ECO 2013 Exam Review
How does a decreasea decrease in the price level affect the quantity of real GDP supplied in the long run?
Changes in the price level do not affect the level of GDP in the long run.
Credit cards are
included in neither the M1 definition of the money supply nor in the M2 definition.
When is the economy in a recession?
when the aggregate expenditure line intersects the 45o line at a level of GDP below potential GDP
Use the following data to answer the question: Y= $8,000 C= $6,200 I= $1,500 G= $1,500 NX= -$500 The unplanned change in inventories is ________ and real GDP will ________.
-$700; increase
A study by the management consulting company McKinsey & Company recommended that the U.S. increase spending on infrastructure, such as bridges and highways, by between $150 and $180 billion per year. The study estimated that the result would be an increase in GDP of between $270 billion and $320 billion per year. Source: David Harrison, "Nation's Crumbling Roads Put a Dent in Drivers' Wallets," Wall Street Journal, July 31, 2015. If the McKinsey study's estimate of the effect of infrastructure spending on GDP is correct, the implied value of the multiplier is between
1.78 and 1.80.
Which of the following is the formula for the multiplier? Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason?
1/1-MPC The formula ignores the impact of an increase in GDP on consumption.
Real GDP per capita in the years 1900 and 2014 are: Real GDP Per Capita 1900 (in 2010 $): $6,000 Real GDP Per Capita 2014 (in 2010 $): $51,015 *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Real GDP per capita increased (BLANK) times in the United States between 1900 and 2014. (Enter your response rounded to one decimal place.) The increase in real GDP per capita (BLANK) the true increase in living standards.
8.5 (51,015/6,000) is likely to be smaller than
In an article in the American Free Press, Professor Peter Spencer of York University in England is quoted as saying: "This printing of money 'will keep the [deflation] wolf from the door'." In the same article, Ambrose Evans-Pritchard, a writer for the London-based newspaper The Telegraph, is quoted as saying: "Deflation has...insidious traits. It causes shoppers to hold back. Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop." Source: Doug French, "We Should Celebrate Price Deflation," American Free Press, November 17, 2008. What is price deflation? What is meant by Professor Spencer's statement "This printing of money 'will keep the [deflation] wolf from the door'"? Why would deflation cause "shoppers to hold back," and what does Evans-Pritchard mean when he says, "Once this psychology gains a grip, it can gradually set off a self-feeding spiral that is hard to stop"?
A fall in the price level. An increase in the money supply that exceeds the rate of growth of GDP will increase the price level. Consumers delay purchases, expecting prices to fall more, and the lack of demand causes prices to fall further.
Would a larger multiplier lead to more severe recessions or less severe recessions?
A larger multiplier means that small changes in spending lead to large changes in GDP, and thus recessions would be more severe.
Suppose that initially, the economy is in long-run macroeconomic equilibrium at point A. If there is increased pessimism about the future of the economy, the AD curve will shift from The new short-run macroeconomic equilibrium occurs at Long-run adjustment will shift the SRAS curve from SRAS 0 to SRAS 1SRAS0 to SRAS1 as workers adjust to lower-than-expected prices. The new long-run macroeconomic equilibrium occurs at
AD 0 to AD 1AD0 to AD1. point B. point C
Which of the following statements is correct?
Actual investment will equal planned investment only when there is no unplanned change in inventories.
Briefly explain why the aggregate expenditure line is upward sloping, while the aggregate demand curve is downward sloping.
Aggregate expenditure is the relationship between spending and income, while aggregate demand is a relationship between output and the price level.
Which of the following is true with respect to Irving Fisher's quantity equation, M x V = Px Y?
All of the above
Which of the following are assertions made by opponents of globalization?
All of the above are assertions made by opponents of globalization.
Why do many low-income countries have low growth rates? Which countries grow faster?
All of the above are reasons why some low-income countries have low growth rates. countries that have a strong rule of law
Which of the following conditions make a good suitable for use as a medium of exchange? What is fiat money?
All of the above conditions must be met. money that is authorized by a central bank and that does not have to be exchanged for gold or some other commodity money
In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports? Because they help us understand
All of the above.
Which of the following factors brought on the recession of 2007−2009?
All of the above.
Which of the following is true with respect to hyperinflation?
All of the above.
The simple deposit multiplier equals A higher required reserve ratio _________ the value of the simple deposit multiplier.
All of the above. decreases
In the graph to the right, the economy is initially in equilibrium at point A. Aggregate expenditure and real GDP both equal $11.0 trillion. Suppose there is an increase in investment spending of $300 billion that increases aggregate expenditure to $11.3 trillion. Which of the following best describes the initial impact of the increase in investment? All of the following are true as the economy adjusts to a new equilibrium except that
All of the above. the initial increase in income or GDP leads to a further increase in investment and aggregate expenditure.
Conversely, an MPC equal to 1 implies an infinite multiplier, meaning that a $1 increase in autonomous expenditures would increase real GDP by an infinite amount. Why does an MPC of 1 result in an infinite multiplier? Explain your answer using the logic of the multiplier process.
An MPC of 1 means that any additional income induces a matching increase in consumption spending, which leads to a matching increase in income, and so on.
An article on the Mexican economy in the Economist notes, "A huge, unproductive informal sector and general lawlessness also drag the economy down." Source: "The 100-Year View," Economist, May 2, 2015. If these factors were the main barriers to more rapid economic growth in Mexico, would that be good news or bad news for the Mexican government's attempts to increase its economy's growth rate?
An unproductive informal sector and general lawlessness are obstacles to productivity growth, so this is bad news.
Distinguish among money, income, and wealth. The central bank of a country controls the money supply, which equals the currency held by
A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to value of assets minus all debts. the public plus their checking acount balances.
An article in the Wall Street Journal in 2017 noted that: "China now has one of the highest [required reserve] ratios in the world, economists say, even though many businesses are starved of credit..." Source: Lingling Wei, "China's Trillion-Dollar Yuan Defense Puts Growth at Risk," Wall Street Journal, April 13, 2017. What does the article mean by Chinese businesses being starved for credit? Is there a connection between the Chinese central bank imposing a higher required reserve ratio on banks and Chinese businesses being starved for credit? Briefly explain.
Being starved for credit means Chinese businesses cannot get loans. Yes, higher required reserve ratios require banks to keep more capital as reserves instead of making loans.
Which of the following statements about compounding is correct?
Compounding magnifies even small differences in interest rates or growth rates over long periods of time.
We can use the diagram to compare movements in real consumption between 1979 and 2017. Which of the following statements is true?
Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions.
Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the first quarter of 2017?
Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007−2009 recession.
In 2017, in a speech in China, Apple CEO Tim Cook stated that globalization is "great for the world...I think the reality is you can see that countries in the world...that isolate themselves, it's not good for their people." Source: Eva Dou, "Apple CEO Tim Cook Defends Globalization in China," Wall Street Journal, March 18, 2017. Why would countries that isolate themselves rather than participating fully in the global economy be hurting their own people? Which of the following is an argument to be made that globalization hurts rather than helps some economies?
Countries that isolate themselves miss out on foreign investment and access to better technology. It can result in unemployment and lower incomes for workers in industries that compete with foreign imports.
In the definition of the money supply, where do credit cards belong?
Credit cards are not included in the definition of the money supply.
Do you agree or disagree with the following statement? "I recently read that more than half of the money issued by the government is actually held by people in foreign countries. If that's true, then the United States is less than half as wealthy as the government statistics indicate."
Disagree. Money is currency plus checking deposits. Wealth is the value of assets minus debts.
Which of the following is not a main determinant of net exports? How would an increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) affect U.S. net exports? An increase in the growth rate of GDP in the BRIC nations (Brazil, Russia, India, and China) will
Expectations of future profitability in the United States. increase U.S. net exports by increasing exports to these countries.
What are the four main determinants of investment? How would an increase in interest rates affect investment?
Expectations of future profitability, interest rates, taxes and cash flow. Real investment spending declines.
If firms accumulate excess inventories and then spending quickly returns to its normal levels, firms usually do not sell their excess inventories before returning to producing at normal levels.
False
In most countries, political stability has little to do with economic growth.
False
Which of the following best explains the difference between commodity money and fiat money?
Fiat money has no value except as money, whereas commodity money has value independent of its use as money.
What is the "shadow banking system"? The financial firms of the shadow banking system were
Financial firms that raise money from investors and provide it to borrowers. more vulnerable than commercial banks to bank runs because they were more highly leveraged than commercial banks.
In 2017, an editorial on bloomberg.com was titled: "Canada Must Deflate Its Housing Bubble." Source: "Canada Must Deflate Its Housing Bubble," bloomberg.com, May 23, 2017. What did the editorial mean by the "housing bubble"? Why should government policymakers be worried about a housing bubble?
Home prices in Canada have risen well above their underlying fundamental value as an asset. A housing bubble would deflate housing prices, which would decrease household wealth, which would decrease aggregate demand, which could cause a recession.
________ is caused by central banks increasing the money supply at a rate far in excess of the growth rate of real GDP.
Hyperinflation
An article in the Wall Street Journal stated that at the beginning of May 2017, inventories of pickup trucks were "touching 97 days' supply as of the beginning of May, or a 12% increase in actual vehicles on dealer lots compared with the prior year... That number is far above the industry norm for inventory..." Source: John D. Stoll and Adrienne Roberts, "As GM Adjusts to Changing Auto Market, Its Sales Slide Behind Ford's," Wall Street Journal, June 1, 2017. Why might U.S. automakers find that their inventories of pickup trucks are unexpectedly rising? How are these automakers likely to react to the increase in inventories?
If inventories are unexpectedly rising, this would indicate that sales of pickup trucks were lower than expected. Automakers will likely produce fewer trucks than they otherwise would have.
Which of the following statements does not correctly describe the effect of an increase in price on the components of aggregate expenditure?
If the price level increases, government tax receipts fall and consequently government expenditure declines.
The formula for the simple deposit multiplier is If the required reserve ratio is 0.20, the maximum increase in checking account deposits that will result from an increase in bank reserves of $20,000 is
Image $100,000
Which of the following statements is correct if real GDP in the United States declined by more during the 2007minus−2009 recession than did real GDP in Canada, China, and other trading partners of the United States?
Imports to the United States fell more than the U.S. exports, leading to an increase in net exports.
Find out which one of the following is not one of the key differences between the basic aggregate demand and aggregate supply model and the dynamic aggregate demand and aggregate supply model.
In the dynamic AD-AS model, the economy does not experience long-run growth, whereas in the basic AD-AS model, the economy experiences both continuing inflation and growth.
Which of the following statements is true? Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
In the long run, changes in the price level do not affect the level of real GDP. All of the above.
The role of the entrepreneur becomes much more important in the new growth theory—the endogenous growth model—than in the traditional economic growth model because
In the new growth theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.
A newspaper article contains the statement: "Income is only one way of measuring wealth." Source: Sam Roberts, "As the Data Show, There's a Reason the Wall Street Protesters Chose New York," New York Times, October 25, 2011. Do you agree that income is a way of measuring wealth?
Income is yearly earnings and it doesn't measure wealth which is the value of personal assets less all debts.
If Irving Fisher was correct in his prediction about the value of velocity, then the quantity equation can be written to solve for the inflation rate as follows:
Inflation rate = Growth rate of the money supply dash- Growth rate of real output.
Consider the downward-sloping aggregate demand (AD) curve to the right. Which of the following results in a movement from point A to point B (a movement up along the AD curve) or from point A to point C (a movement down along the AD curve)? (Mark all that apply.)
Interest rate effect Wealth effect
Into which category of aggregate expenditures would the following transaction fall? Prudential Insurance Company purchases 250 new computers from Dell. Prudential Insurance Company purchases 250 new computers from Dell.
Investment expenditure
In the late 1940s, the Communists under Mao Zedong were defeating the government of China in a civil war. The paper currency issued by the Chinese government was losing much of its value, and most businesses refused to accept it. At the same time, there was a paper shortage in Japan. During these years, Japan was still under military occupation by the United States. Some U.S. troops in Japan realized that they could use dollars to buy up vast amounts of paper currency in China, ship it to Japan to be recycled into paper, and make a substantial profit. Under these circumstances, was the Chinese paper currency a commodity money or a fiat money?
It is a commodity money because it has value as recycled paper.
In 2017, an article in the Wall Street Journal on the latest data on U.S. net exports noted that, along with other currencies: "The [the Chinese] yuan has risen this year against the dollar." The article also noted that there had been "Stronger [economic] growth in Asia and Europe..." Source: Josh Mitchell, "U.S. Trade Gap Shrinks as Exports Rise," Wall Street Journal, April 4, 2017. What does the article mean that the yuan had "risen" against the dollar? Briefly explain whether the combination of other currencies rising against the dollar and stronger economic growth in Asia and Europe had led to an increase or a decrease in U.S. net exports. Will the outcome you discussed above result in a movement along the U.S. aggregate demand curve or a shift of the aggregate demand curve? Briefly explain.
