Chapter 9

If a $1,000 bond is issued with a coupon rate of 12%, the bondholder will receive $12 per year for the life of the bond. T or F

F

In open market operations, the Federal Reserve buys and sells gold on the open market to preserve the value of the dollar. T or F

F

Many U.S. retirement accounts have regained much of their lost value since the 2007-2009 stock market crash because investors switched their portfolio mix from stocks to bonds. T or F

F

When an economy moves to a point below full employment, economists say that an inflationary spiral has set in. T or F

F

One argument against using taxation to pay off the public debt is that it will redistribute wealth from people who do not hold bonds to bondholders. T or F

T

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

T

For a fiscal policy to be sustainable, the present value of all projected future revenues must equal the present value of projected future spending. T or F

T

If a bank makes a loan of $5,000, which is then withdrawn in cash and spent in another country, the money supply will not grow. T or F

T

Missing a minimum payment on your credit card can make it less likely that certain employers will hire you. T or F

T

Open market operations consist of buying and selling government securities on the open market. T or F

T

When households decide to increase saving, real interest rates fall and investment rises. T or F

T

When the Federal Reserve buys bonds, it effectively lowers the nominal interest rate in the market. T or F

T

When the economy booms, tax revenues rise faster than income. T or F

T

All of the following are determinants of aggregate supply EXCEPT:

net exports

Economic growth is most accurately measured using:

real GDP per capita

Because of the wealth effect, a rising aggregate price level ____ the purchasing power of wealth and therefore _____ output demanded.

reduces; reduces

Because of the wealth effect, a rising aggregate price level _____ the purchasing power of wealth and therefore _____ output demanded.

reduces; reduces

Increased consumer confidence will shift the aggregate demand curve to the ________ and ______ output demanded.

right; increase

If a pill is discovered that allows people to work twice as fast as they would ordinarily work, then the aggregate supply curve will:

shift to the right

Economic growth is shown as a:

shift to the right of the long-run aggregate supply curve

Panel A illustrates ______ economic growth and Panel B illustrates _____ economic growth.

short-run; long-run

______ are components of consumer spending that affect aggregate demand.

taxes

To say that interest rates represent the opportunity cost of holding money means that as interest rates rise:

there is a movement upward along the demand curve for money.

Which of the following is a goal of the agencies that regulate financial institutions?

to increase transparency and the flow of information to investors

If income rises from $10,000 to $20,000 and savings increases from $9,000 to $16,000, then the marginal propensity to save is:

.70

If disposable income is $3,000 and savings is $1,200, how much is the average propensity to consume?

0.6

If the Bureau of Economic Analysis reports that the annualized U.S. growth rate was 2.5% for the second quarter, then the actual growth rate from the first quarter to the second quarter was:

0.625%

Rocky Gap Furniture hires 10 employees working 8 hours each to produce 100 rocking chairs. What is the productivity of these workers?

1.25 chairs per hour

A falling aggregate price level ____ demand for a country's exports and therefore _____ output demanded. A) increases; increases B) increases; reduces C) reduces; increases D) reduces; reduces

A) increases; increases

Which of the following events causes an increase in aggregate demand? A) decreasing wealth B) falling interest rates C) decrease in government spending D) rising imports

B) falling interest rates

If income rises from $10,000 to $20,000 and savings increases from $9,000 to $16,000, then the marginal propensity to save is: A)0.80. B)0.70 .C)0.10. D)0.30.

B)0.70

_____ inflation occurs when a supply shock reduces aggregate supply. A)Demand-push B)Cost-push C)Demand-pull D)Sticky

B)Cost-push

____ inflation occurs when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises. A)Overextended B)Demand-pull C)Unnecessary D)Cost-push

B)Demand-pull

A(n) _____ in government spending, a _____ domestic currency, and _____ interest rates will shift a country's aggregate demand to the left. A)increase; stronger; lower B)decrease; stronger; higher C)decrease; weaker; lower D)increase; weaker; higher

B)decrease; stronger; higher

_____ is the change in consumption associated with a change in income. A)The marginal propensity to save B)The average propensity to save C)The average propensity to consume D)The marginal propensity to consume

D)The marginal propensity to consume

Which is NOT a source of productivity growth? A)making investments in technological improvements B)raising the capital-to-labor ratio C)increasing the quality of labor D)moving resources from production to pension benefits

D)moving resources from production to pension benefits

Investment spending: A)is the largest component of total spending. B)is not sensitive to interest rates. C)is limited to the stock and bond markets. D)tends to be volatile.

D)tends to be volatile.

A(n) _________ in government spending, a ________domestic currency, and _______ interest rates will shift a country's aggregate demand to the left.

Decrease; stronger; higher

______ inflation occurs when aggregate demand expands so much that equilibrium output exceeds full employment and the price level rises.

Demand-pull

Suppose policymakers wish to use fiscal policy to fight inflation. Which statement is MOST accurate?

Essentially, the way to lower the inflation rate is to decrease aggregate demand and cause a recession.

A deferment on a college loan means that it need not be paid off at all. T or F

F

About 10% of U.S. dollars are held outside the United States. T or F

F

An investment tax credit for pharmaceutical research is a demand-side fiscal policy. T or F

F

Bond prices and interest rates are positively related. T or F

F

Checking accounts are not money T or F

F

If the marginal propensity to save is 0.25, the multiplier is:

HELP

This economy is currently at point a. This figure depicts an economy:

In short-run equilibrium only

Which of the following events causes a decrease in aggregate demand?

Increase in taxes

If the U.S. aggregate price level falls:

Net exports rise

c

Which of the following is not true about the stock market? a) A person who owns shares of stock becomes an owner of the company. b) A stockholder likely loses its entire investment if the company goes bankrupt. c) A stockholder receives the amount it invests plus interest at a fixed time in the future. d) When a company earns profits or rises in value, the stockholder will earn more money.

