve to the left. (Enter one word in the blank.)

increase

Cost-push inflation occurs as a(n) ____(one word) in resource costs shifts aggregate supply to the left.

increase

Falling U.S. incomes tend to decrease U.S. imports and _____ net exports.

increase

If resource costs ____,output decreases at every price level.

increase

Inflation that results from a(n) ____ in aggregate demand is called demand-pull inflation.

increase

____ prices, like wages, tend to be sticky and take time to adjust to a change in the economy.

input

In the long run, as prices adjust for all firms, falls and the economy returns to the full-employment level of real GDP.

input; output;

Input prices tend to be sticky because:

labor contracts might commit firms to paying a certain wage over multiple years

A(n) _____-ward shift of aggregate supply causes prices to rise with unemployment.

left

If consumers decrease the amount of spending, aggregate demand shifts to the ___

left

If the government decreases the amount of spending, aggregate demand shifts to the ___

left

If consumption or gross investment is increasing because of the lower price level, that's a:

movement along the aggregate demand

As wages rise, firms cut back production in the long run and ____ falls

output

If an economy is working beyond its full-employment level of output in the short run, then in the long run, as input prices adjust for all firms, ____ falls and the economy returns to the _____-employment level of real GDP.

output; full;

Aggregate supply illustrates how the total amount of goods and services produced in an economy relates to the ____ level.

price

In the aggregate demand and supply model, the:

price level is on the vertical axis of the graph and real GDP is on the horizontal axis.

Aggregate demand relates the price level to ____ GDP

real

The aggregate demand and supply model can be used to explain the business cycle. An initial decrease in aggregate demand will cause the economy to go into ____. Over time, as input prices decrease the aggregate supply curve shifts to the right and the economy enters the _______ phase of the business cycle.

recession; recovery

As nominal wages and the costs of other resources fall during a recession, aggregate supply shifts to the ___.

right

If the price level falls, aggregate expenditure:

rises the aggregate expenditure line shifts up and there is a movement to a lower point along the aggregate demand line.

If consumption, gross investment ,or net exports are increasing because of some non-price change, there will be a:

shift of the AD curve.

If net exports are increasing because of some non-price change, there will be a:

shift of the AD curve.

the determination of the the long-run equilibrium price level and real GDP is found by using the long-run aggregate ______ curve.

supply

The determination of the the long-run equilibrium occurs where the AD and SRAS curves intersect the:

the long-run aggregate supply curve.

The aggregate demand and supply model can be used:

to describe changes in an economy's price level and real GDP in the short and the long run.

In the short run, the aggregate supply curve slopes ____

upwards

The long-run aggregate supply curve is a(n) _____ line originating at the full-employment level of real GDP.

vertical