ECON FINAL EXAM HW Q
Assume a government expenditure multiplier of 1.2. Fiscal policy could theoretically fix a recessionary output gap of $800.4 billion with a ____________.
$667 billion increase in government spending. Formula: Gov expenditure multiplier x expenditure based counter-cycle policy= impact policy example: 1.2 x expenditure based counter-cycle policy=800.4
The price of a kg of potatoes is $1.50 in the U.S. The price of a kg of rice is ¥400 in Japan. If the nominal exchange rate is 112¥/$, the real exchange rate for the U.S. is ______ (Round your answer to two decimal places.) Assume potatoes are the only item in the representative basket of goods and services used in the calculation of the real exchange rate. When the nominal exchange rate between two countries is fixed, year-to-year movements in the real exchange rate are derived solely from __________ When the nominal exchange rate between two countries is flexible, year-to-year movements in the real exchange rate are derived mostly from _________.
0.42 different amounts of inflation in the two countries movement in the nominal exchange rate pic q7
If the anticipated inflation rate is 2.75 percent and the nominal interest rate is 3.25 percent, the real interest rate is ______ percent. If expectations about inflation rise and the nominal interest rate remains unchanged, the expected real interest rate will _______. or If the anticipated inflation rate is 1.75 percent and the nominal interest rate is 4.75 percent, the real interest rate is ______ percent.
0.5 decrease or 3 decline formula: longterm expected real interest rate= long term nominal-long term expected inflation rate longterm inflation rate = 4.75-1.75= 3
Suppose country X suffers from a recession. Identify the mechanisms responsible for labor demand's medium run recovery from the recession in the following examples. 1. A toy company's excess inventories get sold off. 2. Interest rates are lowered by 1.5 percentage points to attract investment. 3. The employees- of firms which had to shut down -find other jobs. 4. Corporate taxes in the country are decreased by 5 percentage points. 5. A rise in overall inflation due to an expansionary monetary policy raises the price of firm Z's cars. 6. Researchers develop a cheaper method of manufacturing steel. Part 2 The adjacent graph shows the initial labor supply curve (LS1), initial labor demand curve (LD1), and the initial labor market equilibrium in an economy. Suppose the economy now suffers from a recession. Using the line drawing tool, show: • the short run impact of this shock on the economy with multipliers and label the labor demand curve LDM. • the medium run partial recovery in the economy due to market forces and label the labor demand curve LDPR. • the medium run full recovery in the economy due to inflation and label the labor demand curve LDFR. (Assume the full employment level is reached.) Carefully follow the instructions above and only draw the required objects. The post-recession wage is _______ the pre-recession wage. Part 3 Which of the following statements correctly describes the consequences of considering real wages instead of nominal wages in analyzing recessions?
1. Market forces 2. Government policies 3. Market forces 4. Government policies 5. Government policies 6. Market forces Graph: (left to right- demand curve) LDM, LDPR, LD1, LDFR above We would find that firms base their hiring decisions on the ratio of nominal wages to their output prices.
Identify the components of the U.S. current account to which the following examples belong. 1. an american shipping company buys an insurance policy for its ships from a london insurance broker 2. and indian trader deposits the profits from the sale of an ancient artwork in his SF bank account. 3. the turkish government depositis its US dollars n its Eurodollar account in Greece. 4. The national science foundation gives a grant of 400k to a team of researchers in Ireland. Which of the following equations is correct in relation to the current account?
1. Payments to foreigners, Imports 2. Payments from foreigners, factor payments 3. No change, no entry 4. Payments to foreigners, transfer to foreigners S=NX+I
The adjacent graph shows how a negative shock affects the economy's labor demand curve. Assume that wages in the economy are rigid and cannot fall in the short run. Part 2 Assume the economy is initially on D1 at point 1. If the labor demand curve shifts to D2 and wages remain rigid, the new equilibrium will occur at point ______. Part 3 If the labor demand curve shifts to D2 and wages are flexible, the economy will move from point 1 to point ___. Part 4 If the labor demand curve further shifts to D3 and wages are rigid, the new equilibrium level of employment will occur at point ____. Part 5 If the labor demand curve shifts to D3 and wages are flexible, the new equilibrium will occur at point _____.
