Macro Study Guide

Categorize each of the following as cyclical or structural unemployment: a. An autoworker is laid off during a recession until car sales pick up. This is cyclical unemployment. b. A steel worker loses his job because steel is now produced in foreign countries with lower wages. This is structural unemployment. c. A compositor loses her job because the work is now outsourced to India. This is structural unemployment.

Categorize each of the following as cyclical or structural unemployment: a. An autoworker is laid off during a recession until car sales pick up. This is cyclical unemployment. b. A steel worker loses his job because steel is now produced in foreign countries with lower wages. This is structural unemployment. c. A compositor loses her job because the work is now outsourced to India. This is structural unemployment.

What are two factors that cause the SAS curve to shift?

Changes in productivity. Changes in input prices.

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.

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.

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.

Assuming individuals hold no currency, calculate the simple money multiplier for each of the following reserve ratios:

8%: 12.50 . 15%: 6.67 . 22%: 4.55 . 40%: 2.50 . 60%: 1.67 . 70%: 1.43 . 90%: 1.11 .

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.

List the three major forms of business. a. What form is most common? b. What form accounts for the largest proportion of sales?

Partnership. Sole proprietorship. Corporation. a-Sole proprietorship. b- Corporation.

A country has the following production possibility table: b. What's happening to the trade-off between food and clothing? c. Say the country gets better at the production of food. What will happen to the production possibility curve? The production possibility curve: shifts out along the food axis only. d. Say the country gets better at producing clothing and worse at producing food. What will happen to the production possibility curve? The production possibility curve: shifts out along the clothing axis and shifts in along the food axis.

b.The trade-off between clothing and food is increasing. c. The production possibility curve: shifts out along the food axis only. d. Say the country gets better at producing clothing and worse at producing food. What will happen to the production possibility curve? The production possibility curve: shifts out along the clothing axis and shifts in along the food axis.

If people held all their money as cash:

banks could not create money.

One of the reasons that expansionary monetary policy has not been as effective as expected in recent years is that:

banks were holding significant excess reserves.

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.

Economics is an art because it:

blends objective and subjective analyses.

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.

Two countries that specialize their production along the lines of comparative advantage and then trade with one another will be able to:

both produce and consume more.

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.

In the goods market:

businesses produce goods and services and sells them to households and government.

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.

The lowest sustainable rate of unemployment that policy makers believe is achievable under existing conditions is:

called the target rate of unemployment.

The target rate of unemployment:

can change over time.

Structural unemployment:

cannot be reduced with demand side policies.

A primary goal of the World Bank is to:

channel low-interest loans to developing countries to foster economic growth.

The largest expenditure component of GDP is:

consumption.

Socialism in theory is based on the principle that individuals should:

cooperate with one another to meet their needs.

If median income is unchanged from one year to the next, then per capita income:

could be increasing, decreasing, or constant.

Unemployment caused by recession is called:

cyclical unemployment.

When the Fed promised to hold the Fed funds rate close to zero until the end of 2014, it was:

following a precommitment policy.

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.

A concern about long-term economic growth was important in economics:

from the time of Adam Smith and his The Wealth of Nations.

When the economy entered a serious recession in 2008, the response of the U.S. government was to institute a $700 billion bailout plan, pursue other heavy deficit spending, and take on unusually large liabilities through bond and money market fund guarantees. This is an example of:

functional finance and expansionary fiscal policy.

Under the official definition, discouraged workers are people who:

get discouraged when they can't find a job, and stop looking for one, even though they still want a job.

Keynesian economists believe:

government can implement policy proposals that can positively impact the economy.

Deposit insurance is:

government insurance that promised to reimburse individuals for loss in the value of deposits.

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.

Suppose you work in investments for a financial institution, and other banks are making a fortune with Irish goldmines. The fact that you are more likely to move to invest in Irish goldmines just because you see other banks doing so is called:

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 factor market:

households supply factors of production to business and are paid by business for doing so.

A financial asset is liquid:

if it can be readily exchanged for another asset or good.

Mexico has a comparative advantage in producing corn:

if its opportunity cost of producing corn is lower than the opportunity cost in other countries.

The Classical economists argued that:

if unemployment occurs, it will cure itself because wages and prices will fall.

If the euro rises in price, it becomes:

more expensive for Americans to buy European products but cheaper for Europeans to buy American products.

When interest rates go up, it is:

more expensive for businesses to borrow, so investment falls.

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.

Banks can borrow reserves from each other through:

the Fed funds market.

The theoretical proposition that government deficits do not affect the level of output because individuals realize that they have to pay the deficits in the future and therefore increase their savings is called:

the Ricardian equivalence theorem.

If the hourly wage of U.S. workers is $16, the hourly wage of Mexican workers is $2, and U.S. workers produce 9 times as much output per hour as Mexican workers, then, all else equal, it would be efficient to locate production facilities in:

the U.S. since the cost per unit of output will be lower.

The art of economics is:

the application of the knowledge gained by positive economics to the goals set in normative economics.

Monetary policy directly affects:

the availability of credit.

The opportunity cost of attending college for one year is best measured by the:

value of the next-best activity forgone by attending college.

The largest source of household income in the U.S. is:

wages and salaries.

According to Classical economists in the 1930s, a recession will end when:

wages fall enough to eliminate unemployment.

Profit is:

what is left over from total revenue after all of the appropriate costs have been subtracted.

Economic reasoning would never help you decide:

what is morally right and what is wrong.

Economists generally are:

more concerned about structural deficits than cyclical deficits.

Global corporations in general are:

more difficult to regulate than domestic corporations.

The Rule of 72 implies that a country will double its income in about 9 years if its growth rate is:

8 percent.

