Chapter 1-8 and 10-17 Econ 2301 PCM - Principles of Macroeconomics (ACC ECON 1301-005)

The combination of two fundamental characteristics of public goods sets them apart from all other goods:

1. Public goods can be used by more and more people at no additional opportunity cost and without depriving others of any of the services of the goods. 2. It is difficult to design a collection system for a public good on the basis of how much individuals use it.

The classical model makes four major assumptions:

1. Pure competition exists. 2. Wages and prices are flexible. 3. People are motivated by self-interest. 4. People cannot be fooled by money illusion.

There are two approaches to evaluating how changes in tax rates affect government tax collections.

1. Static tax analysis 2. Dynamic Tax Analysis

Changes in Supply versus Changes in Quantity Supplied

A change in the price of the good in question always (and only) brings about a change in the quantity supplied along a given supply curve. We move to a different point on the existing supply curve. This is specifically called a change in quantity supplied. When price changes, quantity supplied changes—there is a movement from one point to another along the same supply curve.

A change in demand comes about only because of a change in the (ceteris paribus / price conditions of demand). This change in demand is a shift in the demand curve to the left or to the right.

A change in the quantity demanded comes about when there is a change in the price of the good​ (other things held​ constant). Such a change in quantity demanded involves a movement along a given demand curve.

When you think of supply, think of the entire curve. Quantity supplied is represented by a single point on the supply curve.

A change, or shift, in supply is a movement of the entire curve. The only thing that can cause the entire curve to move is a change in one of the ceteris paribus conditions.

Effluent fee

A charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution; also called a pollution tax.

Majority rule

A collective decision-making system in which group decisions are made on the basis of more than 50 percent of the vote. In other words, whatever more than half of the electorate votes for, the entire electorate has to accept.

Direct expenditure offsets

Actions on the part of the private sector in spending income that offset government fiscal policy actions. Any increase in government spending in an area that competes with the private sector will have some direct expenditure offset.

Purchasing power parity

Adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries.

___ ___ consists of the demand for domestically produced consumption goods, investment goods, government purchases, and net exports. Consequently, any change in total planned spending on any one of these components of real GDP will cause a change in ___ ___.

Aggregate demand

Assets

Amounts owned; all items to which a, business or household holds legal claim.

Behavioral economics

An approach to the study of consumer behavior that emphasizes psychological limitations and complications that potentially interfere with rational decision making.

Full employment

An arbitrary level of unemployment that corresponds to 'normal" friction in the labor market. A concept that implies some sort of balance or equilibrium in an ever-shifting labor market,

Trading Desk

An office at the Federal Reserve Bank of New York charged with implementing monetary policy strategies developed by the Federal Open Market Committee.

Credit spread

An unusual widening of the credit spread indicates weakened credit-market sentiment that can signal a sudden looming decline in total real expenditures, whereas an atypical credit-spread narrowing can indicate a pending spending rise.

Positive economics

Analysis that is strictly limited to making either purely descriptive statements or scientific predictions; for example "If A, then B." A statement of what is.

Two Opposing Sets of Answers

At any point in time, every nation has its own economic system. How a nation's residents go about answering the three basic economic questions depends on that nation's economic system.

The law of supply, can be summarized as follows:

At higher prices, a larger quantity will generally be supplied than at lower prices, all other things held constant. At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant.

Bank run

Attempt by many of a bank's depositors to convert transactions and time deposits into currency out of fear that the bank's liabilities may exceed its assets.

Financial Intermediary: Commercial banks, savings and loan associations, savings banks, and credit unions

Assets: Car loans and other consumer debt, business loans, government securities, home mortgages Liabilities: Transactions deposits, savings deposits, various other time deposits

Financial Intermediary: Government-sponsored financial institutions

Assets: Home mortgages Liabilities: Mortgage-backed securities issued to investors

Financial Intermediary: Money market mutual funds

Assets: Short-term credit instruments such as large-denomination certificates of deposit, Treasury bills, and high-grade commercial paper Liabilities: Fund shares with limited checking privileges

Financial Intermediary: Pension and retirement funds

Assets: Stocks, bonds, mortgages, time deposits Liabilities: Pension plans

The terms​ "saving" and​ "savings" differ in that A. savings can be​ negative, but saving cannot. B. savings are a​ stock, and saving is a flow. C. saving is a​ stock, and savings are a flow. D. saving always exceeds savings.

B. savings are a​ stock, and saving is a flow.

The Federal Open Market Committee engages in contractionary monetary policy by A. buying bonds. B. selling bonds. C. creating excess reserves. D. lowering interest rates.

B. selling bonds.

If inflationary expectations​ rise, the Phillips curve A. becomes flatter. B. shifts up. C. shifts down. D. becomes steeper.

B. shifts up.

Rational inattention

Choosing to acquire information infrequently and to make decisions based on incomplete knowledge of the state of the economy during the intervals between updates.

Expenditure approach

Computing GDP by adding up the dollar value at current market prices of all final goods and services. we add the dollar value of all final goods and services.

Entrepreneurship

The component of human resources that performs the functions of raising capital; organizing, managing, and assembling other factors of production; making basic business policy decisions; and taking risks.

Economic way of thinking.

The economic way of thinking provides an analytical approach to understanding the complex world around you allowing for the development of informed conclusions. The framework that you will learn in this text is the economic way of thinking. This framework gives you power—the power to reach informed judgments about what is happening in the world. The economic way of thinking provides a structured set of tools to support​ decision-making allowing the individual to avoid random choices.

The determinants of growth in per capita real GDP are the ___, ___, and ___.

annual growth rate of labor, the rate of year-to-year capital accumulation, and the rate of growth of the productivity of labor and capital.

To determine whether a tax system is proportional, progressive, or regressive, we simply ask, what is the relationship between the ___ ___ ___ and the ___ ___ ___?

average tax rate; marginal tax rate

The ___ tax rate is the total tax payment divided by total​ income, and the ___ tax rate is the change in the tax payment divided by the change in income.

average; marginal

As households or as individuals, we spend our income through consumption expenditure (C), which falls into three categories:

durable consumer goods, non-durable consumer goods, and services.

The financial intermediary with liabilities of shares and checkable deposits and assets that include consumer debt and long term mortgage loans is a A. commercial bank. B. money market mutual fund. C. insurance company. D. credit union.

D. credit union. These are the liabilities and assets of a credit union.

Per capita real GDP equals A. real GDP in the​ nation's capital,​ Washington, D.C. B. real​ GDP/human capital. C. real​ GDP/investment capital. D. real​ GDP/population.

D. real​ GDP/population. Per capita means per person. Per capita real GDP is real​ GDP/population.

Saving differs from savings in that A. saving is both a flow and a stock while savings is a stock. B. saving is a stock while savings is a flow. C. saving is a stock while savings is a flow. D. saving is a flow while savings is a stock.

D. saving is a flow while savings is a stock.

The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as A. the​ expenditure-offset theorem. B. the Keynesian Cross. C. the balanced budget multiplier. D. the Ricardian equivalence theorem.

D. the Ricardian equivalence theorem.

Contractionary monetary policy by the Fed can be hampered by A. international banking restrictions regulated by the International Monetary Fund. B. the increased isolation of central banks around the world. C. the inability of U.S. citizens to hold U.S. bank accounts denominated in foreign currencies. D. the ability of U.S. citizens and businesses to obtain dollars from foreign sources.

D. the ability of U.S. citizens and businesses to obtain dollars from foreign sources. If U.S. citizens can obtain dollars from alternative sources when the Fed is trying to restrict the number of​ dollars, this ability of citizens and businesses weakens the impact of the contractionary policy.

Subsidizing medical services through Medicare A. makes medical services available to a large percentage of the​ population, who otherwise could not afford them. B. drives a wedge between the price received by providers and the price perceived by consumers. C. is a relatively low percentage of U.S. GDP compared to other nations. D. All of the above are true. E. Only A and B are true.

E. Only A and B are true.

INCOME

For most goods, an increase in income will lead to an increase in demand.

Private goods

Goods that can be consumed by only one individual at a time. Private goods are subject to the principle of rival consumption.

Noncontrollable expenditures

Government spending that changes automatically without action by Congress. Nondiscretionary expenditures unrelated to national defense that automatically change without any direct action by Congress.

Price controls

Government-mandated minimum or maximum prices that may be charged for goods and services.

Net investment

Gross private domestic investment minus an estimate of the wear and tear on the existing capital stock. Net investment therefore measures the change in the capital stock over a one-year period. Net investment measures changes in our capital stock over time and is positive nearly every year.

Net public debt

Gross public debt minus all government interagency borrowing.

Entitlements

Guaranteed benefits under a government program such as Social Security, Medicare, or Medicaid. Entitlements, which are legislated federal government payments that anyone who qualifies is entitled to receive, are now the most important component of the federal budget. Entitlements are consequently often called noncontrollable expenditures, or nondiscretionary expenditures.

Passive (nondiscretionary) policymaking

Policymaking that is carried out in response to a rule. It is therefore not in response to an actual or potential change in overall economic activity.

The Fed intervenes in foreign currency markets.

Sometimes the Fed attempts to keep the value of the dollar from changing. It does this by buying and selling U.S. dollars in foreign exchange markets.

Automatic, or built-in, stabilizers

Special provisions of certain federal programs that cause changes in desired aggregate expenditures without the action of Congress and the president. Examples are the federal progressive tax system and unemployment compensation.

​Automatic, or​ built-in, stabilizers

Special provisions of certain federal programs that cause changes in desired aggregate expenditures without the action of Congress and the president. Examples are the federal progressive tax system and unemployment compensation.

Corporate income taxes account for 11.5 percent of all ___ taxes collected. They also make up about 2 percent of all ___ and ___ taxes collected.

federal; state and local. Corporations are generally taxed on the difference between their total revenues and their expenses.

Money is the most ___ asset.

liquid

Consumers will pay most of an excise tax levied on a product when they have a relatively ___ responsiveness of quantity demanded to a change in the price of the good.

low; Consumers will pay most of an excise tax levied on a product when they have a relatively low responsiveness of quantity demanded to a change in the price of the good.

Accounting Identity

meaning that it has to hold true at every moment in time.

The level of ___ ___ per year clearly does not depend on the level of aggregate demand. Hence, we say that in the classical model, the equilibrium level of real GDP per year is completely supply determined. Changes in aggregate demand affect only the ___ ___.

real GDP; price level, not real GDP

Typically, at the beginning of a ___, there is a marked increase in the rate of unemployment, and the duration of unemployment increases. In addition, people's incomes start to decline. In times of expansion, the opposite occurs.

recession

The ___ gap was defined as the amount by which the current level of real GDP falls short of the economy's potential production if it were operating on its LRAS curve.

recessionary

Hence, we say that in the classical model, the equilibrium level of real GDP per year is completely ___ ___. Changes in aggregate demand affect only the price level, not real GDP.

supply determined

The classical economists concluded, after taking account of the four major assumptions...

that the role of government in the economy should be minimal. They assumed that pure competition prevails, all prices and wages are flexible, and people are self-interested and do not experience money illusion. If so, they argued, then any problems in the macroeconomy will be temporary. The market will correct itself.

Total income is also defined as

the annual cost of producing the entire output of final goods and services.

Using the income approach, we have four categories of payments to individuals:

wages, interest, rent, and profits.

Because we know that GDP = C + I + G + X

we know that the formula for NDP is NDP = C + I + G + X — depreciation Alternatively, because net I = I — depreciation, NDP = C + net I + G + X

Fiduciary

comes from the Latin fiducia, which means "trust" or "confidence."

We have just defined the components of GDP using the expenditure approach. When we add them all together, we get a definition for GDP, which is as follows: GDP =

C+I+G+X where C = consumption expenditures I = investment expenditures G = government expenditures X = net exports

Transactions deposits

Checkable and debitable account balances in commercial banks and other types of financial institutions, such as credit unions and savings banks. Any accounts in financial institutions from which you can easily transmit debit-card and check payments without many restrictions.

In the ___​ Model, the equilibrium level of real GDP per year is completely supply determined. The​ supply, in​ turn, is fixed by the​ country's resource endowments and the state of its technology and productivity.

Classical

Cost-of-living adjustments (COLAs)

Clauses in contracts that allow for increases in specified nominal values to take account of changes in the cost of living.

Platform firms

Companies whose services link people to other individuals who share their interests or who seek to buy firms' products, often via networks that the companies operate.

Non-durable consumer goods

Consumer goods that are used up within three years. All the rest, such as food and gasoline.

Durable consumer goods

Consumer goods that have a life span of more than three years. Arbitrarily defined as items that last more than three years. They include automobiles, furniture, and household appliances.

EXPECTATIONS

Consumers' expectations regarding future prices and future incomes will prompt them to buy more or less of a particular good without a change in its current money price.

you know more about your driving skills than your auto insurance company does. This is an example of A. financial intermediation B. moral hazard C. adverse selection D. asymmetric information

D. asymmetric information

Implementing agricultural price supports

The nature of the supports is quite simple: The government simply chooses a support price for an agricultural product and then acts to ensure that the price of the product never falls below the support level.

Law of supply

The observation that the higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal.

Division of labor

The segregation of resources into different specific tasks. For instance, one automobile worker puts on bumpers, another doors, and so on.

Leading Indicators

Events that have been found to occur before changes in business activity.

Government, or political, goods

Goods (and services) provided by the public sector; they can be either private or public goods.

Final goods and services

Goods and services that are at their final stage of production and will not be transformed into yet other goods or services. For example, wheat ordinarily is not considered a final good because it is usually used to make a final good, bread.

Consumption Goods

Goods bought by households to use up, such as food and movies.

Inferior goods

Goods for which demand falls as income rises.

Normal goods

Goods for which demand rises as income rises. Most goods are normal goods.

Collective decision making

How voters, politicians, and other interested parties act and how these actions influence nonmarket decisions.

Complements

Two goods are complements when a change in the price of one causes an opposite shift in the demand for the other.

Substitutes

Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. For substitutes, a change in the price of a substitute will cause a change in demand in the same direction.

Incentives

Rewards or penalties for engaging in a particular activity,

Supply schedule

Supply schedule can also be referred to simply as supply. It is a set of planned production rates that depends on the price of the product.

Money balances

Synonymous with money, money stock, money holdings.

Equilibrium

The situation in which quantity supplied equals quantity demanded at a particular price. The equilibrium point occurs where the supply and demand curves intersect.

Theory of public choice

The study of collective decision making.

Proportional rule

A decision-making system in which actions are based on the proportion of the "votes" cast and are in proportion to them. In a market system, if 10 percent of the "dollar votes" are cast for blue cars, 10 percent of automobile output will be blue cars.

FOMC Directive

A document that summarizes the Federal Open Market Committee's general policy strategy, establishes near-term objectives for the federal funds rate, and specifies target ranges for money supply growth.

Effects of dollar depreciation

A dollar depreciation tends to boost net exports because it makes our exports cheaper in terms of foreign currency and imports more expensive in terms of dollars. Foreign residents demand more of our goods and services, and we demand fewer of theirs.

Inverse relationship

A relationship between two variables that is negative, meaning that an increase in one variable is associated with a decrease in the other and a decrease in one variable is associated with an increase in the other.

Fiduciary monetary system

A system in which money is issued by the government and its value is based uniquely on the public's faith that the currency represents command over goods and services and will be accepted in payment for debts.

Excise tax

A tax levied on purchases of a particular good or service.

Gross public debt

All federal government debt irrespective of who owns it.

Inefficient point

Any point below the production possibilities curve, at which the use of resources is not generating the maximum possible output.

Investment

Any use of today's resources to expand tomorrow's production or consumption.

The unemployment rate, defined as the proportion of the measured labor force that is unemployed, hit a low of 1.2 percent of the labor force at the end of ___ ___ ___, after having reached 25 percent during the Great Depression in the 1930s.

World War II

Money is an ___.

asset

When households purchase goods and services, those payments become a ___ ___.

business receipt Every transaction, therefore, simultaneously involves an expenditure and a receipt.

How is investment defined as an economic​ concept? A. Investment is primarily the market value of all​ equipment, buildings, and inventories held by​ corporations, partnerships, and proprietorships. B. Investment is primarily the market value of all shares of stock held by the public. C. Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income. D. Investment is primarily the portion of your savings held in an​ interest-earning account.

businesses on new capital goods that will yield a future stream of income.

Depreciation is also called ___ ___ ___ because it is the amount of capital stock that has been consumed over a one-year period.

capital consumption allowance

Some economists recently have proposed that ___ ___ ___ is a key determinant of the quantity of credit utilized by consumers to purchase durable goods.

credit-market sentiment

Recall that there are different types of unemployment:

frictional, cyclical, structural, and seasonal.

After economists adjust unemployment to take into account seasonal variations they classify unemployment into three basic types:

frictional, structural, and cyclical.

The seasonally adjusted natural rate of unemployment is the sum of the ___ and ___ unemployment rates.

frictional; structural

Household production

housecleaning, child care, and other tasks performed by people in their own households and for which they receive no payments through the marketplace

The top of an expansion is usually called its ___, and the bottom of a contraction is usually called its ___.

peak; trough

The most important tax in the U.S. economy is the federal ___ ___ ___.

personal income tax

During recessions, the overall unemployment rate exceeds the natural rate, so cyclical unemployment is ___.

positive

Price per constant-quality unit

price per constant-quality unit

Transactions in which households buy goods take place in the ___ ___—that's where households are the buyers and businesses are the sellers of consumer goods.

product markets

All taxes fit into one of three types of taxation systems:

proportional, progressive, or regressive, according to the relationship between the tax rate and in come.

The ___ ___ ___ ___ is the rate of growth of per capita real GDP, which in turn equals the growth rate of real GDP minus the population growth rate.

rate of economic growth

Increases in oil supplies, cuts in marginal tax rates, and deregulation during the 1980s and 1990s helped to prevent ___ episodes from occurring after the early 1980S.

stagflation

There are economy wide reasons that cause the aggregate demand curve to slope downward. They involve at least three distinct forces: ___, ___, and ___.

the real-balance effect, the interest rate effect, and the open economy effect

Otherwise legal underground transactions

those that are legal but not reported and hence not taxed, such as paying housekeepers in cash that is not declared as income to the Internal Revenue Service

Net exports (X) =

total exports — total imports

Fiscal policy has typically been associated with the economic theories of John Maynard Keynes and what is now called ___ ___ ___.

traditional Keynesian analysis

x axis

The horizontal axis in a graph.

Supply

A schedule showing the relationship between price and quantity supplied for a specified period of time, other things being equal.

Goods

All things from which individuals derive satisfaction or happiness.

For whom will items be produced?

Once an item is produced, who should be able to obtain it? People use scarce resources to produce any item, so typically people value access to that item. Thus, determining a mechanism for distributing produced items is a crucial issue for any society.

Reserve ratio

The fraction of transactions deposits that banks hold as reserves.

The U.S. currency is a ___ of the Federal Reserve System.

liability

Job leaver

An individual in the labor force who quits voluntarily.

New entrant

An individual who has never held a full-time job lasting two weeks or longer but is now seeking employment.

Reentrant

An individual who used to work full-time but left the labor force and has now reentered it looking for a job.

Normative economics

Analysis involving value judgments about economic policies; relates to whether outcomes are good or bad. A statement of what ought to be.

GDP stands for gross domestic product

Annual total national income.

Real GDP =

(Nominal GDP / Price Index) x 100

Unemployement Rate ​ =

(Unemployed / Labor force) * 100

Formula for Price Index =

(cost of market basket today / cost of market basket in base year) * 100

Ceteris paribus conditions of demand include...

-Consumers' income -Tastes and preferences -The prices of related goods -Expectations regarding future prices and future incomes -Market size (number of potential buyers).

Ceteris paribus conditions of supply include...

-The prices of resources (inputs) used to produce the product, technology and productivity, taxes and subsidies -Producers' price expectations -The number of firms in the industry

Two key assumptions in economics​ are:

1) that people are rational long dash— that people do not intentionally make decisions that would leave them worse​ off, and​ 2) people respond to changes in incentives​ -- if individuals never intentionally make decisions that would leave them worse​ off, then by definition they will respond to changes in incentives pursuing actions that make those individuals better off or avoiding actions that make them worse off.

Three arguments support the Federal Reserve's credit policy:

1. Giving Banks Time to Recover from the Financial Meltdown. 2. Making Financial Markets and Institutions More Liquid and Solvent. 3. Contributing to International Financial Liquidity.

Four economic functions of government.

1. Providing a Legal System 2. Promoting Competition 3. Providing Public Goods 4. Ensuring Economy-wide Stability

There are three sources of funding available to governments.

1. explicit fees, called user charges, for government services. 2. main source of government funding is taxes. 3. borrowing

APS (formula)

= Real saving / Real Disposable Income

Externality

A consequence of an economic activity that spills over to affect third parties. Pollution is an externality.

Unit tax

A constant tax assessed on each unit of a good that consumers purchase.

Aggregate demand curve

A curve showing planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant.

Transactions approach

A method of measuring the money supply by looking at money as a medium of exchange.

Liquidity approach

A method of measuring the money supply by looking at money as a temporary store of value.

Capital loss

A negative difference between the purchase price and the sale price of an asset.

Subsidy

A negative tax; a payment to a producer from the government, usually in the form of a cash grant per unit.

Money multiplier

A number that, when multiplied by a change in reserves in the banking system, yields the resulting change in the money supply.

Recession

A period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative.

Capital gain

A positive difference between the purchase price and the sale price of an asset. If a share of stock is bought for $5 and then sold for $15, the capital gain is $10.

Shortage

A situation in which quantity demanded is greater than quantity supplied at a price below the market clearing price.

Surplus

A situation in which quantity supplied is greater than quantity demanded at a price above the market clearing price.

Balanced budget

A situation in which the government's spending is exactly equal to the total taxes and other revenues it collects during a given period of time.

Balance sheet

A statement of the assets and liabilities of any business entity, including financial institutions and the Federal Reserve System. Assets are what is owned; liabilities are what is owed.

Personal Consumption Expenditure (PCE) Index

A statistical measure of average prices that uses annually updated weights based on surveys of consumer spending. Measures average prices using weights from surveys of consumer spending.

Lump-sum tax

A tax that does not depend on income. An example is a $1,000 tax that every household must pay, irrespective of its economic situation.

Life-cycle theory of consumption

A theory in which a person bases decisions about current consumption and saving on both current income and anticipated future income.

Permanent income hypothesis

A theory of consumption in which an individual determines current consumption based on anticipated average lifetime income.

Dependent variable

A variable whose value changes according to changes in the value of one or more independent variables.

If the level of consumption is​ $120 billion and disposable income is​ $150 billion, then the A. APC​ = 0.8 and saving is positive. B. APC​ = 0.8 and saving is negative. C. APC​ = 0.75 and saving is positive. D. APC​ = 0.75 and saving is negative.

A. APC​ = 0.8 and saving is positive.

Which of the following is an argument in favor of active ​policymaking? A. Aggregate demand shocks lead to changes in real GDP in the short run and possibly in the long run. B. Prices are usually flexible because firms react immediately to demand changes. C. The Phillips curve relationship varies with inflation expectations and is nonexistent in the long run. D. Aggregate supply shocks cause movements in real GDP and explain most business cycles.

A. Aggregate demand shocks lead to changes in real GDP in the short run and possibly in the long run.

Which of the following arguments is used in support of undertaking passive​ policymaking? A. Aggregate demand shocks play little or no role in the economy in the short run. B. Pure competition is not typical in most markets as imperfect competition dominates the economy. C. Wage flexibility is uncommon because of efficiency wages. D. The Phillips curve varies with inflation expectations.

A. Aggregate demand shocks play little or no role in the economy in the short run.

The Congressional​ meetings, discussions,​ arguments, debates over fiscal policy and the subsequent signing or vetoing by the President of a bill are part of the A. action time lag. B. effect time lag. C. political time lag. D. recognition time lag.

A. action time lag.

New Keynesians argue that A. appropriate activist policies can dampen cyclical fluctuations. B. appropriate activist policies will increase the length of cyclical fluctuations. C. appropriate activist policies will have an known effect on the length of cyclical fluctuations. D. none of the above.

A. appropriate activist policies can dampen cyclical fluctuations.

According to some New Keynesian​ theories, one possible rationale for active policy making is A. bounded rationality B. flexible prices. C. real business cycles. D. growing competition in U.S. product markets.

A. bounded rationality

During normal economic​ times, when there is not​ "excessive" unemployment or​ inflation, discretionary fiscal policy A. is probably not very effective due to lags and the uncertainty created by repeated tax policy changes. B. is used frequently to effectively​ fine-tune the economy. C. is a way of effectively spurring economic growth. D. is not used due to legal restrictions on the ability of Congress to make policy.

A. is probably not very effective due to lags and the uncertainty created by repeated tax policy changes.

The natural rate of unemployment in the U.S. A. is the rate of unemployment that exists in the long run after everyone in the economy has fully adjusted to changes that have occurred. B. is equal to frictional unemployment plus cyclical unemployment. C. has increased steadily and with out interruption since the conclusion of World War II. D. is equal to cyclical unemployment plus structural unemployment.

A. is the rate of unemployment that exists in the long run after everyone in the economy has fully adjusted to changes that have occurred.

The type of policy making that is not in response to actual or potential changes in overall economic activity is called A. passive policy making. B. discretionary policy making. C. discriminatory policy making. D. active policy making.

A. passive policy making. These are responses carried out according to a rule.

The classical economists argued that planned saving and planned investment will always be equal because of changes in A. the interest rate. B. the price level. C. the level of real disposable income. D. wages.

A. the interest rate.

To the extent that a direct expenditure offset results from an expansionary fiscal​ policy, A. the stimulative effect will be less than expected. B. the fiscal policy will not be discretionary. C. the stimulative effect will be more than expected. D. the time lags associated with the implementation of fiscal policy will shorten.