2 A 3 B
If France devotes all of its resources to the production of beer and wine, it can produce 1 million bottles of wine or 250,000 kegs of beer. Likewise, if Germany devotes all of its resources to the production of beer and wine, it can produce 750,000 kegs of beer or 1 million bottles of wine. Part 2 The opportunity cost to France of producing wine is_____ kegs of beer. (Round your response to two decimal places.) Part 3 The opportunity cost to Germany of producing wine is _____ kegs of beer. (Round your response to two decimal places.) Part 4 In this case, France has a comparative advantage in ____ because it has a ______ opportunity cost of producing wine.
250,000/1,000,000= 0.25 750,000/1,000,000= 0.75 wine, lower
How does a flexible exchange rate differ from a managed exchange rate? How does a fixed exchange rate differ from a managed exchange rate?
A managed exchange rate involves government intervention, while a flexible exchange rate does not. A fixed exchange rate is set at a long-run value determined by the government, while a managed exchange rate can vary day to day depending on government actions.
Cazenovia is in the midst of a bad recession, and its Congress has placed economic recovery at the top of its political agenda. Different expansionary fiscal policies are currently being examined, but members of Congress are aware of the problems associated with large, sustained government deficits and will not accept any proposal that increases the deficit by more than $4 million. After lengthy discussions, these are the final proposals: Plan A: Spend $4 million on highways Plan B: Reduce taxes by $4 million Part 2 Assume the economy of Cazenovia is characterized by the following four equations in the short run: formula where C0 = 25 and CY = 0.75. Part 3 Using the government expenditure multiplier from the simple model presented in the chapter, the plan to spend $4 million on highways will increase Y (GDP) by $16 million. (click the following icon for help answering this question) Part 4 Using the government taxation multiplier from the simple model presented in the chapter, the plan to reduce taxes by $4 million will increase Y (GDP) by $12 million. (click the following icon for help answering this question) Part 5 The plan that appears to be the most effective in achieving Congress's goal is to ____________
A: 1/(1-0.75)*4 = 16.0 B: -0.75/(1-0.75)*4 = -12.0 answer 12 spend $4 million on highways.
How does comparative advantage in trade differ from absolute advantage?
Absolute advantage looks at the number of goods or services that a producer can make, whereas comparative advantage looks at the opportunity cost of the goods or services that a producer can make.
Foreign direct investment (FDI) in several sectors in India is still heavily regulated. After much debate, the government of India recently relaxed restrictions on FDI in the retail sector. For purported reasons like national security and possible job losses, many sectors of the economy such as defense, nuclear power, and oil refining are not fully open to foreign direct investment. Suppose you are hired to serve on the government's Working Group on Foreign Direct Investment. What would you suggest to the government based on the discussions in this chapter?
Allow more FDI, because the resulting technology transfer would bring increased efficiency and benefit India.
Briefly explain how an increase in the quantity of reserves that commercial banks hold at the Federal Reserve could lead to inflation.
An increase in reserves triggers a multiple expansion of bank loans and deposits, which generates an increase in the stock of money. If the money supply grows faster than real GDP, inflation will occur.
The graph on the right shows the net exports (NX) curve, which shows the relationship between net exports and the real exchange rate, denoted as E. Part 2 What do we know about a country's imports and exports at points E1 and E2, given that at E1 net exports are less than 0 and at E2 net exports are greater than 0?
At E1 imports exceed exports, while at E2 exports exceed imports.
Graph A shows the initial labor supply curve (LS1), initial labor demand curve (LD1), and the initial labor market equilibrium in country X. Suppose the country now goes into a recession as firms start reducing their investments and spending after they become pessimistic about future economic activity. Using the multi-point curve drawing tool, show the shift in the appropriate curve due to these changes and label the curve appropriately. Carefully follow the instructions above and only draw the required objects. Graph B shows the initial position of the country on its aggregate production curve (point A). With the changes mentioned above, the economy is likely to move to point B. Part 2 During recessions, firms typically prefer to achieve a reduction in employment by__________. But, if this is not sufficient for reducing employment quickly, they would have to _________. Part 3 Which of the following statements correctly describes features / implications of real business cycle (RBC) theory?
B cutting back new hiring, engage in mass layoffs It suggests that technological progress is an important determinant of long-term fluctuations in growth.
Which of the following shows the correct sequence of events from an initial shock to consumption and the resulting multiplier effects?
Consumption declines, firms' revenue falls, labor demand shifts left, unemployment rises, and the multiplier effects continue their cycle.
Recessions are periods in which the economy _________, while economic expansions are defined as the periods __________.
