Macro Final
Which of the following exchange rates between the dollar and the peso would a Mexican buyer of American goods most prefer?
$0.25 = 1 peso
The reserve requirement for large banks on customer deposits in checking accounts is around:
10 percent.
Production Possibility Schedules for Two South Pacific Island Nations Refer to the table shown. In Kiribati, the opportunity cost of producing one mango (in terms of coconuts) is:
4 Since Kiribati can produce 100 more mangoes only by giving up 400 coconuts, Kiribati's opportunity cost of producing another mango is 4 coconuts.
Assuming individuals hold no currency, calculate the simple money multiplier for each of the following reserve ratios:
4%: 25.00 correct. 12%: 8.33 correct. 18%: 5.56 correct. 26%: 3.85 correct. 30%: 3.33 correct. 50%: 2.00 correct. 75%: 1.33 correct.
If output rises by 18 percent and population rises by 10 percent, how much does per capita output increase?
8 percent.
If output rises by 20 percent and population rises by 11 percent, how much does per capita output increase?
9%
How does a depreciation of a currency change the price of imports and exports? Explain using the U.S. dollar and the Chinese yuan.
A depreciation of the U.S. dollar will lead to an increase in the relative price of goods from China.
If a bank is unable to borrow reserves from the Fed funds market to meet its reserve requirement, where else might it borrow reserves? What is the name of the rate it pays to borrow these reserves?
Banks can also borrow reserves from the Fed at the discount window at the discount rate
Why is the LAS curve vertical?
Because output is independent of the price level.
What is leveraging?
Borrowing for the purpose of making financial investments.
How are transparency and credibility related?
By telling people what the Fed is doing, transparency enhances the credibility of the Fed because the people see that in fact, the Fed does what it says it will do.
Demonstrate graphically how the following are represented in the globalized AS/AD model for the United States. What happens to the trade deficit in each?
Chapter 11 question 20 test
From 2001 to 2010, which geographic area or country had the highest per capita growth rate?
China
Which group most benefited from globalization?
International traders and those associated with them.
If all of the government's debt were internal, would financing that debt make the nation poorer?
No. Financing internal debt causes redistribution; it does not make a nation poorer.
Day laborers who are in the United States illegally and work off the books are:
Part of the underground economy which is not measured in GDP.
New growth theory emphasizes the importance of increases in what factor in explaining growth?
Technology
If the U.S. government were to raise the reserve requirement to 100 percent, what would likely happen to the interest rate banks pay on deposits? Why?
The interest rate would decrease and maybe even become negative.
The market solution to structural unemployment according to structural stagnationists, should include:
a lower reservation wage so that workers can be rehired and make firms more competitive.
The purpose of the Dodd-Frank Wall Street Reform Act was to:
force banks to limit their risk-taking.
A bank that is liquid:
has assets that can be readily converted into cash and money.
The Classical economists argued that:
if unemployment occurs, it will cure itself because wages and prices will fall.
A structural stagnationist's criticism of unconventional monetary policy is that:
it kept the economy from making necessary structural adjustments.
Classical economists are generally associated with:
laissez faire
Before the Great Depression the popular view of government was:
laissez-faire; and after the Great Depression, the popular view of government was activist.
The law of diminishing marginal productivity implies that increasing only one input will:
lead to smaller and smaller increases in output.
Moral hazard is a problem that arises when:
people don't have to bear the negative consequences of their actions.
Paying interest on internal government debt involves a:
redistribution of income among citizens of the country.
The wage a person requires before accepting a job is referred to as the ______ wage.
reservation
When the government runs a deficit, it will:
sell bonds to finance the deficit.
The central difference between the structural stagnation hypothesis and the secular stagnation theory is that:
structural stagnation focuses on globalization while secular stagnation focuses on declining investment.
Technological change can result in:
structural unemployment
What type of unemployment is best studied within the long-run framework?
structural unemployment
According to Say's Law, people:
supply goods in order to obtain other goods.
The aim of unconventional monetary policy tools is to:
support the economy by boosting liquidity and reducing interest rates when credit channels are clogged.
Debt is measured relative to GDP because:
the ability of a country to pay off its debt depends on its productive capacity.
Issues of growth are generally considered in:
the long-run framework
The secular trend growth rate is the:
the rate of growth of potential output.
The two frameworks conventional economists generally use to analyze macroeconomic issues are:
the short-run and the long-run frameworks
The business cycle is:
the term used to describe fluctuations in output around its long-term trend.
If a country of 300 million people has a total income of $12 trillion, its per capita income is:
$40,000.
A single bank has a reserve requirement of 10 percent. This means that if a customer deposits $100 million, the bank may lend out:
$90 million. Multiply total deposits times (1 - reserve requirement) to find out how much the bank can lend [$100 million * (1 - 0.1) = $90 million].
What are five factors that cause the AD curve to shift?
(1) Changes in foreign income, (2) changes in expectations, (3) changes in exchange rates, (4) changes in the distribution of income, and (5) changes in governmental aggregate demand policy.
If the structural budget deficit is $100 billion and the actual deficit is $300 billion, what is the size of the cyclical deficit?
200 billion
Why was character George Bailey in the film It's a Wonderful Life right when he stated on the day of a bank run that depositors could not withdraw all their money from the bank?
A bank only holds a fraction of deposits on hand; it lends the remainder.
Which of the following would increase this year's GDP?
A commission charged by your broker when you sold 100 shares of Borden stock.
Will a country do better importing or exporting a good for which it has a comparative advantage?
A country will do better exporting a good for which it has a comparative advantage.
Which of the following best describes stock and flow concepts?
A stock concept is an amount of something at a given point in time, whereas a flow concept has a time period associated with it. Wealth is a stock; GDP is a flow.
Did Keynesian or Classical economics support laissez-faire policy?
Classical economics supported laissez-faire policy.
Are you more likely to see an inverted yield curve when the Fed is implementing contractionary or expansionary monetary policy?
Contractionary monetary policy
Economists normally talk about GDP even though they know NDP is a better measure of economic activity. Why?
Because NDP accounts for depreciation, but measuring depreciation is difficult because asset values fluctuate.
Why hasn't Thomas Malthus's prediction come true?
Because labor has become more efficient as a result of education and technological progress, output per worker has increased.
In the early 20th century worker productivity in the Horndal iron works plant in Sweden increased by 2 percent per year over a 15-year period even though the firm did not invest in new capital. What might be the cause for the increase in productivity?
Productivity could have increased as a result of learning by doing or because of improved embedded technology.