Kim recently purchased a perpetual bond for $1,000. The bond pays $50 in interest per year. Suppose market interest rates rise to 7% after the purchase. The price of the bond:

falls to $714.

What is the interest rate for money borrowed to satisfy daily reserve requirements?

federal funds rate

Which of the following factors is NOT a component of aggregate demand?

income

A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output demanded.

left; decrease

The short-run aggregate supply curve is positively sloped because:

many input prices are slow to change in the short run.

Which of the following statements is NOT true? A)Economic growth always leads to a more equitable distribution of income. B)Economic growth leads to increased consumption of goods and services. C)Economic growth leads to lower poverty rates. D)Economic growth leads to longer life expectancies.

A)Economic growth always leads to a more equitable distribution of income.

SEE GRAPH: If the government raises taxes or increases regulations, the short-run aggregate supply curve will shift from SRAS0to _____ and the price level will be at _____. A)SRAS2; P2 B)SRAS1; P0 C)SRAS1; P1 D)SRAS2; P1

A)SRAS2; P2

According to the figure of ADAS curves and assuming the country begins on AD1and SRAS1, what will happen in the short and long run if the price of oil rises significantly?A)The economy will move from point C to A to B. B)The economy will move from point D to C to E. C)The economy will move from point D to C to B. D)The economy will move from point C to E to B.

A)The economy will move from point C to A to B.`

Which of the following did classical economists believe would happen if the economy experienced a downturn?A)The economy would self-correct. B)Prices would rise. C)The government would fix the inefficiencies. D)Interest rates would rise.

A)The economy would self-correct.

According to the textbook, what brought the United States out of the Great Depression?

An increase in spending on World War II

c

Appleville is a village that specializes in all forms of apple products. Suppose that each winter, when no apples are being produced, the aggregate output falls below the long-run output level. What type of fiscal policy might be most effective to correct this problem? a) Reducing taxes in order to decrease aggregate demand. b) Increasing taxes in order to increase aggregate demand. c) Increasing government spending in order to increase aggregate demand. d) Decreasing government spending in order to increase aggregate demand.

_____ will most likely increase the economy's long-run aggregate supply. A) A low rate of investment B) Unfavorable weather in the corn belt C) Advances in technology D) An increase in the expected inflation rate

C) Advances in technology

_____ occurs when a negative supply shock hits the economy, shifting the short-run aggregate supply curve leftward. A) Demand-pull inflation B) Demand-push inflation C) Cost-push inflation D) Cost-pull inflation

C) Cost-push inflation

Simultaneous recession and deflation can be explained by: A) an increase in aggregate supply. B) a rise in aggregate demand. C) a drop in aggregate demand. D) a decrease in aggregate supply.

C) a drop in aggregate demand.

.If disposable income is $3,000 and saving is $1,200, how much is consumption? A)$2,100 B)$4,200 C)$1,800 D)-$1,200

C)$1,800

The reason business investment is sensitive to interest rates is that: A)interest rates indicate how aggressive government policy is about fighting recessions. B)firms charge interest on any investment they make. C)most funds used for investment are borrowed, so firms incur an interest charge. D)interest rates are a lagging indicator, so they signal to firms the state of the economy.

C)most funds used for investment are borrowed, so firms incur an interest charge.

_____________ inflation occurs when a supply shock reduces aggregate supply.

Cost-push

Which of the following would NOT cause a shift in the short-run aggregate supply curve? A) an increase in resource prices B) a decrease in the expected rate of inflation C) a major technological advance D) a decrease in real interest rates

D) a decrease in real interest rates

The situation when aggregate demand expands so much that equilibrium output exceeds full employment output and the price level rises is known as ________ inflation. A) cost-push B) unnecessary C) overextended D) demand-pull

D) demand-pull

According to the text, what brought us out of the Great Depression? A) increase in investment B) increase in consumption C) decrease in the interest rate D) spending on World War II

D) spending on World War II

A decrease in regulation would cause aggregate: A) supply to shift to the left. B) demand to shift to the right. C) demand to shift to the left. D) supply to shift to the right.

D) supply to shift to the right.

If the growth rate in an economy is 3.5%, then its GDP will double in about: A)245 years. B)70 years. C)3.5 years. D)20 years.

D)20 years.

SEE GRAPH: Equilibrium output is _____ units and the equilibrium price level is _____. A)5,000; $160 B)100; $3,000 C)2,000; $130 D)3,000; $100

D)3,000; $100

If output equals A × (5K + 2L), what is output if A equals 2,000, capital equals 10, and labor equals 100? A)50,000 B)12,000 C)120,000 D)500,000

D)500,000

Which of the following equations is correct? A)AE = C + I -G + (X -M) B)AE = C + I + G + (X + M) C)AE = C -I + G -(X + M) D)AE = C + I + G + (X -M)

D)AE = C + I + G + (X -M)

Long-run growth is MOST likely to be achieved by promoting: A)provision of infrastructure by the government. B)increased saving .C)increases in the size of the labor force. D)development of new technologies.

D)development of new technologies.

A shift to the _____ of the _____ curve would cause the price level and employment to decrease. A)left; short-run aggregate supply B)right; short-run aggregate supply C)right; aggregate demand D)left; aggregate demand

D)left; aggregate demand

Physical capital includes: A)the ability to take physical resources and use them in creative ways to produce goods and services. B)land and raw resources that come from land. C)the physical talents of people. D)manufactured products that are used to produce other goods and services.

D)manufactured products that are used to produce other goods and services.

b

Eastland's government has a total national debt of $500 million, which is financed as follows: $100 million is held by other government agencies, $200 million is held by Eastland's citizens, and $200 million is held by foreign citizens. The amount of public debt in Eastland is:. a) $500 million b) $400 million c) $300 million d) $100 million

Which of the following statements is not true?