Contracts between recessions
How can expansionary expenditure-based fiscal policy lead to crowding out in the economy?
Expenditure-based fiscal policy leads to more government borrowing, absorbing funds that would have otherwise been borrowed and expended by the private sector.
What is foreign direct investment? Which of the following is an example of foreign direct investment? (Check all that apply.) How does foreign direct investment benefit the recipient country?
Investments by foreign individuals and companies that generate an ownership stake in domestic businesses. A U.S. company opens a factory in India. A Chinese company opens a factory in Nigeria that is jointly owned with a Nigerian company. Technology transfer ultimately improves productivity in the recipient country.
Assume that an American worker can produce 7 cars per year or 16 tons of grain per year, whereas a Japanese worker can produce 20 cars per year or 8 tons of grain per year. Assume labor is the only input used in car and grain production. _______ has the absolute advantage in the production of cars, and the __________has the absolute advantage in the production of grain. Part 2 Fill in the table below with the opportunity costs for each country. _______ has the comparative advantage in the production of cars, and ________ has the comparative advantage in the production of grain. Part 3 If free trade is allowed, ______ will import grain. The ______ will import cars.
Japan US US grain= 7/16= 0.44 US cars= 16/7= 2.29 Japam grain= 20/8= 2.5 Japan cars= 8/20= 0.4 Japan the United States Japan United States
Which of the following is an example of countercyclical monetary policy for controlling inflation?
Lower bank reserves and increase interest rates
What does the current account include? (Check all that apply.)
Net transfers from abroad. Net factor payments from abroad. Net exports.
Given the change in the exchange rate between September and October, did U.S. exports to Japan change in a way that economic theory would predict?
No. Since the dollar appreciated against theyen, economic theory would predict that U.S. exports to Japan would decrease.
Complete the table below by indicating the optimum decision based on the given changes in the peso-per-dollar exchange rate. Peso-per-Dollar Real Exchange Rate Mexico United States Goes up Import less from United States Export more to United States Export less to Mexico Import more from Mexico Goes down Import more from United States Export less to United States Export more to Mexico Import less from Mexico
PIC
The Evidence-Based Economics in the chapter identifies three key factors that caused the recession of 2007-2009. How would Keynes's concept of animal spirits explain the creation of a housing bubble? The national income identity shows that ___________. The recession of 2007-2009 affected the components of the national income identity by primarily affecting ____________.
People believed that a house was a worthwhile investment, which led to an increased demand for housing and thus pushed prices up. This confirmed to people that housing was a worthwhile investment, which led to more demand, resulting in an upward spiral driven by optimism. output is a function of consumption, investment, government spending, and net exports. the C and I components through a reduction in consumer wealth and a drop in housing construction.
In his book The Optimum Quantity of Money, Milton Friedman talks about a helicopter dropping $2,000 over a community. The cash dropped by the helicopter gives the people in this community more money to spend. A tax cut also has the same effect: it increases disposable income. Suppose tax cuts, analogous to the helicopter drop, were proposed as a method to shift the labor demand curve to the right following a recession. How effective do you think this policy would be?
Somewhat effective, but only to the extent that most of the tax cut is concurrently spent on domestic output, that multiplier effects occur, and crowding out is small.
In addition to specialization, which of the following is a benefit of international trade? In addition to being a benefit of international trade, technology transfer ____________.
Technology transfer. results in a higher level of cross-country interdependence.
Suppose that, in the United States, the inflation rate is at 3.2 percent (the target inflation rate is 2 percent). Rapidly rising prices and low interest rates have spurred business to hire more workers and invest in new facilities. Part 2 Which of the following is likely to be true of the U.S. economy if there is a rapid rise in prices and low interest rates? Given the circumstances, the countercyclical monetary policy adopted by the Federal Reserve is likely to result in a(n) ________ Which of the following mechanisms can the Fed use to implement a contractionary countercyclical monetary policy? Would countercyclical policy still be enacted if central bankers were appointed by popular vote? Based on your answers in the previous parts, which of the following functions is likely to be true if the central bank works independently? Which of the following is likely to be true if the central bankers were political appointees that could be hired and fired by the president?
The U.S. economy could experience unsustainable expansion, resulting in a sharp economic downturn. increase in the federal funds rate Selling government bonds in an open market operation. No It would be able to control short-term interest rates to regulate inflation. They would be reluctant to increase the federal funds rate during an economic expansion.
