Econ study guide

The Federal Reserve was created

in 1913 by Congress

In the open-economy macroeconomic model, the supply of loanable funds comes from

national saving

As the price level rises

people are more willing to lend, so interest rates rise

Investment in

physical capital, like investment in human capital, has an opportunity cost.

In the open economy macroeconomic model, the price that balances supply and demand in the market for foreign-currency exchange model is the

real exchange rate

Other things the same, the aggregate quantity of goods demanded in the U.S. increases if

real wealth rises.

An increase in the budget deficit

reduces investment because the interest rate rises

Suppose that the MPC is 0.7, there is no investment accelerator, and there are no crowding-out effects. If government expenditures increase by $30 billion, then aggregate demand

shifts rightward by $100 billion.

Suppose the U.S. offered a tax credit for firms that built new factories in the U.S. Then

the demand for loanable funds would shift rightward, initially creating a shortage of loanable funds at the original interest rate.

During periods of expansion, automatic stabilizers cause government expenditures

to fall and taxes to rise

When a country experiences capital flight, its net capital outflow,

which is part of the demand for loanable funds, increases

Factors that shift the demand curve

1. income 2. price of related goods 3. expectations of future prices 4. number of buyers 5. tastes and preferences

In the graph of the money market, the money supply curve is

vertical. It shifts rightward if the Fed buys bonds.

If output is above its natural rate, then according to sticky-wage theory

workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.

The Federal Open Market Committee is ​

​the group at the Federal Reserve that sets monetary policy

If the reserve ratio is 5 percent, then $600 of additional reserves can create up to

$12,000 of new money

If the interest rate is 7.5 percent, then what is the present value of $4,000 to be received in 6 years?

$2,591.85

If M = 9,000, P = 6, and Y = 1,500, what is velocity?

1

If velocity = 5, the price level = 2, and the real value of output is 2,500, then the quantity of money is

1,000

Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?

1,500 deficit

Factors that shift the supply curve

1. input/resource prices 2. technology 3. taxes 4. expectations of future prices 5. number of sellers

The nominal exchange rate is 2 Barbados dollars per U.S. dollar. If the price of a good in Barbados is 3 Barbados dollars and the price in the U.S. is 2 U.S. dollars, what is the real exchange rate to the nearest 100th?

1.33 Barbados goods per U.S. good

Two of the economy's most important financial intermediaries are

Banks and mutual funds

Part of the explanation for why the aggregate-demand curve slopes downward is that a decrease in the price level

Decreases the interest rate

The interest rate that the Fed charges banks that borrow reserves from it is the

Discount rate

The interest rate that the Federal Reserve pays banks on the reserves they hold is called the

Excess reserves

The banking system currently has $200 billion of reserves, none of which are excess. People hold only deposits and no currency, and the reserve requirement is 4 percent. If the Fed raises the reserve requirement to 10 percent and at the same time buys $50 billion worth of bonds, then by how much does the money supply change?

Falls by $2,500 billion

If Japan has an absolute advantage in the production of an item, it must also have a comparative advantage in the production of that item.

False

In the open-economy macroeconomic model, other things the same, an increase in the exchange rate raises the quantity of dollars supplied in the market for foreign-currency exchange.

False

The claim that increases in the growth rate of the money supply increase nominal interest rates but not real interest rates is known as the

Fisher effect

What would happen in the market for loanable funds if the government were to decrease the tax rate on interest income?

There would be an increase in the amount of loanable funds borrowed.

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person.

True

Absolute advantage is a comparison among producers based on productivity.

True

An increase in the price of imported cameras is captured by the CPI but not by the GDP deflator.

True

Comparative advantage is a comparison among producers based on opportunity cost.

True

For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer.

True

If U.S. GDP exceeds U.S. GNP, then foreigners produce more in the United States than U.S. citizens produce in the rest of the world.

True

If U.S. residents purchase $450 billion of foreign assets and foreigners purchase $575 billion of U.S. assets, then the U.S. has net capital outflows of -$125 billion and a trade deficit of $125 billion.

