Econ Exam 2 Review

In a market basket of goods: A. both the prices and the quantities are held constant. B. the quantities may change and the prices are held constant. C. the quantities stay constant and the prices may change. D. both the prices and the quantities may change.

C. the quantities stay constant and the prices may change.

The natural rate of employment is achieved when: A. it is above the actual rate of unemployment. B. the actual rate of unemployment is zero. C. there is no cyclical unemployment. D. the quantity of labor supplied is equal to the quantity of labor demanded.

C. there is no cyclical unemployment.

Unemployment rates are usually higher in Europe than in the United States because: A. there are more unskilled, uneducated workers in Europe than in the United States. B. the minimum wage is higher in the United States than in Europe. C. unemployment benefits are more generous in Europe than in the United States. D. U.S. economic policy is much more effective than European economic policy.

C. unemployment benefits are more generous in Europe than in the United States.

Why is the COLA important?

COLAs adjust payments in proportion to changes in the CPI

What causes a shift in demand for loanable funds Changes in perceived ______________ opportunities Changes in government ____________

Changes in perceived business opportunities Changes in government borrowing

What causes a shift in supply for loanable funds Changes in _________ _________ behavior Changes in net _________ _________

Changes in private savings behavior Changes in net capital inflows

Budget deficit formula

-Sg = G + TR - T

What are the 3 tasks of the financial system? 1. Reducing ___________ costs 2. Reducing ________ 3. Providing ____________

1. Reducing Transaction Costs 2. Reducing Risk 3. Providing Liquidity

Market for loanable funds: Demand Curve Who does it represent? Why does it slope down? What shifts it? Investor ________ism/_______ism, ________ policy, _________ confidence, _______ security, weal___

1. borrowers 2. People want to borrow more when i goes down 3. Investor optimism/pessimism, fiscal policy, consumer confidence, job security, wealth

Market for Loanable Funds: Supply Curve Who does it represent? Why does it slope upwards? What shifts it? Preferences for __________ (__________ preference), ___________ policy, __________ incentives

1. savers 2. As i goes up, people want to save more money 3. Preference for savings (time pref, patience), monetary policy (fed reserve can control supply), govt incentives

GDP deflator formula

100*nominal GDP/RDGP

A survey reveals that on a small island 40 people have jobs, 10 people are not working but looking for jobs, and 30 people are neither working nor looking for work. The unemployment rate on the island is:

20% unemp/labor force

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. (Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is private saving?

3.5 trillion Sg = T - G = 0.5 - 2 = -1.5 S = I = GDP - (C + G) = 2 S = Sg + Sp S - Sg = Sp Sp = 3.5

If a loan carries an interest rate of 8%, but there is 5% inflation, the real interest rate is

8% - 5% = 3%

Trade deficit formula

= M - X

Among the public goods important for economic growth is (are): A. political stability. B. low taxes. C. publicly held companies like Ford. D. public regulation of businesses.

A. political stability.

If money income remains the same while the average price level doubles: A. real income will fall. B. nominal income will fall. C. purchasing power will increase. D. interest rates will fall.

A. real income will fall.

Physical capital is purchased through investment spending, which in turn is mostly financed out of: A. savings. B. consumption expenditure. C. taxes. D. import tariffs.

A. savings.

The topics studied in macroeconomics include A. the average price level in the economy. B. the price of a motorcycle. C. how much ice cream consumers buy. D. the wages of engineers.

A. the average price level in the economy.

The convergence hypothesis helps explain why: A. the income of high-income and lower-income countries get closer. B. highly educated people converge in high-income countries. C. high-income countries continue their high growth rates. D. high-income individuals marry other high-income individuals.

A. the income of high-income and lower-income countries get closer.

Suppose that a country has a progressive income tax code, and taxable income is calculated in nominal terms but the schedule of income tax rates is NOT indexed to inflation. An individual whose income keeps up with inflation over time will pay: A. the alternative minimum tax. B. a higher percentage of income in taxes over time. C. a lower percentage of income in taxes over time. D. the same percentage of income in taxes over time.