A. the stimulative effect will be less than expected.

Nonprice rationing devices

All methods used to ration scarce goods that are price-controlled. Whenever the price system is not allowed to work, nonprice rationing devices will evolve to ration the affected goods and services.

Transaction costs

All of the costs associated with exchange, including the informational costs of finding out the price and quality, service record, and durability of a product, plus the cost of contracting and enforcing that contract.

Liabilities

Amounts owed; the legal claims against a business or household by nonowners.

Voluntary exchange

An act of trading, done on a mutually agreed basis, in which both parties to the trade expect to be better off after the exchange.

Production

Any activity that results in the conversion of resources into products that can be used in consumption. The resources used in production are called factors of production, and some economists use the terms resources and factors of production interchangeably. Production is defined as the conversion of resources into desired goods and services.

There is a core class of events that causes a shift in both the short-run aggregate supply curve and the long-run aggregate supply curve.

Any change in factors of production—labor, capital, or technology—that influence economic growth will shift SRAS and LRAS.

The Fed acts as the "lender of last resort."

As lender of last resort, the Fed stands ready to lend to any temporarily illiquid but otherwise financially healthy banking institution. In this way, the Fed seeks to prevent illiquidity at a few banks from leading to a general loss of depositors' confidence in the overall soundness of the banking system.

Ad valorem taxation

Assessing taxes by charging a tax rate equal to a fraction of the market price of each unit purchased.

Financial Intermediary: Insurance companies

Assets: Mortgages, stocks, bonds, real estate Liabilities: Insurance contracts, annuities, pension plans

Which one of the following is included in M2 but NOT in​ M1? A. coins and currency B. a savings deposit C. transaction deposits D. ​large-denomination time deposits

B. a savings deposit

Barter

Barter is simply a direct exchange of goods for goods. The direct exchange of goods and services for other goods and services without the use of money. For this to occur, there has to be a high likelihood of a double coincidence of wants for each specific item to be exchanged.

Suppose Canada spends less per capita on national defense than many other countries of similar size and income. A reasonable economic explanation would be that A. ​Canada's tax system is less efficient than other industrial nations. B. Canadians perceive national defense as generating external costs rather than as a public good. C. Canada is able to​ free-ride on the defense spending of the United States. D. national defense is not a public good in Canada.

C. Canada is able to​ free-ride on the defense spending of the United States. The​ free-rider problem arises when some presume that others will pay for public goods so​ that, individually, they can escape paying for their portion without causing a reduction in production. Canadians can take advantage of the fact that the​ U.S., in defending its own​ territory, will simultaneously be defending all of North America.

Which of the following can cause​ inflation? A. Decreases in aggregate demand B. Increases in​ short-run aggregate supply C. Decreases in​ short-run aggregate supply D. Increases in​ long-run aggregate supply

C. Decreases in​ short-run aggregate supply

Market failure occurs when A. the stock market experiences a very large loss. B. an unrestrained market economy leads to too few or too many resources going to a specific economic activity. C. a good is too expensive for the market to provide. D. one good is superior to another and drives it out of the market.

C. a good is too expensive for the market to provide.

One possible result of a fall in aggregate demand coupled with a stable​ short-run aggregate supply is A. a rise in the stock market. B. an economic expansion. C. a recession. D. an increase in employment levels.

C. a recession.

By serving as the lender of last​ resort, A. the Fed aids in the sale of government securities. B. the Fed supervises depository institutions. C. the Fed can prevent bank failures. D. the Fed provides check clearing services.

C. the Fed can prevent bank failures.

An increase in government spending shows up exclusively as a change in real GDP when A. the employment level is assumed to be constant. B. the level of nominal GDP is assumed to be constant. C. the price level is assumed to be constant. D. taxes increase by the same amount as government spending.

C. the price level is assumed to be constant.

The​ long-run aggregate supply curve will not shift if there is a change in A. amount of labor. B. amount of capital. C. the price level. D. technology.

C. the price level.

Small menu costs

Costs that deter firms from changing prices in response to demand changes—for example, the costs of renegotiating contracts or printing new price lists. These include the costs of renegotiating contracts, printing price lists (such as menus), and informing customers of price changes.

___ ___ dilutes the effect of expansionary fiscal policy, and a recessionary gap remains.

Crowding out

Which of the following best represents the equation of​ exchange? A. M x P ​= V x Y B. M x Y x V​ = P C. M x Y ​= P x V D. M x V ​= P x Y

D. M x V ​= P x Y

If nominal GDP​ increases, it is possible that A. both prices and output have increased. B. output has increased. C. prices have increased. D. any of the above might have happened.

D. any of the above might have happened. An increase in nominal GDP may be attributed to increases in either or both prices and output.

These determinants will cause a shift in the short-run or the long-run aggregate supply curve or both, depending on whether they are temporary or permanent. Changes That Cause an Decrease in Aggregate Supply

Depletion of raw materials Decreased competition An increase in international trade barriers More regulatory impediments to business A decrease in labor supplied Decreased training and education An increase in marginal income tax rates An increase in input prices

Ceteris paribus conditions

Determinants of the relationship between price and quantity that are unchanged along a curve. Changes in these factors cause the curve to shift.

Constant dollars

Dollars expressed in terms of real purchasing power, using a particular year as the base or standard of comparison, in contrast to current dollars. This price-corrected GDP is called real GDP

The Fed was established by the ___ ___ ___, signed on December 13, 1913, by President Woodrow Wilson.

Federal Reserve Act

Credit policy

Federal Reserve policymaking involving direct lending to financial and nonfinancial firms.

Traveler's checks

Financial instruments obtained from a bank or a nonbanking organization and signed during purchase that can be used in payment upon a second signature by the purchaser.

There are ways other than price to ration goods.

First come, first served is one method. Political power is another. Physical force is yet another. Cultural, religious, and physical differences have been and are used as rationing devices throughout the world.

Net domestic product (NDP)

GDP minus depreciation.

Transactions demand

Holding money as a medium of exchange to make payments. The level varies directly with nominal GDP.

The equation of exchange states that the total amount of funds spent on final output, Ms*V, is equal to the total amount of funds received for final output, P*Y. Thus, a given flow of funds can be viewed from either the buyers' side or the producers' side. The value of goods purchased is equal to the value of goods sold.

If Y represents real GDP and P is the price level, P*Y equals the dollar value of national output of goods and services or nominal GDP. Thus, Ms*V = P*Y equals nominal GDP

COST OF INPUTS USED TO PRODUCE THE PRODUCT

If one or more input prices fall, production costs fall, and the supply curve will shift outward to the right. That is, more will be supplied at each and every price. The opposite will be true if one or more inputs become more expensive.

Money market mutual fund balances

Many individuals keep part of their assets in the form of shares in money market mutual funds- highly liquid funds that investment companies obtain from the public. All money market mutual fund balances except those held by large institutions (which typically use them more like large time deposits) are included in M2 because they are very liquid.

Marginal tax rate, with the word marginal meaning "incremental."

Marginal tax rate = change in taxes due / change in taxable income

Microeconomics vs. Macroeconomics

Microeconomics​, the study of the​ decision-making processes of individuals​ (or households) and​ firms, and macroeconomics​, the study of the performance of the economy as a​ whole, are the two main branches into which the study of economics is divided.

Transfers in kind

Payments that are in the form of actual goods and services, such as food stamps, subsidized public housing, and medical care, and for which no goods or services are rendered in return.

Rationing By Random Assignment or Coupons

Random assignment is another way to ration goods. You may have been involved in a rationing-by-random-assignment scheme in college if you were assigned a housing unit. Sometimes rationing by random assignment is used to fill slots in popular classes. Rationing by coupons has also been used, particularly during wartime. In the United States during World War II, families were allotted coupons that allowed them to purchase specified quantities of rationed goods, such as meat and gasoline. To purchase such goods, they had to pay a specified price and give up a coupon.

Average propensity to consume (APC)

Real consumption divided by real disposable income. For any given level of real income, the proportion of total real disposable income that is consumed.

What and how much will be produced?

Some mechanism must exist for determining which items will be produced while others remain inventors' pipe dreams or individuals' unfulfilled desires.

Fiscal policy

The discretionary changing of government expenditures or taxes to achieve national economic goals, such as high employment with price stability.

Law of increasing additional cost

The fact that the opportunity cost of additional units of a good generally increases as people attempt to produce more of that good. This accounts for the bowed-out shape of the production possibilities curve. When people take more resources and apply them to the production of any specific good, the opportunity cost increases for each additional unit produced.

Nominal rate of interest

The market rate of interest observed in contracts expressed in today's dollars.

Property rights

The rights of an owner to use and to exchange property.

The synchronization of decisions by buyers and sellers that leads to equilibrium is called the ________ ________ __ ______.

The synchronization of decisions by buyers and sellers that leads to equilibrium is called the rationing function of prices.

Unemployment

The total number of adults (aged 16 years or older) who are willing and able to work and who are actively looking for work but have not found a job.

Tax base

The value of goods, services, wealth, or incomes subject to taxation.

Purchasing power

The value of money for buying goods and services. If your money income stays the same but the price of one good that you are buying goes up, your effective purchasing power falls. A dollar's purchasing power is the real goods and services that it can buy.

Nominal values

The values of variables such as GDP and investment expressed in current dollars, also called money values; measurement in terms of the actual market prices at which goods and services are sold.

To derive GDP using the expenditure approach, we must look at each of the separate components of expenditures and then add them together. These components are...

These components are consumption expenditures, investment, government expenditures, and net exports.

Real GDP per year tends to return to the level implied by the long-run aggregate supply curve (LRAS).

Thus, whatever rate of unemployment the economy tends to return to in long-run equilibrium can be called the natural rate of unemployment.

In a​ bank's balance​ sheet, total assets equals total liabilities and net worth. In this​ case, we know how to calculate the​ bank's total assets. A bank has ​$269 million in total​ reserves, of which ​$10 million are excess reserves. The bank currently has ​$3.548 billion in​ loans, ​$1.081 billion in​ securities, and ​$141 million in other assets. The required reserve ratio for transactions deposits is 10 percent.

Total assets equals Total reserves + Loans + Securities + Other assets

Savings deposits

Total savings deposits—deposits with no set maturities—are the largest component of the M2 money supply.

Example of Equation of exchange formula: Consider a numerical example involving the entire economy. Assume that in this economy, the total money supply, M, is $15 trillion; real GDP, Y, is $20 trillion (in base year dollars); and the price level, F, is 1.5 (150 in index number terms).

Using the equation of exchange, Ms*V = P*Y $15 trillion X V = 1.5 x $20 trillion $15 trillion X V = $30 trillion v = 2.0 Thus, each dollar is spent an average of 2 times per year.

Income velocity of money (V) formula

V = (P*Y) / Ms

Wants

What people would buy if their incomes were unlimited.

TECHNOLOGY AND PRODUCTIVITY

When the available production techniques change, the supply curve will shift. An improvement in technology or productivity will reduce the costs of production​ (more output for each unit of resource​ input). Producers will react by increasing the rate of production and offering more product at each and every price.

PRICES OF RELATED GOODS: SUBSTITUTES AND COMPLEMENTS

When we refer to related goods, we are talking about goods for which demand is interdependent. If a change in the price of one good shifts the demand for another good, those two goods have interdependent demands. There are two types of demand interdependencies: those in which goods are substitutes and those in which goods are complements.

Shifts in the demand curve

You can avoid confusion about shifts in curves by always relating a rise in demand to a rightward shift in the demand curve and a fall in demand to a leftward shift in the demand curve.

Suppose that the market rate of interest is 5 percent and at this interest rate you have decided to hold half of your financial wealth as bonds and half as holdings of​ non-interest bearing money. You notice that the market interest rate is starting to​ rise, however, and you become convinced that it will ultimately rise to 10 percent.

a. As the interest rate​ rises, the value of your bond holdings will decline. b. If you wish to prevent the value of your financial wealth from declining in the​ future, you will hold less bonds and more money.

The ___ ___ ___ gives the total amount, measured in base-year dollars, of real domestic final goods and services that will be purchased at each price level—everything produced for final use by households, businesses, the government, and foreign (non-U.S.) residents.

aggregate demand curve

Say's Law fits best in the Classical Theory since this philosophy placed great importance on ___ ___ to determine the ___ ___.

aggregate supply; level of output

Cost-of-living adjustments (COLAs), which are

automatic increases in wage rates to take account of increases in the price level.

Recall the components of GDP: ___, ___, ___, and ___.

consumption spending, investment expenditures, government purchases, and net foreign demand for domestic production. They are all components of aggregate demand.

According to the transactions approach to measuring money, the money supply consists of...

currency, transactions deposits, and traveler's checks not issued by banks.

Deviations of the actual unemployment rate from the natural rate are called ___ ___ because they are observed over the course of nationwide business fluctuations.

cyclical unemployment

Dynamic tax analysis recognizes that increasing the tax rate could actually cause the government's total tax collections to ___ if a sufficiently large number of consumers react to the higher sales tax rate by cutting back on purchases of goods and services included in the state's tax base.

decline

Supply side inflation is caused by a ___ in​ long run aggregate supply.

decline

In early​ 2008, it appeared that the U.S. economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as​ ___________ and was intended to​ ______________.

discretionary fiscal​ policy; increase consumer spending

In effect, we can say that the nominal rate of interest is _____.

equal to the real rate of interest plus an inflationary premium to take account of anticipated inflation.

In the ___ ___, households are the sellers. They sell resources such as labor, land, capital, and entrepreneurial ability.

factor market Businesses are the buyers in factor markets.

Dynamic tax analysis indicates that there is a tax rate that maximizes the​ government's tax collections. Setting the tax rate any higher would cause the tax base to ___ sufficiently that the​ government's tax revenues will ___.

fall; decline

The ___ gap was defined as the amount by which the short-run equilibrium level of real GDP exceeds the long-run equilibrium level as given by LRAS.

inflationary

Another way of describing money as a unit of accounting

is to say that it serves as a standard of value that allows people to compare the relative worth of various goods and services.

During periods of economic booms, the overall unemployment rate can go below the natural rate. At such times, cyclical unemployment is ___.

negative

According to the ___ ___, sticky prices strengthen the argument favoring active policymaking as a means of preventing substantial short-run swings in real GDP and, as a consequence, employment.

new Keynesians

In 2017, the labor force amounted to 150.8 million + 7.9 million = 158.7 million people. To calculate the unemployment rate, we simply divide the ___ by the ___ and ___ : 7.9 million/158.7 million X 100 = 5.0 percent.

number of unemployed; number of people in the labor force; multiply by 100

When the Fed takes actions that alter the rate of growth of the money supply, it is seeking to influence investment, consumption, and total aggregate expenditures. In taking these monetary policy actions, the Fed in principle has four tools at its disposal:

open market operations, changes in the reserve ratio, changes in the interest rates paid on reserves, and discount rate changes.

Tax systems can be ___​, ___​, or ___​, depending on whether the marginal tax rate is the same​ as, greater​ than, or less than the average tax rate as income rises, respectively.

proportional; progressive; regressive

Governments collect taxes by applying a tax ___ to a tax ___​, which refers to the value of​ goods, services,​ wealth, or incomes.

rate; base

S&Ls

savings and loan associations

The ___ view of the relationship between tax rates and tax revenues implies that higher tax rates always generate increased government tax collections.

static

The resulting difference between GDP and GDI is called a ___ ___.

statistical discrepancy

We have learned, then, that a ___ dollar simultaneously leads to an increase in SRAS and a decrease in AD

stronger

People who support the notion that reducing tax rates does not necessarily lead to reduced tax revenues are called ___ ___.

supply-side economists

Economists have struggled to reach agreement about how to define and measure money, however. There are two basic approaches:

the transactions approach, which stresses the role of money as a medium of exchange, and the liquidity approach, which stresses the role of money as a temporary store of value.

Illegal underground activities

these include prostitution, illegal gambling, and the sale of illicit drugs

The Tax Reform Act of 1986 reduced the number to ___ tax brackets from ___ separate tax brackets.

three; fourteen There are now seven tax brackets.

According to Keynes, ___ and ___ ___ are real-world factors that explain the inflexibility of nominal wage rates.

unions and long-term contracts

Demand Schedule

Schedule of alternative quantities demanded per year at different possible prices.

Base year

The year that is chosen as the point of reference for comparison of prices in other years.

Value added

The dollar value of an industry's sales minus the value of intermediate goods (for example, raw materials and parts) used in production.

Potential money multiplier formula

1 / reserve ratio

Assume a 1 percent required reserve ratio​, zero excess​ reserves, and no currency leakages. Calculate the potential money multiplier. ___ ​(Enter your response as an integer value​). If the Federal Reserve purchases ​$6 million in U.S. government​ securities, calculate the change in total deposits in the banking system as a whole. $___million.

100; $600 million

Since the mid-1960s, the average annual duration of unemployment for all the unemployed has varied between __ and __ weeks. The overall average duration for the past 25 years has been about __ weeks.

10; 20; 17

Contraction

A business fluctuation during which the pace of national economic activity is slowing down.

Tax bracket

A specified interval of income to which a specific and unique marginal tax rate is applied.

Retained earnings

Earnings that a corporation saves, or retains, for investment in other productive activities; earnings that are not distributed to stockholders.

Gross output (GO)

Includes all forms of business-to-business expenditures.

Transfer payments

Money payments made by governments to individuals for which no services or goods are rendered in return. Examples are Social Security old-age and disability benefits and unemployment insurance benefits.

Dissaving

Negative saving; a situation in which spending exceeds income. Dissaving can occur when a household is able to borrow or use up existing assets.

Disposable personal income (DPI)

Personal income after personal income taxes have been paid.

Impact fiscal multiplier

The actual immediate multiplier effect of a fiscal policy action after taking into consideration direct fiscal offsets and other short-term crowding out of private spending.

Money supply

The amount of money in circulation.

Store of value

The ability to hold value over time; a necessary property of money. Money provides a way to transfer value (wealth) into the future.

Human capital

The accumulated training and education of workers.

Rationality assumption

The assumption that people do not intentionally make decisions that would leave them worse off.

Government budget constraint

The limit on government spending and transfers imposed by the fact that every dollar the government spends, transfers, or uses to repay borrowed funds must ultimately be provided by the user charges and taxes it collects.

GDP is a measure of the ___ __ ___ in terms of market prices and an indicator of economic activity. It is not a measure of a nation's ___ ___.

value of production; overall welfare

When you think of demand, think of the entire curve. Quantity demanded, in contrast, is represented by a single point on the demand curve.

A change or shift in demand is a movement of the entire curve. The only thing that can cause the entire curve to move is a change in a determinant other than the good's own price.

GDP deflator

A price index measuring the changes in prices of all new goods and services produced in the economy. The most general indicator of inflation because it measures changes in the level of prices of all new goods and services produced in the economy.

Federal funds market

A private market (made up mostly of banks) in which banks can borrow reserves from other banks that want to lend them. Federal funds are usually lent for overnight use.

Standard of deferred payment

A property of an item that makes it desirable for use as a means of settling debts maturing in the future; an essential property of money.

Flow

A quantity measured per unit of time; something that occurs over time, such as the income you make per week or per year or the number of individuals who are fired every month.

Direct relationship

A relationship between two variables that is positive, meaning that an increase in one variable is associated with an increase in the other and a decrease in one variable is associated with a decrease in the other.

Demand

A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant.

The federal personal income tax accounts for roughly​ ________ of all federal revenues. A. 6 percent B. 46 percent C. 32 percent D. 92 percent

B. 46 percent

Which of the following is not an automatic​ stabilizer? A. Unemployment compensation. B. Defense spending. C. Progressive tax rates. D. All of the above are automatic stabilizers.

B. Defense spending. This is discretionary. Congress and the President decide how much defense spending will take place.

Inventory investment

Changes in the stocks of finished goods and goods in process, as well as changes in the raw materials that businesses keep on hand. Whenever inventories are decreasing, inventory investment is negative. Whenever they are increasing, inventory investment is positive.

Real Disposable Income

Real GDP minus net taxes, or after-tax real income.

Open market operations

The purchase and sale of existing U.S. government securities, such as bonds, in the open private market by the Federal Reserve System.

Incentive structure

The system of rewards and punishments individuals face with respect to their own actions.

Adverse selection

The tendency for high-risk projects and clients to be over-represented among borrowers.

Base-year dollars

The value of a current sum expressed in terms of prices in a base year.

Resources

Things used to produce goods and services to satisfy peoples wants.

When the FED purchases bonds on the open market it will result in an ___ in the money supply. If it sells bonds on the open market, it will result in a ___ in the money supply. A purchase of bonds means the FED buys a government treasury bond from one of its primary dealers.

increase; decrease

Money is an asset—something of value—that accounts for part of personal wealth. Wealth in the form of money can be exchanged for ___ ___, ___, or ___.

other assets, goods, or services

Long-run aggregate supply (LRAS) curve

A vertical line representing the real output of goods and services after full adjustment has occurred. It can also be viewed as representing the real GDP of the economy under conditions of full employment—the full-employment level of real GDP.

Price System

An economic system in which relative prices are constantly changing to reflect changes in supply and demand for different commodities. The prices of those commodities are signals to everyone within the system as to what is relatively scarce and what is relatively abundant.

Taylor rule

An equation that specifies a federal funds rate target based on an estimated long-run real interest rate, the current deviation of the actual inflation rate from the Federal Reserve's inflation objective, and the gap between actual real GDP per year and a measure of potential real GDP per year.

Government budget deficit

An excess of government spending over government revenues during a given period of time. A government budget deficit exists if the government spends more than it receives in taxes during a given period of time.

Federal funds rate

The interest rate that depository institutions pay to borrow reserves in the interbank federal funds market.

The law of supply states...

The law of supply states that there is a positive relationship between the price and the quantity supplied.

Anything other than the price level that affects the production of final goods and services will shift ___ ___ ___.

aggregate supply curves

A person's ___ and ___ decisions realistically depend on both current income and anticipated future income.

consumption; saving

According to ___ tax​ analysis, higher tax rates cause the tax base to decrease. Tax collections will rise less than predicted by ___ tax analysis.

dynamic; static

A progressive tax system is one in which the tax rates A. are dependent on the progress of the​ economy; for example if real GDP grows by​ 3% then tax rates grow by​ 3%. B. remain constant as income increases. C. increase as income increases. D. decrease as income increases.

C. increase as income increases.

The largest component of U.S. currency is paper bills called ___ ___ ___.

Federal Reserve notes

Quantitative easing

Federal Reserve open market purchases intended to generate an increase in bank reserves at a nearly zero interest rate.

Intermediate goods

Goods used up entirely in the production of final goods.

Interest rate effect

One of the reasons that the aggregate demand curve slopes downward: Higher price levels increase the interest rate, which in turn causes businesses and consumers to reduce desired spending due to the higher cost of borrowing.

However, the U.S. experience shows that there is no clear relationship between the unemployment rate and the inflation rate. Since the 1950s data indicate that changes in the inflation rate have not altered the unemployment rate.​ Thus, empirical data provide evidence that the long run Phillips Curve is ___.

vertical The Phillips curve becomes vertical since there is no change in the unemployment rate in the​ long-run as inflation rate changes.

Total Expenditures

C​ + I​ + G​ + X.

The Federal Reserve purchases ​$12 million in U.S. Treasury bonds from a bond​ dealer, and the​ dealer's bank credits the​ dealer's account. The required reserve ratio is 15 ​percent, and the bank typically lends any excess reserves immediately. Assuming that no currency leakage​ occurs, calculate how much will the bank be able to lend to its customers following the​ Fed's purchase. $___ (Enter your response rounded to two decimal​ places.)

$10.20 million.

Assume that the multiplier in a country is equal to 10 and that autonomous real consumption spending is ​$5 trillion. If current real GDP is ​$20 ​trillion, the current value of real consumption spending is ​$__ trillion.

$23 trillion

There are three general categories of purely financial transactions:

(1) the buying and selling of securities, (2) government transfer payments, and (3) private transfer payments.

Frictional unemployment rate =

(Frictional Unemployment / Labor Force) * 100

Labor force participation rate ​ =

(Labor force / Labor force + Nonmilitary and non-institutionalized adults) * 100 or (Labor force / Adult Population) * 100

Arguments against the Federal Reserve's credit policy:

1. Providing an Incentive for Institutions to Operate Less Efficiently. 2. Reducing Incentives to Screen and Monitor in Order to Limit Asymmetric Information Problems. 3. Making Monetary Policy Less Effective.

A production possibilities curve that is bowed outward​ (from the​ origin) represents the concept that...

...production of additional units of one good requires that increasing quantities of the other good be given up. When moving along a bowed outward​ PPC, we find that production of additional units of one good require​ ever-increasing reductions in the other good.

In reality, more than one interest rate matters for Fed policymaking. Three interest rates are particularly relevant.

1 . The Federal Funds Rate. 2. The Discount Rate. 3. The Interest Rate on Reserves.

In the short run, an unexpected increase in aggregate demand causes the price level to rise and the unemployment rate to fall. Conversely, in the short run, an unexpected decrease in aggregate demand causes the price level to fall and the unemployment rate to rise. Two additional points are true:

1 . The greater the unexpected increase in aggregate demand, the greater the amount of inflation that results in the short run, and the lower the unemployment rate. 2. The greater the unexpected decrease in aggregate demand, the greater the deflation that results in the short run, and the higher the unemployment rate.

According to the Bureau of Labor Statistics, an unemployed individual will fall into any of four categories:

1. A job loser, whose employment was involuntarily terminated or who was laid off (40 to 60 percent of the unemployed) 2. A reentrant, who worked a full-time job before but has been out of the labor force (20 to 30 percent of the unemployed) 3. A job leaver, who voluntarily ended employment (less than 10 to around 15 per cent of the unemployed) 4. A new entrant, who has never worked a full-time job for two weeks or longer (10 to 15 percent of the unemployed)

Structural unemployment results from factors including these:

1. Government-imposed minimum wage laws, laws restricting entry into occupations, and welfare and unemployment insurance benefits that reduce incentives to work 2. Union activity that sets wages above the equilibrium level and also restricts the mobility of labor. Such factors reduce individuals' abilities or incentives to choose employment rather than unemployment.