If the structural budget deficit is $150 billion and the actual deficit is $500 billion, what is the size of the cyclical deficit?

$ 350 billion.

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.

If a country of 300 million people has a total income of $12 trillion, its per capita income is:

$40,000.

Which of the lines represents the structural stagnation's assumption about trend growth?

2.25% trend.

Suppose you are a lender and you expect inflation to be 4 percent over the next year because inflation was 4 percent in the last year. If you want to earn a real return of 2 percent on any loans you make, you will set the interest rate on your loans equal to:

6 percent.

If output rises by 14 percent and population rises by 8 percent, how much does per capita output increase?

6% Increase in per capita output = increase in output - increase in population = 14 - 8 = 6 percent

From the standpoint of adjustment costs to trade, which would a country prefer—inherent or transferable comparative advantage? Why?

A country would prefer an inherent comparative advantage because it would not lose that comparative advantage or face the adjustment costs that accompany the change of comparative advantages.

Which of the following will help address structural stagnation problems?

A decrease in workers' reservation wages.

The text mentions 10 sources of U.S. comparative advantage. Which of the following is not one of them?

A high ratio of lawyers to the population

How does a policy regime differ from a policy?

A policy regime is a predetermined statement about what policies will be followed in various situations. It ties the hands of policy makers. A policy is a one-time action that does not imply the course of future actions.

What are the three functions of money?

A store of wealth. A unit of account. A medium of exchange.

What is functional finance?

A view that government should make spending and taxing decisions on the basis of their effect on the economy rather than concern itself with balancing the budget.

If the government increases transfer payments, what happens to aggregate output?

Aggregate output would remain the same.

Which of the following industries likely will be a long-term inherent comparative advantage for the United States?

Agriculture

Which of the following would cause the demand curve for euros to shift left?

Americans want to buy fewer European goods.

What is an economic model? What besides a model do economists need to make policy recommendations?

An economic model is a framework that places the generalized insights of a theory in a more specific contextual setting. Policymakers need to understand the empirical evidence supporting the theory as well as real-world economic institutions to make policy recommendations.

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.

Consider the AS/AD model below. Assume the initial equilibrium position is indicated by point A.

Assume the government has been running a deficit. The government has just increased taxes. a. Using the standard model, the new equilibrium point will occur at G. b. If there were partial crowding out, the new equilibrium point would occur at D. c. If there were complete crowding out, the new equilibrium point would occur at A.

How can automatic stabilizers slow an economic recovery?

Automatic stabilizers increase taxes and reduce expenditures during recoveries without additional government action, which act to slow the recovery.

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.

Why is the LAS curve vertical?

Because output is independent of the price level.

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 $3 million through open market operations.

Because the current money multiplier is 10 , the Fed would buy $ 300,000 worth of bonds, increasing the monetary base and so increasing the money supply by $ 3,000,000 .

Which of the following is an example of the law of one price?

Because their countries have similar institutions, computer programmers in Germany and the United States are paid about the same.

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 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.

From 2001 to 2010, which geographic area or country had the highest per capita growth rate?

China.

Did Keynesian or Classical economics support laissez-faire policy?

Classical economics supported laissez-faire policy.

College degrees are usually associated with higher wages. That association means that what one learns in college could increase a college student's productivity if: the college courses improve the student's ability to think and perform in work.

College degrees are usually associated with higher wages. That association means that what one learns in college could increase a college student's productivity if: the college courses improve the student's ability to think and perform in work.

What expenditure category of production is largest for most countries?

Consumption.

What are the six roles of government listed in the text?

Correcting for externalities. Adjusting for undesired market results. Promoting effective and workable competition. Providing public goods. Providing a stable set of institutions and rules. Ensuring economic stability and growth.

Which one of the following is short-run involuntary unemployment?

Cyclical unemployment.

Which of the following has been an effect of globalization and a large trade deficit?

Decreased employment in the tradable sector

Which of the following would not be considered an automatic stabilizer?

Defense spending.

Does the unemployment rate underestimate or overestimate the unemployment problem? Explain. The unemployment rate could underestimate or overestimate the problem, depending on how a person views those who are not working or working less than desired.

Does the unemployment rate underestimate or overestimate the unemployment problem? Explain. The unemployment rate could underestimate or overestimate the problem, depending on how a person views those who are not working or working less than desired.

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.

How are state balanced-budget requirements procyclical?

During downturns, tax revenue generally falls, making it necessary for state governments to raise tax rates and cut expenditures in order to maintain a balanced budget, further slowing down the economy.

Is capitalism or socialism the better economic system? Why?

Economics does not provide an answer to normative questions such as this.

What is the largest component of aggregate income for most countries?

Employee compensation.

Why is entrepreneurship a central part of any business?

Entrepreneurship is a central part to any business because business is dynamic; it involves meeting new problems constantly, recognizing needs, and meeting those needs in a timely fashion.

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.

Inflation is 20 percent. Debt is $2 trillion. The nominal deficit is $300 billion. If the expected inflation rate falls from 20 percent to 15 percent, by how much does the real deficit change?

Expected inflation does not change the real deficit.

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.

Which of the following are macroeconomic problems

Federal budget deficit. & Recession

Which of the following equations is the correct equation for GDP?

GDP = C + I + G + X - M.

If U.S. imports of goods and services exceed exports U.S.:

GDP is less than the sum of consumption, investment, and government purchases.

What effect has globalization had on the ability of firms to specialize? How has this affected the competitive process?

Globalization increases competition by allowing greater specialization and division of labor.

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.

According to the structural stagnation hypothesis what is the long-run cause of the recent problems facing the United States?

Globalization.

Which of the following is a reason why government debt is different from individual debt?

Government can create money to finance its debt.

