Exam 4 - Econ202

Acme Home Builders, Inc., has built 24 houses so far this year at a total cost to the company of $4.80 million. If the company builds a 25th house, its total cost will increase to $5.05 million. The marginal cost of the 25th house, if it is built, will equal

$250,000

a) similarity in NGDP and RGDP b) why favor RGDP

- Both provide a measurement for the money value of the final goods and services produced in an economy during a given period. - Real GDP is nominal GDP adjusted for changes in price levels to reflect changes in output only - Since changes in real GDP reflect only changes in quantities produced in an aggregate economy, macroeconomists argue that real GDP provides a more accurate representation of a country's economic activity

industrial machinery is an example of

- Factor of production that in the past was an output from the production process - Physical capital - Something that influences productivity

The following table presents information about a closed economy whose market for loanable funds is in equilibrium GDP: $7.3 trillion Consumer spending: $5.2 trillion Taxes - Transfers: $1.1 trillion Government Purchases: $0.7 trillion the quantity of loanable funds demanded is

1.4 trillion

Last year real GDP in the imaginary nation of Oceania was 561.0 billion and the population was 2.2 million. The year before, real GDP was 500.0 billion and the population was 2.0 million. What was the growth rate of real GDP per person during the year?

2%

Production Possibilities Corn----------Wheat 2000. 0 1600. 700 1200. 1300 800. 1800 400. 2200 0. 2500 What is the opportunity cost of increasing production of corn from 400 bushels to 800 bushels

400 bushels of wheat

Solow Growth Model

A model showing how saving, population growth, and technological progress determine the level of and growth in the standard of living.

stock

A share of ownership in a corporation.

If the Federal Open Markets Committee decides to increase the money supply, it

Creates dollars and uses them to purchase government bonds from the public

Suppose banks decide to hold more excess reserves relative to deposits. Other things he same, this action will cause the money supply to

Fall. To reduce the impact of this the Fed could buy Treasury bonds

Michael learns how to sew from his grandmother. This is an example of

Human capital, but not technological knowledge

A 5 percent reduction in the money supply will, according to classical economists, reduce prices 5 percent:

In the long run but lead to unemployment in the short run

How r is determined (liquidity theory)

MS curve is vertical: changes in r do not affect MS, which is fixed by the Fed MD curve is downward sloping: a fall in r increases the quantity of money demanded

Most economist believe the principle of monetary neutrality is

Mostly relevant to the long run

If the reserve requirement is 7 percent, a bank desired to hold no excess reserves, and it receives a new deposit of $200, it

Must increase required reserves by $14

tools of the Fed

Open Market Operations, Reserve Requirements, Discount rate new: Quantitative Easing, Interest on Reserves

A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deflator of 125 in 2010 and 120 in 2009. Between 2009 and 201

Real output and the price level both rose

public saving is

T - G

Large-scale asset purchases

The Fed's open market operations normally involve only the purchase of government securities, particularly those that are short-term. However, during the crisis, the Fed started two new, large-scale asset purchase programs (often referred to as LSAPs) to lower interest rates for particular types of credit.

money growth rate

The proportionate change per year in the nominal quantity of money.

Suppose that interest rates unexpectedly rise and that FineLine Corporation announces that revenues from last quarter were down but not as much as the public had anticipated they would be down. According to the efficient markets hypothesis, which of the following makes the price of FineLine Corporation Stock fall?

With rising interest rates most people will have less of an incentive to take out loans which will cause a slowing in economic activity on a macro scale. This slowing of economic activity is likely the cause of Fineline corporation's stock price fall - only the rising interest rate

private saving is

Y - T - C

what shifts AD curve

Y = C + Ig + G + NX changes in consumption, investment, government spending, and net exports

variables that influence money demand

Y, r, and P aka real income, interest rate, and price

bond

a certificate of indebtedness

Phillip's curve

a curve that shows the short-run trade-off between inflation and unemployment -- shifts in AS-AD model

misperceptions theory

a low-price level led some suppliers to think their relative prices have fallen, including a fall in production

Stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

quantity theory of money

a theory asserting that the quantity of money available determines the price level and that the growth rate in the quantity of money available determines the inflation rate

fixed interest rate

an interest rate that does not change-- what bondholders expect to earn

sticky price theory

an unexpectedly low price level leaves some firms with higher than desired prices, which depresses their sales and leads them to cut back production

sticky wage theory

an unexpectedly low price level raises the real wage, which causes firms to hire fewer workers and produce a smaller quantity of goods and services; nominal wages are slow to adjust to changing economic conditions

Unemployment in the long run will be

at its natural rate regardless of inflation

Why is the long-run aggregate supply curve vertical?

because of monetary neutrality, any change in price level does not affect the quantity of goods and services produced in the long run

AD shifters generally respond to

behavioral changes, not price changes

open markets expansionary policy

buy bonds, doing so puts funds directly in the loanable fund market, enabling banks to increase lending

unexpected inflation can

change unemployment in the short run (SRPC tradeoff), however the market will adapt and come to expect this infaltion

what shift long run aggregate supply

changes in labor, capital, human capital, natural resources, technology

included in M1 and M2

currency, demand deposits and other checkable deposits

Suppose you are deciding whether or not to buy a particular bond for $5,980.17. If you buy the bond and hold it for 5 years, then at that time you will receive a payment of $10,000. You will buy the bond today if the interest rate is a. no less than 9.48 percent. b. no greater than 9.48 percent. c. no less than 10.83 percent. d. no greater than 10.83 percent.

d. no greater than 10.83 percent. Because if it is higher than that then you want to save in the bank because you'll make more mula (11% percent for example would be more than 10,000 in 5 year) 5980.17 (1+r)^5 >10,000

wealth effect given a decrease in the price level

decrease in the price level raises the real value of money and makes you feel richer which encourages you to spend more

expansionary discount rate

decrease the rate, making it less expensive to borrow from the Fed, thus stimulating lending

reserve requirements expansionary policy

decrease the reserve ratio so that banks may lend more of their deposits. during so enables banks to increase lending

Phillips curve and expectations if the Fed reduces the rate of money growth and maintain it at a new lower rate, eventually expected inflation will ___ and the SRPC will shift ____

decrease, downward

contractionary policy ____ money supply

decreases

stockholders typically expect to earn what

dividend income and capital gains

automatic stabilizers

government spending and taxes that automatically increase or decrease along with the business cycle

during a presidential campaign, the incumbent argues that he should be reelected because nominal GDP grew by 12 percent during his 4-year term in office. You know that population grew by 4 percent over the period and that GDP deflator increased by 6% during the past 4 years. You should conclude that real GDP per person

grew, but by less than 12 percent

index funds typically have a

higher rate of return and lower cost than managed mutual funds

when the Fed increases the money supply and expands aggregate demand, it moves along the Phillips curve to a point with ___ inflation and ___ unemployment

higher, lower

Long Run Phillips Curve

illustrates the conclusion that unemployment does not depend on money growth and inflation in the long run

in the simple circular flow diagram, with households and firms, GDP can be computed as the

income received by households, in the form of wages, rent, business interest income, proprietors' income and profit

suppose the interest rate increases, while real income and prices remain the same/ What can we expect to happen to the demand for money?

increase

contractionary discount rate

increase the rate, making it more expensive to borrow from the Fed, thus discouraging lending

reserve requirements contractionary policy

increase the reserve ratio so that banks cannot lend as many of their deposits. doing so limits banks lending behavior

Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has

increased measured GDP by the value added by the restaurants preparation and serving of meals

expansionary policy ____ money supply

increases

temporary open market operations

involve repurchase and reverse repurchase agreements that are designed to temporarily add or drain reserves available to the banking system.

attach the income earned tot he use of one of the four key resources

labor (K): wages and salaries land and other NR (H): rental income capital (K): business interest income ET: proprietors' income and corporate profits

things that may shift in LRAS curve

labor, capital, natural resources, technological knowledge

- Which way would the AD curve shift if there was a decrease in demand?