Economic growth always leads to a more equitable distribution of income

Savings deposits are included in M1. T or F

F

The 2007 housing crisis led banks to increase lending in an effort to offset foreclosures. T or F

F

Which of the following statements about fiscal policy and aggregate supply is CORRECT?

Fiscal policies that influence aggregate supply don't always require tradeoffs between price levels and output.

Based on the information provided in the graph, the marginal propensity to consume equals:

HELP

If an economy's GDP will double in 25 years, then its growth rate must be about:

HELP

The capital-to-labor ratio is:

High in rich countries

Which of the following may be an explanation for the shift in aggregate demand form line A to line B?

Interest rates fall and boost investments

Which of the following regarding supply-side fiscal policy is INCORRECT?

It is geared toward short-term increases in employment.

A shift to the _____ of the _______ curve would cause the price level and employment to decrease

Left; aggregate demand

When money is deposited in a bank, why is the deposit both an asset and a liability?

Money deposited in a bank is a liability because the bank is holding something that belongs to the depositor. In effect, the bank borrows the funds. It can, however, use the fund for making loans. Since it is a resource for generating profits, it is an asset to the bank.

Which is NOT a source of productivity growth?

Moving resources from production to pension benefits

What is the likely chain of events if asset prices rise?

People feel wealthier, so their spending rises and their saving falls, causing interest rates to rise.

If the government raises taxes or increases regulations, the short-run aggregate supply curve will shift from SRAS0 to ______ and the price level will be at _______.

SRAS2; P2

The long-run aggregate supply curve represents the full-employment capacity of the economy. T or F.

TRUE

Infrastructure is:

a country's public capital

Which of the following will NOT shift the aggregate supply curve to the left?

a decrease in corporate taxes

If a country's population increases at a higher rate than the growth in its real GDP:

the standard of living in the country has declined

Long-run growth is MOST likely to be achieved by promoting:

development of new technologies

The aggregate demand curve slopes ______ and has _____ on the vertical axis.

downward; the price level

If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will:

fall by $125 billion

Which of the following is NOT a policy tool of the Federal Reserve?

fiscal policy

In the Keynesian model, the price level is _____ ; in the aggregate demand and supply model, the price level is _____.

fixed; flexible

A(n) _______ in oil prices and a(n) _______ in taxes will shift short-run aggregate supply to the left.

increase; increase

As income increases, consumption _____________.

increases at a slower rate

The _______ effect is the reason for the negative slope of the aggregate demand curve.

interest rate

The demand curve for loanable funds represents _____ and is _____.

investors; downward sloping

If an economy is producing at a level beyond full employment, using contractionary fiscal policy to reduce aggregate demand means a tradeoff between ________ price levels and ________ output.

lower; lower

Ceteris paribus, suppose an economy institutes reforms that reduce government regulations. In this case the demand for loanable funds shifts ______ and the equilibrium interest rate _______.

right; rises

Other things equal, when the U.S. aggregate price level falls, U.S. exports _______ and U.S. imports ________.

rise; fall

A production function:

shows the output that is produced using different combinations of inputs combined with existing technology

Money is employed as a _____ because it enables people to save the money they earn today and use it to buy goods and services later.

store of value

Fiscal policy that focuses on shifting the long-run aggregate supply curve to the right is:

supply-side fiscal policy.

The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100? A)Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached. B)Total spending exceeds income, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached. C)Total income exceeds spending, firms reduce production, workers are laid off, and incomes fall until equilibrium is reached. D)Total income exceeds spending, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

A)Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached.

Infrastructure is: A)a country's public capital. B)unimportant for economic growth because the government provides it. C)not important in a market-based economy. D)typically better when provided by private companies.

A)a country's public capital.

As a general rule, the more capital employed with workers, the _____ their productivity and the _____ their earnings. A)higher; higher B)lower; higher C)higher; lower D)lower; lower

A)higher; higher

Which of the following events causes a decrease in aggregate demand? A)increase in taxes B)increase in government spending C)improving consumer confidence D)decrease in interest rates

A)increase in taxes

Which of the following best illustrates the wealth effect?A)Simon felt he needed at least $800,000 to retire comfortably. He increased his savings to build up his wealth. B)The Jones family has $50,000 in a bank. Prices in the market rose dramatically, diminishing their purchasing power by $50,000. C)Margaret had her savings in Treasury bonds. She thought that stocks might offer her a better opportunity to increase her wealth, so she sold her bonds to buy stocks .D)Jacob saved $25,000, which he put in the stock market. The market suddenly did very well, and though Jacob is not yet aware of it, his stock portfolio value rose to $36,000.34.

B)The Jones family has $50,000 in a bank. Prices in the market rose dramatically, diminishing their purchasing power by $50,000.

In the Keynesianmodel, the price level is _____; in the aggregate demand and supply model, the price level is _____. A)flexible; flexible B)fixed; flexible C)fixed; fixed D)flexible; fixed

B)fixed; flexible

An increase in the incomes of the countries that purchase U.S.-made products will cause a(n) _____ in the _____ U.S.-made products. A)increase; short-run aggregate supply of B)increase; aggregate demand for C)decrease; short-run aggregate supply of D)decrease; aggregate demand for

B)increase; aggregate demand for

A(n) _____ in oil prices and a(n) _____ in taxes will shift short-run aggregate supply to the left. A)decrease; decrease B)increase; increase C)increase; decrease D)decrease; increase

B)increase; increase

In the long run, attempts to expand beyond an economy's natural rate of unemployment tend to result in :A)increased output. B)increased inflation. C)both increased output and increased inflation D)neither increased output nor increased inflation.

B)increased inflation.