According to crowding out, how is government spending offset by a reduction in private spending?

Government spending increases the demand for loanable funds and increases the interest rate. An increase in the interest rate reduces private investment spending, which offsets the effect of increases in government spending on aggregate demand.

The assumption that the size of the debt doesn't matter has been called into question even more fervently than ever because of the debt problems faced by:

Greece, showing that major debts are unsustainable.

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.

Suppose your college has been given $5 million. You have been asked to decide how to spend it to improve your college. Explain how you would use the economic decision rule and the concept of opportunity costs to decide how to spend it.

I would spend the $5 million on those projects that provide the highest marginal benefit per dollar spent.

If an economy has a trade surplus, total domestic production is _______ than total domestic expenditures.

If an economy has a trade surplus, total domestic production is GREATER than total domestic expenditures.

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.

What dynamic feedback effects can offset the interest rate, international, and money wealth effects?

If the price level falls, it creates expectations of falling aggregate demand. If the price level falls, it lowers asset prices.

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.

What is the effect of expansionary monetary policy in the structural stagnation model?

In the structural stagnation model, the domestic price level is held down by the world price level. As a result, domestic production stays the same, foreign production increases, and the trade deficit increases. Asset price inflation may result.

What are the two largest categories of federal government expenditures?

Income security and health and education.

What are two ways in which long-term economic growth is measured?

Increases in total output and per capita total output.

Use the AS/AD model to explain why most presidents advocate government spending programs when running for reelection.

Increasing government spending shifts out aggregate demand and thereby increases income and reduces unemployment. This makes people better off in the short run and more likely to vote for the incumbent president. The exception would be if the economy is already above potential income and there is a significant inflation threat.

Use the AS/AD model to explain the maxim in politics that if you are going to increase taxes, the time to do it is right after your election, when reelection is far off.

Increasing taxes shifts the aggregate demand curve to the left, decreasing income, increasing unemployment, and making people less likely to vote for those in office. The maxim holds because people tend to have short memories.

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.

Your income is $35,000 per year; your expenditures are $40,000. You spend $25,000 of that $40,000 for tuition. Is your budget in deficit or surplus? Why?

It depends on the accounting procedure used.

Which will be larger, gross domestic product or gross national product?

It depends.

Why is countercyclical fiscal policy difficult to implement?

It is difficult to assess the condition of the economy at any one time. It takes a long time to enact new government policies. Politically it is difficult to raise taxes, even when countercyclical policy is contractionary.

If workers in China and India become as productive as U.S. workers, what adjustments will allow the United States to regain its competitiveness?

It is possible that there will be development in areas of production/services that will allow U.S. wages to remain high, but in all likelihood either U.S. nominal wages will grow slowly and foreign nominal wages will grow rapidly and catch up or U.S. exchange rates will decline to equalize wages. Some combination of the two is most likely.

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.

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.

If the U.S. dollar appreciates against the Japanese yen:

Japanese goods will be cheaper in the United States.

Macroeconomics emerged as a separate field largely in response to:

John M. Keynes's explanation of depression.

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 role do almost all economists agree the central bank has in a financial crisis?

Lender of last resort.

"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.

Why are international organizations limited in their effectiveness?

Membership is voluntary and there is no world government to enforce the laws.

In what market are short-term interest rates determined?

Money market.

Moore's law states that every 18 months, the computing speed of a microchip doubles.

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? The price level falls and output rises. b. Demonstrate your answer graphically using the AS/AD model. [on phone]

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.

In what way would the guaranteed jobs program outlined in the text be more expensive if it provided useful jobs for society?

More people would participate and higher employment levels would raise wages.

Why do smaller countries usually get most of the gains from trade?

More trade opportunities are opened up for small countries.

Name three types of capital.

Name three types of capital. Physical capital. Human capital. Social capital.

Assume that per capita income is growing at different rates in the following countries: Nepal, 1.1 percent; Kenya, 1.7 percent; Singapore, 7.2 percent; Egypt, 3.9 percent. How long will it take for each country to double its income per person?

Nepal: 65.5 ± .1years. Kenya: 42.4 ± .1 years. Singapore: 10.0 ± .1 years. Egypt: 18.5 ± .1years. Explanation: 72/ growth rate= number of years to double Thus, it will take Nepal 65.5 years, Kenya 42.4 years, Singapore 10.0 years, and Egypt 18.5 years to double its income per person.

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.

Does economic theory prove that the free market system is best? Why?

No, economic theory proves nothing about what system is best. It simply gives ways to look at systems and determine what the advantages and disadvantages of various systems will likely be. Normative decisions about what is best can only follow from one's value judgments.

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.

If unemployment rises by 2 percentage points, what will likely happen to output in the United States relative to its growth trend? (Use Okun's rule of thumb.)

Output will decrease by 4 percent.

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.

Why does an economy's strength ultimately reside in its people?

People choose which goods to supply and what goods to demand; they supply labor and develop new technologies.

According to the Ricardian equivalence theorem, why is government spending offset by a reduction in private spending?

People increase their savings in anticipation of a future increase in taxes to pay for that deficit.

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.

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 income category keeps aggregate output and aggregate income equal?

Profit.

Which of the following are microeconomic problems?

Raw material inventory control. & Advertisement outlay

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.

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?

Significant amounts of non-market transactions exist in many less-developed countries. There is a considerable difference in the relative prices of products among different countries.

Since a jobs program puts people to work, would it impose costs on society?

Since a jobs program puts people to work, would it impose costs on society? Yes, because there are administrative costs and possible forgone employment costs.

Select three sources of comparative advantage that the United States has and will likely maintain over the coming decade.

Skills of the U.S. labor force. U.S. governmental institutions. U.S. physical and technological infrastructure.