In the private market sector, a dollar voting system is in effect. This dollar voting system is not equivalent to the voting system in the public sector.

1. In a political system, one person gets one vote, whereas in the market system, each dollar a person spends counts separately. 2. The political system is run by majority rule, whereas the market system is run by proportional rule. 3. The spending of dollars can indicate intensity of want, whereas because of the all-or-nothing nature of political voting, a vote cannot.

The Simple Circular Flow of Income - The concept of a circular flow of income (ignoring taxes) involves two principles:

1. In every economic exchange, the seller receives exactly the same amount that the buyer spends. 2. Goods and services flow in one direction and money payments flow in the other.

In the modern Keynesian short run, when the price level rises partially, real GDP can be expanded beyond the level consistent with its long-run growth path, for a variety of reasons:

1. In the short run, most labor contracts implicitly or explicitly call for flexibility in hours of work at the given wage rate. Therefore, firms can use existing workers more intensively: They can get workers to work harder, to work more hours per day, and to work more days per week. 2. Existing capital equipment can be used more intensively. Machines can be worked more hours per day. Some can be made to operate faster. Maintenance can be delayed. 3. If wage rates are held constant, a higher price level leads to increased profits from additional production, which induces firms to hire more workers. All these adjustments cause real GDP to rise as the price level increases.

Rational expectations hypothesis This hypothesis has two key elements:

1. Individuals base their forecasts (expectations) about the future values of economic variables on all readily available past and current information. 2. These expectations incorporate individuals' understanding about how the economy operates, including the operation of monetary and fiscal policy.

The spending decisions of firms, individuals, and other countries' residents depend on the taxes levied on them.

1. Individuals in their role as consumers look to their disposable (after-tax) income when determining their desired rates of consumption. 2. Firms look at their after-tax profits when deciding on the levels of investment per year to undertake. 3. Foreign residents look at the tax-inclusive cost of goods when deciding whether to buy in the United States or elsewhere. Therefore, holding all other things constant, an increase in taxes causes a reduction in aggregate demand because it reduces consumption, investment, or net exports.

Multiplier (formula)

= (1 / (1 - MPC)) or = 1 / MPS

MPC (formula)

= Change in Real Consumption / Change in Real Disposable Consumption

MPS (formula)

= Change in Real Saving / Change in Disposable Income

Disposable Income (formula)

= Consumption + Saving

Saving (formula)

= Disposable income - Consumption

Change in equilibrium real GDP (formula)

= Multiplier x Change in Autonomous Spending

APC (formula)

= Real Consumption / Real Disposable Income

As a consequence of the inverse relationship between the price of existing bonds and the interest rate, the Fed is able to influence the interest rate by engaging in open market operations.

A Fed open market sale that reduces the equilibrium price of bonds brings about an increase in the interest rate. A Fed open market purchase that boosts the equilibrium price of bonds generates a decrease in the interest rate.

Central bank

A banker's bank, usually an official institution that also serves as a bank for a nation's government treasury. Central banks normally regulate commercial banks.

Expansion

A business fluctuation in which the pace of national economic activity is speeding up.

Movement along the demand curve v. Shift of the demand curve.

A change in a good's own price lead to a change in quantity demanded for any given demand curve, other things held constant. This is a movement along the curve. A change in any of the ceteris paribus conditions for demand leads to a change in demand. This is a shift of the curve.

TASTES AND PREFERENCES

A change in consumer tastes in favor of a good can shift its demand curve outward to the right.

The Interest-Rate-Based Money Transmission Mechanism

A change in monetary policy > A change in excess reserves > A multiple change in the money supply > A change in the interest rate > A change in investment > A multiple change in real GDP

Movement along the supply curve v. Shift of the supply curve.

A change in price leads to a change in the quantity supplied, other things being constant. This is a movement along the curve. A change in any ceteris paribus condition for supply leads to a change in supply. This is a shift of the curve.

PRICE EXPECTATIONS

A change in the expectation of a future relative price of a product can affect a producer's current willingness to supply, just as price expectations affect a consumer's current willingness to purchase.

Production possibilities curve (PPC)

A curve representing all possible combinations of maximum Outputs that could be produced, assuming a fixed amount of productive resources of a given quality. Points inside the PPC are always attainable but imply that more of one or both goods could be produced with available resources and technology. This represents an inefficient use of those resources.

Defining Inflation

A decline in the purchasing power of money. The faster the rate of inflation, the greater the rate of decline in the purchasing power of money.

Say's law

A dictum of economist J. B. Say that supply creates its own demand. Producing goods and services generates the means and the willingness to purchase other goods and services.

Monopoly

A firm that can determine the market price of a good. In the extreme case, a monopoly is the only seller of a good or service.

Government-sponsored good

A good that has been deemed socially desirable through the political process. Museums are an example.

Federal Deposit Insurance Corporation (FDIC)

A government agency that insures the deposits held in banks and most other depository institutions. All U.S. banks are insured this way.

Free-rider

A problem that arises when individuals presume that others will pay for public goods so that, individually, they can escape paying for their portion without causing a reduction in production.

Demand curve

A graphical representation of the demand schedule. It is a negatively sloped line showing the inverse relationship between the price and the quantity demanded (other things being equal).

Price ceiling

A legal maximum price that may be charged for a particular good or service.

Price floor

A legal minimum price below which a good or service may not be sold. Legal minimum wages are an example.

Number line

A line that can be divided into segments of equal length, each associated with a number.

A linear​ (straight line) production possibility curve depicts...

A linear​ (straight line) production possibility curve depicts a constant​ trade-off between the two goods displayed on its axes. This means that the opportunity cost of obtaining an additional unit of one good requires constant reductions of the other good.

Black market

A market in which goods are traded at prices above their legal maximum prices or in which illegal goods are sold.

Unit of accounting

A measure by which prices are expressed; the common denominator of the price system; a central property of money. A unit of accounting is a way of placing a specific price on economic goods and services.

National Income accounting

A measurement system used to estimate national income and its components. One approach to measuring an economy's aggregate performance.

Secular deflation

A persistent decline in prices resulting from economic growth in the presence of stable aggregate demand.

Import quota

A physical supply restriction on imports of a particular good, such as sugar. Foreign exporters are unable to sell in the United States more than the quantity specified in the import quota.

A shock to the supply and demand system can be represented by a shift in the ______ _____, a shift in the ______ _____, or a shift in ____ ______. Any shock to the system will result in a new set of supply and demand relationships and a new equilibrium.

A shock to the supply and demand system can be represented by a shift in the supply curve, a shift in the demand curve, or a shift in both curves. Any shock to the system will result in a new set of supply and demand relationships and a new equilibrium. Forces will come into play to move the system from the old price-quantity equilibrium (now a disequilibrium situation) to the new equilibrium, where the new demand and supply curves intersect.

Stagflation

A situation characterized by lower real GDP, lower employment, and a higher unemployment rate during the same period that the rate of inflation increases.

Scarcity

A situation in which the ingredients for producing the things that people desire are insufficient to satisfy all wants at a zero price. It is the mismatch between unlimited wants and limited resources that defines the problem of scarcity. The clash between unlimited wants and limited resources​ (scarcity) implies that people must make choices regarding the use of resources. When one particular use for a resource is​ chosen, a​ trade-off occurs since production of the next best alternative is foregone.

Market failure

A situation in which the market economy leads to too few or too many resources going to a specific economic activity.

Economic system

A society's institutional mechanism for determining the way in which scarce resources are used to satisfy human desires.

Consumer Price Index (CPI)

A statistical measure of a weighted average of prices of a specified set of goods and services purchased by typical consumers in urban areas. Attempts to measure changes only in the level of prices of goods and services purchased by consumers.

Producer Price Index (PPI)

A statistical measure of a weighted average of prices of goods and services that firms produce and sell. Attempts to show what has happened to the average price of goods and services produced and sold by a typical firm.

Deflation

A sustained decrease in the average of all prices of goods and services in an economy. Defined as a downward movement in the average level of prices.

Inflation

A sustained increase in the average of all prices of goods and services in an economy. An upward movement in the average level of prices.

Fractional reserve banking

A system in which depository institutions hold reserves that are less than the amount of total deposits.

Regressive taxation

A tax system in which as more dollars are earned, the percentage of tax paid on them falls. The marginal tax rate is less than the average tax rate as income rises. As income increases, the marginal tax rate falls, and so does the average tax rate. The U.S. Social Security tax is regressive.

Progressive taxation

A tax system in which, as income increases, a higher percentage of the additional income is paid as taxes. The marginal tax rate exceeds the average tax rate as income rises. In a progressive system, the marginal tax rate is above the average tax rate. Your marginal tax rate is always above your average tax rate.

Proportional taxation

A tax system in which, regardless of an individual's income, the tax bill comprises exactly the same proportion. In a proportional taxation system, the marginal tax rate is always equal to the average tax rate.

Rational expectations hypothesis

A theory stating that people combine the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes.

Minimum wage

A wage floor, legislated by government, setting the lowest hourly rate that firms may legally pay workers.

Obviously financial intermediaries need to collect money from a variety of sources so they can redirect it where it can be used efficiently. The primary source of funds for a financial intermediary are known as its A. liabilities. B. income. C. capital controls. D. assets.

A. liabilities. Liabilities are the funds that financial intermediaries collect. They owe this money back to the households and businesses that place their money in the institution.

Read through the descriptions below to correctly match the action and the type of policy undertaken. A. Active policy​ making: Fed buying U.S. government securities in response to a​ recession; Passive policy​ making: Unemployment compensation paid out by the government. B. Active policy​ making: Fed buying U.S. government securities in response to a​ recession; Passive policy​ making: Congress increasing government spending. C. Active policy​ making: Unemployment compensation paid out by the​ government; Passive policy​ making: Fed buying U.S. government securities in response to a recession. D. Active policy​ making: The U.S. progressive tax​ system; Passive policy​ making: A decrease in the marginal tax rates approved by Congress and the President.

A. Active policy​ making: Fed buying U.S. government securities in response to a​ recession; Passive policy​ making: Unemployment compensation paid out by the government. The Fed is attempting to react to a current or potential future economic problem. Unemployment compensation is an automatic stabilizer and this spending changes by rule.

Which of the following statements is correct when considering the choice between active and passive policy​ making? A. Economists believing that markets are stable and efficient support passive policy​ making; economists that believe that there are rigidities in markets support active policy making. B. Economists believing that markets are stable and efficient support contractionary policy​ making; economists that believe that there are rigidities in markets support expansionary policy making. C. Economists believing that markets are stable and efficient support monetary​ policy; economists that believe that there are rigidities in markets support fiscal policy. D. Economists believing that markets are stable and efficient support active policy​ making; economists that believe that there are rigidities in markets support passive policy making.

A. Economists believing that markets are stable and efficient support passive policy​ making; economists that believe that there are rigidities in markets support active policy making. Stable markets that efficiently arrive at equilibrium will allow the economy to self​ correct, implying there is no need for an active policy. Markets that have sticky prices and wages need active policy to get the economy to equilibrium.

Which of the following is not a difference between market and collective decision​ making? A. Government goods are costless to​ produce, while private goods have production costs. B. Money payments can signal intensity of desire for a​ product, but voting cannot. C. Government goods are often provided free of​ charge, while market goods have a price. D. The government can use expropriation to extract​ payments, but private firms cannot.

A. Government goods are costless to​ produce, while private goods have production costs.

Which of the following economic theories is most likely to support active​ policymaking? A. New Keynesian model. B. Real business cycle theory. C. Monetarism. D. New classical model.

A. New Keynesian model. Due to this​ theory's belief of sticky wages and prices

The U.S. federal government has contemplated ways to reduce its national debt. Which of the following suggestions would best enable the government to achieve this​ goal? A. Reduce government​ spending, raise​ taxes, or both. B. Decrease the amount of government borrowing during the year. C. Increase the money supply or print money to pay these obligations. D. Double the marginal tax rates on wealthy households.

A. Reduce government​ spending, raise​ taxes, or both.

Which of the following events caused Congress to begin seriously looking at setting up the Federal Reserve​ system? A. Some severe banking crises at the end of the 19th century and early 20th century. B. World War I. C. The need to control inflation. D. The American​ people's loss of confidence in the​ nation's currency.

A. Some severe banking crises at the end of the 19th century and early 20th century. It was created to counter periodic panics in the banking industry.

Which of the following is a true​ statement? A. The C​ + I​ + G​ + X curve is used to derive the aggregate demand​ curve, but the C​ + I​ + G​ + X curve is drawn for one price level while price levels vary along the aggregate demand curve. B. Both the C​ + I​ + G​ + X curve and the aggregate demand curve are drawn for one price level. C. The C​ + I​ + G​ + X curve is used to derive the aggregate demand​ curve, but the aggregate demand curve is drawn for one price level. D. The C​ + I​ + G​ + X curve has no relationship to the aggregate demand curve other than some of the variables that affect one curve also affect the other.

A. The C​ + I​ + G​ + X curve is used to derive the aggregate demand​ curve, but the C​ + I​ + G​ + X curve is drawn for one price level while price levels vary along the aggregate demand curve.

Which of the following events would be likely to increase the supply of​ money? A. The Fed decreases the discount rate relative to the federal funds rate. B. The Fed increases reserve requirements for banks. C. The Fed conducts an open market sale of bonds. D. Banks perceive loans to be more risky and wish to hold more excess reserves.

A. The Fed decreases the discount rate relative to the federal funds rate.

Which of the following would cause aggregate demand to​ decrease? A. The government increases taxes on both business and personal income. B. A drop in the foreign exchange value of the dollar C. The Fed increases the amount of money in circulation. D. Businesses and households believe that the economy is headed for good​ times, so they begin to feel increased security about their jobs.

A. The government increases taxes on both business and personal income.

Which of the following statements is true when considering an economy with an​ upward-sloping short-run aggregate supply​ curve? A. The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap. B. The multiplier has an equal but muffled impact when there is either a recessionary or inflationary gap. C. The multiplier has more impact when the economy is experiencing an inflationary gap compared to a recessionary gap. D. The multiplier has its full effect no matter what the economy is experiencing.

A. The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap. This is because the rise in the price level is much smaller when there is a recessionary gap as opposed to an inflationary gap.

If the prices were​ sticky, according to​ Keynes, this would then imply that the A. ​short-run aggregate supply is horizontal. B. ​long-run aggregate supply is vertical. C. ​long-run aggregate demand vertical. D. ​short-run aggregate demand horizontal.

A. ​short-run aggregate supply is horizontal.

Which of the following statements about the policy irrelevance proposition is not​ true? A. The policy irrelevance proposition implies that the there is a short run change in real​ GDP, but no long run change in real GDP. B. The policy irrelevance proposition implies that any anticipated policy will have no effect on the level of real GDP. C. The policy irrelevance proposition is associated with the natural rate of unemployment. D. he policy irrelevance proposition assumes that people​ don't make the same mistakes in forecasting the future.

A. The policy irrelevance proposition implies that the there is a short run change in real​ GDP, but no long run change in real GDP. According to the policy irrelevance proposition there would be no change in either short or​ long-run real GDP.

Which of the following statements is true regarding the national debt and federal government​ deficits? A. There is a positive relationship between the national debt and a federal government budget deficit. B. There is a positive relationship between the amount of borrowing and a federal government surplus. C. There is a positive relationship between the national debt and a federal government budget surplus. D. There is a positive relationship between the federal government budget surplus and a federal government budget deficit.

A. There is a positive relationship between the national debt and a federal government budget deficit.

The Laffer curve indicates which of the​ following? A. There is an ideal​ tax-revenue-maximizing tax rate for government taxes. B. There is an ideal amount of government spending that will lead to full national employment. C. There is an ideal income tax rate on​ individuals, depending on their consumption behavior. D. There is an ideal interest rate that will maximize investment spending.

A. There is an ideal​ tax-revenue-maximizing tax rate for government taxes.

A member of​ Congress, who has never had an economics​ course, has just been placed on a Money and Banking Committee. The official needs a briefing prior to the first meeting concerning the role of the money supply in the economy. Which of the following statements should you insist that the official remember when entering the first committee​ meeting? A. There is a​ direct, albeit​ loose, relationship between the growth of the money supply and the price​ level; and a direct relationship between the growth of the money supply and GDP growth. B. There is an indirect relationship between the growth of the money supply and the price​ level; and an indirect relationship between the growth of the money supply and GDP growth. C. There is a​ direct, albeit​ loose, relationship between the growth of the money supply and the price​ level; and an indirect relationship between the growth of the money supply and GDP growth. D. There is an indirect relationship between the growth of the money supply and the price​ level; and a direct​ (but not​ perfect) relationship between the growth of the money supply and GDP growth.

A. There is a​ direct, albeit​ loose, relationship between the growth of the money supply and the price​ level; and a direct relationship between the growth of the money supply and GDP growth.

How do automatic stabilizers work? A. When a decline in national income occurs there will be a reduction in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. B. When an increase in national income occurs there will be an increase in income tax collections and an increase in unemployment compensation and welfare payments muting the increase in planned expenditures that would have otherwise resulted. C. When an increase in national income occurs there will be a reduction in income tax collections and a decrease in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. D. When a decline in national income occurs there will be an increase in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted.

A. When a decline in national income occurs there will be a reduction in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. A decrease in income causes tax revenues to decrease. It also increases government aid to families through welfare and unemployment compensation.

An increase in the interest rate causes A. a decrease in the amount of real planned investment. B. an increase in the investment function. C. a decrease in the investment function. D. a decrease in disposable income

A. a decrease in the amount of real planned investment. Any change in the interest rate causes a movement along the investment function. It does not cause a shift in the function.

Generally a larger US trade deficit is accompanied by a A. a larger US federal government budget deficit. B. decreased borrowing by the US government. C. a smaller US national debt. D. a smaller US federal government budget deficit.

A. a larger US federal government budget deficit.

When there are too few or too many resources going to an economic​ activity, A. a market failure exists. B. scarcity of resources no longer exists. C. a public good exists. D. consumer sovereignty exists.

A. a market failure exists.

In the short​ run, if aggregate demand shifts to the left while the position of the​ short-run aggregate supply curve does NOT​ change, then A. a recessionary gap occurs. B. an inflationary gap occurs. C. the level of economic activity rises. D. there is no change in real GDP and the price level.

A. a recessionary gap occurs.

Bank X had a reputation for asking few questions when it provided loans. Five years​ later, the majority of the loans were not repaid. This is because the bank had failed to address the A. adverse selection problem. B. ​free-rider problem. C. moral hazard problem. D. contrary selection problem.

A. adverse selection problem.

If society wants aggregate demand to increase without changes in the price​ level, then there must be A. an increase in autonomous spending and a horizontal short−run aggregate supply curve. B. an increase in autonomous saving so that autonomous investment spending can increase. C. an increase in autonomous spending combined with an increase in the marginal propensity to save. D. a gap between full employment and the current level of real GDP and an increase in autonomous spending.

A. an increase in autonomous spending and a horizontal short−run aggregate supply curve.

Some Relationships

APC + APS = 1 (100 percent of total income) MPC + MPS = 1 (100 percent of the change income)

During the​ 1945-1946 Hungarian​ hyperinflation, when the rate of inflation reached 41.9 quadrillion percent per​ month, the Hungarian government discovered that the real value of its tax receipts was falling dramatically. To keep real tax revenues more​ stable, it created a good called a​ "tax pengö", in which all bank deposits were denominated for purposes of taxation. ​Nevertheless, payments for goods and services were made only in terms of the regular Hungarian​ currency, whose value tended to fall rapidly even though the value of a tax​ pengö remained stable. Prices were also quoted only in terms of the regular currency.​ Lenders, however, began denominating loan payments in terms of tax​ pengös. The tax​ pengö functioned as money in Hungary in 1945 and 1946 A. as a store of value. B. as a medium of exchange. C. As a unit of accounting. D. as a barter exchange.

A. as a store of value.

Consider the following​ statement: "In an important​ sense, the term policy irrelevance proposition is misleading because even if the rational expectations hypothesis is​ valid, economic policy actions can have significant effects on real GDP and the unemployment​ rate." This statement is A. correct because unanticipated government policy can influence real GDP and the rate of unemployment. B. incorrect because fully anticipated government policy can influence real GDP and the rate of unemployment. C. correct because all government policies can always influence real GDP and the rate of unemployment. D. incorrect because government policy can no longer influence real GDP and the rate of unemployment.

A. correct because unanticipated government policy can influence real GDP and the rate of unemployment.

When there is an economic​ downturn, Congress and the President use fiscal policy to stabilize real GDP. But the conduct of the fiscal policy involves several time​ lags, such as the recognition time lag that causes a delay in identification of the economic​ problem, the action time lag that is caused by the delay in Congressional approval of the​ policy, and the effect time lag that arises because policy actions take time to exert their full effects on the economy. These time lags could actually cause discretionary fiscal policy to A. destabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be recovering and the policy action might push real GDP up faster than​ intended, thereby making real GDP less stable. B. destabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be in worse trouble and the policy action might push real GDP down faster than​ intended, thereby making real GDP less stable. C. stabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be recovering and the policy action might push real GDP down faster than​ intended, thereby making real GDP more stable. D. stabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be recovering and the policy action might push real GDP up faster than​ intended, thereby making real GDP more stable.

A. destabilize real GDP because by the time a policy has begun to have its​ effects, the economy might already be recovering and the policy action might push real GDP up faster than​ intended, thereby making real GDP less stable.

Saving is the portion of A. disposable income that is not consumed. B. stock of consumption. C. disposable income that is consumed. D. investment that is spent on machinery.

A. disposable income that is not consumed.

Suppose the government decreases lumpminus−sum taxes. This causes A. disposable income to​ increase, which causes consumption spending to decrease and aggregate demand to increase. B. disposable income to​ decrease, which causes aggregate supply to decrease. C. government spending to​ decrease, which causes aggregate demand to decrease. D. consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most.

A. disposable income to​ increase, which causes consumption spending to decrease and aggregate demand to increase.

Private goods are goods A. for which the more one person has the less is available for someone else. B. for which price is greater than zero. C. that are produced by the government. D. that carry a price.

A. for which the more one person has the less is available for someone else.

The actual rate of unemployment is A. greater than the natural rate of unemployment when cyclical unemployment is positive. B. always equal to the natural rate of unemployment. C. greater than the natural rate of unemployment when cyclical unemployment is zero. D. less than the natural rate of unemployment when cyclical unemployment is positive.

A. greater than the natural rate of unemployment when cyclical unemployment is positive.

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by A. increased government expenditures and decreased investment. B. increased government expenditures and decreased interest rates. C. increased taxes and increased investment. D. decreased government expenditures and decreased investment.

A. increased government expenditures and decreased investment.

According to your​ text, which of the following represents the largest source of tax receipts for the Federal ​government? A. individual income taxes B. property taxes C. corporate income taxes D. sales taxes

A. individual income taxes

An important assumption in the theory of public choice is that A. individuals will act within the political process to maximize their individual​ well-being. B. individuals will act within the political process to maximize their collective​ well-being. C. scarcity does not exist in the government sector. D. individuals will only operate outside the political process when their​ well-being is involved.

A. individuals will act within the political process to maximize their individual​ well-being.

Asymmetric information is a situation in which A. information possessed by one party in a transaction is not known by another party. B. the government has information that it chooses to pass along to private firms. C. information possessed by one party in a transaction is also known by another party. D. private firms have information that they choose to pass along to the government.

A. information possessed by one party in a transaction is not known by another party.

The​ short-run aggregate supply curve in modern Keynesian analysis A. is an upward sloping curve. B. is a negatively sloped curve. C. is a vertical line the same as in the classical model. D. is a horizontal line the same as in the Keynesian model.

A. is an upward sloping curve.

In the​ figure, P and Q locate the socially optimal price and quantity of a good. In the case of a good that generates positive​ externalities, the market price would be​ _____ P and the market quantity would be​ ______ Q​, while in the case of a good that generates negative​ externalities, the market price would be​ ________ P and the market quantity would be ____________ Q. A. lower​ than; lower​ than; lower​ than; higher than B. lower​ than; lower​ than; higher​ than; higher than C. lower​ than; equal​ to; higher​ than; equal to D. equal​ to; lower​ than; higher​ than; equal to

A. lower​ than; lower​ than; lower​ than; higher than The presence of positive externalities will lead the market to under produce and under price the good while negative externalities will cause the uncorrected market to yield too much output at too low a price.

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures is the A. multiplier. B. marginal propensity to consume. C. average propensity to consume. D. unplanned investment.

A. multiplier.

The U.S. government is in the midst of spending more than​ $1 billion on seven buildings containing more than​ 100,000 square feet of space to be used for study of infectious diseases. Prior to the​ government's decision to construct these​ buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings​ began, however, the universities dropped their plans. The​ government's $1 billion expenditure will A. not push U.S. real GDP above the level it would have reached in the absence of the​ government's construction spree because this expenditure would have been undertaken by universities. B. push U.S. real GDP above the level it would have reached in the absence of the​ government's construction spree because the universities dropped their plans. C. not push U.S. real GDP above the level it would have reached in the absence of the​ government's construction spree because both the government and the universities would require borrowed funds. D. push U.S. real GDP above the level it would have reached in the absence of the​ government's construction spree because there is a multiplier effect.

A. not push U.S. real GDP above the level it would have reached in the absence of the​ government's construction spree because this expenditure would have been undertaken by universities.

In order to induce private banks to maintain substantial reserve deposits with the Federal Reserve​ banks, since 2008 the Fed has A. paid banks an interest rate that is higher than the federal funds rate on their reserves. B. raised the legal reserve ratio that the banks have to maintain. C. paid banks an interest rate that is lower than the federal funds rate. D. paid banks an interest rate that is equal to the federal funds rate.

A. paid banks an interest rate that is higher than the federal funds rate on their reserves.

​"Rational expectations" means that A. people base their expectations on all readily available past and current information. B. people make systematic errors in forming expectations about the economy. C. people correctly anticipate all changes in the economy. D. people base their expectations only on what has happened in the past.