What is the largest component of aggregate income for most countries?
Employee compensation
Which of the following would cause the supply curve for euros to shift right?
Europeans want to buy more American goods.
How does the U.S. per capita growth rate since 1940 compare to growth rates in other areas around the world?
From 1940 to 1970, the U.S. growth rate was, on average, higher than the average world growth rate. Since 2000, the U.S. growth rate has been lower than the average world growth rate.
Which has the more pessimistic view of the problems facing the United States economy: structural stagnation theory or conventional business cycle theory?
Structural stagnation theory is more pessimistic because the economy remains stuck in a period of growth that is lower than the economy's normal growth rate, whereas in a business cycle the economic downturn is followed by an upturn that returns the economy to its long-term growth rate.
How does growth through technology differ from growth through the accumulation of physical capital?
Technology can change the types of goods people buy in an economy by introducing new types of products and technology makes the existing capital more efficient; accumulation of physical capital does not make such changes.
If the U.S. dollar appreciates against the Japanese yen:
Japanese goods will be cheaper in the United States.
In the United States, globalization has caused workers in the education, healthcare, and government sectors to face:
Little or no downward pressure on their wages.
"Budget deficits should be avoided, even if the economy is below potential, because they reduce saving and lead to lower growth." Does this policy directive follow from the short-run or the long-run framework?
Long-run framework. The long-run framework directs one to avoid deficits; in the short-run framework deficits are useful if the economy is significantly below potential.
In what market are short-term interest rates determined?
Money market.
Assume that per capita income is growing at different rates in the following countries: Nepal, 0.7 percent; Kenya, 1.3 percent; Singapore, 6.9 percent; Egypt, 3.8 percent. How long will it take for each country to double its income per person?
Nepal: 102.9 correct years. Kenya: 55.4 correct years. Singapore: 10.4 correct years. Egypt: 18.9 correct years.
What are network externalities and how do they lead to growth?
Network externalities are externalities in which the use of a good by one individual makes that technology more valuable to other people. Network externalities can make switching to a superior technology expensive or nearly impossible.
Moore's law states that every 18 months, the computing speed of a microchip doubles. a. What effect does this likely have on the economy? b. Demonstrate your answer graphically using the AS/AD model.
The price level falls and output rises.
Which of the following is not something the Fed can change directly?
The prime rate
What does it mean to securitize a loan?
The process of bundling several loans together into a new financial instrument called a security and for the purpose of selling that security.
How do wealth accounts differ from national income accounts?
Wealth accounts are stock measures; national income accounts are flow measures.
Over the last three decades, the Chinese government has adopted a series of market-oriented reforms that have shifted control of many parts of the Chinese economy from government officials to private individuals. These reforms have most likely stimulated China's growth for which of the following reasons?
They have provided individuals with a greater incentive to be efficient.
If the Fed eliminated the reserve requirement, what would happen to the money multiplier and the supply of money?
They would both increase.
What roles do specialization and division of labor play in economists' support of free trade?
Through free trade, countries specialize in the goods for which they have a comparative advantage and trade for those in which they do not. Specialization allows a country to divide labor among the various production segments, which results in higher productivity and greater economic growth for the involved countries.
Suppose that the U.S. dollar buys 100 Japanese yen, gold costs $500 per ounce in New York, and gold costs 20,000 yen per ounce in Tokyo. What does the law of one price predict will happen?
Traders will buy gold in Japan and sell it in the United States.
When the government bails out one sector, other sectors go to Congress and ask for bailout money. This is referred as:
a bad precedent problem.
Suppose the people in my town hear a rumor that their local bank is in trouble and all rush to withdraw money from the bank. This is referred to as:
a bank run.
Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8 percent. A Keynesian economist would most likely blame this increase in unemployment on:
a decline in the level of aggregate demand.
If the United States were to stop trading with other nations, economists would predict that in the long run the United States would end up with:
a lower standard of living.
If the distribution of the gains from growth matter, growth in median income is:
a more informative measure of growth than growth in per capita income when the gains from growth are concentrated on a small segment of the population.
Paying interest on external government debt rather than on domestic debt produces:
a net reduction in domestic income.
A fiscal policy that increases government spending or cuts taxes is most appropriate when the economy is in:
a recessionary gap.
At the intersection of the short-run aggregate supply curve and the aggregate demand curve, the economy is in:
a short-run equilibrium but not necessarily a long-run equilibrium.
A budget deficit is defined as:
a shortfall of revenues compared to expenditures.
Double counting in the national income accounts will occur if GDP is computed by summing up:
all sales.
If nations trade on the basis of comparative advantage:
all trading partners can gain from trade.
Technological development:
alters the nature of production and consumption.
A recession is often considered to be:
an economic downturn that persists for more than two consecutive quarters of the year.
According to the structural stagnation hypothesis expansionary macro policy tends to lead to:
asset price inflation.
When a country runs a trade deficit, it does so by:
borrowing from foreign countries or selling assets to them.
A commercial bank is a financial institution that:
borrows from and lends to individuals and businesses.
What expenditure category of production is largest for most countries?
consumption
Initially, policy makers were not concerned about the financial crisis because:
conventional economic theory was telling them they did not have to worry about such an event occurring.
All of the following are important sources of growth except:
decreasing returns to scale.
A commercial bank's reserve ratio equals the ratio of its reserves to its:
deposit
In the graph below, the value of the dollar is:
depreciating because the dollar buys fewer yuan.
The international adjustments which will help the U.S. economy out of a structural stagnation include:
depreciating the value of the dollar.
The underlying growth trend is important for policy because it
determines how quickly an economy can grow without creating accelerating inflation.
The balance of trade measures the:
difference between the value of imports and that of exports.
Suppose my financial adviser advises me to combine different financial assets, whose prices are not expected to move together, in an effort to reduce risk. This process is known as:
diversification
A rise in the U.S. price level will cause:
exports to decrease and imports to increase.
The group that benefited the most from international trade has been people who:
financed international trade.
Monetary policy is one of the two main macroeconomic tools governments use to control the aggregate economy, the other being:
fiscal policy.
External government debt is:
government debt owed to individuals in foreign countries.
Deposit insurance is:
government insurance that promised to reimburse individuals for loss in the value of deposits.
If an economy has a trade surplus, total domestic production is greater than total domestic expenditures.
greater than
If output increases by 5 percent and population growth is 3 percent, per capita output:
grows by 2 percent.
A financial asset is liquid:
if it can be readily exchanged for another asset or good.