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.

You're starting a software company in which you plan to sell software to your fellow students. What form of business organization would you choose? Why?

Sole proprietorship or partnership because it's easy to start, requires minimal bureaucratic hassle, and is controlled by the owners.

If you add up all the transactions in an economy, do you arrive at GDP, GNP, or something else?

Something else.

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.

What is the difference between the structural stagnation hypothesis and secular stagnation theory?

Structural stagnation sees globalization as the cause of a stagnation, while secular stagnation sees too little investment as the cause.

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.

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

Workers at a car-manufacturing plant are let go because automated machinery has been installed that requires fewer employees to operate. What type of unemployment describes the workers' situation?

Structural unemployment

Distinguish between structural unemployment and cyclical unemployment.

Structural unemployment is unemployment caused by the institutional structure of an economy or by economic restructuring making some skills obsolete, whereas cyclical unemployment is unemployment resulting from fluctuations in economic activity.

What type of unemployment is best studied within the long-run framework?

Structural unemployment.

Which of the following is a normative statement?

The governments should spend more to aid the poor.

How does the Fed use open market operations to increase the money supply?

The Fed buys bonds to increase 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.

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.

An innovator, who creates new products and new ways to get business done, is referred to as:

an entrepreneur.

What are two organizations that countries can use to coordinate economic relations and reduce trade barriers?

The World Trade Organization (WTO) and the North American Free Trade Agreement (NAFTA).

What is the opportunity cost of buying a $15,000 car?

The benefit from spending that $15,000 on the next-best alternative.

In a centrally planned socialist economy, what is the central coordinating mechanism?

The central planners.

The U.S. economy did not recover as expected after which economic downturn?

The crash of 2008

Say the government establishes rights to pollute so that without a pollution permit you aren't allowed to emit pollutants into the air, water, or soil. Firms are allowed to buy and sell these rights. In what way will this correct for an externality?

The creation of pollution permits with a market forces polluters to take into account the cost of their pollution and assign rights, thereby correcting for the externality.

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 will likely lower cyclical unemployment?

The economy expands.

Which of the following topics is best categorized as a macroeconomic issue?

The effect of an increase in federal spending on the unemployment rate

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.

List three ways in which individual debt differs from government debt.

The government lives forever; people don't. Government owes much of its debt to itself, which is debt owed to its own citizens. The government can print money to pay its debt; people can't.

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.

On what law of production did Thomas Malthus base his prediction that population growth would exceed growth in goods and services?

The law of diminishing marginal productivity.

State the law of one price. How is it related to the movement of production out of the United States?

The law of one price states that the wages of workers in one country will not differ significantly from the wages of (equal) workers in another institutionally similar country. Wages adjusted for productivity differences are lower in other countries, so firms choose to use workers in foreign countries.

In a market economy, what is the central coordinating mechanism?

The price mechanism.

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.

Suppose you currently earn $23,000 a year. You are considering a job that will increase your lifetime earnings by $230,000 but that requires an MBA. The job will mean also attending business school for two years at an annual cost of $28,000. You already have a bachelor's degree, for which you spent $75,000 in tuition and books. Which of the above information is relevant to your decision whether to take the job?

The relevant costs are the opportunity cost of taking the job (forgone earnings from your current job) and other things you could have done with the money you need to pay for business school. The tuition for the bachelor's degree is a sunk cost and is not relevant. The relevant benefit is the increased lifetime earnings of $230,000.

Would you expect the resource curse to improve or worsen the distribution of income in a country?

The resource curse will reduce the comparative advantage of other tradable goods.

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.

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. Demand shifted to the left because Americans wanted to hold fewer rand. The supply of rand shifted to the right because South Africans lost faith in their government.

The safety net in the proposed guaranteed jobs program differs from the current safety net because unlike the current program, the guaranteed jobs proposal provides a safety net to those people: who either don't have a job or haven't held a job for very long.

The safety net in the proposed guaranteed jobs program differs from the current safety net because unlike the current program, the guaranteed jobs proposal provides a safety net to those people: who either don't have a job or haven't held a job for very long.

What is the relationship between tools, operating targets, intermediate targets, and ultimate targets?

The tools 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 such as the Fed funds rate. These operating targets in turn will affect intermediate targets such as consumer confidence. It is these intermediate targets that then impact the Fed's ultimate targets, which are prices, growth, and employment. Because the Fed cannot directly control its ultimate targets, the Fed must rely on adjusting its tools to try to achieve its ultimate targets.

Which of the following factors will help the United States regain comparative advantages in industries in which it has lost comparative advantages?

The value of the U.S. dollar falls.

Which of the following statements best describes the figure shown?

The world price level equals the domestic price level.

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.

If neither of two countries has a comparative advantage in either of two goods, what are the gains from trade?

There are no gains from trade.

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.

During the past few recessions, government ran expansionary policies, but the duration of unemployment has risen. What does this suggest about the change in structural unemployment over this time period?

This suggests that structural unemployment has risen.

Why does competition among traders affect how much of the gains from trade are given to the countries involved in the trade?

Traders will compete with one another, giving countries greater and greater amounts of the gains from trade to gain their business.

Interest rates on government bonds are relatively low because:

U.S. government bonds are considered one of the safest assets in the world.

Government debt is defined as:

accumulated deficits minus accumulated surpluses.

If an economy is in short-run equilibrium that is below potential, what forces will bring the economy to long-run equilibrium?

Underutilization of inputs will cause input prices to fall, causing the short-run aggregate supply curve to shift down 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.

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.

Which of the following is an example of the law of one price in action?

Wages in India are lower than in the United States, so firms move their call-centers to India. This tends to raise wages in India and depress wages in the United States.

