Macroeconomics
This higher injection causes the level of income to rise so a rise in Savings, Import or Taxes would have to occur to create balance again or equilibrium.
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This total spending by buyers is called aggregate expenditures.
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Transfer payments are one-way transactions in which payment is made by the government but no good or service flows back in return.
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Value of production = business receipts = aggregate expenditures
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Value of production = cost of production (including profits) = total income
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We can also measure the value of production in terms of how much it costs to produce that output.
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Yet the government purchases goods and services too so that is considered an injection.
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According to the Fisher equation, a __ percent increase in the rate of inflation causes a __ percent increase in the nominal interest rate.
1, 1
According to the Quantity Theory, an increase in the rate of money growth of __ percent causes a __ percent increate in the rate of inflation.
1, 1
What are the three purposes of money?
1. A store of value 2. A unit of account 3. A medium of exchange
What are the three subcategories of investment?
1. Business fixed investment 2. Residential fixed investment 3. Inventory investment
What are the six categories of National Income (NI)?
1. Compensation of Employees 2. Proprietor's Income 3. Rental Income 4. Corporate Profites 5. Net Interest Earned 6. Indirect Business Taxes
What are the three categories in the Current Population Survey?
1. Employed 2. Unemployed 3. Not in the Labor Force
What are the three subcategories of consumption?
1. Nondurable goods 2. Durable goods 3. Services
What are two costs of unexpected inflation?
1. Redistribution costs 2. High inflation variability
What are five costs of expected inflation?
1. Shoeleather costs 2. Menu costs 3. Relative price variability 4. Changes in tax liability 5. Dollar less useful as a measure of value
What are the two ways of computing GDP in the Circular Flow model?
1. Total income from production of goods and services. 2. Total expenditures on purchases of bread.
(LO 2) T or F Aggregate demand is the total quantity of final goods and services that consumers, businesses, government, and those living outside the country would buy at different price levels.
1. True
(LO 5) T or F According to neoclassicists, an increase in aggregate demand will have no effect upon real GDP but will cause the price level to increase.
10. True
The reference base period for the CPI has an index number of
100
automatic stabilizer
Federal expenditure or revenue item that automatically responds counter cyclically to changes in national income, like unemployment benefits and income taxes
structural deficit
Federal revenues at full employment minus expenditures at full employment under prevailing fiscal policy.
Is a person's income and expenditure a stock or a flow?
Flows.
What is the dumping argument for protection from international trade?
Foreign producers selling below cost to drive domestic firms bankrupt must be stopped.
When people only want to hold a little money for each dollar of income, money changes hands _____.
Frequently.
find real GDP using GDP deflator
GDP/(GDP deflator/100)
How is GNP calculated?
GNP = GDP + Factor Pmts. FROM Abroad - Factor Pmts. TO Abroad.
What does Government consist of in the NIA identity?
Goods and services bought by federal, state, and local governments.
What does Investment consist of in the NIA identity?
Goods bought for future use.
What is "crowding out" ?
Government purchases (G) increase, causing the interest rate to increase, which causes investment to decrease.
What causes hyperinflation?
Governments print money to finance large budget deficits.
What is commodity money?
Has intrinsic value, e.g., gold.
The main policy making body of the Federal Reserve System is the
Federal Open Market Committee.
Conducting the nation's monetary policy is the duty of the
Federal Reserve System.
How can we use the Fisher equation to write the nominal interest rate as the sum of the real interest rate and expected inflation?
M/P = L(r + Eπ, Y).
What are the components of M2?
M1 + Retail Money Market Mutual Fund Balances + Savings Deposits + Small Time Deposits.
If Joe withdraws a $100 bill from his checking account and Jack deposits another $100 bill in his savings account, by how will M1 and M2 change?
M1 will decrease, but M2 will remain the same
How would you express the concept of Marginal Product of Capital (MPK) in a production function?
MPL = F(K+1, L) - F(K,L).
How would you express the concept of Marginal Product of Labor (MPL) in a production function?
MPL = F(K, L+1) - F(K,L).
MPC
Marginal Propensity to Consume
MPS
Marginal Propensity to Save
What are constant returns to scale?
Mathematically, zY = F(zK, zL) for any positive number z.
What is the mathematical term for National saving (S) ?
S = (Y - T - C) + (T - G) = I
What is the nominal interest rate?
The rate interest rate investors pay to borrow money.
How do we calculate the competitive firm's demand for for labor?
W = P x MPL or MPL = W / P
What does the GDP Deflator show?
What's happening to the overall level of prices in the economy.
S = Y - C. Savings can be defined as income (Y) received but not spent on c______________ (C).
consumption
Which of the following is a final good or service?
a new replacement muffler installed by Midas Mufflers
In the figure below, the economy is at an equilibrium with real GDP of $16 trillion and a price level of 110. At this point there is
a recessionary gap.
Which of the following is a thrift institution?
a savings and loan association
Using the data in the table below, if the price of a stapler is $8, then there is ________ of staplers and the quantity of staplers demanded ________ the quantity of staplers supplied.
a surplus; is less than
(LO 1) What are the four sources of economic growth?
a) Improved levels of human capital (an increase in the quantity or quality of labour employed); b) an increase in the capital stock; c) technological change; d) additional quantities of natural resources.
The largest share of total production in the United States is
consumption goods and services.
Full employment occurs when
cyclical unemployment is zero.
The type of unemployment that arises from a decrease in real GDP is called
cyclical unemployment.
If the Fed engages in quantitative easing, it has likely
decreased the federal funds rate to almost zero by buying large sums of securities.
If the government reduces expenditure on goods and services by $30 billion, then aggregate demand
decreases by more than $30 billion and real GDP decreases.
Leakage is a flow of income that is d________ out of the circular flow and doesn't flow directly back.
diverted
National income is the SUM OF ALL INCOMES earned from e____________ transactions or the SUM OF ALL SPENDING.
economic
Which of the following is a bias in the CPI?
new goods bias/commodity substitution bias/outlet bias
real interest rate
nominal interest -anticipated inflation rate=
The relationship between the nominal interest rate, the real interest rate, and the inflation rate is that the
nominal interest rate is equal to the real interest rate plus the inflation rate.
The national debt is the amount
of debt outstanding that arises from past budget deficits.
major macro outcomes
output, prices, jobs, and international balances.