A. people base their expectations on all readily available past and current information.

An increase in corporate income taxes would reduce A. personal income. B. national income. C. gross domestic product. D. net domestic product.

A. personal income. Higher corporate income taxes will reduce the amount of personal income. This is because a larger portion of earned income is no longer being received.

The most important tax in the U.S. economy is the A. personal income​ tax, which accounts for 49 percent of all federal revenues. B. corporate income​ tax, which accounts for 49 percent of all federal revenues. C. corporate income​ tax, which accounts for 62 percent of all federal revenues. D. personal income​ tax, which accounts for 85 percent of all federal revenues.

A. personal income​ tax, which accounts for 49 percent of all federal revenues.

Market failures A. prevent the price system from attaining economic efficiency. B. weaken the argument for government intervention in the economy. C. result in quantities and prices that are socially desirable. D. strengthen economic efficiency by forcing unprofitable firms to close.

A. prevent the price system from attaining economic efficiency.

A decrease in aggregate demand will cause A. prices to fall according to classical​ economists, and unemployment to increase according to Keynes. B. aggregate supply to fall according to​ Keynes, and unemployment to increase according to classical economists. C. aggregate supply to fall according to classical​ economists, and prices to fall according to Keynes. D. prices to fall and unemployment to increase according to both classical economists and Keynes.

A. prices to fall according to classical​ economists, and unemployment to increase according to Keynes.

Economic growth causes the A. production possibilities curve to shift rightward and the​ long-run aggregate supply curve to shift rightward. B. production possibilities curve to shift rightward and the​ long-run aggregate supply curve to shift leftward. C. production possibilities curve to shift leftward and the​ long-run aggregate supply curve to shift leftward. D. production possibilities curve to shift leftward and the​ long-run aggregate supply curve to shift rightward.

A. production possibilities curve to shift rightward and the​ long-run aggregate supply curve to shift rightward.

The study of collective decision​ making, or the process through which​ voters, politicians and other interested parties influence nonmarket choices is known as A. public choice theory. B. the exclusion principle. C. antitrust legislation. D. a private choice theory.

A. public choice theory. The theory of public choice refers to the analysis of collective decision making involving​ voters, politicians, political​ parties, interest​ groups, and many others

Subsidizing medical services through Medicare A. raises the price per unit of medical care received by producers. B. makes the quantity demanded of medical services smaller than the quantity supplied. C. lowers the price per unit of medical care received by producers. D. makes the quantity supplied of medical services smaller than the quantity demanded.

A. raises the price per unit of medical care received by producers.

The multiplier is weakened in inflationary gaps because of A. rapid price level increases. B. incomes rising faster than the price level. C. increasing returns. D. economies of scale.

A. rapid price level increases. As the price level increases more​ rapidly, purchasing power decreases more rapidly too.

In the traditional Keynesian​ model, if the government increases​ spending, then A. real Gross Domestic Product​ (GDP) will rise and the price level will remain constant. B. real Gross Domestic Product​ (GDP) will increase and the price level will fall. C. both real Gross Domestic Product​ (GDP) and the price level will rise. D. real Gross Domestic Product​ (GDP) will remain constant and the price level will rise.

A. real Gross Domestic Product​ (GDP) will rise and the price level will remain constant.

The largest component of M2 is A. savings and money market deposits at depository institutions. B. M1. C. retail money market mutual fund shares. D. overnight repurchase agreements and Eurodollars.

A. savings and money market deposits at depository institutions.

If the federal government has a budget deficit it can finance its spending by A. selling Treasury bonds. B. selling municipal bonds. C. selling corporate bonds. D. All the above.

A. selling Treasury bonds.

Suppose that the value of the US dollar​ ($) yesterday was​ $1 = 4 euros. Today the exchange rate changed such that​ $1 = 33 euros. Given that the US dollar has​ depreciated, the aggregate demand in the United States should A. shift to the right. B. not be affected. C. shift to the left. Given that the US dollar has depreciated the​ short-run aggregate supply in the United States should A. shift to the left. B. shift to the right. C. not be affected.

A. shift to the right. A. shift to the left.

According to your​ text, one reason for flat or falling achievement scores even in the face of substantially higher education subsidies may be that A. some of the funds are going to social services rather than to enhance learning activities. B. students are so unmotivated that no amount of spending will ever improve scores. C. the additional funds are being siphoned off by dishonest school board members. D. most parents do not support the schools or their​ children's educational activities.

A. some of the funds are going to social services rather than to enhance learning activities.

The Fed acts like a government agency when it A. supplies the economy with fiduciary currency. B. acts as the​ government's fiscal agent. C. holds a depository​ institution's reserves. D. provides​ payment-clearing services.

A. supplies the economy with fiduciary currency.

The country with the highest per capita GDP based on purchasing power parity​ (U.S. dollars) is A. the United States. B. Germany. C. France. D. Japan.

A. the United States. According to the World​ Bank, the U.S. ranks first in per capita GDP based on purchasing power parity.​ Japan, France, and Germany follow in this order.

Fiscal policy is defined as A. the discretionary changing of government expenditures​ and/or taxes to achieve macroeconomic economic goals. B. the use of the taxing power of the government to redistribute wealth in a socially acceptable manner. C. the design of a tax system to transfer income from large corporations to the poor. D. the use of Congressional power to pursue social and political goals.

A. the discretionary changing of government expenditures​ and/or taxes to achieve macroeconomic economic goals.

The theory of public choice is the study of A. the process through which​ voters, politicians, and other interested parties interact to influence nonmarket choices. B. how the price system allocates resources in the public sector. C. how legal coercion influences the allocation of resources in the private sector. D. the study of the system of rewards or punishments in the private sector.

A. the process through which​ voters, politicians, and other interested parties interact to influence nonmarket choices. The examination of how​ voters, politicians, and other parties collectively reach decisions in the public sector of the economy is known as the theory of public choice.

An inflationary gap occurs when A. the​ short-run equilibrium level of real GDP is greater than​ long-run aggregate supply. B. aggregate demand​ falls, but other things remain constant. C. the​ short-run equilibrium level of real GDP is less than​ long-run aggregate supply. D. ​short-run aggregate supply​ falls, but other things remain constant.

A. the​ short-run equilibrium level of real GDP is greater than​ long-run aggregate supply.

The largest component of the M1 money supply is A. transactions deposits. B. currency. C. ​traveler's checks. D. money market mutual fund shares.

A. transactions deposits.

Consider a bank balance​ sheet, with​ "Assets" on the left and​ "Liabilities" on the right side. Identify where the following items belong. I. Deposits this bank holds in an account with another private bank. II. Borrowings from another bank in the interbank loan market. A. ​I: assets;​ II: liabilities. B. Both liabilities. C. Both assets. D. ​I: liabilities;​ II: assets.

A. ​I: assets;​ II: liabilities.

What did Keynes mean when he said that prices are​ sticky? A. ​Prices, especially the price of​ labor, are inflexible downward. B. Prices are sticky because of​ cost-push inflation. C. Prices are inflexible upward due to the aversion people have to higher prices. D. Prices need to be sticky or we would have​ cost-push inflation.

A. ​Prices, especially the price of​ labor, are inflexible downward.

If a government determines that the provision of services by museums should be​ encouraged, then this means that the government has judged museum displays to be​ a(n) A. ​government-sponsored good. B. exclusive good. C. public good. D. ​government-inhibited good.

A. ​government-sponsored good.

Entitlements in the U.S. are A. ​non-discretionary expenditures that have been legislated by Congress. B. a small fraction of the total amount of government expenditures. C. rights individuals possess that allow them the freedom to choose what they can purchase. D. payments that every citizen in the U.S. is entitled to receive.

A. ​non-discretionary expenditures that have been legislated by Congress. Sometimes this is referred to as mandatory spending.

The new Keynesian​ model, using the theories of sticky prices and efficiency​ wages, suggests that the A. ​short-run aggregate supply curve is horizontal. B. ​short-run aggregate supply curve has a steep positive slope. C. the aggregate demand curve is downward sloping. D. ​long-run aggregate supply is vertical.

A. ​short-run aggregate supply curve is horizontal. The new Keynesians promote the idea of sticky prices which can be modeled by a horizontal SRAS curve.

Active (discretionary) policymaking

All actions on the part of monetary and fiscal policymakers that are undertaken in response to or in anticipation of some change in the overall economy.

Physical capital

All manufactured resources, including buildings, equipment, machines, and improvements to land that are used for production.

Market

All of the arrangements that individuals have for exchanging with one another. Thus, for example, we can speak of the labor market, the automobile market, and the credit market.

If last year a compact fluorescent light bulb cost $6.00, and this year it costs $9.00, there has been a 50 percent rise in the price of that light bulb over a one-year period. We can express the change in the individual light bulb price in one of several ways: The price has gone up $3.00. The price is one and a half (1.5) times as high. The price has risen by 50 percent.

An index number of this price rise is simply the second way (1.5) multiplied by 100, meaning that the index today would stand at 150. We multiply by 100 to eliminate decimals because it is easier to think in terms of percentage changes using whole numbers.

Government budget surplus

An excess of government revenues over government spending during a given period of time.

Depression

An extremely severe recession.

Habit formation

An inclination for household choices, such as decisions to purchase goods and services, to become automatic, or habitual, through frequent repetition.

MARKET SIZE (NUMBER OF POTENTIAL BUYERS)

An increase in the number of potential buyers (holding buyers' incomes constant) at any given price shifts the market demand curve outward. Conversely, a reduction in the number of potential buyers at any given price shifts the market demand curve inward.

Job loser

An individual in the labor force whose employment was involuntarily terminated.

Capital consumption allowance

Another name for depreciation, the amount that businesses would have to put aside in order to take care of deteriorating machines and other equipment.

Another term for the market clearing price is...

Another term for the market clearing price is. the equilibrium price, the price at which there is no tendency for change. Consumers are able to get all they want at that price, and suppliers are able to sell all they want at that price.

Aggregate demand shock

Any event that causes the aggregate demand curve to shift inward or outward.

Aggregate supply shock

Any event that causes the aggregate supply curve to shift inward or outward.

Medium of exchange

Any item that sellers will accept as payment.

Money

Any medium that is universally accepted in an economy both by sellers of goods and services as payment for those goods and services and by creditors as payment for debts.

What determines the position of the aggregate demand curve?

Any non-price-level change that increases aggregate spending (on domestic goods) shifts AD to the right. Any non-price-level change that decreases aggregate spending (on domestic goods) shifts AD to the left.

As long as a price ceiling is below the market clearing price, imposing a price ceiling creates a shortage.

As long as a price ceiling is below the market clearing price, imposing a price ceiling creates a shortage. Normally, whenever quantity demanded exceeds quantity supplied—that is, when a shortage exists—there is a tendency for the price to rise to its equilibrium level. But with a price ceiling, this tendency cannot be fully realized because everyone is forbidden to trade at the equilibrium price.

There is usually a direct relationship between price and quantity supplied.

As the price rises, the quantity supplied rises. As the price falls, the quantity supplied also falls.

Examples of M1 and M2

A​ $1,000 balance in a transactions deposit at a mutual savings bank. This item is counted in both M1 and M2. A​ $100,000 certificate of deposit issued by a New York bank. This item is counted in neither M1 nor M2. A​ $10,000 time deposit an elderly widow holds at her credit union. This item is counted in M2 only. A​ $50 traveler's check. This item is counted in both M1 and M2. A​ $50,000 money market deposit account balance. This item is counted in M2 only.

Economic System

A​ society's institutional mechanism for determining the way in which scarce resources are used to satisfy human desires refers to it economic system.

Which of the following is an example of a transfer in kind? A. Unemployment insurance benefits B. Food stamps C. Disability benefits D. Social Security

B. Food stamps

Which of the following statements is​ correct? A. Governments have learned how to use fiscal policy to​ fine-tune the economy. B. Governments have a difficult time​ fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable. C. Governments have the knowledge about how to​ fine-tune the​ economy, but the effect time lag generates a backlash from voters that makes it difficult to implement. D. Governments have a difficult time​ fine-tuning the economy by using fiscal policy because of the automatic stabilizers.

B. Governments have a difficult time​ fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable.

Which of the following is not an economic function of​ government? A. Providing a legal system. B. Income redistribution. C. Promoting competition. D. Ensuring​ economy-wide stability.

B. Income redistribution. A relatively recent political function of government has been the explicit redistribution of income.

Which one of the following statements is​ true? A. Over the​ years, real consumption spending has been more volatile than real investment spending. B. Over the​ years, real investment spending has been more volatile than real consumption spending. C. In the Keynesian​ model, changes in the volume of real investment spending are fully explained by changes in the real interest rate. D. Domestic real investment in the United States was highest during the Great Depression.

B. Over the​ years, real investment spending has been more volatile than real consumption spending.

Which one of the following is a primary difference between a public good and a private​ good? A. A private good is subject to the​ free-rider problem while a public good is not. B. Private goods are subject to the principle of rival consumption while public goods are not. C. Private goods are purchased by money transfers while public goods are purchased by​ in-kind transfers. D. Private goods are manufactured because of the workings of the price system while public goods come about through antitrust legislation.

B. Private goods are subject to the principle of rival consumption while public goods are not. While several differences between these two types of goods​ exist, the primary difference is that the principle of rival consumption applies to private but not public goods. In other​ words, the use of private goods is exclusive to the people who purchase or rent them. One​ person's consumption of a private good reduces the amount available for others to consume. Public​ goods, however, can be jointly consumed by many individuals simultaneously at no additional cost and with no reduction in quality or quantity.

Which of the following is an example of a transfer payment​? A. Subsidized public housing. B. Social Security. C. Medicare. D. food stamps.

B. Social Security.

Which of the following is a major reason why financial​ intermediaries, such as​ banks, exist? A. Financial intermediaries exist because they provide a medium of exchange for their customers. B. The existence of asymmetric information makes financial intermediaries more efficient in channeling money to its most efficient use. C. Banks create near monies. D. Banks exist to facilitate exchanges through barter.

B. The existence of asymmetric information makes financial intermediaries more efficient in channeling money to its most efficient use. The bank has better information than what an individual possesses when dealing with loans to other firms. This reduces the risk to the household or individual.

What is the basic structure of the Federal Reserve​ Bank? A. There is one major bank located in Washington D.C. with branch banks located in every major city. B. There are 12 district​ banks, a Board of Governors and a Federal Open Market Committee. C. It is the combination of all private banks in the U.S. excluding Savings and Loans banks. D. There is one major bank with 25 branches.

B. There are 12 district​ banks, a Board of Governors and a Federal Open Market Committee. This is the structure of the Fed.

Which of the following statements is true when considering time​ lags? A. The effect time lag depends on the action of presidential economic advisors who will evaluate the effectiveness level of the fiscal policy. B. Time lags in fiscal policy can be extremely long and may take several years before any impact is felt. C. The shortest time lag is the action time lag since Congress has a set period to debate fiscal policy matters. D. Due to the fiscal policy variables​ (G and​ T) being flow​ variables, which are measured over a set​ period, time lags are confined to the same​ period, that is no longer than one year.

B. Time lags in fiscal policy can be extremely long and may take several years before any impact is felt. Time lags have no set time​ period, so they can be very long.

The most important tax in the U.S. economy is the federal personal income tax. A. False B. True

B. True

Which of the following is NOT an assumption of the classical​ model? A. Pure competition exists. B. Wages and prices are fixed. C. Buyers react to changes in relative prices. D. People are motivated by the own​ self-interest.

B. Wages and prices are fixed. Wages are prices are flexible in the classical model.

Suppose the economy is in equilibrium when there is a change in environmental policy that bans all pesticides and herbicides on farmland. We would expect to observe A. a decrease in aggregate supply and an increase in aggregate demand. B. a decrease in real output and an increase in the price level. C. a decrease in both real output and the natural rate of unemployment. D. a decrease in real output and an increase in the natural rate of unemployment.

B. a decrease in real output and an increase in the price level.

If the U.S. dollar becomes weaker in international​ markets, the net effects will include A. an increase in​ short-run aggregate supply and a decrease in aggregate demand. B. a decrease in​ short-run aggregate supply and an increase in aggregate demand. C. an increase in both short run aggregate supply​ (SRAS) and aggregate demand. D. a decrease in both short run aggregate supply​ (SRAS) and aggregate demand.

B. a decrease in​ short-run aggregate supply and an increase in aggregate demand.

If equilibrium level of real Gross Domestic Product​ (GDP) is less than the​ full-employment real Gross Domestic Product​ (GDP) consistent with the position of the​ economy's long-run aggregate supply​ (LRAS) curve, then the difference between​ full-employment real Gross Domestic Product​ (GDP) and current equilibrium real Gross Domestic Product​ (GDP) is A. an aggregate demand shock. B. a recessionary gap. C. an aggregate supply shock. D. an inflationary gap.

B. a recessionary gap.

Each of the following factors has played a significant role in the rapid expansion of Medicare spending by the U.S. government except A. the profit motive of physicians and hospitals. B. consumers of Medicare tend to only consume the high valued medical services. C. total medical spending​ (number of consumers times the price of medical​ services) has risen rapidly in the U.S. D. government planners failed to correctly estimate the increase in consumption of medical services.

B. consumers of Medicare tend to only consume the high valued medical services. There is no evidence that consumers of Medicare services tend to consume only high valued medical services. In​ fact, they tend to consume a large quantity of services. Since the marginal utility of services falls as more are​ consumed, they consume low valued services that are extremely costly to provide.

In the traditional Keynesian​ model, if the government decreases​ spending, then A. consumption will increase or​ decrease, and so real Gross Domestic Product​ (GDP) will increase or decrease depending on the change in consumption. B. consumption will​ decrease, and so real Gross Domestic Product​ (GDP) will decrease by more than the increase in government spending. C. consumption will remain the​ same, and so real Gross Domestic Product​ (GDP) will increase by the same amount of the increase in government spending. D. consumption will​ decrease, and so real Gross Domestic Product​ (GDP) will decrease by less than the increase in government spending.

B. consumption will​ decrease, and so real Gross Domestic Product​ (GDP) will decrease by more than the increase in government spending.

The traditional Keynesian approach to fiscal policy assumes A. prices are flexible while interest rates are not. B. current taxes are the only taxes taken into account by firms and consumers. C. the focus of attention should be the long run. D. exchange rates are fixed.

B. current taxes are the only taxes taken into account by firms and consumers.

The type of unemployment that rises as the economy goes into a recession is called A. structural. B. cyclical. C. frictional. D. seasonal.

B. cyclical. Cyclical unemployment is defined as unemployment associated with changes in business conditions long dash— recessions and booms.

A higher domestic price level should A. increase real wealth and consumption. B. decrease net exports. C. increase desired investment. D. none of these.

B. decrease net exports.

According to traditional Keynesian​ analysis, fiscal policy operates by A. informing consumers and business people about its plans for the economy so they will know how to adjust their behavior. B. directly affecting aggregate demand. C. directly affecting aggregate supply. D. indirectly affecting aggregate demand through its effect on interest rates.

B. directly affecting aggregate demand.

According to the classical​ model, the income generated by production is A. enough to meet the needs of everyone in society. B. enough to purchase all the goods and services produced. C. fully spent on savings. D. always insufficient to purchase all the goods and services produced.

B. enough to purchase all the goods and services produced.

If the economy is underutilizing its economic​ resources, the Fed should A. contract the money supply to decrease aggregate demand. B. expand the money supply to increase aggregate demand. C. decrease aggregate supply. D. discourage investment spending.

B. expand the money supply to increase aggregate demand.

The net export effect of contractionary monetary policy predicts that a​ country's A. imports decrease as the money supply contracts. B. exports decrease as the money supply contracts. C. value of currency depreciates as the money supply contracts. D. experience will include all of the above.

B. exports decrease as the money supply contracts. As the money supply​ decreases, interest rates​ rise, causing an appreciation of the domestic currency and thereby reducing exports.

Expenditures by firms on new machines and buildings that are expected to yield a future stream of income is known as A. inventory investment. B. fixed investment. C. consumption goods. D. consumer durable.

B. fixed investment.

In the circular flow of income A. households buy goods and services and firms supply goods. Resources are supplied by other firms. B. households demand goods and services which are supplied by​ firms, and the firms demand resources that are supplied by intermediate firms. C. households buy goods and services while firms sell goods and services. Firms obtain labor from​ households, capital from​ government, and raw materials from firms. D. households demand goods and services that are supplied by​ firms, while supplying resources that are demanded by firms.

B. households demand goods and services which are supplied by​ firms, and the firms demand resources that are supplied by intermediate firms. Firms supply goods and services that are demanded by households while demanding resources that are owned and supplied by households.

The corporate income tax in the United States A. does not apply to profits earned on exports. B. results in​ individuals' being doubly taxed on corporate earnings. C. excludes dividends paid out. D. only taxes retained earnings.

B. results in​ individuals' being doubly taxed on corporate earnings. Because individual stockholders must pay taxes on the dividends they​ receive, which are paid out of after-tax profits by the​ corporation, corporate profits are taxed twice.

Situations in Which Both Demand and Supply Shift

Changes of demand and supply in the same direction. Changes of demand and supply in opposite directions.

One of the main conclusions of​ Say's Law was that A. if people demand goods in order to then supply​ goods, there can be overproduction in a market economy and less than full employment will be the normal state of affairs. B. if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs. C. if people demand goods in order to then supply​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs. D. if people supply goods in order to then demand​ goods, there can be overproduction in a market economy and less than full employment will be the normal state of affairs.

B. if people supply goods in order to then demand​ goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. There can be positive unemployment in this situation because A. in a free society some people will always prefer idleness over work. B. information is costly and rigidities always exist causing some types of unemployment​ (frictional and​ structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes. C. corporations need the presence of some unemployment to keep workers​ "in line." D. business cycles are an inherent feature of the economy causing cyclical unemployment to naturally occur.

B. information is costly and rigidities always exist causing some types of unemployment​ (frictional and​ structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes. The natural rate of unemployment consists of frictional and structural​ unemployment, which is positive because information is costly and rigidities always exist causing some unemployment to occur even in the long run after everyone in the economy has fully adjusted to any changes.

Adverse selection refers to the A. possibility that the borrower may engage in riskier behavior after the loan is obtained. B. likelihood that a potential borrower may use the funds that he receives for​ unworthy, high risk projects. C. use of statistical discrimination in making loans. D. possession of information by one party in a financial transaction not known by the other party.

B. likelihood that a potential borrower may use the funds that he receives for​ unworthy, high risk projects.

In an open​ economy, the net export effect A. may enhance an expansionary fiscal policy and an expansionary monetary policy. B. may offset an expansionary fiscal policy but enhance an expansionary monetary policy. C. may offset an expansionary monetary policy but enhance an expansionary fiscal policy. D. may offset an expansionary fiscal policy and an expansionary monetary policy.

B. may offset an expansionary fiscal policy but enhance an expansionary monetary policy.

Until​ 1946, residents of the island of Yap used large​ doughnut-shaped stones as financial assets. Although prices of goods and services were not quoted in terms of the​ stones, the stones were often used in exchange for particularly large​ purchases, such as payments for livestock. To make the​ transaction, several individuals would place a large stick through a​ stone's center and carry it to its new owner. A stone was difficult for any one person to​ steal, so an owner typically would lean it against the side of his or her home as a sign to others of accumulated purchasing power that would hold value for later use in exchange. Loans would often be repaid using the stones. These stones performed the following functions of money LOADING...​: A. medium of​ exchange, unit of​ accounting, and standard of deferred payment functions of money. B. medium of​ exchange, store of​ value, and standard of deferred payment functions of money. C. medium of​ exchange, unit of​ accounting, and store of value functions of money. D. unit of​ accounting, store of​ value, and standard of deferred payment functions of money.

B. medium of​ exchange, store of​ value, and standard of deferred payment functions of money.

Suppose the actual federal funds rate is above the rate implied by a particular inflation goal. In this​ situation, the Taylor rule implies that A. monetary policy is neither expansionary or contractionary. B. monetary policy is contractionary. C. monetary policy is expansionary. D. fiscal policy is expansionary.

B. monetary policy is contractionary.

In order to understand the outcomes of a model it is necessary to know the assumptions of a model. In the Keynesian​ model, businesses A. have retained earnings. B. pay no indirect taxes. C. pay only sales tax. D. earn no profit. The Keynesian model assumes that international trade A. plays a large role since trade is an important part of every economy. B. plays no role in the simple model. C. has imports equal to a​ country's exports for simplicity. D. plays a small role since exports and imports are minimal for most countries.

B. pay no indirect taxes. B. plays no role in the simple model.

Keynesians argue that expansionary monetary policy during recessions will cause A. government spending to increase. B. people to accumulate money. C. banks to increase their interest rates. D. investors to increase their investments greatly.

B. people to accumulate money.

An increase in social security benefits will make A. net domestic product smaller. B. personal income larger. C. national income smaller. D. national income larger.

B. personal income larger. Higher social security benefits will increase the amount of personal income. These increased payments to retirees clearly make received income higher.​ However, since the recipients concurrently produced no goods or​ services, earned income did not change.

Other than correcting​ externalities, other economic functions of government include A. deciding what to​ produce, how to produce it and for whom to produce for all sectors of the economy. B. providing a legal​ system, allocating public​ goods, promoting​ competition, and stabilizing the economy. C. deciding which states may or may not impose income​ taxes, charge fees and enforce contracts. D. income redistribution and the regulation and provision of merit and demerit goods.

B. providing a legal​ system, allocating public​ goods, promoting​ competition, and stabilizing the economy.

Planned real investment is determined by the A. the marginal tax rate. B. rate of interest. C. the marginal propensity to save. D. money supply.

B. rate of interest. There is an inverse relationship between the interest rate and the amount of investment. As the interest rate​ falls, more projects become profitable. This leads to greater investment.