As income increases, consumption _____. A)decreases at a slower rate B)increases at a slower rate C)decreases faster D)increases faster

B)increases at a slower rate

d

When the stock market is rising rapidly, what tends to happen to bond prices and interest rates on bonds? a) Bond prices rise and interest rates on bonds fall. b) Bond prices rise and interest rates on bonds rise as well. c) Bond prices fall and interest rates on bonds fall as well. d) Bond prices fall and interest rates on bonds rise.

What would cause inflation to rise and employment to increase?

a shift of the AD curve to the right

Investment spending:

tends to be volatile

If disposable income is $3,000 and savings is $1,200, how much is consumption?

$1,800

Assume that the Federal Reserve sets the reserve requirement at 10%. If a bank has $100 million in deposits, then its required reserves must equal:

$10 million

If a person borrows $2,000 at 5% interest and never makes any payments, how much will the loan balance be after five years?

$2,552.56

New deposits of $1 billion are placed in a bank. The reserve requirement is 20%. How much does the money supply increase, assuming no leakages?

$5 billion

SCENARIO: Assume that the Empathy State Bank begins with the balance sheet below and is fully loaned up. Empathy State Bank Assets Liabilities Vault Cash $2,500 Deposits $100,000 Deposits at the Federal Reserve 7,500 Loans 90,000 If this bank is subject to a reserve requirement of 5%, how much more can it loan out if it wants to be fully loaned up?

$5,000

Perry deposits $10,000 in his bank account. If the reserve requirement is 15%, how much of this amount can his bank make in new loans?

$8,500

When the disposable income is $1,200, what is the value of the average propensity to save?

-0.083

U.S. interest on its national debt, measured as a percentage of GDP, fell during ____ and rose during the _____.

1990s; 1980s

Equilibrium output is _______ units and the equilibrium price level is _______.

3,000; $100

If output equals A x (5K+2L), what is output if A equals 2,000, capital equals 10, and labor equals 100?

500,000

Which of the following events will NOT cause the aggregate demand curve to shift?

A rise in the aggregate price level causes a decline in exports

Demand-pull inflation scenarios took place in the: A) 1960s for the United States and from 1985 to 1995 for Japan. B) 1930s for the United States and from 1985 to 1995 for Japan. C) 1960s for the United States and in the 1930s for Japan. D) 1930s for both the United States and Japan.

A) 1960s for the United States and from 1985 to 1995 for Japan.

If the U.S. aggregate price level rises: A) U.S. imports rise. B) the aggregate demand curve shifts to the left. C) the aggregate demand curve shifts to the right. D) business investment increases.

A) U.S. imports rise.

The short-run aggregate supply curve is positively sloped because: A) a short-run increase in GDP usually is accompanied by an increased rise in the price level. B) many input prices are slow to change in the short run. C) all variables are fixed in the short run. D) a short-run increase in GDP usually is accompanied by a slower rise in the price level.

A) a short-run increase in GDP usually is accompanied by an increased rise in the price level.

In the aggregate demand/aggregate supply (AD/AS) model, the vertical axis is labeled: A) aggregate price level. B) consumption. C) GDP. D) consumption plus investment plus government spending.

A) aggregate price level.

An increase in aggregate demand can be caused by: A) the depreciation of the dollar. B) a cut in government spending. C) an increase in interest rates. D) a rise in consumer debt.

A) the depreciation of the dollar.

(Graph: Consumption) Based on the information provided in the graph, at an income level of $300, savings equals _____, the MPC equals _____, and the APC equals _____. A)-$80; 0.6; 1.27 B)$300; 0.4; 0.5 C)-$120; 0.4; -0.7 D)$80; 0.6; -0.27

A)-$80; 0.6; 1.27

If disposable income is $3,000 and saving is $1,200, how much is the average propensity to consume? A)0.6 B)2.5 C)0.4 D)1.2

A)0.6

Rocky Gap Furniture hires ten employees working eight hours each to produce 100 rocking chairs. What is the productivity of these workers? A)1.25 chairs per hour B)50 chairs C)2.5 chairs per hour D)100 chairs

A)1.25 chairs per hour

If an economy's GDP will double in 25 years, then its growth rate must be about: A)2.8%. B)28%. C)2.5% .D)25%.

A)2.8%.

Which of the following events will NOT cause the aggregate demand curve to shift? A)A rise in the aggregate price level causes a decline in exports. B)Governments increase spending on national security in the wake of terrorist attacks .C)Consumers' wealth declines because of a drop in the stock market. D)Businesses are optimistic about the economy, investing heavily in new equipment.

A)A rise in the aggregate price level causes a decline in exports.

USE GRAPH: This economy is currently at point a. This figure depicts an economy: A)in short-run equilibrium only. B)in long-run equilibrium only. C)in neither short-run nor long-run equilibrium. D)in both short-run and long-run equilibrium study how short run and long run look differently

A)in short-run equilibrium only.

The _____ effect is a reason for the negative slope of the aggregate demand curve. A)interest rate B)income C)multiplier D)substitution

A)interest rate

If the U.S. aggregate price level falls: A)net exports rise. B)interest rates go up. C)the aggregate demand curve shifts to the right. D)the purchasing power of wealth declines.

A)net exports rise.

Economic growth is most accurately measured using: A)real GDP per capita. B)GDP. C)GDP per capita .D)Genuine Progress Indicator per capita.

A)real GDP per capita.

Because of the wealth effect, a rising aggregate price level _____ the purchasing power of wealth and therefore _____ output demanded. A)reduces; reduces B)reduces; increases C)increases; increases D)increases; reduces

A)reduces; reduces

Increased consumer confidence will shift the aggregate demand curve to the _____ and _____ output demanded. A)right; increase B)left; decrease C)right; decrease D)left; increase

A)right; increase

Which of the following equations is correct?