In the early 2000s, analysts feared that low academic achievement in math in the United States may reduce U.S. economic growth by as much as half a percentage point a year. In terms of factors leading to growth, the low math scores indicate that the U.S. may be at a disadvantage in terms of:
human capital.
Which would help resolve structural stagnation?
productivity rises
Buying financial assets from banks and other financial institutions with newly created money is referred to as:
quantitative easing.
Demonstrate the effect of contractionary monetary policy in the AS/AD model.
question 4 actual test chapter 13
Per capita output would be certain to increase if:
real output increases and population decreases.
The cyclical deficit:
rises as the economy moves below potential output.
A decrease in the expected future income of the U.S. would likely:
shift its AD curve to the left.
If you add up all the transactions in an economy, do you arrive at GDP, GNP, or something else?
something else.
Countries can expect to gain from international trade as long as they:
specialize according to their comparative advantage.
If I am worried about the price of assets such as bonds falling, I may be more inclined to hold money instead. You hold cash for the:
speculative motive.
Net foreign factor income is:
the difference between the income earned abroad by domestic factors and the income earned domestically by foreign factors.
According to some economists when a country's debt-to-GDP ratio exceeds 90 percent:
the government will face financial instability
The financial crisis of 2008 led to massive federal spending in an effort to stimulate the economy. The combination of the new federal spending and the automatic stabilizers led to:
the largest budget deficit since World War II.
Whenever a regulatory system is set up, individuals or firms being regulated will figure out ways to get around these regulations. This is referred to as:
the law of diminishing control.
Economists generally are:
more concerned about structural deficits than cyclical deficits.
If you expect interest rates to rise, you will want to be holding:
more money because bond prices will likely fall.
The loss of jobs due to international trade is often:
more visible than the decline in consumer prices due to international trade.
In the AS/AD model, the repercussions that a change in quantity demanded has on production and subsequently on income and expenditures is called the:
multiplier effect.
Government expenditures for social security and unemployment insurance are, for GDP accounting purposes, considered:
transfers, and are not included in government spending as part of GDP.
Nominal output is best defined as a measure of the:
value of output at prices in the current year
Keynes believed the economy was:
not generally at potential income.
Transfers of assets, such as stock sales are:
not included in GDP because they do not increase domestic production.
Inflation is 14 percent. Debt is $4 trillion. The nominal deficit is $360 billion. What is the real deficit or surplus?
number 18 practice test ch 15
Per capita growth:
occurs when there is an increase in goods and services per person.
The Federal Reserve Bank is the U.S. central bank:
whose liabilities serve as cash in the United States.
If the reserve requirement is 10 percent, and banks keep no excess reserves, an increase in an initial $300 into the banking system will cause an increase in total money of:
$3,000. The money multiplier is 1/r = 1/.1 = 10 which gives an increase of total money of $3,000.
The table below gives the Fed funds rate target at the end of each year shown Using these figures, describe how the monetary policy directions changed from 2005 through 2008.
2006: Slightly contractionary 2007: Expansionary 2008: Expansionary
If you invest $300 in a stock, borrowing $240 of the $300 at 10 percent interest, and the stock price rises by 15 percent, what is the return on your investment?
35 percent Your initial investment is $60, and you borrowed $240. At 10 percent interest, you had to repay the original $240 plus $24 interest for a total of $264. The value of the stock rose to $345. You will earn $21 on an investment of $60, which makes your rate of return 35 percent.
How might an inflation target policy impair the ability of the Fed?
An inflation target policy might make the Fed pursue contractionary monetary policy when only temporary factors raise inflation, and it might have been better to wait until the temporary factors disappear instead of slowing the economy.
Suppose the Fed decides it needs to pursue an expansionary policy. Assume people hold no cash, the reserve requirement is 10 percent, and there are no excess reserves. Show how the Fed would increase the money supply by $1 million through open market operations.
Because the current money multiplier is 10 , the Fed would buy $ 100,000 worth of bonds, increasing the monetary base and so increasing the money supply by $ 1,000,000 .
Suppose the Fed decides it needs to pursue an expansionary policy. Assume people hold no cash, the reserve requirement is 50 percent, and there are no excess reserves. Show how the Fed would increase the money supply by $1 million through open market operations.
Because the current money multiplier is 2 correct, the Fed would buy correct $500,000 correct worth of bonds, increasing correct the monetary base and so increasing correct the money supply by $1,000,000 correct.
Outline some of the benefits and costs to society when it experiences growth.
Benefits: Higher income, higher employment, and a higher standard of living. Costs: Pollution, resource exhaustion, and destruction of natural habitat.
How can a debt that is too high lead to an even higher debt?
Bondholders may require a risk premium on bonds, resulting in higher interest rates, interest payments, deficits, and ultimately more debt.
Which of the following would make the effects of globalization worse for the United States?
China and India moves up the value-added chain.
News Story: Workers at a car-manufacturing plant in Flint, Michigan are laid off because the economy is weak and GM cars aren't selling well. GM isn't sure when the plant will reopen. What type of unemployment describes the workers' situation?
Cyclical Unemployment
How do structural problems from the aftermath of a financial crisis make policy more difficult?
During a financial crisis, fiscal policy and monetary policy are both in high gear. These policies cannot be sustained over time. As the government's demand policy is changed from expansionary to neutral and fiscal policies are changed to contractionary, government policy will exert a slowing effect on the economy, thus making policy more difficult.
Which of the following statements best characterizes the Keynesian view of business cycles?
Expansions and contractions of the business cycle are symptoms of underlying problems and should be dealt with through activist government policies.
In recent years, many environmentalists have proposed changes to GDP accounting that would take into account the impact of economic activity on the environment. Which of the following economic activities that affect the environment is currently included in GDP?
Expenditures on pollution control technology
True or false? Wages in China are lower than those in the United States. This means that China has a comparative advantage in everything.
False. Comparative advantage refers to relative cost; therefore, if China has a comparative advantage in producing a set of goods, its trading partner will have a comparative advantage in producing another set of goods.
True or false? Globalization is a one-time event, and thus does not present a problem for the future of the United States. Explain your answer.
False. Globalization is not a one-time event. It is an ongoing process in which developing countries compete in more and more activities as they move trade from natural resources to low-skill manufacturing to increasingly complicated goods and services.
True or false? Since globalization causes structural problems, it should be restricted. Explain your answer.
False. Globalization is simply competition on the global level. It should not be restricted. Because of globalization, tradable goods are much cheaper. It has increased the overall world growth rate and increased U.S. consumption even as U.S. potential output was reduced. The problem is that the United States enjoyed the benefits of globalization without facing up to the difficult structural changes that accompany globalization and the resulting trade deficits.