The real interest rate adjusts to equilibrate _____ and _____.
savings, investment
(LO 4) In Figure 5.28, show a new equilibrium on the graph illustrating demand-pull inflation, and then name three things that could have caused the change.
see answer at q 56
(LO 3, 4) Starting from full-employment equilibrium, indicate whether each of the following factors will affect aggregate demand (AD) or aggregate supply (AS) and whether the effect would be an increase or a decrease. Then, indicate what will happen to the price level and the level of real GDP and what type of equilibrium will result. A decrease in interest rates: Price level: Real GDP: Type of equilibrium An improvement in technology: Price level: Real GDP: Type of equilibrium An increase in the exchange rate: Price level: Real GDP: Type of equilibrium . A decrease in government spending: Price level: Real GDP: Type of equilibrium An increase in the money supply: Price level: Real GDP: Type of equilibrium An increase in the nominal wage rate: Price level: Real GDP: Type of equilibrium
see answers q54
46A.(LO 4) Use the graph in Figure 5.27 to illustrate the effect of the Great Depression on the Canadian economy, when prices, production, and employment all decreased dramatically in the 1930s. (Assume the economy was originally at full-employment equilibrium.)
see q 55
Say's Law
supply creates its own demand/Self-Regulating Economy, Classical economics
If the federal government has a budget surplus, then it is definitely the case that
tax revenues exceeds government outlays.
Inflation is known as a ________ because it ________.
tax; redistributes goods and services from household
What two parts of the government determine the federal budget?
the President/the Congress
Hot dogs and hot dog buns are complements. If the price of a hot dog falls, then...
the demand for hot dog buns will increase.
The first equilibrium view is the national income equilibrium view. The second view is value of production or "value of total output."
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The government taxes both the household sector and the business sector and so taxes are considered leakages.
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The value of production is the total receipts of all producers.
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How can we compute the velocity of money?
V = (Price x Real GDP)/Money
What are "nominal variables"?
Variables expressed in terms of money.
What are Exogenous Variables?
Variables that a model takes as given.
What are Endogenous Variables?
Variables that a model tries to explain.
The economic growth rate is measured as the
annual percentage change of real GDP.
Money is a__ medium of exchange that is widely accepted.
any
determinants of consumption
Autonomous consumption. Income-dependent consumption.
APC
Average Propensity to Consume
Savings + Imports + Taxes = Investment +Exports + Government Spending or LEAKAGE = INJECTIONS
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So, changes in spending have BIG impact on the level of income. Thus . . .
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(LO 1) Suppose the real GDP of an economy is $480 billion dollars and its unemployment rate is 7 percent. If the natural rate of unemployment is estimated at 5 percent, what is the value of the country's potential GDP in billions of dollars? $
$504 billion. (the GDP gap is equal to cyclical unemployment of 2% x 2.5 x actual GDP of $480 = $24 billion. Potentail GDP is equal to actual GDP of $480 + GDP gap of $24 = $504)
Some of the goods and services households buy come from foreign business sectors so this expenditure on imports is a leakage.
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The aggregate expenditures of buyers and the total receipt of the business sector are the same thing.
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The amount that producers receive for their product is equal to the amount paid by those who buy the output.
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What is an example of a simple money demand function?
(M/P)^d = k*Y
How is the quantity equation expressed?
(Money x Velocity) = (Price x RGDP) M x V = P x Y
What is public saving?
(T - G) Any excess of tax revenue over government spending, which can be positive (budget surplus) or negative (budget deficit).
"Sit and Leak"
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"Veg Injections"
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Business receives payments for goods and services exported and that is a leakage.
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Equilibrium implies not only that the total leakages equal total injections but also that aggregate expenditures equal total income.
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Equilibrium is a state of balance between equal forces.
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Examples of transfer payments are Employment Insurance payments, Canada PEnsion Plan payments and subsidies to businesses.
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Financial intermediaries are financial institution, such as banks that act as agents between borrowers and lenders
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If Leakage = Injections, then national income will remain unchanged.
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If tax rates were to increase this would cause consumption spending to fall and income to continue to fall until the resulting decreases in Savings, Imports or Taxes were sufficient to bring injection and leakage back into equilibrium.
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Injections > Leakage this causes disequilibrium.
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LO2- Explain the concept of equilibrium and why national income can rise and fall.
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Net tax revenue is total tax revenues minus government transfer payments.
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Open Private Model with the Public Sector- The third pair of leakage/injections is not so simple- we must add another sector to our analysis: government.
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Open Private Model- Putting Savings and Leakage aside for now, lets look a second pair of leakage/injection: imports and export.
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Our first definition of national income equilibrium is: the level of income is where the total of all three leakages equals the total of all three injections.
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(LO 2) Why is the AD curve downward sloping? Because production costs decline as real GDP increases Because higher prices cause an increase in wealth, which increases spending Because lower prices cause an increase in real balances, which increases spending Because lower prices cause interest rates to increase, which increases spending
11. c
(LO 2) Why is the AS curve upward sloping? Because firms will produce more if prices are higher, despite a lack of increase in profits Because firms will experience higher profits at higher prices and will therefore produce more Because aggregate demand rises with higher prices Because the potential GDP curve is also upward sloping
12. b
(LO 3) Which of the following will cause the aggregate demand curve to shift to the right? A decrease in the money supply A decrease in the interest rate An increase in the exchange rate A decrease in government spending
13. b
(LO 2) When does macroeconomic equilibrium occur? When aggregate supply equals potential GDP When the aggregate demand curve intersects the aggregate supply curve When the aggregate demand curve intersects the potential GDP curve When full employment occurs
14. b
(LO 4) What could cause the level of real GDP to rise but the price level to fall? A rightward shift in the aggregate demand curve A leftward shift in the aggregate demand curve A rightward shift in the aggregate supply curve A leftward shift in the aggregate supply curve
15. c
(LO 3) What can cause an increase in potential GDP? An increase in nominal wage rates A decrease in taxes Technological improvement A leftward shift in the AS curve
16. c
(LO 2) What does the real-balances effect mean? A higher price level will lead to an increase in the rate of interest thereby causing a decrease in consumption. A lower price level will lead to an increase in the rate of interest thereby causing a decrease in consumption. A higher price will increase the real value of financial assets thereby causing an increase in consumption. A higher price will decrease the real value of financial assets thereby causing an increase in consumption. A higher price will decrease the real value of financial assets thereby causing a decrease in consumption.
