ECON305 chapter quizes
Y=N. According to the production function, labor's productivity (output per worker) is
constant and equal to 1.
Output per hour worked is referred to as _____ and is a key economic variable.
productivity
riskless bond and a risky bond will yield the same expected return? If the two bonds have the same expected return, investors will still prefer the ___. The preference investors have for riskless bonds even when risky bonds possess the same expected return as riskless bonds is attributed to investors being risk ___.
(1+i) = (1+i+x)(1-p)+p(0). riskless bond. averse.
The bank will remain solvent provided its assets decline by no more than
1 less than its capital
Consider an economy where the nominal interest rate is 8.4% and the expected inflation rate is 6.7%. The real interest rate is __
1.7
The real wage implied by the price-setting behavior of firms having some market power is given by
1/1+m. This wage does not depend on the rate of unemployment.
Which of the following factors determines the risk premium that bond holders require to hold bonds?
Borrowers' probability of default.
Which of the following accurately describes the relationship between an economy's production of goods and services, its sales of goods and services, and its inventory investment? A. Sales = Production − Inventory investment B. Production = Sales + Inventory investment C. Inventory investment = Production − Sales D. All of the above
D. all of the above
During prolonged recessions, it is difficult for workers to find a job and many workers become discouraged. Which of the following is a correct statement? A. Discouraged workers are counted in the labor force and cause the participation rate to rise. B. Discouraged workers are counted in the labor force and cause the participation rate to fall. C. Discouraged workers are not counted in the labor force and cause the participation rate to fall. D. Discouraged workers are not counted in the labor force and cause the participation rate to rise.
Discouraged workers are not counted in the labor force and cause the participation rate to fall.
The labor market is characterized by the flows of workers in and out of employment. What best describes the size of these flows?
Each month, the flows in and out of employment are large relative to the number of workers who are unemployed.
In response to the financial crisis, policymakers enacted an assortment of corrective measures. Which of the following were among these?
Efforts to strengthen the financial system via financial policies. Stimulation of demand via fiscal policy. Attempts to reduce borrowing costs for consumers and firms
For the last 25 years Europe has had a higher average unemployment rate than the United States. Given that Europe has not experienced any sustained decrease in inflation over that period, what is the most likely explanation for this difference?
Europe has a higher natural rate of unemployment than the United States.
Which of the following best describes the change in nominal and real GDP from 1960 to 2014 in the United States?
GDP in 2014 was about 32 times higher in nominal terms and about 5 times higher in real terms compared to 1960 levels.
The downward-sloping curve is the __ curve, and at any point on this curve, we know that the ___ market is in equilibrium. The horizontal line is the ___ curve, and at any point on this curve, we know that the ___ market is in equilibrium. At point Upper A in the figure, both the markets you identified above are in equilibrium, so this point (Yi) defines the economy's ___ equilibrium.
IS; goods. LM; financial. overall.
Suppose the bank's assets fall. In this case, the bank might consider which of the following options?
Increasing its capital from investors. A one-for-one reduction in assets and liabilities
Which of the following best describes the relationship between workers' actual wages and their reservation wages?
Most workers are typically paid a wage that is greater than their reservation wage.
If the goods market is not perfectly competitive, then
P>W
Suppose the government's enforcement of existing antitrust legislation becomes more stringent. In this case, the ____ curve shifts ___ and the natural rate of unemployment ___
PS; up; falls
Which of the following is true about U.S. productivity growth in the mid-1990s?
Productivity growth was high in the mid-1990s, but it is not realistic to expect that high growth rate to continue indefinitely.
What is true regarding wage indexation?
Wage indexation allows workers' wages to increase automatically in line with inflation. Wage indexation becomes more likely to be used during periods of high inflation.
The financial crisis that struck in 2007-2008 was ignited by
a decline in U.S. housing prices and the accompanying risks faced by banks.
The textbook indicates that China has been growing at a staggering pace in recent years. This has contributed to the U.S. trade deficit, the situation in which ______
a nation's imports are greater than its exports
In the IS-LM model, investment spending is specified as
a positive function of output and a negative function of the interest rate.
If investors become more risk averse and/or more concerned about the health of the financial system, consumers and firms are likely to see ____ in the rate they pay to obtain funds.
a rise
U.S. data covering the 1996-2014 period show that the proportion of unemployed workers finding jobs has
a strong inverse relationship with the unemployment rate.
U.S. data covering the 1996-2014 period show that the separation rate has ____. The same U.S. data indicate that from periods of low unemployment to periods of high unemployment, the probability that employed workers will lose their jobs ______
a strong positive relationship with the unemployment rate. nearly doubles
Government policy can increase output without changing the interest rate when
an expansionary fiscal policy is used.