True or false? If you have a job in the nontradable sector, you don't have to worry about the structural effects of globalization. Explain your answer.
False. People working in the nontradable sector are indirectly affected by the structural effects of globalization, since unemployed workers from the tradable sector compete for jobs in the nontradable sector. This competition holds wages and prices down, but much less so than in the tradable sector.
True or false? Policy makers in practice use the money multiplier to determine the amount of reserves needed to achieve the desired money supply. Explain.
False. The cash-to-deposit rate fluctuates too much, making the multiplier change.
If U.S. imports of goods and services exceed exports U.S.:
GDP is less than the sum of consumption, investment, and government purchases.
According to the structural stagnation hypothesis what is the long-run cause of the recent problems facing the United States?
Globalization
How has globalization made the rich richer and poor poorer in the United States?
Globalization led to outsourcing of low income manufacturing jobs while increasing demand for high income financial jobs.
Which of the following is a reason why government debt is different from individual debt?
Government can create money to finance its debt.
Why is who holds the debt an important factor when comparing debt-to-GDP ratios among countries?
Higher levels of external debt create a greater threat of global instability.
Beginning with a country that has a trade deficit, demonstrate graphically what will happen to a country's potential output with globalization if that country's costs of production fall. Explain your answer.
If a country has a trade deficit and its costs of production fall, it will shift the short-run aggregate supply curve down. A fall in wages and other input costs will decrease consumption, since falling wages and costs mean workers have less income to spend. A large enough fall in the costs of production will take the country back to a higher level of potential output.
Using the graph, explain what will happen to a country's potential output with globalization if that country's exchange rate falls. (Assume the country has a trade deficit.)
If a country has a trade deficit and its exchange rate rises, then this will shift the world supply curve up, reducing both domestic spending and the amount of that spending met with foreign production. The upward pressure on the exchange rate should continue until the trade deficit is reinstated. A large enough exchange rate increase will eliminate the structural unemployment caused by globalization, and the country's potential output will decrease.If a country has a trade deficit and its exchange rate rises, then this will shift the world supply curve up, reducing both domestic spending and the amount of that spending met with foreign production. The upward pressure on the exchange rate should continue until the trade deficit is reinstated. A large enough exchange rate increase will eliminate the structural unemployment caused by globalization, and the country's potential output will decrease.
Why are financial-sector crises scarier than collapses in other sectors of the economy?
If the financial sector fails, it can bring the whole economy down with it.
Why does the paradox of thrift suggest that government needs to intervene in a recession?
If the paradox of thrift holds, increasing savings will lower aggregate income and set in motion a cycle of declining expenditures and production. This will reduce income far enough so that once again saving and investment will be in equilibrium, but then the economy will be in an almost permanent recession, with ongoing unemployment. Keynesians believe that in this case the economy will need government's help to prop up aggregate expenditures.
Which of the following puts downward pressure on U.S. manufacturing wages?
Immigration.
How is structural stagnation different from a normal downturn?
In a normal downturn, unemployment rises and output falls, but with expansionary demand-side macro policy, aggregate output goes back to its growth trend. A structural stagnation is a downturn followed by a period of slow growth that is not expected to speed up any time soon without major structural changes in the economy. Structural stagnations are far less responsive to expansionary demand-side policies.
What has happened to growth rates in Western Europe and the United States in recent years?
In recent years, Western Europe and the United States have exhibited very slow growth rates.
Why does globalization mask inflation? Demonstrate your answer graphically.
In the standard AS/AD model, any increase in aggregate demand above potential output will cause inflation. In the globalized AS/AD model shown above, the economy can exceed potential output without generating accelerating inflation because the world price level puts a cap on the domestic price level.
How can an increase in the U.S. saving rate lead to higher living standards?
Increasing the saving rate increases investment, which increases technological growth and total output, both of which raise people's income, leading to a higher standard of living.
How does inflation affect money's function as a store of wealth?
Inflation reduces how much can be purchased with a given amount of money; it lowers money's value.
In what ways do informal property rights limit growth?
Informal property rights limit growth by limiting the size of companies (they must stay small to remain below the government's radar) and by limiting access to business and individual loans when people don't have legal collateral.
How do inherent comparative advantages differ from transferable comparative advantages?
Inherent comparative advantages are those that are based on factors that are relatively unchangeable, while transferable comparative advantages are those based on factors that can change relatively easily.
Why is debt service an important measure of whether debt is a problem?
Interest payments are the result of past expenditures and do not result in additional productive expenditures. They are the burden of the debt: if the debt service is large and is hurting the government's ability to fund today's expenditures, that debt could be considered a problem.
What role do almost all economists agree the central bank has in a financial crisis?
Lender of last resort.
Your income is $38,000 per year; your expenditures are $42,000. You spend $14,000 of that $42,000 for tuition. Is your budget in deficit or surplus? Why?
It depends on the accounting procedure used.
Your income is $54,000 per year; your expenditures are $59,000. You spend $22,000 of that $59,000 for tuition. Is your budget in deficit or surplus? Why?
It depends on the accounting procedure used.
Is the Fed a private or a public agency?
It is neither completely private nor completely public.
When someone stops mowing his own lawn and hires a lawn service to mow it for him, what happens to GDP? (Assume that the lawn service reports its income to the IRS.)
It rises because when the person mows his own lawn it is non-market production that is not counted.
Why would policy makers pay attention to the shape of the yield curve?
It tells policy makers whether their policies are likely to be effective.
What does the structural stagnation hypothesis say about how soon the economy will return to its trend growth?
It will be long time before the economy returns to its previous trend growth rate.
Why can't a large safety net be created so that no one is hurt by globalization?
It would be very costly and people would not want to pay this cost.
Production Possibility Schedules for Two South Pacific Island Nations Refer to the table shown. A comparative advantage in the production of coconuts is held by:
Kiribati Kiribati produces coconuts at a lower opportunity cost (1/4 mango) than Tuvalu (1/3 mango) and therefore has a comparative advantage in coconuts.
Why is knowing the level of potential output important to designing appropriate fiscal policy?
Knowing where the economy is relative to potential output tells you whether to implement expansionary or contractionary policy.
What is the moral hazard problem and how does deposit insurance lead to it?
Moral hazard arises when people's actions do not reflect the full cost of their actions. With deposit insurance, people could put their money into banks that made excessively risky loans without fear of losing their money should the bank fail.