B. a higher percentage of income in taxes over time.

Which of the following will NOT increase the productivity of labor? A. technological improvements B. an increase in the size of the labor force C. an increase in the capital stock D. improvements in education

B. an increase in the size of the labor force

In the long run the overall price level is mainly determined by: A. the price of crude oil. B. changes in the money supply. C. the government's budgetary policies. D. the business cycle.

B. changes in the money supply.

Technological progress allows workers to produce more: A. because it increases the amount of physical capital available. B. even when the amount of physical capital and human capital do not change. C. because it increases the amount of human capital available. D. only if the amount of physical capital grows at the same rate.

B. even when the amount of physical capital and human capital do not change.

In the circular-flow diagram, the places where resources, especially capital and labor, are bought and sold are the: A. firms. B. factor markets. C. product markets. D. households.

B. factor markets.

Labor productivity growth can be attributed to: A. a decline in the physical capital per worker. B. improvement in technology. C. an increase in population growth. D. a decline in university attendance.

B. improvement in technology.

Inventory is counted as investment because: A. it is tax deductible. B. it is a source of future sales. C. it is used for future production. D. it has no opportunity cost.

B. it is a source of future sales.

The GDP deflator for a given year is 100 times _____ GDP for that year _____ GDP for that year. A. nominal; minus real B. nominal; divided by real C. real; plus nominal D. real; divided by nominal

B. nominal; divided by real

Productivity is declining when: A. real GDP growth exceeds the population growth. B. population growth exceeds real GDP growth. C. the number of hours worked exceeds the number of workers. D. the ratio of adult civilians employed outside the home rises

B. population growth exceeds real GDP growth.

With regard to the aggregate price level, economists generally believe: A. inflation is worse than deflation. B. price stability is desirable. C. deflation is worse than inflation. D. inflation benefits most retired people

B. price stability is desirable.

Investment spending is spending on: A. corporate bonds. B. productive physical capital. C. mutual funds. D. stocks

B. productive physical capital.

Which of the following do economists view as investment spending? A. stocks B. spending on physical capital C. bonds D. mutual fund investing

B. spending on physical capital

If private savings increase, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____. A. demand for; increase; increase; increase B. supply of; increase; decrease; increase C. supply of; decrease; increase; decrease D. demand for; decrease; decrease; decrease

B. supply of; increase; decrease; increase

The Bureau of Labor Services calculates U-6. This measures the: A. rate of overuse of labor when workers hold multiple jobs. B. underuse of labor that includes discouraged workers, marginally attached workers, and underemployed workers. C. use of labor based on various demographics. D. labor force participation rate in a comprehensive way.

B. underuse of labor that includes discouraged workers, marginally attached workers, and underemployed workers.

Most households derive the bulk of their income from: A. rent. B. wages. C. profit. D. interest.

B. wages.

Why is the LRAS curve vertical?

Because in the long run, a change in the aggregate price level has no effect on the quantity of aggregate output supplied

Y =

C + I + G + (X - IM)

A relatively low saving rate affects productivity growth by: A. decreasing consumption spending and increasing investment in human capital. B. reducing the tax base and preventing the government from providing public goods. C. causing a shortage of funds for investment in physical capital. D. stimulating imports and increasing the trade deficit.

C. causing a shortage of funds for investment in physical capital.

Real GDP tends to understate our economic well-being because it: A. includes the value of services produced in the home. B. includes expenditures on crime prevention equipment. C. excludes the value of leisure. D. includes health care costs related to the consumption of cigarettes.

C. excludes the value of leisure.

Economists believe that the best way to stimulate investment in physical capital is to encourage: A. higher rates of investment in human capital. B. the conservation of natural resources. C. higher rates of national saving. D. more spending on infrastructure.

C. higher rates of national saving.

Households derive income from all of the following EXCEPT: A. interest from lending. B. rent from allowing firms to use their land. C. imports. D. wages or labor income.

C. imports.

A key insight into macroeconomics is that in the short run the combined effect of individual decisions: A. is always the same as what one individual intended. B. is always detrimental to the economy as a whole. C. may be very different from what any one individual intended. D. is always beneficial to the economy as a whole.

C. may be very different from what any one individual intended.

According to the text, productivity is driven by all of the following EXCEPT: A. technological progress. B. human capital. C. natural resources. D. physical capital.