In the fourth quarter of 2016, the U.S. current account deficit was $112.4 billion, while the trade deficit was $132.3 billion. Part 2 Which of the following statements best explains the difference in the values of the trade deficit and the current account deficit? In 2016, U.S. net capital outflows were $________ billion. Which of the following is true of net capital outflows? Suppose Apple (based in the United States) sold an additional $0.5 billion in iPhones to retailers in Spain. Given the information above, the trade deficit would be $ negative _____ billion. Which of the following is likely to happen if the U.S. real interest rate increases?
The current account deficit is greater than the trade deficit because the current account deficit is comprised of the trade balance, factor payments, and international transfers, and the trade balance is only one component of the current account. trade deficit x -1= −132.3 Net capital outflows tell us how much money, on net, is flowing out of a country. previous answer + additional 0.5 billion (or given num)= −131.8 U.S. net capital outflows will decrease, and the U.S. trade deficit will also decrease.
Which of the following is true of a country's financial account? Which of the following is true of the relationship between a country's financial account and its current account?
The financial account is the increase in domestic assets held by foreigners minus the increase in foreign assets held domestically. The sum of the current account and the financial account is zero.
The adjacent graph shows the initial labor supply curve (LS1), initial labor demand curve (LD1), and the initial labor market equilibrium in an economy. Suppose the economy now has a technological breakthrough. 1. Using the multi-point curve drawing tool, show the short run effects of this shock on this economy without considering the effects of multipliers and use 'BM' (before multipliers) as the subscript while labelling the new curve. 2. Using the multi-point curve drawing tool, show the short run effects of this shock on this economy by considering the effects of multipliers and use 'AM' (after multipliers) as the subscript while labelling the new curve. Assume that the shock is not strong enough to generate full employment. Carefully follow the instructions above and only draw the required objects. Use the fewest points possible in achieving the desired outcome. Part 2 Which of the following are consequences of an economic expansion when the labor market is already close to full employment? (Check all that apply.)
The optimism or other factors that originally triggered the boom may get reversed at some point and create negative multiplier effects. The boom is likely to generate a great deal of wage inflation and very little employment and output growth. Graph: e1, LD1, LDRM, LDAM
What does it mean to say that an economic fluctuation involves the co-movement of many aggregate macroeconomic variables?
These variables grow or contract together during booms and recessions.
In the United States, recessions are usually defined as
Two consecutive quarters of negative growth in real GDP.
The graph on the right shows actual and projected estimates of potential GDP and GDP. Potential GDP is also a measure of trend GDP. When is the output gap, defined as the percent difference between GDP and potential GDP, negative? According to the Taylor rule, should the Fed raise or lower the federal funds rate when the output gap is negative?
When the economy experiences a recession. When the economy's capacity to produce exceeds its actual production. When actual real GDP falls below potential GDP. - all of the above It should lower the federal funds rate.
Brazil imports aircraft parts from the U.S. Suppose the dollar appreciates. This means there is _________ in the real exchange rate. Fill in the following blanks based on the above information. Brazil's demand for aircraft parts from the U.S. U.S. net exports. Demand for aircraft parts supplied by U.S. producers. Labor demand curve of aircraft parts producers in the U.S. With downward rigid wages, a shift in the labor demand curve will translate into _________ in the U.S. that will ultimately ______ consumption. In this way, a change in net exports has led to a larger _____than the direct effect of the change in net exports.
an increase Decreases Decrease Decreases Shifts to the left lower employment reduce aggregate economic contraction
Expansionary monetary policy would include ____________.
an increase in the supply of reserves, a reduction in the federal funds rate, an increase in lending capacity (reserves) of the banks, and an increase in liabilities (bonds) for the Fed.
An economic expansion begins
at the end of a recession.
Progressive income taxes are an example of ________ countercyclical components of fiscal policy. A tax rebate like cash for clunkers is an example of ________ countercyclical components. A ________ could be used to either stimulate or contract the economy.
automatic, discretionary, progressive tax
To support an undervalued currency, a foreign government would need to ____________.
buy dollars and sell its local currency.
An economic expansion that occurs close to full employment ___________
can cause inflation with very little employment and output growth.
The Taylor rule states that ___________.
central banks should set their policy rates (in the United States, the federal funds rate) according to a formula that incorporates the long-term target for the policy rate, the output gap, and the deviation of inflation from its target.
