Macroeconomics

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. What is the desired level of investment spending in this economy if it is to achieve a noninflationary, full-employment level of real GDP?

$100

At the end of 2017, U.S. households held approximately __________ in mutual funds.

$16.9 trillion

A nation's real GDP was $250 billion in Year 1 and $265 billion in Year 2. Its population was 120 million in Year 1 and 125 million in Year 2. What is its real GDP per capita in Year 2?

$2,120 per person

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. The per-unit cost of production in the economy described is

$2.

The largest mutual fund, as of March 2019, held approximately _____ billion in assets under management.

$260

Refer to the table. Money supply M2 for this economy is

$480.

Refer to the accompanying table. The size of the M2 money supply is ItemBillions of DollarsCheckable Deposits$ 597Small Time Deposits818Currency639Money-Market Mutual Funds Held by Businesses1,045Savings Deposits, Including Money-Market Deposit Accounts2,866Money-Market Mutual Funds Held by Individuals979

$5,899 billion.

In the diagram, the economy's long-run aggregate supply curve is shown by line

1

If Nations Quirk and Turk only produce aluminum or oil, the accompanying table shows the maximum output of each nation. Output (Units)NationsAluminumOilQuirk2040Turk3090 Which one of the following terms of trade is most likely to produce mutually beneficial exchange between the two nations?

1 unit of oil for 0.4 unit of aluminum

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. Which items are included in the M2 money supply but not the M1 money supply?

1, 2, and 5

The number of countries belonging to the World Trade Organization (WTO), as of 2018, is about

164.

In the accompanying graph, which line might represent an immediate-short-run aggregate supply curve?

2

In the accompanying graph, which line might represent an immediate-short-run aggregate supply curve? 2 is horizontal 4 3 2 1

2

You are given the following information about the economy: the nominal interest rate = 8 percent, and the real rate of interest = 6 percent. The inflation premium is

2 percent.

The United States' current account deficit reached a record high in

2006.

Answer the question based on the given consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions. Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation. To accomplish this, it could increase the reserve requirement from 20 percent to

25 percent.

As of 2018, how many European nations belonged to the European Union (EU)?

28

At what average annual rate have real GDP and real GDP per capita grown from 1950 to 2018?

3.1 percent and about 2 percent, respectively

In the accompanying graph, the long-run aggregate supply curve would be represented by which line? 2 horizonatl

4

In the diagram, the economy's relevant aggregate demand and long-run aggregate supply curves, are lines 3 horizonatal

4 and 1, respectively.

In the diagram, the economy's relevant aggregate demand and immediate-short-run aggregate supply curves, respectively, are lines

4 and 3.

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. The M1 money supply is composed of items Money Market Mutual Fund Balances Held by Businesses$ 100 Money Market Mutual Fund Balances Held by Individuals 220 Currency in Banks 10 Currency in Circulation 60 Savings Deposits, Including Money Market Deposit Accounts 50 Large-denominated ($100,000 or more) Time Deposits 180 Small-denominated ($100,000 or less) Time Deposits 80 Checkable Deposits 70

4 and 6.

Items 1. Money market mutual funds held by individuals 2. Savings deposits, including money market deposit accounts 3. Money market mutual funds held by businesses 4. Currency held by the public 5. Small time deposits 6. Checkable deposits Refer to the accompanying list. The M1 money supply is composed of items

4 and 6.

. Improvements in technology. 2. Increases in the supply (stock) of capital goods. 3. Purchases of expanding output. 4. Obtaining the optimal combination of goods, each at least-cost production. 5. Increases in the quantity and quality of natural resources. 6. Increases in the quantity and quality of human resources. Use the accompanying list to answer the following question. As distinct from the supply factors and demand factor of economic growth, the efficiency factor(s) of economic growth is (are)

4 only

1. Improvements in technology. 2. Increases in the supply (stock) of capital goods. 3. Purchases of expanding output. 4. Obtaining the optimal combination of goods, each at least-cost production. 5. Increases in the quantity and quality of natural resources. 6. Increases in the quantity and quality of human resources. Use the accompanying list to answer the following question. As distinct from the supply factors and demand factor of economic growth, the efficiency factor(s) of economic growth is (are)

4 only

The accompanying tables give production possibilities data for Gamma and Sigma. All data are in tons. Gamma's production possibilities Assume that before specialization and trade, Gamma and Sigma both chose production possibility "C." Now if each specializes according to comparative advantage, the gains from specialization and trade will be Sigma's production possibilities Gamma's production possibilities

40 tons of tea.