17. e
disposable income
= consumption + saving
(LO 3, 4) What could cause a movement from point a to point b? An increase in government spending A decrease in labour productivity The discovery of new oil fields A decrease in taxes A decrease in the prevailing nominal wage
18. b
(LO 4) What effect will a decrease in aggregate demand have if the economy is in a recession? The price level will drop a great deal, but real GDP will fall only a little. The price level will drop a little, but real GDP will fall a great deal. The price level will drop a little, but real GDP will increase a great deal. The price level will drop a little, and real GDP will increase a little. Both the price level and real GDP will increase by the same amount.
19. b
(LO 2) T or F The foreign-trade effect is the effect that a change in exports and imports has on the price level.
2. False: it is the effect which a change in the price level has upon exports and imports.
(LO 3) What is the result of an increase in labour productivity? A decrease in aggregate supply An increase in potential GDP An increase in aggregate demand An increase in aggregate demand and aggregate supply
20. b
(LO 1) What is the business cycle? The periodic cycles of profits and losses that all firms experience The natural evolution of new firms growing quickly at first, then slowing and fading into obsolescence The fact that real GDP falls as often as it rises The expansionary and contractionary phases in the growth rate of real GDP
21. d
(LO 1) What is meant by the term human capital? The sum of all financial assets owned by people The accumulated skills and knowledge of human beings The total amount of machines and physical overhead a country possesses The amount of physical capital that each worker has to work with
22. b
What qualifies as the "Long Term" in macroeconomics?
>3 years, i.e. Decades, Centuries.
(LO 1) All of the following, except one, will contribute to economic growth. Which is the exception? Increased levels of human capital Higher prices Increases in the capital stock Technological improvement Increased quantities of natural resources
23. b
(LO 3) What are the four components of aggregate demand? Consumption, investment, government spending, and net exports Consumption, investment, productivity, and net exports Consumption, investment, productivity, and human capital Potential GDP, AD, AS, and the GDP deflator
24. a
(LO 3) What will be the effect on trade of an increase in the Canadian price level? It will increase the volume of both Canadian exports and imports It will decrease the volume of both Canadian exports and imports It will increase the volume of Canadian exports but decrease the volume of imports It will decrease the volume of Canadian exports but increase the volume of imports
25. d
(LO 3) What is the domestic effect of an increase in the incomes of a country's major international trading partners? The aggregate demand curve will shift to the right. The aggregate demand curve will shift to the left. The aggregate supply curve will shift to the right. The aggregate supply curve will shift to the left.
26. a
(LO 4) All of the following, except one, would cause a movement from a to b. Which is the exception? An increase in the price level An increase in wealth holdings An increase in government spending A decrease in the interest rate An increase in foreign incomes
27. a
(LO 3, 4) Which of the following would cause a movement from point a to point c? A decrease in the price level An increase in wealth holdings An increase in government spending An increase in the interest rate An increase in foreign incomes
28. d
(LO 4) What are the implications if the price level is 100? The price level is above equilibrium. There is a shortage of real output of $250. There is a surplus of real output of $250. There is a surplus of real output of $150.
29. b
(LO 2) T or F The aggregate supply curve is upward sloping.
3. True
(LO 4) If the aggregate quantity demanded falls by $100 at every price level, what will be the new equilibrium price level and real output, respectively? 100 and $550 105 and $650 110 and $650 115 and $500
30. b
(LO 4) At what level of real output will full employment occur in this economy? $600 $650 $700 Cannot be determined from the information
31. d
(LO 5) What is the slope of the aggregate supply curve, according to neoclassical economists? Vertical, because prices tend to be inflexible Vertical, at the capacity level of output in the economy Horizontal, because wages are flexible Horizontal, because prices are flexible
32. b
(LO 6) Which of the following statements is true if the economy is at point a? Firms will find it hard to hire labour, and people will find it easy to find jobs. Wages will eventually be forced down. An inflationary gap exists. Unemployment is at its natural rate. The achievement of full employment must await a decrease in aggregate demand.
33. b
(LO 6) If the economy was initially at point a, then what would a movement to point b suggest? The movement could be the result of an increase in aggregate demand. The movement could be the result of a decrease in prices. The movement could be the result of a decrease in wages. It is a movement from one full-employment level of real GDP to another. The movement could be the result of expansionary monetary policy.
34. c
(LO 5) What is the slope of the AS curve according to Keynesians? Vertical, because prices tend to be inflexible Vertical, at the level of potential GDP Horizontal, because wages are inflexible Downward sloping, because wages are inflexible
35. c
(LO 2) T or F Macroeconomic equilibrium occurs where the aggregate demand is equal to potential GDP.
4. False: where aggregate demand equals the short-run aggregate supply.
A.(LO 4) Assume that the potential GDP of the economy of Arion is $1000 and that the aggregate demand and the aggregate supply are as shown in Table 5.4. What is the value of equilibrium real GDP and the price level? Is there a recessionary gap or an inflationary gap? Real GDP: Price level: There is a(n) gap of $ If firms become more optimistic and aggregate demand increases by $65, what will be the new values of equilibrium real GDP and the price level? Real GDP: Price level: Is there a recessionary gap or an inflationary gap? What is the size of the gap? There is a(n) gap of $
42A. a) Real GDP: $1000; price level: 100; There is no gap. (Actual GDP is the same as potential GDP). b) Real GDP: $1025; price level: 102; c) There is an inflationary gap of $25 (Actual GDP is $25 greater than potential GDP)..
(LO 2) Assume that the nominal wage rate increases from $18 to $20.80 per hour and, at the same time, the price index increases from 120 to 130. By how much has the real wage rate changed?
43A The real wage has increased by $1 from $15 (18/120 x 100) to $16 (20.8/130 x 100).
(LO 1) What does the term potential GDP mean?
44A Potential GDP refers to the total amount that the economy is capable of producing when all of its resources are being fully utilized. (It is also referred to as capacity GDP or full-employment GDP).
(LO 1) Assume that the size of the labour force in the economy of Mersin remained unchanged in the year 2011, while labour productivity increased. If real GDP also remained unchanged, what change in the labour market must have occurred?