In general, career choices that individuals make are a consequence of ____________. In a competitive labor market, people's wages are equal to their personal contribution or value added. Assume that two goods can be produced in an economy, food and housing. The table below gives the production capabilities of Amit and Susan. If the value added from producing a unit of food is $20 and the value added from producing a unit of housing is $20, what will be the yearly salaries for Amit and Susan? Given these potential salaries, Amit produces _____ and Susan produces _______, which _____ an equilibrium. Part 3 Since the economy needs both food and housing, what must happen so that both are produced?
comparative advantage. *time each number by 20 or given number food, food, is not The equilibrium wage for housing production must increase relative to the wage for food production.
Imagine a new technology emerged, allowing for increased productivity and driving U.S. real GDP growth from 4.5 percent one year to 6.5 percent in the next year. Part 2 Given this information, the change in the unemployment rate when the growth rate is 4.5 percent will be to decrease by 1.25 percent. The change in the unemployment rate when the growth rate increases is 6.5 percent will be to decrease by 2.25 percent. Part 3 Using Okun's Law, we can infer that the change in the growth rate of GDP will _____________. Part 4 Using the real business cycle approach, it can be concluded that the new technology will ____________. Which of the following statements explains why the new technology is likely to lead to higher unemployment than estimated using Okun's Law?
decrease, 1.25 decrease, 2.25 accelerate the decrease in the unemployment rate stimulate both employment and GDP The effect of the new technology on the unemployment rate would be moderated by substituting capital for labor. Use formula: Unemployment rate= -1/2 * (g-2%) when g is real GDP growth *do not plug in the result as a negative number example: -1/2 * (4.5-2)= -1.25 --> 1.25
Countercyclical monetary and fiscal policies both work by shifting the labor ______ curve. The adjacent graph shows the initial labor supply curve (LS1), initial labor demand curve (LD1), and the initial labor market equilibrium in an economy (E1). Suppose the economy now experiences an economic boom due to a technological breakthrough. This shifts the labor demand curve to LD2 and the economy to E2. Using the multi-point curve drawing tool, show the shift in the appropriate curve if the government now carries out a countercyclical policy. Carefully follow the instructions above and only draw the required objects. Use the fewest points possible in achieving the desired outcome. Part 3 Which of the following is not a reason why policymakers might implement growth-reducing contractionary policies during a boom?
demand e1,LD1,LD3,LD2,e2 To bring the unemployment rate down to the target level.
The real exchange rate for the United States is defined as the ratio of the ____ price of a basket of goods and services in the United States divided by the _____ price of ______ basket of goods and services in a foreign country.
dollar dollar the same
Some pundits have advocated for a "rules-based" monetary policy. This problem considers one extreme possibility: a world in which the Federal Open Market Committee (FOMC) decides on a new federal funds rate simply by applying the Taylor rule. Part 2 In such an environment, market participants will form their expectations of the federal funds rate by using _______. Part 3 uppose that the next FOMC meeting is coming up in a few days and the official inflation and output gap numbers have just been released. The current federal funds rate is 1.25 percent, the long-term fed funds rate target is 3.00 percent, and the inflation rate target is 2 percent. According to the release, inflation is currently at 1.25 percent and the output gap is -0.5 percentage points. Given the information above, the expected federal funds rate is ____ percent Suppose the market participants expect that the Fed will increase the federal funds rate from 1.25 percent to 1.625 percent. Based on this information, which of the following outcomes is likely to be true? Which of the following problems is the Fed likely to face if it wants to set its policy by applying the Taylor rule?
economic news 1.625 formula: federal funds rate= LR federal funds rate target +1.5*(inflation rate- inflation rate target)+0.5*(output gap in percentage points) =3+1.5*(1.25-2)+0.5*(-0.5)= 1.625 Loan origination will decrease. Applying the Taylor rule would reduce the Fed's flexibility to respond to changes in economic conditions.
f an economic shock decreases labor demand, equilibrium employment _______ and real GDP ________. Part 2 If wages are flexible, the decrease in employment and real GDP will be ________ the decrease if wages are rigid. Part 3 When workers are laid off, what happens to physical capital?
falls, falls smaller than Physical capital becomes less productive, leading firms to reduce capacity utilization.