Suppose the probability that a particular bond issuer (firm) will default becomes lowerlower. If at the same time, the risk aversion of bond holders falls, the risk premium on the issuer's bonds ___
become smaller
If the central bank wants to increase the money supply, it can ___________.
buy bonds in the market for bonds
In the expression for equilibrium output, autonomous spending is given by
c0+I+G−c1T
Central bank money differs from money in general in that central bank money excludes _____
checkable deposits
More often than not, policymakers find it useful to employ monetary and fiscal policies in ___
combination
A government's use of fiscal policy to promote a desirable level or growth rate of output is
complicated by a variety of factors.
If all the exogenous variables in the IS relation, such as taxes and government spending, are constant, then an increase in the interest rate will
decrease output.
If the central bank wants to keep the borrowing rate at some target value, and the risk premium rises, then the real policy rate must be
decreased
The demand for money ____________.
depends negatively on the interest rate.
The Federal Reserve can ____________.
determine the federal funds rate by changing the supply of central bank money.
Given the value of labor's productivity in the simplified production function, Y =N , it follows that the cost of one more unit of output (that is, the marginal cost) is _____ the cost of employing one more worker, at wage W.
equal to
If the central bank wants to maintain the economy's output at its initial level, the change cited above will require ___ monetary policy.
expansionary
The fight against a recession is done via __ monetary and fiscal policies.
expansionary
If the money supply intersects the horizontal portion of the money demand, ____ monetary policy no longer works, and the economy is said to be stuck in a _____
expansionary; liquidity trap.
The LM curve is horizontal because equilibrium in
financial markets implies that as output increases, the central bank adjusts the money supply to maintain its interest rate target
Nominal interest rates differ from real interest rates in that real interest rates are expressed in terms of __
goods
The IS curve is downward sloping because equilibrium in the
goods market implies that interest rate and output are inversely related.
Fiscal policy refers to the ____________.
government's decisions on the uses of government spending and taxes.
When GDP is measured by summing the wages and profits earned by resource owners, the approach is said to be taken from the ____ side.
income
When government spending increases by $100, equilibrium output in the short run is expected to ____________.
increase by more than $100.
An increase in unemployment benefits would be expected to ___________.
increase the natural rate of unemployment because it allows unemployed workers to hold out for better wages.
Lower unemployment leads to increased wages, which in turn lead to ____prices. The higher the proportion of wage contracts that are indexed, the ___ wages can adjust, causing ____increases in prices during the year.
increased; quicker; even more
Which of the following is true about the effect of an increase in government spending? An increase in government spending
increases output.
The expectations-augmented Phillips curve
is consistent with workers and firms adapting their expectations after the macroeconomic experience of the 1960s.
Which of the following is a true statement about the Phillips curve relationship? The original Phillips curve
is the negative relation between unemployment and inflation first observed in the United Kingdom.
In any given year, inventory investment
is typically small and may be positive, negative, or zero.
The predictive reliability of the IS-LM model appears to weaken over time because the assumption of a given price level becomes ____ realistic
less
An exploration of the factors underlying an economy's capital stock and its level of technology indicates that the relevant time frame is the __ run
long
Inflation in the United States and the European Union has been ______ in the last few decades recently.
lower
When an analysis is conducted of the factors underlying supply, (e.g., the capital stock) as the determinant of output in an economy, the time frame under consideration is the ___ run
medium
For an equilibrium condition to occur in the goods market, ___________.
output must equal consumption, investment, government spending, and net exports
According to some economists, the relatively high unemployment in some Euro area countries stems from efforts by those countries to ______. For those holding this view, these efforts promote high unemployment by A. deterring firms from hiring workers. B. discouraging the unemployed from taking jobs quickly. C. creating rigidities in the labor market that block its efficient operation. D. all of the above. Other economists contend that the problem is not the degree of protection afforded workers but rather the manner in which the protection is ______
overly protect workers. D. all of the above. implemented.
The demand for money curve shown in the accompanying figure becomes horizontal when the interest rate falls to zero because
people become indifferent between holding money and holding bonds at zero percent
In the IS-LM framework, the ________ interest rate directly reflects central bank actions, while the ________ rate is taken as the relevant rate for consumers and firms.
policy; borrowing
Investment is
positively related to the level of sales and negatively related to the interest rate.
The term investment, as used by economists, refers to the ___________.
purchase of new plants and equipment by firms and the purchase of new houses by households.
Factors that one might explore to understand the pace at which a country's capital stock and its level of technology are advancing include the
quality of its education system; role of the government; saving rate.
expressions captures the approximate relationship between the nominal interest rate, the real interest rate, and the expected rate of inflation? what are the implications of the equation
r = i - pi^e. When expected inflation equals zero, the nominal interest rate and the real interest rate are equal. Because expected inflation is typically positive, the real interest rate is typically lower than the nominal interest rate. The expected rate of inflation can be discerned by examining the difference between the nominal interest rate and the real interest rate.
China's impressive economic growth over the past 30 years is primarily attributable to
rapid technological progress and substantial capital accumulation.
The interest rate relevant to consumers and firms, known as the real borrowing rate, is determined by combining the
real policy rate and the risk premium.
