ECON FINAL EXAM STUDY GUIDE
During a year, a firm's net investment is $5,600 and depreciation is $1,400 What is the firm's gross investment?
$7,000
the money price of a box of ramen noodles is $0.50 and the money price of a jar of pasta sauce is $2.00. The opportunity cost of a jar of pasta sauce is The relative price of a jar of pasta sauce is an opportunity cost because ______.
4.00 boxes of ramen noodles,which is the relative price of a jar of pasta sauce the relative price tells us how many boxes of ramen noodles we must give up to get a jar of pasta sauce
According to RBC theory, a fall in productivity growth brings a decrease in investment demand, a decrease in the demand for loanable funds, and a decrease in the real interest rate. It also brings a decrease in the demand for labor, a decrease in the supply of labor, a decrease in employment, and a decrease in the real wage rate.
According to RBC theory, a fall in productivity growth brings a decrease in investment demand, a decrease in the demand for loanable funds, and a decrease in the real interest rate. It also brings a decrease in the demand for labor, a decrease in the supply of labor, a decrease in employment, and a decrease in the real wage rate.
A recessionary gap eventually emerges even if aggregate demand remains constant because over time ______.
potential GDP increases
The mainstream business cycle theory is that ______ grows at a steady rate while ______ grows at a fluctuating rate.
potential GDP; aggregate demand
The aggregate demand curve shows the relationship between the quantity of real GDP demanded and ______ when everything else remains the same.
price level
A movement along the aggregate demand curve occurs if _______.
price level changes and all other factors remain the same
If the demand curve for bikes shifts leftward and the supply curve for bikes shifts rightward, the equilibrium
price of bikes definitely decreases.
The combination of a rising _____ and decreasing _____ is called stagflation.
price level; real GDP
Aggregate expenditures include all of the following EXCEPT: -purchases of intermediate goods. -purchases of a piece of capital equipment -consumption of food -purchases of guns by govt.
purchases of intermediate goods.
The defining feature of the Keynesian view of macroeconomics is that the economy is ______.
rarely at full employment
Labor productivity is defined as
real GDP per hour of labor.
Aggregate demand is the relationship between the quantity of _____ demanded and the _____ when all other influences on expenditure plans remain the same.
real GDP; price level
The main criticisms of RBC theory include all of the following except ______.
real business cycle theory relies too heavily the role of money in the economy to make its predictions
n the long run, the money wage rate ______, short-run aggregate supply ______, and the economy returns to afull-employment equilibrium.
rises; decreases
Flights to Paris are a normal good and people's incomes rise. At the same time, the price of jet fuel rises. The equilibrium price of a flight to Paris ________ and the equilibrium quantity of flights to Paris ________.
rises; might increase, decrease, or not change
The defining feature of the classical view of macroeconomics is that the economy is ______.
self-regulating and always at full-employment
The defining feature of the monetarist view of macroeconomics is that the economy is______.
self-regulating and that it will normally operate at full employment, provided that monetary policy is not erratic and that the pace of money growth is kept steady
When the money wage rate rises _______. When the price level in India increases _______.
short run aggregate supply decreases; quantity of real gap supplied
A supply curve that illustrates the law of supply _______.
shows that the quantity supplied increases as the price rises
In mainstream business cycle theory, the money wage rate is
sticky
Which of the following measurements of inflation tracks the rate at which infrequently changed prices are changing?
sticky-price CPI
Real GDP is calculated by _______.
summing together the value of the years production using the prices of the reference base year.
An assumption of neoclassical growth theory is that
technology change is random
Which of the following statements illustrate fiscal policy?
the US government has proposed a hike in corporate tax
Because of the choices people make in the pursuit of profit, new growth theory argues that
the economy can enjoy a period of indefinite growth.
Aggregate demand will increase if ______.
the effect of the tax rebates and the change in the foreign exchange rate outweigh the effect of the housing, credit, and financial crises
Russell studies instead of playing tennis. The opportunity cost to him of studying is
the forgone value of playing tennis.
The marginal benefit that Veronica receives from the second taco is _______.
the maximum amount she is willing to pay for the second taco
Marginal cost of a good is _______
the opportunity cost of producing one more unit of it
When the price level in Mexico falls, _______.
the quantity of real GDP demanded in Mexico increases (along curve)
The nominal interest rate approximately equals which of the following?
the real interest rate plus the inflation rate
Full employment occurs when the
the unemployment rate equals the natural unemployment rate
If the price of chocolate chip cookies rises, then
there is a movement upward along the demand curve for chocolate chip cookies.