C. natural resources.

In the circular-flow diagram, the places where goods and services are bought and sold are the: A. firms. B. households. C. product markets. D. factor markets.

C. product markets.

In the circular-flow model, households: A. buy resources in the factor markets. B. sell products in the market for goods and services. C. receive transfer payments from the government. D. issue stocks and bonds to raise capital.

C. receive transfer payments from the government.

Inflation is important because of COLA, which stands for

Cost of living adjustments

Suppose a panel of economists predicts that a nation's real GDP per capita will double in approximately 20 years. According to the rule of 70, what must be the predicted annual growth rate of real GDP per capita? number of years for variable to double = 70/annual growth rate of variable A. 14% B. 140% C. 2.85% D. 3.5%

D. 3.5% number of years for variable to double = 70/annual growth rate of variable

Which one of the following transactions is included in a current year's GDP as investment spending? A. ABC company purchased 10,000 shares of IBM stock. B. Anton purchased his friend's condo. C. Ronnie bought a new BMW. D. Maggie bought a play-gym set for her day-care business.

D. Maggie bought a play-gym set for her day-care business.

The 3 types of unemployment

Frictional, structural, cyclical

The market value of all final goods and services produced in a country in a time interval

GDP

What are the roles of government in promoting economic growth? Government _________ (i, e, R&D) Maintaining a well functioning __________ system Protection of __________ rights _________ stability and good ______________

Government policies such as: Government subsidies to infrastructure Government subsidies to education Government subsidies to R&D Maintaining a well-functioning financial system Protection of property rights Political stability and good governance

Which of the following are sources of funds for investment spending? I. domestic savings II. foreign savings III. consumption

I and II

Most human capital is provided by: I. governments through public education II. investment spending by private sector firms

I. governments through public education

Most physical capital, except for infrastructure, is provided by: I. governments through public education II. investment spending by private sector firms

II. investment spending by private sector firms

Which of the following factors have contributed to the lack of economic growth in Latin America? I. lack of natural resources II. high rates of savings that led to insufficient consumption of goods and services III. political instability

III. political instability

What is unemployment rate's relationship with RGDP and Inflation?

Phillips Curve

Examples of Investment

Physical capital Business structures (buildings) Software Residential structures (housing, apartments) - you invest by buying a house

What are the big three statistics?

RGDP, Unemployment Rate, Inflation Rate

Per capita real GDP formula

Real GDP/Total Population

Real return equation

Real return = nominal return - inflation rate

Total savings equation

S = Sg + Sp

What are the reasons for growth rates differing across countries? __________ and __________ spending Ed____________ R_______ and D__________

Savings and Investment Spending Education Research and Development

Government savings formula

Sg = T - TR - G

What are the downsides of inflation? (the 3 costs)

Shoe-leather costs, menu costs, unit-of-account costs

When the demand for labor is falling and employers have committed to high wages, _____ unemployment will result. A. permanent B. frictional C. cyclical D. structural

D. structural

In the circular-flow diagram, households: A. supply services. B. buy resources. C. supply goods. D. supply resources.

D. supply resources.

T/F: Inflation was a problem for the first time in the recession of 1929-1933.

F

Formulas for: Proportion percent Growth rate percent

F/M+F * 100 (proportion to total) new - old/old *100

How do discouraged workers create deceptive movement in the unemployment rate?

The unemployment rate can understate because it ignores frustrated workers, such as discouraged workers

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. (Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. What is the government budget balance?

a deficit of $1.5 trillion

We don't count used goods in GDP because

a good can only be produced once

The long-run aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if

all prices, including nominal wages, were fully flexible

Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which of the following is most likely?

an increase in aggregate demand

Imports are/are not counted in the home country in GDP

are not

Intermediate goods are/are not counted in GDP Why is this?

are not Because final good includes all markets that went into it

T/F: In GDP, we only count production within our borders ("domestic")

True

T/F: Unlike what CPI assumes, people actually change their consumption based on price changes (think of the carnivore and vegetarians' personal inflation examples)

True

The two problems with inflation

Unexpected/surprise inflation Hyperinflation

Why is it that as M goes up, I goes up?