It now takes more dollars to buy one yuan. Increase, because U.S. exports are cheaper. Shift of the U.S. aggregate demand curve, because this is not a change in the price level.
During the Civil War, the Confederate States of America printed lots of its own currencylong dash—Confederate dollarslong dash—to fund the war. By the end of the war, nearly 1.5 billion paper dollars had been printed by the Confederate government. Source: "Textual Transcript of Confederate Currency," Federal Reserve Bank of Richmond. How would such a large quantity of Confederate dollars have affected the value of the Confederate currency?
It would have generated high inflation and therefore decreased the value of the Confederate currency.
In reporting on real GDP growth in the second quarter of 2016, an article on Reuters news noted that: "U.S. economic growth unexpectedly remained tepid in the second quarter as inventories fell" and also that the "inventory drawdown was almost across the board." Source: Lucia Matikani, "Inventory Reduction Curbs U.S. Economic Growth; Rebound Expected," reuters.com, July 20, 2016. If companies are drawing down inventories is aggregate expenditure likely to have been larger or smaller than GDP? The chief economist at UniCredit Research is quoted in the article as stating that: "The U.S. economy just went through a meaningful inventory correction cycle." What would an "inventory correction cycle" be? The article states that: "Though the inventory drawdown weighed on GDP growth, that is likely to provide a boost to output in the coming quarters." Why would an inventory drawdown boost output in the coming quarters?
Larger than GDP, because more is being bought than produced. The process of companies decreasing or increasing actual inventories to match planned inventories. Once inventories reach desired levels, firms will increase production to match expected planned aggregate expenditures.
In 2008, the required reserve ratio for a bank's first $9.3 million in checking account deposits was zero. It was 3 percent on deposits between $9.3 million and $43.9 million, and 10 percent on deposits above $43.9 million. In most cases, and for simplicity, we assume that the required reserve ratio is 10 percent on all deposits. Therefore, the simple deposit multiplier is 10. Is the real-world deposit multiplier greater than, less than, or equal to the simple deposit multiplier?
Less. The simple deposit multiplier is a model with assumptions that keep it higher than the real-world multiplier.
According to an article in the Wall Street Journal, KB Home and other builders found demand for new houses increasing in 2017 as a result of an increase in the formation of new households. In the long run, formation of new households depends on population growth. Source: Laura Kusisto and Sarah Chaney, "U.S. Housing Starts Fell in April for Third Time in Four Months," Wall Street Journal, May 16, 2017. Are firms like homebuilders that sell products whose demand depends partly on demographic factors likely to be more or less affected by the business cycle than are other firms whose products are less dependent on these factors (holding constant other factors that affect the demand for new houses)? Briefly explain.
Less affected, because demographic factors are independent of the business cycle.
Indicate which of the following would cause a shift in the aggregate demand curve from point A to point C. (Mark all that apply.)
Lower interest rates Lower taxes Increased consumer optimism Decrease in the U.S. exchange rate relative to other currencies
Which one of the following is not the formula for the quantity theory of money? How does the quantity theory provide an explanation about the cause of inflation?
M x Y = P x V The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.
In early 2009, Christina Romer, who was then the chair of the Council of Economic Advisers, and Jared Bernstein, who was then an economic adviser to Vice President Joseph Biden, forecast how long they expected it would take for real GDP to return to potential GDP, assuming that Congress passed fiscal policy legislation proposed by President Obama: It should be understood that all of the estimates presented in this memo are subject to significant margins of error. There is the obvious uncertainty that comes from modeling a hypothetical package rather than the final legislation passed by the Congress. But, there is the more fundamental uncertainty that comes with any estimate of the effects of a program. Our estimates of economic relationships . . . are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity. Source: Christina Romer and Jared Bernstein, The Job Impact of the American Recovery and Reinvestment Plan, January 9, 2009. Why would the causes of a recession and its severity affect the accuracy of forecasts of when the economy would return to potential GDP?
Models used for forecasting are based on historical experience and the relationships in the model can change.
Which of the following is included in M2 but not M1? The Federal Reserve uses two definitions of the money supply, M1 and M2, because
Money market deposit accounts in banks M1 is a narrow definition focusing more on liquidity, whereas M2 is a broader definition of the money supply.
An article in the Wall Street Journal on the shadow banking system contained the following observation: "If investors rush to the exits en masse, acting as a herd, asset prices could plummet and markets could face funding problems." Source: Bylan Talley, "IMF Warns (Again) of Growing Shadow-Banking Risks," Wall Street Journal, April 8, 2015. Why might investors in a money market mutual fund, for example, be more likely to "rush to the exits" if they heard bad news about the fund's investments, than would bank depositors if they received bad news about their bank's investments?
Money market mutual funds are not protected by deposit insurance, as commercial banks' deposits are through the Federal Deposit Insurance Corporation (FDIC).
Which one of the following is not one of the policy tools the Fed uses to control the money supply? Which tool is the most important?
Moral suasion. The Fed conducts monetary policy principally through open market operations.
The U.S. penny is made primarily of zinc. There have been several times in recent years when zinc prices have been high and it has cost the U.S. Treasury more than one cent to manufacture a penny. There are currently about 1.4 billion pennies in circulation. Economist François Velde of the Federal Reserve Bank of Chicago has proposed making the current penny worth 5 cents. Source: Austan Goolsbee, "Now That a Penny Isn't Worth Much, It's Time to Make It Worth 5 Cents," New York Times, February 1, 2007. The effect of this proposal would cause an increase in the value of M1. Is this change likely to have much impact on the economy?
No
"Real GDP in 2016 was $16.7 trillion. This value is a large number. Therefore, economic growth must have been high during 2016." Do you agree or disagree with this statement?
No, I do not agree
The English economist William Stanley Jevons described a world tour during the 1880s by a French singer, Mademoiselle Zelie. One stop on the tour was a theater in the Society Islands, part of French Polynesia in the South Pacific. She performed for her usual fee, which was one-third of the receipts. This turned out to be three pigs, 23 turkeys, 44 chickens, 5000 coconuts, and "considerable quantities of bananas, lemons, and oranges." She estimated that all of this would have had a value in France of 4000 francs. According to Jevons, "as Mademoiselle could not consume any considerable portion of the receipts herself, it became necessary in the meantime to feed the pigs and poultry with the fruit." Source: W. Stanley Jevons, Money and the Mechanism of Exchange, New York: D. Appleton and Company, 1889, pp. 1-2. Do the goods Mademoiselle Zelie received as payment fulfill the four functions of money?
No. The goods are not a store of value.
Which one of the following is not a function of money? If something is to be considered as money, it has to fulfill
Open market operation. all four functions
An article in the Wall Street Journal notes that online peer-to-peer lenders: "have automated the processes of checking borrowers' credit metrics and looking up their histories while in many cases avoiding more labor-intensive practices of collecting and reviewing pay stubs or tax returns." The article also notes that: "Charge-off rates, which reflect loans on which a lender doesn't expect to collect, have risen..." Source: Telis Demos and Peter Rudegeair, "Lending Club's Newest Problem: Its Borrowers," Wall Street Journal, July 12, 2016. Why do banks require borrowers to submit pay stubs and tax returns when applying for a loan? Why would online lenders skip this step in the loan application process? If online lenders find that borrowers are defaulting on loans at higher than expected rates, can they offset the problem by charging higher interest rates on the loans? Briefly explain.
Pay stubs and tax returns allow lenders to gauge a borrower's ability to pay back the loan. Online lenders skip this step because gathering and reviewing information on borrowers is costly. No, because only the most high-risk borrowers will accept loans, meaning the borrower is more likely to default.
Refer to the graph to the right. According to the economic concept of catch-up, which of the following is CORRECT?
Poorer countries should grow more quickly and will be at point A.
Use the graph to help determine which one of the following statements regarding real and potential GDP is true.
Potential GDP increases every year.
Why does the short-run aggregate supply curve slope upward? Why does the failure of workers and firms to accurately predict the price level result in an upward-sloping aggregate supply curve?
Profits rise when the prices of the goods and services firms sell rise more rapidly than the prices they pay for inputs. All of the above.
Which of the following is not a "loanable fund"? Households supply loanable funds because of the Businesses demand loanable funds because
Real estate. interest income received from the borrowers. firms need to borrow funds for new projects, such as building new factories or carrying out new research projects.
Consider the following data for a closed economy: Y = $12 trillion C = $8 trillion G = $2 trillion Spublic= $−0.50 trillion T = $2 trillion Now suppose that government purchases increase from $2 trillion to $2.50 trillion but the values of Y and C are unchanged. What must happen to the values of S and I?
S and I drop by $0.50 trillion. (I=Y-C-G and S= Spub+Spvt) (Spub=T-G-TR) (Spvt=Y+TR-C-G)
Suppose the economy enters a recession. If government policymakersdash-Congress, the president, and members of the Federal Reservedash-do not take any policy actions in response to the recession, what is the likely result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long run? i. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run.
Statement ii is correct.
Consider the following four statements. i. The iPhone is made in China, using Chinese-made parts. ii. The iPhone is made in the United States, using U.S.-made parts. iii. The iPhone is made in the United States, using Chinese-made parts. iv. The iPhone is made China, using parts that are all made outside of China. Which of the statements above is correct? What relevance does your answer have to how the Bureau of Economic Analysis calculates data on U.S. imports?
Statement iv is correct. The iPhone is assembled in China using parts shipped to China from many countries. Producers increasingly rely on global supply chains, so there are flaws in accounting for imports and exports.
Consider the following cases to figure out which one of the following variables causes the short-run aggregate supply curve to shift, and identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left.
The SRAS curve will shift to the right if there is an increase in the labor force or capital accumulation. The SRAS curve will shift to the right if there is an increase in productivity. The SRAS curve will shift to the right if there is a technological change. The SRAS curve will shift to the left if there is an increase in the expected price of an important natural resource. The SRAS curve will shift to the left if there is an increase in the adjustment of workers' and firms' prior underestimation of the price level. The SRAS curve will shift to the left if there is an increase in expected future prices.
An article in the Wall Street Journal in mid-2017 noted that: "Mexico's economy kept up steady growth in the first quarter, expanding for a 15th consecutive period despite concerns that strained trade and investment relations with the U.S. will bring about a sharp slowdown." Source: Anthony Harrup, "Mexican Economy Maintains Growth in First Quarter," Wall Street Journal, April 28, 2017. During this period, why were some observers concerned about Mexico's economic relations with the United States? Why are these relations particularly important if the Mexican economy is to experience sustained growth?
The Trump administration had proposed renegotiating NAFTA, which could decrease Mexican exports to the United States. All of the above are possible reasons.
Panel (a) shows movements in real GDP for each quarter from the beginning of 1999 through the beginning of 2017. Panel (b) shows movements in the sales of motor vehicles and gasoline for the same years. Use the graphs to determine which one of the following statements is true:
The effects of the recession on sales of motor vehicles are much more dramatic and long-lived than the effects on the economy as a whole.
Which one of the following is not a determinant of consumption spending? The most important determinant of consumption spending is A rise in stock prices and housing prices
The growth rate in the United States relative to the growth rates in other countries. current personal disposable income. increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.
The figure shows average annual growth rates in real GDP per hour worked in the United States. Based on the data from the figure, which one of the following statements is false?
The growth rate of real GDP per hour worked has continually accelerated over time.
An article in the Wall Street Journal on the housing market states that "Steady job growth, rising wages and low interest rates have helped prop up housing demand." Source: Steven Russolillo, "Why the Housing Market is Getting Stronger," Wall Street Journal, May 22, 2016. Why do low interest rates increase the demand for housing? What component of aggregate expenditure does purchases of new houses fall under?
The lower the interest rate, the less expensive it is for households to borrow money. Planned investment.
In the figure at right, a $20 trillion increase in planned investment increased the AE line from AE1 to AE2. However, real GDP increased by $40 trillion. Why?
The multiplier effect.
As output increases along the short-run aggregate supply curve, briefly explain what happens to the natural rate of unemployment. As output increases along the short-run aggregate supply curve, briefly explain what happens to the cyclical rate of unemployment.
The natural rate remains the same because it is not affected by the business cycle. The cyclical rate decreases because fewer workers will be laid off.
A column in the New York Times in 2017 noted that Tesla was expanding both its California automobile factory where it was beginning to produce its Model 3 electric cars and its Nevada "Gigafactory" where it was producing lithium ion batteries for cars and other uses. The article quoted an investment analyst as saying: "I don't know what kind of multiplier you put on that, but it's a significant boost to the economy." Source: James B. Stewart, "Elon Musk Has Trump's Ear, and Wall Street Takes Note," New York Times, January 26, 2017. What does the analyst mean by a multiplier? Why would Tesla's engaging in this investment spending result in a significant boost to the economy? Why might the analyst have been unsure of the size of the multiplier in this case?