AE=C+I+G+ (X-M)

In the Keynesian macroeconomic equilibrium:

AE=Y and S=I

The real GDP that firms will produce at varying price levels is:

Aggregate supply

Suppose a booming stock market encourages consumption spending to rise dramatically. What would be the most likely long-run impact? A) Prices fall. B) GDP first rises, and then falls back to long-run equilibrium. C) A recession occurs. D) The impact cannot be determined from the information given.

B) GDP first rises, and then falls back to long-run equilibrium.

______ are components of consumer spending that affect aggregate demand. A) Expected rates of return on investment B) Taxes C) Exchange rate changes D) Government spending programs

B) Taxes

Which of the following would NOT cause a shift in the aggregate demand curve? A) a change in consumption spending B) a change in the price level C) a change in investment D) a change in net exports

B) a change in the price level

What would cause the price level to rise and employment to increase? A) a shift to the left of the aggregate demand curve B) a shift to the right of the aggregate demand curve C) a shift to the left of the short-run aggregate supply curve D) supply shift to the right of the short-run aggregate supply curve

B) a shift to the right of the aggregate demand curve

A solution to the simultaneous emergence of deflation and unemployment is to use policies that shift the: A) aggregate supply curve to the right. B) aggregate demand curve to the right. C) aggregate supply curve to the left. D) aggregate demand curve to the left.

B) aggregate demand curve to the right.

Which are determinants of short-run aggregate supply? A) changes in government spending, taxes, and business and inflationary expectations B) changes in input prices, taxes, and business and inflationary expectations C) changes in education, taxes, and business and inflationary expectations D) changes in input prices, taxes, and technology

B) changes in input prices, taxes, and business and inflationary expectations

Suppose the government raises income taxes, so consumers have less take-home pay. This policy action will cause a(n): A) increase in aggregate demand. B) decrease in aggregate demand. C) increase in short-run aggregate supply. D) decrease in short-run aggregate supply.

B) decrease in aggregate demand.

When home values collapsed in the period that began in 2008, it reduced many Americans': A) bank balances. B) household wealth. C) household income. D) retirement accounts.

B) household wealth.

If an economy is on the vertical portion of the aggregate supply curve, then it: A) is overheating. B) is at full employment. C) has high unemployment. D) is in a severe recession.

B) is at full employment.

The short-run aggregate supply curve: A) is vertical because the economy is at full capacity. B) is upward sloping because some costs are slow to rise as output expands. C) is horizontal because input prices do not rise as output rises. D) cannot be generalized because each economy is unique.

B) is upward sloping because some costs are slow to rise as output expands.

Cost-push inflation occurs because of a shift to the: A) right of the short-run aggregate supply curve. B) left of the short-run aggregate supply curve. C) right of the aggregate demand curve. D) left of the aggregate demand curve.

B) left of the short-run aggregate supply curve.

Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by: A)$5 billion. B)$20 billion. C)$4 billion. D)$75 billion.

B)$20 billion.

.If the Bureau of Economic Analysis reports that the annualized U.S. growth rate was 2.5% for the second quarter, then the actual growth rate from the first quarter to the second quarter was: A)10%. B)0.625%. C)2.5%. D)7.5%.

B)0.625%

Which of the following will shift the aggregate supply curve to the right? A) the development of a cartel in the production of soybeans B) an increase in corporate taxes C) increased investment in human capital D) an increase in the price of garbage collection

C) increased investment in human capital

SEE CHART: When disposable income is $1,200, what is the value of the average propensity to save? A)-1.083 B)-0.5 C)-0.083 D)-1.5

C)-0.083

SEE GRAPH: Based on the information provided in the graph, the marginal propensity to consume equals: A)0.6. B)0.7. C)0.5. D)any number less than one, but the eventual value depends on the level of income.

C)0.5.

If the marginal propensity to save is 0.25, the multiplier is: A)1.33. B)3.33. C)4. D)3.

C)4.

In the Keynesian macroeconomic equilibrium: A)AE = Y and C = S. B)AE = I and C = S .C)AE = Y and S = I. D)AE = S and C = I.

C)AE = Y and S = I.

3.(Table) According to the table, which country was MOST likely to experience catch-up growth? A)Croland B)Nomica C)Econia D)Macroland

C)Econia

(Figure: Aggregate Demand Shift)Which of the following may be an explanation for the shift in aggregate demand from line A to line B? A)Consumer confidence declines and consumption spending falls. B)Goods and services become less competitive and exports fall. C)Interest rates fall and boost investments. D)Prices fall and increase real wealth.

C)Interest rates fall and boost investments.

(Table) According to the Table: Real Per Capita GDP and Growth, which country will have the higher real per capita GDP in 17.5 years? A)Econia because its real GDP per capita will have time to double and then almost double again B)Econia because its growth rate is higher C)Nomicia because its real GDP per capita will double and Econia's will still lag behind even though it is growing at a faster rate D)Nomicia because it has a higher starting GDP in the currentyear

C)Nomicia because its real GDP per capita will double and Econia's will still lag behind even though it is growing at a faster rate

The real GDP that firms will produce at varying price levels is: A)individual product supply .B)aggregate demand .C)aggregate supply. D)individual product demand

C)aggregate supply.

According to the textbook, what brought the United States out of the Great Depression? A)an increase in consumption B)a decrease in the interest rate C)an increase in spending on World War II D)an increase in investment

C)an increase in spending on World War II

The aggregate demand curve slopes _____ and has _____ on the vertical axis. A)upward; the price level B)downward; output C)downward; the price level D)upward; output

C)downward; the price level

If consumption decreases from $600 billion to $575 billion and the marginal propensity to consume is 0.8, then equilibrium income will: A)rise by $25 billion. B)rise by $125 billion. C)fall by $125 billion. D)fall by $25 billion.

