Chapter 12 Economics

Suppose that an economy produces 500 units of output. It takes 10 units of labor at $15 a unit and 4 units of capital at $50 a unit to produce this amount of output. The per unit cost of production is

$0.70

The table gives information about the relationship between input quantities and real domestic output in a hypothetical economy. If the price of each input is $5, the per-unit cost of production in the economy is

$2.50

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. If the equilibrium level of real GDP is $43 billion, its level of consumption will be

$26 billion

Which two of the following are necessary for price level stability?

- Careful management of interest rates - Intelligent management of the money supply

Which of the following are components of M1?

- Checkable deposits - Currency

Checkable deposits are the debts or liabilities of which of the following?

- Commercial banks - Thrift institutions

Which of the following characteristics of checks has made checkable deposits a large component of the M1 money supply?

- Convenience - Safety Reason: The safety and convenience of checks has made checkable deposits a large component of the M1 money supply

Money enables society to gain which of the following advantages?

- Geographic specialization - Human specialization

Which of the following comprise the currency of the United States?

- Paper money - Metal coins Reason: Coins and bills constitute our nation's currency and, in effect, all other nations' fiat currencies. Checkable deposits are where coins and bills may be held which is part of the money supply.

Which of the following are functions of money?

- Store of value - Medium of exchange - Unit of account

Personal taxes

- a reduction in personal income tax rates raises take-home income and increases consumer purchases at each possible price level

In the accompanying graph, which line might represent an aggregate demand curve?

1

The accompanying table shows the aggregate demand and aggregate supply schedules for a hypothetical economy. The equilibrium price and output levels will be

200 and $6,000.

Commercial Bank

A firm that engages in the business of banking (accepts deposits, offers checking accounts, and makes loans).

Money is used for buying and selling goods and is therefore considered what?

A medium of exchange

Thrift Institutions

A savings and loan association, mutual savings bank, or credit union.

Aggregate Demand

A schedule or curve that shows the total quantity of goods and services that would be demanded (purchased) at various price levels.

National Income Abroad

All else equal, higher income level abroad may increase exports of US which leads to shift in AD curve to the right and vice versa.

Time Deposits

An interest-earning deposit in a commercial bank or thrift institution that the depositor can withdraw without penalty after the end of a specified period.

Checkable Deposit

Any deposit in a commercial bank or thrift institution against which a check may be written.

Why are currency and checkable deposits money?

Because they are widely accepted by people Reason: Recall that any item can serve as money as long as it is widely accepted as is currency and deposits.

In the United States, the monetary authorities are members of the Board of Governors of the _________, ________ System.

Blank 1: Federal Blank 2: Reserve

People can convert _________ deposits into paper money and coins on demand.

Blank 1: checkable or checking

Money is a medium of ________ that is used for buying and selling goods and services.

Blank 1: exchange or trade

Money functions primarily as a medium of ________ , a unit of ________ , and a store of value

Blank 1: exchange or trade Blank 2: account

Household Borrowing

Consumers can increase their consumption spending by borrowing

Which of the diagrams for the U.S. economy best portrays the effects of declines in the incomes of U.S. trading partners?

D

When the consumer price index, or "cost-of-living" index rises, the purchasing power of the dollar goes (up/down).

Down

Consumer Expectations

Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.

determinants of aggregate demand

Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.

True or false: Society can attain a higher degree of specialization without the use of money than it can with money.

False Reason: Money enables society to gain the advantages of geographic and human specialization.

True or false: Money supply M1 includes all components of M2.

False Reason: M2 includes all of M1

Near-Money,

Financial assets that are not themselves a medium of exchange but that have extremely high liquidity and thus can be readily converted into money. Includes non-checkable savings accounts, time deposits, and short-term U.S. government securities plus savings bonds.

The money supply in the United States essentially is "backed" by whose ability to keep the value of money relatively stable?

Government

Net Export Spending

The total amount of spending on exports minus the total amount of spending on imports in a given period of time

Appropriate fiscal policy that is supportive of efforts of the nation's monetary authorities is meant to control ______.

Inflation

money market deposit accounts (MMDAs)

Interest-bearing accounts offered by commercial banks and thrift institutions that invest deposited funds into a variety of short-term securities. Depositors may write checks against their balances, but there are minimum-balance requirements as well as limits on the frequency of check writing and with-drawls.

Other things equal, an improvement in productivity will

shift the aggregate supply curve to the right.

An asset's ______ is the ease with which it can be converted quickly into the most widely accepted and easily spent form of money, cash, with little or no loss of purchasing power.