left

interest rate effect given a decrease in the price level

lower price level reduces the IR and encourages consumer to spend more on investment goods

according to classical theory, changes in money supply affect

nominal variables, not real

interest rate effect

occurs when a change in the price level leads to a change in interest rates and, therefore, in the quantity of aggregate demand

GDP components in public, private, international sectors

public: G private: C + IG international: XN

MV = PY

quantity equation

According to the classical dichotomy,

real variables, such as real GDP and the real interest rate are not affected by monetary policy

money demand (MD)

reflects how much wealth people want to hold in liquid form

- Which way would the AD Curve Shift if there is an increase in demand?

right

An decrease in the expected price level shifts SRAS

right

equity finance

sale of stock to raise money

what shifts short run aggregate supply

same as long run (factors), but also changes in expected price level

a higher interest rate induces people to

save more, so the supply of loanable funds slopes upward

If the government's expenditures exceeded its receipts, it would likely

sell bonds directly to the public

open markets contractionary policy

sell bonds. doing so removes bank reserves that could have been lent in the loanable funds market, preventing banks from lending

classical dichotomy

separation of real and nominal variables

AS/AD model used to explain

short-run fluctuations in economic activity arounds its long-term trend

aggregate supply curve

shows the quantity of goods and services that firms choose to produce and sell at each price level

aggregate demand curve

shows the quantity of goods and services that households, firms, the government, and customers abroad want to buy at each price level

when output increases employment generally

tends to increase

wealth effect

the change in the quantity of aggregate demand that results from wealth changes due to price-level changes

natural rate hypothesis

the claim that unemployment eventually returns to its natural rate regardless of the rate of inflation

Mia Denton was an accountant in 1943 and earned $21,000 that year. Her son is an accountant too and he earned $270,000 this year. Suppose the price index was 18.3 in 1943 and 20.2 in the current year. Mia's 1943 income in current dollars is

$23, 180

If the nominal interest rate is 5% and the real interest rate is 7%, the the inflation rate is

-2%

GDP =

C + I + NX or C +IG + G + (EX - IM)

the theory of liquidity preferance

Keynes's theory that the interest rate (r) adjusts to bring money supply and money demand into balance

When the government's budget deficit increases the government is borrowing

More and public saving falls

Unemployment rate formula

natural rate - (actual inflation - expected inflation)

aggregate supply slopes upward for 3 reasons

sticky wage, sticky price, and misperceptions theory

monetary neutrality

the proposition that changes in the money supply do not affect real variables

In a closed economy, investment must be equal to private saving

true

social security payments are indexed for inflation using the CPI. A recent newspaper editorial claimed that SS recipients are harmed by years of low inflation because they do not receive as large a payment as they do in years in high inflation. Is the newspaper correct?

the newspaper editorial could be correct if the prices of the goods consumed by social security recipients change at a different rate than the price of the goods in the market basket used to compute the CPI

debt finance

the sale of bonds to raise money

When banks hold large amounts of reserves...

the scale of traditional open market operations is not sufficient to influence the short-term lending rate of commercial banks. unconventional monetary policy tools may be needed to support the flow of credit to households and businesses

Dani must decide between going to Florida and Brazil for spring break represents which principle adage

there ain't no such thing as a free lunch

Other things the same, corporate bonds generally feature higher interest rates than U.S. government bonds

true

T or F: Abjihit deposits $100 in a bank account that pays an annual interest rate of 5%. A year later, Abjihit withdraws his $105. If inflation was 2 percent during the year the money was deposited, then Abjihit's purchasing power has increased by 3 percent.

true

Three fourths of economist did not agree with what proposition

we should withdraw from NAFTA

AD slops downward for three key reasons

wealth, interest rate, and exchange rate effect

exchange rate effect

when a fall in the US price level reduces the IR, the value of the US dollar falls in the foreign exchange market. This depreciation of the dollar makes our goods appear cheaper to foreigners, so they buy more