C)fall by $125 billion.

The capital-to-labor ratio is: A)the ratio of managers to workers. B)a key element in decreasing real wages. C)high in rich countries. D)high in poor countries.

C)high in rich countries.

Improvements in production capacity will: A)move the economy up to the PPF. B)move the economy along the PPF. C)shift the PPF outward. D)rotate the PPF clockwise.

C)shift the PPF outward.

54.If a pill is discovered that allows people to work twice as fast as they would ordinarily work, then the aggregate supply curve will: A)become vertical. B)shift to the left. C)shift to the right. D)not change.

C)shift to the right.

Refer to the production possibilities frontiers below. Panel A illustrates _____ economic growth and Panel B illustrates _____ economic growth. A)long-run; long-run B)long-run; short-run C)short-run; long-run D)short-run; short-run

C)short-run; long-run

A production function: A)shows the output that is produced using different combinations of technology combined with existing inputs. B)shows the most desired production method for a given level of output. C)shows the output that is produced using different combinations of inputs combined with existing technology. D)shows the output that is most highly valued by consumers.

C)shows the output that is produced using different combinations of inputs combined with existing technology.

Economic growth is shown as a: A)shift to the left of the short-run aggregate supply curve. B)shift to the left of the long-run aggregate supply curve. C)movement up along the short-run aggregate supply curve. D)shift to the right of the long-run aggregate supply curve.

D)shift to the right of the long-run aggregate supply curve.

If a country's population increases at a higher rate than the growth in its real GDP: A)the country's rate of inflation has increased .B)average output per person remains constant. C)GDP per capita has increased. D)the standard of living in the country has declined.

D)the standard of living in the country has declined.

If the Growth rate in an economy is 3.5%, then its GDP will double in about:

HELP

Suppose the marginal propensity to consume in Economia is 0.75. People feel increasing confidence in their economy and spend $5 billion more on vacations. Equilibrium income will rise by:

HELP

Which of the following is TRUE regarding the possible effects of a tax change?

Higher marginal tax rates tend to depress economic activity.

As a general rule, the more capital employed with workers, the _______ their productivity and the _____ their earnings.

Higher; higher

b

If Eastland's consumer confidence rises, what would happen to macroeconomic equilibrium in the short-run if the short-run aggregate supply curve is upward sloping? a) AD shifts right, aggregate output increases, and prices fall. b) AD shifts right, aggregate output increases, and prices rise. c) AD shifts left, aggregate output decreases, and prices fall. d) AD shifts left, aggregate output decreases, and prices rise.

b

If Northland has a debt of $5 million in 2014, and runs a deficit of $0.3 million in 2015, and a surplus of $0.4 million in 2016, what would its debt be at the end of 2016, assuming no additional interest is added to its debt? a) $4.3 million b) $4.9 million c) $5.3 million d) $5.7 million

c

If the government of Balancia runs a deficit of $50 million per year in Year 1 and in Year 2 due to its recession, but then has a $100 million surplus in Year 3 due to strong economic recovery, Balancia is likely following which type of rule? a) Annually balanced budget b) Biannually balanced budget c) Cyclically balanced budget d) Functional finance

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

Increased inflation

Which of the following statements does NOT describe a problem of balancing the budget over the business cycle?

Increasing taxes at the top of the cycle exacerbates inflation.

A practical implication of the crowding-out effect is that it:

Makes expansionary fiscal policy less effective.

Physical capital includes:

Manufactured products that are used to produce other goods and services

c

Martha needs to acquire funds in order to expand her bakery. She does not want to give up control of her business, but her credit score is weak due to the recent foreclosure of her house. What should Martha do to acquire these funds? a) Issue stock to willing investors. b) Borrow money from her local bank. c) Issue bonds to willing investors. d) She should do all of the above.

(Figure: Determining SRAS Shifts) If there is a decrease in input prices, the short-run aggregate supply curve will shift from SRAS0 to _____ and the price level will become _____.

SHIFT RIGHT - SRAS1; P1

Improvements in production capacity will:

Shift the PPF outward

b

South World has a total debt of $10 million and an annual GDP of $5 million. It currently pays 4% interest on its debt. What percentage of GDP does interest on the debt represent? a) 4% b) 8% c) 15% d) 50%

b

Suppose a country has a debt of $20 million. Which of the following events would most add to the debt in the following year? a) An increase in the deficit by $500,000. b) A 3% rise in the interest rate. c) An increase in tax revenues by $600,000. d) All of the above would increase the debt by the same amount.

b

Suppose the government introduces a new incentive for individuals to save money for retirement. How would this affect the market for loanable funds and the interest rate? a) supply of loanable funds would decrease and interest rates would fall b) supply of loanable funds would increase and interest rates would fall c) supply of loanable funds would decrease and interest rates would rise d) supply of loanable funds would increase and interest rates would rise

c

Suppose the government passes a new law providing companies with low-cost alternative energy sources such as solar and wind. This would lead to a(n): a) increase in aggregate demand b) decrease in aggregate demand c) increase in aggregate supply d) decrease in aggregate supply

An increase in subsidies will lead to an increase in aggregate supply T or F

T

Which of the following best illustrates the wealth effect?

The Jones family has $50,000 in a bank. Prices in the market rose dramatically, diminishing their purchasing power by $50,000

Show graphically the difference between a movement along an aggregate demand curve and a shift to a new aggregate demand curve. Explain what causes each.