Using the graph below, indicate domestic production and imports. a. Would the United States want to raise or lower the world supply of the good? Why? b. How might that happen?
On the graph, domestic production is Point A and imports are The difference between Point B and Point A. a. The United States would want to raise the world supply to the point where the world supply would equal the domestic demand and supply at the domestic equilibrium price; imports would be exactly offset by exports. b. An increase in the domestic economy's exchange rates relative to a decrease in wages or improvements in comparative advantage can eliminate the trade deficit and raise the world supply. correct
What are examples of tools, operating targets, and ultimate targets?
Open market operations: Tool correct. Discount rate: Tool correct. Reserve requirement: Tool correct. Fed funds rate: Operating target correct. Stable prices: Ultimate target correct. Sustainable growth: Ultimate target correct. Acceptable employment: Ultimate target correct. Moderate long-term interest rates: Ultimate target correct.
How does the outsourcing of manufacturing production benefit production in the United States?
Outsourcing hurts some U.S. workers, but since it improves global income, it can lead to additional demand for goods produced in the United States.
Which of the following contributes to structural unemployment?
People losing a job when their skills become obsolete due to technological innovations.
If people expect interest rates to rise in the future, how will they change the quantity of money they demand? Explain your answer.
People will increase the amount of money they hold, and sell bonds, if they expect interest rates to rise in the future because the price of those bonds will be falling
Why are politicians so uneasy about discussing the structural problems caused by globalization?
Politicians are uneasy because most are reluctant to say that U.S. wages need to fall relative to foreign wages. Thus most political policies provide the illusion of an effective policy but do not offer a serious solution to the structural problems facing the United States.
The business cycle consists of several stages or phases. Which is the accurate sequence?
Recession, trough, expansion, peak
Congratulations! You have been appointed adviser to the Federal Reserve Bank. a. The Federal Open Market Committee decides that it must increase the money supply by 90. Committee members tell you the reserve ratio is 0.1. They ask you what directive they should give to the open market desk. You tell them, being as specific as possible, using the money multiplier. The Fed should buy correct $9.00 correct worth of government bonds. b. They ask you for two other ways they could have achieved the same end. You tell them. c. Based on the AS/AD model, tell them what you think the effect on the price level of your policy will be. d. Based on the structural stagnation model, how does the policy affect the price level?
Reduce the discount rate Lower the reserve requirement. Using the AS/AD model, the effect of increasing the money supply in the short run would be to increase real output and the price level. In the long run, the effect depends on where the economy is relative to potential. If it is above potential, the short-run aggregate supply curve will shift up, bringing the economy back to potential. If the economy is below potential and through monetary policy is brought to potential, the effect will be to increase correct output and the price level. In the structural stagnation model, as the aggregate demand curve shifts to the right, total consumption rises, but the increase in consumption is met with increased correct imports. The result would be an increase correct in the trade deficit, no change in domestic production, and no goods inflation. The increase in the money supply, however, could lead to asset inflation.
A widget has an opportunity cost of 4 wadgets in Saudi Arabia and 2 wadgets in the United States. Given these opportunity costs, you would suggest that:
Saudi Arabia specialize in wadgets and the United States in widgets.
What are two components of M2 that are not components of M1?
Savings deposits. Small-denomination time deposits.
How does the structural stagnation hypothesis differ from secular stagnation theory?
Secular stagnation theory states that advanced countries such as the United States would eventually stop growing because investment opportunities would be eliminated. Without new investment opportunities, the investment component of aggregate demand will wither, and along with it economic growth. The structural stagnation hypothesis, on the other hand, believes that globalization causes structural problems that primarily affect advanced economies, particularly the United States and Europe, which will keep their economic growth below world economic growth into the foreseeable future as much of the growth takes place in developing countries.
If dollar bills (Federal Reserve notes) are backed by nothing but promises and are in real terms worthless, why do people accept them?
Social convention: everyone believes that other people will accept dollar bills in exchange for goods.
What are spillover effects and how do they affect growth?
Spillover effects are positive externalities resulting from a technological change not taken into account by the decision maker. The positive spillover effects result from the common knowledge aspect of technology because the idea behind the technology can often be used by others without payment to the developer. This is the key to growth.
Mexico can produce vine-ripened tomatoes at a lower opportunity cost than firms in the United States. Through trade negotiations, the United States lifted quotas limiting the import of tomatoes from Mexico. Some firms in Florida, in the face of this new competition, had to close their farms and let go their workers. Many of the workers could not find new jobs right away. What type of unemployment describes the workers' situation?
Structural unemployment
How does the Fed use open market operations to increase the money supply?
The Fed buys bonds to increase correct the amount of reserves that banks have on hand. When the Fed buys bonds, banks have more reserves and are able to lend more. As banks lend more, the money supply increases
Why does the Fed have significant influence on the Fed funds rate?
The Fed most directly affects bank reserves and the Fed funds rate is the rate banks charge one another for overnight reserves.
The Fed wants to increase the money supply (which is currently 5,000) by 350. The money multiplier is 4, and people hold no cash. For each 1 percentage point the discount rate falls, banks borrow an additional 10. Explain how the Fed can achieve its goals using the following tools:
The Fed should lower the reserve requirement to 23 percent. b. Change the discount rate. Instructions: Round your answer to 2 decimal places. The Fed should lower the rate by 8.75 percentage points. c. Use open market operations. Instructions: Round your answer to 2 decimal places. The Fed should buy $ 87.50 worth of bonds.
What is meant by the Federal funds rate?
The Federal funds rate is the interest rate banks charge one another for Fed funds or reserves.
Which of the following is not directly affected by monetary policy?
The budget deficit
Why does globalization tend to make the distribution of income less equal?
The distribution of income has become less equal because different groups have been affected differently. International traders and workers have done well from globalization, but the unskilled and not highly skilled in the tradable sector have been most hurt by globalization through job loss or wage cuts. Workers in nontradable sectors are affected because of the indirect competition for jobs from those who have lost jobs in the tradable sector.
What are two roles of the financial sector?
The financial sector facilitates trade, acting as a lubricant to the economy. Its second role is to transfer saving, outflows from the spending stream, back into spending.
If financial institutions don't produce any tangible real assets, why are they considered a vital part of the U.S. economy?
The financial sector transfers saving into investment and makes the real economy more efficient.
What is the relationship between tools, operating targets, intermediate targets, and ultimate targets?