48A There must have been an increase in unemployment in Mersin.
(LO 1) Figure 5.29 depicts the economy of Altrua, which is presently in equilibrium. What is the size of its recessionary gap? $ What is the size of this gap as a percentage of its actual GDP$? $ If the natural rate of unemployment is 6 percent, use Okun's law to calculate the amount of actual unemployment in Altrua. %
49A a) $20; b) 5 percent (20/400 x 100); c) Since the GDP gap is 2 ½ times the amount of cyclical unemployment, the latter must equal 2% (5/2.5). Therefore the unemployment rate must be 8 percent (natural rate of 2% plus cyclical unemployment of 2%).
(LO 3) T or F A change in resource prices will shift both the aggregate supply and the potential GDP curves.
5. False: it will not shift the potential GDP curve.
You are given the following options: ↑ aggregate demand ↓ aggregate demand ↑ aggregate supply ↓ aggregate supply ↑ aggregate supply and potential GDP ↓ aggregate supply and potential GDP Which of options 1-6 will occur as the result of the following changes? An increase in investment spending A decrease in imports An increase in factor prices A decrease in productivity A decrease in factor prices An increase in human capital
50A. a) 1; b) 1; c) 4; d) 6; e) 3; f) 5
(LO 2) What are the three reasons for the downward slope of the aggregate demand curve?
51A. The aggregate demand curve is downward-sloping because of: real-balances effect which refers to the fact that a lower price level increases the value of real balances which will cause an increase in consumption; interest-rate effect which means that a lower price level will reduce interest rates and thereby causing an increase in investment; foreign-trade effect which means that a lower price level will make domestic products more competitive on world markets thus increasing exports and decreasing imports.
(LO 4) Starting from full-employment equilibrium, explain what effect an increase in aggregate demand will have on price, real GDP, and equilibrium.
52A. An increase in aggregate demand will lead to an increase in both real GDP and in the price level. As a result the economy will be above potential, full-employment GDP, i.e. an inflationary gap will exist.
(LO 4) T or F An increase in potential GDP has no effect on macroeconomic equilibrium.
6. False: it will, because any change in potential GDP will also affect the aggregate supply and, therefore, equilibrium.
(LO 4) T or F An increase in aggregate demand will cause an increase in both real GDP and the price level.
7. True
(LO 4) T or F An increase in wage rates will cause an increase in both real GDP and the price level.
8. False: it will cause a decrease in real GDP.
(LO 5) T or F According to Keynes, the aggregate supply curve is vertical.
9. False: to Keynes, it is horizontal.
wealth effect
A change in consumer spending caused by a change in the value of owned assets.
recession
A decline in total output (real GDP) for two or more consecutive quarters.
deflation
A decrease in the average level of prices of goods and services
consumption function
A mathematical relationship indicating the rate of desired consumer spending at various income levels.
Consumer Price Index (CPI)
A measure (index) of changes in the average price of consumer goods and services.
What are real money balances?
A measure of the purchasing power of the stock of money.
adjustable-rate mortgage (ARM)
A mortgage (home loan) that adjusts the nominal interest rate to changing rates of inflation.
growth recession
A period during which real GDP grows but at a rate below the long-term trend of 3 percent.
GDP deflator
A price index that refers to all goods and services included in GDP.
In macroeconomic terms, what is a "stock"?
A quantity measured at a given point in time, e.g., the amount of water in a bathtub.
In macroeconomic terms, what is a "flow"?
A quantity measured per unit of time, e.g., the amount of water coming out of a faucet.
crowding out
A reduction in private sector borrowing (and spending) caused by increased government borrowing.
bracket creep
A situation where inflation pushes income into higher tax brackets. The result is an increase in income taxes but no increase in real purchasing power.
Is a person's wealth a stock or a flow?
A stock.
What is national income accounting?
Accounting system used to measure GPD and many related statistics.
national debt
Accumulated debt of the federal government.
disposable income
After-tax income of households; personal income less personal taxes.
The production possibilities frontier illustrates which of the following economic ideas?
All of the above
Production efficiency is represented by ________ on a production possibilities frontier.
All points
What are "real variables"?
All variables measured in physical units, such as quantities and relative prices.
business cycle
Alternating periods of economic growth and contraction.
Capital is a factor of production. Which TWO of the following are examples of capital?
An accounting software for a retail store/a drill press in your local machine shop
injection
An addition of spending to the circular flow of income.
budget surplus
An excess of government revenues over government expenditures in a given time period.
debt ceiling
An explicit, legislated limit on the amount of outstanding national debt.
deficit ceiling
An explicit, legislated limitation on the size of the budget deficit.
According to the Cobb-Douglas production function, what happens when there is an increase in the amount of capital?
An increase in K raises the MPL and reduces the MPK.
According to the Cobb-Douglas production function, what happens when there is an increase in the amount of labor?
An increase in L raises the MPK and reduces the MPL.
crowding in
An increase in private sector borrowing (and spending) caused by decreased government borrowing.
________ is most likely to contribute to an improvement in our living standard.
An increase in real GDP
inflation
An increase in the average level of prices of goods and services.
demand-pull inflation
An increase in the price level initiated by excessive aggregate demand
liability
An obligation to make future payment; debt.
asset
Anything having exchange value in the marketplace; wealth.
Classify the following goods as inferior or normal:
As income increases, demand for bus rides decreases. Hence, bus rides are: Inferior Goods As income increases, demand for movie tickets increases. Hence movie tickets are: Normal good
cost-of-living adjustment (COLA)
Automatic adjustments of nominal income to the rate of inflation.
Why does the nominal interest rate affect money demand?
Because it's the cost of holding money.
Why does the MPL curve slope downwards?
Because the MPL declines as L increases.
Why does the quantity theory of money imply that the price level is proportional to the quantity of money?
Because the factors of production and the production function determine RGDP.
How does expected inflation affect the dollar's usefulness as a measure of value?
Becomes less useful because the $'s value must constantly be corrected for π.
In the circular flow model.
Both firms and households buy or sell in different markets.
How would we mathematically express the assumption that the level of consumption depends on directly on the level of disposable income?