The aggregate demand curve is negatively sloped. Everything else held constant, a change in the aggregate price level will change the quantity of real GDP demanded. This change would cause a movement along the aggregate demand curve. Hence, if aggregate demand is represented by AD0 in the following figure and the aggregate price level changes, then the quantity of real GDP demanded will change, as represented as a movement along curve AD0. The determinants of aggregate demand are factors that shift the entire aggregate demand curve when they change. They are the "everything else held constant." If one of these components of aggregate spending changes, the aggregate demand curve will shift. At first, aggregate demand is AD0, so a shift to AD1 represents an increase in aggregate demand; more real output is demanded at the same price level, P0. If, for example, businesses decide to invest more in new technology, more real output is demanded at the current price level, P0. For similar reasons, a decline in aggregate demand to AD2 means that less real output is being demanded. If consumers for some reason fear the onset of a recession and decide to reduce spending to increase their saving reserves, less output, Q2, will be demanded.

Show graphically the difference between a movement along a short-run aggregate supply curve and a shift to a new curve. Explain what causes each.

The aggregate supply curve is positively sloped in the short run. Everything else held constant, a change in the aggregate price level will change the quantity of aggregate output supplied in the short run, causing a movement along the short-run aggregate supply curve. Hence, if the short-run aggregate supply is represented in the figure provided by SRAS0 and the aggregate price level changes, the quantity of aggregate output supplied will change as represented as a movement along curve SRAS0. The determinants of aggregate supply—the "other things held constant"—include changes in input prices, productivity, taxes, regulation, the market power of firms, and business and inflationary expectations. When any of these determinants changes, the entire short-run aggregate supply curve shifts. An increase in aggregate supply is indicated by a shift from SRAS0 to SRAS1; a decrease in aggregate supply is indicated by a shift from SRAS0 to SRAS2.

b

The country of Doomsville is currently in a recession. The government of Doomsville, in an effort to maintain its tax revenues in a time when incomes are falling, decides to increase the tax rate. Would this policy help or hurt the recession? a) This policy would likely help Doomsville recover faster. b) This policy would likely make Doomsville's recession worse. c) This policy would likely have no effect on Doomsville's economy. d) This policy would have an unknown effect on Doomsville's economy.

According to the figure of ADAS curves and assuming the country begins on AD1 and SRAS1, what will happen in the short and long run if the price of oil rises significantly?

The economy will move from point C to A to B

Suppose a perpetuity bond pays an interest of $40. The financial investor can earn a 5% return elsewhere. What is the maximum amount buyers would be willing to pay for this bond?

The formula to calculate the price of a perpetuity is Price = Interest Payment / Yield. If there are other options available to the investor that yield a 5% return, then the buyer must receive 5% in order to make it worthwhile to purchase the bond. The interest payment of $40 is fixed by the terms of the bond. Hence, the price of the bond must be $800 (or $40 / 5%).

c

The government of Happyland collects $100 million in taxes each year, and currently has a public debt of $1.2 billion, which it finances by issuing Treasury bonds that pay 8% per year. Is this a manageable level of debt for the government of Happyland? a) Yes, the debt is manageable because an interest rate of 8% is relatively low. b) Yes, the debt manageable because the public debt is only 12 times the size of tax revenues. c) No, the debt is not manageable because interest payments equal $96 million per year. d) No, the debt is not manageable because the government must repay the entire $1.2 billion debt at the end of the year.

In the economists' toolkit, both demand-side and supply-side fiscal expansionary policies include tax cuts. What accounts for the different effects of the two tax cuts on the economy?

The main difference is where the tax cut is applied. If the purpose is to provide funds for households to spend on buying final goods and services, then the policy is targeted to increase the aggregate demand curve. An income tax cut is an example of such a policy. If the tax cut is designed to encourage investment, such as by building new factories or encouraging education, then the policy is designed to increase aggregate supply. A tax cut tied to investment spending is a supply-side policy. And a tax cut that is designed to encourage more work, like a reduction in marginal tax rates, is a supply-side strategy.

______ is the change in consumption associated with a change in income.

The marginal propensity to consume

What are the three functions of money? Which function addresses the double coincidence of wants problem?

The medium of exchange function means that the asset is generally accepted for making purchases, thus solving the double coincidence of wants problem caused by the barter system. The problem is that if one wishes to trade away item A in return for item B, one must find someone willing to trade away B for A. The unit of account function allows people in an economy to compare the value of different goods and services. The store of value function allows saving for future transactions.

Which of the following statements regarding the short-run aggregate supply curve is TRUE?

The short-run aggregate supply curve shifts to the right with a reduction in burdensome regulations.

Explain how the wealth, export, and interest rate effects cause a negative relationship between the price level and GDP.

The three effects show how price level changes (inflation or deflation) change the real value of goods, services, and financial assets. The wealth effect states that as prices rise, the real value of financial assets falls, causing households to spend less. According to the export effect, inflation causes the prices of exports to rise in the world markets, so purchases of these goods drop. The interest rate effect says that when prices rise, interest rates rise and investment spending drops.

In 2008 the Fed began paying banks interest on the reserves they held at the Fed. How did this change the incentives banks had for making loans?

This policy changed the incentives banks faced by reducing the opportunity cost of choosing not to lend. In tough economic times, for instance, banks may choose to forgo making loans in favor of earning interest on their excess reserves deposited at the Fed.

The figure shows the aggregate expenditures line for an economy. Which is the proper sequence of events if income was originally at $100?

Total spending exceeds income, firms expand production, workers are hired, and incomes rise until equilibrium is reached

d

Using the vertical long-run aggregate supply curve, an increase in the aggregate demand for an economy would have which of the following effects in the long-run? a) An increase in government spending to shift aggregate demand to the right. b) An increase in aggregate output and a rise in the price level. c) No change in aggregate output and a fall in the price level. d) No change in aggregate output and a rise in the price level.

Describe the crowding-out effect.