When you import, you send dollars overseas that can only be invested back into the U.S

GDP Accounting Identity

Y = C + I + G + NX

Even when jobs are plentiful, the natural rate of unemployment is above/below zero

above

John Maynard Keynes believed that the government should:

actively try to mitigate the effects of recessions by using fiscal and monetary policies.

Investment equation

Sp + Sg - NX

Private savings equation

Sp = Y - T + TR Sp = Y + TR - T - C

Twin deficits hypothesis

TD and BD tend to move together

The only government policy that has a DIRECT effect on the aggregate demand curve is:

changing the level of government purchases of final goods and services

What causes Aggregate Supply to shift: Changes in _________ prices Changes in _________ wages Changes in ____________

commodity nominal productivity

The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:

consumption and investment

When the govt borrows more (budget deficit), Investment (by businesses) goes down. This is called

crowding out

Hyperinflation causes: _________ to become worthless __arter _____ currencies arise (foreign currency) ________ becomes difficult More _______ inflation

currency barter alt saving surprise

The aggregate price level is the:

overall level of prices

CPI overstates/understates the effect of inflation on consumers, so they make COLA <, >, = the CPI inflation

overstates < less than

The sequence of business cycle phases is:

peak, recession, trough, expansion.

A country's living standard is best measured by:

per capita real GDP

The inflation rate is the ______ in price level

percent

Sp can also push I up, but this is _________ difficult

politically

What are the sources of long-run growth? ______ivity 1. increase in ___________ capital 2. increase in __________ capital 3. ____________ progress

productivity 1. increase in physical capital 2. increase in human capital 3. technological progress

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate:

quantity of output demanded by households, businesses, the government, and the rest of the world

Unexpected inflation affects: _______ wages ________ markets

real lending

The best available measure of the standard of living in a country is:

real GDP per capita

Fisher equation

real interest rate = nominal int rate - inflation rate

When demand declined in the Great Depression of 1929-1933, the GDP deflator:

decreased by 26%

During deflation, the % change in CPI increases/decreases

decreases

In a contraction/recession, RGDP increases/decreases

decreases

The government is a source of dissavings when it runs a negative budget balance, also known as a budget ___________

deficit

If prices are constant, but the value of financial assets increases, aggregate _____ shifts to the _____.

demand; right

Increasing the quantity of money in circulation shifts the demand curve to the _____.

demand; right

The total income of households after taxes and government transfers is called:

disposable income

Private savings is equal to:

disposable income - consumption

As long as you keep it on inventory, it does/does not go to GDP

does

Investment = S - NX too, so if NX goes up then Investment goes

down

Investment = S - NX --> = S + M - X --> So as X goes up, I goes _____ As M goes up, I goes ___

down up

What causes Aggregate Demand to shift: Changes in __________ Changes in ________ Size of the existing stock of __________ capital _______ policy ________ policy

expectations wealth physical fiscal monetary

The three consequences of the decline in demand during the Great Depression were _____ prices, _____ output, and a surge in unemployment.

falling; declining

If people leave the labor force, the unemployment rate rises/falls

falls (both denominator and numerator go down)

Changing the level of government spending is an example of _____ policy.

fiscal

In the long run, nominal wages are:

flexible because contracts and informal agreements are renegotiated in the long run

RGDP eliminates the effect of changing prices by

freezing prices

Unemployment that is due to the time workers spend in job search is _____ unemployment.

frictional

If the actual inflation rate is higher/lower than expected, borrowers gain at the expense of lenders

higher

The short-run aggregate supply curve slopes upward because a higher/lower aggregate price level leads to higher/lower output, since...?

higher; higher output, since most production costs are fixed in the short run.