The process by which an increase in autonomous expenditure leads to a larger increase in real GDP. It increases autonomous expenditures, causing an even larger increase through the multiplier effect on real GDP. The real-world multiplier is not simple to calculate.
Is the following statement correct? "The equilibrium level of GDP is determined by the level of aggregate expenditure. Therefore, GDP will decline only if households decide to spend less on goods and services."
The statement is wrong because household spending is only one part of aggregate expenditures.
Explain whether you agree with the following statement: "The dynamicaggregate demand and aggregate supply modelLOADING... predicts that a recession caused by a decline in AD will cause the inflation rate to fall. I know that the 2007minus−2009 recession was caused by a fall in AD, but the inflation rate was not lower after the recession. The prices of most products were definitely higher in 2008 than they were in 2007, so the inflation rate could not have fallen."
The statement is wrong because it is confusing the price level with the inflation rate.
An economics student raises the following objection: "The textbook said that a higher interest rate lowers investment, but this doesn't make sense. I know that if I can get a higher interest rate, I am certainly going to invest more in my savings account." The problem with the student's argument is which of the following?
The student is confusing saving with investment.
A student was asked to draw an aggregate demand and aggregate supply graph to illustrate the effect of an increase in aggregate supply. The student drew the following graph: The student explained the graph as follows: "An increase in aggregate supply causes a shift from SRAS1 to SRAS2. Because this shift in the aggregate supply curve results in a lower price level, consumption, investment, and net exports will increase. This change causes the aggregate demand curve to shift to the right from ADl to AD2. We know that real GDP will increase, but we can't be sure whether the price level will rise or fall because that depends on whether the aggregate supply curve or the aggregate demand curve has shifted farther to the right. I assume that aggregate supply shifts out farther than aggregate demand, so I show the final price level, P3, as being lower than the initial price level, P1." Which of the following is a correct statement about the student's analysis?
The student is incorrect because the aggregate demand curve does not shift because of the price level change.
Use the graph to help determine which one of the following statements regarding unemployment and business cycles is true.
The unemployment rate usually continues to rise even after the recession has ended.
In a newspaper column, author Delia Ephron described a conversation with a friend who had a large balance on her credit card on which the friend was being charged an interest rate of 18 percent per year. The friend was worried about ever being able to pay off the debt. Ephron was earning only 0.4 percent interest on her bank certificate of deposit (CD). She considered withdrawing the money from her CD and using it to make a loan to her friend so her friend could pay off her credit card balance: "So I was thinking that all of us earning 0.4 percent could instead loan money to our friends at 0.5 percent. ... [M]y friend would get out of debt [and] I would earn $5 a month instead of $4." Source: Delia Ephron, "Banks Taketh, but Don't Giveth," New York Times, January 27, 2012. Why don't more people use their savings to make loans rather than keeping the funds in bank accounts that earn very low rates of interest?
There is a risk that the borrower won't pay the money back.
The following is from an article on community banks: "Their commercial-lending businesses, funded by their stable deposit bases, make them steady earners." Source: Karen Richardson,"Clean Books Bolster Traditional Lenders," Wall Street Journal, April 30, 2007, p. C1. What is commercial lending? We can say that loans are funded by deposits because deposits give banks financial capital, which can be loaned out so banks can make a profit.
This is when banks make loans to businesses. True
Deirdre McCloskey, an economist at the University of Illinois at Chicago, argues that: "A poor country that adopts thoroughgoing innovation...can get within hailing distance of the West...in about two generations." Source: Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can't Explain the Modern World, Chicago: University of Chicago Press, 2010, p. 122. What does McCloskey mean by a country adopting "thoroughgoing innovation"? What does she mean by a country getting within "hailing distance of the West"? A generation is usually considered to be about 25 years. In 2016, real GDP per capita in Italy was about $33,500 (measured in 2010 U.S. dollars), and real GDP per capita in Haiti was about $1,500. If Haiti adopted thoroughgoing innovation and as a result its average annual growth rate over the next 50 years increased to 6.5 percent, would Haiti end up with the level of real GDP per capita that Italy enjoyed in 2016? Hint: Use the following equation: RealGDPpercapita2016 x (1 + g)^50 = RealGDPpercapita2066 With a 6.5 percent growth rate, Haiti's real GDP per capita (BLANK) catch up with Italy as measured in 2016. McCloskey also notes that: "[My previous observation] does not mean that catch-up is inevitable." Which of the following does not explain why low-income countries catching up with high-income countries isn't inevitable?
This refers to a country adopting the latest technologies. McCloskey means reaching a standard of living closer to the level of high-income countries. would Globalization.
During the German hyperinflation of the 1920s, many households and firms in Germany were hurt economically; however, people with debt actually benefited some from the hyperinflation.
True
Evaluate the following statement: "The reason that the aggregate demand curve slopes downward is that when the price level is higher, people cannot afford to buy as many goods and services." This statement is:
True
Over the past 20 years, other high-income countries have actually fallen further behind the United States in terms of real GDP per capita. In the United States, what is a key source of funds for start-up firms bringing new technologies to market?
True funding from venture capital firms
The economic growth model predicts that countries with lower real GDP per capita will grow faster than countries with higher real GDP per capita, but other high-income countries have actually fallen further behind the United States rather than catching up to it over the past 25 years because
U.S. labor markets are more flexible and the U.S. financial system is more efficient.
An MPC equal to 0 implies a multiplier of 1, meaning that a $1 increase in autonomous expenditures would increase real GDP by only $1.
When the MPC is 0, any additional income does not induce any additional consumption spending.
Which one of the following is not true when the economy is in macroeconomic equilibrium?
When the economy is at long-run equilibrium, firms will have excess capacity.
How do the banks "create money"?
When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands.
In an article in the Wall Street Journal, Kevin Brady, a member of Congress from Texas, stated, "To get Congress to pass the Federal Reserve Act [in 1913, President Woodrow] Wilson had to retain the support of...northeastern lawmakers while convincing southern and western Democrats that legislation would not... create a [single] central bank. Wilson's ingenious solution was federalism." Source: Kevin Brady, "How the Fed's East Coast Title Warps Monetary Policy," Wall Street Journal, June 4, 2015. When Congressman Brady stated that Woodrow Wilson used "federalism" to convince Congress to pass the Federal Reserve Act, he meant that
Wilson created a Federal Reserve System composed of 12 district banks under the supervision of a board in Washington.
Which of the following causes the short-run aggregate supply curve to shift to the right? Which of the following causes the short-run aggregate supply curve to shift to the left?
a positive technological change an increase in the expected price of an important natural resource
If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run. Which of the following is usually the cause of stagflation?
a recession in the short run and a decline in the price level in the long run. an increase; an increase a supply shock as a result of an unexpected increase in the price of a natural resource
Typically, when will the National Bureau of Economic Research (NBER) announce that the economy is in a recession?
a year or more after the recession has begun
The lines in the following three graphs show the average relationship between the initial level of real GDP per capita and the growth rate of real GDP per capita for three groups of countries over a given time period. Match each group of countries with the graph that best depicts the relationship between the initial level of real GDP per capita and the growth rate of real GDP per capita for that group. a. All countries for which statistics are available, 1960-2014 Select: b. United States, Western Europe, Canada, and Japan, 1990-2016 Select: c. Current high-income countries, 1960-2014 Select
a. 1 b. 2 c. 3
Suppose the economy moves from point A in year 1 to point B in year 2. a. The growth rate of potential GDP from year 1 to year 2 is b. The unemployment rate in year 2 is greater than in year 1. c. The inflation rate in year 2 is d. The growth rate of real GDP from year 1 to year 2 is
a. 2.30% c. 1.79% d. 1.15%
Use the graph on the right to answer the following questions. a. Which of points A, B, C, or D can represent a long-run equilibrium? b. Suppose that initially the economy is at point A. Then aggregate demand increases from AD1 to AD2. Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?
a. A and C b. The new short-run equilibrium will be at point D. The long-run equilibrium point will be at point C. Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.
Explain how each of the following events would affect the short-run aggregate supply curve.
a. An increase in the price level will not change the SRAS curve because this is a change in the price level. b. An increase in what the price level is expected to be in the future will decrease (shift leftward) the SRAS curve because this is a change in expectations about future prices. c. The price level that is currently higher than expected will decrease (shift leftward) the SRAS curve because this is a change in an adjustment to past errors in expectations about future prices. d. An unexpected increase in the price of an important raw material will decrease (shift leftward) the SRAS curve because this is a change in the price of an important natural resource. e. An increase in the labor force will increase (shift rightward) the SRAS curve because this is a change in the productive capacity of the economy.
In a speech delivered in June 2008, Timothy Geithner, then president of the Federal Reserve Bank of New York and later U.S. Treasury secretary, said: The structure of the financial system changed fundamentally during the boom. . . . [The] non-bank financial system grew to be very large. . . . [The] institutions in this parallel financial system [are] vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks. Source: Timothy F. Geithner, "Reducing Systemic Risk in a Dynamic Financial System," Remarks at the Economics Club of New York, June 9, 2008. a. What did Geithner mean by the "non-bank financial system"? b. What is a "classic type of run"? c. Why would deposit insurance provide the banking system with protection against runs?
a. Money market mutual funds, hedge funds, and other financial firms that raise money from investors and provide it to firms and households. b. Many depositors simultaneously decide to withdraw their money from a bank. c. Since most depositors are insured, it is less likely that panicked buyers will simultaneously withdraw funds.
Consider the data in the following table for the years 1969 and 1970 (the values for real GDP are in 2009 dollars): a. In 1969, actual real GDP was greater than potential real GDP. Which of the following best explains this? b. Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not change? c. The table does not give the inflation rates for 1969 and 1970.
a. The economy can produce a level of GDP above potential GDP in the short run. b. Potential GDP increased significantly, but actual GDP did not, and thus there is unemployment. If the inflation rate for 1970 is greater than the inflation rate for 1969, it is likely that the recession was caused by a negative supply shock rather than an increase in aggregate demand.
Explain how each of the following events would affect the long-run aggregate supply curve.
a. The price level increases. Because this is a change in the price level, the LRAS curve will not change. b. The labor force increases. Because this is a change in the productive capacity of the economy, the LRAS will shift to the right. c. There is an increase in the quantity of capital goods. Because this is a change in the productive capacity of the economy, the LRAS will shift to the right. d. Technological change occurs. Because this is a change in the productive capacity of the economy, the LRAS will shift to the right.
In the figure to the right, each dot represents a country with its initial real GDP per capita and its growth rate of real GDP per capita. a. For the range of initial Real GDP per capita from 0 to Real GDP per capita2, the figure (BLANK) support the economic growth model's prediction of catch-up because in the figure on the right, for the range of initial Real GDP per capita from 0 to Real GDP per capita2, (BLANK) consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita. b. For the range of initial Real GDP per capita from 0 to Real GDP per capita1, the figure (BLANK) support the catch-up prediction, because in the figure on the right, for the range of initial Real GDP per capita from 0 to Real GDP per capita1, (BLANK) a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita. c. For the range of initial Real GDP per capita11 to Real GDP per capita2, the figure (BLANK) support the catch-up prediction, because in the figure on the right, for the range of initial Real GDP per capita11 to Real GDP per capita2, there (BLANK) a consistent relationship between initial real GDP per capita and its growth rate of real GDP per capita.
a. does not, there does not exist b. does, there exists c. does not, does not exist
a. Match the following scenarios to the appropriate graph. b. Match one or more of the four graphs to each of the following scenarios:
a. i. An increase in the expected price level: 1 ii. An increase in households' expectations of their future income: 4 iii. A decrease in the price of an important natural resource: 2 iv. A decrease in firms' expectations of the future profitability of investment spending: 3 b. i. The economy experiences a recession: 1, 3 ii. The economy experiences short-term inflation: 1, 4 iii. The economy experiences stagflation: 1
For each of the following policies, indicate whether it will or will not increase the rate of economic growth in the United States. a. Congress passes an investment tax credit, which reduces a firm's taxes if it installs new machinery and equipment. It is likely that the rate of economic growth will b. Congress passes a law that allows taxpayers to reduce their income taxes by the amount of state sales taxes they pay. It is likely that the rate of economic growth will c. Congress provides more funds for low-interest loans to college students. It is likely that the rate of economic growth will
a. increase b. increase c. increase
Explain whether each of the following will cause a shift of the AD curveLOADING... or a movement along the AD curve. a. Firms become more optimistic and increase their spending on machinery and equipment. Because this is a change in b. The federal government increases taxes in an attempt to reduce a budget deficit. Because this is a change in c. c. The U.S. economy experiences 4 percent inflation. Because this is a change in
a. investment it will cause a shift to the right in the aggregate demand curve. b. consumption it will cause a shift to the left in the aggregate demand curve. c. the price level it will cause a movement along the aggregate demand curve.