The tools correct of monetary policy are those things over which the Fed has direct control such as open market operations. These tools have a direct effect on operating targets correct such as the Fed funds rate. These operating targets correct in turn will affect intermediate targets such as consumer confidence. It is these intermediate targets correct that then impact the Fed's ultimate targets, which are prices, growth, and employment. Because the Fed cannot directly control its ultimate targets correct, the Fed must rely on adjusting its tools to try to achieve its ultimate targets
If an economy is in short-run equilibrium that is below potential, what forces will bring the economy to long-run equilibrium?
Underutilization correct of inputs will cause input prices to fall, causing the short-run aggregate supply curve to shift down correct and the price level to fall This will set the money wealth, interest rate, and international effects in motion, increasing the quantity of aggregate demand and thereby bringing the economy into long-run equilibrium at potential output.
What function is money serving when people compare the price of chicken to the price of beef?
Unit of account.
Why might deflation be a problem for an economy?
When prices are falling, profits decline, making entrepreneurs hesitant to start businesses, slowing the growth of the economy. Asset values (prices of assets such as houses, stocks, and bonds) also decline, thus reducing the value of collateral used to support consumer and producer loans and therefore spending. So both types of deflation undermine business and consumer confidence.
Why are there few regional Fed banks in the western part of the United States?
When the Fed was established, there were fewer banks in the West.
Why is trust important to the functioning of the economy?
Without some trust that the loan will be repaid, lending will cease and firms will not be able to borrow to invest in production. Production will cease, or at least slow dramatically.
What are the three functions of money?
a. A store of wealth. b. A unit of account. c. A medium of exchange.
Explain how a rise in the price level affects aggregate quantity demanded with the: a. interest rate effect b. international effect c. money wealth effect
a. A rise in the price level reduces the value of cash people are holding. To keep the real value constant, they withdraw more from their banks. This reduces the amount banks have to lend, which leads to higher interest rates and lower investment expenditures. b. Assuming fixed exchange rates, a rise in the price level makes goods less competitive internationally, decreasing exports. c. The money people hold in cash is worth less, which decreases spending.
State the immediate effect of each of the following actions on M1 and M2:
a. Barry writes his plumber a check for $325. The plumber takes the check to the bank, keeps $25 in cash, and deposits the remainder in his savings account. M1 declines correct by $300 M2 does not change correct by $0 b. Maureen deposits the $900 from her CD in a money market mutual fund. M1 does not change correct by $0 M2 does not change correct by $0 c. Sylvia withdraws $65 in cash from her savings account. M1 rises correct by $65 M2 does not change correct by $0 d. Paulo cashes a $200 traveler's check that was issued in his Ohio bank at a New York bank. M1 does not change correct by $0 M2 does not change correct by $0
What are two factors that cause the SAS curve to shift?
a. Changes in productivity. b. Changes in input prices.
Classical growth theory and new growth theory both contribute to economists' understanding of how the sources of growth lead to economic growth. a. How are they the same? b. How do they differ?
a. Classical economists focus on saving. Increased saving increases investment, which in turn increases capital and leads to higher growth. New growth theory's central argument is that technological advance leads to investment, which promotes further technological advance and higher growth. Thus, although capital isn't the primary determinant of growth in new growth theory, it does have a role to play in both growth theories. b. Increases in technology can occur with little investment and saving, whereas increases in investment require increases in saving to build the capital. Also, increases in technology often have enormous positive spillover effects, whereas increases in capital investment are subject to the law of diminishing marginal productivity.
Calculate real growth per capita in the following countries:
a. Democratic Republic of Congo: population growth = 2.5 percent; real output growth = - 1.3 percent. -3.8 b. Estonia: population growth = - 0.1 percent; real output growth = 4.8 percent. 4.9 c. India: population growth = 1.9 percent; real output growth = 5.7 percent. 3.8 d. United States: population growth = 0.9 percent; real output growth = 2.9 percent. 2.0
Congratulations! You have been appointed an economic policy adviser to the United States. You are told that the economy is significantly below its potential output and that the following will happen next year: World income will fall significantly and the price of oil will rise significantly. (The United States is an oil importer.) What policy might you suggest to the government?
a. Expansionary monetary policy. b. Expansionary fiscal policy.
Suppose that two countries, Machineland and Farmland, have the following production possibility curves:
a. Explain how these two countries can move from points A and C, where they currently are, to points B and D. Machineland should produce 200 machines and 0 units of food, while Farmland should produce 200 units of food and 0 machines. If they do this, to get to the desired consumption combination, Machineland can trade 50 machines for 50 units of food and Farmland can trade 50 units of food for 50 machines. b. If possible, state by how much total production for the two countries has risen. Total production of food has increased by 30 units. Total production of machines has increased by 90 units. c. If you were a trader, how much of the gains from trade would you deserve for discovering this trade? The trader could expect up to, but not including, 30 units of food and 90 machines. The trader has to leave the countries better off than they were before. d. If the per unit cost of production falls as output rises, how would your analysis change? Economies of scale would mean that the production possibility curves would not be straight lines, and would be a further argument in favor of specialization; the recommendation doesn't change, but the economic case behind it becomes stronger.
Choose those factors that might destabilize the economy when the price level falls.
a. Falling asset prices reduce perceived wealth. b. Banks call in loans as asset values fall. c. People expect aggregate demand to fall.
When more and more women entered the labor force in the 1970s and 1980s, the economy's potential output rose. a. To the extent that real output rose because of their entry into the labor market, what was the effect on measured GDP? b. What is the effect on aggregate welfare?
a. GDP increased b. it is impossible to say
State whether the following is an example of the transactions, precautionary, or speculative motive for holding money:
a. I like to have the flexibility of buying a few things for myself, such as a latte or a snack, every day, so I generally carry $10 in my pocket. Transactions motive b. You never know when your car will break down, so I always keep $50 in my pocket. Precautionary motive c. When the stock market is falling, money managers generally hold more in cash than when the stock market is rising. Speculative motive d. Any household has bills that are due every month. Transactions motive
The financial sector channels saving into spending. a. What is the risk of the financial sector expanding the spending flow too much? b. What kept this from happening in the United States in the period from 2000 to 2007?
a. If the financial sector expands the spending flow too much, inflationary pressures in either goods or assets may result. b. In the early 2000s, globalization kept inflation low because foreign firms could sell products at much lower prices than could domestic firms.
What dynamic feedback effects can offset the interest rate, international, and money wealth effects?
a. If the price level falls, it creates expectations of falling aggregate demand. b. If the price level falls, it lowers asset prices.