True

Many economists believe that the theory of purchasing-power parity describes the forces that determine exchange rates in the long run.

True

consumption is the largest component of GDP.

True

Which of the following is not correct?

Unemployment insurance decreases frictional unemployment

What is the difference between a normal good and an inferior good?

When income rises, demand for a normal good increases or shifts right. When income rises, demand for an inferior good decreases or shifts left.

Which of the following equations represents GDP for a closed economy?

Y= C+I+G

Which of the following would cause prices to rise and real GDP to fall in the short run?

an increase in the expected price level.

Imagine that the government increases its spending by $75 billion. Which of the following by itself would tend to make the change in aggregate demand different from $75 billion?

both the multiplier effect and the crowding-out effect

A U.S. grocery chain borrows money to buy a warehouse in Ohio and another in Italy. Borrowing for which warehouse(s) is included in the demand for loanable funds in the U.S.?

both the one in Ohio and the one in Italy

Higher inflation

causes firms to change prices more frequently and makes relative prices more variable.

comparative advantage

comparative advantage compares opportunity costs of production for each producer. The producer with the lower opportunity cost of production is said to have a comparative advantage

M1 includes

currency, demand deposits, travelers checks

Which list ranks assets from most to least liquid?

currency, stocks, fine art

If expected inflation is constant and the nominal interest rate decreases by 2 percentage points, then the real interest rate

decreases by 2 percentage points

Diversifying

decreases the standard deviation of the value of a portfolio indicating its risk has decreased.

Discounting refers directly to

finding the present value of a future sum of money.

Productivity is defined as the quantity of

goods and services produced from each unit of labor input

According to liquidity preference theory, the money-supply curve would shift rightward

if the Federal Reserve chose to increase the money supply

Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits. As a result, bank reserves will

increase and the money supply will eventually increase.

Unemployment insurance tends to

increase frictional unemployment

Suppose that roofers are not unionized. If roofers unionize, then the supply of labor in other sectors of the economy will

increase, reducing wages in industries that are not unionized.

If a country went from a government budget deficit to a surplus, national saving would

increase, shifting the supply of loanable funds right.

Suppose monetary neutrality holds and velocity is constant. A 4 percent increase in the money supply

increases price level by 4%

Aggregate demand shifts right when the Federal Reserve

increases the money supply

If U.S. citizens decide to purchase more foreign assets at each interest rate, the U.S. real interest rate

increases, the real exchange rate of the dollar depreciates, and U.S. net capital outflow increases.

If the U.S. price level is increasing by 3 percent annually and the Japanese price level is increasing by 1 percent annually, then according to purchasing-power parity, by about what percent would the nominal exchange rate be changing?

increasing by 2 percent

If a country exports more than it imports, then it has

positive net exports and positive net capital outflows

Velocity is computed as the

price level times real GDP divided by the money supply

A nation's standard of living is determined by

productivity of its workers

In 2002 it looked like the Argentinean government might default on its debt (which eventually it did). The open-economy macroeconomic model predicts that this should have

raised Argentinean interest rates and caused the Argentinean currency to depreciate.

The investment component of GDP measures spending on

residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount.

Other things the same, an increase in taxes with no change in government purchases makes national saving

rise. The supply of loanable funds shifts right

When inflation rises, the nominal interest rate

rises, and people desire to hold less money

If the interest rate is below the Fed's target, the Fed would

sell bonds to decrease the money supply.

If the federal funds rate were below the level the Federal Reserve had targeted, the Fed could move the rate back towards its target by

selling bonds. This selling would reduce the money supply

People hold money primarily because it

serves as a medium of exchange

Liquidity preference theory is most relevant to the

short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

Menu costs help explain

sticky-price theory

If the Federal Reserve increases the money supply, then initially there is a

surplus in the money market, so people will want to buy bonds.

Which of the following would both shift aggregate demand right?

taxes decrease and government expenditures increase.

Other things the same, the aggregate quantity of goods demanded in the U.S. increases if

the dollar depreciates

Other things the same, the aggregate quantity of goods demanded in the U.S. increases if

the dollar depreciates.