Refer to the diagram to the right, to answer the following: a. The movement from point A to point B represents: b. The movement from point B to point C represents: c. The movement from point A to point C represents:
a. more capital per hour worked b. technological change c. technological change and more capital per hour worked
Consider each of the following events and then figure out how each of these events will affect the aggregate demand curve. a. An increase in the price level will cause a b. An increase in government purchases will cause a c. An increase in state income taxes will cause a d. An increase in interest rates will cause a e. A faster income growth in other countries will cause a
a. movement up along the aggregate demand curve. b. rightward shift of the aggregate demand curve. c. leftward shift of the aggregate demand curve. d. eftward shift of the aggregate demand curve. e. rightward shift of the U.S. aggregate demand curve.
What is the meaning of the 45° line in the 45°-line diagram? In the 45°-line diagram, the 45° line shows
all the points where aggregate expenditure equals real GDP.
The multiplier effect is the process by which: The adjacent figure shows the effect of a reduction in equilibrium GDP when government purchases decline. Which of the following is not true about the multiplier effect of such a change in government purchases ?
an increase in autonomous expenditure leads to a larger increase in real GDP. The value of the multiplier is −$5 billion.
From August 2009 to May 2017, the Standard & Poor's Index of 500 stock prices increased by more than 135 percent, while the consumer price index increased by less than 15 percent. These changes would have caused
an increase in the real value of household wealth, which shifted the aggregate demand curve to the right.
An increase in real GDP that increases imports will cause the value of the multiplier to Upper A decrease in individual income tax ratesA decrease in individual income tax rates will cause the value of the multiplier to
be smaller be larger
To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to By raising the discount rate, the Fed leads banks to make _________ loans to households and firms, which will _________ checking account deposits and the money supply.
buy U.S. Treasury securities from the public. fewer; decrease
How does the dynamic model of aggregate supply and aggregate demand explain inflation?
by showing that if total spending in the economy grows faster than total production, prices will rise
Does a change in the price level cause a movement along the aggregate expenditure line or a shift of the aggregate expenditure line? A change in the price level Does a change in the price level cause a movement along the aggregate demand curve or a shift of the aggregate demand curve? A change in the price level
causes a shift of the aggregate expenditure line. causes a movement along the aggregate demand curve.
Consider the two aggregate demand curves in the graph at right. A movement from point A to point B on AD1 could be the result of a A movement from point A to point C could be the result of a
change in the price level. change in the expectations of households.
Consider the short-run aggregate supply curves in the graph at right. A movement from point A to point B on SRAS1 could be the result of a A movement from point A to point C could be the result of a change in
change in the price level. the labor force.
The long-run aggregate supply curve is vertical because in the long run,
changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.
An article in the Wall Street Journal notes that "raising productivity in the long run is the most effective way to elevate standards of living." Source: Greg Ip, "Politicians Should Pay Heed to Productivity Problem," Wall Street Journal, July 22, 2015. The claim of this article is
consistent with economic theory that explains that long-run economic growth is dependent on increases in real GDP per capita.
Robert Samuelson, a columnist for the Washington Post argues that the Great Moderation actually caused the Great Recession. During the Great Moderation, "consumers could assume more debtlong dash—and lenders could lend more freely." Source: Robert J. Samuelson, "Is the Economy Experiencing another Great Moderation?" Washington Post, June 4, 2014. Consumers may have been willing to assume more debt, and banks and other lenders may have been willing to make loans more freely, during the Great Moderation because These actions might have made the severe recession of 2007-2009 more likely because
consumer incomes were generally rising, and repayment prospects were good. once incomes began to fall, people could not pay their debt, and banks suffered losses as repayments fell.
Aggregate expenditure, or the total amount of spending in the economy, equals
consumption spending plus planned investment spending plus government purchases plus net exports.
The diagram shows the relationship betwen consumption and income for the years 1960 through 2016. Which of the following statements is true? The line that represents the relationship between consumption and disposable income is called the __________. The slope of the this line is the __________.
consumption function; marginal propensity to consume
The most important determinant of consumption is Which of the following causes saving to increase? If the marginal propensity to consume (MPC) is 0.9, how much additional consumption will result from an increase of $100 billion of disposable income?
current disposable income. an increase in the interest rate $90 billion
The growth in real investment spending
declines significantly during recessions, and is subject to larger changes than is real consumption.
An increase in the amount of excess reserves that banks keep _________ the value of the real-world deposit multiplier. Whenever banks gain reserves and make new loans, the money supply ___________; and whenever banks lose reserves, and reduce their loans, the money supply __________.
decreases expands; contracts
Which of the following is the largest liability of a typical bank? Which of the following refers to the minimum fraction of deposits banks that are required by law to keep as reserves?
deposits the required reserve ratio
An economics student makes the following statement: "It's easy to understand why the aggregate demand curve is downward sloping: When the price level increases, consumers substitute into less expensive products, thereby decreasing total spending in the economy." This statement is false because the aggregate demand curve is
downward sloping because as prices rise, consumer real wealth declines, interest rates rise, and exports become more expensive.
Most of the poor countries experience slow growth because of all the following reasons except
excellent public health and education.
An article on bloomberg.com about the Japanese economy noted, "Whether the 2.4 percent annualized gain in gross domestic product reported Wednesday can be maintained depends on consumers stepping in to buy the products that companies are piling up in warehouses." Source: Keiko Ujikane and Toru Fujioka, "Japan's Economy Grows as Investment Gains, Inventories Rise," bloomberg.com, May 20, 2015. Business inventories in Japan increased during this period. If products are piling up in warehouses, aggregate expenditure will be less than total production. These increases in inventories lead firms to decrease their production. The gap between total spending and total production will
fall
The new growth theory states that The new growth theory differs from the growth theory developed by Robert Solow, since
firms will add to an economy's stock of knowledge capital by engaging in research and development or by contributing to technological change. the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.
Suppose that exports become more sensitive to changes in the price level in the United States. That is, when the price level in the United States rises, exports decline by more than they previously did. This change makes the aggregate demand curve
flatter
When a corporation purchases or builds a facility in a foreign country, it is called Which countries have experienced faster economic growth?
foreign direct investment. countries that have been generally more open to foreign trade and investment
The government policy that does not increase economic growth is
foreign trade policy that favors imposing a high tariff on imported high-tech goods.
A columnist in the New York Times observes that, "many analysts agree that economic reform, of which integration into the global economy was a key element, has lifted millions of people out of poverty in India." Source: Vivek Dehejia, "Has Globalization Helped India's Poor?" New York Times, October 7, 2011. The term "integration into the global economy" means Integration into the global economy has
globalization and more integration of trade. reduced poverty in India by increasing the growth rate of the economy and a higher rate of economic growth generally results in faster poverty reduction.
Inventories refer to Usually at the beginning of a recession, inventories (BLANK), but at the beginning of an expansion, inventories (BLANK).
goods that have been produced but have not yet been sold. rise, fall
In a speech to a conference of government trade officials, Angel Gurría, secretary general of the Organization for Economic Cooperation and Development, made the following observation: "As goods and services cross borders several times at different stages of processing, conventional trade statistics may not tell the whole story." Source: Angel Gurra', "Understanding Global Value Chains," speech delivered at the G20 trade ministers conference in Puerto Vallarta, Mexico, 19 April 2012, www.oecd.org/about/secretary-general/g20understandingglobalvaluechains.htm. When Gurría refers to "conventional trade statistics," he means statistics that have Conventional trade statistics may no longer be as reliable as they once were because Inaccurate trade statistics cause problems because they
historically been publically available and commonly used. once goods and services cross borders several times, double counting may occur. reduce the accuracy of export and import information.
An article in the Wall Street Journal on changes in Intel's sales noted, "Intel sells its chips to customers in U.S. dollars, but many PC makers that buy those chips sell their products in local currencies." Source: Tess Stynes, "Intel Earnings: What To Watch," Wall Street Journal, July 15, 2015. In these circumstances, an increase in the value of the dollar relative to foreign currencies would be likely to
hurt Intel's sales because the cost of the chip is more expensive in terms of the foreign currency, but the selling price of the product is in the lower-valued foreign currency.
In an interview with the Wall Street Journal, Prime Minister Narendra Modi of India stated that: "In two years, we have done a lot to position India to thrive in the changing world." He mentions that under his administration restrictions on foreign investment into India have been loosened. Source: Raymond Zhong, "India's Economic Growth Picks Up Pace, Accelerating to 7.6%," Wall Street Journal, May 31, 2016. All of the following are reasons that would explain why loosening restrictions on foreign investment help position India to thrive except
if restrictions on foreign investment were loosened, it would decrease the need for Indian firms to save and invest.
In the 1980s and 1990s, a small group of countries experienced high rates of growth. These countries are sometimes called the newly industrializing countries. Where are most of these countries located?
in East Asia
What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that
in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.
Savings account balances, small-denomination time deposits, and noninstitutional money market fund shares are Jill makes a deposit into her savings account at the local bank with $100 in cash. As a result of this transaction,
included only in M2. M1 will decrease by $100.
An article in the Economist magazine noted that: "the economy's potential to supply goods and services [is] determined by such things as labour force and capital stock, as well as inflation expectations." Source:"Money's Muddled Message" Economist, May 19, 2009. This list of the determinants of potential GDP is
incorrect since changes in the expected price level affect short run aggregate supply but not the long run aggregate supply.
Evaluate the following statement: "Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else." The statement is
incorrect. The supply of loanable funds is determined by household saving.
Suppose Intel is forecasting demand for its computer chips during the next year. How will the forecast be affected by the following? Upper A decrease in real interest rates.A decrease in real interest rates. Demand is expected to
increase
A column in the Wall Street Journal considers two observations about the U.S. economy: "We live in an era of accelerating technological progress ...." and "In the years since the recession ... the economy has been growing very slowly." Source: Josh Zumbrun, "Goldman Sachs and J.P. Morgan Can't Agree Why the Economy's Productivity Has Slumped," Wall Street Journal, June 16, 2015. The writer correctly concludes that "Both statements can't be completely correct" because
increases in productivity usually result in greater economic growth.
India's labor force has been gradually shifting out of the low-productivity agricultural sector into the higher-productivity service and industrial sectors. This shift is Economists and policymakers think that India's growth rates may
increasing India's real GDP per capita because the shift is towards higher-productivity sectors. not be sustainable because of poor education, poor medical care, and poor infrastructure.
n the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be
inflation recession
What is the rule of 70? The rule of 70 If real GDP per capita grows at a rate of 3.9 percent per year, it will take (BLANK) years to double. (Enter your response rounded to one decimal place.)
is a mathematical formula that is used to calculate the number of years it takes real GDP per capita or any other variable to double. 17.9 (number of years to double = 70/Annual growth rate)
Pranab Bardhan, an economist at the University of California, Berkeley, argues: "China may be close to exhausting the possibilities of technological catch-up with the West, particularly in manufacturing." Source: Pranab Bardhan, "The Slowing of Two Economic Giants," New York Times, July 14, 2013. When Bardhan refers to "technological catch-up," he means that China If Bardhan is correct, in the future, the Chinese economy might Comparing the Chinese economy today and the Soviet economy in the 1980s, it can be seen that both countries had a history of
is experiencing diminishing returns to investments in technology. realize slower economic growth. central planning and have introduced market systems, but have experienced problems in making the transition that have, and will continue to, hinder future growth.
Firms are likely to underinvest in research and development, which slows the accumulation of knowledge capital, slowing economic growth, because Government policy can increase the accumulation of knowledge capital in all the following ways except by:
knowledge capital is both nonrival and nonexcludable; other firms can freely access the research and development of one particular firm. investing in capital accumulation.
Following the financial crisis of 2007-2009, Congress passed the Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. The act increased regulation of the banking system, and from 2010 to 2016, regulators approved only five new banks, which was not enough to offset the closure of existing banks. According to the article, "Community bankers say the decline in the number of banks has led to fewer lending options for startups and small businesses." Source: Rachel Witkowski, "Banks Are Finally Sprouting Anew in America," Wall Street Journal, February 8, 2017. Startups and small businesses might be more likely than large corporations to rely on banks for funding because
large corporations have more ways to obtain funding than do startups and small businesses.
A study by the McKinsey Global Institute reported that labor productivity increased at an average annual rate of 5.8 percent between 1999 and 2013 in Mexico's large companies, but fell at an average annual rate of 6.5 percent over the same period for Mexico's smaller firms, such as family-owned stores and bakeries. Source: Anthony Harrup, "Two Economies Explain Mexico's Productivity Quandary," Wall Street Journal, March 27, 2014. Productivity growth would be much higher for Mexico's largest companies than for its smaller companies because the
larger companies have greater access to better technology which stimulates productivity growth.