How do wealth accounts differ from national income accounts?

Wealth accounts are stock measures; national income accounts are flow measures.

What is a reservation wage? It is the wage a person requires before accepting a job. How is it related to structural unemployment? The higher a person's reservation wage, the higher will be structural unemployment.

What is a reservation wage? It is the wage a person requires before accepting a job. How is it related to structural unemployment? The higher a person's reservation wage, the higher will be structural unemployment.

According to Keynesians how could the economy's output deviate from its potential?

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. 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.

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.

Which of the following is not one of the three central coordination problems of the economy given in the book?

Whether

Why does the author suggest that students be ineligible for the guaranteed jobs program even though many students are in need? Limiting eligibility reduces the cost of the program and students often seek only part-time employment.

Why does the author suggest that students be ineligible for the guaranteed jobs program even though many students are in need? Limiting eligibility reduces the cost of the program and students often seek only part-time employment.

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.

Does it matter to policy makers how people form expectations?

Yes, expectations generally affect the impact of policy.

Show how a production possibility curve would shift if a society became more productive in its output of widgets but less productive in its output of wadgets.

[lowest dash on y and farthest dash on x]

Demonstrate graphically how a falling price level can destabilize an economy. Choose those factors that might destabilize the economy when the price level falls.

[on phone] Falling asset prices reduce perceived wealth. Banks call in loans as asset values fall. People expect aggregate demand to fall.

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.

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.

Any economic system:

addresses the questions what is produced, how it is produced, and for whom it is produced.

A key difference between functional finance and sound finance is that in the functional finance approach the government has the potential for:

a more active role in spending and taxing decisions.

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 budget deficit is defined as:

a shortfall of revenues compared to expenditures.

In two hours JustBorn Candies can produce 30,000 Peeps or 90,000 Mike and Ikes or any combination in between. a. What is the trade-off between Peeps and Mike and Ikes? b. Draw a production possibility curve that reflects this trade-off. c. Identify and label three points: efficient production, inefficient production, impossible. d. Illustrate what would happen if JustBorn candies developed a technology that increased productivity by one third for both products.

a- For every Peep, 3 Mike and Ikes can be produced. b-[y at 30 and x at 90] c- An efficient production point is on the production possibilities curve., an inefficient production point is inside the production possibilities curve., and an impossible point is outside the production possibilities curve.. d- [y at 40 and x at 120]

State whether the following statements belong in positive economics, normative economics, or the art of economics. a. In a market, when quantity supplied exceeds quantity demanded, price tends to fall. b. When determining tax rates, the government should take into account the income needs of individuals. c. When deciding which rationing mechanism is best (lottery, price, first-come/first-served), one must take into account the goals of society. d. California currently rations water to farmers at subsidized prices. Once California allows the trading of water rights, it will allow economic forces to be a market force.

a- Positive b- Normative c-Could either be normative or art of economics d- Positive

What will happen to the position of the SAS curve and/or LAS curve in the following circumstances?

a. Available factors of production increase. The LAS curve will shift to the right, and the SAS curve will not shift initially. b. A civil war occurs. The LAS curve will shift to the left, while the SAS curve will shift up. c. Wages that were fixed become flexible, and aggregate demand increases. The SAS curve will shift up, and the LAS curve will not shift.

State the immediate effect of each of the following actions on M1 and M2:

a. Barry writes his plumber a check for $140. The plumber takes the check to the bank, keeps $15 in cash, and deposits the remainder in his savings account. M1 declines by $ 125 . M2 does not change by $ 0 . b. Maureen deposits the $650 from her CD in a money market mutual fund. M1 does not change by $ 0 . M2 does not change by $ 0 . c. Sylvia withdraws $120 in cash from her savings account. M1 rises by $ 120 . M2 does not change by $ 0 . d. Paulo cashes a $350 traveler's check that was issued in his Ohio bank at a New York bank. M1 does not change by $ 0 . M2 does not change by $ 0 .

Individuals have two kidneys, but most of us need only one. People who have lost both kidneys through accident or disease must be hooked up to a dialysis machine, which cleanses waste from their bodies. Say a person who has two good kidneys offers to sell one of them to someone whose kidney function has been totally destroyed. The seller asks $30,000 for the kidney, and the person who has lost both kidneys accepts the offer. a. Who benefits from the deal? Both parties benefit. b. In the long run, which of the following is true? though neither party is hurt, society may be hurt c. Should a society allow such market transactions? Why? Economics alone cannot answer whether society should allow such market transactions.

a. Both parties benefit. b. though neither party is hurt, society may be hurt c. Economics alone cannot answer whether society should allow such market transactions.

a. How does a market economy solve the what to produce problem? b. How does a market economy solve the how to produce problem? c. How does a market economy solve the for whom to produce problem?

a. Businesses decide what to produce based on what they think will sell and earn profit for the business. b. Businesses decide how to produce guided by what they believe will earn them the largest profit. c. Those who are willing to pay for the goods and services at the market-determined prices will get them.

You have been hired as a research assistant and are given the following data.

a. Calculate GNP, GDP, and aggregate income. GDP is $509 GNP is $512 Aggregate income is $512 b. What is depreciation in this year? Depreciation is $8 c. What is NDP? NDP is $501 EXPLANATION a. GDP = C + I + G + (X - M) = $509. GNP = GDP + Net foreign factor income = $512. Aggregate income = Compensation + Rent + Profit + Interest = $512. b. Depreciation = Investment - Net investment = $8. c. NDP = GDP - Deprecation = 509 - 8 = $501.