C = C(Y-T)
consumption function
C = a + b*YD (current consumption (C)= autonomous consumption(a) + marginal propensity to consume (b) * disposable income (YD)
Suppose that the price for flour, which is used to produce bagels, increases. In the market for cream cheese,
Demand decreases, quantity supplied decreases and price falls
How do we compute the CPI?
CPI = (Q x Current Price) / (Q x Base Year Price)
core inflation rate
Changes in the CPI, excluding food and energy prices.
In order to make a rational choice, people must
Compare marginal costs and marginal benefits.
autonomous consumption
Consumer spending not dependent on current income.
dissaving
Consumption expenditure in excess of disposable income; a negative saving flow.
What are the components of M1?
Currency + DD + Traveler's checks + Other Checkable Deposits.
True or False: the CPI assigns changing weights to the prices of different goods.
FALSE. The CPI assigns FIXED weights to the prices of goods.
gross business saving
Depreciation allowances and retained earnings.
What are "sticky" prices and wages?
Describe the slow rate at which some prices and wages adjust to supply and demand.
How do households divide their disposable income?
Disposable income is divided between consumption and saving.
What is private saving?
Disposable income minus consumption, (Y - T - C)
consumption
Expenditure by consumers on final goods and services.
investment
Expenditures on (production of) new plants, equipment, and structures (capital) in a given time period, plus changes in business inventories.
What are the exogenous variables in the basic macro model?
Exports Government Imports Investment
What is the Cobb-Douglas production function?
F(K,L) = A K^a*L^(1-a)
True or False: Business cycles are recurrent and predictable.
FALSE. Business cycles are NOT predictable.
The Financial Flows of income model. They move in opposite direction from the H_________ Sector to the Business Sector.
Household
What do the Quantity Theory and the Fisher equation together tell us?
How money growth affects i.
What does National Income (NI) measure?
How much everyone in the economy has EARNED.
What is the investment function?
I = I(r)
Why is the GDP deflator a good measure of how the prices of imported goods are changing?
IT ISN'T!! The GDP deflator only includes DOMESTICALLY PRODUCED goods.
(LO 6) Explain, in terms of a graph, how an increase in aggregate demand could have no effect on the price level.
If the AS was horizontal.
What is disposable income?
Income after the payment of all taxes (Y-T).
real income
Income in constant dollars; nominal income adjusted for inflation.
leakage
Income not spent directly on domestic output but instead diverted from the circular flow—for example, saving, imports, taxes
AD shifts in response to:
Income. Expectations Wealth. Credit conditions. Tax policy.
Match statement to their type: Positive or Normative
Increase in interest rates decreases investments: Positive The only was to bring the economy out of a recession is to decrease taxes: Normative
I_____________ control the sale of their own labour; individual land and mineral rights; individual own the shares of a corporate assets or their capital.
Individuals
hyperinflation
Inflation rate in excess of 200 percent, lasting at least one year
When people want to hold a lot of money for each dollar of income, money changes hands _____.
Infrequently.
How do we calculate real money balances?
M / P
Why is the classical dichotomy an important insight?
It allows us to examine real variables while ignoring nominal variables.
What is a benefit of inflation?
It can grease labor markets by allowing inflation to cut real wages, bypassing nominal wage cuts.
What happens when expected inflation induces variability in relative prices?
It leads to microeconomic inefficiencies in the allocation of resources.
How is high inflation variability costly?
It makes it difficult to plan for the future, affecting both lenders and workers (with pensions).
What does the interest rate do?
It measures the cost of the funds used to finance investment.
What would be an example of a consumption good or service?
Jake buys an iPhone/Rhianna gets a haircut.
How do we calculate the Labor-force participation rate?
Labor-Force Participation Rate = (Labor Force) / (Adult Population) x 100
Who is hurt/helped by redistribution costs of unexpected inflation?
Lenders are hurt - value of their loan decreases. Borrowers are helped - amount they owe, in real terms, decreases.
Is the CPI a good measure of the overall prices of goods and services in the economy?
NO. The CPI only measures the prices of goods and services bought by consumers.
What does NBER stand for?
National Bureau of Economic Research.
What does NFI stand for?
Net Farm Income
What is fiat money?
No intrinsic value; established as money by government decree.
What is a quick way to calculate the GDP deflator?
Nominal GDP = Real GDP x GDP Deflator.
What transfer payments are included in Government, as represented in the NIA identity?
None.
What qualifies as the "short-medium term" in macroeconomics?
One financial quarter to 3 years.
What is a leading indicator?
One that may be predictive of a recession or an expansion.
What does the production state?
Output is a function of the amount of capital and the amount of labor.
income transfers
Payments to individuals for which no current goods or services are exchanged, such as Social Security, welfare, and unemployment benefits.
What is "market clearing assumption?"
Presumes that the price of a good or service moves quickly to bring Qs=Qd
redistributive mechanics of inflation
Price Effect, Income Effect, Wealth Effect
Consider a production possibility frontier with books and tables. A combination of 1000 books and 500 tables is on the frontier. Which of the following are true?
Production of 700 books and 400 tables is attainable but inefficient/Production of 1000 books and 600 tables is unattainable.
reasons AS slopes upward
Profit effect, Cost effect
Treasury bonds
Promissory notes (IOUs) issued by the U.S. Treasury.
How is RGDP computed?
Real GDP=(Base year prices x Current year quantities)
reasons AD slopes downward
Real balances effect, Foreign trade effect, Interest rate effect
Because human wants are insatiable and unlimited while available resources are limited, people are said to face the problem of..
Scarcity
Match the events to the resulting changes
Shift of AD curve Shift of AS curve Movement along AS curve
The question of "How are goods and services produced?" most closely addresses which of the following issues?
Should Ford use expensive industrial robots or inexpensive Mexican autoworkers to produce SUVs?
What is an economic aggregate?
Summarization of data across different markets for goods, services, workers and assets
fiscal stimulus
Tax cuts or spending hikes intended to increase (shift) aggregate demand.
fiscal restraint
Tax hikes or spending cuts intended to reduce (shift) aggregate demand.
saving
That part of disposable income not spent on current consumption; disposable income less consumption.
cyclical deficit
That portion of the budget deficit attributable to unemployment or inflation.
What does the equation M/P= L(r+Eπ, Y) state?
That the level of real money balances depends on the expected rate of inflation.
