Macroeconomics

In the national income accounts, depreciation is called

"consumption of fixed capital"

The word "economy" comes from the Greek word oikonomos which means

"one who manages a household"

Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade,

Belarus should export linen to Russia

Tom produces baseball gloves and baseball bats. Steve also produced baseball gloves and baseball bats, but Tom is better at producing both goods. In this case, trade could

Benefit both Steve and Tom

If the Apple corporation sells a bond it is

Borrowing directly from the public

Olivia bakes cakes and Andrew grows corn. Olivia and Andrew both like to eat cake and eat corn. In which of the following cases is it impossible for both Olivia and Andrew to benefit from trade?

Both Olivia and Andrew can benefit from trade in all of the above cases; Olivia cannot grow corn and Andrew cannot bake cakes, Olivia is better than Andrew at baking cakes and Andrew is better than Olivia at growing corn, Olivia is better than Andrew at baking cakes and at growing corn

In general, as a person includes fewer stocks and more bonds in his portfolio,

Both risk and expected return fall

Which of the following is correct concerning stock market irrationality?

Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future

Changes in the quality of a good

Can lead to either an increase or a decrease in the value of a dollar

Over time, people have come to rely more on market-produced goods and services and less on goods and services they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has

Caused measured GDP to rise

A budget deficit

Changes the supply of loanable funds

A surplus or shortage in the money market is eliminated by adjustments in the price level according to

Classical theory, but not liquidity preference theory

Which of the following in included in M2 but not in M1?

Savings deposits

What term refers to the property that society has limited resources and therefore cannot produce all the goods and services people wish to have?

Scarcity

• When a society cannot produce all the goods and services people wish to have, it is said that the economy is experiencing

Scarcity

Most economists use the aggregate demand and aggregate supply model primarily to analyze

Short-run fluctuations in the economy

For the US economy, money holdings are

Small part of household wealth, and so the wealth effect is small

A decrease in the money supply might indicate that the Fed had

Sold bonds in an attempt to increase the federal funds rate

Al, Ralph, and Stan are all intending to retire. Each currently has $1 million in assets. Al will earn 16% interest and retire in two years. Ralph will earn 8% interest and retire in four years. Stan will earn 4% interest and retire in eight years. Who will have the largest sum when he retires?

Stan

After adjusting for inflation, over time the prices of most natural resources have been

Steady or falling, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling

A U.S. Treasury bond is a

Store of value, but not a common medium of exchange

Sam has no job but keeps applying to get a job with a business that is unionized. He is qualified and he finds the pay attractive, but the firm is not hiring. Sam is

Structurally unemployed. Structural unemployment exists even in the long run

The forces that make market economies work are

Supply and demand

Other things being constant, when a firm sells new shares of stock, the

Supply of the stock increases and the price decreases

One of the differences between the GDP deflator and the consumer price index is

The GDP deflator reflects prices for all goods and services produced domestically and the consumer price index reflects prices for some goods and services bought by consumers

In most societies resources are allocated by

The combined actions of millions of households and firms

Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a reasonable guess?

The country has high money supply growth, inflation is acting like a tax on everyone who holds money, the government is printing money to finance its expenditures

Buyers are able to buy all they want to buy and sellers are able to sell all they want to sell at

The equilibrium price but not above or below the equilibrium price

You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you would use on your own car

The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard

Which of the following is a subject that economists study?

The growth in average income, the fraction of the population that cannot find work, the rate at which prices are rising

Disposable income is

The income that households and businesses have remaining after satisfying their obligations to the government.

According to John Maybnard Keynes

The interest rate adjusts to balance the supply of, and demand for, money.

A decrease in government spending and the enactment of an investment tax credit would definitely cause

The interest rate to increase

A downward-sloping demand curve illustrates

The law of demand

Social security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that Social security recipients are harmed by years of low inflation because they do not receive as large an increase in their payments as they do in years of high inflation. Which are of the following statements is correct?

The newspaper editorial could be correct if the prices of the goods consumed by Social Security recipients change at a different rate than the prices of the goods in the market basket used to compute the CPI

According to the classical dichotomy, when the money supply doubles, which of the following also doubles?

The price level and the nominal wages

According to the assumptions of the quantity theory of money, if the money supply increases 5 percent, then

The price level would rise by 5 percent and real GDP would be unchanged

Aggregate demand includes

The quantity of goods and services the government, households, firms, and customers abroad want to buy

As the interest rate falls,

The quantity of money demanded rises, which would reduce a surplus

A production possibilities frontier is a straight line when

The rate of tradeoff between the two goods being produced is constant

Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?

The real interest rate is the nominal interest rate minus the rate of inflation

A demand curve shows the relationship between

price and quantity demanded

"Other things equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises." This relationship between price and quantity demanded is referred to as

the law of demand

"Monetary policy can be described either in terms of the money supply or in terms of the interest rate". This statement amounts to the assertion that

changes in monetary policy aimed at contracting aggregate demand can be described either as decreasing the money supply or as raising the interest rate

Corey deposits $1,000 in a savings account that pays an annual interest rate of 5 percent. Over the course of a year, the inflation rate is 1.7 percent. At the end of the year, Corey has

$50 more in his account, and his purchasing power has increased by $33

Economists have found that union workers earn what percent more than similar nonunion workers?