When the government runs a deficit, it must sell bonds to either the public or the Federal Reserve. If it sells bonds to the Federal Reserve when the economy is near full employment, inflation will result. At full employment, expansionary monetary policy results in an increase in aggregate demand, increasing output temporarily above full employment, with a corresponding increase in aggregate price level. Eventually the economy moves back to full employment at a higher price when the government runs a deficit. The government must sell bonds to finance the deficit, causing a movement up the now higher aggregate demand curve, with the resulting higher prices and inflation. Alternatively, when the federal government spends more than tax revenues permit, it can sell bonds to the public. As the supply of bonds sold on the market rises, prices drop and interest rates rise. As interest rates rise, consumption and private investment drops. The consequence of decreased investment is that future generations will be bequeathed a smaller and potentially less productive economy, resulting in a lower standard of living. This is the crowding-out effect of deficit spending.

c

Which of the following best describes a country's external debt? a) It is the portion of the total national debt that is financed by foreign bondholders. b) It is the portion of the annual fiscal deficit financed by foreign bondholders. c) It is the portion of the public debt financed by foreign bondholders. d) It is the portion of the public debt financed by domestic bondholders.

b

Which of the following factors would cause the aggregate demand curve to increase? a) A decrease in consumer confidence b) A government stimulus program c) A rise in interest rates d) A rise in imports

c

Which of the following is a common criticism of the use of fiscal policy? a) Fiscal policy is often enacted too quickly, before the market is ready for it. b) Expansionary fiscal policy can help pull an economy out of a recession. c) A government borrowing money to finance fiscal policy can crowd out investments. d) If no fiscal policy is used, the economy will never be able to correct itself, even partially.

b

Which of the following is an example of an automatic stabilizer? a) Spending on unemployment benefits falls when the economy enters a recession. b) The amount of tax revenues collected rises when an economy is booming. c) Governments debate implementing tax cuts when the economy is in a recession. d) Low-income households lose their food stamp benefits when unemployment rises.

a

Which of the following is not a major role of financial institutions? a) It seeks to minimize interest rates that it pays to savers. b) It seeks to diversify assets to reduce risk. c) It seeks to minimize transaction costs. d) It seeks to minimize information costs.

d

Which of the following is not a program that is managed using fiscal policy? a) Social Security b) Unemployment benefits c) Corporate taxes d) Mortgage rates

c

Which of the following occurs when investment is crowded out by government spending? a) interest rates fall b) the amount of borrowing by the government falls c) the amount of government debt rises d) consumption increases

b

Which of the following policies would be most effective to control inflation? a) An increase in government spending to shift aggregate demand to the right. b) A decrease in government spending to shift aggregate demand to the left. c) An increase in taxes to shift aggregate supply to the left. d) None of the above would reduce inflation.

d

Which of the following would be an example of expansionary fiscal policy? a) A reduction in interest rates. b) A reduction in government subsidies to farmers. c) A reduction in unemployment benefits. d) A reduction in income taxes on low-income earners.

b

Which of the following would be an example of expansionary fiscal policy? a) An increase in the individual income tax rate b) Extending the period in which unemployed workers can collect unemployment benefits c) A decrease in the amount of federal grants given to college students d) A decrease in interest rates

d

Which of the following would be most likely to cause the short-run aggregate supply curve to shift left? a) A reduction in oil prices due to increased drilling. b) A decrease in investor confidence. c) A rise in government spending. d) A spike in food prices due to a drought.

b

Which of the following would cause the demand for loanable funds to increase? a) A reduction in consumer confidence that causes people to save more. b) A new investment tax credit for businesses to expand. c) A major sporting event in town that causes people to withdrawl money from their bank accounts. d) A reduction in government spending.

If the federal government were required to balance its budget annually:

a recession would lead to higher taxes or reduced spending.

In September 2013, the Bank of India raised the rate at which it lends to commercial banks. a. The Fed lends to commercial banks, just as India does. What is the name for the rate that the Fed charges commercial banks and other eligible institutions for loans? b. Was the Bank of India attempting to increase or decrease the money supply by increasing the rate at which it lends to commercial banks? c. The Bank of India has tools very similar to those of the Federal Reserve in the United States. How could the Bank of India have used its other tools to achieve the same result as raising the rate at which it lends to commercial banks?

a. The Fed lends to commercial banks at the discount rate. b. The Bank of India was attempting to decrease the money supply. c. The Bank of India could have raised its reserve requirements or sold bonds in the open market to decrease the money supply.

The use of money as a medium of exchange helps reduce the inefficiencies inherent in:

barter

Which of the following assets is included in M1?

checkable deposits

Banks:

create money by making loans using the deposits of their customers.

At Christmas, people tend to draw money out of their checking accounts to pay for Christmas presents. As a result, the money multiplier will:

decrease

In February 2010, the Central Bank of Brazil raised reserve requirements. By raising reserve requirements, Brazil was attempting to:

decrease its money supply.

A(n) __________ in government spending, a __________ domestic currency, and ________ interest rates will shift a country's aggregate demand to the left.

decrease; stronger; higher

This economy is at point a. This figure depicts an economy:

in both short-run and long-run equilibrium

When the price of a given product declines, the consumer's spendable income rises because it takes less income to purchase the same quantity. This is called the:

income effect

An increase in the incomes of the countries that purchase U.S.-made products will cause a(n) ________ in the ________ U.S.-made products.

increase; short-run aggregate supply for

Reducing tax rates can _____ aggregate demand and __________ aggregate supply.

increase;increase

Automatic stabilizers include all of the following EXCEPT

increased research and development.

Monetary policy involves all of the following EXCEPT:

increases in personal taxes.

The reason business investment is sensitive to interest rates is that:

most funds used for investment are borrowed, so firms incur an interest charge

Decreased interest rates will shift the aggregate demand curve to the _____ and _____ output demanded.

right; increase

Which of the following did classical economists believe would happen if the economy experienced a downturn?

the economy would self-correct

Mandatory spending comprises nearly ________ of the federal budget.

two-thirds