Given the following data about the economy: a. Calculate aggregate output (GDP) and aggregate income. b. Compare the two calculations in a. Why are they not precisely equal? c. Calculate GNP. d. Calculate NDP.

a. Calculate aggregate output (GDP) and aggregate income. Aggregate output (GDP) is $2,267 Aggregate income is $1,974 b. Compare the two calculations in a. Why are they not precisely equal? GDP must be adjusted for net foreign factor income. c. Calculate GNP. GNP is $2,271 d. Calculate NDP. NDP is $2,245 EXPLANATION a. The expenditure approach: Aggregate output = C + I + G + (X - M) = 956 + 710 + 291 + 310 = $2,267. Aggregate income = Employee compensation + Rent + Interest + Profit: 1,472 + 20 + 162 + 320 = $1,974. c. GNP = GDP + NFFI = 2,267 + 4 = $2,271. d. NDP = GDP - Depreciation = 2,267 - 22 = $2,245.

Suppose the value of your home increases from $100,000 to $125,000. If you continue to live in your home, the increase in its value:

adds nothing to GDP.

Adding globalization with large trade deficits to the standard AS/AD model shows:

decreased domestic production and increased consumption.

Below are nominal GDP and GDP deflators for four years.

a. Calculate real GDP in each year. Instructions: Round your answers to the nearest whole number. For 2010, GDP is $ 12,000 ± 1 billion. For 2011, GDP is $ 12,500 ± 1 billion. For 2012, GDP is $ 13,800 ± 1 billion. For 2013, GDP is $ 13,454 ± 1 billion. b. Did the percentage change in nominal GDP exceed the percentage change in real GDP in any of the last three years listed? 2011: Yes. 2012: Yes. 2013: Yes. c. In which year did society's welfare increase the most? It's impossible to say. Explanation: a. Real GDP = (Nominal GDP/GDP Deflator) × 100. For 2010: (12000/100.0) × 100 = $12000 billion. For 2011: (13000/104.0) × 100 = $12500 billion. For 2012: (14490/105.0) × 100 = $13800 billion. For 2013: (14800/110.0) × 100 = $13454.5 billion. b. Since inflation was positive in every year, nominal GDP growth exceeded real GDP growth in each of the last three years. c. It is impossible to say in which year society's welfare increased the most. GDP measures market activity, not welfare.

Calculate real growth per capita in the following countries:

a. Democratic Republic of Congo: population growth = 2.1 percent; real output growth = - 1.1 percent. -3.2 ± .1%. b. Estonia: population growth = - 0.3 percent; real output growth = 4.2 percent. 4.5 ± .1%. c. India: population growth = 1.6 percent; real output growth = 5.3 percent. 3.7 ± .1%. d. United States: population growth = 0.4 percent; real output growth = 2.4 percent. 2.0 ± .1%.

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? 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. How do they differ? 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.

While Jon is walking to school one morning, a helicopter flying overhead drops a $50 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 15 percent of its money in reserves:

a. How much money can the bank initially lend out? Instructions: Round your answer to 1 decimal place. $ 42.5 . b. After this initial transaction, by how much is the money in the economy changed? Instructions: Round your answer to 1 decimal place. $ 92.5 . c. What's the money multiplier? Instructions: Round your answer to 2 decimal places. 6.67 . d. How much money will eventually be created by the banking system from Jon's $50? Instructions: Round your answer to 2 decimal places. $ 333.33 .

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

Explain how a rise in the price level affects aggregate quantity demanded with the:

a. Interest rate effect. 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. International effect. Assuming fixed exchange rates, a rise in the price level makes goods less competitive internationally, decreasing exports. c. Money wealth effect. The money people hold in cash is worth less, which decreases spending.

The Bureau of Labor Statistics reported that in 2001 the total labor force was 143,734 thousand of a possible 215,092 thousand working-age adults. The total number of unemployed was 6,801 thousand. From this information, calculate the following:

a. Labor force participation rate. Instructions: Round your answer to 1 decimal place. 66.8 ± 0.1 percent. b. Unemployment rate. Instructions: Round your answer to 1 decimal place. 4.7 ± 0.1 percent. c. Employment-population ratio. Instructions: Round your answer to 1 decimal place. 63.7 ± 0.1 percent.

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? Price level may increase or decrease and output decreases. Using the AS/AD model, demonstrate your predictions graphically. [on phone] b. What policy might you suggest to the government? Expansionary monetary policy. Expansionary fiscal policy.

What will likely happen to the SAS curve in each of the following instances?

a. Productivity rises 3 percent; wages rise 4 percent. The SAS curve will shift up, since wages rise by more than the rise in productivity. b. Productivity rises 3 percent; wages rise 1 percent. The SAS curve will shift down, since productivity rises by more than the rise in wages. c. Productivity declines 1 percent; wages rise 1 percent. The SAS curve will shift up, since wages rise and productivity declines. d. Productivity rises 2 percent; wages rise 2 percent. The SAS curve will not shift, since the wage increase is exactly offset by a productivity increase.

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. Instructions:Round your answer to 2 decimal places. The Fed should buy $ 16.00 ± 1 worth of government bonds. b. They ask you for two other ways they could have achieved the same end. You tell them. Lower the reserve requirement. Reduce the discount rate. c. Based on the AS/AD model, tell them what you think the effect on the price level of your policy will be. 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 output and the price level. d. Based on the structural stagnation model, how does the policy affect 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 imports. The result would be an increase 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.

What fiscal policy actions would you recommend in the following instances?

a. The economy begins at potential output, but foreign economies slow dramatically. Increase spending while decreasing taxes (expansionary fiscal policy). b. The economy has been operating above potential output and inflationary pressures rise. Decrease spending while increasing taxes (contractionary fiscal policy). c. A new technology is invented that significantly raises potential output. Increase spending while decreasing taxes (expansionary fiscal policy).