What fiscal policy actions would you recommend in the following instances? a. The economy begins at potential output, but foreign economies slow dramatically. b. The economy has been operating above potential output and inflationary pressures rise. c. A new technology is invented that significantly raises potential output.
a. Increase spending while decreasing taxes (expansionary fiscal policy). b. Decrease spending while increasing taxes (contractionary fiscal policy). c. Increase spending while decreasing taxes (expansionary fiscal policy).
Why is countercyclical fiscal policy difficult to implement?
a. It is difficult to assess the condition of the economy at any one time. b. It takes a long time to enact new government policies. c. Politically it is difficult to raise taxes, even when countercyclical policy is contractionary.
Name three types of capital.
a. Physical capital. b. Human capital. c. Social capital.
Congratulations! You have been appointed an economic policy adviser to the United States. You are told that the economy is significantly below its potential output and that the following will happen next year: World income will fall significantly and the price of oil will rise significantly. (The United States is an oil importer.) a. What will happen to the price level and output? b. Using the AS/AD model, demonstrate your predictions graphically. b. What policy might you suggest to the government?
a. Price level may increase or decrease and output decreases. b. Expansionary monetary policy. c. Expansionary fiscal policy.
You find that real GDP per capita in Burundi is $800 while real GDP per capita in the United States is $50,000. What is misleading about these figures when comparing standards of living?
a. Significant amounts of nonmarket transactions exist in many less-developed countries. b. There is a considerable difference in the relative prices of products among different countries.
Select three sources of comparative advantage that the United States has and will likely maintain over the coming decade.
a. Skills of the U.S. labor force. b. U.S. governmental institutions. c. U.S. physical and technological infrastructure.
Categorize the following as components of M1, M2, both, or neither.
a. State and local government bonds. Neither correct b. Checking accounts. Both c. Money market deposit accounts. M2 d. Currency. Both e. Stocks. Neither f. Corporate bonds. Neither correct g. Traveler's checks. Both
What are the six explicit functions of the Fed?
a. Supervising financial institutions. b. Providing banking services to the U.S. government. c. Providing financial services to commercial banks. d. Conducting monetary policy. e. Issuing coin and currency. f. Serving as a lender of last resort.
Congratulations! You have been appointed adviser to the Federal Reserve Bank. a. The Federal Open Market Committee decides that it must increase the money supply by 80. Committee members tell you the reserve ratio is 0.2. They ask you what directive they should give to the open market desk. You tell them, being as specific as possible, using the money multiplier. b. They ask you for two other ways they could have achieved the same end. You tell them. c. Based on the AS/AD model, tell them what you think the effect on the price level of your policy will be. d. Based on the structural stagnation model, how does the policy affect the price level?
a. The Fed should buy $16.00 worth of government bonds. b. lower the reserve requirements, reduce the discount rate c. Using the AS/AD model, the effect of increasing the money supply in the short run would be to increase correct real output and the price level. In the long run, the effect depends on where the economy is relative to potential. If it is above potential, the short-run aggregate supply curve will shift up correct, bringing the economy back to potential. If the economy is below potential and through monetary policy is brought to potential, the effect will be to increase correct output and the price level. d. In the structural stagnation model, as the aggregate demand curve shifts to the right correct, total consumption rises correct, but the increase in consumption is met with increased correct imports. The result would be an increase correct in the trade deficit, no change in domestic production, and no goods inflation. The increase in the money supply, however, could lead to asset inflation correct.
What will happen to the position of the SAS curve and/or LAS curve in the following circumstances? a. Available factors of production increase. b. A civil war occurs. c. Wages that were fixed become flexible, and aggregate demand increases.
a. The LAS curve will shift to the right, and the SAS curve will not shift initially. b. The LAS curve will shift to the left, while the SAS curve will shift up. c. The SAS curve will shift up, and the LAS curve will not shift.
What will likely happen to the SAS curve in each of the following instances? a. Productivity rises 3 percent; wages rise 4 percent. b. Productivity rises 3 percent; wages rise 1 percent. c. Productivity declines 1 percent; wages rise 1 percent. d. Productivity rises 2 percent; wages rise 2 percent.
a. The SAS curve will shift up, since wages rise by more than the rise in productivity. b. The SAS curve will shift down, since productivity rises by more than the rise in wages. c. The SAS curve will shift up, since wages rise and productivity declines. d. The SAS curve will not shift, since the wage increase is exactly offset by a productivity increase.
While Jon is walking to school one morning, a helicopter flying overhead drops a $20 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 25 percent of its money in reserves:
a. The bank can lend out $20 - ($20 x 0.25) = $15. b. There is now an additional $35 ($20 + $15) in the economy. c. The multiplier is 1 / 0.25 = 4. d. Jon's $20 will ultimately turn into $20 x 4 = $80.
List three ways in which individual debt differs from government debt.
a. The government lives forever; people don't. b. Government owes much of its debt to itself, which is debt owed to its own citizens. c. The government can print money to pay its debt; people can't.
The dollar price of the South African rand fell from 29 cents to 22 cents in 1996, the same year the country was rocked by political turmoil. Using the supply/demand graph above, explain why the turmoil led to a decline in the price of the rand.
a. The supply of rand shifted to the right because South Africans lost faith in their government. b. Demand shifted to the left because Americans wanted to hold fewer rand. c. The rightward shift of supply and the leftward shift of demand led to a fall in the price of the rand from 29 cents to 22 cents.
According to Keynesians how could the economy's output deviate from its potential?
a. When aggregate demand falls, in response firms lower production and lay off workers. This causes people's income to fall, thus lowering consumption expenditures further and causing firms to lower production. This downward spiral leads to an equilibrium where output is lower than potential output. b. When aggregate demand is high, in response firms increase production and hire workers. This causes people's income to increase, thus increasing consumption expenditures further and causing firms to increase production. This upward spiral leads to an equilibrium where output is greater than potential output.
The Genuine Progress Indicator is an alternative measure to economic activity. a. Is the Genuine Progress Indicator a subjective measure of the economy? b. Is GDP a subjective measure?
a. Yes, because it requires a valuation of social goals. b.Yes, because what is being measured is a matter of judgment.
Assume that a country's real growth is 5 percent per year, while its real deficit is rising 8 percent a year. a. Can the country continue to afford such deficits indefinitely? b. What problems might it face in the future?
a. Yes. The country can continue to afford such deficits as long as it can sell bonds. b. At some point, creditors will begin to doubt the country's ability to repay the debt because of the increasing debt-to-GDP ratio. Then selling bonds will become more difficult and eventually impossible.