Crowding out occurs when _________ borrowing displaces ______ borrowing. Since expansionary fiscal policy should only take place during times of ____________, it seems worth the risk for many policy makers.
government, private, recession
Contractionary monetary policy leads to a____ real interest rate. This causes the economy to _____ along the downward-sloping line summarizing the relationship between the real interest rates and net exports (net capital outflows). The change in the real interest rate also brings about _____ in the real exchange rate. In equilibrium, net exports ________.
higher move up an increase decline
Using the graph on the right, show the effect of a negative shock on the labor demand curve in an economy. Assume that wages in the economy are rigid and cannot change in the short run. Compare the point of trough employment on the graph with the point of trough employment if wages were flexible. If wages were flexible, employment would have been ___________ employment with rigid wages.
higher than
The Conference Board publishes data on Business Cycle Indicators (BCI). The Composite Index of Leading Economic Indicators is one of the three components of the BCI. Changes in leading economic indicators usually precede changes in GDP. Some of the variables tracked by the index are listed below. i. The average weekly hours worked by manufacturing workers ii. The average number of initial applications for unemployment insurance iii. The amount of new orders for capital goods unrelated to defense iv. The amount of new building permits for residential buildings v. The S&P 500 stock index vi. Consumer sentiment
i. Positively correlated ii. Negatively correlated iii. Positively correlated iv. Positively correlated v. Positively correlated vi. Positively correlated
Challenge Problem. The chapter mentions that an open market operation by the Fed can increase or decrease the quantity of deposits in banks and therefore the money supply. The change in the money supply from a Fed open market operation is given by the following equation: Change in money supply= Change in reserves×1/(RR+ER) where RR = the percentage of deposits that banks are required to keep as reserves ER = the percentage of deposits that banks voluntarily hold as excess reserves 1/(RR+ER) = the "money multiplier" Part 2 Suppose the Fed decides to buy $11 billion in Treasury bonds. Assume that the reserve requirement is 8 percent, banks hold 4 percent in excess reserves, and the public holds no cash. Part 3 This action by the Fed causes the money supply to increase by $91.67 billion. or 12 9 3
increase 91.67 or decrease 100 formula: 1/(.3+.9)*12 sale= dec buy=inc
While the inverse relationship between unemployment and real GDP growth is unquestionable over time, it is not always proportional because ____________.
labor hoarding slows down the hiring process.
Consider the following particulars of the U.S. national accounts. Particulars Amount ($ in million) Gross domestic product 700 Consumption by domestic residents 500 Investment by domestic residents 300 Government expenditure 325 Foreign investment into the U.S. is ______ U.S. investment in foreign countries. Part 2 The investment by foreign countries into the U.S. increases due to a recent change in the economy. Which of the following could have been the possible change?
more than A rise in the real interest rate.
Contractionary monetary policy would ____________.
most likely be implemented for inflation above 2 percent.
If an economic boom is present, it is likely to be represented by a ____________.
movement up the Phillips curve.
Suppose the Fed sells $2 billion worth of Treasury bonds to Barclays. Complete the following table showing the balance sheet of Barclays before and after this sale.
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Suppose the following table shows data on transactions between the United States and the rest of the world for the month of May, 2013. Assuming the list is exhaustive, use the information given to fill in the table showing the current and financial accounts for May, 2013. (Enter your responses as integers and use a minus sign if necessary.)
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Suppose the Fed wants to implement an anti-recession monetary policy. For each of the tools listed below, indicate the direction the Fed's action should take. The Fed should conduct an open market _______ of Treasury bonds. The Fed should _____ the reserve requirement. The Fed should _______ the interest rate paid on reserves deposited at the Fed. The Fed should _______ lending from its discount window.
purchase lower decrease expand
Suppose the Fed conducts an open market purchase. Such an action would be called for if the economy faced the possibility of ________. Part 2 The Fed's open market purchase impacts the federal funds market shown on the right by shifting the ______ reserves. Part 3 In the diagram on the right: 1.) Use the line drawing tool to indicate the appropriate shift of reserves. 2.) Use the point drawing tool to indicate the new equilibrium in the market. Carefully follow the instructions above and only draw the required objects. Part 4 Following the Fed's successful open market purchase, the process that ensues is given by ____________.
recession supply of Short-term interest rates fall→Long-term interest rates fall→Demand for goods and services increases→Labor demand shifts right. graph: line of demand shift right
Through open market operations, the Fed can _________ by buying up Treasury bonds from the public. Through quantitative easing, the Fed prints extra money in order to ______ long-term bonds and ______ the long-term interest rate.
reduce the short-term interest rate, buy, reduce
Expansionary policy can be achieved through _________ in income taxes. This change in taxes ______ have multiplier effects, but will likely have to be ______ than expenditure-based fiscal policy injections.
reductions, can, larger
Trade allows buyers and sellers to exploit gains from specialization because it allows sellers to ____________.
specialize in the production of the good or service for which they have a comparative advantage and buy goods and services for which they do not have a comparative advantage.