Refer to the table. Between years 1 and 2, real GDP grew by __________ percent in Alta.

5

The table shows the quantity of labor (measured in hours) and the productivity of labor (measured in real GDP per hour) in a hypothetical economy in three different years. Between Year 1 and Year 2, real GDP increased by Year Quantity of Labor Productivity of Labor 1 2,000 $ 200 2 2,000 210 3 2,000 210

5.0 percent.

If the rate of inflation is 12 percent per year, the price level will double in about

5.8 years.

Which of the following best describes the cause-effect chain of a restrictive monetary policy?

A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

Refer to the diagram, in which Qf is the full-employment output. Expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD0

Refer to the diagram, in which Qf is the full-employment output. Expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at

AD0.

Assume that by devoting all of its resources to the production of X, nation Alpha can produce 40 units of X. By devoting all of its resources to Y, Alpha can produce 60Y. Comparable figures for nation Beta are 60X and 40Y. We can conclude that

Alpha should specialize in Y and Beta in X.

Which of the following is the best example of economic investment?

Apple builds a new plant to manufacture iPads.

Which of the following statements is false?

As a percentage of GDP, U.S. exports are the highest among the industrially advanced nations.

The tables give production possibilities data for two countries, Alpha and Beta, which have populations of equal size. The given data show that

Beta is more efficient than Alpha both in catching fish and in producing chips.

The government agency responsible for collecting and reporting unemployment data is the

Bureau of Labor Statistics.

Which country is the United States' largest trading partner in terms of volume of trade?

Canada

Which country has the largest share of total world exports?

China

In terms of individual nations, the largest U.S. trade deficit is with

China.

(Consider This) Which of the following is not true about the use of a credit card?

Credit card balances are part of M2 but not part of M1.

Which group is responsible for the policy decision of changing the money supply?

Federal Open Market Committee

The group that sets the Federal Reserve System's policy on buying and selling government securities (bills, notes, and bonds) is the

Federal Open Market Committee (FOMC).

The discount rate is the rate of interest at which

Federal Reserve Banks lend to commercial banks.

In the U.S. economy, the money supply is controlled by the

Federal Reserve System.

The Bureau of Consumer Financial Protection was created in 2010 to become part of the

Federal Reserve System.

In Germany, one worker can produce either one cuckoo clock or one beer mug. In Taiwan, one worker can produce either two cuckoo clocks or three beer mugs. Who has the comparative advantage in each good?

Germany in clocks and Taiwan in mugs

Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs. It can be deduced that

Greece has a comparative advantage in chemicals.

Michelle transfers $4,000 from her savings account to her checking account. What effect is this change likely to have on M1 and M2?

M1 increases and M2 stays the same

Money market deposit accounts are included in

M2 only.

Which of the following statements is most accurate about modern economic growth?

Modern economic growth is characterized by sustained and ongoing increases in living standards.

Nation A pays lower wages to workers than Nation B. Nation A also uses fewer capital goods per worker than Nation B. This suggests that gains from trade are likely to result if

Nation A produces products that are more labor-intensive and exports them to Nation B in return for products from Nation B that are more capital-intensive.

Which of the following best describes economists' general assessment of the impacts of offshoring?

Offshoring benefits the U.S. economy by promoting greater specialization and exchange of goods and services based on comparative advantage.

Which of the following statements about the European Union (EU) is true?

The EU has abolished most trade barriers among participating countries and has common tariffs applied to non-EU goods.

Which of the following statements about stocks and bonds is true?

The U.S. federal government issues bonds but not stocks.

Which of the following statements is most accurate about the U.S. current account since the Great Recession (the period covering 2009-2015)?

The current account deficit has grown in absolute terms, but remained relatively constant as a percentage of GDP.

The production possibilities for country X are either 6,000 bushels of soybeans or 10,000 bushels of wheat. The production possibilities for country Y are either 2,000 bushels of soybeans or 4,000 bushels of wheat. Which of the following is true?