If the bank's assets decline in value, its leverage ratio will ___
rise
The rate of unemployment tends to ___ during recessions and ____ during expansions.
rise; fall
The immediate effects of the financial crisis on the macroeconomy included
sharply higher borrowing rates for consumers and firms. limited access to credit for many borrowers, especially small firms. a dramatic decline in confidence
When an assessment is made of an economy's prospects over a period of, say, a few years, the time frame under consideration is the ___ run
short
According to the wage-setting relation, a decrease in the unemployment rate the workers' bargaining power and consequently the real wage.
strengthens; raises.
In the late 1960s, the economists Milton Friedman and Edmund Phelps said
that the inflation-unemployment tradeoff could not be sustained below the natural rate of unemployment.
An econometric study of the dynamics of monetary policy using U.S. data covering three decades indicates that
the IS-LM model accurately captures the short-run behavior of the economy in response to these policies.
Equilibrium in the goods market requires that production Y be equal to ___
the demand for goods.
Suppose there is a decrease in the economy's level of nominal income. What happens to money demand?
the money supply stays; the money demand curve shifts left and equilibrium moves down.
The prices that firms set are a function of the costs they incur, and these costs, in turn, depend on
the nature of the production function. the prices of inputs.
If the central bank wants to reduce the real policy rate, the minimum value it can take is
the negative of inflation
The substantial attention commonly paid to China today derives largely from
the rapid economic growth it has achieved in recent decades.
The United States is
the richest nation in the world but also borrows huge amounts from the rest of the world each year
The decline in U.S. housing prices starting in 2006 was amplified into a major financial crisis as a result of several contributory factors.
the spread of securitization. banks becoming highly leveraged. the increased reliance by banks on wholesale funding.
The measurement of GDP can be accomplished in ____ different but equivalent ways.
three
If the price of bonds increases, the interest rate ____________.
will fall.
The upward slope of curve ZZ is attributable to
consumption's positive relation to disposable income. investment's positive dependence on sales.
Decisions regarding investment are made by __________, whereas decisions regarding saving are made by __________.
firms; consumers and the government
Income is a _______ variable, and financial wealth is a _______ variable.
flow; stock.
The average unemployment rate in the United States in the 1980s was around ____, in the 1990s the average rate was around ____, and the average rate for the early 2000s was around ____
7.3; 5.8%; 5.0%
Which of the following contributed to the transformation of the financial crisis into a major economic crisis? (Check all that apply.) A. Reduced investment spending. B. Sharply declining consumption. C. A collapse in stock prices. D. Competitive currency devaluations by major countries. E. Weak responses by policy makers, particularly the Fed.
A. Reduced investment spending. B. Sharply declining consumption. C. A collapse in stock prices.
Consider the following statements. All of the following are true except ___________. A. about two-thirds of U.S. currency is held outside the United States. B. about one-third of U.S. currency is held in the United States. C. more than 50% of U.S. currency is held outside the United States. D. about one-third of U.S. currency is held outside the United States
D. about one-third of U.S. currency is held outside the United States
An increase in the propensity to consume will ___________. A. raise consumption spending. B. increase the demand for output. C. raise equilibrium output in the short run. D. all of the above.
D. all of the above
Central bank money refers to A. currency held by people plus reserves held by banks. B. the money that the central bank has issued. C. the liabilities of the central bank. D. all of the above.
D. all of the above.
What are some of the possible causes for Europe's high average unemployment rate?
High levels of employment protection. A generous system of unemployment benefits. Bargaining rules that strengthen unions
If government spending and taxes increase by equal amounts, then the
IS curve will shift to the right.
Equilibrium in the goods market can be expressed as Production = Demand. Alternatively, it can be stated as
Investment = Saving.
The LM relation is given algebraically as ___. According to this relation, equilibrium in the financial market requires that the real demand for money be equal to the money stock, measured in terms of ____
M/P = YL(i). goods
When inflation is relatively low, the Fed may focus more on avoiding a recession in the United States. How does it do so?
The Fed tries to increase demand by lowering interest rates
Which of the following best explains how the participation rate in the United States has changed over time?
The labor force participation rate has increased over time largely due to the increasing participation of women.
What is the effect of the increase in μ on the natural rate of unemployment?
The natural rate of unemployment will increase.
A simplified production function showing output (Y) as a function of employment (N) and labor productivity (A) can be written as
Y = AN
the inflation equation is derived from the price equation: you can see that expected inflation can impact actual inflation through its effects on _______.
nominal wages, W.
Policymakers can exploit the inflation-unemployment trade-off
only temporarily, because expectations adapt to higher levels of inflation.
A government seeking to decrease output through the use of fiscal policy may consider
raising taxes and/or decreasing government spending.
If you believe the economy adjusts slowly to shocks, you will likely have a more ___ focus and would advocate for policies that ___ output quickly.
short-run; impact