10 to 20

About what percentage of jobs are destroyed every year, and about what percentage of workers leave their jobs in a typical month?

10% and 3%

Approximately what percentage of the world's economies experience scarcity?

100%

You put money into an account that earns a 5 percent nominal interest rate. The inflation rate is 2 percent, and your marginal tax rate is 20 percent. What is your after-tax real rate of interest? (Tax rate x nominal interest rate, after tax rate x nominal interest rate, after tax nominal interest rate-inflation rate)

2.0 percent

A typical American worker covered by unemployment insurance receives

50 percent of his former wages for 26 weeks

According to the aggregate demand and aggregate supply model, in the long run a decrease in the money supply leads to

A decrease in the price level but does not change real GDP

A decrease in the US interest rates leads to

A depreciation of the dollar that leads to greater net exports

Other things the same, as the maturity of a bond becomes longer, the bond will pay

A higher interest rate because it has more risk

Examples of a nondurable good

A pair of shoes, one gallon of gasoline, a pencil

Any item that people can use to transfer purchasing power from the present to the future is called

A store of value

A basic principle of economics is that a country's standard of living depends on its

Ability to produce goods and services

A decrease in government spending initially and primarily shifts

Aggregate demand to the left

A decrease in the availability of an important major resource such as oil shifts

Aggregate supply left

Trade can make everybody better off because it

Allows people to specialize according to comparative advantage

If Congress increased the tax rate on interest income, investment

And saving decrease

All of the presidents of the regional Federal Reserve banks

Attend each FOMC meeting

The most obvious benefit of specialization and trade is that they allow us to

Consume more goods than we otherwise would be able to consume

Which famous economist developed the principle of comparative advantage as we know it today?

David Ricardo

An increase in the minimum wage

Decreases the quantity of labor demanded but increases the quantity of labor supplied

A decrease in the money supply creates an excess

Demand for money that is eliminated by falling prices

A national chain of grocery stores wants to finance the construction of several new stores. The firm has limited internal funds, so it likely will

Demand the required funds by selling bonds

Which of the following is a characteristic of a perfectly competitive market?

Different sellers sell identical products, there are many sellers, sellers must accept the price of market determines

A leading environmental group recently published a report contending that humans are running a "resource deficit" because we are using natural resources faster than they can be regenerated. The group claims that this means that economic growth will eventually stop, and will even be reversed. An economist would

Disagree with the report, in part because it ignores the mitigating effects of technological change

A Closed economy

Does not engage in international trade of goods and services and does not engage in international borrowing or lending

If a firm sells a total of 100 shares of stock, then

Each share represents ownership of 1 percent of the firm

Policies such as rent control and trade barriers persist in spite of the fact that economists are virtually united in their oppositition to such policies probably because

Economists have not yet convinced the general public that the policies are undesirable

Macroeconomics is the study of

Economy-wide phenomena

According to the quantity equation, the price level would change less than proportionately with a rise in the money supply if there were also

Either a rise in output or a fall in velocity

The National Labor Relations Board

Enforces workers' rights to unionize

Suppose the incomes of buyers in a market for a particular normal good decrease and there is also a reduction in input prices. What would we expect to occur in this market?

Equilibrium price would decrease, but the impact on the equilibrium quantity would be ambiguous

Which of the following defines an annuity?

For a fee, an insurance company provides you with regular income until you die

An economic outcome is said to be efficient if the economy is

Getting all it can from the scarce resources it has available

All Fed purchases and sales of

Government bonds are conducted at the New York Fed's trading desk

Aggregate demand shifts left if

Government purchases decrease and shifts left is stock prices fall

Fiscal policy refers to the idea that aggregate demand is affected by changes in

Government spending and taxes

Historically, as recessions have ended the unemployment rate declined

Gradually to a rate of about 5%-6%

The key determinant of the standard of living in a country is

Growth rate of real GDP

A circular-flow diagram is a model that

Helps to explain how participants in the economy interact with one another and helps to explain how the economy is organized

Wealth is redistributed from debtors to creditors when inflation was expected to be

High and it turns out to be low

A market supply curve is determined by

Horizontally summing individual supply curves

Categories of U.S. consumer spending, ranked from largest to smallest are

Housing, transportation, food & beverages, and medical care

The principle of comparative advantage does not provide answers to certain questions. One of those questions is

How are the gains from trade shared among the parties to a trade?