Liquidity

The ease with which an asset can be converted quickly into cash, with little or no loss of purchasing power, is called what?

Liquidity

Currency in the hands of the public and checkable deposits are components of ______.

M1

What is the money in the form of currency and checkable deposits in commercial banks called?

M1

M2

M1 plus savings accounts, certificates of deposit, and other liquid assets

A second and broader definition of money includes which of the following?

M1 plus several near-monies

Which of the following will not tend to happen if the U.S. dollar depreciates against the euro?

Many Europeans will switch and buy their own products instead of imports from the U.S.

The supply of _________ in the United States essentially is "backed" (guaranteed) by the government's ability to keep its value relatively stable.

Money

Which of the following is a "stock" of some item or group of items that is used as a medium of exchange?

Money

Money, M1 = currency + checkable deposits

People can convert checkable deposits into paper money and coins on demand; checks drawn on those deposits are thus the equivalent of currency

The amount of goods and services a unit of money will buy is called ______.

Purchasing Power

The aggregate demand curve

shows the amount of real output that will be purchased at each possible price level.

Money is a ______ of some item or group of items that is used as a medium of exchange.

Stock

Foreign-purchases effect

The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.

M1

The most narrowly defined money supply, equal to currency in the hands of the public and the checkable deposits of commercial banks and thrift institutions.

What happens when the consumer price index, or "cost-of-living" index rises?

The purchasing power of the dollar falls

Interest-rate effect

The tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).

real balances effect

The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.

Currency that derives its value from the amount printed on it rather than from the value of the paper or metal from which it is made is referred to as ______ money.

Token

True or false: People can convert checkable deposits into paper money and coins on demand.

True Reason: People can convert checkable deposits into paper money and coins on demand.

True or false: The currency of the United States consists primarily of metal coins and paper money.

True Reason: The currency of a country consists of coins and paper money.

The real-balances effect indicates that

a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Exchange Rates

a measurement of the value of one nation's currency relative to the currency of other nations

Token money consists of _____.

bills or coins with face values that exceed their commodity value

The immediate-short-run aggregate supply curve represents circumstances where

both input and output prices are fixed.

The safety and convenience of ______ has made checkable deposits a large component of the M1 money supply.

checks

Because people accept them as money, ______ and ______ deposits are money.

currency; checkable

Suppose that an economy produces 2,400 units of output, employing 60 units of input, and the price of the input is $30 per unit. If productivity increased such that 3,000 units are now produced with the quantity of inputs still equal to 60, then per-unit production costs would

decrease and aggregate supply would increase.

The interest rate effect on aggregate demand indicates that a(n)

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

If the dollar depreciates in value relative to foreign currencies, then aggregate

demand increases

Changes in the national incomes of our trading partners would directly impact our

exports

Real Interest Rates

the percentage increase in purchasing power that a borrower pays (adjusted for inflation)

A decrease in aggregate supply means

the real domestic output will decrease and the price level will rise.

Expected Returns

the return on a risky asset expected in the future

The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will

increase U.S. exports and decrease U.S. imports.

Refer to the diagram. A shift of the aggregate demand curve from AD1 to AD0 might be caused by a(n)

increase in investment spending.

In the accompanying figure, if AD1 shifts to AD2, then the equilibrium output

increases from Q1 to Q2 while the price level rises from P1 to P2.

M1 is a component of the U.S. ______.

money supply

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift

rightward by $50 billion at each price level.

Government Spending

spending by all levels of government on final goods and services

Investment Spending

spending on new productive physical capital, such as machinery and structures, and on changes in inventories

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3. If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate

supply curve would shift to the left.

The equilibrium price level and level of real output occur where

the aggregate demand and supply curves intersect.

Consumer wealth

total dollar value of all assets owned by consumers in the economy less the dollar value of their liabilities Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.

Metal coins are issued by the US

treasury

1). Real-Balances Effect 2). Household Expectations 3). Rate Effect 4). Personal Income Tax Rates 5). Profit Expectations 6). National Incomes Abroad 7). Government Spending 8). Foreign Purchases Effect 9). Exchange Rates 10). Degree of Excess Capacity Answer the question based on the accompanying list of factors that are related to the aggregate demand curve. Changes in which two of the factors would most likely cause a shift in aggregate demand due to a change in consumer spending?

2 and 4

The __________ power of money is the amount of goods and services a unit of money will buy.

Blank 1: purchasing, buying, or spending Reason: When the consumer price index of "cost-of-living" index goes up, the value of the dollar goes down, and vice versa