Unemployed workers receive unemployment insurance payments from the government. Does the existence of unemployment insurance make it likely that consumption will fluctuate more or fluctuate less over the business cycle than it would in the absence of unemployment insurance? The existence of unemployment insurance makes it (BLANK) that consumption will fluctuate over the business cycle. The primary explanation for this is because:
less likely with unemployment insurance, current disposable income fluctuates less over the business cycle.
The economic growth model predicts that the Have poor countries been catching up to rich countries?
level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations. There has been catch-up by some poor but industrialized countries.
According to the paradox of thrift, a simultaneous increase in saving without any change in income leads to
lower real GDP in the short run but higher real GDP in the long run.
According to Peter Heather, a historian at King's College London, during the Roman Empire, the German tribes east of the Rhine River produced no coins of their own but used Roman coins instead: "Although no coinage was produced in Germania, Roman coins were in plentiful circulation and could easily have provided a medium of exchange (already in the first century, Tacitus tells us, Germani of the Rhine region were using good-quality Roman silver coins for this purpose)." Source: Peter Heather, The Fall of the Roman Empire: A New History of Rome and the Barbarians, New York:Oxford University Press, 2006, p. 89. When sellers are willing to accept money in exchange for goods and services, money is acting as a If some of the Roman coins had been taken to Germania, then the coins could have been a medium of exchange in Germania if people began to consider it safe and would have accepted it for payments. If coins could have been easily used to purchase goods and services in other areas, the coins would also have some intrinsic value.
medium of exchange. True
One of the lessons from the economic growth model presented in this chapter is that technological change is
more important than increases in physical capital in explaining long-run growth.
Based on a Survey of Consumer Payment Choice, researchers from the Federal Reserve Bank of Boston estimated that the average consumer, 18 years of age and older, held about $202 in currency. However, there is actually about $4,500 of currency in circulation for every person in the United States. Source: Claire Greene, Scott Schuh, and Joanna Stavins, "The 2015 Survey of Consumer Payment Choice," Federal Reserve Bank of Boston Research Data Report No. 17-3, August 8, 2017. The amount of U.S. currency in circulation is much higher than the amount held by the U.S. population because Because of this,
more than half of the currency is held outside the borders of the United States. the M1 monetary aggregate is a poor measure of the U.S. money supply.
An article in the Wall Street Journal on the use of artificial intelligence (AI) in the financial system states that "Similar to index-tracking funds, funds managed in part by artificial intelligence require less human intervention and therefore can often cost less to run." The article also notes that banks are using AI to decrease the costs and increase the accuracy of compliance with government regulations. Source: Kim Nash, "Artificial Intelligence Geared to Erase Capital Markets Jobs," Wall Street Journal, May 3, 2017. "Index-tracking funds" or "funds" refer to (BLANK) Does the use of AI increase or decrease labor productivity in the financial system? Briefly explain. Would the financial system's use of AI increase or decrease the rate of long-run economic growth? Briefly explain.
mutual funds Increase, because the use of AI represents a technological advance. Increase, because the use of AI increases labor productivity.
During the years from 2010 to 2016, the average annual growth rate of M1 was 10.3 percent, while the inflation rate as measured by the GDP deflator averaged 1.6 percent. Source: Data from the Federal Reserve Bank of St. Louis. These values are To determine if these values are consistent with the quantity equation, additional information would be needed about
not included in the quantity equation. All of the above.
Which one of the following is not a reason why businesses accept paper currency knowing that, unlike a gold coin, the paper the currency is printed on is worth very little? Paper currency is a good medium of exchange because it is
not valuable.
The sum of the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) equals Which of the following is not correct?
one. MPS = 1 - (C/YD)
Money serves as a unit of account when Money serves as a standard of deferred payment when
prices of goods and services are stated in terms of money. payments agreed to today but made in the future are in terms of money.
People who live in rural areas often have less access to capital and, as a result, their productivity is lower on average than the productivity of people who live in cities. An article in the New York Times quotes a financial analyst as arguing that "the core driver" of economic growth in China "is the simple process of urbanization." Source: Neil Irwin, "China Will Keep Growing. Just Ask the Soviets.," New York Times, October 24, 2014. The analyst's reference to the "process of urbanization" describes the Assume the analyst is correct that urbanization is the core driver of economic growth in China. Will China be able to continue to experience high rates of economic growth in the long run?
process of people moving from rural areas to cities. It is unlikley because the process of urbanization will eventually slow down and growth will require technological progress.
Economist George Ayittey, in an interview on PBS about economic development in Africa, states that of the 54 African countries, only eight have a free press. For Africa's economic development, Ayittey argues strongly for the establishment of a free press. Source: George Ayittey, "Border Jumpers," Anchor Interview Transcript, WideAngle, PBS.org, July 24, 2005. A free press will be vital for enhancing A free press could help reduce corruption, which would then promote growth, by all of the following except:
property rights and the rule of law and controlling corruption. Publishing gossip columns about a politician's personal matter.
Which of the following is the best measure of the standard of living of the typical person in a country?
real GDP per person
The process of ________ involves creating a secondary market in which loans that have been bundled together can be bought and sold in financial markets. Which of the following is not a factor that helped lead to the financial crisis of 2007dash-2009?
securitization deposit insurance for commercial banks
A Federal Reserve publication notes that "the shedding of unwanted inventories often accounts for a large portion of the decline in gross domestic product (GDP) during economic recessions." Source: Jeremy M. Piger, "Is the Business Cycle Still an Inventory Cycle?," Economic Synopses, Federal Reserve Bank of St. Louis, No. 2, 2005. "Shedding of unwanted inventories" means that firms are Inventories are unwanted when Shedding inventories would lead to a decline in GDP because
selling their unplanned increases in inventories from previous time periods. expenditures are too low to keep pace with inventories. current production will decease as inventories are "shed," which reduces GDP.
Think about the relationship between economic prosperity and life expectancy. The size of the health care sector in a less developed country is (BLANK) the size of the health care sector of a developed country. In particular, the size of the health care sector in a developing country
smaller than grows with economic prosperity as life expectancy increases.
When a firm increases output by either replacing existing capital with more productive capital or by reorganizing how production takes place, that firm is experiencing
technological change.
The growth in U.S. real government purchases
tends to be positive, but has fallen in recessions and in response to concerns about the size of budget deficits.
The Federal Reserve is divided into two bodies: Which of the following is not a Federal Reserve district?
the Board of Governors and 12 regional districts. Denver
Which of the following does the aggregate expenditure macroeconomic model seek to explain?
the business cycle
The source line for the Apply the Concept includes an article entitled "Why Your Business Should Ditch Cash." Source: Christopher Mims, Wall Street Journal, January 30, 2017. A business that "ditches cash" means Technological changes that make it possible for businesses to ditch cash include all of the following except A pro to a business of ditching cash is A con to a business of ditching cash is
the business no longer accepts currency as payment. barter a reduced risk of robbery. cash is the only medium of exchanged used by some.
Consider the following information about menu costs. Menu costs are
the costs to firms of changing prices. If menu costs were eliminated, the short-run aggregate supply curve will be upward sloping because of wage price stickiness and slow wage adjustment by firms.
A double coincidence of wants refers to
the fact that for a barter trade to take place between two people, each person must want what the other one has.
What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between
the price level and the quantity of real GDP demanded by households, firms, and the government. the price level and the quantity of real GDP supplied by firms.
According to Joseph Schumpeter, which of the following factors provides entrepreneurs with the most important incentive to bring the factors of production together to start new firms and to introduce new goods and services?
the profits entrepreneurs hope to earn
The two key factors that cause labor productivity to increase over time are
the quantity of capital per hour worked and the level of technology.
When the Federal Reserve purchases Treasury securities in the open market, When the Federal Reserve sells Treasury securities in the open market,
the sellers of such securities deposit the funds in their banks and bank reserves increase. the buyers of these securities pay for them with checks and bank reserves fall.
The slope of the aggregate expenditure line equals
the slope of the consumption function.
The value of the multiplier is larger when
the value of the MPC is larger.
An article in the Wall Street Journal discussing the relatively slow adoption of bitcoin by individuals and businesses notes that: "The vast majority of consumers, certainly in the developed world, simply don't care about the benefits of decentralization and anonymity." Source: Paul Vigna, "Bitcoin Still Not Ready for Prime Time, Citi Says" Wall Street Journal, June 30, 2016. All of the following may help explain the slow adoption of bitcoin except The article qualifies the observation as applying to the developed world. Using bitcoins may be more attractive to individuals and firms in developing countries, such as Brazil or India, than to individuals and firms in the United States because
the vast majority of consumers may not care that bitcoins provide no record of their transactions. bitcoins would help conceal the high levels of corruption and illegal activity that take place in developing countries.
In an opinion column in the Wall Street Journal, Purdue University President Mitchell Daniels wrote that "today's 20- and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint." Source: Mitchell E, Daniels, "How Student Debt Harms the Economy," Wall Street Journal, January 27, 2015. From an economic point of view, young people might be delaying marriage and childbearing because From an economic point of view, the trend toward delaying marriage and childbearing is not helpful because The trend toward delaying marriage and childbearing could be connected with the slow recovery from the 2007-2009 recession because the recovery
their student debt levels are so high they cannot afford to marry and have children. it reduces investment spending on new houses and weakens economic growth. left millions of young people unemployed, and unable to afford to marry and have children.
Consider the per-worker production function graph on the right. If there is an increase in capital per hour worked, holding technology constant, then If there is an increase in technology, holding constant the quantity of capital per hour worked, then
there is a movement from A to B. there is a movement from A to C.
If the price level increases, then
there will be a movement up along a stationary aggregate demand curve.
The quantity theory of money is better able
to explain the inflation rate in the long run.
Macroeconomic equilibrium occurs where
total spending, or aggregate expenditure, equals total production, or GDP.
An article in the Economist notes, "For 60 years, from 1770 to 1830, growth in British wages, adjusted for inflation, was imperceptible because productivity growth was restricted to a few industries." Not until the late nineteenth century, when productivity "gains had spread across the whole economy," did a sustained increase in real wages begin. Source: "The Onrushing Wave," Economist, January 18, 2014. You can expect there to be a close relationship between productivity gains and increases in real wages because
unit costs fall when more goods are produced per worker, so prices can fall, thereby increasing the value of real wages.
Economists Mary Daly, Bart Hobijn, and Timothy Ni of the Federal Reserve Bank of San Francisco argue that "employers hesitate to reduce wages and workers are reluctant to accept wage cuts, even during recessions." Source: Mary C. Daly, Bart Hobijn, and Timothy Ni, "The Path of Wage Growth and Unemployment," Federal Reserve Bank of San Francisco Economic Letter, July 15, 2013. Employers are hesitant to cut workers' salaries because wage cuts
upset workers and lower their productivity.
The Roman Empire lasted from 27 B.C. to 476 A.D. The empire was wealthy enough to build such monuments as the Roman Coliseum. Roman engineering skill was at a level high enough that aqueducts built during the empire to carry water long distances remained in use for hundreds of years. Yet the growth rate of income per capita during the empire was very low, perhaps zero. Consider the following list of preconditions for economic growth. Which one of the following reasons seems the most likely explanation for why the Roman Empire was unable to bring about sustained economic growth? If the Roman Empire had been able to bring about sustained economic growth, it is likely that the standard of living today would (BLANK)
wars and revolutions. be substantially higher.
The wealth effect refers to the fact that The interest rate effect refers to the fact that a higher price level results in The international-trade effect refers to the fact that an increase in the price level will result in
when the price level falls, the real value of household wealth rises, and so will consumption. higher interest rates and lower investment. a decrease in exports and an increase in imports.
Economist Charles Kenny of the World Bank has argued that: The process technologieslong dash—institutions like laws and inventory management systemslong dash—that appear central to raising incomes per capita flow less like water and more like bricks. But ideas and inventionslong dash—the importance of ABCs and vaccines for DPTlong dash—really might flow more easily across borders and over distances. Source: Charles Kenny, Getting Better, New York: Basic Books, 2011, p. 117. If Kenny is correct, these facts indicate that these low-income countries As these countries become able to increase their standards of living, there
will have a healthier and more productive labor force as there is significant improvment in health, education, and civil and political liberties. will be economic growth but in order to have sustainable growth, these countries need their incomes to increase.
The lower birthrate in China China has experienced
will shrink its labor force, which will include mostly less educated and less healthy older workers, resulting in a slower growth in its real GDP per capita. high rates of growth in the short run by spending heavily on physical capital, infrastructure, and property but their lack of democracy can slow growth in the long run.