With regard to the relationship between the C​ + I​ + G​ + X curve and the aggregate demand​ curve, changes in the price level cause A. the aggregate demand curve to shift while it causes a movement along the C​ + I​ + G​ + X curve. B. the C​ + I​ + G​ + X curve to shift while it causes a movement along the aggregate demand curve. C. a movement along both the aggregate demand and C​ + I​ + G​ + X curves. D. a shift of both the aggregate demand and C​ + I​ + G​ + X curves.

B. the C​ + I​ + G​ + X curve to shift while it causes a movement along the aggregate demand curve.

The Federal Reserve System LOADING... is divided into 12​ districts, each served by one of the Federal Reserve district​ banks, located in the following​ cities: Boston,​ MA; New​ York, N.Y.;​ Philadelphia, PA;​ Washington, D.C.;​ Richmond, VA;​ Atlanta, GA; St.​ Louis, MO;​ Dallas, TX;​ Cleveland, OH;​ Chicago, IL;​ Minneapolis, MN; Kansas​ City, MO; and San​ Francisco, CA.​ Today, the U.S. population is centered just west of the Mississippi River long dash that​ is, about half of the population is either to the west or the east of a line running roughly just west of this river. The current locations of Fed districts and banks are structured this way because A. the Fed districts were redesigned in 1965 to best serve the population at that​ time; these have remained the same. B. the Fed districts were designed in 1913 to best serve the population at that​ time; these have remained the same. C. the Fed districts have been redesigned only once in 1973 to best serve the population at that time. D. the original Fed districts were designed in​ 1913, but have been redesigned many times since then.

B. the Fed districts were designed in 1913 to best serve the population at that​ time; these have remained the same. Consider the map of the locations of the Federal Reserve districts and their headquarters.​ Today, the U.S. population is centered just west of the Mississippi River long dash that​ is, about half of the population is either to the west or the east of a line running roughly just west of this river. The current locations of Fed districts and banks are structured this way because the Fed districts were designed in 1913 to best serve the population at that​ time; these have remained the same.

The opportunity cost of money holdings is A. the reduction in purchasing power brought on by deflation. B. the alternative interest income foregone from not holding some other asset. C. the liquidity foregone from not holding some other asset. D. All of the above.

B. the alternative interest income foregone from not holding some other asset. The opportunity cost of holding money is the lost interest that could have been earned if an interest bearing asset were held instead of money.

When the economy is operating at a level of real GDP that is greater than its potential​ level, we know that A. the actual unemployment rate is greater than the natural rate of unemployment. B. the cyclical rate of unemployment is negative. C. the frictional unemployment is zero. D. the structural rate of unemployment is negative.

B. the cyclical rate of unemployment is negative.

The amount of time that elapses between the implementation of a policy and the results of that policy is A. the recognition time lag. B. the effect time lag. C. the action time lag. D. fiscal policy.

B. the effect time lag.

When considering the gross public​ debt, one can argue that it is overstated because A. the gross public debt is the​ pre-tax debt. B. the federal government owes itself money. C. it includes household debt too. D. the government borrows more than it needs as a precautionary measure.

B. the federal government owes itself money. Interagency borrowing inflates the debt. It is like your right hand owing your left hand​ $10.

In January​ 2009, the President submitted a bill to Congress that was designed to stimulate the economy and increase employment. The legislation was passed in March​ 2009, and the spending occurred from June 2009 to September 2010.​ Consequently, A. the economy should have been at full employment by December 2009. B. the full effect of the spending would be felt some time after September 2010 because the full multiplier effects could not be felt until all the increase in spending took place. C. the full impact of the bill would be felt by the end of September 2010. D. the full impact of the bill would be felt by March 2009 because people anticipated the effects of the increased spending.

B. the full effect of the spending would be felt some time after September 2010 because the full multiplier effects could not be felt until all the increase in spending took place.

The policy relevance of new Keynesian inflation dynamics based on the theory of small menu costs and sticky prices depends on the exploitability of the implied relationship between inflation and real GDP. Consider the reasons why the average time between price adjustments by firms is a crucial determinant of whether policymakers can actively exploit this relationship to try to stabilize real GDP. Consider the reasons why the average time between price adjustments by firms is a crucial determinant of whether policymakers can actively exploit this relationship to try to stabilize real GDP. If the average interval between​ firms' price adjustments is relatively long A. the horizontal new Keynesian aggregate supply curve will remain in position for a longer interval and there will be less opportunity to exploit the relationship between inflation and real GDP to stabilize the economy. B. the horizontal new Keynesian aggregate supply curve will remain in position for a longer interval and there is a greater opportunity to exploit the relationship between inflation and real GDP to stabilize the economy. C. speedier adjustments of prices will automatically tend to dampen movements in real GDP and the unemployment rate and there will be less opportunity to exploit the relationship between inflation and real GDP to stabilize the economy D. speedier adjustments of prices will automatically tend to dampen movements in real GDP and the unemployment rate and there is a greater opportunity to exploit the relationship between inflation and real GDP to stabilize the economy.

B. the horizontal new Keynesian aggregate supply curve will remain in position for a longer interval and there is a greater opportunity to exploit the relationship between inflation and real GDP to stabilize the economy. New Keynesian approaches suggest that firms facing costs of adjusting their prices may be slow to change prices in the face of variations in demand. Since prices and wages are sufficiently inflexible in the short run that there is an exploitable​ trade-off between inflation and real GDP. By​ "exploitable," economists mean a relationship that is sufficiently predictable and​ long-lived to allow enough time for policymakers to reduce unemployment or to push up real GDP when economic activity falls below its​ long-run level. At the heart of this issue is just how often firms adjust their prices. If the average interval between​ firms' price adjustments is relatively​ long, then the horizontal new Keynesian aggregate supply curve will remain in position for a longer interval. As a​ result, a decline in aggregate demand will have a​ longer-lasting negative effect on real GDP. Then there will be a greater potential scope for activist policymaking to be able to boost aggregate demand and stabilize real GDP and unemployment. In​ contrast, if the average interval between changes in prices is​ short, then prices will adjust relatively quickly to a change in aggregate demand. There will be less scope for activist policies to stabilize the​ economy, because speedier adjustments of prices will automatically tend to dampen movements in real GDP and the unemployment rate.

The assumption that the price level is fixed in the Keynesian model allows A. the​ short-run aggregate supply curve to be vertical. B. the multiplier to be fully applied. C. the government budget to be balanced. D. weakens the effect of the multiplier.

B. the multiplier to be fully applied.

If real GDP increases in any​ year, we know that A. nominal GDP must have risen. B. the output of goods and services produced this year has increased. C. inflation has raised the value of output. D. both inflation and output have increased.

B. the output of goods and services produced this year has increased.

The​ real-balance effect implies that when A. the price level​ decreases, the value of money balances held by​ individuals, firms,​ government, and foreigners increases and spending decreases. B. the price level​ increases, the value of money balances held by​ individuals, firms,​ government, and foreigners decreases and spending decreases. C. the price level​ decreases, the value of money balances held by​ individuals, firms,​ government, and foreigners decreases and spending decreases. D. the price level​ increases, the value of money balances held by​ individuals, firms,​ government, and foreigners increases and spending increases.

B. the price level​ increases, the value of money balances held by​ individuals, firms,​ government, and foreigners decreases and spending decreases.

Refer to the figure at right. If the price level is​ 80, A. the aggregate demand curve will automatically shift leading to a stable equilibrium. B. the total planned real expenditures by​ individuals, businesses, and the government exceed total planned production by firms. C. the total planned real expenditures by​ individuals, businesses, and the government are less than total planned production by firms. D. the economy will have economic growth and the new equilibrium price level will be 80.

B. the total planned real expenditures by​ individuals, businesses, and the government exceed total planned production by firms.

During normal​ times, fiscal policy probably achieves most of its impact through A. the workings of time lags. B. the workings of automatic stabilizers. C. the workings of discretionary fiscal policy. D. It is always ineffective.

B. the workings of automatic stabilizers.

In the Keynesian​ model, whenever planned saving is more than planned investment A. the interest rate will remain unchanged. B. there will be unplanned inventory accumulation. C. real GDP will not be influenced. D. there will be unplanned inventory depletion.

B. there will be unplanned inventory accumulation.

Checkable and debitable accounts in commercial banks and other financial institutions are classified as money because A. they are not liabilities of the banks. B. they are generally acceptable in the payment of debt. C. they sometimes earn an interest income for the depositor. D. banks hold currency in their vaults equal to the value of demand deposits.

B. they are generally acceptable in the payment of debt.

When Alan Greenspan was nominated for his third term as chair of the Federal​ Reserve's Board of​ Governors, a few senators held up his confirmation. One of them explained their joint action to hinder his confirmation by​ saying, "Every time growth starts to go​ up, they​ [the Federal​ Reserve] push on the​ brakes, robbing working families and businesses of the benefits of faster​ growth." This statement is based on A. the adaptive expectations theory. B. the​ trade-off as shown by the​ short-run Phillips curve. C. the​ trade-off as shown by the​ long-run Phillips curve. D. the rational expectations theory.

B. the​ trade-off as shown by the​ short-run Phillips curve.

Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A. black market payments. B. transfer payments. C. ​government-sponsored payments. D. ​government-inhibited payments.

B. transfer payments.

Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A. black market payments. B. transfer payments. C. demerit payments. D. merit payments.

B. transfer payments. Any payment for which the recipient has concurrently produced no good or service is called a transfer payment.

Real business cycle theory assumes that A. prices are sticky downward. B. wages and prices are perfectly flexible. C. the LRAS curve remains stationary. D. unemployment always is equivalent to the natural rate of unemployment.

B. wages and prices are perfectly flexible. Flexible prices and wages allow the economy to​ re-establish itself at full employment.

A government is considering two alternative plans for providing subsidy to private schools. Under the first plan it offers to let a number of students at a public school transfer to a private school under two​ conditions: It will transmit to the private school the same​ per-pupil subsidy it currently provides the public​ school, and the private school will be required to admit the students at a below market tuition rate. Under the second​ plan, the government will simply provide the students with grants to cover the current market tuition rate at the private school. ​( Hint: Does it matter if schools receive payments directly from the government or from the​ consumers?) The outcomes of the two plans A. will be​ identical; a private school will charge the students the same tuition rate. B. will be​ different; under the first plan where a private school directly receives the​ subsidy, it will provide a quantity of educational services in excess of the market equilibrium quantity. C. will be​ identical; a private school will provide identical educational services under both the plans. D. will be​ different; under the first plan where a private school directly receives the​ subsidy, it will provide a level of educational services that is less than the market equilibrium quantity.

B. will be​ different; under the first plan where a private school directly receives the​ subsidy, it will provide a quantity of educational services in excess of the market equilibrium quantity.

The amount of government spending on education per public school student has​ ________ since​ 1960, and the achievement level of students has generally​ ________ since that time. A. ​increased; increased B. ​increased; decreased C. ​decreased; increased D. ​decreased; decreased

B. ​increased; decreased

According to the supply side economists​ a(n) decreasedecrease in marginal tax rates will A. decrease the opportunity cost of leisure. B.either decrease or increase the amount of leisure time chosen by workers. C. decrease disposable income. D. decrease aggregate demand .

B.either decrease or increase the amount of leisure time chosen by workers. It depends the respective sizes of the substitution and income effects from the change in the marginal tax rates.

Which of the following is a reason for this resurgence in federal government budget​ deficits? A. Larger tax revenue with low government spending. B. Lower government spending but even lower tax receipts. C. Tax revenue not keeping pace with growth in spending. D. Higher interest rates.

C. Tax revenue not keeping pace with growth in spending.

The classical model makes four major assumptions: 3. People are motivated by self-interest.

Businesses want to maximize their profits, and households want to maximize their economic well-being.

What is a primary determinant of the asset demand for​ money? I. the interest rate II. the opportunity cost of holding money III. the supply of money A. both II and III B. I only C. both I and II D. III only

C. both I and II

The classical model makes four major assumptions: 4. People cannot be fooled by money illusion.

Buyers and sellers react to changes in relative prices. That is to say, they do not suffer from money illusion. For example, workers will not be fooled into thinking that doubling their wages makes them better off if the price level has also doubled during the same time period.

Mixed Economic Systems

By and large, the economic systems of the world's nations are mixed economic systems that incorporate aspects of both centralized command and control and a decentralized price system.

The Board of Governors of the Federal Reserve System has A. 12 members serving 14 year terms. B. 7 members serving 4 year terms. C. 7 members serving 14 year terms. D. 12 members serving 4 year terms.

C. 7 members serving 14 year terms.

When real Gross Domestic Product​ (GDP) falls, which of the following will automatically​ occur? A. A decrease in all tax rates B. An increase in income tax revenues C. A decrease in income tax revenues D. A decrease in unemployment compensation expenditures

C. A decrease in income tax revenues

Suppose that the economy is presently operating at full employment. If there is a decrease in national​ income, which of the following will occur​ automatically? A. A decrease in unemployment compensation spending. B. A decrease in tax rates. C. A decrease in tax revenues. D. An increase in tax rates.

C. A decrease in tax revenues.

Which of the following assets is the least​ liquid? A. Currency. B. A share of publicly traded stock. C. A house. D. A​ three-month Treasury bill.

C. A house. A house is the least liquid since it takes a longer time to convert into​ money, and there are larger transaction costs in selling a house compared to the other listed assets.

Which of the following arguments is used in support of undertaking passive​ policymaking? A. The Phillips curve varies with inflation expectations. B. Pure competition is not typical in most markets as imperfect competition dominates the economy. C. Aggregate demand shocks play little or no role in the economy in the short run. D. Wage flexibility is uncommon because of efficiency wages.

C. Aggregate demand shocks play little or no role in the economy in the short run. If aggregate demand is believed to have little impact on the economy there is no reason to pursue an active policy to correct for disturbances created by aggregate demand shocks.

Which of the following is a correct explanation for why the aggregate demand curve slopes​ downward? A. As the price level decreases​, exports become more expensive overseas and imports become relatively less expensive​ domestically, and thus net exports rise. B. As the price level decreases​, consumers substitute more expensive goods for less expensive choices. C. As the price level decreases​, the real value of cash balances increases​, and total expenditures rise. D. As the price level decreases​, the labor force increases.

C. As the price level decreases​, the real value of cash balances increases​, and total expenditures rise.

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In​ fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. This outcome can be explained by all of the​ following, except one. Which one of the following is the​ exception? A. The​ Fed's contractionary monetary policy. B. The Ricardian Equivalence Theorem. C. Automatic stabilizers. D. Indirect crowding out.

C. Automatic stabilizers.

The Modern Keynesian​ short-run aggregate supply curve is best described by which of the following​ statements? A. It is very steep at low levels of real​ GDP; decreases slightly as real GDP​ grows; and becomes horizontal at full employment. B. It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes horizontal at full employment. C. It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes very steep as real GDP surpasses full employment. D. It is very steep at low levels of real​ GDP; decreases slightly as real GDP​ grows; and becomes very flat as real GDP surpasses full employment.

C. It is very flat at low levels of real​ GDP; increases slightly as real GDP​ grows; and becomes very steep as real GDP surpasses full employment.

What is one result of the Medicare​ subsidy? A. The elderly population in the United States receives a lower quality of medical care than what is provided for the elderly population in other countries. B. The number of physicians in the United States has declined. C. Patients may elect to have some treatments that are of low value to them but that are costly to provide. D. The health care industry is more efficient than it otherwise would be.

C. Patients may elect to have some treatments that are of low value to them but that are costly to provide.

The proposition that increases in government spending that raise the government budget deficit has no effect on aggregate demand is called the A. federalism effect. B. ​open-economy effect. C. Ricardian equivalence theorem. D. ​interest-rate effect.

C. Ricardian equivalence theorem.

Which of the following statements best reflects the relationship between saving and savings​? A. Saving and savings are both stock variables. B. Saving and savings are both flow variables. C. Saving is a flow​ variable; savings is a stock variable. D.Saving is the total amount not consumed whereas savings refers to the amount placed into a savings account.

C. Saving is a flow​ variable; savings is a stock variable.

If a recessionary gap occurs in the short​ run, then in the long run a new equilibrium arises when input prices and expectations adjust​ downward, causing the​ short-run aggregate supply curve to shift downward and to the right and pushing equilibrium real GDP per year back to its​ long-run value. The Federal Reserve can eliminate a recessionary gap in the short run by undertaking a policy action that increases aggregate demand. Which of the following is one monetary policy action that could eliminate the recessionary gap in the short​ run? A. The Fed can increase the money supply through an open market sale of Treasury securities. B. The Fed can decrease the money supply through an open market purchase of Treasury securities. C. The Fed can increase the money supply through an open market purchase of Treasury securities. D. The Fed can lower taxes.

C. The Fed can increase the money supply through an open market purchase of Treasury securities.

An excise tax of 60 cents is levied on a product. As a result of the​ tax, the price of the product goes from​ $1 to​ $1.40. Which of the following is​ true? A. The producer pays the entire tax. B. The consumer pays the entire tax. C. The consumer pays the majority of the tax but not the entire tax. D. The producer pays the majority of the tax but not the entire tax.

C. The consumer pays the majority of the tax but not the entire tax. Since consumers pay 40 cents​ more, and the tax is 60​ cents, consumers pay the majority of the tax.

Which of the following is a benefit of the price​ system? A. Consumers have what they want since politicians and business managers decide what is to be produced. B. the existence of positive externalities. C. The freedom of consumers to decide what they want to purchase. D. the production of public goods.

C. The freedom of consumers to decide what they want to purchase.

Suppose that the value of the US dollar​ ($) yesterday was​ $1 = 4 yenyen. Today the exchange rate changed such that​ $1 = 11 yenyen. One can say that the A. The yen depreciated. B. US​ $ appreciated. C. US​ $ depreciated. D. The yen accelerated. A depreciation of the U.S. dollar should result in A. a lower price level and a higher level of real GDP. B. a higher price level and a higher level of real GDP. C. a higher price level and a lower level of real GDP. D. a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and​ short-run aggregate supply curves.

C. US​ $ depreciated. D. a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and​ short-run aggregate supply curves.

A system in which depository institutions hold reserves that are less than the amount of total deposits is A. a ratio reserve banking system. B. a legal reserve banking system. C. a fractional reserve banking system. D. a percentage reserve banking system.

C. a fractional reserve banking system.

Most economists agree with which of the​ following? A. active policymaking is likely to exert sizable​ long-run effects on real GDP. B. passive policymaking is likely to exert sizable​ long-run effects on real GDP. C. active policymaking is unlikely to exert sizable​ long-run effects on real GDP. D. none of the above

C. active policymaking is unlikely to exert sizable​ long-run effects on real GDP.

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply​ curve, A. there will be no price level change. B. actual real GDP would exceed total planned real​ expenditures, and the price level will fall. C. actual real GDP would be less than total planned real​ expenditures, and the price level will rise. D. there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves.

C. actual real GDP would be less than total planned real​ expenditures, and the price level will rise.

Government-provided unemployment insurance is an example of A. an automatic monetary stabilizer. B. a monetary stabilizer. C. an automatic fiscal stabilizer. D. a discretionary fiscal stabilizer.

C. an automatic fiscal stabilizer.

An increase in the amount of physical capital will cause A. an increase in both aggregate supply and real​ GDP, but have no effect on the price level. B. an increase in both aggregate demand and real​ GDP, but have no effect on the price level. C. an increase in both aggregate supply and real GDP and a reduction in the price level. D. aggregate demand and aggregate supply to increase by the same​ amounts, causing real GDP to increase and the price level to remain constant.

C. an increase in both aggregate supply and real GDP and a reduction in the price level.

Between early 2005 and late​ 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. From a​ short-run Keynesian​ perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were A. an increase in the price level along with a decrease in equilibrium real GDP. B. a decrease in the price level along with a decrease in equilibrium real GDP. C. an increase in the price level along with an increase in equilibrium real GDP. D. a decrease in the price level along with an increase in equilibrium real GDP. The resulting spending gap between early 2005 and late 2007 when total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation can best be described as A. a deflationary gap. B. a recessionary gap. C. an inflationary gap. D. a full employment gap.

C. an increase in the price level along with an increase in equilibrium real GDP. C. an inflationary gap.

During the late​ 1970s, prices quoted in terms of the Israeli​ currency, the​ shekel, rose so fast that grocery stores listed their prices in terms of the U.S. dollar and provided customers with​ dollar-shekel conversion tables that they updated daily. Although people continued to buy goods and services and make loans using​ shekels, many Israeli citizens converted shekels to dollars to avoid a reduction in their wealth due to inflation.​ Thus, the U.S. dollar functioned as money in Israel during this period A. as a medium of exchange. B. as a credit card. C. as a store of value. D. as a standard of deferred payment.

C. as a store of value.

An advantage of automatic stabilizers over discretionary fiscal policy is that A. the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy. B. only policymakers are involved in implementing automatic stabilizers. C. automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. D. automatic stabilizers can be easily​ fine-tuned to move the economy to full employment.

C. automatic stabilizers are not subject to the same time lags as discretionary fiscal policy.

To compute national​ income, which of the following items are added to net domestic product​ (NDP)? I. business income adjustments net of indirect business taxes and transfers II. capital consumption allowance III. U.S. net income earned abroad A. I only B. II only C. both I and III D. both II and III

C. both I and III the total of all factor payments to resource owners. It can be obtained from net domestic product (NDP) by subtracting indirect business taxes and transfers and adding net U.S. income earned abroad and other business income adjustments

If foreigners have an excess supply of dollars after trading goods and services they will likely A. sell more U.S. Treasury bonds. B. be able to sell more goods and services to the U.S. C. buy more U.S. Treasury bonds. D. sell more foreign bonds.

C. buy more U.S. Treasury bonds. Since foreigners have not spent all the dollars they received from their exports on US goods and services they are holding an excess supply of dollars.

As the interest rate or yield on U.S. bonds​ increases, foreigners A. buy fewer U.S. bonds and fewer U.S. goods and services. B. buy more U.S. bonds and more U.S. goods and services. C. buy more U.S. bonds and fewer U.S. goods and services. D. buy fewer U.S. bonds and more U.S. goods and services.

C. buy more U.S. bonds and fewer U.S. goods and services. They act as​ substitutes, the U.S. exports of goods and services and US bonds.

Real GDP is computed by adjusting nominal GDP for A. exchange rate changes. B. capital consumption allowances. C. changes in the price level. D. depreciation.

C. changes in the price level. The measurement of GDP after adjustments have been made for changes in the average of prices between years is known real GDP.

In the United​ States, which of the following is an example of a​ government-inhibited good? A. sports stadiums B. movies C. cocaine D. museums

C. cocaine

Suppose social security contributions rise by​ $1 billion while social security benefits also rise by​ $1 billion.​ Further, personal income taxes fall by​ $500 million. As a​ result, A. national​ income, personal​ income, and disposable income should increase. B. personal​ income, disposable personal​ income, and national income remain unchanged. C. disposable income should increase while personal income and national income are unchanged. D. both personal and disposable personal income should increase.

C. disposable income should increase while personal income and national income are unchanged. Disposable income will increase since taxes are lower while both personal income and national income remain unchanged.

The accumulation of borrowing by all federal government agencies is referred to as the A. gross private debt. B. net public debt. C. gross public debt. D. net private debt.

C. gross public debt.

Increased government spending crowds out investment due to A. the existence of interest rate floors. B. an increased money supply. C. higher interest rates. D. stricter government regulations.

C. higher interest rates.

Suppose the economy currently has some underutilized resources. The Fed engages in expansionary monetary policy. The impact of expansionary monetary policy will be to A. increase aggregate​ demand, increase prices and decrease real GDP. B. increase​ short-run aggregate​ supply, decrease in prices and decrease in real GDP. C. increase aggregate​ demand, increase prices and increase real GDP. D. increase​ short-run aggregate​ supply, decrease prices and increase real GDP.

C. increase aggregate​ demand, increase prices and increase real GDP.

One reason that collective and private decision making differ is A. private individuals compete and act in their own interest while government bureaucrats do not. B. the government actions do not have an opportunity cost while private actions do. C. individuals working in the government sector face a different incentive structure than those in the private sector. D. there is no difference between collective and private decision making.

C. individuals working in the government sector face a different incentive structure than those in the private sector.

The purpose of automatic stabilizers is to A. stabilize tax revenue and government expenditures. B. make sure people have a living wage. C. lessen the impact of unemployment in a recession and slowdown inflation during an expansion. D. act as a safety measure preventing the government from using fiscal policy.

C. lessen the impact of unemployment in a recession and slowdown inflation during an expansion.

In the classical​ model, a rightward shift in the aggregate demand curve​ will, in the long​ run, A. decrease real GDP and will not change the price level. B. increase real GDP and the price level. C. not change real GDP and will increase the price level. D. increase real GDP and will not change the price level.

C. not change real GDP and will increase the price level.

According to the policy irrelevance​ proposition, monetary policy can affect real variables A. as long as the policy is fully anticipated. B. in both the short run and the long run. C. only in the short run when the policy is unanticipated. D. in the long run only.

C. only in the short run when the policy is unanticipated.

Suppose that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy​ instruments, then the Fed will engage in A. open market​ sales, decreasing the reserve​ requirement, and increasing the discount rate. B. open market​ purchase, increasing the reserve​ requirement, and increasing the discount rate. C. open market​ sales, increasing the reserve​ requirement, and increasing the discount rate. D. open market​ purchase, increasing the reserve​ requirement, and decreasing the discount rate.

C. open market​ sales, increasing the reserve​ requirement, and increasing the discount rate.

During the​ 1960s, many Keynesian economists felt that by studying the Phillips​ curve, A. policymakers could eliminate even frictional unemployment in the economy. B. policymakers could dispense with the Federal​ Reserve's open-market operations. C. policymakers could​ fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives. D. the President and Congress did not need to attempt to balance the budget.

C. policymakers could​ fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives.

If real GDP rises above total planned expenditures the economy will see A. production decreases and employment increases. B. production and employment increases. C. production and employment decreases. D. production increases and employment decreases.

