final exam macro asu
Objectives of the FED
1. a high level of employment in the economy 2. economic growth 3. price stability 4. interest rate stability 5. financial market stability 6. exchange rate stability
Suppose the MPC is 0.9. There are no crowding out or investment accelerator effects. If the government increases its expenditures by $30 billion, then by how much does aggregate demand shift to the right? If the government decreases taxes by $30 billion, then by how far does aggregate demand shift to the right?
300 billion and 270 billion
Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is an accountant today and he earned $210,000 in 2013. The price index was 17.6 in 1944 and 218.4 in 2013. In real terms, Sue Holloway's income amounts to about what percentage of Josh Holloway's income?
70.9 percent
Inflation
A general and progressive increase in prices
Fed and money supply
Fed will buy or sell government bonds from/to banks to change money supply they have and what they can loan.
fiscal policy
Government policy that attempts to manage the economy by controlling taxing and spending.
monetary policy
Government policy that attempts to manage the economy by controlling the money supply and thus interest rates.
GDP
Gross Domestic Product- the total market value of all final goods and services produced annually in an economy
Scarcity
Limited quantities of resources to meet unlimited wants
increases in the capital stock
More output; outward shift of PPF
natural resources
Raw materials supplied by nature
Productivity
The value of a particular product compared to the amount of labor needed to make it.
research and development
a set of activities intended to identify new ideas that have the potential to result in new goods and services
Which of the following would cause prices and real GDP to rise in the short run?
aggregate demand shifts right
physical capital
all human-made goods that are used to produce other goods and services; tools and buildings
Which of the following events would shift money demand to the right?
an increase in the price level
Economists equate money with
assets people use regularly to buy goods and services
Changes in Nominal GDP reflect
both changes in prices and changes in the amounts being produced
Some persons are counted as out of the labor force because they have made no serious or recent effort to look for work. However, some of these individuals may want to work even though they are too discouraged to make a serious effort to look for work. If these individuals were counted as unemployed instead of out of the labor force, then
both the unemployment rate and labor force participation would be higher
According to the quantity theory of money, a 3 percent increase in the money supply
causes the price level to rise by 3 percent
Which of the following events must cause equilibrium price to fall?
demand decreases and supply increases
The classical dichotomy refers to the idea that the supply of money
determines nominal variables, but not real variables
The unemployment rate is computed as the number of unemployed
divided by the labor force, all times 10
Total output in an economy increases when each person specializes because
each person spends more time producing that product in which he or she has a comparative advantage
Productivity is defined as the quantity of
goods and services produced from each unit of labor input
The producer that requires a smaller quantity of inputs to produce a certain amount of a good relative to the quantities of inputs requires by other producers to produce the same amount of that good,
has an absolute advantage in the production of that good
population growth
increase in the number of people who inhabit a territory or state
an open market purchase
increases the number of dollars in the hands of the public and decreases the number of bonds in the hands of the public
When the Fed decreases the money supply, we expect
interest rates to rise and stock prices to fall.
free trade
international trade free of government interference
The federal reserve
is responsible for conducting the nation's monetary policy, and it plays a role in regulating banks.
The source of the supply of loan able funds
is saving and the source of demand for loanable funds is investment
technological knowledge
knowledge about how the world works that is used to produce goods and services
what is money
medium of exchange
The consumer price index is used to
monitor changes in the cost of living over time
Monetary Policy Tools
open market operations, discount policy, and reserve requirements
in the short run an increase in the costs of production makes
output fall and prices rise
All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?
output will rise but by less than it did when the previous unit was added
Law of Supply
producers offer more of a good as its price increases and less as its price falls
Functions of the Federal Reserve
provide financial services, supervise and regulate banking institutions, maintain the stability of the financial system, conduct monetary policy
The model of aggregate demand and aggregate supply explains the relationship between
real GDP and the price level
The market demand curve
represents the sum of the quantities demanded by all the buyers at each price of the good
aggregate supply shifters
resource prices, actions of the government, productivity
An economic expansion caused by a shift in aggregate demand causes prices to
rise in the short run and rise even more in the long run
If the price level falls , the real value of a dollar
rises, so people will want to buy more
A bond buyer is a
saver, long term bonds have more risk than short term bonds
The quantity supplied of a good is the amount that
sellers are willing and able to sell
classical dichotomy
separation of real and nominal variables
An increase in government purchases will
shift aggregate demand from AD1 to AD2.
long-run aggregate supply curve
shows the relationship between the aggregate price level and the quantity of aggregate output supplied that would exist if all prices, including nominal wages, were fully flexible
Which of the following shifts aggregate demand to the left
stock prices fall for some reason other than a change in price level
Dollars bills, rare paintings and emerald necklaces are all
stores of value
shocks
sudden, unexpected changes in demand or supply
Monetary policy is determined by
the Federal Reserve and involves changing the money supply.
comparative advantage
the ability to produce a good at a lower opportunity cost than another producer
absolute advantage
the ability to produce a good using fewer inputs than another producer
purchasing power
the ability to purchase goods and services
aggregate demand
the amount of goods and services in the economy that will be purchased at all possible price levels
money multiplier
the amount of money the banking system generates with each dollar of reserves
money demand
the amount that households and firms want to hold in currency and deposits
open market operations
the buying and selling of government securities to alter the supply of money
the long-run aggregate supply curve shifts right if
the capital stock increases
nominal wages
the dollar amount of the wage paid
muliplier effect
the idea that every one dollar of spending creates more than one dollar in economic activity
Marginal Propensity to Consume (MPC)
the increase in consumer spending when disposable income rises by $1
People choose to hold a larger quantity of money if
the interest rate falls, which causes the opportunity cost of holding money to fall
market for loanable funds
the market in which those who want to save supply funds and those who want to borrow to invest demand funds
model of aggregate demand and aggregate supply
the model that most economists use to explain short-run fluctuations in economic activity around its long-run trend
real interest rate
the nominal interest rate minus the inflation rate
During a certain year, the consumer price index increased from 120 to 132 and the purchasing power of a person's bank account increased by 4 percent. For that year,
the nominal interest rate was 14 percent
Fiscal policy is determined by
the president and Congress and involves changing government spending and taxation.
The sticky wage theory of the short run aggregate supply curve says that the quantity of output firms supply will increase if
the price level is higher than expected making production more profitable
education
the process through which academic, social, and cultural ideas and tools, both general and specific, are developed
Real GDP
the production of goods and services valued at constant prices
Nominal GDP
the production of goods and services valued at current prices
catch-up effect
the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich
diminishing returns
the property whereby the benefit from an extra unit of an input declines as the quantity of the input increases
money supply
the quantity of money available in the economy
production function
the relationship between quantity of inputs used to make a good and the quantity of output of that good
Economic Fluctuations
the rise and fall of economic activity relative to the long-term growth trend of the economy; also called business cycles
human capital
the skills and knowledge gained by a worker through education and experience
Liquidity Preference Theory
the theory that investors demand a risk premium on long-term bonds
GDP is defined as the
value of all final goods and services produced within a country in a given period of time
The opportunity cost of an item is
what you give up to get that item
Which of the following statements about real and nominal interest rate is correct?
when the inflation rate is positive, the nominal interest rate is necessarily greater than the real interest
The quantity demanded of a good is the amount buyers are
willing and able to purchase
market equilibrium
a situation in which quantity demanded equals quantity supplied
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
aggregate demand shifters
consumer spending, investment spending, government spending, net exports
Law of Demand
consumers buy more of a good when its price decreases and less when its price increases