Liquidity refers to

the ease with which an asset is converted into a medium of exchange.

Using the liquidity-preference model, when the Federal Reserve decreases the money supply,

the equilibrium interest rate increases.

Suppose government expenditures on goods and services increase, transfers are unchanged, and taxes rise by less than the increase in expenditures. These changes in the government's budget cause

the equilibrium interest rate to rise and the equilibrium quantity of loanable funds to fall

Other things the same, if foreign residents desired to purchase more U.S. wheat

the exchange rate would rise and net exports would be unchanged

Other things the same, which of the following would both make Americans more willing to buy Italian goods?

the nominal exchange rate rises, the price of goods in Italy falls

market equilibrium

the point of intersection of demand and supply curves of a given commodity; at equilibrium the market is cleared of the commodity

Net capital outflow equals

the value of foreign assets purchased by domestic residents - the value of domestic assets purchased by foreigners

An increase in the budget deficit causes domestic interest rates

to rise and investment to fall.

An decrease in taxes shifts aggregate demand

to the right. The larger the multiplier is, the farther it shifts.

With the value of money on the vertical axis, the money supply curve is

vertical

If the reserve ratio is 8 percent, then an additional $800 of reserves can increase the money supply by as much as

$10,000

What is the future value of $450 at an interest rate of 9 percent two years from today?

$534.65

Suppose that in a closed economy GDP is equal to 15,000, government purchases are equal to 3,000, consumption equals 10,500, and taxes equal 3,500. What are private saving and public saving?

1,000 and 500, respectively

If you put $400 into a bank account today and it promises to pay 5% interest for 6 years, how much is in the account at the end of the six years?

$400 x (105)6

In equilibrium a country has a net capital outflow of $200 billion and domestic investment of $150 billion. What is the quantity of loanable funds demanded?

$350 billion

In the United States, currency holdings per person average about

$4,490; one explanation for this relatively large amount is that criminals probably prefer currency as a medium of exchange.

If a county has 25 billion euros of imports, 15 billion euros of exports, and sells 20 billion euros of assets to foreigners, how many foreign assets do domestic residents purchase?

10 billion euros

Fourteen years ago William put money in his account at First National Bank. William decides to cash in his account and is told that his money has quadrupled. According to the rule of 70, what rate of interest did Alfred earn?

10%

Last year real GDP per person in the imaginary nation of Olympus was 4,250. The year before it was 4,100. By about what percentage did Olympian real GDP per person grow during the period?

3.7 percent

Suppose the real exchange rate is 3/4 gallon of country A's gasoline per gallon of U.S. gasoline, a gallon of U.S. gasoline costs $3.00 U.S., and a gallon of gas in country A costs 6 units of their currency. What is the nominal exchange rate?

3/2 units of country A's currency per dollar.

If $300 of new reserves generates $800 of new money in the economy, then the reserve ratio is

37.5%

Economists at the Congressional Budget Office estimated that for 2015, the U.S. natural rate of unemployment was

4.9%

Since 1960, the natural rate of unemployment in the U.S. has been between

5-6 %

Your accountant tells you that if you can continue to earn the current interest rate on your balance of $750 for the next three years, you will have $944.78 in your account. If your accountant is correct, then what is the current interest rate?

8%

If the inflation rate is 2 percent and the real interest rate is 7 percent, then the nominal interest rate is

9%

shifts in demand curve- income

A normal good is a good for which an increase in income leads to an increase in demand. An inferior good is a good for which an increase in income leads to a decrease in demand.

Which of the following would shift long-run aggregate supply to the right? a. increased immigration from abroad b. a decrease in the price of an imported natural resource c. opening the economy to international trade d. All of the above are correct.

All of the above

According to the loanable funds model, which of the following events would result in higher interest rates and greater saving?