RGDP represents the country's ________ and e_________

income and expenditure

A decrease in the money supply is likely to cause a(n) _____ in borrowing and interest rates and a(n)_____ in aggregate demand.

increase; decrease This is because they have less money holdings than before, leading them to borrow more and lend less -> raises interest rate

According to the interest rate effect, an increase in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending.:

increase; increases; decreases

During inflation, the % change in CPI increases/decreases

increases

According to the wealth effect, when prices decrease, the purchasing power of assets _____ and consumer spending _____.

increases; increases

An increase in the nation's overall price level is:

inflation

Nominal GDP is not adjusted for ___________

inflation

Limitations of the Investment Equation (I = Sp + Sg - NX) i.) Ignores mechanism that coordinates S and I, this mechanism being _______ rates ii.) Ignores short-run ________ in investment

interest fluctuations

Unsold goods are treated as inventory _________ in GDP

investment

All else equal, a nation that has a high rate of savings will have a high rate of _____ and therefore a high growth rate of _____ capital.

investment; physical

We use real GDP per capita because we want to

isolate the effect of changes in the population

The problem with nominal GDP

it fluctuates

Suppose that the stock market crashes, which causes a large decrease in the value of many households' financial assets. The most likely outcome is a _____ the aggregate demand curve.

left shift in

A decrease in savings by the private sector will shift the supply of loanable funds to the _____ and _____ the interest rate.

left; increase

If inflation is higher/lower than expected, lenders gain at the expense of borrowers

lower

Used goods are measured as

markup

Changing interest rates is an example of _____ policy.

monetary

GNP was _________ based

nationality

The sum of the frictional and structural rates of unemployment is the:

natural rate of unemployment

Formula for growth rate

new - old/old

When a borrower and a lender enter into a loan contract, the contract is normally written in dollar terms - that is, the interest rate it specifies is a _______ interest rate

nominal

Market value, or GDP, excludes ____-________ goods and undervalues _________ goods and services

non-market public

Employment is the total

number of people actively working, either full-time or part-time

Personal/Financial Investment: _______ earnings A ________ Issue e_____ in the form of s______ that can be resold within a secondary market (less risk) These are all the components of a ________ system

retained loan equity; stock Financial

Review how to calculate market basket (quiz 5)

review

Review how to calculate nominal GDP (Quiz 7)

review

An increase in government borrowing will shift the demand for loanable funds to the _____ and _____ the interest rate.

right; increase

When short-run aggregate supply increases, it means that the short-run aggregate supply curve shifts to the _____ and the quantity of aggregate output that producers are willing to supply _____.

right; increases

If more people join the labor force, the unemployment rate rises/falls

rises

A survey reveals that on a small island initially 40 people have jobs, 10 people are not working but looking for jobs, and 30 people are neither working nor looking for work. Suppose that 10 of the 30 people who weren't working or looking for work now begin looking for work. There are now 20 people without jobs but looking for work and 40 people working. The unemployment rate:

rises to 33.3%

In a simple closed economy, all investment spending must come from:

savings

Frictional unemployment deals with ________ time Structural unemployment is when there's not enough/too many jobs in the matching industry Cyclical unemployment is due to _________ cycle swings

search not enough business cycle

Used good sellers are treated as _________ providers

service

A decrease in energy prices will:

shift aggregate supply to the right

Disinflation is when growth _______ down, but it is still growing

slows

In the short run, wages and some prices are considered to be:

sticky

Economic investment examples

stocks bonds gold artwork bit coin foreign currency collectables

Other things being equal, an increase in taxes on savings and investment income will shift _____ to the _____ and _____ the interest rate.

supply; left; increase (because a tax on savings -> less savers)

The government is a source of savings when it runs a positive budget balance, also known as ________

surplus

When: T > (TR + G) --> Budget _______, Sg > 0 T < (TR + G) --> Budget _______, Sg < 0 T = (TR + G) --> _________ Budget

surplus deficit balanced

Another CPI disadvantage is problems dealing with changes in __________ or ___________

technology or quality

Potential output is the level of real GDP that:

the economy would produce if all prices, including nominal wages, were fully flexible

Define shoe-leather costs

the increased costs of transactions caused by inflation

Define menu costs

the real cost of changing a listed price

Government purchases exclude __________ because you will spend it on consumption, so you don't want to include it twice

transfers

The CPI is the basket of goods of a

typical household

CPI assumes consumption is responsive/unresponsive to price changes

unresponsive

I = Sp - Budget Deficit + Trade Deficit As I goes up, Sp also goes up. This offsets BD going ___

up

Nominal wages are sticky because:

wages are slow to rise in the short run when there are labor shortages and slow to fall even when there is significant level of unemployment

What are sticky wages?