The domestic opportunity cost of wheat production is lower in country Y.

Which of the following is not true about subprime mortgage loans?

They had always been discouraged by the government and even banned in some cases.

The organization created to oversee the provisions of multilateral trade agreements, resolve disputes under the international trade rules, and meet periodically to consider further trade liberalization is called the

World Trade Organization (WTO).

Which of the following represents the most contractionary fiscal policy?

a $30 billion decrease in government spending

Which of the following fiscal policy changes would be the most expansionary?

a $40 billion increase in government spending

An appropriate fiscal policy for a severe recession is

a decrease in tax rates.

Other things equal, which of the following would decrease the rate of economic growth, as measured by changes in real GDP?

a decrease in the labor force participation rate

What function is money serving when you use it when you go shopping?

a medium of exchange

Refer to the diagrams. A decline in aggregate expenditures from AE2 to AE1 resulting from the real-balances, interest-rate, and foreign purchases effects would be depicted as

a movement from C to A along aggregate demand curve AD1.

Refer to the diagrams. A decline in aggregate expenditures from AE2 to AE1 resulting from the real-balances, interest-rate, and foreign purchases effects would be depicted as 2 graphs up and down

a movement from C to A along aggregate demand curve AD1.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing

a negative GDP gap.

What function is money serving when you deposit money in a savings account?

a store of value

If you are estimating your total expenses for school next semester, you are using money primarily as

a unit of account.

An increase in net exports will shift the

aggregate expenditures curve upward and the aggregate demand curve rightward.

Which of the following is not a supply factor in economic growth?

aggregate expenditures of households, businesses, and government

Which of the following product groups is a leading export of the United States?

airplanes

Present consumption supported by large trade deficits may come at the expense of

all of these.

A decrease in the reserve ratio increases the

amount of excess reserves in the banking system.

In deriving the aggregate demand curve from the aggregate expenditures model, we note that

an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward).

Refer to the accompanying graph. What combination would most likely cause a shift from AD1 to AD3?

an increase in taxes and a decrease in government spending

The interest-rate effect suggests that

an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.

The buying and selling activities that tend to equalize the rates of return on identical or nearly identical assets is called

arbitrage.

In recent years, the United States has had large

balance of trade deficits.

A natural-resource abundant nation would be expected to export a land-intensive commodity such as

beef.

"Default" occurs when

bond issuers fail to make promised payments.

What are "mortgage-backed securities"?

bonds backed by mortgage payments

Currency in circulation is part of

both M1 and M2.

The amount by which government expenditures exceed revenues during a particular year is the

budget deficit.

The diagram illustrates the pattern of

business cycles.

Assume that two firms (Firm A and Firm B) are similar in all respects, but Firm A's stock has a higher rate of return than Firm B's stock. Arbitrage will occur as investors

buy Firm A's stock and sell Firm B's stock.

If the economy were encountering a severe recession, proper monetary and fiscal policies would call for

buying government securities, reducing the reserve ratio, reducing the discount rate, reducing interest paid on reserves held at Fed banks, and a budgetary deficit.

Real GDP per capita

can grow either more slowly or more rapidly than real GDP.

The impact of increasing, as opposed to constant, costs is to

cause the bases for further specialization to disappear as nations specialize according to comparative advantage.

As of March 2019, more than half of the money supply (M1) was in the form of

checkable deposits.

The largest component of the money supply (M1) is

checkable deposits.

"Thrifts" refers to the following institutions except

commercial banks.

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with

contractionary fiscal policy.

Which of the following is the basic economic policy function of the Federal Reserve Banks?

controlling the supply of money

Savings are generated whenever

current income exceeds current spending.

What do bonds represent?

debt contracts with corporations or governments and regular interest payments on the loan

An increase in the price level in the aggregate expenditures model would

decrease aggregate expenditures but would not shift the AD curve.