What does the Fisher equation show?
That the nominal interest rate can change for two reasons: 1. r changes. 2. π changes.
fiscal year (FY)
The 12-month period used for accounting purposes; begins October 1 for the federal government.
What is the Fisher Effect?
The 1:1 relationship between π and i.
What does the Business Cycle Dating Committee do?
The Business Cycle Dating Committee dates recessions (trough) & recoveries (peak).
According to the Quantity Theory of Money, what has ultimate control over the rate of inflation?
The Central Bank.
price stability
The absence of significant changes in the average price level; officially defined as a rate of inflation of less than 3 percent
AD excess
The amount by which aggregate demand must be reduced to achieve full- employment equilibrium after allowing for price-level changes
inflationary GDP gap
The amount by which equilibrium GDP exceeds full-employment GDP.
recessionary GDP gap
The amount by which equilibrium GDP falls short of full-employment GDP
budget deficit
The amount by which government spending exceeds government revenue in a given time period.
What is the marginal propensity to consume (MPC) ?
The amount consumption changes when disposable income increases by one dollar.
AD shortfall
The amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes
What is the Marginal Product of Capital (MPK) ?
The amount of extra output the firm gets from an extra unit of capital, holding the amount of labor constant.
What are factor prices?
The amount paid to the factors of production.
inflation rate
The annual percentage rate of increase in the average price level.
equilibrium (macro)
The combination of price level and real output that is compatible with both aggregate demand and aggregate supply, AD=AS
What are menu costs?
The costs of firms having to change posted prices more frequently as a result of a higher (expected) π.
laissez faire
The doctrine of "leave it alone," of nonintervention by government in the market mechanism.
What does Eπ represent?
The expectation of future inflation, where π denotes actual future inflation.
What is the Marginal Product of Labor (MPL)?
The extra amount of output the firm gets from one extra unit of labor, holding the amount of capital fixed.
According to the Quantity Theory of Money, what determines the level of output (Y) in an economy?
The factors of production and the production function.
MPC
The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.
marginal propensity to consume (MPC)
The fraction of each additional (marginal) dollar of disposable income spent on consumption; the change in consumption divided by the change in disposable income.
What does Consumption consist of in the NIA identity?
The goods and services bought by households.
What is shoeleather cost?
The inconvenience of reducing money holding, caused by a higher i, which is caused by a higher (expected) π.
What are the factors of production?
The inputs used to produce goods and services.
debt service
The interest required to be paid each year on outstanding debt.
What is monetary neutrality?
The irrelevance of money for real variables.
refinancing
The issuance of new debt in payment of debt issued earlier.
full employment
The lowest rate of unemployment compatible with price stability, variously estimated at between 4 percent and 6 percent unemployment
According to the Quantity Theory of Money, what determines the nominal value of output (P*Y) in an economy?
The money supply (M).
optimal mix of output
The most desirable combination of output attainable with existing resources, technology, and social values.
opportunity cost
The most desired goods or services that are forgone in order to obtain something else.
multiplier
The multiple by which an initial change in aggregate spending will alter total expenditure after an infinite number of spending cycles; 1/(1 - MPC)
real interest rate
The nominal interest rate minus the anticipated inflation rate.
What is the real interest rate?
The nominal intrest rate corrected for inflation.
What is the income velocity of money?
The number of times a dollar bill enters someone's income in a given period of time.
What is the nominal interest rate, in terms of opportunity cost?
The opportunity cost of holding money.
What does the term "real wage" mean in macroeconomics?
The payment to labor measured in units of output, rather than in dollars.
What is the Labor-force participation rate?
The percentage of adult population that is in the labor force.
What is the unemployment rate?
The percentage of the labor force that is unemployed.
item weight
The percentage of total expenditure spent on a specific product; used to compute inflation indexes
Try this (see 53 for answer)
The plotting is fairly straightforward, though you will appreciate that the AS is not a straight line and therefore needs a little care in drawing it. The potential GDP curve is a vertical straight line at $200. Since Everton is in equilibrium and at full employment, the potential GDP is located at the intersection of the AD1 and AS1 curves. See the following figure at q53 b) Price: 80; real GDP: $200 The equilibrium values can be read off the graph or by glancing at Table 5.3 and locating the price at which the quantity demanded is equal to the quantity supplied. c) See Figure 5.26 (completed) above. The new AD2 curve is 3 squares to the left of AD1. Price: 75; real GDP: $160 d) Recessionary gap of $40. (The difference between the new equilibrium GDP and potential GDP.) e) increased exports higher taxes X higher interest rates X lower government spending X f) See Figure 5.26 (completed) above. Price: 75; real GDP: $220 g) Inflationary gap of $20. (The difference between the new equilibrium GDP and potential GDP.)
What does it mean if the demand for money depends on the nominal interest rate?
The price level depends on both the current quantity of money and the expected future quantities of money.
relative price
The price of one good in comparison with the price of other goods.
law of demand
The quantity of a good demanded in a given time period increases as its price falls, ceteris paribus.
inflationary flashpoint
The rate of output at which inflationary pressures intensify; the point on the AS curve where slope increases sharply
What is the GDP Deflator?
The ratio of nominal GDP to real GDP.
According to the Quantity Theory of Money, what determines the level of prices (P) in an economy?
The ratio of the nominal vale of output (P*Y) to the level of output (Y).
What is seigniorage?
The revenue raised by printing money.
macroeconomics
The study of aggregate economic behavior, of the economy as a whole.
What is the definition of the labor force?
The sum of the employed and unemployed.
If the automobile workers' union successfully negotiates a wage increase for its members, how does the wage hike affect the supply of automobiles?
The supply decreases.
Milk can be used to produce cheese or butter. If the price of a pound of butter rises, what happens to the supply of cheese?
The supply of cheese decreases.
How does expected inflation affect changes in tax liability?
The tax code measures income as the nominal, rather than real, capital gain, distorting how taxes are levied.
What is the classical dichotomy?
The theoretical separation of real and nominal variables.
aggregate demand
The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.
aggregate supply
The total quantity of output (real GDP) producers are willing and able to supply at alternative price levels in a given time period, ceteris paribus
deficit spending
The use of borrowed funds to finance government expenditures that exceed tax revenues.
fiscal policy
The use of government taxes and spending to alter macroeconomic outcomes.
monetary policy
The use of money and credit controls to influence macroeconomic outcomes.
money illusion
The use of nominal dollars rather than real dollars to gauge changes in one's income or wealth
supply-side policy
The use of tax incentives, (de)regulation, and other mechanisms to increase the ability and willingness to produce goods and services.