An article in the Economist discussing the 2007-2009 recession states that "employers found it difficult to reduce the cash value of the wages paid to their staff. (Foisting a pay cut on your entire workforce hardly boosts morale.)" Source: "Careful Now," Economist, April 11, 2015. During a recession, some firms lay off some of their workers, while not cutting the wages of the workers they continue to employ, because the workers they continue to employ Could these firms have reduced their labor costs by the same, or possibly more, if they laid off fewer workers while cutting wages? What does the article mean by firms reducing the "cash value" of workers' wages? If firms want to reduce workers wages over time, they have to reduce
would likely react by becoming less productive if their wages are cut. No, because workers would become disgruntled with wage cuts and reduce their productivity, resulting in higher production costs. It means firms found it difficult to cut nominal wages. the cash or nominal value, of wages.
There are ________ members of the Board of Governors, who the President of the United States appoints to ________. One of the Board members is appointed Chairman for ________.
7; 14-year nonrenewable terms; a 4-year renewable term
An article in the Los Angeles Times about driver-less trucks states that "Trucking will likely be the first type of driving to be fully automatedlong dash—meaning there's no one at the wheel." The article adds that there is a financial incentive for automating trucks because "Trucking is a $700-billion industry, in which a third of costs go to compensating drivers." Source: Natalie Kitroeff, "Robots Could Replace 1.7 Million American Truckers in the Next Decade," Los Angeles Times, September 25, 2016. How are driver-less trucks likely to affect costs to businesses of transporting goods? How are driver-less trucks likely to affect the short-run aggregate supply curve (SRAS)? How are driver-less trucks likely to affect the long-run aggregate supply curve (LRAS)?
Driver-less trucks would decrease transportation costs by requiring less labor. Driver-less trucks would shift the SRAS curve to the right due to a technological advance. Driver-less trucks would shift the LRAS curve to the right due to a technological advance.
In addition to the Federal Reserve Bank, what other economic actors influence the money supply?
Households, firms, and banks.
The graph shows the relationship between country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth are true:
Korea, Singapore, and Taiwan had the lowest incomes in 1960 and grew the fastest between 1960 and 2014.
The M2 definition of the money supply includes
M1, savings accounts, small time deposits, and money markets.
In November 2016 the Indian government decided to withdraw paper currency that made up more than 86 percent of the value of all rupee bills in circulation. An article in the Wall Street Journal published shortly after that decision described a small merchant in India as having "traded one customer a kilogram of potatoes, cauliflower and tomatoes for half a liter of honey. That was a good deal, he says. In normal times, the honey would be 120 rupees in the market (around $1.80) and the vegetables 70 rupees." Source: Raymond Zhong and Karan Deep Singh, "Barter Economy Is Reborn in Villages as India Cancels Cash," Wall Street Journal, November 18, 2016. Does the merchant's ability to arrange a barter deal with a customer indicate that the Indian economy doesn't actually require money to function efficiently? Briefly explain.
No, resorting to barter means that each trade required a double coincidence of wants for trade to occur.
A columnist in the New York Times noted, "Normally when we say that a central bank like the Federal Reserve or European Central Bank creates money from thin air, it does so by buying up bonds." Source: Neil Irwin, "Helicopter Money: Why Some Economists Are Talking about Dropping Money from the Sky," New York Times, July 28, 2016. Does the government create money by printing currency? A central bank can "create money" by buying bonds because
Yes, but banks create the majority of the money supply by making loans. by increasing the banks' reserves, banks can make loans which increase checking account balances, and these are part of the money supply.
Economics arrives at the conclusion that economic growth will always improve economic well-being. Do you agree?
Yes, economic growth increases living standards, improves health and education, and builds a corruption-free society.
An article in the Wall Street Journal in 2017 about Venezuela notes that: "The economy has shrunk by an estimated 27% since 2013. The International Monetary Fund says inflation this year will hit 720%." Source: Matt Wirz, Kejal Vyas, and Carolyn Cui, "Venezuela Tries to Resell $5 Billion Bond at Deep Discount Of Oil and Coconut Water," Wall Street Journal, June 5, 2017. Are these facts related? Briefly explain.
Yes, high inflation diminishes the ability of the Venezuelan currency to function as money, leading to lower output growth.
Give the three reasons the aggregate demand curve slopes downward. The U.S. aggregate demand curve slopes downward due to all of the following reasons except the Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is
government-spending effect, where a change in the price level affects government purchases. different, because consumers can substitute between individual products.
According to the dynamic AD-AS model, what is the most common cause of inflation?
A and B only.
Suppose that the economy grows from 2019 to 2020 without inflation. Which of the following graphs correctly shows this situation? (Note: 2020 positions are shown with green dashed lines.) To have growth without inflation, which of the following must be true?
*Correct answer has dots next to eachother AD, SRAS, and LRAS must increase by the same amount.
A change in the price level causes a movement along the short-run aggregate supply (SRAS) curve. In the figure, this is shown by moving from point A to B. A change in any other factor causes a shift in the SRAS curve. In the figure, this is shown by moving from point B to C.
.
If the money supply is growing at a rate of 4 percent per year, real GDP (real output) is growing at a rate of 3 percent per year, and velocity is constant, what will the inflation rate be? If the money supply is growing at a rate of 4 percent per year, real GDP (real output) is growing at a rate of 3 percent per year, and velocity is growing at 2 percent per year instead of remaining constant, what will the inflation rate be?
1% 3%
The United States is divided into 12 Federal Reserve Districts. The Federal Reserve Bank's Board of Governors consists of 7 members appointed by the president of the U.S. to 14-year, non-renewable terms. One of the board members is appointed to a 4 year, renewable term as the chairman.
12 7 4
From April 2019April 2019 to July 2019July 2019, business inventories increased by $7 billion. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need?
Aggregate expenditure was less than GDP in this quarter.
Which of the following is a monetary policy tool used by the Federal Reserve Bank?
All of the above
The M1 measure of the money supply includes which of the following components?
All of the above.
Suppose you decide to withdraw $100 in currency from your checking account. What is the effect on M1? Ignore any actions the bank may take as a result of your having withdrawn the $100.
M1 remains unchanged.
Suppose you withdraw $1,000 from a money market mutual fund and deposit the funds in your bank checking account. How will this action affect M1 and M2?
M2 will not be affected, but M1 will increase.
The figure to the right shows a breakdown of the M1 definition of the money supply in 2017. Which area corresponds to the amount of checking account deposits?
C
The behavior of consumption and investment over time can be described as follows: Which of the following statements about investment spending is correct? Which of the following statements is correct?
Consumption follows a smooth, upward trend, but investment is subject to significant fluctuations. All of the above are correct. An increase in the corporate income tax decreases the after-tax profitability of investment spending.
The total value of saving in the economy must equal the total value of investment. Assume a closed economy, where: I = Investment S = Sprivate + Spublic Sprivate = Private Saving Spublic = Public Saving C = Consumption Expenditure G = Government Expenditure Y = GDP TR = Government Transfers Which one of the following expressions shows the investment-saving equality?
S = Y - C - G
The graph shows the relationship between country's initial level of GDP per capita and its growth rate over the following years. The horizontal axis shows the initial level of GDP per capita, and the vertical axis shows the rate at which GDP per capita is growing. Use the graph to help determine which of the following statements regarding economic growth is true:
Some countries, such as Niger and the Democratic Republic of the Congo, that had low levels of real GDP per capita in 1960, actually experienced negative economic growth.
Which of the following equalities is correct?
Disposable income is equal to national income minus net taxes.
Suppose that Congress changes the law to require all firms to accept paper currency in exchange for whatever they are selling. All of the following are correct except:
Firms lose since they don't have the convenience of credit cards.
Which of the following equals the amount of public saving? A government that collects more in taxes than it spends experiences
Government tax revenue minus the sum of government purchases and transfer payments to households. a budget surplus.
What is the effect of an increase in the price level on the short-run aggregate supply curve?
a movement up along a stationary curve
Along the downward-sloping catch-up line, a country near the top of the line is
a poor country growing rapidly.
Suppose you can receive an interest rate of 10 percent on a certificate of deposit (CD) at a bank that is charging borrowers 20 percent on new car loans. Which one of the following choices does not explain why you might be unwilling to loan money directly to someone who wants to borrow from you to buy a new car, even if that person offers to pay you an interest rate higher than 10 percent?
You are better at assessing risks than the usual financial institutions.
Suppose you decide to withdraw $100 in cash from your checking account. Which one of the following choices accurately shows the effect of this transaction on your bank's balance sheet.
Your bank's balance sheet shows a decrease in reserves by $100 and a decrease in deposits by $100.
Which of the following factors does not cause the aggregate demand curve to shift? How can government policies shift the aggregate demand curve to the right?
a change in the price level by increasing government purchases
The difference between aggregate expenditure and aggregate demand is that:
aggregate demand shows the relationship between the price level and the level of aggregate expenditure when all other factors that affect aggregate expenditure are held constant; aggregate expenditure is a point on the aggregate demand curve at a specific price.
Which of the following changes does not cause an increase in the quantity of goods and services that can be produced by one worker, or in one hour of work? Which of the following changes will ensure that an economy experiences sustained economic growth?
an increase in the number of workers technological change
Consider the statistics in the following table: These statistics (BLANK) consistent with the economic growth model's predictions of catch-up, because although there has been catch-up among (BLANK), there (BLANK) catch-up among (BLANK).
are not, the industrialized countries, has not been, all the countries in the world
Excess reserves
are reserves banks keep above the legal requirement.
According to an article in the Wall Street Journal, in late 2014, the Japanese economy experienced a large increase in business inventories. The article noted, "The large buildup of inventories is a reflection that the ... drop in demand was bigger than expected." Source: Eleanor Warnock, "Rising Inventories Hamper Japan Recovery," Wall Street Journal, September 30, 2014. Because the Japanese firms didn't expect the drop in demand, they A decline in demand does not always lead to an increase in firms' holdings of inventories because
did not reduce their inventories. sometimes the decline is anticipated and inventories can be adjusted.
Assume that Intel sells $1 billion of computer chips to Dell, Inc., for use in Dell's personal computers. This transaction
does not affect aggregate expenditure because computer chips are an intermediate good, and including the value of the computer chip would be double counting.
At the beginning of a recession, aggregate expenditure (BLANK) GDP. As a result, firms (BLANK) large amounts of unplanned inventory and GDP and employment (DECREASE).
falls short of, accumulate, decrease
The U.S. dollar can best be described as
fiat money.
Investment tax credits allow
firms to deduct from their taxes some fraction of the funds they have spent on investment.
Business spending on information processing equipment, particularly computers, has
grown only slowly since the end of the recession of 2007-2009, due in part to a shift toward software and away from equipment.
Some economists argue that the development of information technology (IT) caused the (BLANK) productivity growth that began in the mid-1990s.
higher
A baseball fan with a Mike Trout baseball card wants to trade it for a Giancarlo Stanton baseball card, but everyone the fan knows who has a Stanton card doesn't want a Trout card. Economists characterize this problem as a failure of the
principle of a double coincidence of wants.
When potential real GDP is equal to 70, this economy is in The amount of the shortfall in planned aggregate expenditure is equal to
recession the vertical distance between AE and the 45degrees° line at the level of potential real GDP.
At point A in the graph to the right, planned aggregate expenditure is greater than GDP. At point B, planned aggregate expenditure is equal to GDP. At point C, planned aggregate expenditure is less than GDP. At point A, the unintended change in inventories can be shown on the graph by:
the vertical distance between point A and the 45° line.
Increases in the value of the dollar relative to foreign currenciesIncreases in the value of the dollar relative to foreign currencies will make the aggregate demand curve shift
to the left
Suppose the per-worker production function was shaped as shown in the graph at right. If a country was accumulating increasing quantities of capital per hour worked, this country would experience
increasing labor productivity and higher levels of economic growth.
In the diagram to the right, moving from point A to point B is called a Moving from point A to point C is referred to as a
movement along the AD curve shift in the AD curve.
Consider the table on the right, which shows the change in inventories for each quarter from 2007:I to 2010:IV measured in billions of 2009 dollars. Provide a macroeconomic explanation for this pattern. (Hint: When did the recession during this period begin and end?) The negative growth of invenories indicates a period of
recession because demand was met by drawing down past inventories and production did not increase.
Upper A technological changeA technological change will cause thelong-run aggregate supply curve to Upper A change in the price levelA change in the price level will cause thelong-run aggregate supply curve to
shift to the right move along a stationary LRAS curve
Economic growth will Some economies are able to maintain high growth rates despite diminishing returns to capital by using
slow down or stop if more capital per hour is used because of diminishing returns to capital. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns.
A curve showing the relationship between the price level and the level of aggregate expenditure in the economy, holding constant all other factors that affect aggregate expenditure, is called
the aggregate demand curve.
The migration of highly educated and successful individuals from developing countries to high-income countries is called
the brain drain.
The 2007-2009 recession was a clear example of
the effect that a decrease in aggregate demand can have on the economy.
From a trough to a peak, the economy goes through
the expansionary phase of the business cycle.
Potential real GDP is Potential real GDP
the level of GDP attained when all firms are producing at capacity. grows over time
If inflation in the United States is lower than inflation in other countries, then U.S. exports ________ and U.S. imports ________, which _________ net exports. When incomes rise faster in the United States than in other countries,
increase; decrease; increases U.S. net exports will fall.