Congress passes a reform of the tax laws that encourages greater investment

Price takers

If a market is perfectly competitive, both buyers and sellers are said to be price takers because they cannot influence the price.

ambiguous

If both supply and demand shift at the same time and we do not know the magnitude of each shift, then the change in either the price or the quantity must be ambiguous

Surplus in market

If the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded, and there is a surplus, or an excess supply, of the good. A surplus causes the price to fall until it reaches equilibrium

Shortage in market

If the price is below the equilibrium price, the quantity demanded exceeds the quantity supplied, and there is a shortage, or an excess demand for the good. A shortage causes the price to rise until it reaches equilibrium.

Complements- demand curve

If two goods are used together, they are known as complements. When two goods are complements, an increase in the price of one good leads to a decrease in the demand for the other good.

substitutes- demand curve

If two goods can be used in place of one another, they are known as substitutes. When two goods are substitutes, an increase in the price of one good leads to an increase in the demand for the other good.

Marcus is of the opinion that the theory of liquidity preference explains the determination of the interest rate very well. Most economists would say that Marcus's opinion is

Keynesian in nature, and that his view is more valid for the short run than for the long run

Which of the following is not an example of physical capital

Knowledge of workers

GDP

Market value of all final goods and services produced within a country in a given period of time.

Which of the following is correct?

NCO = NX

If you buy a $20,000 Toyota that was produced entirely in Japan, does this affect U.S. GDP?

No. Consumption would increase by $20,000 and net exports would decrease by $20,000. As a result, U.S. GDP is unaffected.

According to purchasing-power parity, if prices in the United States increase by a larger percentage than prices in the United Kingdom, then the

Nominal exchange rate falls

According to purchasing-power parity, if prices in the United States increase by a smaller percentage than prices in the United Kingdom, then the

Nominal exchange rate rises

law of demand.

Other things equal, price and quantity demanded of a good are negatively related.

law of supply

Other things equal, price and quantity supplied of a good are positively related.

Which of the following is not always correct for a closed economy?

Private saving equals investment.

If a country has Y > C + I + G, then

S > I and it has a trade surplus

In the open-economy macroeconomic model, the market for loanable funds identity can be written as

S= I+ NCO

Which of the following would make both the equilibrium real interest rate and the equilibrium quantity of loanable funds decrease?

The demand for loanable funds shifts left.

Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international tensions, and loss of confidence in policymakers, people become pessimistic regarding the future and retain that level of pessimism for some time. Refer to Pessimism. What happens to the expected price level and what's the result for wage bargaining?

The expected price level falls. Bargains are struck for lower wages

A perfectly competitive market has two main characteristics:

The goods offered for sale are all exactly the same. The buyers and sellers are so numerous that no one buyer or seller can influence the price.

Consumer Price Index (CPI)

The overall cost of the goods and services purchased by the typical consumer.

absolute advantage

The producer who requires fewer resources (say fewer hours worked) to produce a good is said to have an absolute advantage in the production of that good.

Which of the following does purchasing-power parity imply?

The purchasing power of the dollar is the same in the U.S. as in foreign countries.

perfectly competitive market

a perfectly competitive market consists of goods offered for sale that are all exactly the same.

Other things the same, which of the following responses would we expect to result from a decrease in U.S. interest rates? a. U.S. citizens decide to hold more foreign bonds. b. People choose to hold more currency. c. You decide to purchase a new oven for your cookie factory. d. All of the above are correct.

all of the above

Which of the following causes of unemployment is associated with a wage rate above the market equilibrium level? a. minimum-wage laws b. unions c. efficiency wages d. All of the above are correct.

all of the above

Which of the following is correct? a. A higher price level shifts money demand rightward. b. When money demand shifts rightward, the interest rate rises. c. A higher interest rate reduces the quantity of goods and services demanded. d. All of the above are correct.

all of the above

If P denotes the price of goods and services measured in terms of money, then a. 1/P represents the value of money measured in terms of goods and services. b. P can be regarded as the "overall price level." c. an increase in the value of money is associated with a decrease in P. d. All of the above are correct.

all of the above are correct

The Fed can influence the money supply by a. changing how much it lends to banks. b. changing the interest rate it pays banks on the reserves they are holding. c. using open-market operations. d. All of the above are correct

all the above

Which of the following shifts short-run aggregate supply right?

an increase in immigration from abroad

In which case(s) does(do) a country's supply of loanable funds shift left?

an increase in the budget deficit, but not capital flight

Which of the following shifts both the short-run and long-run aggregate supply right?

an increase in the capital stock

An increase in the money supply

and an investment tax credit both cause aggregate demand to shift right.