You are given the following information about aggregate demand at the existing price level for an economy: (1) consumption = $500 billion, (2) investment = $50 billion, (3) government purchases = $100 billion, and (4) net export = $20 billion. If the full-employment level of GDP for this economy is $620 billion, then what combination of actions would be most consistent with closing the GDP gap here?

decrease government spending and increase taxes

Assume the economy is operating at less than full employment. An expansionary monetary policy will cause interest rates to ________, which will ___________ investment spending.

decrease; increase

Discretionary fiscal policy will stabilize the economy most when

deficits are incurred during recessions and surpluses during inflations.

Money functions as a store of value if it allows you to

delay purchases until you want the goods.

Refer to the accompanying diagram. If the production possibilities of an economy are shown by curve AB but the economy is operating at point 4, the reasons are most likely to be because of

demand and efficiency factors.

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks buy $2 in securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money will

directly increase by $2, and the money-creating potential of the commercial banking system will increase by an additional $6.

When the Federal government takes budgetary action to stimulate the economy or rein in inflation, such policy is

discretionary fiscal policy.

Payments to shareholders from corporate profits are known as

dividends.

Owners of stock can receive ___________ from their shares; sellers of stock can receive ___________ from selling their shares.

dividends; capital gains

The gross domestic product is not a good measure of the standard of living in a nation because it

does not account for the composition and distribution of output.

The aggregate demand curve is

downsloping because of the interest-rate, real-balances, and foreign purchases effects.

If Congress passes legislation to increase government spending to counter the effects of a recession, then this would be an example of a(n)

expansionary fiscal policy.

Refer to the diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with

expansionary fiscal policy.

If the United States wants to regain ownership of domestic assets sold to foreigners, it will have to

export more than it imports.

In recent years, the United States has

exported more services abroad than it has imported.

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually

fall

All else equal, when the Federal Reserve Banks engage in a restrictive monetary policy, the prices of government bonds usually

fall.

Which one of the following is not a major factor that contributed to large trade deficits in the United States in the period 2002-2007?

flexible exchange rate between the U.S. dollar and the Chinese yuan

When the Fed does repos and reverse repos (or repurchase agreements) with financial institutions, the collateral used in these transactions is

government bonds.

Critics of the World Trade Organization (WTO) say that liberalized world trade does all of the following except

help developing nations escape from poverty.

"Subprime mortgage loans" refer to

high-interest-rate loans to home buyers with above-average credit risk.

Assuming labor forces of equal size, the production possibilities curves suggest that workers in West Mudville will have

higher wages than workers in East Mudville both before and after trade.

The U.S. federal government is unlikely to default on its bond payments because

if necessary, it can print the money needed to make payments on time.

In 2018, the United States

imported more goods than it exported.

Benefits from international trade are based on differences in the following areas, except

income levels.

Assume that the MPC is 0.75 and that the price level is "sticky." If the Federal Reserve increases the money supply and investment spending increases by $8 billion, then aggregate demand is likely to

increase by $32 billion.

Refer to the diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to

increase government expenditures or reduce taxes.

Refer to the graphs, in which the numbers in parentheses near the AD1, AD2, and AD3 labels indicate the level of investment spending associated with each curve. All figures are in billions. The economy is at point X on the investment demand curve. Given these conditions, what policy should the Fed pursue to achieve a noninflationary, full-employment level of real GDP?

increase the money supply from $75 to $150 billion

Refer to the diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the money supply is MS1 and the goal of the monetary authorities is full-employment output Qf, they should

increase the money supply from $80 to $100.

Two of the implications of large U.S. trade deficits for the United States are

increased current consumption and increased indebtedness to foreigners.

During the period 2002-2009, U.S. trade deficits

increased from 2002 to 2006, but then decreased in the recession of 2007-2009.

If the economy is in a recession and prices are relatively stable, then the discretionary fiscal policy or policies that would most likely be recommended to correct this macroeconomic problem would be

increased government spending or decreased taxation, or a combination of the two actions.

Relatively rapid U.S. growth between 2002 and 2007 contributed to large U.S. trade deficits by

increasing U.S. national income, which increased U.S. imports.

If the MPC in an economy is 0.75, government could shift the aggregate demand curve leftward by $60 billion by

increasing taxes by $20 billion.

The Fed can induce banks to increase their reserve holdings by

increasing the interest on reserves.

The Federal Reserve System is an

independent agency of government.

The M2 money supply includes

individual shares in money market mutual funds.

