Economics Final Study Guide

If the reserve requirement is 25%, a new deposit of $1000 leads to a potential increase in the money supply of

$4000

About how large is the US public debt as a fraction of GDP?

75%

Suppose that Japan is a nation of savers with MPC of 0.6 and the US is a nation of spenders with MPC of 0.9. Which statement is correct?

A small increase in spending will have a more powerful effect in starting a recovery in the United States than Japan

National Activity Index

A weighted average of 85 indicators of aggregate economic performance, designed to pinpoint signs of a recession in a reasonable time frame

Multiplier Effect

An effect in economics in which an increase in spending produces an increase in national income and consumption greater than the initial amount spent.

What impact will a rising price level have on real GDP?

Changes in price level do not impact real GDP

When consumer spending is a smaller share of total spending, it suggests what?

Consumers are saving a larger share of their income

What assets are included in M1?

Currency and checking deposits

In 1933 Congress directed the _____ to develop estimates of the "total national income for each of the calendar years 1929, 1930, 1931..."

Department of Commerce

A glut of oil in the world market would most likely cause

Disinflation in the US

Econia and Macroland are each other's main trading partner. Which statement correctly identifies an event that would cause Econia's aggregate demand to rise and Macroland's aggregate demand to fall?

Econia's currency depreciates in value compared to Macroland's currency

The balanced budget multiplier is

Equal to one

A consumer price index of 107 means that prices rose 7% from last year

FALSE

An increase in interest rates will lead to an increase in aggregate demand

FALSE

Automatic stabilizers, such as tax revenues and transfer payments, eliminate fluctuations in the business cycle

FALSE

Hyperinflation occurs when there is an excess of tax revenue over government spending

FALSE

If Manny writes a $1000 check to his landlord and his landlord deposits that money into her bank, the money supply can increase by the amount of that check times the money multiplier

FALSE

If market interest rates increase to 9% and the yield on a bond is 7%, then the price of the bond will rise

FALSE

Long run economic growth is shown by moving from a point below the PPF to a point on the PPF

FALSE

On average, the US falls into a recession every ten years

FALSE

One argument against using taxation to pay off the public debt is that it will redistribute wealth from richer bondholders to poorer people who do not own bonds

FALSE

One reason the price level did not rise after the implementation of the 2008-2009 stimulus policy actions is that the US capacity was fully utilized

FALSE

Savings deposits are included in M1

FALSE

The Federal Reserve's interest rate is the target level that will generally result in inflationary pressures

FALSE

The GDP deflator is one of the narrowest measures of inflation

FALSE

The balanced budget multiplier changes according to the values of the marginal propensity to consume and the marginal propensity to save

FALSE

The natural rate of unemployment occurs when the rate of increase in the wage is greater than the increase in productivity

FALSE

There is a positive relationship between bond prices and interest rates

FALSE

Which statement does not explain why the actual money multiplier and the potential money multiplier are different?

Foreign deposits in American banks are not counted in the actual money multiplier

Which measure takes into account the differences in the cost of living between countries?

GDP - PPP

Net domestic product measures

GDP minus depreciation

Which expenditure component of GDP tends to be the most volatile over time?

Gross Private Domestic Investment

John has $100,000 in annual income but does not own a house or car. Bob also has $100,000 in annual income but owns two houses and four cars. Which theorist would predict that John spends a different proportion of his current income than Bob?

Milton Friedman

Which statement describes a difference between the consumer price index and the producer price index?

Only the PPI measures net revenues received by firms

In the US, what three entities must agree on spending and taxation policies?

President, House of Representatives, Senate

Suppose the economy is at full employment and a booming stock market encourages consumption spending to rise dramatically. What would be the most likely long-run impact?

Real GDP first rises and then falls back to long-run equilibrium

Actions taken by the European Central Bank to address the European Union's financial crisis from 2009-2013 include all of these except

Reducing taxes to provide stimulus packages

Which occurrence will lead to increased imports and decreased exports, ultimately resulting in currency depreciation for the USD?

Rising interest rates in the US

According to the equation for the Philips curve, inflation is zero when the increase in nominal wages is equal to the rate of increase in labor productivity

TRUE

An increase in business inventories is included in Gross Private Domestic Investment

TRUE

Assume the economy is at full employment. If an inflation targeting rule is used and a positive demand shock hits the economy, the Federal Reserve will use contractionary monetary policy to keep the inflation rate low

TRUE

During the financial panic in late 2008, the Fed changed the allocation of assets in its balance sheet away from Treasury bonds towards bank assets

TRUE

Each regional Federal Reserve branch helps to compile information about the economic conditions in its home region

TRUE

Equal changes in government spending and taxation lead to an equal change in income

TRUE

Friedman advocated a steady growth in the money supply

TRUE

If a country's CPI rises, it does not cause a decrease in AD

TRUE

If the government offers firms investment tax credits for building new factories, the after-tax rate of return rises, causing the loanable funds demand curve to shift rightward, leading to higher interest rates

TRUE

Other things equal, if US disposable income falls, imports will fall and the current account deficit will decrease

TRUE

Rational expectations are forward looking

TRUE

The Great Depression was characterized by a lack of aggregate demand

TRUE

The digital market is not part of the financial system

TRUE

The recession of 2007-2009 probably lasted longer than other postwar recessions because it was associated with a bank-centered financial crisis

TRUE

The target federal funds rate is the Fed's primary approach to monetary policy

TRUE

Treasury Bonds that can be traded on the open market do not satisfy the definition of a bank reserve asset

TRUE

When a supply shock occurs in the short run, the best policy is to target nominal income or output in order to spread the shock's impact between income and output losses and price level increases

TRUE

When the economy booms, tax revenues rise faster than income

TRUE

Which statement explains why the size and direction of the gap between long and short term interest rates is a predictor of stages in the business cycle?