If the government of Canada increased its budget deficit, then domestic investment

and net exports would fall

Owners of municipal bonds

are not required to pay federal income tax on the interest income.

Suppose the government ran a budget surplus in 2010 and a larger surplus in 2011. The loanable funds model would predict that, as a result of the increase in the surplus,

both the government debt and interest rates decreased between 2010 and 2011.

The Federal Funds rate is the interest rate

banks charge each other for short-term loans

President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that

both of them could be telling the truth if the labor force grew faster than employment

Which of the following fall during a recession?

both retail sales and employment

An American brewery sells dollars to obtain euros. It then uses the euros to buy brewing equipment from a German company. These transactions

decrease U.S. net capital outflow because Germans obtain U.S. assets

When taxes increase, consumption

decreases as shown by a shift of the aggregate demand curve to the left.

Other things the same, if the exchange rate changes from 30 Thai bhat per dollar to 25 Thai bhat per dollar, then the dollar has

depreciated and so buys fewer Thai goods.

Assuming the Fisher Effect holds, and given U.S. tax laws, an increase in inflation

does not change the real interest rate but reduces the after-tax real rate of interest.

The long-run aggregate supply curve shifts right if

either immigration from abroad increases or technology

The long-run aggregate supply curve shifts right if

either immigration from abroad increases or technology improves.

What would happen to the equilibrium price and quantity in the bicycle market if the demand for bicycles increases more than the increase in the supply of bicycles?

equilibrium price and quantity will rise

What would happen to the equilibrium price and quantity in the bicycle market if there were an increase in both the supply and the demand for bicycles?

equilibrium quantity will rise, equilibrium price is ambiguous

If net exports are positive, then

exports are greater than imports.

If the U.S. imposes a quota on cotton, then

exports of other goods will fall and imports of other goods will rise.

An increase in household saving causes consumption to

fall and aggregate demand to decrease.

If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would

fall from 10 to 5

Other things the same, when the price level falls, interest rates

fall, so firms increase investment.

Other things the same, an increase in the U.S. interest rate causes U.S. net capital outflow to

fall, so supply in the market for foreign-currency exchange shifts left.

When public saving falls by $2b and private saving falls by $1b in a closed economy

investment falls by $3b

The source of the supply of loanable funds

is saving and the source of demand for loanable funds is investment.

Money

is the most liquid asset

market demand

is the sum of the quantities demanded for each individual buyer at each price. That is, the market demand curve is the horizontal sum of the individual demand curves.

Other things the same, a country that increases its saving rate increases

its future productivity and future real GDP.

According to the definitions of national saving and public saving, if Y, C, and G remained the same, an increase in taxes would

leave national saving unchanged and raise public saving

Other things the same, a decrease in the price level motivates people to hold

less money, so they lend more, and the interest rate falls

A pair of running shoes costs $70 in the U.S. If the price of the same shoes is 4500 rupees in India and the exchange rate is 60 rupees per dollar, than the real exchange rate is

less than 1, so a profit could be made by buying these shoes in the U.S. and selling them in India

Open-market purchases by the Fed

make the price level rise, and make the value of money fall.

The slope of the supply of loanable funds is based on the logic that an increase in interest rates

makes saving more attractive.

If the government cuts the tax rate, workers get to keep

more of each additional dollar they earn, so work effort increases, and aggregate supply shifts right.

The slope of the demand for loanable funds curve represents the

negative relation between the real interest rate and investment.

Your spouse complains that her 6% raise this year will not keep up with the increase in prices. In other words, she is unable to buy the same basket of goods with her 6% raise. Therefore, she believes that her

nominal income increased, but their real income decreased.