International transactions fall into what two broad categories?

international trade and international asset transactions

The aggregate demand curve shows the

inverse relationship between the price level and the quantity of real GDP purchased.

Expansionary fiscal policy is so named because it

is designed to expand real GDP.

Gordon sells narcotics "on the street." This type of illegal activity

is excluded from GDP figures.

Refer to the given balance sheets and assume the reserve ratio is 25 percent. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction, the supply of money assets $72 110 60 240 2 liabilities 240 2 72 30 140

is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8.

The aggregate supply curve (short run)

is steeper above the full-employment output than below it.

Refer to the given diagram, in which line AB is the U.S. production possibilities curve and AC is its trading possibilities curve. The international exchange ratio between beef and cheese (terms of trade)

is the absolute value of the slope of line AC.

The "eurozone"

is the subset of the EU that uses a common currency.

The economy's long-run aggregate supply curve

is vertical.

Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The assets that are not included in either M1 or M2 are

items 1, 5, 9, and 10.

Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults The M2 definition of money includes

items 2, 3, 4, 6, 7, and 8.

Refer to the given list of assets. 1. Large-denominated ($100,000 and over) time deposits 2. Savings deposits 3. Currency (coins and paper money) in circulation 4. Small-denominated (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances held by individuals 9. Money market mutual fund balances held by businesses 10. Currency held in bank vaults Which of the following are considered to be near monies?

items 2, 4, 7, and 8

In the theory of comparative advantage, a good should be produced in that nation where

its cost is least in terms of alternative goods that might otherwise be produced.

A major goal of the World Trade Organization is to

liberalize international trade among nations.

Which of the following Fed actions increases the excess reserves of commercial banks?

lowering the reserve ratio

Lowering the discount rate has the effect of

making it less expensive for commercial banks to borrow from central banks.

The law of increasing opportunity costs

may limit the extent to which a nation specializes in producing a particular product.

Which one of the following is considered to be a "stock" rather than a "flow" variable?

money

Which of the following is a popular type of investment?

mutual funds

Suppose stock A sells for $50 per share and pays dividends of $2 per share per year. Stock B sells for $100 per share and pays dividends of $4 per share per year. Through the process of arbitrage, we would expect the price of

neither stock to change.

When changes in taxes and government spending occur in the economy without explicit action by Congress, such policy is called ______ fiscal policy.

nondiscretionaryCorrect

(Consider This) Credit cards are

not money, as officially defined.

Banks lost money during the mortgage default crisis because

of all of these reasons.

Which of the following is a tool of monetary policy?

open-market operations

Which of the following tools of monetary policy is flexible and able to affect bank reserves quickly and by relatively specific amounts?

open-market operations

Gross output (GO) and GDP both measure

output of an economy.

The aggregate supply curve (short run) is upsloping because

per-unit production costs rise as the economy moves toward and beyond its full-employment real output.

A checking account entry is money because it

performs the functions of money.

Refer to the graphs. Stanville has a comparative advantage in producing

product B.

Suppose that an economy's labor productivity and total worker-hours each grew by 3 percent between year 1 and year 2. We could conclude that this economy's

production possibilities curve shifted outward.

The reason for the Fed being set up as an independent agency of government is to

protect it from political pressure.

Growth-promoting institutional structures include the following, except

protection of domestic firms from foreign rivals.

An important routine function of the Federal Reserve Bank is to

provide facilities by which commercial banks and thrift institutions may collect checks.

The Federal Reserve System performs the following functions except

providing banking services to the general public.

(Last Word) Behavioral economics incorporates culture and the studies of

psychology and economics.

Which of the following actions by the Fed would cause the money supply to increase?

purchases of government bonds from banks

The growth of GDP may understate changes in the economy's economic well-being over time if the

quality of products and services improves.

The Financial Crisis of 2007-2008 started in which sector of the economy?

real estate and housing sector

Labor productivity is measured by

real output per worker-hour.

Other things equal, an increase in input prices will

reduce aggregate supply and reduce real output.

Refer to the diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to

reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2.

Suppose the price level is fixed, the MPC is 0.5, and the GDP gap is a negative $80 billion. To achieve full-employment output (exactly), government should

reduce taxes by $80 billion.