The Internet boom of the 1990s transformed the way business is conducted and dramatically increased worker productivity. Using the graph on the right, show the effect of the Internet boom on the labor demand curve in an economy, including the effects of multipliers. 1.) Using the line drawing tool, show the new labor demand curve prior to the effects of any multipliers. Label your line 'D2.' 2.) Using the line drawing tool, show the new labor demand curve after the effects of multipliers. Label your line 'D3.' 3.) Using the point drawing tool, locate the equilibrium point. Label your point 'e3.' Carefully follow the instructions above and only draw the required objects. Part 2 Using your graph, the most likely explanation for the shift of the labor demand curve is ____________.
the increase in productivity increases the marginal product of labor, leading to an increase in labor demand. GRAPH:________________ Q19
The Internet boom of the 1990s transformed the way business is conducted and dramatically increased worker productivity. Using the graph on the right, show the effect of the Internet boom on the labor demand curve in an economy, including the effects of multipliers. 1.) Using the line drawing tool, show the new labor demand curve prior to the effects of any multipliers. Label your line 'D2.' 2.) Using the line drawing tool, show the new labor demand curve after the effects of multipliers. Label your line 'D3.' 3.) Using the point drawing tool, locate the equilibrium point. Label your point 'e3.' Carefully follow the instructions above and only draw the required objects. Part 2 Using your graph, the most likely explanation for the shift of the labor demand curve is ____________.
the increase in productivity increases the marginal product of labor, leading to an increase in labor demand. Graph: (Demand shifts right) D1, D2, D3, e3 on D3 and S intersection
According to the Taylor rule, the federal funds rate should increase by 1 percentage point if ____________.
the output gap increases by 2 percent.
The demand curve for dollars shows the relationship between ____________ The demand curve for dollars slopes downward because when the dollar ____________.
the quantity of dollars demanded and the exchange rate. depreciates invalue, U.S. goods become relatively less expensiveabroad, causing more people to buy dollars.
The supply curve for dollars shows the relationship between ___________. The supply curve for dollars slopes upward because when the dollar ___________.
the quantity of dollars supplied and the exchange rate. appreciates invalue, goods from abroad become relatively less expensive in the UnitedStates, causing more people to sell(supply) dollars to buy the foreign currency.
One major difference between modeling economic busts and booms is that ____________. While economic booms are generally positive, they also have a dark side. This is because ____________.
there is no issue of rigid nominal wages when modeling booms. if the economy is close to full employment and full capacity utilization before the beginning of the boom, the economy might eventually experience a leftward shift in labor demand, causing a recession rather than a gentle fall to pre-boom levels.
Consider the adjacent diagram showing the net exports curve of the UK. When the real exchange rate is E1, the country runs a trade surplus; and, when the real exchange rate is E2, the country runs a ______. Suppose the UK runs a large permanent deficit with the U.S. Which of the following statements is not correct for the UK?
trade deficit The trade deficit would be unceasing. graph
A currency is said to appreciate against a foreign currency when the nominal exchange rate goes____________
up, meaning the domestic currency now buys more of the foreign currency.
The trade balance is defined as the ___________. The trade balance is known as ___________. A country has a trade deficit when ________ and a trade surplus when _________.
value of a country's exports minus the value of its imports. net exports. the value of exports is less than the value of imports, the value of imports is less than the value of exports
Okun's Law states that ____________. Okun's Law ____________. Which of the following years is an outlier, that is, a year where Okun's Law does not hold? Okun's Law is defined as: If the unemployment rate is 4.0% and real GDP grows by 0.5%, the new unemployment rate is _____
when growth in real GDP is above 2%, unemployment drops and when it is below 2%, unemployment increases. is usually an accurate representation of the data. 2013 4.8% Use formula: Unemployment rate= -1/2 * (g-2%) when g is real GDP growth
Does the effectiveness of monetary policy depend on inflation expectations? Explain.
Yes, the central bank's ability to influence the long-term expected real interest rate is partly determined by the public's long-term expectations of the inflation rate.
Economic fluctuations are
short-run changes in the growth of GDP.