What is Real GDP (RGDP)?
The value of all goods and services measured using a constant set of prices.
real GDP
The value of final output produced in a given period, adjusted for changing prices.
nominal GDP
The value of final output produced in a given period, measured in the prices of that period (current prices).
What is Nominal GDP?
The value of goods and services measured at current prices.
full-employment GDP
The value of total market output (real GDP) produced at full employment
equilibrium GDP
The value of total output (real GDP) produced at macro equilibrium (AS = AD)
base year
The year used for comparative analysis; the basis for indexing price changes.
Suppose the current price of a pound of steak is $6 per pound and the equilibrium price is $9 per pound. What takes place?
There is a shortage, so the price rises and quantity demanded decreases.
Which TWO of the following help explain the increase in the U.S. labor force participation rate for women?
There was an increase in the educational level of women/Technological change in the home increased the time available for work outside the home.
Why are transfer payments not included in Government purchases in the NIA identity?
They reallocate existing income without adding to production.
discretionary fiscal spending
Those elements of the federal budget not determined by past legislative or executive commitments.
Which of the following is true?
To be classified as employed, you must work at least 1 hour per week at a paid job or 15 hours or more as an unpaid worker in your family business.
average propensity to consume (APC)
Total consumption in a given period divided by total disposable income.
Which two of the following does GDP measure?
Total expenditure/Total income
How is National Income distributed to the factors of production?
Total output is divided between the payments to K and the payments to L, depending on their marginal productivities.
How do we calculate the unemployment rate?
U = (Number of Unemployed) / (Labor Force) x 100
internal debt
U.S. government debt (Treasury bonds) held by U.S. households and institutions.
external debt
U.S. government debt (Treasury bonds) held by foreign households and institutions
cyclical unemployment
Unemployment attributable to a lack of job vacancies—that is, to an inadequate level of aggregate demand
What is the national income accounts identity?
Y = C + I + G + NX.
How do we write the production function?
Y = F(K,L).
convert CPI to inflation
[(CPI2 - CPI1)/ CPI1 ]* 100
Which of the following does NOT shift the aggregate demand curve?
a change in the money wage
A change in the demand for apples could result from any of the following EXCEPT
a change in the price of an apple.
Gasoline prices increase by 50 percent and other things remain the same. As a result, there is...
a decrease in the quantity of gasoline demanded.
What is a lagging indicator?
a measurable economic factor that changes after the economy has already begun to follow a particular pattern or trend.
Expenditures is the a_______ of spending funds.
action
If firms' expectations about the future become pessimistic so that they think future profits will be lower, then
aggregate demand decreases and the AD curve shifts leftward
AD
aggregate demand, The total quantity of output (real GDP) demanded at alternative price levels in a given time period, ceteris paribus.
Without household savings there would be no business sector investment. However this does not mean that a__ savings will be invested by the business sector through bank loans.
all
Which of the following is NOT directly related to human capital?
an MRI machine
Demand-pull inflation starts with
an increase in aggregate demand.
Suppose an economy experiences a permanent increase in its expected inflation rate. As a result, there is
an upward shift of the short-run Phillips curve.
Money is best defined as
anything accepted as a means of payment.
Fiscal policies that move the economy toward potential GDP without a change in policy are called
automatic stabilizers.
Total expenditure equals total income
because firms pay out everything they receive as income to the factors of production.
When the Fed ________ securities in an open market operation, banks' reserves ________, and therefore lending ________.
buys; increase; increases
Be careful of the word investment in this book, it is an increase in the economy's c__________ to produce goods and services and is done by business for profit. Merely investing in stock does not create new wealth for the firm it just means it changed hands.
capacity
Interest is income received for the use of the factor c________.
capital
The difference between consumption and capital goods is that
capital goods are used to produce additional goods while consumption goods are not.
This income is divided into specific c__________ of wages, interest, rent and profits.
categories
Which of the following is money?
checkable deposits
LO1- I want to understand the c__________ flow of national income
circular
The fundamental force that generates international trade is
comparative advantage.
Individuals in the household sector earn income by receiving payment for the factors they sell or rent. With this income, they engage in c__________.
consumption
The factors of production are divided into 4 categories: land, labour, capital and e___________.
enterprise
Closed Private Money: This simple economy demonstrates the value of production, e____________ and income.
expenditures
Summary: Households sell f______ services to the business sector and earn incomes. With this income, they pay for the goods and services received from the business sector.
factor
The business sector must pay for the f______ services they receive which goes to the household sector which is income for the Household sector.
factor
The lower two loops are considered the f_______ market, which is the buying and selling of the factor production, land, labour, capital and enterprise.
factor
Income is the earnings of f_________ of production expressed as an amount per period of time.
factors
Which of the following is a potential monetary policy instrument for the Fed?
federal funds rate
If the interest rate rises, _____ investment projects are profitable, and the quantity of investment goods demanded _____.
fewer, falls
A term deposit is a deposit held at a financial institution - bank, building society or credit union - for a f_____ amount of time, known as a term.
fixed
The opportunity cost of holding money is that you
forego interest on an alternative asset.
Which type of unemployment is a permanent and healthy phenomenon in a dynamic economy?
frictional
When a country imports a good, the ________ to consumers is ________ the ________ to producers.
gain; larger than; loss
Consumption is the expenditure (the action of spending funds) by households on g______ and services.
goods
An injection is any expenditure received by firms in the business sector that does not come from the h________ sector in the form of consumption and thus does not depend on the level of income from households.
household
According to the CPI basket, the largest item in the households' budgets is
housing
What is the Ex-Ante real interest rate?
i - Eπ.
What is the Ex-Post real interest rate?
i - π.
How can we more precisely write the Fisher Effect?
i = r + Eπ.