The time period with higher rates is likely to have higher economic activity than the time period with lower rates

Why are some politicians critical of the Fed's efforts to temper inflation by using contractionary monetary policy?

The use of contractionary monetary policy slows economic growth, which could make re-election prospects more difficult

Why have many American's retirement accounts regained much of their lost value since the 2007-2009 stock market crash?

They were able to buy more stocks for a cheaper value when the market price was low

Which statement is true in the case of the simple circular flow model with no savings?

Total spending equals total income

Treasury Notes

United States government obligation with a maturity of 1 to 10 years

adaptive expectations theory

Uses past rates of inflation only to form expectations of inflation

An example of an item include in the capital account is

a Pepsi bottling plant in Greece

If the federal government were required to balance its budget annually

a recession would lead to higher taxes and reduced spending

teaser rate

a temporarily low interest rate for a credit card

If a Japanese mutual fund buys a share of stock on the New York Stock Exchange, it will be accounted for as

addition to the US capital

If MPC rises, the multiplier

also rises

Demand pull inflation is caused by

an increase in aggregate demand

Which of these will cause the supply of loanable funds curve to shift outward?

an increase in the government deficit

In counteracting demand shocks, the Federal Reserve can achieve

both full employment and price stability

The multiplier effect shows that a change in aggregate spending

causes output to change even more than the change in aggregate spending

During times of economic expansion with inflationary pressure, what type of monetary policy should the Fed pursue?

contractionary monetary policy to raise interest rates

To counteract a positive demand shock, the Federal Reserve uses _____ monetary policy, which _____.

contractionary; reduces both output and price level

American tourists planning a trip to Japan benefit more by

converting USD to yen before USD depreciates against yen rather than after

Foreign trade transfers are part of the

current account

A luxury car manufacturer is considering investing in its assembly plants. It learns that the probability of a recession in the next few years has increased dramatically because of adverse international events. Its investment demand will

decrease because lower investment returns are expected

One implication of the long run Phillips curve is that

economic policies that keep the unemployment rate below its natural rate will lead to accelerating inflation

The unit of account function of money

eliminates the need to value every item in terms of every other item

LRAS uses the classical assumptions that all variables are _____ in the long run and that long run equilibrium occurs at _____ employment

flexible; full

Thomas Malthus believed that population increased ____________ and food resources increased ____________

geometrically; arithmetically

Which is not consistent with the level of output in the long run?

high inflation

The fractional reserve banking system

imposes limits on the amount of money banks can create

When current real output exceeds potential real output, the Fed will _____ interest rates in an effort to fight _____.

increase; inflation

In the long run, attempts to expand beyond an economy's natural rate of unemployment tend to result in

increased inflation

What is the single most important factor influencing economic growth for an economy?

increased productivity

Which approach to monetary policy would be the most likely to increase unemployment problems caused by a negative supply shock to an economy?

inflation targeting

The spending reduction necessary to bring an overheated economy back to full employment is called the

inflationary gap

The effects of expansionary fiscal and monetary policies differ under a flexible exchange rate system because they have different effects on

interest rates

The marginal propensity to consume

is the change in consumption associated with a change in income

Which asset is not included in M2?

large denomination time deposits

Which of these is an appropriate policy to address a jobless recovery?

lowering interest rates to reduce the cost of financing major projects

If you hire a lawn service to mow your grass, the money you pay for the service is included in GDP, whereas if you mow your own lawn, the value of this service is not included in GDP. This fact represents a criticism of GDP's focus on

market produced goods and services

The Index of Economic Freedom

measures the quality of a country's intangible infrastructure

Money is considered what because it is generally accepted as a payment for goods and services?

medium of exchange

If aggregate expenditures are greater than aggregate income businesses will produce

more, raising both employment and income

The idea that new spending creates more new spending is the

multiplier effect

Absolute Purchasing Power Parity

nominal exchange rates equal the purchasing power in each country

In the Keynesian Aggregate Expenditures model, which variable is assumed to be fixed?

price level

Which of these would not be included in the capital account?

profits earned by General Motors in China that are brought back to the US

Price of once country's currency in terms of another country's currency, with the price levels of both countries taken into account

real exchange rate

What is not a category of personal consumption goods?

residential housing

What component of GDP includes college tuition?

services

Monetary targeting

setting a steady growth rate in the money supply

A decrease in taxes will

shift the AD curve to the right

The great depression demonstrated that

short run equilibrium can occur at levels substantially less than full employment

The classical form of the production function states that output is determined by

some function of available labor or capital

The Taylor rule

targets the federal funds rate

The aggregate demand curve shows

the amount of real GDP that will be demanded at each possible price level

When the dollar price per the British pound rises

the dollar depreciates against the pound

When the long run aggregate supply curve is drawn as a vertical line, the theorist is assuming that

the economy tends to move toward full employment in the long run

Marginal Propensity to Consume (MPC)

the increase in consumer spending when disposable income rises by $1

According to the Taylor rule, the more GDP falls below potential GDP

the lower the federal funds target rate gets

Short-run macroeconomic equilibrium has not occurred if

the short run aggregate supply quantity exceeds the aggregate demand quantity

Which entity will gain from unexpected inflation?

the state of Kansas, which is running a budget deficit

Monetary policy is least effective in maintaining low inflation and high GDP when

there has been a supply shock

The labor force is defined as the

total number of the employed and unemployed

The long run supply curve is

vertical