U.S. real net exports are typically
negative, and usually rise in recessions and fall in expansions.
In the securitization process,
banks grant loans to households and bundle the loans into securities that are then sold to investors.
Look carefully at the following list. a. The coins in your pocket. b. The funds in your checking account. c. The funds in your savings account. d. The traveler's check that you have left over from a trip. e. Your Citibank Platinum MasterCard. Which of the things above are NOT included in the M1 definition of the money supply?
c & e
Growth rates matter because living standards may stagnate in an economy that grows too slowly.
TRUE
The use of money
all of the above.
There is a strong link between changes in the money supply and inflation
in the long run.
Productivity growth rates matter because
productivity growth rates have a big impact on future economic growth.
Potential GDP is
sometimes greater, sometimes less, and sometimes equal to actual real GDP.
Suppose you had a choice between living in the United States in 1900 with an income of $969,000 per year or in the United States in 2018 with an income of $40,000 per year. Assume the incomes for both years are measured in 2018 dollars. In which year would you have the highest real income? In which year would you have the better standard of living?
1900 2018
What are the largest asset and the largest liability of a typical bank?
Loans are the largest asset and deposits are the largest liability of a typical bank.
A supply shock is Stagflation is a Stagflation occurs when
a sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve. combination of inflation and recession a supply shock shifts the SRAS to the left, increasing the price level and decreasing actual GDP
Consider the variables that shift long-run aggregate supply and the variables that shift short-run aggregate supply. Match each of the following scenarios with one of the following three graphs of long-run aggregate supply and short-run aggregate supply.
a. A decrease in the expected future price level: 3 b. Workers and firms adjust to having previously underestimated the price level: 2 c. A positive technological change occurs: 1
Consider the information in the following table for the first two years of the Great Depression (the values for real GDP and potential GDP are in 2009 dollars): a. The information in the table is different from what we would expect to have happened in a recession in the past 50 years because b. Recall that the Great Depression began due to increased pessimism of households and firms, causing a fall in aggregate expenditures. Which of the following dynamic aggregate demand and supply graphs best shows this situation, as based on the information shown in the table? (1930 positions shown with green dashed lines.)
a. the price level decreased. b. *second dot on the lower left side
Congress passed legislation to create the Federal Reserve System in 1913 in order to The most important role of the Federal Reserve in today's U.S. economy is
end the instability created by bank panics by acting as a lender of last resort. controlling the money supply to pursue economic objectives.
Edward Leamer of UCLA has argued that "housing is the business cycle." Spending on housing is likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because
housing is very sensitive to interest rate changes, which are cyclical.
Very high rates of inflation are called Governments sometimes allow hyperinflation to occur because
hyperinflation. when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation.
The short-run aggregate supply curve slopes upward because of all of the following reasons except
in the short run, an unexpected change in the price of an important resource can change the cost to firms.
The computation of the average annual growth rate of real GDP What is the best use of the rule of 70 among those listed below?
is more complex when examining data for a long period of time than when examining data for only a few years. to judge how rapidly real GDP per capita is growing over long time periods
According to the quantity theory of money, if velocity does not change, when the money supply of a country increases, what will occur?
nominal GDP will increase
The average annual growth rate is the (BLANK) between 2007 and 2017, and the total percentage increase in real GDP is the (BLANK).
rate at which GDP must grow on average each year, percentage increase in real GDP between the two years 2007 and 2017
Aggregate expenditure is:
the sum total of consumption, planned investment, government purchases, and net exports.
Suppose that velocity is 3 and the money supply is $600 million. According to the quantity theory of money, nominal output equals Velocity is defined as
$1.8 billion. V = (P x Y)/M
Suppose the reserve requirement is 15%. What is the effect on total checkable deposits in the economy if bank reserves increase by $40 billion?
$267 billion increase
Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10 percent. In this situation, American Bank has
$50 in required reserves.
Consider the figure on the right. It shows growth rates in real GDP per hour worked in the United States for various periods from 1900 onward. According to the figure, economic growth (as measured by growth in real GDP per hour worked) in the United States was slowest during the period from How might the growth rates in the figure be different if they were calculated for real GDP per capita instead of per hour worked? (Hint:How do you think the number of hours worked per person has changed in the United States since 1900?)
2006 to 2016. The growth rate of real GDP per capita would be higher than the growth rate of real GDP per hour.
Real GDP per capita in the country of Arcadia grew from about $4,896 in 1900 to about $39,980 in 2008, which represents an annual growth rate of 1.96 percent. If Arcadia continues to grow at this rate, calculate the number of years when its real GDP per capita will double. (BLANK) years. (Enter your response as an integer.)
36 (70/1.96)
Real GDP per capita in the United States grew from about $6,000 in 1900 to about $47,772 in 2010, which represents an annual growth rate of 1.90 percent. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. If the United States continues to grow at this rate, it will take (BLANK) years for real GDP per capita to double. (Enter your response rounded to two decimal places.) If government economic policies meant to stimulate economic growth result in the annual growth rate increasing to 2.75 percent, it will take (BLANK) years for real GDP per capita to double. (Enter your response rounded to two decimal places.)
36.84 (70/1.90) 25.45 (70/2.75)
Use the table below to answer the following questions. a. Calculate the growth rate of real GDP for each year from 2015 to 2019: (Enter your responses rounded to two decimal places and include a minus sign if necessary.) Year: 2015, 2016, 2017, 2018, 2019 Real GDP (Billions of 2009 dollars): 17,404, 17,689, 18,108, 18,638, 19,073 b. Calculate the average annual growth rate of real GDP for the period from 2015 to2019. Average annual growth rate = (BLANK)%. (Enter your response rounded to two decimal places.)
Annual Growth rate of Real GDP: 1.64%, 2.37%, 2.93%, 2.33% ((RGDPthisyear- RGDPlastyear/RGDPlastyear) x 100) 2.32% ((Sum of Annual Growth Rate RGDP)/4)
The National Bureau of Economic Research (NBER), a private group, is responsible for declaring when recessions begin and end. The Bureau of Economic Analysis (BEA), part of the federal government, might not want to take on this responsibility. Which one of the following is the most appropriate reason for the BEA's refusal?
Because it is part of the government, the BEA could be pulled into politics with the dating of recessions.
From 2008 to 2009, the total revenue Chevron earned from all of its operations declined by more than 50 percent while its expenditures on oil exploration remained unchanged. Source: Chevron Corporation, 2009 4Q Earnings Release, January 29, 2010. If the firm was suffering from declining sales of gasoline and other products during the recession, why would it maintain its spending on exploring for additional oil?
Chevron would maintain its current spending in order to prepare for future crude oil demand.
Globalization entails all of the following except: Developing countries have benefited from globalization, because globalization can do all of the following except
Cultural exchange between nations. impose trade barriers and tariffs on imported goods so as to protect domestic industries.
Use the graph to help determine which one of the following statements regarding flucuations in real GDP is true:
In the first half of the twentieth century, real GDP had much more severe swings than in the second half of the twentieth century.
Panel (a) shows an idealized business cycle. Panel (b) shows an actual business cycle by plotting fluctuations in real GDP during the period from 2006 to 2017. Use the graphs to help determine which one of the following statements is NOT true:
Inconsistent movements in real GDP around the business cycle peak can mean that the beginning and ending of a recession are clear-cut.
According to an article in the Wall Street Journal, Federal Reserve Chair Janet Yellen stated that unless obstacles to some women working in the paid labor force are removed, the United States will "incur a substantial loss to the productive capacity of our economy." Ms. Yellen also stated that more women in the labor force would "help overcome long-term challenges such as an aging population and slow productivity growth." Source: Harriet Torry, "Yellen Says Family-Friendly Work Policies Can Boost Economy," Wall Street Journal, May 5, 2017. What measure do economists use for the productive capacity of the economy? Why might an aging labor force and slow productivity growth pose long-term challenges to the U.S. economy? How might more women working in the paid labor force help overcome these challenges? Relative to older male workers, the average female worker would have (BLANK) labor productivity.
Potential GDP An aging labor force and slow productivity growth could reduce the growth rate of potential GDP. a higher
Consider the following choices. Which one of the following choices is correct? Many economists agree that this difference is due to all of the following reasons except:
Recessions were more severe and lasted longer in the first half of the twentieth century and became shorter and milder in the second half. Since the 1950s, people have become more rational and control their spending behavior countercyclically.
A writer for the Wall Street Journal wrote a whimsical "Letter to Stingy American Consumers": Dear American Consumer: This is The Wall Street Journal ... The sun shined in April and you didn't spend much money ... You've been saving more too ... This saving is not like you ... Do you know the American economy is counting on you? Economist Steven Landsburg praised Ebenezer Scrooge for choosing to save rather than spend his money, arguing that savinglong dash—not consumptionlong dash—fuels economic growth. The Wall Street Journal letter pretends to chide the American consumer for saving, rather than spending income, arguing that spendinglong dash—not savinglong dash—fuels economic growth. Source: John Hilsenrath, "Grand Central: A Letter of Stingy American Consumers," Wall Street Journal, June 2, 2015. Which argument is correct in terms of promoting long-run economic growth?
Steven Landsburg because saving funds the investment spending needed for long-run economic growth.
How does technological change affect the per-worker production function? In the long run, a country will experience an increasing standard of living only if
Technological change shifts the per-worker production function up. the country experiences continuing technological change.
The financial systemlong dash—either financial markets or financial intermediarieslong dash—provides savers and borrowers with all of the following except:
The financial system provides security to savers by warranting that their funds are fully insured against loss.
The figure shows how growth rates of real GDP per capita for the entire world have changed over long periods. Based on the data from the figure which one of the following statements is false?
The smallest acceleration in growth occurred during the twentieth century as the average annual growth rate increased from 1.3 percent per year to 2.3 percent per year.
Which of the following describes the effect of the business cycle on the inflation rate and the unemployment rate? Why might the unemployment rate continue to rise during the early stages of a recovery?
The unemployment rate increases and the inflation rate falls during recessions. Because both (a) and (c) are true. a- Employment growth may be slow relative to the growth in the labor force. c- Some firms continue to operate well below their capacity even after a recession has ended.
n the 1961 edition of his best-selling introductory economics textbook, the late Nobel laureate economist Paul Samuelson, noted that Soviet GDP might become larger than U.S. GDP by 1984. Source: Paul A. Samuelson, Economics, New York: McGraw-Hill, 1961, Figure 37.1, as reproduced in David M. Levy and Sandra J. Peart, "Soviet Growth and American Textbooks: An Endogenous Past," Journal of Economic Behavior and Organization, Vol. 78, No. 1-2, April 2011, p. 115. In 1961, why might a leading economist have expected the Soviet economy to eventually have become larger than the U.S. economy? Briefly explain why the Soviet economy failed to overtake the U.S. economy.
There were rapid increases in capital per hour worked, which led to rapid increases in real GDP per hour worked. The Soviet Union experienced diminishing returns to capital and a slower rate of technological advance.
Use the graph to help determine which one of the following statements regarding inflation and business cycles is true. Note: The points on the figure represent the annual inflation rate measured by the change in the consumer price index (CPI) for the year ending in the indicated month.
Toward the end of the 1991-2001 expansion, the inflation rate began to rise.
The Apply the Concept argues that a key difference between market economies and centrally planned economies, like the former Soviet Union, is that "In market economies, decisions about which investments to make and which technologies to adopt are made by entrepreneurs and managers with their own money on the line. In the Soviet system, these decisions were usually made by salaried bureaucrats trying to fulfill a plan formulated in Moscow." But in large corporations, investment decisions are often made by salaried managers who do not, in fact, have their own money on the line. These managers are spending the money of the firm's shareholders rather than their own money. The investment decisions of salaried managers in the United States tend to be better for the long-term growth of the economy than were the decisions of salaried bureaucrats in the Soviet Union because:
U.S. managers are driven by incentives of higher profits, leading them to adopt new technologies.
The Apply the Concept claims that Ebenezer Scrooge promoted economic growth more when he was a miser and saved most of his income than when he reformed and began spending freely. Suppose, though, that most of his spending after he reformed involved buying food for the Cratchits and other poor families. Many economists believe there is a close connection between how much very poor people eat and how much they are able to work and how productive they are while working. Does this fact affect the conclusion about whether the pre-reform or post-reform Scrooge had a more positive impact on economic growth?