A marginally attached worker i. does not have a job and has not looked for one in the last month. ii. is available and willing to work. iii. must work at least 1 hour per week.
i and ii
Which of the following is included in U.S. GDP? i. the rental value of homes owned by U.S. citizens ii. the production of Suburban SUVs by GM in its plant in Mexico iii. tickets sold by U2 for concerts held in the United States
i and iii
We are building a circular flow of of i_________ model and it is important that we distinguish between the flow of income and the stock of money.
income
Which of the following shifts the aggregate supply curve rightward?
increase in potential GDP
To eliminate a recessionary gap, the government can ________ government expenditures on goods and services or ________ taxes.
increase; decrease
When the Fed buys government securities, banks' reserves ________, the quantity of money ________, and the federal funds rate ________.
increase; increases; falls
Since 1960, the labor force participation rate in the United States has
increased for women and decreased for men.
Sustained increases in the standard of living depend on
increases in labor productivity.
When the unemployment rate is greater than the natural unemployment rate, real GDP is
less than potential GDP.
Which of the following is NOT among the primary functions of money?
indicator of supply
After calculating net domestic product at factor cost, to calculate GDP using the income approach, in part we must add
indirect taxes and depreciation.
Investments = i__________!
injection
Savings make up the portion of wealth that is held in the form of financial i____________, such as bonds, term deposits, savings accounts and checking accounts.
instruments
determinants of investment spending
interest rates, expectations of future sales, and innovation
major macro determinates
internal market forces, external shocks, and policy levers
If the economy is at full employment, then the inflation rate
is equal to the expected inflation rate.
The quantity of money demanded
is the money that people choose to hold.
Long-run AS
is vertical at the "natural" rate of output.
Which of the following is a monetary policy goal?
keeping the inflation rate low/attaining maximum employment
Which of the following correctly lists the categories of factors of production?
land, labor, capital, and entrepreneurship
Savings thus becomes a l___________ from the circular flow of income.
leakage
MPS
marginal propensity to save, The fraction of each additional (marginal) dollar of disposable income not spent on consumption; 1 - MPC
Gross Domestic Product measures the
market value of the final goods and services produced in a given year within a country.
A commercial bank's main goal is to
maximize the wealth of its stockholders.
The quantity theory of money shows that rate of _____ determines the rate of _____.
money growth, inflation.
The CPI is calculated by the Bureau of Labor Statistics on a frequency of every
month
A change in any component of aggregate demand creates a larger change in overall aggregate demand. This is the ________ effect, and it means, for example, that a(n) ________ in consumption will cause an even larger ________ in AD.
multiplier; decrease; decrease
Investment is defined as spending that results in a p_________ increase in plant or equipment. Why would a firm invest in new machinery or equipment? To increase potential profit on the future.
physical
Capital is defined as the p___________ plant, tools and equipment. In finance capital equals m_________ but not in economics.
physical, money
These four factors of production combine to p_________ the goods and services that individuals consume on a daily basis.
produce
So the upper two loops show counter flowing of money. This portion of the model is referred to as the p_______ market. Goods and services-Consumption expenditures.
product
The Fed is a central bank and as such
provides banking services to banks but not individuals.
Open market operations are the
purchase or sale of government securities by the Fed.
How do we calculate the real interest rate (r)?
r = i - π (π=rate of inflation)
The Fisher equation tells us to add the _____ and the _____ to determine the _____.
r, π, i
The nominal interest rate is the sum of the _____ and the _____.
r, π.
There's an interesting relationship: When a business borrows money from a bank to invest (build a bigger plant) that money came from the household's s_______.
saving
If the AS and the AD curve intersect at a level of real GDP that exceeds potential GDP, then the appropriate monetary policy is one that ________ the federal funds rate and ________ aggregate demand.
raises; decreases
When the CPI rises ________, the inflation rate is ________.
rapidly; high
If prices have increased since the base period, then
real GDP is smaller than nominal GDP.
Labor productivity is equal to the quantity of
real GDP produced by one hour of labor.
Profits is income left over after the three factors of production have been paid. It can be thought as a r________ for the fourth factor; enterprise.
reward
If consumers buy a large number of plug-in electric cars, the equilibrium price of electricity will ________ and the equilibrium quantity of electricity will ________.
rise; increase
Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of a bagel ________ and the equilibrium quantity ________.
rises; decreases
Remember that rent in this case means a business having to pay a r_______ for the use of a stand of timbre not an apartment building, etc. For the household sector it is income received from the use of the factor LAND.
royalty
What else do individuals in the household sector do with their money besides spend on consumption? They s____it.
save
Wages mean income received for the use of labour s________ - includes commissions, tips, all employee benefits.
services
Which of the following is a policy tool of the Fed?
setting the required reserve ratios/conducting open market operations
Advances in technology and growth in human capital ________ because ________.
shift the productivity curve upward; labor and capital become more productive
Also, note that every buy/sell transaction in either market is income to one sector and s___________ to the other.
spending
The quantity theory of money assumes that the velocity of money is _____.
stable
Another way of thinking of investment is spending that increases the economy's s________ of capital goods.
stock
The Flow of Income versus the Stock of Money: Before we add complications there's a fundamental point to be understood; we are building a circular flow of income model and now we must distinguish between the flow of income and the s_____ of money.
stock
The book used an example of only $10 as the stock of money for the 3 businesses. Each business passed along the $10- 3 times. Total production, total spending and total income was $30 but the s______ remained at only $10.
stock
If the demand for used cars decreases after the price of a new car falls, used cars and new cars are..
substitute goods.
The short-run Phillips curve is a curve that shows the relationship, other things being constant, between ________ and ________.
the inflation rate; the unemployment rate
The aggregate supply curve shows the relationship between
the quantity of real GDP supplied and the price level.
In measuring GDP, which of the following is included?
the value of increases in business inventories
When personal computers were first produced, the price was very high. As time passed, the price of personal computers fell because
there were technological advances in the production of personal computers.
The "shoe-leather costs" of inflation are the costs from
time spent trying to spend money quickly.
If you shop for a car online and compare car prices across dealerships, money is functioning as a
unit of account.
The aggregate supply curve slopes ________ because a ________ in the price level brings a ________ in the real wage rate.
upward; rise; fall
weighted CPI
weighted price index for all items/total weights
The CPI market basket
weights the goods and services according to the budget of an average urban household.
95. If the Fed fears inflation, then the Fed
will sell government securities in the open market.
After a tariff is imposed, consumers must pay a price equal to the
world market price plus the tariff
