AP Macroeconomics Chapter 9

Which of the following is the most accurate statement about real and nominal interest rates?

Real interest rates can be either positive or negative, but nominal interest rates must be positive.

The change in the quantity of goods and services demanded in the U.S. is based on the logic that as the price level rises,

Real wealth falls, interest rates rise, and net exports fall.

he market that coordinates the exchange of productive inputs between the households and business sectors is the

Resource Market.

Falling interest rates cause the market value of previously issued bonds to?

Rise.

Which of the following are leakages from the circular flow of income?

Savings, taxes, and imports.

Which of the following will always be true when an economy is in long run equilibrium?

The output of the economy will correspond with the full employment output.

The Exchange Rate is?

The price of one currency in terms of another currency.

The exchange rate is

The price of one nation's currency in terms of the currency of another nation.

If the actual price level exceeds the expected price level reflected in long-term contracts,

Unemployment will decrease.

Your grandmother gives you a $100 savings bond that will mature in 15 years. The bank tells you that they will buy it from you today at a price of $24. If interest rates rise in the near future, the value of your bond? (DID you Read the Box)?

Will fall and it will be worth less than $24.

If expected inflation is constant and the nominal interest rate increased 3 percentage points, the real interest rate would?

Increase 3 percentage points.

Other things constant, an increase in the expected inflation rate will?

Increase money (nominal) interest rates.

In the short run, an unexpected increase in prices will?

Increase the profits of firms, thereby leading them to expand output.

If a person earns an 8 percent nominal rate of interest on his savings account in a year when inflation is 9 percent, the person's real rate of interest is?

-1 percent.

An unexpected sharp reduction in inflation will most likely result in?

A temporary increase in unemployment and a decline in real output.

The short run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in prices will?

Cause firms to expand output since the higher product prices will improve profitability.

If the expected inflation rate is 7 percent and banks are charging a 12 percent money rate of interest, the real rate of interest is?

5 percent

Suppose you purchase a $5,000 bond that pays 7 percent interest annually and matures in five years. If you expect that the inflation rate during the next five years will be 2 percent annually, what real rate of return do you expect to earn?

5 percent.

People anticipate inflation will be 3 percent during the next several years. If this is true, when the real interest rate is 4 percent, the money interest rate will be?

7 percent.

Suppose people anticipate INFLATION will be 5 percent during the next several years. IF the real rate of interest is 4 percent, the money rate of interest must be?

9 percent.

As prices rise, consumers and businesses will want to hold larger money balances. This will lead to,

A reduction in the supply of loanable funds and an increase in the interest rate.

Saving is?

After-tax income that is not spent on consumption.

Which of the following is TRUE? (Do you have your Drawing) A. Savings, taxes, and imports are leakages from the circular flow of income. B. Investment, government purchases, and exports are injections into the circular flow of income. C. When the loanable funds and foreign exchange markets are in equilibrium, the injections into the circular flow of income will equal the leakages from it. D. All of the above are true.

All of the above are true.

The real interest rate is? A. The premium that borrowers must pay in order to acquire more purchasing power. B. The reward lenders receive in exchange for their willingness to delay consumption into the future. C. Equal to the money interest rate minus the inflationary premium. D. All of the above.

All of the above.

Ceteris Paribus, a decrease in the U.S. price level will cause,

An increase in U.S. exports.

Ceteris paribus, a decrease in the U.S. price level will cause?

An increase in U.S.exports.

The aggregate demand curve slopes downward indicating that?

An increase in the general price level will reduce the aggregate quantity of goods and services demanded.

A vertical long run aggregate supply curve indicates that?

An increase in the price level will not expand an economy's output capacity in the long run.

If the dollar price of the English pound goes from $1.75 to $1.50, the dollar has?

Appreciated, and Americans will find English goods cheaper.

Which of the following helps explain why the aggregate quantity demanded of goods and services is INVERSELY related to prices within the framework of the AD/AS model?

As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services.

If the expected rate of inflation is zero, the real interest rate must?

Be equal to the money (nominal) interest rate.

Which of the following best characterizes the circular flow of income?

Businesses buy resources from households, and households use their income to buy goods and services from businesses.

The short run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in price will,

Cause firms to expand output since the higher product prices will improve profitability.

Once decision makers fully adjust to an increase in prices,

Competitive forces will restore the usual relationship between product prices and costs.

If the dollar price of the English pound goes from $1.50 to $1.75, the dollar has,

Depreciated, and Americans will find English goods more expensive

Which of the following would generate a supply of euros in exchange for dollars?

European demand for U.S. government bonds.

If prices in the United States rose, which of the following could be directly attributed to the international substitution effect?

Europeans purchase fewer American made personal computers.

If prices in the USA rose, which of the following coil be directly attributed to the international substitution effect?

Europeans purchase fewer American-made personal computers.

The size of the inflationary premium will vary directly with the?

Expected inflation rate

The four key markets in the simple AD/AS model are?

Goods and services, resources, foreign exchange, and loanable funds.