What policies are needed to deal with the structural problems caused by globalization?
a. decreasing the exchange rate value of the dollar b. instituting policies that will pressure workers to lower their reservation wages c. raise tariffs to increase the cost of imported goods
What are the two ways government can finance a budget deficit?
a. sell bonds b. print money
Which of the following are reasons why economists' and laypeople's view of trade differ?
a.Economists can identify both the costs and benefits of trade. Laypeople often do not recognize that the decline in product prices is the result of trade, while they can readily identify that lost jobs are the costs. b. Economists know that comparative advantage implies that each country is better at producing at least one good. Laypeople worry that since wages are lower in China, it has a comparative advantage in all goods and the United States will lose all its jobs. c. Economists recognize that trade occurs in more sectors than manufacturing. They see the comparative advantage that the United States has in trading services. Laypeople tend to see trade as trade in manufactured goods only.
Government debt is defined as:
accumulated deficits minus accumulated surpluses.
To move from gross domestic product (GDP) to gross national product (GNP), one must:
add net foreign factor income to GDP.
The short-run business cycle framework focuses primarily on factors:
affecting demand.
State whether the following actions will increase or decrease GDP: b. An individual sells her house on her own. c. An individual sells his house through a broker. d. Government increases Social Security payments. e. Stock prices rise by 20 percent.
b. GDP will not change c. GDP will rise d. GDP will not change e.GDP will not change
If people held all their money as cash:
banks could not create money.
In the short-run framework, budget deficits should:
be run on a temporary basis whenever the economy is below potential output.
The U.S. balance of trade has:
been in deficit since the 1980s.
According to the short-run aggregate supply curve, firms are most likely to respond to an increase in aggregate demand by raising:
both production and prices.
The efficient market hypothesis suggests that:
bubbles won't occur
If housing prices are rising by 20 percent per year, you can borrow money at 5 percent per year, and you are sure housing prices will continue to rise in the future, you would be wise to:
buy as many houses as you can.
Bank reserves are:
cash and deposits a bank keeps on hand or at the central bank.
Say the marginal tax rate is 25 percent and that government expenditures do not change with output. Say also that the economy is at potential output and that the deficit is $300 billion a. What is the size of the cyclical deficit? c. How would your answers to a and b change if the deficit was still $300 billion but output was $100 billion below potential? b. What is the size of the structural deficit? d. How would your answers to a and b change if the deficit was still $300 billion but output was $200 billion above potential? e. Which is likely of more concern to policy makers: a cyclical or a structural deficit?
ch 15 question 25 PT
Assume a country's nominal GDP is $850 billion, government expenditures less debt service are $100 billion, and revenue is $100 billion. The nominal debt is $100 billion. Inflation is 5 percent and interest rates are 4 percent. a. Calculate debt service payments. b. Calculate the nominal deficit or surplus. Add a negative sign before the value to indicate a deficit. c. Calculate the real deficit or surplus, placing a negative sign in front of the value if it is a deficit.
chapter 15 practice test number 21
Small differences in growth rates can create large differences in income levels because of:
compounding.
Unemployment caused by recession is called:
cyclical unemployment
Which one of the following is short-run involuntary unemployment?
cyclical unemployment
Keynesian economists believe:
government can implement policy proposals that can positively impact the economy.
Money facilitates trade because it:
does not require a double coincidence of wants among individuals.
The study of economic growth focuses on the factors that cause an:
economy's production possibility curve to shift out.
Aggregate income is the sum of:
employee compensation, rent, profits, and interest.
One of structural stagnationist's criticisms of Fed policy after the financial crisis is that it:
enabled government to run large deficits through lower interest rates.
When comparative advantage is based on transferable factors, the law of one price tends to:
erode the advantage away.
The Glass-Steagall Act was set up to:
establish banking regulations and deposit insurance as a result of the 1930s crisis.
Globalization is an ongoing process because:
foreign countries, especially China and India, are moving up the value added chain and will compete with more and more goods.
One of the reasons that expansionary monetary policy was not as effective as expected in recent years is that banks:
held onto the reserves that the Fed added to banks.
Deficits may be desirable in the short run if they:
help to stabilize the economy when the economy falls below potential output.
The two main causes of a bubble are:
herding and leverage.
If the financial sector fails, it can bring the whole economy down with it.
herding.
If foreign producers can supply an infinite amount of tradable goods at the world price, this would imply that the world supply curve is:
horizontal.
In the globalized AS/AS model, the world supply curve is:
horizontal.
If the Fed decreases the reserve requirement, it:
increases the amount of excess reserves and this eventually increases the money supply.
In the structural stagnation model where the world price level is below the domestic price level, expansionary monetary policy:
increases the trade deficit.
Structural stagnation cannot be treated as a normal business cycle because:
it is far less responsive to typical demand-side policies.
Using a credit card creates a financial:
liability for the holder and a financial asset for the issuer.
According to structural stagnationists, when workers lose their jobs in the tradable sector they are pressured to:
lower their reservation wage.
The target rate of unemployment is defined as the:
lowest sustainable rate of unemployment achievable under existing conditions.
The growth produced by markets:
makes the average person better off but may worsen the distribution of income.
If economic activity increases, it follows that economic welfare:
may increase, decrease, or remain unchanged depending on the nature of the increase in economic activity.
Compounding means that changes in living standards depend:
on both the initial level of income and the accumulation of changes in income since the initial year.
The foreign exchange rate is the rate at which:
one country's currency can be traded for another country's currency.
The primary tool of monetary policy is:
open market operations.
Selling short-term treasury bills and buying longer-term treasury bonds without creating more new money is called:
operation twist.
Politicians would tend not to support the policy solutions to end structural stagnation proposals put forward in this chapter because they would:
politicians have to worry about getting reelected.
The highest amount of output an economy can sustainably produce and sell using existing production processes and resources is called:
potential output
Demonstrate the effect of expansionary monetary policy in the AS/AD model when the economy is: a. Below potential output
practice test 13 number 7
One solution to long-run structural problems could involve:
shifting the world supply curve up.
According to new growth theory, the primary source of growth is:
technology
The discount rate is the interest rate:
the Fed charges on loans to commercial banks.
Open market operations are related to:
the Fed's buying and selling of government securities.
The Mexican demand for American goods leads to:
the demand for U.S. dollars and the supply of Mexican pesos on the foreign exchange market.
A cyclical deficit is the portion of the deficit that exists when:
the economy is beneath potential income.
If a firm or an industry is considered too big to fail, it is
wise to regulate it because of the moral hazard problem.