The financial sector channels saving into spending.

a. What is the risk of the financial sector expanding the spending flow too much? If the financial sector expands the spending flow too much, inflationary pressures in either goods or assets may result. b. What kept this from happening in the United States in the period from 2000 to 2007? In the early 2000s, globalization kept inflation low because foreign firms could sell products at much lower prices than could domestic firms.

Economic reasoning would argue that there is an opportunity cost to:

all choices.

Some individuals have suggested raising the required reserve ratio for banks to 100 percent.

a. What would the money multiplier be if this change were made? Assume people hold no cash. Instructions: Enter your answer as a whole number. 1 b. What effect would such a change have on the money supply? The money supply would decrease. c. How could that effect be offset? Expansionary monetary policy.

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.

Juan works at Texas Burgers in El Paso and earns $8.00 per hour. His twin brother Felipe works in Mexico Burgers in Cuidad Juarez just across the border earning $3.00 per hour for exactly the same work. An economist looking at this situation sees:

an incentive for Felipe to cross the border to get a job and thus reduce the gap.

In early 2000s, the dollar depreciated sharply against the euro and the yen. The dollar's depreciation should result in:

an increase in U.S. exports and an outward shift of the U.S. aggregate demand curve.

The concept of unemployment involves normative judgments because some people view employment as:

an individual responsibility and some view employment as a social responsibility.

Debt needs to be judged relative to assets because:

assets can increase the ability of a country to repay a debt.

Suppose the United States and Japan have the following production possibility tables: b. In what good does the United States have a comparative advantage? c. Is there a possible trade that benefits both countries?

b-wheat c- Japan has a comparative advantage in cloth and will trade cloth for wheat; the United States has a comparative advantage in wheat and will trade wheat for cloth.

State whether the following actions will increase or decrease GDP:

b. An individual sells her house on her own. GDP will not change. c. An individual sells his house through a broker. GDP will rise. d. Government increases Social Security payments. GDP will not change. e. Stock prices rise by 20 percent. GDP will not change.

Suppose there are two countries, Busytown and Lazyasiwannabe, with the following production possibility tables:

b. Which country has the comparative advantage in producing cars? In producing gourmet meals? Producing cars: Busytown. Producing gourmet meals: Lazyasiwannabe. c. Suppose each country specializes in the production of one good. Explain how Busytown can end up with 42,000 cars and 22,000 meals and Lazyasiwannabe can end up with 28,000 meals and 28,000 cars. Busytown will produce 70 thousand cars, while Lazyasiwannabe will produce 50 thousand meals. Busytown can then trade 28 thousand cars for 22 thousand meals.

If the federal government has a budget surplus in a given year, the national debt will:

decrease.

All of the following are important sources of growth except:

decreasing returns to scale.

What policies are needed to deal with the structural problems caused by globalization?

decreasing the exchange rate value of the dollar instituting policies that will pressure workers to lower their reservation wages raise tariffs to increase the cost of imported goods

Banks hold people's cash for free, and sometimes even pay for the privilege of holding it, because:

deposits allow banks to make profitable loans.

A commercial bank's reserve ratio equals the ratio of its reserves to its:

deposits.

The international adjustments which will help the U.S. economy out of a structural stagnation include:

depreciating the value of the dollar

The problem with the Fed's exit strategy following the financial crisis is that it:

didn't have one.

The balance of trade measures the:

difference between the value of imports and that of exports.

Most economies today are:

differentiated primarily by the degree to which they depend on markets.

Money facilitates trade because it:

does not require a double coincidence of wants among individuals.

The demand for euros on foreign exchange markets slopes:

downward because foreign consumers buy fewer European goods when the value of the euro increases.

From 2008 to 2009, the interest rate on 10-year government bonds fell to 2.75 percent, its lowest level in many years. This is most likely the result of:

easier monetary policy

The study of economic growth focuses on the factors that cause an:

economy's production possibility curve to shift out.

Which of the following would most likely generate a positive externality?

education

The ______ hypothesis assumes that all financial decisions are made by rational people and are based on all relevant information that accurately reflects the value of assets today and in the future:

efficient market

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.

The Glass-Steagall Act was set up to:

establish banking regulations and deposit insurance as a result of the 1930s crisis.

Suppose most economists agree that the target rate of unemployment is between 4 and 7 percent. If the actual unemployment rate is 11 percent, then most economists would agree that:

expansionary monetary and fiscal policies are appropriate

As the economy contracts, tax revenues:

fall and transfer payments rise, causing the economy to contract by less than it would in the absence of automatic stabilizers.

Pro-cyclical fiscal policies:

increase cyclical fluctuations in the economy.

Microeconomics and macroeconomics are:

interrelated because what happens in the economy as a whole is based on individual decisions.

If potential output exceeds actual output, the economy:

is experiencing a recessionary gap.

Brooke and Sandy both attend the same college and have the same expenses for tuition, books, and supplies. However, Brooke is a famous actress who could earn $2 million per year if she were not attending college whereas Sandy could earn $10,000 a year serving hamburgers if he were not attending college. It follows that the opportunity cost of attending college:

is greater for Brooke than for Sandy.

Structural stagnation cannot be treated as a normal business cycle because:

it is far less responsive to typical demand-side policies.

A structural stagnationist's criticism of unconventional monetary policy is that:

it kept the economy from making necessary structural adjustments.

The determination of prices and the behavior of individual markets are studied in __________, whereas topics such as business cycles, unemployment, and inflation are studied in ___________:

microeconomics, macroeconomics.

The reserve requirement is the:

minimum ratio of reserves to deposits that a bank can have.

The number of people over age 16 in an economy willing and able to work, is known as the:

labor force.