Mary Green takes a summer course in London, England. She doesn't buy British pounds at the U.S. airport, where the rate is 1 pound = $1.60. Upon arrival in London, she finds that she can buy pounds for $1.65 each. Which of the following is TRUE?

Green would have been better off if she had bought pounds in the United States where pounds were less expensive.

A positive nominal interest rate indicates?

How fast the number of dollars in your savings account is rising over time.

A positive real interest rate indicates?

How fast the purchasing power of your savings account is rising over time.

When the foreign exchange market is in equilibrium, which of the following will be TRUE?

Imports - exports =net capital inflow.

When equilibrium is present in the foreign exchange market, which of the following will tend to be in balance?

Imports plus capital outflow and exports plus capital inflow.

Other things constant, if the cost of labor goes down, the profits of firms will

Increase, and short-run aggregate supply will shift to the right.

The difference between the money rate of interest and the real rate of interest is often called the?

Inflationary premium.

Of the following, who would most likely be hurt by an unanticipated increase in the rate of inflation?

Lenders who have made long-term loans at fixed interest rates.

Other things the same, an increase in the price level makes the dollars people hold worth?

Less, so they are willing to spend less.

The International substitution effect exists because a

Lower price level will make domestically produced goods less expensive relative to foreign goods.

The international substitution effect exists because a

Lower price level will make domestically produced goods less expensive relative to foreign goods.

A depreciation in the U.S. dollar on the foreign exchange market will

Make U.S. exports cheaper for foreign consumers.

If a nation's currency depreciates, this will tend to?

Make foreign goods more expensive for the nation's citizens.

Americans needing Foreign currencies get those currencies from a bank. The ultimate source of these currencies is?

U.S. sales to foreign countries.

Controlling the money supply to achieve desired macroeconomic goals is called,

Monetary policy.

Claude agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent. Claude earned a real rate of return of ?

Negative 2%

Tina agrees to lend Steve $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent. Tina earned a real rate of return of?

Negative 2%

If net exports are negative, then

Net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by Americans.

If net exports are positive then?

Net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought by foreigners.

Output in the goods and services market will be sustained into the future,

Only when the prior choices of decision makers were based on a correct anticipation of prices.

Which two submarkets are included in the resource market?

Physical capital and labor.

The aggregate supply curve indicates the,

Quantity of goods and services producers will supply at different price levels.

In the Loanable Funds market, the true burden of borrowers and the true yield to lenders is the?

Real (inflation adjusted) interest rate.

The actual rate of unemployment will be greater than the natural rate of unemployment when?

The actual output is less than the economy's potential output.

Monetary policy can be most accurately described as,

The deliberate control of the money supply to achieve macroeconomic goals.

Suppose business decision makers become more optimistic about future economic conditions and desire additional funds to expand their plant capacity. What is the likely effect on the loanable funds market?

The demand for loanable funds will increase, and the interest rate will rise.

If the U.S. demand for British pounds increases,

The dollar price of a British pound will increase.

Which of the following markets coordinates transactions with foreigners that involve the exchange of currency?

The foreign exchange market.

The money interest rate may be a misleading indicator of real borrowing costs when?

The inflation rate is high.

When the loanable funds and foreign exchange markets are in equilibrium,

The leakages from the circular flow will equal the injections into it.

The Real Rate of Interest is?

The money rate of interest adjusted for inflation.

A decrease in the dollar price of foreign currency would cause?

The nation's imports to increase and exports to decline.

When an economy operates at its long run potential output level,

The natural and actual rates of unemployment will be equal.

If the real interest rate in the domestic loanable funds market increases,

The net inflow of foreign capital will tend to increase

Arnold puts money into an account. One year later he sees that he has 5 percent more dollars and that his money will buy 6 percent more goods.

The nominal interest rate was 5 percent and the inflation rate was -1 percent.

Fiscal policy is

The use of government taxation and expenditures to achieve macroeconomic goals.

Which of the following will be True when the foreign exchange market is in equilibrium and exports exceed imports?

There will be a net outflow of capital.

For a major country with extensive capital flows, what is the effect of an increase in interest rates?

There will be an inflow of capital, a currency appreciation, and reduced net exports.

Within the aggregate demand/aggregate supply framework (The Graph), the quantity on the horizontal axis in the aggregate goods and services market represents the?

Total real output (real GDP) of the economy.

Unlike a single product on a supply curve, when the price level rises on an Aggregate Supply Curve, the prices of all goods produced in the United States rise?

True

Imagine that there are only two nations in the world, the United States and Mexico. If Americans buy more goods made in Mexico, other things constant, the

U.S. demand curve for Mexican peso will shift rightward.

A decrease in the dollar price of the English pound will make,

U.S. exports to England decrease.

Which of the following will most likely result from a decline in the dollar price of a foreign currency?

U.S. exports will become more expensive for foreigners, and therefore, they will decrease.

Ceteris Paribus

a Latin phrase that means "all other things held constant"