Business cycles are
unpredictable, but always have two phases and two turning points.
Why does the aggregate demand curve slope downward? The aggregate demand curve slopes downward because _______.
wealth effect and the substitution effect.
In ______ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand. In ______ cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuations in aggregate demand.
Keynesian; monetarist
When the inflation rate exceeds the expected rate, the economy behaves like it does in a ______ inflation: The price level is higher than expected and real GDP ______ potential GDP.
demand-pull; rises above
The increase in investment ______ aggregate demand. The decrease in government spending _______ aggregate demand.
increases; decreases
The fall in the average weekly wage rate ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; does not change
Gross Domestic Product for the First Quarter of 2017 The increase in real GDP in the first quarter primarily reflected increases in personal consumption expenditures, exports, and investment. Government spending decreased. Source: Bureau of Economic Analysis, June 29, 2017 Explain how the items in the news clip influence U.S. aggregate demand. The increase in the personal consumption expenditures ______ aggregate demand. The increase in exports ______ aggregate demand.
increases; increases
The fall in the minimum wage ______ short-run aggregate supply and ______ long-run aggregate supply.
increases; increases
If the price level rises and the money wage rate remains constant, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
increases; short-run
In Keynesian cycle theory, fluctuations in _____ driven by fluctuations in business confidence - summarized by the phrase "animal spirits" - are the main source of fluctuations in _____.
investment; aggregate demand
Krugman on Monetary and Fiscal Policy Nobel Laureate economist Paul Krugman has launched an all-out attack on the monetary policy actions and inactions of Fed Chairman Ben Bernanke. Bernanke has increased the quantity of money by historically large amounts and in mid-2012 was cautiously trying to determine whether more stimulation was needed. Krugman says Bernanke is too cautious and should print money faster and move the inflation rate upward. Krugman also wants Congress to cut taxes and increase spending. Based on this news clip, Paul Krugman most likely follows the ______ school of thought and Ben Bernanke most likely follows the ______ school of thought.
D. Keynesian or new Keynesian; Keynesian or new Keynesian
If Geoffrey and Hermione devote equal amounts of time and effort to making pretzels, Geoffrey produces more units than Hermione. This information tells us that
Geoffrey has an absolute advantage in producing pretzels.
In monetarist cycle theory, fluctuations in both _____, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuation in aggregate demand.
Investment and consumption expenditure
In more than a year of campaigning, Barack Obama has made a long list of promises for new federal programs costing tens of billions of dollars. Obama has said he would strengthen the nation's bridges and dams ($6 billion a year), extend health insurance to more people (part of a $65-billion-a-year health plan), develop cleaner energy sources ($15 billion a year), curb home foreclosures ($10 billion in one-time spending) and add $18 billion a year to education spending. In total a $50-billion plan to stimulate the economy through increased government spending. A different blueprint offered by McCain proposes relatively little new spending and tax cuts as a more effective means of solving problems. Based on this news clip, Barack Obama most likely follows the ______ school of thought and John McCain most likely follows the ______ school of thought.
Keynesian or new Keynesian; classical or new classical
Treasury Secretary Timothy Geithner is reported as having said that the United States can no longer rely on consumer spending to be the growth engine of recovery from recession. Washington needs to plant the seeds for business investment and exports. "We can't go back to a situation where we're depending on a near short-term boost in consumption to carry us forward," he said.
Keynesian school of thought if he is recommending an active policy of tax cuts to combat the recession
The two main official measures of money in the United States today are ______. The two main official measures of money in the United States ______ really money.
M1 and M2; are
The opportunity cost to produce 1 pretzel for Mark is 2 cookies. For Jessica, the opportunity cost to produce 1 pretzel is 3 cookies. From this information, we know that
Mark has a comparative advantage in pretzel production.
When the U.S. economy goes into a recession, a ______.
Mexico's exports to the United States decrease Mexico's aggregate demand decreases and Mexico's AD curve shifts leftward
Which of the following statements illustrate monetary policy?
Monetary policy includes changing the quantity of money and the interest rate. The fact that the Fed has raised the federal funds rate by 0.3 percent, implies a change in the interest rate. So it illustrates monetary policy.