Before the Great Depression the popular view of government was:

laissez-faire; and after the Great Depression, the popular view of government was activist.

In the globalized model, the eventual equivalency of domestic and world prices follows from the:

law of one price

Globalization has tended to: lower people's reservation wage.

lower people's 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.

To engage in economic reasoning, one must compare:

marginal cost and marginal benefit.

GDP is the:

market value of an economy's production of final goods and services in a one year period.

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.

Economists view recent increases in outsourcing as:

merely the working of comparative advantage in services rather than in goods.

If someone had money in a bank, but did not care if their bank invested in risky assets, this would be considered an example of:

moral hazard

Quantitative easing refers to:

non-standard monetary policy designed to extend credit in the economy.

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.

Positive economics seeks to:

objectively explain how the economy functions.

Per capita growth:

occurs when there is an increase in goods and services per person.

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.

on phone

Using the demand and supply of loanable funds, demonstrate the effect of the following on the interest rate. As a result, what would you expect to be the impact of the change on growth?

on phone

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.

When your wages rise, the:

opportunity cost of an hour of leisure increases.

In recent years many phone banks for telemarketing and customer service have moved from the U.S. to foreign nations such as the Philippines and India. This move is usually called:

outsourcing

The Apple iPod was designed by Apple in the U.S., manufactured in factories in Asia, and sold throughout the world. Apple's use of Asian manufacturers to produce the iPod is an example of:

outsourcing.

Someone who believes that unemployment is an individual's responsibility will believe that the current measure of unemployment:

overstates the true level of unemployment because all unemployment is voluntary.

Moral hazard is a problem that arises when:

people don't have to bear the negative consequences of their actions

What economists call the law of one price depends on:

people seeking to exploit profit opportunities.

Demonstrate the effect of contractionary monetary policy in the AS/AD model.

phone

Demonstrate the effect of expansionary monetary policy in the AS/AD model when the economy is:

phone

In the United States globalization has:

played a significant role in growing income disparity because some sectors have benefited and others have not.

Many drugs are illegal in the United States. Despite this law, illegal drugs are usually available at a price many times higher than they would be if the drugs weren't illegal. The high price of illegal drugs is an example of:

political forces affecting the market.

When a central bank is acting as a lender of last resort it is:

providing banks liquidity to meet their obligations.

Buying financial assets from banks and other financial institutions with newly created money is referred to as:

quantitative easing.

If private investment is relatively sensitive to interest rates, then a fiscal expansion financed by government bond sales will:

raise output by a relatively small amount.

Per capita output would be certain to increase if:

real output increases and population decreases.

In the AS/AD model, a contractionary monetary policy:

reduces both investment and aggregate demand.

The concept of fiscal policy refers to the:

running of a deficit or surplus to affect the level of output in the economy.

What are the two ways government can finance a budget deficit?

sell bonds print money

A decrease in the expected future income of the U.S. would likely:

shift its AD curve to the left.

Generally speaking, the government implements fiscal policy in a:

slow and inaccurate manner.

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.

Globalization accompanied by large trade deficits most likely raises:

structural unemployment.

Technological change can result in:

structural unemployment.

Households are on the:

supply side of factor markets and the demand side of goods markets.

The aim of unconventional monetary policy tools is to:

support the economy by boosting liquidity and reducing interest rates when credit channels are clogged.

If the economy falls into a recession, automatic stabilizers will cause:

tax receipts to fall and government spending to rise.

A cyclical deficit is the portion of the deficit that exists when:

the economy is beneath potential income.

The structural stagnation hypothesis provides a general explanation for why:

the economy is experiencing a weak recovery.

Consumers were able to spend beyond their means during the last 15 years due to:

the financial bubble

The real deficit is the nominal deficit adjusted for changes in:

the general price level.

Countries gain from trade by producing:

the goods they can produce at the lowest opportunity cost.

Fiscal policy would be more effective if:

the government could change taxes and expenditures rapidly.

Deficits and debt are often measured relative to GDP because:

the government's ability to repay the debt depends on GDP.

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.

A pay-as-you-go pension system is viable as long as:

the relative sizes of different generations do not change too much.

Activist fiscal policies:

usually produce budget deficits.

Nominal output is best defined as a measure of the:

value of output at prices in the current year.

Macroeconomics is:

the study of aggregate economic relationships.

The business cycle is:

the term used to describe fluctuations in output around its long-term trend.

In the fall of 2008, the Federal Reserve reduced its target for the federal funds rate dramatically. The Fed likely made this decision because it believed:

there was threat of a recession and was trying to stimulate the economy.

The morel is a prized mushroom that is often abundant in the Western United States in years after forest fires. Suppose two companies are buying morels from workers willing to find them. One company offers to pay workers $5.00 per pound, and the other company will pay workers only $4.00 per pound. Economists would say that:

this situation violates the law of one price and is not likely to persist.

If the world supply curve is SW0,

trade is in balance.

The text refers to the type of comparative advantage that can be gained or lost because of changes in skills of workers or types of capital as:

transferable comparative advantage.

Underemployment includes people:

who are working part time, or not using all their skills, at a full-time job.

The Federal Reserve Bank is the U.S. central bank:

whose liabilities serve as cash in the United States.

Derivatives are financial instruments:

whose value depends on the value of another financial instrument.

If a firm or an industry is considered too big to fail, it is

wise to regulate it because of the moral hazard problem.

A primary goal of the International Monetary Fund (IMF) is to:

work out repayment plans for developing countries with large international debts.

Fill in the missing values in the table below: Instructions: Enter your answers as whole numbers. Real Interest Rate Nominal Interest Rate Inflation 5 9 4 5 10 5 6 13 7

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