When the Fed undertakes reverse repo transactions with financial institutions, it is trying to

reduce the money supply.

When the required reserve ratio is increased, the excess reserves of banks are

reduced and the multiple by which the commercial banking system can lend is reduced.

If the MPS in an economy is 0.4, government could shift the aggregate demand curve leftward by $50 billion by

reducing government expenditures by $20 billion.

The Federal Reserve can increase aggregate demand by

reducing the discount rate.

Investment happens when

resources are devoted toward increasing future output.

The foreign purchases effect on aggregate demand suggests that a

rise in our domestic price level will increase our imports and reduce our exports, thereby reducing the net exports component of aggregate demand.

Specialization and trade based on comparative advantage allow nations to attain the following results, except

rising total employment.

If an economy wants to increase its current level of investment, it must

sacrifice current consumption.

The amount of investment is ultimately limited by the amount of

saving.

Suppose the economy is at full employment with a high inflation rate. Which combination of government policies is most likely to reduce the inflation rate?

sell government securities in the open market, do bond reverse-repos, and cut government spending

Meb owns stock in two similar, large, financially sound corporations. Company A consistently earns rates of return of 12 percent per year, while company B regularly generates rates of return of 8 percent per year. If Meb is attempting to arbitrage, he will

sell his stock in company B and buy more stock in company A.

The limited liability rule means that if a corporation goes bankrupt,

shareholders can only lose the amount they invested.

Refer to the figure. The economy is at equilibrium at point C, which is below potential output. Which fiscal policy would increase real GDP?

shift aggregate demand by increasing transfer payments

What other economic process needs to accompany international trade, for nations to benefit from such trade?

specialization in production

Ownership of a single corporation is represented by what investment?

stock

If you place a part of your summer earnings in a savings account, you are using money primarily as a

store of value.

If the government wishes to increase the level of real GDP, it might reduce

taxes

The ratio at which nations will exchange one product for another is known as the

terms of trade.

Which of the following government agencies estimates and compiles the U.S. GDP accounts?

the Bureau of Economic Analysis

The primary risk that bondholders face is that

the bond issuer will default.

Checkable deposits include

the deposits held by banks and thrifts on which checks can be written.

The four main tools of monetary policy are

the discount rate, the reserve ratio, interest on excess reserves, and open-market operations.

The interest rate that the Fed charges banks for loans to them through the traditional channel is called

the discount rate.

When the Federal Reserve acts to tighten money and credit in the economy, it is trying to reduce

the inflation rate.

Research suggests that

the less independent the central bank, the higher the average annual rate of inflation.

The exchange rate system currently used by the industrially advanced nations is

the managed float.

The purchase of government securities from the public by the Fed will cause

the money supply to increase.

Assume the economy faces high unemployment but stable prices. Which combination of government policies is most likely to reduce unemployment?

the purchase of government securities in the open market and an increase in government spending

GDP tends to underestimate the productive activity in the economy because it excludes the value of output from

the underground economy.

If two nations have straight-line production possibilities curves,

there will be a basis for mutually advantageous trade provided the slopes differ.

In defining money as M1, economists exclude time deposits because

they are not directly or immediately a medium of exchange.

The service a homeowner performs when she mows her yard is not included in GDP because

this is a nonmarket transaction.

GDP tends to overstate economic well-being because it takes into account

total spending to deal with the adverse health effects of some products.

A large underground economy results in an

understated GDP.

The functions of money are to serve as a

unit of account, store of value, and medium of exchange.

Stock market price quotations best exemplify money serving as a

unit of account.

In the aggregate demand-aggregate supply model, the economy's price level is assumed to be

variable, unlike in the aggregate expenditures model.

The real-balances, interest-rate, and foreign purchases effects all help explain

why the aggregate demand curve is downsloping.

For heavily traded assets like stocks and bonds, arbitrage

will often equalize rates of return among similar assets within minutes.

The Trade Adjustment Assistance Act of 2002 focused mainly on assisting

workers displaced by imports or plant relocations abroad.

In the accompanying diagrams, solid lines are production possibilities curves, and the dashed lines are trading possibilities curves. The trading possibilities curves imply that

world resources will be allocated more efficiently if the two nations specialize and trade based on comparative advantage.