Defenders of RBC theory claim all of the following except ______
RBC theory is consistent with a negligible intertemporal substitution effect
Which business cycle theory would say that the second economist is correct and why? ______ business cycle theory, because it says unemployment is ______ .
Real; structural, caused by technological shocks that decrease aggregate supply
What must happen to create a demand-pull inflation spiral?
The quantity of money must persistently increase.
consider the market for broccoli. if the price of a pound of broccoli increases, what happens to the supply of broccoli?
The supply of broccoli increases
Which of the following questions is a macroeconomic issue?
What is the future growth prospect for an economy?
Describe the policy change that a classical macroeconomist, a Keynesian, and a monetarist would recommend for U.S. policymakers to adopt in response to each of the following events: a. Growth in the world economy slows. b. The world price of oil rises. c. U.S. labor productivity declines.
a classical and monetarist recommend that taxes
A cost-push inflation begins when an increase in the money wage rate or an increase in the money prices of raw materials brings ______ .
a decrease in short-run aggregate supply
Economic growth results from ______.
a growing supply of labor and increasing labor productivity, which increases long-run aggregate supply
A rise in the money wage rate with no change in potential GDP creates ______.
a leftward shift of the SAS curve and no change in the LAS curve
If as Stephens income decreases, his demand for leather gloves decreases, then for Stephen, leather gloves are _______.
a normal good
Inflation results from ______.
a persistent increase in aggregate demand at a faster pace than that of the increase in long-run aggregate supply
Describe three types of short-run macroeconomic equilibrium. A macroeconomic equilibrium in which real GDP exceeds potential GDP is _____ equilibrium. And one in which real GDP is less than potential GDP is _____ equilibrium.
above full-employment; below full-employment
An inflation that starts because _____ is called demand-pull inflation.
aggregate demand increases
A demand-pull inflation begins with _______.
an increase in aggregate demand
Which of the following always raises the equilibrium price?
an increase in demand combined with a decrease in supply
According to the quantity theory of money, in the long run
an increase in the quantity of money creates an increase in prices but no additional increase in real GDP.
If aggregate demand grows faster than potential GDP, ______ gap emerges and if it grows more slowly than potential GDP, ______ gap emerges.
an inflationary; a recessionary
Discouraged workers ________ counted as officially unemployed because they ________.
are not; are not actively seeking work
The consumer price index (CPI)
compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.
An inflation that is kicked off by an increase in _____ is called cost-push inflation.
costs
event 3
decreases aggregate demand
The following events have occurred at times in the history of the United States: 1. A deep recession hits the world economy 2. The world oil price rises sharply 3. U.S. businesses expect future profits to fall Explain the effect of each of the following events on aggregate supply and aggregate demand in the United States. Event 1 ______. Event 2 ______.
decreases aggregate demand; decreases short-run aggregate supply
A rise in the wage rate _______.
decreases short run aggregate supply and does not change long run aggregate supply
Paychecks in Kansas are growing, according to the U.S. Department of Labor. Jacqueline Midkiff, with the department's office in Kansas City, says the average overall increase across the board through the Midwest, is 1.9 percent over this time last year, while inflation grew at 1.4 percent for the same time period. The "average overall increase across the board" wage increase _______.
decreases short run-supply because it increases firms' costs
How do a decrease in the quantity of money and an increase in expected future income change aggregate demand? Aggregate demand _______ when a decrease in the quantity of money occurs. Aggregate demand _______ when an increase in expected future income occurs.
decreases; increases
A rise in wages in China _______ .
decreases China's short-run aggregate supply and the quantity of real GDP supplied does not change
An open market sale of securities by the Fed
decreases banks' reserves and increases banks' securities.