C. production and employment decreases. Whenever total planned real expenditures are less than real GDP, the opposite occurs. There are unplanned inventory increases, causing firms to cut back on their production of goods and services in an effort to push inventories back down to planned levels. The result is a drop in real GDP toward the equilibrium level.

When the Fed conducts open market​ operations, it A. is engaging in fiscal policy. B. also raises taxes at the same time. C. purchases or sells government bonds issued by the U.S. Treasury. D. shifts the demand for money curve.

C. purchases or sells government bonds issued by the U.S. Treasury.

When comparing per capita GDP across​ countries, GDP should be adjusted for A. foreign exchange rates. B. the unemployment rate. C. purchasing power parity. D. population.

C. purchasing power parity. Purchasing power parity refers to adjustments in exchange rate conversions that take into account differences in the true cost of living across countries.

The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called A. ​currency-adjusted purchasing power. B. raw purchasing power. C. purchasing power parity. D. nominal purchasing power.

C. purchasing power parity. The purchasing power parity adjustment to those simple exchange rate conversions is thought to give a much more accurate picture of living standards around the world.

The​ short-run aggregate supply curve is a relationship between A. inflation and time. B. unemployment and real GDP. C. real GDP and price level. D. capital goods and consumer goods.

C. real GDP and price level.

According to the​ real-balance effect, an increase in the price level A. does not affect the real value of cash balances in the​ short-run. B. does not affect the real value of cash balances in the​ long-run. C. reduces an​ individual's expenditures due to a decrease in the real value of cash balances. D. increases an​ individual's expenditures due to an increase in the real value of cash balances.

C. reduces an​ individual's expenditures due to a decrease in the real value of cash balances.

The​ "incidence of a​ tax" A. is a special tax on individuals with high income. B. is a tax paid by​ self-employed workers. C. refers to those who bear the final burden of taxation. D. is a benefit tax.

C. refers to those who bear the final burden of taxation. The​ "incidence of a​ tax" refers to those who bear the final burden of taxation.

A contractionary monetary policy lowers equilibrium real GDP in the short​ run, by increasing the interest rate. In an open​ economy, the net export effect A. has no effect on real GDP since changes in exports and imports cancel each other. B. reinforces the effect of a contractionary monetary policy since the increase in the interest​ rate, increases the value of​ dollar, lowers U.S. imports and causes the real GDP to fall. C. reinforces the effect of a contractionary monetary policy since the increase in the interest​ rate, increases the value of​ dollar, lowers U.S. exports and causes the real GDP to fall. D. weakens the effect of a contractionary monetary policy since the increase in the interest​ rate, increases the value of​ dollar, increases U.S. exports and causes the real GDP to increase.

C. reinforces the effect of a contractionary monetary policy since the increase in the interest​ rate, increases the value of​ dollar, lowers U.S. exports and causes the real GDP to fall. A contractionary monetary policy lowers equilibrium real GDP in the short​ run, by increasing the interest rate. In an open​ economy, the net export effect reinforces the effect of a contractionary monetary policy since the increase in the interest​ rate, increases the value of​ dollar, lowers U.S. exports and causes the real GDP to fall.

Since​ 2001, more often than​ not, the U.S. federal government has A. run a balanced budget. B. run a budget surplus. C. run a budget deficit. D. decreased its borrowing.

C. run a budget deficit. We have experienced budget deficits since 2002.

The primary difference between the aggregate demand curve and an individual demand curve is that A. the aggregate demand curve is vertical in the long​ run, while an individual demand curve is downward sloping. B. a change in the price level will shift the aggregate demand curve but not an individual demand curve. C. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service. D. a change in real balances will shift an individual demand curve but not the aggregate demand curve.

C. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service.

The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. All the following are likely to influence the natural rate of​ unemployment, except A. the training and skill level of the workers. B. the extent of government taxation and regulation on the firms. C. the burden of government debt on the general public. D. the access to information and the degree of competition in product markets.

C. the burden of government debt on the general public. The natural rate of unemployment depends on factors that affect the behavior of both workers and firms. All the following are likely to influence the natural rate of unemployment except the burden of government debt on the general public.

A trade deficit implies that A. the number of items exported is larger than the number of items imported. B. the dollar value of exports exceeds the dollar value of imports. C. the dollar value of imports exceeds the dollar value of exports. D. the number of items imported is larger than the number of items exported.

C. the dollar value of imports exceeds the dollar value of exports. The trade deficit is defined by the dollar value of imported goods and services exceeding the dollar value of exported goods and services.

When a firm produces a product that creates external​ costs, A. the firm produces a level of output which would be the same as it would produce without the external cost. B. the firm produces a level of output smaller than would be produced without the external cost. C. the firm produces a level of output larger than would be produced without the external cost. D. the market provides the efficient level of output even with the existence of the external cost.

C. the firm produces a level of output larger than would be produced without the external cost.

Autonomous real investment spending is A. the level of investment expenditure that would prevail if interest rates were zero. B. the level of investment expenditure required to keep the economy expanding at its current growth rate. C. the level of investment expenditure that is independent of real GDP. D. the level of investment expenditure required to replace capital lost to depreciation.

C. the level of investment expenditure that is independent of real GDP.

In new Keynesian models of aggregate economic​ activity, "sticky" prices and wages are explained by A. ​supply-side factors such as technology and changes in the composition of the labor force. B. monetary disturbances in the aggregate economy. C. the small​ menu-cost and efficiency wage​ theories, respectively. D. inaccuracies in​ people's forecasts of the future.

C. the small​ menu-cost and efficiency wage​ theories, respectively.

The supply curve of bonds is drawn vertically because A. government bonds do not bear interest. B. the Fed is buying or selling bonds in order to set the price of the bond. C. the​ Fed's decision to buy or sell bonds is independent of bond prices. D. the price of bonds is influenced by interest rates and the graphs do not include interest rates.

C. the​ Fed's decision to buy or sell bonds is independent of bond prices. The Fed is deciding how it wants to affect the money supply when it buys or sells bonds.

A characteristic of a public good is A. the exclusion principle. B. rival consumption. C. the​ free-rider problem. D. clear property rights.

C. the​ free-rider problem.

Some economists argue that corporate income taxes are typically not paid by the​ firm, but by A. bondholders. B. the​ firm's board of directors. C. the​ stockholders, employees, and customers. D. the government.

C. the​ stockholders, employees, and customers. The incidence of corporate taxation is the subject of considerable debate. Some economists suggest that corporations pass their tax burdens on to consumers by charging higher prices. Other economists argue that it is the stockholders who bear most of the tax. Still others contend that employees pay at least part of the tax by receiving lower wages than they would otherwise.

The function of money that allows individuals a method to compare the relative value of goods and services is A. medium of exchange. B. store of value. C. unit of accounting. D. liquidity.

C. unit of accounting.

The reserve ratio equals 2 percent. The Fed buys​ $1 million in U.S. government securities. The most the money supply can increase is A. ​$10 million. B. ​$40 million. C. ​$50 million. D. ​$100 million.

C. ​$50 million.

Suppose that each​ 0.1-percentage-point increase in the equilibrium interest rate induces a ​$4 billion decrease in real planned investment spending by businesses. In​ addition, the investment multiplier is equal to 3​, and the money multiplier is equal to 3. ​Furthermore, every ​$10 billion decrease in the money supply brings about a​ 0.1-percentage-point increase in the equilibrium interest rate. Use this information to answer the following questions under the assumption that all other things are equal. Calculate by how much the real planned investment must decrease if the Federal Reserve desires to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___ billion. ​(Enter your response rounded to one decimal​ place.) Calculate by how much must the money supply decrease for the Fed to induce the change in real planned investment to bring about an ​$100 billion decrease in equilibrium real GDP. ​$___ billion. ​(Enter your response rounded to one decimal​ place.) Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply decrease required for an ​$100 billion decrease in equilibrium real GDP. ​$___ billion. ​(Enter your response rounded to one decimal​ place.)

Calculate by how much the real planned investment must decrease if the Federal Reserve desires to bring about an ​$100 billion decrease in equilibrium real GDP. ​$33.0 billion. ​(Enter your response rounded to one decimal​ place.) Calculate by how much must the money supply decrease for the Fed to induce the change in real planned investment to bring about an ​$100 billion decrease in equilibrium real GDP. ​$82.5 billion. ​(Enter your response rounded to one decimal​ place.) Calculate the dollar amount of open market operations that the Fed must undertake to bring about the money supply decrease required for an ​$100 billion decrease in equilibrium real GDP. ​$27.5 billion. ​(Enter your response rounded to one decimal​ place.)

Expansionary monetary policy ___.

Causes interest rates to fall. Such a decrease will induce international outflows of funds, thereby reducing the international value of the dollar and making U.S. goods more attractive abroad. The net export effect of expansionary monetary policy will be in the same direction as the monetary policy effect, thereby amplifying the effect of such policy.

TAXES AND SUBSIDIES

Certain taxes, such as a per-unit tax, are effectively an addition to production costs and therefore reduce supply. A per-unit subsidy would do the opposite. Every producer would get a "gift" from the government for each unit produced.

ceteris paribus assumption.

Ceteris paribus means "other things constant" or "other things equal." The assumption that nothing changes except the factor or factors being studied.

Change in investment x multiplier​ = change in real GDP

Change in investment x multiplier​ = change in real GDP

As a result of monetary policy of the​ Fed, the dollar appreciated and the amount of exports decreased. Which of the following Fed policies could have caused this​ outcome? A. A decrease in the discount rate. B. A Fed purchase of bonds from banks. C. A decrease in the reserve requirement ratio. D. A Fed sale of bonds to brokers and banks.

D. A Fed sale of bonds to brokers and banks. This reduces the reserves of banks and increases the interest rate.

Which of the following are failures of the real business cycle​ theory? A. It cannot explain all facets of the business cycle. B. It fails to explain the rigidity of wages and prices in the economy. C. It cannot explain the Great Depression. D. All of the above are failures of the real business cycle theory. E. None of the above are​ failures, as the real business cycle model addresses all these issues.

D. All of the above are failures of the real business cycle theory.

According to the rational expectations​ hypothesis, a policy cannot have a​ long-run effect on real GDP or the unemployment rate because A. people do not persistently make the same mistakes in forecasting the future. B. in the long​ run, people's expectations will correctly anticipate the effects of any policy action and the public will react in such a way as to nullify the impact of policy. C. the policy will not contain unsystematic qualities in the long run and thus the public will be able to accurately forecast the actions and consequences of policy makers. D. All of the above. E. A and C only.

D. All of the above.

An increase in the money supply will A. increase the price level. B. create an indirect effect of increased consumption and investment through increased saving and loans. C. create a direct effect of an increase in consumption due to higher money balances. D. All of the above.

D. All of the above.

In what way might society gain if the Fed implements an​ anti-recessionary policy instead of simply permitting​ long-run adjustments to take​ place? A. The​ Fed's policy can shorten the adjustment period. B. The​ Fed's policy can reduce unemployment sooner. C. The​ Fed's policy can move the economy to​ long-run equilibrium sooner. D. All of the above.

D. All of the above.

In the decision making process for markets and the public sector A. the market system is run by proportional voting rules and the public sector is run by majority rule. B. the spending of dollars can indicate intensity of​ want, but political voting does not. C. dollars spent count as votes in the market​ system, but in the public sector one person gets one vote. D. All of the above.

D. All of the above. Each of the above the describes a key difference between the private​ market's dollar voting system and the voting system in the public sector.

An increase in the money supply will A. not change the​ long-run aggregate supply curve but ultimately will only raise the price level in​ long-run equilibrium price level. B. move the equilibrium point along the​ short-run aggregate supply curve. C. shift the aggregate demand curve outward and to the right. D. All of the above.

D. All of the above. Each of these occur as a result of an increase in the money supply.

Total income can be viewed as the sum of A. payments to factor services such as​ land, labor,​ capital, and entrepreneurial activity. B. the dollar value of output produced since total income and total production are equal. C. ​wages, rents,​ interest, and profits. D. All of the above.

D. All of the above. The total of income payments​ (wages, rents,​ interest, and​ profits) to the owners of resources (labor, land,​ capital, and entrepreneurial​ ability) must, because of​ profit's role as a​ residual, be exactly equal to the value of output.

A credit card is not considered money because A. it simply defers rather than completes transactions that ultimately involve the use of money. B. it is not a store of value. C.it is not a unit of accounting. D. All of the above.

D. All of the above. The use of a credit card initiates a new loan and creates a new debt. It does not decrease​ one's debt. The card itself is not​ exchanged, therefore credit cards are not a medium of exchange.​ Finally, a credit card is a piece of plastic that facilitates the loan​ process, it is not an asset. It has no possibility of increasing in value.

Fiscal policy is likely to be more effective A. when there are less offsetting reductions in private sector spending. B. when government borrowing does not increase interest rates substantially. C. during abnormal times as opposed to more normal times. D. All of the above.

D. All of the above. These are the situations in which fiscal policy has the greatest effectiveness.

An example of a fiduciary monetary system is A. gold coins. B. paper money that can be converted into gold at a fixed price. C. silver coins. D. American​ one-dollar bills.

D. American​ one-dollar bills.

Given the existence of time​ lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time​ lags? A. Subsequent changes in the economy have caused the government to change its fiscal policy making it less consistent and the government less trustworthy. B. Governments may undershoot the necessary change to government spending or taxes to reach full employment real GDP because they are uncertain what other factors may impact the economy. C. Governments may overshoot the full employment real GDP as the economy has improved by the time the policy takes effect. D. Each of these scenarios are potential outcomes because of the existence of time lags.

D. Each of these scenarios are potential outcomes because of the existence of time lags.

A true public good must be provided by the government. Which of the following goods provided by the government is a true public​ good? A. Tax collection. B. Highways where tolls are collected. C. Postal service. D. Flood control.

D. Flood control. True public goods must necessarily be provided by government. This is because the private sector has a​ difficult, if not​ impossible, time providing them. Because nonpayers cannot be excluded from consuming the protection a flood control project​ yields, individuals in the private sector have no incentive to build and then sell flood protection.

Which of these questions will aggregate demand help us​ answer? I. What determines the total amount of our output that​ individuals, firms, governments and foreigners want to​ buy? II. What is the​ economy's long-run real Gross Domestic Product​ (GDP)? III. What determines the​ economy's equilibrium price level and the rate of​ inflation? A. I only B. I and II C. II and III D. I and III

D. I and III

Which of the following is a possible explanation for sticky​ prices? A. It is illegal for firms to lower prices without the consent of the courts. B. All firms act as a cartel and maintain a constant​ non-competitive price. C. Lack of union power to lower prices on products allows firms to maintain higher priced goods. D. Labor contracts cause wages to be fixed over the contract period.

D. Labor contracts cause wages to be fixed over the contract period. Labor contracts are the main factor that creates the potential for sticky prices. Firms are locked into these costs for several years at a time. This reduces the​ firm's flexibility in trying to adjust to changing economic conditions and could prevent their prices from falling.

Which one of the following is not a component of total​ expenditures? A. Investment expenditures. B. Consumption spending. C. Government purchases. D. Merchandise inventories.

D. Merchandise inventories.

Which of the following economic theories is most likely to support active​ policymaking? A. Monetarism. B. New classical model. C. Real business cycle theory. D. New Keynesian model.

D. New Keynesian model. Due to this​ theory's belief of sticky wages and prices.

There is greater support for active policymaking when A. wage flexibility is common. B. price flexibility is common. C. pure competition is common. D. None of the above.

D. None of the above.

Suppose that a state government implements a tax on​ mechanics' labor time at all state auto repair shops in order to enhance its tax revenues. One year later the government is disappointed to find that not only is the amount of tax collected​ small, but that​ in-state auto repair work significantly declined. This state government apparently utilized which type of tax​ analysis? A. Linear projection tax analysis. B. Dynamic tax analysis. C. Speculative tax analysis. D. Static tax analysis.

D. Static tax analysis. Static tax analysis evaluates the effects of tax rate changes under the assumption that the changes will not impact the tax base.

Suppose that​ currently, the economy is overutilizing its resources. Which of the following correctly describes what type of monetary policy the Fed might choose and how the policy would change the​ economy? A. The Fed could use a contractionary monetary policy to reduce short minus run aggregate supply and GDP. B. The Fed could use an expansionary monetary policy to increase aggregate demand and GDP. C. The Fed could use an expansionary monetary policy to increase short minus run aggregate supply and GDP. D. The Fed could use a contractionary monetary policy to reduce aggregate demand and GDP.

D. The Fed could use a contractionary monetary policy to reduce aggregate demand and GDP.

If you live in​ Atlanta, Georgia, and you purchase a computer in Los​ Angeles, California, while there on​ vacation, which of the following paths would your check take before it finally​ clears? A. The check goes into the computer​ store's bank and is then sent to your bank directly. B. The check goes from the computer​ store's bank to the Federal Reserve bank in San​ Francisco, and then directly to your bank. C. The check goes from the computer​ store's bank right to the Atlanta Federal Reserve and then back to your bank. D. The check goes from the computer​ store's bank to the Federal Reserve bank in San​ Francisco, then to the Federal Reserve bank in​ Atlanta, and then to your bank.

D. The check goes from the computer​ store's bank to the Federal Reserve bank in San​ Francisco, then to the Federal Reserve bank in​ Atlanta, and then to your bank.

Which of the following must be true if the balanced budget multiplier to equal​ one? A. The​ government's budget must be balanced to begin with. B. The increases in income stemming from a change in government spending must be the same as the change in income stemming from the change in taxes. C. Taxes equal government spending. D. The increases in income stemming from a change in government spending must be greater than the change in income stemming from the change in taxes.

D. The increases in income stemming from a change in government spending must be greater than the change in income stemming from the change in taxes.

Which of the following statements is true when considering​ liquidity? A. Stocks have no transaction fees. B. Physical assets are the most liquid type of assets. C. Bonds have a guaranteed redemption value so there is no chance of a financial loss from their purchase. D. The most liquid assets typically earn no or little interest.

D. The most liquid assets typically earn no or little interest.

Which of the following is TRUE about the political and market systems of​ voting? A. The political voting system functions according to proportional​ rule, while the market voting system functions according to majority rule. B. The political system and the market system are identical. C. The political voting system functions according to minority​ rule, while the market voting system functions according to majority rule. D. The political voting system functions according to majority​ rule, while the market voting system functions according to proportional rule.

D. The political voting system functions according to majority​ rule, while the market voting system functions according to proportional rule.

Which of the following best exemplifies​ Say's Law? A. The more you consume the less additional satisfaction you obtain from the next unit of the good. B. Increases in labor eventually lead to smaller and smaller increases in output. C. A decrease in the price of a good leads to a larger amount of the good being purchased. D. The production of a​ $4000 plasma TV set creates demand for other goods and services valued at​ $4000.

D. The production of a​ $4000 plasma TV set creates demand for other goods and services valued at​ $4000.

Which of the following statements is true concerning the potential money​ multiplier? A. The required reserve ratio and the potential money multiplier are positively related. B. The required reserve ratio and the potential money multiplier sum to one. C. The actual money multiplier and the potential money multiplier are inversely related. D. The required reserve ratio and the potential money multiplier are inversely related.

D. The required reserve ratio and the potential money multiplier are inversely related.

Which of the following is an example of a negative​ externality? A. The opening of a new shopping mall increases the business of nearby restaurants. B. A consumer pays a higher price than another consumer does for the same product. C. Consumers pay a sales tax in addition to the price of a product. D. There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers

D. There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers

According to Friedman and​ Phelps, which of the following statements is a correct characterization of unemployment and inflation in the United States since the​ 1950s? A. The relationship between inflation and unemployment is very different from the Phillips curve. A positive relationship is evident rather than an inverse relationship. B. A​ trade-off between inflation and unemployment as pictured in the Phillips curve existed over the entire time period. C. A​ trade-off between inflation and unemployment as pictured in the Phillips curve existed in the 1970s and​ 1980s, but not over the entire period. D. There is no clear relationship between unemployment and inflation.

D. There is no clear relationship between unemployment and inflation.

Which of the following is NOT a reason the Fed alters the rate of growth of the money​ supply? A. To influence the amount of consumption B. To influence aggregate demand C. To influence the amount of investment D. To shift the demand for money curve

D. To shift the demand for money curve

All of the following will cause the planned investment function to shift rightward except A. a decrease in business taxation. B. an increase in expected profits. C. an improvement in technology. D. a decrease in the interest rate.

D. a decrease in the interest rate. Any change in the interest rate causes a movement along the investment function. It does not cause a shift in the function.

A good that has been deemed socially desirable through the political process is known as A. a demerit good. B. a positive externality. C. a​ free-rider. D. a merit good.

D. a merit good. The designation of certain goods as merit goods is entirely subjective and is done within the political process. Some examples of merit goods in our society are sports​ stadiums, museums,​ ballets, plays, and concerts.

All of the following will shift the​ short-run aggregate supply and the​ long-run aggregate supply except for A. increased training and education of the labor force. B. a depletion of raw materials. C. decreased competition. D. a temporary change in input prices.

D. a temporary change in input prices.

The sum of all planned expenditures for the entire economy at each possible price level is A. effective demand. B. aggregate supply. C. actual expenditures by consumers. D. aggregate demand.

D. aggregate demand.

Suppose the Federal Reserve increases the money supply. Which of the following will tend to occur as a result of this policy in a Keynesian​ model? A. a movement along the​ short-run aggregate supply curve B. ​demand-pull inflation C. an inflationary gap D. all of the above

D. all of the above

Which of the following will cause a leftward shift in the aggregate demand​ curve? A. a reduction in government spending B. a reduction in the money supply C. an increase in taxes D. all of the above

D. all of the above

Which of the following would increase aggregate​ supply? A. a discovery of new raw materials B. a reduction in input prices C. increased training and education D. all of the above

D. all of the above

If the marginal propensity to consume​ (MPC) is 0.8 and there is a desire to increase real GDP by​ $400 billion, then A. an increase in planned real investment spending of​ $100 billion will generate this change. B. an increase in autonomous real consumption spending of​ $80 billion will generate this change. C. a decrease in autonomous real saving of​ $400 billion will generate this change. D. an increase in real autonomous spending of​ $80 billion will generate this change.

D. an increase in real autonomous spending of​ $80 billion will generate this change.

Investment is A. a positive function of real GDP. B. a positive function of interest rates. C. a negative function of real GDP. D. autonomous with respect to real GDP.

D. autonomous with respect to real GDP.

The consumption function shows the relationship A. between government spending and tax collection. B. between the relative prices of goods and the total amount of household consumption spending. C. between consumption spending and capital gains. D. between​ households' disposable income and their consumption spending.

D. between​ households' disposable income and their consumption spending.

The Laffer curve indicates A. an inverse relationship between tax rates and tax revenues. B. a positive relationship between tax rates and tax revenues. C. by how much the aggregate demand curve shifts when tax rates are changed. D. both options A and B.

D. both options A and B. If the current marginal tax rate is below the optimum rate then increasing it will increase tax revenue. If the current marginal tax rate is above the optimum rate then increasing it will decrease tax revenue.

The discovery of new iron ore fields will cause A. the​ short-run aggregate supply curve to shift to the​ right, but not the​ long-run aggregate supply curve. B. the​ long-run aggregate supply curve to shift to the right and the​ short-run aggregate supply curve to shift to the left. C. the​ long-run aggregate supply curve to shift to the​ right, but not the​ short-run aggregate supply. D. both the​ long-run and the​ short-run aggregate supply curves to shift to the right.

D. both the​ long-run and the​ short-run aggregate supply curves to shift to the right.

In the Keynesian model equilibrium national income A. equals planned​ consumption, investment,​ government, and import expenditures. B. occurs at the point where the consumption function crosses the​ 45-degree line. C. occurs when the marginal propensity to consume equals the multiplier. D. equals planned​ consumption, investment,​ government, and net export expenditures.

D. equals planned​ consumption, investment,​ government, and net export expenditures. Total expenditures are C​ + I​ + G​ + X.

Suppose the dollar value of imports to the U.S. exceed the dollar value of exports from the US. This implies that A. U.S. citizens and firms have a surplus of foreign currency. B. foreigners have a shortage of dollars. C. U.S. government spending must increase further. D. foreigners are holding an excess supply of dollars.

D. foreigners are holding an excess supply of dollars. Since foreigners have not spent all the dollars they received from their exports on US goods and services they are holding an excess supply of dollars.

When the economy is operating on the LRAS​ curve, then expansionary fiscal policy will A. generate an increase in real GDP without higher prices in the short​ run, but then real GDP will return to its long−run ​level, and the price level will increase. B. generate higher prices in the short​ run, but will induce aggregate supply to increase in the long run. C. generate an increase in real GDP and higher prices in both the short run and the long run. D. generate an increase in real GDP and higher prices in the short​ run, but then real GDP will decrease to its long−run ​level, and the price level will increase some more.

D. generate an increase in real GDP and higher prices in the short​ run, but then real GDP will decrease to its long−run ​level, and the price level will increase some more.

The Keynesian perspective on the effect of an increase in taxes is that this policy action A. increases current consumption and reduces future consumption. B. generates reductions in consumption and an increase in saving to pay for the new taxes. C. has no impact on consumption. D. generates reductions in consumption and in saving.

D. generates reductions in consumption and in saving.

Typically during a recession A. incomes fall and unemployment falls. B. incomes rise and unemployment falls. C. incomes and unemployment both rise. D. incomes fall and unemployment rises.

D. incomes fall and unemployment rises. Typically, at the beginning of a​ recession, people's income starts to fall and the duration of unemployment increases so that the unemployment rate increases.

If the government increases aggregate demand when the economy is at both​ short-run and​ long-run equilibrium, the full​ long-run effect of this fiscal policy will be to A. increase real Gross Domestic Product​ (GDP). B. decrease both real Gross Domestic Product​ (GDP) and the price level. C. increase either the real Gross Domestic Product​ (GDP) or the price​ level, depending on the length of the time lag. D. increase the price level.