Nominal wages that are slow to fall even in the face of high unemployment and slow to rise even in the face of labor shortages

The unemployment rate is the: A. percent of the labor force that is unemployed. B. average length of time someone is unemployed. C. number of people unemployed. D. the labor force minus the number of people unemployed.

A. percent of the labor force that is unemployed.

Unemployment rate formula

#unemp/#labor force * 100%

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. (Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is investment spending?

$2 trillion

In an open economy GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. (Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is the net capital inflow?

$2 trillion NCI = IM - X

GDP is $12 trillion this year in a closed economy. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. (Scenario: Closed Economy S = I) Look at the scenario Closed Economy S = I. How much is national saving?

$2 trillion S = I = GDP - (C + G)

In an open economy GDP is $12 trillion this year. Consumption is $8 trillion, and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion, and imports are $3 trillion. (Scenario: Open Economy S = I) Look at the scenario Open Economy S = I. How much is investment spending?

$4 trillion I = (GDP - C - G) + (IM - X)

Suppose that roughly 8 million people in the United States were actively seeking jobs but had not found them this month, the same number as last month. Suppose that 2 million of the people who were unemployed last month gave up their search this month and stopped looking for work. What will happen to the official unemployment rate this month, all other things unchanged? A. It will fall, because 2 million people are not in the labor force this month and are not counted as unemployed. B. It will be unaffected, because the same number of people is unemployed. C. The unemployment rate will decrease by 25%. D. It will rise, because 2 million people are not in the labor force this month and are not counted as unemployed.

A. It will fall, because 2 million people are not in the labor force this month and are not counted as unemployed.

Diminishing returns to physical capital implies that when the human capital per worker and the state of technology remain fixed, each successive increase in physical capital leads to _____ productivity. A. a smaller increase in B. a decrease in C. a larger increase in D. negative

A. a smaller increase in

Goods that are produced in a particular period but NOT sold in that period: A. end up in inventory and are included in investment. B. go into inventory and are called consumption. C. are finally included in depreciation when they are sold. D. are classified as intermediate goods.

A. end up in inventory and are included in investment.

Real GDP tends to overstate our economic well-being by including: A. expenditures on crime prevention, payments for cleaning up the environment, and repairs to structures destroyed by storms. B. payments for cleaning up the environment. C. expenditures on crime prevention. D. repairs to structures destroyed by storms.

A. expenditures on crime prevention, payments for cleaning up the environment, and repairs to structures destroyed by storms.

A business will want to borrow to undertake an investment project when the rate of return on that project is _____ rate. A. higher than the interest B. equal to the inflation C. lower than the interest D. higher than the exchange

A. higher than the interest

Economies with high growth rates tend to be those that increase their: A. human capital. B. resources. C. consumption. D. government regulation.

A. human capital.

Unexpected inflation _____ lenders and _____ borrowers. A. hurts; benefits B. benefits; does not affect C. benefits; hurts D. does not affect; benefits

A. hurts; benefits

Private savings equals: A. income after taxes minus consumption. B. taxes minus government spending on goods and services. C. income plus investment. D. the total amount of savings accounts plus stocks plus bonds owned by households.

A. income after taxes minus consumption.

Long-run economic growth depends almost entirely on: A. labor productivity growth. B. the number of hours worked. C. population growth. D. agricultural production growth.

A. labor productivity growth.

During a recession: A. unemployment increases and the growth rate of real GDP decreases. B. unemployment and the growth rate of real GDP both decrease. C. there is no relation between unemployment and the growth rate of real GDP. D. unemployment decreases and the growth rate of real GDP increases.

A. unemployment increases and the growth rate of real GDP decreases.

The costs that arise from the way inflation makes money a less reliable unit of measurement are: A. unit-of-account costs. B. shoe-leather costs. C. medium of exchange costs. D. menu costs

A. unit-of-account costs.

The aggregate supply curve shows the relationship between the aggregate price level and:

Aggregate output supplied.