Economics is the study of

How society manages its scarce resources

Consumer goods that are produced, go into inventory, and are not sold during the current period are

Included in current period GDP as inventory investment

The notion that our ability to conserve natural resources is growing more rapidly that their supplies are dwindling is supported by the fact that

Inflation-adjusted prices of most natural resources have been stable or fallen over time

The concept of present value helps explain why

Investment decreases when the interest rate increases, and it also helps explain why the quantity of loanable funds demanded decreases when the interest rate increases

The inflation tax

Is a tax on everyone who holds money

When a society decides to increase its quantity of physical capital, the society

Is in effect deciding to consume fewer goods and services in the present

For the purpose of calculating the consumer price index, the basket of goods

Is kept the same from year to year so that the effects of price changes are isolated from the effect of any quantity changes that might be occurring at the same time

The risk of a portfolio

Is positively related to the average return of the portfolio

A double coincidence of wants

Is required when there is no item in an economy that is widely accepted in exchange for goods and services, is required in an economy that relies on barter, is a hindrance to the allocation of resources when it is required for trade

A bank has a 10 percent reserve requirement, $36,000 in loans, and has loanded out all it can given the reserve requirement

It has 40, 000 in deposits

If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?

It increases by $150,000

Which of the following is correct concerning diversification?

It only reduces firm-specific risk; much of the reduction comes from increasing the number of stocks in a portfolio from 1 to 30

Janet bought flour and used it to bake bread she ate. ABC Bakery bought flour which it used to bake bread that customers purchased. In which case will the flour be counted as a final good?

Janet's purchase but not ABC Bakery's purchase

A society allocates its scarce resources to various jobs. These scarce resources include

Land, people, machines

A decrease in demand is represented by a

Leftward shift of a demand curve

A reduction in the inflation rate would make relative prices

Less variable, making it more likely that resources will be allocated to their best use

A significant example of a temporary tax cut was the one announced in 1992 by President George H. W. Bush. The effect of that tax cut on consumer spending and aggregate demand was

Likely smaller than if the cut had been permanent

A situation in which the Fed's target interest rate has fallen as far as it can fall it sometimes described as a

Liquidity trap

Economists would predict that, other things the same, the more generous unemployment compensation a country has, the

Longer the duration of each spell of unemployment and the higher the unemployment rate.

In the United States in the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were

Low, and in some years they were negative

In a market economy, scarcity of resources is most clearly reflected in

Market prices

Real GDP

Measures economic activity and income

If people decide to hold less money, then

Money demand decreases, there is an excess supply of money, and interest rates fall

The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called

Natural resources

Cyclical unemployment is caused by

Neither frictional nor structural unemployment

If the prices of all goods and services produced in the economy rose while the quantity of all goods and services stayed the same, which would rise?

Nominal GDP but not real GDP

According to classical macroeconomic theory, changes in the money supply affect

Nominal variables, but not real variables

When all market participants are price takers who have no influence over prices, the markets have

Numerous buyers and sellers

Currency includes

Paper bills and coins

In a simple circular-flow diagram, firms use the money they get from a sale to

Pay wages to workers, pay rent to landlords, pay profit to the firms owners

The Wagner Act of 1935

Prevents employers from interfering when workers try to organize a union

A demand schedule is a table that shows the relationship between

Price and quantity demanded

The one variable that stands out as the most significant explanation of large variations in living standards around the world is

Productivity

A relatively steep demand curve indicates that

Quantity demanded will adjust only slightly to a price change

A relatively flat demand curve indicates that

Quantity demanded will adjust significantly to a price change

The introduction of a union into an industry

Raises wages and lowers employment in that industry

A nation's standard of living is best measured by its

Real GDP per person

The phenomenon of scarcity stems from the fact that

Resources are limited

Economists believe that production possibilities frontiers are often bowed because

Resources are not completely adaptable

A decrease in the expected price level shifts short-run aggregate supply to the

Right, and an increase in the actual price level does not shift short-run aggregate supply

If the efficient markets hypothesis is correct, then

The stock market is informationally efficient

When two countries trade with one another, it is most likely because

The two countries wish to take advantage of the principle of comparative advantage

If net exports is a negative number for a particular year then

The value of foreign goods purchased exceeded the value of goods sold to foreigners during the year

In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct?

The value of the consumer price index is always 100 in the base year

If an economy is producing efficiently then

There is no way to produce more of one good without producing less of another good

Suppose that fundamental analysis indicates a particular company's stock is overvalued.

This means its present value is less than its price. You shouldn't consider adding the stock to your portfolio.

A German citizen buys an automobile produced in the United States by a Japanese company. As a result,

U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GNP and GDP are unaffected

All US paper dollars read "This note is legal tender for all debts, public and private". This statement represents which characteristic of US currency?

US paper money is fiat money

Wealth is redistributed from creditors to debtors when inflation is

Unexpectedly high

Economics is the study of how society manages its

Unlimited wants and limited resources

Factors of production are

Used to produce goods and services.

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

When a new good is introduced, it gives consumer greater choice, thus reducing the amount they must spend to maintain their standard of living

When can two countries gain from trading two goods?

When the first country can only produce the first good and the second country can only produce the second good, when the first country can produce both goods, but can only produce the second good at great cost, and the second country can produce both goods, but can only produce the first good at great cost, when the first country is better at producing both goods and the second country is worse at producing both goods