D. increase the price level.

Contractionary monetary policy causes the A. amount of government spending to increase. B. price level to increase. C. dollar value of real GDP to increase. D. interest rate to increase.

D. interest rate to increase.

In the Keynesian​ model, planned investment is inversely related to A. positively related to the wage rate. B. positively related to household consumption. C. negatively related to the level of income. D. negatively related to the interest rate.

D. negatively related to the interest rate.

Suppose a constitutional amendment is passed that mandates a balanced federal budget every year and the President and Congress consistently carry this mandate out. This would be an example of A. decisive policymaking. B. active policymaking. C. cooperative policymaking. D. nondiscretionary policymaking.

D. nondiscretionary policymaking.

Historical evidence suggests that A. shifts in​ long-run aggregate supply do not affect real output. B. inflation rates are lowest when unemployment rates are also low. C. the Phillips curve is horizontal. D. once policy makers attempted to exploit a​ short-run Phillips curve​ trade-off, it disappeared.

D. once policy makers attempted to exploit a​ short-run Phillips curve​ trade-off, it disappeared.

If the U.S. federal government operates with a budget deficit it must borrow. In order to entice people to lend money to finance this​ deficit, the U.S. government must A. increase the money supply. B. decrease taxes. C. retire previous debt first. D. pay a higher rate of interest on the bonds it sells.

D. pay a higher rate of interest on the bonds it sells. A higher interest rate or yield makes the purchase of Treasuries more competitive relative to other assets.

The Fed acts like a private banking institution when it A. supplies the economy with fiduciary currency. B. acts as the​ "lender of last​ resort." C. regulates the money supply. D. provides payment minus clearing services to depository institutions.

D. provides payment minus clearing services to depository institutions.

Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open​ market, increases the discount​ rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will A. lower the interest​ rate, increase the inflows of international​ capital, increase the value of the​ dollar, decrease​ imports, and as a consequence real GDP will decline even further. B. raise the interest​ rate, decrease the inflows of international​ capital, decrease the value of the​ dollar, increase​ exports, and as a consequence real GDP will increase. C. lower the interest​ rate, increase the inflows of international​ capital, decrease the value of the​ dollar, decrease​ imports, and as a consequence real GDP will increase. D. raise the interest​ rate, increase the inflows of international​ capital, increase the value of the​ dollar, decrease​ exports, and as a consequence real GDP will decline even further.

D. raise the interest​ rate, increase the inflows of international​ capital, increase the value of the​ dollar, decrease​ exports, and as a consequence real GDP will decline even further. Assuming that the Fed judges inflation to be the most significant problem in the economy and that it wishes to employ all three of its policy instruments. It sells bonds in the open​ market, increases the discount​ rate, and increases the reserve ratio. The net export effect resulting from these monetary policy actions will raise the interest​ rate, increase the inflows of international​ capital, increase the value of the​ dollar, decrease​ exports, and as a consequence real GDP will decline even further.

A government agency is contemplating launching an effort to expand the scope of its activities. One rationale for doing so is that another government agency might make the same effort​ and, if​ successful, receive larger budget allocation in future years. Another rationale for expanding the​ agency's activities is that this will make the jobs of its workers more​ interesting, which may help the agency attract​ better-qualified employees.​ Nevertheless, to broaden its legal​ mandate, the agency will have to convince more than half of the House of Representatives and the Senate to approve a formal proposal to expand its activities. In​ addition, to expand its​ activities, the agency must have the authority to force private companies it does not currently regulate to be officially licensed by agency personnel. The behavior of the government agency is similar to a​ profit-seeking private enterprise in all of the following​ aspects, except A. the government agency is promoting competition. B. the government agency attempts to increase its budgetary allocations. C. the government agency attempts to make its​ workers' jobs more interesting. D. the government agency depends on majority rule to enact the changes that it is seeking.

D. the government agency depends on majority rule to enact the changes that it is seeking.

When the marginal propensity to consume​ increases, A. the multiplier remains unchanged. B. the average propensity to save remains unchanged. C. the multiplier decreases. D. the multiplier increases.

D. the multiplier increases.

Suppose you go shopping for a gift for a friend and also find a sweater that you want for yourself. You pay cash for the gift and write a check for the sweater. Your purchases are made with money holdings represented by A. the asset demand for money because you used money for both purchases. B. the transaction demand for money because you paid for the gift with cash. C. your supply of money to the economy. D. the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater.

D. the transaction demand for money because you planned to buy the gift and the precautionary demand for money because you did not anticipate buying the sweater. Transaction demand for money is used to make expected purchases. Precautionary demand for money is used for emergencies and unexpected purchases.

Automatic stabilizers are​ so-named because A. they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits. B. the policy suggestions of the Council of Economic Advisors are automatically followed. C. the policy suggestions of the Office of Management and Budget are automatically followed. D. they occur automatically when real GDP changes.

D. they occur automatically when real GDP changes.

The Federal​ Reserve's credit policy refers to A. a direct credit on bank​ depositors' saving and checking accounts. B. the​ Fed's direct lending to homeowners and students. C. regulations on terms on credit cards that banks issue. D. the​ Fed's direct lending to financial and nonfinancial firms.

D. the​ Fed's direct lending to financial and nonfinancial firms.

If the MPC​ = 0.8 and planned autonomous investment increases by​ $80 billion, then equilibrium real GDP will increase by A. ​$320 billion. B. ​$64 billion. C. ​$80 billion. D. ​$400 billion.

D. ​$400 billion.

If the marginal propensity to save is 0.4 and disposable income increases from​ $1,000 to​ $2,000, saving will increase A. ​$200. B. ​$300. C. ​$100. D. ​$400.

D. ​$400.

Demand curves are drawn with determinants other than the price of the good held constant. These other​ determinants, called ceteris paribus​ conditions, are​ (1) income/input prices​, ​(2) technology and productivity/tastes and preferences​, ​(3) taxes and subsidies/prices of related goods​, ​(4) expectations about future prices and incomes/expectations of future relative prices​, and​ (5) the number of potential buyers in the market/the number of firms in the industry at any given price. If any one of these determinants​ changes, the demand curve will shift to the right or to the left.

Demand curves are drawn with determinants other than the price of the good held constant. These other​ determinants, called ceteris paribus conditions, are​ (1) income​, ​(2) tastes and references​, ​(3) prices of related goods​, ​(4) expectations about future prices and incomes ​, and​ (5) the number of potential buyers in the market at any given price. If any one of these determinants​ changes, the demand curve will shift to the right or to the left.

These determinants will cause a shift in the short-run or the long-run aggregate supply curve or both, depending on whether they are temporary or permanent. Changes That Cause an Increase in Aggregate Supply

Discoveries of new raw materials Increased com petition A reduction in international trade barriers Fewer regulatory impediments to business An increase in the supply of labor Increased training and education A decrease in marginal income tax rates A reduction in input prices

Producer durables, or capital goods

Durable goods having an expected service life of more than three years that are used by businesses to produce other goods and services. A producer durable, or a capital good, is simply a good that is purchased not to be consumed in its current form but to be used to make other goods and services.

The disadvantage of holding money balances as an asset, of course, is the interest earnings forgone.

Each individual or business decides how much money to hold as an asset by looking at the opportunity cost of holding money. The higher the interest rate—which is the opportunity cost of holding money—the lower the money balances people will want to hold as assets. Conversely, the lower the interest rate offered on alternative assets, the higher the money balances people will want to hold as assets.

Dynamic Tax Analysis

Economic evaluation of tax rate changes that recognizes that the tax base declines with ever-higher tax rates, so that tax revenues may eventually decline if the tax rate is raised sufficiently.

Static tax analysis

Economic evaluation of the effects of tax rate changes under the assumption that there is no effect on the tax base, meaning that there is an unambiguous positive relationship between tax rates and tax revenues.

Depository Institutions

Financial institutions that accept deposits from savers and lend funds from those deposits out at interest.

Thrift institutions

Financial institutions that receive most of their funds from the savings of the public. They include savings banks, savings and loan associations, and credit unions.

For​ substitutes, a change in the price of a product will cause a change in demand in the​ ________ direction for the other good. For​ complements, a change in the price of a product will cause a change in demand in the​ ________ direction for the other good.

For​ substitutes, a change in the price of a product will cause a change in demand in the​ same direction for the other good. For​ complements, a change in the price of a product will cause a change in demand in the​ opposite direction for the other good.

___ unemployment arises because individuals take the time to search for the best job opportunities. Much unemployment is of this type, except when the economy is in a recession or a depression, when cyclical unemployment rises.

Frictional

___ unemployment and ___ unemployment both exist even when the economy is in long-run equilibrium—they are a natural consequence of costly information (the need to conduct a job search) and the existence of rigidities such as those noted above.

Frictional; structural

There are financial transactions, transfers of the owner ship of preexisting goods, and other transactions that should not (and do not) get included in our measure of ___.

GDP

NDP =

GDP — depreciation

Public goods

Goods for which the principle of rival consumption does not apply and for which exclusion of nonpaying consumers is too costly to be feasible. They can be jointly consumed by many individuals at no additional cost and with no drop in quality or quantity. Furthermore, no one who fails to help pay for the good can be denied benefits.

Economic goods

Goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price. For many goods the desired quantity exceeds the quantity available at a zero price. These goods are therefore scarce and are called economic goods.

Interest

Here interest payments do not equal the sum of all payments for the use of funds in a year. Instead, interest is expressed in net rather than in gross terms. The interest component of total income is only net interest received by households plus net interest paid to us by foreign residents. Net interest received by households is the difference between the interest they receive (from savings accounts, certificates of deposit, and the like) and the interest they pay (to banks for home mortgages, credit cards, and other loans).

Asset demand

Holding money as a store of value instead of other assets such as corporate bonds and stocks. People choose to hold money rather than other assets for two reasons: its liquidity and the lack of risk.

Precautionary demand

Holding money to meet unplanned expenditures and emergencies. The higher the rate of interest, the lower the precautionary money balances people wish to hold.

Many other transactions are not included in GDP for practical reasons:

Household production, Otherwise legal underground transactions, Illegal underground activities

Dollar depreciation

If residents of foreign countries decide that they want to purchase fewer U.S. government securities or other U.S. assets, they will require fewer U.S. dollars with which to purchase these U.S. assets. As a consequence, the demand for dollars decreases in foreign exchange markets. The international price of the dollar therefore falls. This is called a depreciation of the dollar.

NUMBER OF FIRMS IN THE INDUSTRY

If the number of firms increases, supply will increase, and the supply curve will shift outward to the right. If the number of firms decreases, supply will decrease, and the supply curve will shift inward to the left.

The Demand for Money Curve

If we use the interest rate as a proxy for the opportunity cost of holding money balances, the demand for money curve, Md, is downward sloping, similar to other demand curves.

In 1946, Congress passed the ___ ___, a landmark law concerning government responsibility for economic performance.

In 1946, Congress passed the Full-Employment Act, a landmark law concerning government responsibility for economic performance.

Labor force

Individuals aged 16 years or older who either have jobs or are looking and available for jobs; the number of employed plus the number of unemployed.

Discouraged workers

Individuals who have stopped looking for a job because they are convinced that they will not find a suitable one.

For state and local governments, , key taxes are:

Sales taxes, property taxes, and personal and corporate income taxes.

The functions of rental prices.

In any housing market, rental prices serve three functions: (1) to promote the efficient maintenance of existing housing and to stimulate the construction of new housing, (2) to allocate existing scarce housing among competing claimants, and (3) to ration the use of existing housing by current demanders. Rent controls interfere with all of these functions.

In its ideal form, a ___ system allows all resources to move from lower-valued uses to higher-valued uses via voluntary exchange, by which mutually advantageous trades take place.

In its ideal form, a price system allows all resources to move from lower-valued uses to higher-valued uses via voluntary exchange, by which mutually advantageous trades take place.

Each definition of the money supply, M1 or M2, will yield a different actual money multiplier.

In most years, the actual Ml multiplier has been in a range between 1 and 3 . The actual M2 multiplier showed an upward trend until recently, rising from 6.5 in the 1960s to over 12 in the mid-2000s. Since then, however, it has dropped to about 4.

New Keynesian inflation dynamics

In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand—initial sluggish adjustment of the price level in response to increased aggregate demand followed by higher inflation later. Consequently, an economy with growing aggregate demand should exhibit so-called new Keynesian inflation dynamics: initial sluggish adjustment of the price level in response to aggregate demand increases followed by higher inflation later on.

In principle, GDP and GDI should be the same.

In practice, however, they usually differ slightly as a consequence of incomplete data and measurement errors.

Unanticipated inflation

Inflation at a rate that comes as a surprise, either higher or lower than the rate anticipated.

Cost-push Inflation

Inflation caused by decreases in short-run aggregate supply.

Reserves

In the U.S. Federal Reserve System, deposits held by Federal Reserve district banks for depository institutions, plus depository institutions' vault cash.

Whenever government spending is a substitute for private spending, however, a rise in government spending causes a direct reduction in private spending to offset it.

In the extreme case, the direct expenditure offset is dollar for dollar, so we merely end up with a relabeling of spending from private to public. Otherwise stated, if there is a full direct expenditure offset, the government spending multiplier is zero.

The fact that long-run equilibrium real GDP is unaffected in the face of increased government deficits has an important implication:

In the long run, higher government budget deficits have no effect on equilibrium real GDP per year. Ultimately, therefore, government spending in excess of government receipts simply redistributes a larger share of real GDP per year to government-provided goods and services.

Demand-pull inflation

Inflation caused by increases in aggregate demand not matched by increases in aggregate supply.

Full-Employment Act

It established three goals for government stabilization policy: full employment, price stability and economic growth.

Suppose​ that, as part of an expansion of its State Care health​ system, a state government decides to offer a​ $50 subsidy to all people​ who, according to their​ physicians, should have their own blood pressure monitoring devices. Prior to this governmental​ decision, the market clearing price of blood pressure monitoring devices in this state was​ $50, and the equilibrium quantity purchased was​ 20,000 per year. After the government expands its State Care​ plan, people in this state desire to purchase​ 40,000 devices each year. Manufacturers of blood pressure monitoring devices are willing to provide​ 40,000 devices at a price of​ $60 per device. In this case the​ out-of-pocket price each consumer pays for a blood pressure monitoring device is ​$__ The dollar amount of the increase in total expenditures on blood pressure monitoring devices in this state following the expansion in the State Care program is ​$__ million. Following the expansion of the State Care​ program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is __​%. The percentage of total expenditures paid by the consumers of these devices is __​%).

In this case the​ out-of-pocket price each consumer pays for a blood pressure monitoring device is ​$10 The dollar amount of the increase in total expenditures on blood pressure monitoring devices in this state following the expansion in the State Care program is ​$1.4 million. Following the expansion of the State Care​ program, the percentage of total expenditures on blood pressure monitoring devices paid by the government is 83​%. The percentage of total expenditures paid by the consumers of these devices is 17​%).

For the federal government, key taxes are:

Individual income taxes, corporate income taxes, Social Security taxes, and excise taxes on items such as gasoline and alcoholic beverages.

Asymmetric information

Information possessed by one party in a financial transaction but not by the other party.

Financial intermediaries

Institutions that transfer funds between ultimate lenders (savers) and ultimate borrowers.

Examples

Insurance companies offer safe driver discounts to encourage insured individuals to drive safely. This is an attempt to limit moral hazard. Pension funds tend to combine the retirement funds of many future retirees to lower management costs. Savings banks review loan applications to determine which of the potential borrowers carry high risk of default. This is an attempt to limit adverse selection. A manager of a savings and loan association responds to reports of a likely increase in federal deposit insurance coverage. She directs loan officers to extend mortgage loans to less creditworthy borrowers. This situation poses a moral hazard problem. A loan applicant does not mention that a legal judgment in his divorce case will require him to make alimony payments to his​ ex-wife. This situation poses an adverse selection problem. An individual who was recently approved for a loan to start a new business decides to use some of the funds to take a Hawaiian vacation. This situation poses a moral hazard problem. Stockbrokers monitor the companies after investing funds in​ them, in order to limit moral hazard. Commercial banks screen their borrowers before a loan can be​ approved, in order to limit adverse selection. Money market mutual funds combine the savings of many​ individuals, in order to lower management costs. An individual with several children who has just learned that she has lung cancer applies for life insurance but fails to report this recent medical diagnosis. This situation poses an adverse selection problem. A corporation that recently obtained a loan from several banks to finance installation of a new computer network instead directs some of the funds to executive bonuses. This situation poses a moral hazard problem. A​ state-chartered financial institution exempt from laws requiring it to have federal deposit insurance decides to apply for deposit insurance after experiencing severe financial problems that may bankrupt the institution. This situation poses an adverse selection problem.

Antitrust legislation

Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices.

What does Say's law really mean?

It states that the very process of producing specific goods (supply) is proof that other goods are desired (demand).

The Keynesian Theory of Consumption and Saving

Keynes argued that real consumption and saving decisions depend primarily on a household's current real disposable income.

Total population

Labor force + Adults in the military + Non-adult population + Institutionalized adults + ​Nonmilitary, non-institutionalized adults not in labor force The adult population consists of​ unemployed, employed, and civilians who are not in the labor force. These civilians are​ homemakers, retired​ people, full time​ students, military personnel and institutionalized people.

Total number of unemployed people​ =

Labor force minus− Employed people. The labor force consists of unemployed and employed individuals.

M2

M1 plus (1) savings deposits at all depository institutions, (2) small-denomination time deposits, and (3) balances in retail money market mutual funds.

Market equilibrium can change whenever there is a _____ caused by a change in a _______ _______ condition for demand or supply.

Market equilibrium can change whenever there is a shock caused by a change in a ceteris paribus condition for demand or supply.

Services

Mental or physical labor or assistance purchased by consumers. Examples are the assistance of physicians, lawyers, dentists, repair personnel, house-cleaners, educators, retailers, and wholesalers; items purchased or used by consumers that do not have physical characteristics. Intangible commodities: medical care, education, and the like.

Ms*V = P*Y

Ms = actual money balances held by the non-banking public V = income velocity of money, which is the number of times, on average per year, each monetary unit is spent on final goods and services P = price level or price index Y = real GDP per year

Saving function

Mathematically, the saving function is the complement of the consumption function because consumption plus saving always must equal disposable income. What is not consumed is, by definition, saved.

Real values

Measurement of economic values after adjustments have been made for changes in the average of prices between years.

Income approach

Measuring GDP by adding up all components of national income, including wages, interest, rent, and profits. we add the income received by all factors of production.

Services

Mental or physical labor or assistance purchased by consumers. Examples are the assistance of physicians, lawyers, dentists, repair personnel, house cleaners, educators, retailers, and wholesalers; items purchased or used by consumers that do not have physical characteristics.

Suppose that initially the money supply is ​$3 ​trillion, the income velocity of money is 5​, the price level equals 3​, and real GDP is ​$5 trillion in​ base-year dollars. Then suppose that the quantity of money in circulation remain fixed but the income velocity of money doubles. If real GDP remains at its​ long-run potential​ level, calculate the equilibrium price level.

Ms*V = P*Y 3 * 5 = 3 * 5 3 * 10 = P * 5 P = 6

The classical model makes four major assumptions: 1. Pure competition exists.

No single buyer or seller of a commodity or an input can affect its price.

Both the traditional Keynesian theory and the new Keynesian theory indicate that the​ short-run aggregate supply curve is horizontal. a. In terms of their ​short-run implications for the price level and real​ GDP, is there any difference between the two​ approaches? No b. In terms of their ​long-run implications for the price level and real​ GDP, is there any difference between the two​ approaches? Yes

No; Yes

The Fed conducts monetary policy.

Perhaps the Fed's most important task is to regulate the nations money supply. To understand how the Fed manages the money supply, we must examine more closely its reserve-holding function and the way in which depository institutions aid in expansion and contraction of the money supply.

There are a number of Producer Price Indexes...

One for foodstuffs, another for intermediate goods (goods used in the production of other goods), and one for finished goods. Most are in mining, manufacturing, and agriculture. Can be considered general-purpose indexes for non-retail markets.

There are two determinants of the size of this ratio.

One is the quantity of reserves that the Federal Reserve requires banks to hold, which are called required reserves. The other determinant of the reserve ratio is whatever additional amount of reserves that banks voluntarily hold, known as excess reserves.

Open economy effect

One of the reasons that the aggregate demand curve slopes downward: A higher price level induces foreign residents to buy fewer U.S-made goods and U.S. residents to buy more foreign-made goods, thereby reducing net exports and decreasing the amount of real goods and services purchased in the United States.

What Causes the Investment Function to Shift?

One of those variables is the expectations of businesses. If higher profits are expected, more machines and bigger plants will be planned for the future. More investment will be undertaken because of the expectation of higher profits. Any change in productive technology can potentially shift the investment function. A positive change in productive technology would stimulate demand for additional capital goods and shift I outward to the right. Changes in business taxes can also shift the investment function. If they increase, we predict a leftward shift in the planned investment function because higher taxes imply a lower (after-tax) rate of return.

Most nations, including the United States, have a banking system that encompasses two types of institutions.

One type consists of privately owned profit-seeking institutions, such as commercial banks and thrift institutions. The other type of institution is a central bank.

Comparative advantage vs. Absolute advantage

Only comparative advantage, not absolute advantage, matters in determining how you will allocate your time. Comparative advantage determines your choice because it involves the highest-valued alternative in a decision about time allocation.

Profits and non-income expense items.

Our last category includes three business-related items. The first of these is total gross corporate profits. The second is proprietors' income earned from the operation of unincorporated businesses, which include sole proprietorships, partnerships, and producers' cooperatives. The third is non-income expense items. Included among non-income expense items are various taxes unrelated to incomes, such as sales taxes that firms collect from consumers and transmit to government agencies, net of any non-income-related subsidies that governments transmit to firms. The total of these taxes less subsidies is the net portion of GDI transmitted indirectly to the government sector via firms. Also included among non-income expense items is depreciation, the part of GDI used to replace physical capital consumed in the process of production.

The following equation gives the relationship between real​ GDP, nominal​ GDP, and the price level in index​ form, PI.

PI = (NGDP / RDGP) * 100 thus NGDP = (RGDP * PI) / 100

Most often the ___ increase before the ___ because it takes time for producer price increases to show up in the prices that consumers pay for final products.

PPIs; CPI

Third parties

Parties who are not directly involved in a given activity or transaction.

Rent control

Price ceilings on rents. Rent control is a system under which the local government tells building owners how much they can charge their tenants for rent.

Anticipated value of price index next year =

Price index of base year​ + Expected inflation rate Current year is assumed to be the base year.

Price system, otherwise known as a ______________ ______________.

Price system, otherwise known as a market system.

Prices are indicators of ________ ________.

Prices are indicators of relative scarcity.

Capital goods

Producer durables; nonconsumanble goods that firms use to make other goods.

Labor

Productive contributions of humans who work. Labor is the human resource, which includes productive contributions made by individuals who work, such as Web page designers, iPad applications creators, and professional football players.

___ is always the residual item that makes total income equal to the dollar value of total output.

Profit

Permanent income hypothesis

Proposes that an individual's current flow of consumption depends on the individual's permanent, or anticipated lifetime, income.

Fixed Investment

Purchases by businesses of newly produced producer durables, or capital goods, such as production machinery and office equipment.

Money illusion

Reacting to changes in money prices rather than relative prices. If a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion.

Average propensity to save (APS)

Real saving divided by real disposable income. For any given level of real income, the proportion of total real disposable income that is saved.

Recall that the consumption function is given as C​ = a​ + bY​, where a is autonomous consumption and b is the MPC. In​ addition, the multiplier is given by ​1/(1minus−​MPC).

Recall that the consumption function is given as C​ = a​ + bY​, where a is autonomous consumption and b is the MPC. In​ addition, the multiplier is given by ​1/(1minus−​MPC).

Depreciation

Reduction in the value of capital goods over a one-year period due to physical wear and tear and obsolescence; also called capital consumption allowance.

Empirical

Relying on real-world data in evaluating the usefulness of a model.

Rationing the Current Use of Housing

Rent controls also affect the current use of housing because they restrict tenant mobility.

Rent Controls and Construction

Rent controls discourage the construction of new rental units. Rents are the most important long-term determinant of profitability; and rent controls artificially depress them.

Rent

Rent is all income earned by individuals for the use of their real (non-monetary) assets, such as farms, houses, and stores. As stated previously, we have to include here the implicit rental value of owner-occupied houses. Also included in this category are royalties received from copyrights, patents, and assets such as oil wells

Models or​ Theories

Simplified representations of the real world used as the basis for predictions or explanations.

Since 1965, that concern has been reflected in the existence of the ___ program, which pays hospital and physicians' bills for U.S. residents over the age of 65 (and for those younger than 65 in some instances). In return for paying a tax on their earnings while in the workforce (2.9 percent of wages and salaries, plus 3.8 percent on certain income for high-income households), retirees are assured that the majority of their hospital and physicians' bills will be paid for with public monies.

Since 1965, that concern has been reflected in the existence of the Medicare program, which pays hospital and physicians' bills for U.S. residents over the age of 65 (and for those younger than 65 in some instances). In return for paying a tax on their earnings while in the workforce (2.9 percent of wages and salaries, plus 3.8 percent on certain income for high-income households), retirees are assured that the majority of their hospital and physicians' bills will be paid for with public monies.

The difference between real and monetary shocks

Some economists argue that real, as opposed to purely monetary, forces might help explain aggregate economic fluctuations. These shocks may take any of the following forms: . Technological advances that improve productivity . Changes in the composition of the labor force . Changes in prices of and availability of a key resource, such as oil and other key factors used in producing energy

Indirect Effect of an Increase in the Money Supply

Some people may wish to deposit a portion or all of those excess money balances in banks. Banks, however, cannot induce people to borrow more funds than they were borrowing before unless the banks lower the interest rate that they charge on loans. This lower interest rate encourages people to take out those loans. Businesses will therefore engage in new investment with the funds loaned. Individuals will engage in more consumption of durable goods such as housing, autos, and home entertainment centers. In both ways, the increased loans generate a rise in aggregate demand.