Which of the following statements is CORRECT? A. Inflation affects only the more advanced countries, whereas less advanced countries face deflation. B. When the economy is in recession and jobs are hard to find, inflation tends to fall. C. Supply and demand cannot explain why a particular good or service becomes more expensive relative to other goods and services. D. Prices of most goods and services remained stable during the Great Depression.

B. When the economy is in recession and jobs are hard to find, inflation tends to fall.

Which would most likely be a MICROECONOMIC question? A. What government policies should be adopted to promote full employment and growth? B. What determines the overall salary levels paid to workers in a given year? C. Should I go to business school or take a job? D. What determines the level of output for the economy as whole?

C. Should I go to business school or take a job?

Growth accounting enables us to: A. calculate how long it takes the economy to grow. B. compare growth rates across countries. C. calculate the effects of technological progress on economic growth. D. better calculate real GDP per capita.

C. calculate the effects of technological progress on economic growth.

If there is an increase in the government budget deficit, the _____ loanable funds will _____, interest rates will _____, and the amount of borrowing will _____. A. supply of; increase; decrease; increase B. supply of; decrease; increase; decrease C. demand for; decrease; decrease; decrease D. demand for; increase; increase; increase

D. demand for; increase; increase; increase

The sources of financing of physical capital include: A. domestic consumption. B. domestic consumption, foreign borrowing from the home country, and foreign investment in the home country. C. foreign borrowing from the home country. D. foreign investment in the home country.

D. foreign investment in the home country.

Firms pay an efficiency wage because: A. they don't have to offer health insurance if they pay efficiency wages. B. it is required by law. C. it reduces the employee's income tax liability. D. it reduces the risk of losing the best workers.

D. it reduces the risk of losing the best workers.

Which pair of policies is likely to reduce the natural rate of unemployment? A. high minimum wages and generous unemployment benefits B. job training and higher minimum wages C. employment subsidies and policies designed to strengthen labor unions D. job training and employment subsidies

D. job training and employment subsidies

To help increase investment spending, the government can: A. raise taxes on the returns from bonds while lowering taxes on stock dividends. B. lower taxes on consumption, so that disposable income rises. C. lower taxes on investment spending while raising taxes on savings, so that total tax revenue remains constant. D. lower taxes on the returns from savings, so that total savings increase and the interest rate falls.

D. lower taxes on the returns from savings, so that total savings increase and the interest rate falls.

In a market basket of goods: A. both the prices and the quantities may change. B. both the prices and the quantities are held constant. C. the quantities may change and the prices are held constant. D. the quantities stay constant and the prices may change.

D. the quantities stay constant and the prices may change.

One role of government policy is: A. to provide insurance to cover damages from macroeconomic fluctuations. B. to avoid Keynesian economics. C. to subsidize private insurance for businesses to cover harm from macroeconomic fluctuations. D. to attempt to manage short-run macroeconomic fluctuations.

D. to attempt to manage short-run macroeconomic fluctuations.

The supply of loanable funds is _____ sloping because _____ respond to lower interest rates by _____ their quantity supplied of loanable funds. A. downward; investors; increasing B. upward; savers; increasing C. upward; investors; decreasing D. upward; savers; decreasing

D. upward; savers; decreasing

The two ways to measure price level

Deflator CPI

What is the difference between the deflator and the CPI?

Deflator can be deceptive since it includes military expenses, like rockets

How do you calculate CPI?

Divide the basket price for that year by the base year basket price

Total savings is equal to

Investment, S=I

Sustained upward trend in aggregate output per person over several decades.

Long run growth

Why is I important? _____ run growth _____ run vol______

Long run growth Short run volatility (recession/expansion)

Suppose that in the base period a college student buys 20 gallons of gasoline at $2 per gallon, 2 CDs for $13 each, and 4 movie tickets for $7 each. In the next month, the price of gasoline is $2.25 per gallon, CDs cost $12.50 each, and the price of a movie ticket is $7.50. Look at the scenario Price Index. The price index for the second month is:

Market basket first month = 94 Market basket second month = 100 Price index for second month = 100/94 * 100 = 106.4

Deflator formula

NGDP/RGDP * 100

Net exports formula

NX = X - IM