Uncertain
In a column on bloomberg.com, Noah Smith notes that people who work at a computer have many ways to slack off or waste timelong dash—posting to Facebook, Twitter, or Instagram; watching YouTube videos; or playing video gameslong dash—that weren't available to workers in previous decades. He calculates that: "The average working American spends about 34.4 hours on the job. If we assume that's five days a week, it means that one hour of slacking per day means that true work hours are really only 85.5 percent of the official number." Source: Noah Smith, "Goofing Off at Work Masks Rising Productivity," bloomberg.com, May 10, 2017. If Smith's estimates are correct, is the rate of growth of labor productivity as measured by government statistics overstated or understated? Briefly explain. What are the implications of your answer above for using increases in real GDP per capita, as calculated by the BEA, to measure increases in well-being? Is well-being overstated or understated?
Understated, assuming that workers are producing the output in fewer hours than the official work hours. Understated, because workers are working fewer hours and consuming more leisure.
Using GDP per capita in 2016 (measured in U.S. dollars, corrected for differences across countries in the cost of living), identify which one of the following statements is true:
Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.
Consider the following data for a closed economy: Y = $15 trillion C = $9 trillion I = $1 trillion TR = $2 trillion T = $3 trillion Use the data to calculate the following. (Enter your responses as integers.) a. Private saving: b. Public saving: c. Government purchases: d. The government budget balance is (BLANK) and as a result the government budget is in (BLANK).
a. $5 trillion ((Y+TR)-(C+T)) b. $-4 trillion (T-G-TR) c. $5trillion (Y-C-I) d. $-4 trillion, deficit (T<G+TR)
Consider the following data for a closed economy: Y = $15 trillion C = $7 trillion G = $22trillion Spublic = $−0.5 trillion T = $3 trillion Use the data to calculate the following: (Enter your responses rounded to one decimal place.) a. Private saving is: b. Investment spending is: c. Transfer payments are: d. The government budget balance is: (BLANK) and as a result the government budget is in (BLANK).
a. $6.5 trillion. (Y+TR-C-T) b. $6.0 trillion. (T-G-TR) c. $1.5 trillion. (T-G-Spublic) d. $−0.5 trillion, deficit (T-G-Spublic)
Consider the graph on the right to answer the following questions: a. The shift from S1 to S2 represents (BLANK) in the supply of loanable funds b. With the shift in supply, the equilibrium quantity of loanable funds (BLANK). c. With the change in the equilibrium quantity of loanable funds, the quantity of saving (BLANK) and the quantity of investment (BLANK).
a. a decrease b. decreases c. decreases, decreases
a. The high point of economic activity is called b. The low point of economic activity is called c. The period between the high point of economic activity and the following low point is called d. The period between the low point of economic activity and the following high point is called
a. a peak. b. a trough. c. a recession. d. an expansion.
Refer to the graph on the right to answer the following questions: a. With the shift in the demand for loanable funds, the equilibrium real interest rate (BLANK) and the equilibrium quantity of loanable funds (BLANK). b. The fact that the equilibrium quantity of loanable funds may increase along with an increase in the real rate of interest c. How much would the quantity of loanable funds demanded have increased if the interest rate had remained at i1? d. How much does the quantity of loanable funds supplied increase with the increase in the interest rate from i1 to i2?
a. increases, increases b. assumes that demand for loanable funds increases with supply remaining unchanged. c. from L1 to L3 d. from L1 to L2
a. Ford F-150 trucks. Production of this good is likely to fluctuate (BLANK) fluctuations of real GDP during the business cycle. b. McDonald's Big Macs. Production of this good is likely to fluctuate (BLANK) fluctuations of real GDP during the business cycle. c. Chevron's sales of advanced plastics to be used in automobile manufacturing. Production of this good is likely to fluctuate (BLANK) fluctuations of real GDP during the business cycle. d. Huggies diapers. Production of this good is likely to fluctuate (BLANK) fluctuations of real GDP during the business cycle. e. Boeing passenger aircraft. Production of this good is likely to fluctuate (BLANK) fluctuations of real GDP during the business cycle.
a. more than b. less than c. more than d. less than e. more than
A country's rate of economic growth is important because
an economy that grows too slowly fails to raise the living standards of its citizens.
Amartya Sen, a professor of economics at Harvard and a Nobel Laureate, has argued: "For India to match China in its range of manufacturing capacity... it needs a better-educated and healthier labor force at all levels of society." Source: Amartya Sen, "Why India Trails China," Wall Street Journal, June 19, 2013. Education and health care are important for economic growth because India has been able to experience rapid economic growth since 1991 despite poor educational and health care systems because
a well-educated and healthy workforce has higher productivity. the government scaled back central planning, reduced regulations, and introduced market-based reforms.
Which of the following are financial securities that represent promises to repay a fixed amount of funds? Which of the following is not a service that the financial system provides for savers and borrowers?
bonds guaranteeing savers high rates of return
An International Monetary Fund Factsheet makes the following observation regarding sound financial systems: "A country's financial system...provide[s] a framework...[for] supporting economic growth." Source: "Financial System Soundness," International Monetary Fund Factsheet, March 2013. Do you agree with this observation? Briefly explain. A weak financial system might make economic growth difficult, since
capital investment, essential for rapid economic growth, is often financed by borrowed funds and an unstable financial system leads to difficulty attracting loanable funds.
Which of the following is not a reason that the economy is considered to have been more stable in the 1950-2007 period than in other periods? During the last half of the twentieth century, the U.S. economy experienced
continually falling oil prices long expansions, interrupted by relatively short recessions.
Consider the per-worker production function to the right. Equal increases in the quantity of capital per hour worked lead to (BLANK) increases in output per hour worked.
diminishing
The financial system of a country is important for long-run economic growth because
firms need the financial system to acquire funds from households.
Writing in 2016, economist Robert Gordon of Northwestern University stated his views of the effects of information technology on the economy: We don't eat computers or wear them or drive to work in them or let them cut our hair. We live in dwelling units that have appliances much like those of the 1950s, and we drive in motor vehicles that perform the same functions as in the 1950s, albeit with more convenience and safety....Most of the economy has already benefited from the Internet and web revolution, and in this sphere of the economic activity, methods of production have been little changed over the past decade....The revolutions in everyday life made possible by e-commerce and search engines were already well established [by 2004]. Source: Robert J. Gordon, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War, Princeton, NJ: Princeton University Press, 2016, p. 579. If Gordon's observations about the information revolution are correct, that implies
it will be difficult to sustain high growth rates in U.S. labor productivity in the future.
Chinese transportation companies adopt a new computerized method to handle nbspChinese transportation companies adopt a new computerized method to handle luggage comma saving millions and increasing labor productivity.luggage, saving millions and increasing labor productivity. This will cause a (BLANK) China's per-worker production function.
shift of
Which of the following events marks the beginning of significant economic growth in the world economy?
the Industrial Revolution in England
Recently, economists Carol Shiue and Wolfgang Keller of the University of Texas at Austin published a study of "market efficiency" in the eighteenth century in England, other European countries, and China. If the markets in a country are efficient, a product should have the same price wherever in the country it is sold, allowing for the effect of transportation costs. If prices are not the same in two areas within a country, it is possible to make profits by buying the product where its price is low and reselling it where its price is high. This trading will drive prices to equality. Trade is most likely to occur, however, if entrepreneurs feel confident that their gains will not be seized by the government and that contracts to buy and sell can be enforced in the courts. Therefore, the more efficient a country's markets were, the more its institutions would have favored long-run growth. Shuie and Keller found that in 1770, the efficiency of markets in England was significantly greater than the efficiency of markets elsewhere in Europe and in China. Source: Carol H. Shiue and Wolfgang Keller, "Markets in China and Europe on the Eve of the Industrial Revolution," American Economic Review, Vol. 97, No. 4, September 2007, pp. 1189-1216. This finding supports Douglas North's argument concerning why the Industrial Revolution occurred in England because
the efficient market system thrived due to a stable British parliament and an independent court system.
In determining whether to borrow funds, firms compare the rate of return they expect to make on an investment with Which of the following factors determines the supply of loanable funds? Holding all else constant, a federal government budget deficit will
the interest rate they must pay to borrow the necessary funds. the willingness of households and governments to save decrease the supply of loanable funds and increase the equilibrium real interest rate.
In his book The White Man's Burden, William Easterly reports that A vaccination campaign in southern Africa virtually eliminated measles as a killer of children. Routine childhood immunization combined with measles vaccination in seven southern Africa nations starting in 1996 virtually eliminated measles in those countries by 2000. A national campaign in Egypt to make parents aware of the use of oral rehydration therapy from 1982 to 1989 cut childhood deaths from diarrhea by 82 percent over that period. Source: William Easterly, The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good, New York: The Penguin Press, 2006, p. 241. As a result of the near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt, The near elimination of measles and the large decrease in childhood deaths from diarrhea in southern Africa and Egypt The elimination of measles and childhood deaths from diarrhea will
the standard of living for these low-income countries increased significantly. did not increase real GDP per capita, but increased productivity and human capital resulting in a higher standard of living. remove a major impediment to growth, increase productivity and should eventually lead to increases in real GDP per capita.
Shortly before the fall of the Soviet Union, the economist Gur Ofer of the Hebrew University of Jerusalem, wrote this: "The most outstanding characteristic of Soviet growth strategy is its consistent policy of very high rates of investment, leading to a rapid growth rate of [the] capital stock." Source: Gur Ofer, "Soviet Economic Growth, 1928-1985," Journal of Economic Literature, December 1987, p. 1,784. This turned out to be a very poor growth strategy because
there were diminishing returns to capital.
What term describes the relationship between real GDP per hour worked and capital per hour worked, holding the level of technology constant? Along the per-worker production function, what happens to real GDP per hour worked as capital per hour worked increases?
the per-worker production function Real GDP per hour worked increases at a decreasing rate.
As the economy nears the end of an expansion, which of the following typically occurs? Purchases of which types of goods are business cycles most likely to affect? Recessions cause the inflation rate to _________, and the unemployment rate to _________.
All of the above occur. durable goods decrease; increase
ome economists argue that the apparent slowdown in productivity growth in the United States in recent years is a measurement problem resulting from the failure of GDP to capture the effects of many recent innovations, such as cloud computing. James Manyika, head of technology at McKinsey & Company, argues that for many of these innovations, "we have all these benefits but we're not paying for them." Source: Timothy Aeppel, "Silicon Valley Doesn't Believe U.S. Productivity Is Down," Wall Street Journal, July 16, 2015. Before the arrival of the Internet, people looking for facts, such as the population of France or the salary of the president of the United States, had to go to the library to look them up. Now people can find that information in a few seconds with a Google search. Are the benefits to you of being able to do a Google search included in GDP? It has been argued that the slowdown in U.S. productivity growth in recent years is just a measurement problem. Is your answer above consistent with that argument?
No, because the benefits are diffused throughout the economy. Yes, because the benefits are difficult to measure.
The formula for the multiplier is
1/(1-MPC)
In a fractional reserve banking system, what is the difference between a "bank run" and a "bank panic?"
A bank run involves one bank; a bank panic involves many banks.
Which of the following is NOT a function of money?
Acceptability
Use the graph to help determine which one of the following statements is true:
The average American in the year 2016 could buy more than eight times as many goods and services as the average American in the year 1900.
According to the quantity theory of money, inflation results from which of the following?
The money supply grows faster than real GDP.
More people in high-income countries than in low-income countries tend to believe that rapid rates of economic growth are not desirable. Recall the concept of a "normal good." Some people in (BLANK) -income countries are (BLANK) with certain consequences of rapid economic growth, such as a higher standard of living a higher standard of living.
low, satisfied
Which of the following periods in U.S. economic history had the slowest growth rate, as measured by the average annual increase in real GDP per hour worked?
1974-1995
Briefly explain whether you agree or disagree with the following statement: "Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability."
Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability.
What is the general relationship between the business cycle and unemployment and inflation?
During an expansion, unemployment falls and inflation increases.
Consider the choices below. All of these except one truly represent the record of productivity growth in the United States from 1800 to the present. Find the one that does not belong.
GDP per capita fell rapidly between 1900 and 1950.
The graph shown at right contains two aggregate expenditure functions. Consider a movement from point A to point B, and a movement from point B to point C. Which movement shows a change in autonomous expenditure? Which movement shows a change in induced expenditure?
Point A to point B because the change does not depend on the level of GDP. Point B to point C because the change depends on the level of GDP.
Which of the following is the definition of the new growth theory? When are additions to knowledge capital subject to diminishing returns? Which of the following is not a government policy that will increase the accumulation of knowledge capital?
a model of long-run economic growth that emphasizes that technological change is influenced by economic incentives when we look only at their effect on an individual firm encouraging the growth of labor unions
For most of the 1979-2010 period, real government purchases
rose steadily.
An article in the Wall Street Journal noted that "the total debt held by American households reached a record in early 2017, exceeding its 2008 peak." Source: Ben Leubsdorf, "U.S. Household Debt Hit Record in First Quarter," Wall Street Journal, May 17, 2017. Does this information indicate that the U.S. economy was close to the end of an economic expansion in early 2017?
Yes, because debt will normally increase near the end of an expansion.
When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.
fall; increase