Investment

Spending on items such as machines and buildings, which can be used to produce goods and services in the future. (It also includes changes in business inventories.) The investment part of real GDP is the portion that will be used in the process of producing goods and in the future. In economic analysis, investment primarily is defined to include expenditures on new machines and buildings—capital goods—that are expected to yield a future stream of income. This is called fixed investment. We also include changes in business inventories in our definition. This we call inventory investment.

Consumption

Spending on new goods and services to be used up out of a household's current income. Whatever is not consumed is saved. Consumption includes such things as buying food and going to a concert.

Say's law:

Supply creates its own demand. Hence, it follows that desired expenditures will equal actual expenditures.

Sales taxes

Taxes assessed on the prices paid on most goods and services.

The Fed holds depository institutions' reserves and pays interest on these reserves.

The 12 Federal Reserve district banks hold the reserves (other than vault cash) of depository institutions. Depository institutions are required by law to keep a certain percentage of their transactions deposits as reserves. Since 2008, the Federal Reserve has paid institutions interest on all reserves held at the Federal Reserve banks at a rate set by the Board of Governors.

Marginal tax rate

The change in the tax payment divided by the change in income, or the percentage of additional dollars that must be paid in taxes. The marginal tax rate is applied to the highest tax bracket of taxable income reached.

The Federal Reserve performs several functions:

The Fed supplies the economy with fiduciary currency. The Fed holds depository institutions' reserves and pays interest on these reserves. The Fed acts as the government's fiscal agent. The Fed supervises depository institutions. The Fed conducts monetary policy. The Fed intervenes in foreign currency markets. The Fed acts as the "lender of last resort. " As lender of last resort.

The Fed supervises depository institutions.

The Fed, along with the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the National Credit Union Administration, is a supervisor and regulator of depository institutions.

Slope

The change in the y value divided by the corresponding change in the x value of a curve; the incline' of the curve.

The Fed

The Federal Reserve System; the central bank of the United States.

The Fed supplies the economy with fiduciary currency.

The Federal Reserve banks supply the economy with paper currency called Federal Reserve notes, which are printed at the Bureau of Engraving and Printing in Washington, D.C. Each of these notes is an obligation, liability, of the Federal Reserve System, not the U.S. Treasury.

The Bureau of Economic Analysis, an agency of the U.S. Department of Commerce, uses continuously updated annual surveys of consumer purchases to construct the weights for the PCE Index. Thus, an advantage of the PCE Index is that weights in the index are updated every year.

The Federal Reserve has used the rate of change in the PCE Index as its primary inflation indicator because Fed officials believe that the updated weights in the PCE Index make it more accurate than the CPI as a measure of consumer price changes. Nevertheless, the CPI remains the most widely reported price index, and the U.S. government continues to use the CPI to adjust the value of Social Security benefits to account for inflation.

The Fed acts as the government's fiscal agent.

The Federal Reserve is the primary banker and fiscal agent for the federal government. Consequently, the U.S. Treasury has a transactions account with the Federal Reserve, which helps the government collect certain tax revenues and aids in the purchase and sale of government securities.

Lender of last resort

The Federal Reserve's role as an institution that is willing and able to lend to a temporarily illiquid bank that is otherwise in good financial condition to prevent the bank's illiquid position from leading to a general loss of confidence in that bank or in others.

Comparative advantage

The ability to produce a good or service at a lower opportunity cost compared to other producers. The ability to perform an activity at a lower opportunity cost.

Absolute advantage

The ability to produce more units of a good or service using a given quantity of labor or resource inputs. Equivalently, the ability to produce the same quantity of a good or service using fewer units of labor or resource inputs.

Saving

The act of not consuming all of one's current income. Whatever is not consumed out of spendable income is, by definition, saved. Saving is an action measured over time (a flow), whereas savings are a stock, an accumulation resulting from the action of saving in the past.

The Price System

The alternative to command and control is the price system (also called a market system), which is a shorthand term describing an economic system that answers the three basic economic questions via decentralized decision making. Under a pure price system, individuals and families own all of the scarce resources used in production. Consequently, choices about what and how many items to produce are left to private parties to determine on their own initiative, as are decisions about how to go about producing those items.

Personal income (PI)

The amount of income that households actually receive before they pay personal income taxes.

How do increased government budget deficits affect the economy in the short run?

The answer depends on the initial state of the economy. When there is a recessionary gap, the increase in aggregate demand can eliminate the recessionary gap and push the economy toward its full-employment real GDP level. In the presence of a short-run recessionary gap, therefore, government deficit spending can influence both real GDP and employment. If the economy is at the full-employment level of real GDP, however, increased total planned expenditures and higher aggregate demand generated by a larger government budget deficit create an inflationary gap. Although greater deficit spending temporarily raises equilibrium real GDP above the full-employment level, the price level also increases.

The classical model makes four major assumptions: 2. Wages and prices are flexible.

The assumption of pure competition leads to the notion that prices, wages, and interest rates are free to move to whatever level supply and demand dictate (as the economy adjusts). Although no individual buyer can set a price, the community of buyers or sellers can cause prices to rise or to fall to an equilibrium level.

The avowed aim of antitrust legislation is to reduce the power of ___—firms that can determine the market price of the goods they sell.

The avowed aim of antitrust legislation is to reduce the power of monopolies—firms that can determine the market price of the goods they sell.

Efficiency

The case in which a given level of inputs is used to produce the maximum output possible. Alternatively, the situation in which a given output is produced at minimum cost. Here we are discussing productive efficiency. An economy is productively efficient whenever it is producing the maximum output with given technology and resources.

Real-balance effect

The change in expenditures resulting from a change in the real value of money balances when the price level changes, all other things held constant; also called the wealth effect.

Policy irrelevance proposition

The conclusion that policy actions have no real effects in the short run if the policy actions are anticipated and none in the long run even if the policy actions are unanticipated. Under the assumption of rational expectations on the part of decision makers in the economy, anticipated monetary policy cannot alter either the rate of unemployment or the level of real GDP Regardless of the nature of the anticipated policy, the unemployment rate will equal the natural rate, and real GDP will be determined solely by the economy long-run aggregate supply curve.

Repricing, or menu, cost of inflation

The cost associated with recalculating prices and printing new price lists when there is inflation. The higher the rate of inflation, the higher the repricing cost of inflation, because prices must be changed more often within a given period of time.

Price index

The cost of today's market basket of goods expressed as a percentage of the cost of the same market basket during a base year.

Gross private domestic Investment

The creation of capital goods, such as factories and machines, that can yield production and hence consumption in the future. Also included in this definition are changes in business inventories and repairs made to machines or buildings.

To measure credit-market sentiment, these economists typically utilize the "credit spread."

The credit spread is the differential between an interest rate that households must pay to obtain credit and an open-market interest rate such as a U.S. Treasury bond rate.

liquidity

The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value and with small transaction costs. Money is the most liquid asset. We say that an asset is liquid when it can easily be acquired or disposed of without high transaction costs and with relative certainty as to its value.

Market demand

The demand of all consumers in the marketplace for a particular good or service. The summation at each price of the quantity demanded by each individual.

Tax incidence

The distribution of tax burdens among various groups in society.

Equation of exchange

The formula indicating that the number of monetary units (Ills) times the number of times each unit is spent on final goods and services (V) is identical to the price level (P) times real GDP (Y).

The fundamental problem of ___ goods is that the private sector has a difficult, if not impossible, time providing them. Individuals in the private sector have little or no incentive to offer public goods. It is difficult for them to make a profit doing so, because it is too costly and, hence, infeasible to exclude nonpayers.

The fundamental problem of public goods is that the private sector has a difficult, if not impossible, time providing them. Individuals in the private sector have little or no incentive to offer public goods. It is difficult for them to make a profit doing so, because it is too costly and, hence, infeasible to exclude nonpayers. Consequently, true public goods must necessarily be provided by government.

Inflationary gap

The gap that exists whenever equilibrium real GDP per year is greater than full-employment real GOP, as shown by the position of the long-run aggregate supply curve.

Recessionary gap

The gap that exists whenever equilibrium real GDP per year is less than full-employment real GDP as shown by the position of the long-run aggregate supply curve.

Supply curve

The graphical representation of the supply schedule; a line (curve) showing the supply schedule, which generally slopes upward (has a positive slope), other things being equal.

Opportunity cost

The highest-valued, next-best alternative that must be sacrificed to obtain something or to satisfy a want. Your opportunity cost is the next-highest ranked alternative, not all alternatives.

Keynesian short-run aggregate supply curve

The horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy.

Quantity theory of money and prices

The hypothesis that changes in the money supply lead to equiproportional changes in the price level.

Bounded rationality

The hypothesis that people are nearly, but not fully, rational, so that they cannot examine every possible choice available to them but instead use simple rules of thumb to sort among the alternatives that happen to occur to them. 1. Unbounded selfishness. People are interested only in their own satisfaction. 2. Unbounded willpower Their choices are always consistent with their long-term goals. Ceteris paribus [KAY-ter-us PEAR-uh-busl assumption The assumption that nothing changes except the factor or factors being studied. Empirical Relying on real-world data in evaluating the usefulness of a model. 3. Unbounded rationality. They are able to consider every relevant choice.

Anticipated inflation

The inflation rate that we believe will occur. When it does occur, we are in a situation of fully anticipated inflation.

Discount rate

The interest rate that the Federal Reserve charges for reserves that it lends to depository institutions. It is sometimes referred to as the rediscount rate or, in Canada and England, as the bank rate.

Origin

The intersection of the y-axis and the x-axis in a graph.

The law of demand tells us...

The law of demand tells us that the quantity demanded of any commodity is inversely related to its price, other things being equal. In an inverse relationship, one variable moves up in value when the other moves down. The law of demand states that a change in price causes a change in the quantity demanded in the opposite direction.

45-Degree Reference Line

The line among which planned real expenditures equal real GDP per year.

Autonomous Consumption

The part of consumption that is independent of (does not depend on) the level of disposable income. Changes in autonomous consumption shift the consumption function.

The market demand for a normal good decreases if the incomes of the consumers​ decrease, or if the price of a complement increases or if the price of substitute decreases. The market demand for a normal good increases if the number of consumers in the market increases.

The market demand for a normal good decreases if the incomes of the consumers​ decrease, or if the price of a complement increases or if the price of substitute decreases. The market demand for a normal good increases if the number of consumers in the market increases.

Relative price

The money price of one commodity divided by the money price of another commodity; the number of units of one commodity that must be sacrificed to purchase one unit of another commodity.

M1

The money supply, measured as the total value of currency plus transactions deposits plus traveler's checks not issued by banks.

Wages

The most important category is, of course, wages, including salaries and other forms of labor income, such as income in kind and incentive payments. Because GDI measures all income, there is no deduction from wages for Social Security taxes (whether paid by employees or employers).

Cumulative fiscal multiplier

The multiplier effect of a fiscal policy action that applies to a long-run period after all influences on equilibrium real GOP have been taken into account.

Labor force participation rate

The percentage of non-institutionalized working-age individuals who are employed or seeking employment.

Break-even income point

The point in which there is neither positive nor negative real saving. Point F of Figure 12-1

Land

The natural resources that are available from nature, Land as a resource includes location, original fertility and mineral deposits, topography, climate, water, and vegetation. Land encompasses all the nonhuman gifts of nature, including timber, water, fish, minerals, and the original fertility of land. It is often called the natural resource.

Real rate of interest

The nominal rate of interest minus the anticipated rate of inflation.

Income velocity of money (V)

The number of times per year a dollar is spent on final goods and services; identically equal to nominal GDP divided by the money supply.

Law of demand

The observation that there is a negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant.

Money traditionally has four functions.

The one that most people are familiar with is money's function as a medium of exchange. Money also serves as a unit of accounting, a store of value or purchasing power, and a standard of deferred payment. Anything that could serve these four functions could be considered money.

Specialization

The organization of economic activity so that what each person (or region) consumes is not identical to what that person (or region) produces. An individual may specialize, for example, in law or medicine. A nation may specialize in the production of coffee, e-book readers, or digital cameras.

credit-market sentiment

The overall emotional state of household borrowers of credit and financial managers who extend credit

Moral hazard

The possibility that a borrower might engage in riskier behavior after a loan has been obtained.

Money price

The price expressed in today's dollars; also called the absolute or nominal price.

Relationship between the Price of Existing Bonds and the Rate of Interest

The price of existing bonds and the rate of interest are inversely related. The market price of existing bonds (and all fixed income assets) is inversely related to the rate of interest prevailing in the economy.

Foreign exchange rate

The price of one currency in terms of another.

Market clearing, or equilibrium, price

The price that clears the market, at which quantity demanded equals quantity supplied; the price where the demand curve intersects the supply curve.

Financial intermediation

The process by which financial institutions accept savings from businesses, households, and governments and lend the savings to other businesses, households, and governments. Banks and other financial institutions are all in the same business—transferring funds from savers to investors.

Tax rate

The proportion of a tax base that must be paid to a government as taxes.

Ricardian equivalence theorem

The proposition that an increase in the government budget deficit has no effect on aggregate demand.

Stock

The quantity of something, measured at a given point in time—for example, an inventory of goods or a bank account. Stocks are defined independently of time, although they are assessed at a point in time.

Natural rate of unemployment

The rate of unemployment that is estimated to prevail in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy.

Natural rate of unemployment

The rate of unemployment that is estimated to prevail in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy. If correctly estimated, it should not include cyclical unemployment. Thus, the natural unemployment rate should include only frictional and structural unemployment.

Marginal propensity to save (MPS)

The ratio of the change in saving in the change in disposable income. A marginal propensity to save of 0.2 indicates that out of an additional $100 in take-home pay, $20 will be saved. Whatever is not saved is consumed. The marginal propensity to save plus the marginal propensity to consume must always equal 1, by definition.

Multiplier

The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures. The number by which a change in autonomous real investment or autonomous real consumption, for example, is multiplied to get the change in equilibrium real GDP.

Marginal propensity to consume (MPC)

The ration of the change in consumption to the change in disposable income. A marginal propensity to consume of 0.8 tells that an additional $100 in take-home pay will lead to an additional $80 consumed. The marginal propensity to consume plus the marginal propensity to save must always equal 1, by definition.

Potential money multiplier

The reciprocal of the reserve ratio, assuming no leakages into currency. It is equal to 1 divided by the reserve ratio.

Principle of rival consumption

The recognition that individuals are rivals in consuming private goods because one person's consumption reduces the amount available for others to consume.

Consumption function

The relationship between amount consumed and disposable income. A consumption function tells you how much people plan to consume at various levels of disposable income.

Short-run aggregate supply curve (SRAS)

The relationship between total planned economywide production and the price level in the short run, all other things held constant. If prices adjust incompletely in the short run, the curve is positively sloped.

Direct Effect of an Increase in the Money Supply

The simplest thing that people can do when they have excess money balances is to go out and spend them on goods and services. Here they have a direct impact on aggregate demand. Aggregate demand rises because with an increase in the money supply, at any given price level people now want to purchase more output of real goods and services.

How the values of MPC and MPS affect the Multiplier

The smaller the marginal propensity to save, the larger the multiplier. Otherwise stated: the larger the marginal propensity to consume, the larger the multiplier.

MZM aggregate

The so-called money-at-zero-maturity money stock. Obtaining MZM entails adding to M1 those deposits without set maturities, such as savings deposits, that are included in M2. MZM includes all money market funds but excludes all deposits with fixed maturities, such as small denomination time deposits.

Net wealth

The stock of assets owned by a person, household, firm, or nation (net of any debts owed). For a household, net wealth can consist of a house, cars, personal belongings, stocks, bonds, bank accounts, and cash (minus any debts owed).

Microeconomics

The study of decision making undertaken by individuals (or households) and by firms.

Economics

The study of how people allocate their limited resources to satisfy their unlimited wants. As​ such, economics is the study of how people make choices.

Macroeconomics

The study of the behavior of the economy as a whole, including such economy-wide phenomena as changes in unemployment, the general price level, and national income.

Gross domestic income (GDI)

The sum of all income—wages, interest, rent, and profits—paid to the four factors of production.

The supply curve is drawn with other things held constant. If these ceteris paribus conditions of supply​ change, the supply curve will shift. The major ceteris paribus conditions are​ (1) input prices​, ​(2) technology and productivity​, ​(3) taxes and subsidies​, ​(4) expectations of future relative prices​, and​ (5) the number of firms in the industry.

The supply curve is drawn with other things held constant. If these ceteris paribus conditions of supply​ change, the supply curve will shift. The major ceteris paribus conditions are​ (1) input prices​, ​(2) technology and productivity​, ​(3) taxes and subsidies​, ​(4) expectations of future relative prices​, and​ (5) the number of firms in the industry.

Crowding-out effect

The tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector. This decrease normally results from the rise in interest rates.

Supply-side economics

The theory that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward.

Action time lag

The time between recognizing an economic problem and implementing policy to solve it. The action time lag is quite long for fiscal policy, which requires congressional approval.

Recognition time lag

The time required to gather information about the current state of the economy.

Effect time lag

The time that elapses between the implementation of a policy and the results of that policy.

Gross Domestic Product (GDP)

The total market value of all final goods and services produced during a year by factors of production located within a nations borders. The total market value of all final goods and services produced in an economy during a year.

Gross output

The total market value of all goods and services produced during a year by factors of production located within a nation's borders, including all forms of business to-business expenditures and thereby double counting business spending across all stages of production.

National Income (NI)

The total of all factor payments to resource owners. It can be obtained from net domestic product (NDP) by adding net U.S. income earned abroad and adjusting for statistical discrepancies.

Aggregate demand

The total of all planned expenditures in the entire economy.

Aggregate supply

The total of all planned production for the economy.

Technology

The total pool of applied knowledge concerning how goods and services can be produced.

Average tax rate

The total tax payment divided by total income. It is the proportion of total income paid in taxes. Average tax rate = total taxes due / total taxable income

Public debt

The total value of all outstanding federal government securities.

Business fluctuations

The ups and downs in business activity throughout the economy.

Consumption

The use of goods and services for personal satisfaction.

Endowments

The various resources in an economy, including both physical resources and such human resources as ingenuity and management skills.

y axis

The vertical axis in a graph.

Total income

The yearly amount earned by the nation's resources (factors of production). Total income therefore includes wages, rent, interest payments, and profits that are received by workers, landowners, capital owners, and entrepreneurs, respectively.

How will items be produced?

There are many ways to produce a desired item. It is possible to use more labor and fewer machines, or vice versa. It is possible, for in stance, to produce an item with an aim to maximize the number of people employed. Alternatively, an item may be produced with an aim to minimize the total expenses that members of society incur. Somehow, a decision must be made about the mix of resources used in production, the way in which they are organized, and how they are brought together at a particular location.

Political Functions of Government: At least two functions of government are political or normative functions rather than economic ones like those discussed in the first part of this chapter.

These two areas are: 1. the provision and regulation of government-sponsored and government-inhibited goods. 2. income redistribution.

Suppose the government adopts a policy that forces pesticide producers to bear the social costs of groundwater contamination associated with the use of their product. This policy will ___ the price of pesticides.

This policy will increase the price of pesticides. A government policy that forces pesticide producers to bear the social costs of pesticide use will push the price of pesticide upward.

Centralized Command and Control

Throughout history, one common type of economic system has been command and control (also called central planning) by a centralized authority, such as a king or queen, a dictator, a central government, or some other type of authority. Such an entity assumes responsibility for addressing fundamental economic issues. Under command and control, this authority decides what items to produce and how many, determines how the scarce resources will be organized in the items' production, and identifies who will be able to obtain the items.

Aggregates

Total amounts or quantities. Aggregate demand, for example, is total planned expenditures throughout a nation.

Frictional unemployment

Unemployment due to the fact that workers must search for appropriate job offers. This activity takes time, and so they remain temporarily unemployed.

Structural unemployment

Unemployment of workers over lengthy intervals resulting from skill mismatches with position requirements of employers and from fewer jobs being offered by employers constrained by governmental business regulations and labor market policies.

Cyclical unemployment

Unemployment resulting from business recessions that occur when aggregate (total) demand is insufficient to create full employment.

Rationing By Waiting

We call this rationing by queues, where queue means "line." Whoever is willing to wait in line — the longest obtains the good that is being sold at less than the market clearing price. All who wait in line are paying a higher total outlay than the money price paid for the good. Personal time has an opportunity cost. To calculate the total outlay expended on the good, we must add up the money price plus the opportunity cost of the time spent waiting.

Changes of demand and supply in opposite directions.

We can be certain that when demand decreases and supply increases at the same time, the equilibrium price will fall, because both the decrease in demand and the increase in supply tend to push down the equilibrium price. The change in the equilibrium quantity is uncertain without more information, because the decrease in demand tends to reduce the equilibrium quantity, whereas the increase in supply tends to increase the equilibrium quantity. If demand increases and supply decreases at the same time, both occurrences tend to push up the equilibrium price. Thus, the equilibrium price definitely rises. The increase in demand tends to raise the equilibrium quantity, whereas the decrease in supply tends to reduce the equilibrium quantity. Consequently, the change in the equilibrium quantity cannot be determined without more information.

The three fundamental questions of economics concern the problem of how to allocate society's scarce resources:

What and how much will be produced? How will items be produced? For whom will items be produced? What and how many items to​ produce, how scarce resources are used in producing the​ items, and who can obtain the items produced.

The rationality assumption as used in economics states that people respond to incentives.

When an​ action's outcome​ (upon the​ decision-maker) changes from beneficial to​ harmful, we assume the​ decision-maker will desist from the act. To not respond would result in intentional harm to oneself. This would violate the rationality assumption.​ Hence, we conclude that people will respond to incentives.

Changes of demand and supply in the same direction.

When both demand and supply increase, the equilibrium quantity unambiguously rises, because the increase in demand and the increase in supply both tend to generate a rise in quantity. The change in the equilibrium price is uncertain without more information, because the increase in demand tends to increase the equilibrium price, whereas the increase in supply tends to decrease the equilibrium price. Decreases in both demand and supply tend to generate a fall in quantity; so the equilibrium quantity falls. Again, the effect on the equilibrium price is uncertain without additional information, because a decrease in demand tends to reduce the equilibrium price, whereas a decrease in supply tends to increase the equilibrium price.

When nations specialize in an area of comparative advantage and then trade with the rest of the world, the average standard of living in the world rises. In effect, international trade allows the world to move from inside the global production possibilities curve toward the curve itself; thereby improving worldwide economic efficiency;

When nations specialize in an area of comparative advantage and then trade with the rest of the world, the average standard of living in the world rises. In effect, international trade allows the world to move from inside the global production possibilities curve toward the curve itself; thereby improving worldwide economic efficiency;

Effects on the Existing Supply of Housing

When rental rates are held below equilibrium levels, property owners cannot recover the cost of maintenance, repairs, and capital improvements through higher rents. Hence, they curtail these activities. In the extreme situation, taxes, utilities, and the expenses of basic repairs exceed rental receipts. The result has been abandoned buildings.

Associated with the concept of demand is the law of demand, which can be stated as follows:

When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal.

Whenever the rationing function of prices is frustrated by government-enforced price ceilings that set prices below the market clearing level, a prolonged ________ results.

Whenever the rationing function of prices is frustrated by government-enforced price ceilings that set prices below the market clearing level, a prolonged shortage results.

Whenever there is a change in a ceteris paribus condition there will be a change in​ ________, which is represented by a​ ________.

Whenever there is a change in a ceteris paribus condition there will be a change in​ demand, which is represented by a​ shift in the entire demand curve.

Changes in Demand versus Changes in Quantity Demanded

Whenever there is a change in a ceteris paribus condition, there will be a change in demand—a shift in the entire demand curve to the right or to the left. A quantity demanded is a specific quantity at a specific price, represented by a single point on a demand curve. When price changes, quantity demanded changes according to the law of demand, and there will be a movement from one point to another along the same demand curve.

Expropriation

Which means that if you refuse to pay your taxes, your bank account and other assets may be seized by the Internal Revenue Service. In fact, you have no choice in the matter of paying taxes to governments.

Small-denomination time deposits

With a time deposit, the funds must be left in a financial institution for a given period before they can be withdrawn without penalty. To be included in the M2 definition of the money supply, time deposits must be less than $100,000—hence, the designation small-denomination time deposits.

Suppose that the government altered the computation of the unemployment rate by including people in the military as part of the labor force. a. How would this affect the actual unemployment​ rate? b. How would such a change affect estimates of the natural rate of​ unemployment? c. If this computational change were​ made, would it in any way affect the logic of the​ short-run and​ long-run Phillips curve analysis and its implications for​ policymaking? A. Yes B. No

a. decrease b. decrease c. B. No

In the ___ model, any change in aggregate demand will quickly cause a change in the price level.

classical

The sales tax rate applied to all purchases within a state was 0.04​ (4 percent) throughout 2016 but increased to 0.05 ​(5 percent​) during all of 2017. The state government collected all taxes​ due, but its tax revenues were equal to​ $40 million each year. Within this​ state, the sales tax base from 2016 to 2017 must have ___. Which of the following could account for this change in the tax​ base? A. A weaker state economy. B. Rapid economic growth. C. People avoiding the purchase of taxable items. D. All of the above. E. Both A and C.

declined; E. Both A and C.

Price of a bond Example: A bond sells for​ $1,000 and will pay ​$94 a year forever. The Fed changes its policy and the interest rate changes to 11 percent. The price of the perpetual bond is found by using the following​ relationship:

equals periodic return / interest rate Price of bond = 94 / 0.11 = $854.5

The ___ ___ ___ occurs at the point where the aggregate demand curve (AD) crosses the long-run aggregate supply curve (LRAS).

equilibrium price level

The cost of holding money, its ___ ___, is measured by the alternative interest yield obtainable by holding some other asset.

opportunity cost