In new classical cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate _____, determines the _____ and the position of the SAS curve.
demand; money wage rate
If the price level and the money wage rate rise by the same percentage, the quantity of real GDP supplied ______ and there is a movement up along the ______ aggregate supply curve.
does not change; long-run
A rational expectation is a forecast that results from the use of all the relevant data and _____.
economic science
An increase in labor productivity increases potential GDP because ______.
employment increases and a given amount of employment produces more real GDP
According to RBC theory, the source of the business cycle is _______, which result mainly from _______.
fluctuations in productivity; fluctuations in the pace of technological change
The law of supply states that other things remaining the same, the _______ the price of a good, the _______.
higher; greater is the quantity supplied
Gustavo graduates from college and his income increases by $20,000 a year. nothing else changes. Gustavo decreases the quantity of T-shirts and bread rolls that he buys and increases the quantity of hot caramel apple cider that he buys. For Gustavo,
hot caramel apple cider is a normal good
The Fed is the lender of last resort, which means _______.
if depository institutions are short of reserves, they can borrow from the Fed
Which of the following is NOT one of the Fed's monetary policy tools? -required reserve ratio -last resort loans -income tax rate -buying and selling us securities
income tax rate
An increase in the demand for computers and a decrease in the number of sellers of computers will ________.
increase the price of a computer
T-shirts and tank tops are substitutes IF the price of a t-shirt increases, the demand for tank tops will
increase, and the demand curve for tank tops will shift rightward
When Canada sets new environmental standards that require power utilities to upgrade their production facilities, Canada's aggregate demand _______.
increases
When Mexico increases the quantity of money, Mexico's aggregate demand ______.
increases and its AD curve shifts rightward
The Fed increases the quantity of money and all other things remain the same. Explain the effect of the increase in the quantity of money on aggregate demand in the short run. In the short run, aggregate demand _______.
increases because interest rates fall and it is it easier to get a loan to buy homes and large consumer goods
An increase in exports of goods or services with no change in imports of goods or services
increases GDP.
Starting from a full-employment equilibrium, an increase in aggregate demand ______, and creates ______ gap.
increases real GDP above potential GDP; an inflationary
Starting from a full-employment equilibrium, a decrease in short-run aggregate supply ______ the price level and ______ potential GDP.
increases; decreases real GDP below
When the government of Canada cuts income taxes, Canada's aggregate demand _______. When the United States experiences strong economic growth, Canada's aggregate demand _______.
increases; increases
Explain how a rise in labor productivity and wages in China will influence the quantity of real GDP supplied and aggregate supply in China. A rise in labor productivity _______.
increases long-run aggregate supply and short-run aggregate supply
Which of the following pairs does not match?
land; profit
Because of the biases in calculating the CPI, actual inflation is
less than the measured inflation rate.
When potential GDP increases, ______.
long-run aggregate supply and short-run aggregate supply increase. The LAS and the SAS curve shift rightward
Which business cycle theory would say that the first economist is correct and why? ______ business cycle theory, because it says unemployment is caused by too little aggregate ______ .
mainstream; demand
In any year, the real GDP of an economy
may be greater or less than potential GDP.
In any year, real GDP
might be greater or less than potential GDP.
The required reserve ratio is the ______.
minimum percentage of deposits that depository institutes are required to hold as reserves
An increase in the real interest rate results in a
movement along the supply of loanable funds curve.
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.
new classical; new key
In calculating GDP, household production is
not included because there is no market transaction
The Fed's three policy tools are _______.
open market operations, last resort loans, and the required reserve ratio
Because pollution reduces economic welfare, on this count real GDP
overstates economic welfare.
The new Keynesian cycle theory emphasizes the fact that today's money wage rates were negotiated at many past dates, which means that _____ rational expectations of the _____ price level influence the money wage rate and the position of the SAS curve.
past; current
Keynesian macroeconomists recommend ______.
policies that actively offset changes in aggregate demand that bring recession
Monetarist macroeconomists recommend ______.
policies that keep taxes low to avoid disincentive effects that decrease potential GDP
Classical macroeconomists recommend ______.
policies that minimize the disincentive effects of taxes on employment, investment, and technological change
In one hour, Sue can produce 60 caps or 18 jackets and Tessa can produce 60 caps or 24 jackets. Sue's opportunity cost of producing a cap is ______ jackets and Tessa's opportunity cost of producing a cap is ______ jackets. ______ has a comparative advantage in producing caps. If Sue and Tessa each specialize in producing the good in which they have a comparative advantage and trade 1 jacket for 3 caps, ___
0.3;0.40 Sue; both Sue and Tessa gain
At one point along a PPF, 50 tons of coffee and 100 tons of bananas are produced. At another point along the same PPF, 30 tons of coffee and 140 tons of bananas are produced. The opportunity cost of a ton of coffee between these points is
2 tons of bananas
