Intro to Macro Final

Based on the information in the table, what total quantity of reserves would the Federal Reserve have had to inject into the economy in 1932 to prevent the money supply from falling, given that the public increased the amount of currency it held and that banks increased the reserve-deposit ratio?

$0.66 billion

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store, is produced by the production process in the chart below. What is the value added of Citrus Growers Inc.?

$0.75

An economy produces only 1,000,000 computers valued at $2,000 each. Of these, 200,000 are sold to consumers, 300,000 are sold to businesses, 300,000 are sold to the government, and 100,000 are sold abroad. No computers are imported. The unsold computers at the end of the year are held in inventory by the computer manufacturers. What is the value of the investment component of GDP?

$0.8 billion

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals 0.75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals _____.

$1,160

Suppose the Fed decided to set US money supply in Dec 1933 at the same value as in Dec 1930. Assuming that the values of the currency held by the public and the reserve-deposit ratios remained at levels as shown on the chart, by how much more should the Fed have increased bank reserves in 1933 to accomplish that objective?

$1.77 billion

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and real GDP equals $10 trillion. What is potential GDP in Omega?

$10 trillion

If the desired reserve/deposit ratio equals .10, then every dollar of currency in bank vaults supports ______________ of the money supply, while every dollar of currency held by the public contributes ______________ to the money supply.

$10, $1

Assume an economy produces only hamburgers and hot dogs and the base year is 2016. Use the date to calculate the value of real GDP in 2017.

$10,000

Fred purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is __________, the coupon rate is __________, and the term of this bond is __________.

$10,000; 4 percent; four years

Sydney purchases a newly-issued, two-year government bond with a principal amount of $10,000 and a coupon rate of 6% paid annually. One year before the bonds matures (and after receiving the coupon payment for the first year), Sydney sells the bond in the bond market. What price (rounded to the nearest dollar) will Sydney receive for his bond if the prevailing interest rate is 5%?

$10,095

Bobbie purchases a bond, newly issued by the Big Time Corporation, for $10,000. The bond pays $400 to its holder at the end of the first, second, and third years and pays $10,400 upon its maturity at the end of four years. The principal amount of this bond is ___, the coupon rate is ____, and the term of this bond is _____.

$10000; 4%; four years

The Hatfields and the McCoys both earn $50,000 per year in real terms in the labor market, and both families are able to earn a 25 percent real interest rate on their savings. Assume that all interest is paid out as income in the following year. In the year 2010, both families began to save. The Hatfields saved 8 percent of their income each year; the McCoys saved 10 percent. In 2010, the Hatfields consumed __________ more than the McCoys; in 2011, the Hatfields consumed __________ than the McCoys.

$1000; $795

Pat purchased a newly issued, two-year government bond with a face value of $10,000 in 2014. The coupon rate on the bond is 7%. After one year, in 2015, pat wants to sell the bond in the bond market. The market rate of interest in 2015 is 5%. What price will pat receive for the bond?

$10190.47

Jordan's wealth is __________, the value of Jordan's assets is __________ and the value of Jordan's liability is __________.

$109,000; $213,000;

What is Taylor's wealth?

$111,000

If total government tax collections equal $200 billion, transfer payments equal $75 billion, and government interest payments equal $10 billion, then net taxes equal:

$115 billion

If bank reserves are 200, the public holds 400 in currency, and the desired reserve/deposit ratio is .25, deposits are ____ and the money supply is _____.

800; 1200

Private saving is __________; public saving is __________; and national saving is __________.

800; 200; 1000

In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. Planned aggregate expenditure equals:

900 + 0.8Y

The CPI in 1930 equaled 0.17. The CPI in 1931 equaled 0.15. The rate of inflation between 1930 and 1931 was ____ percent.

-11.8%

According to Okun's Law, when cyclical unemployment increases from 1 to 2 percent, the output gap increases from ___ percent.

-2 to -4

On January 1, 2004, Anna invested $5,000 at 5% interest for one year. The CPI on January 1, 2004 stood at 1.60. On January 1, 2005, the CPI was 1.68. The real rate of interest earned by Anna was ____ percent.

0

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y - 20,000r, and potential output equals 36,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

0.03

Data on after-tax income and consumption spending for the Adam Smith family are given below. Based on these data the Adam Smith family has a marginal propensity to consume of:

0.9

A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract and by another 3 percent in the third year. The CPI is 1.00 in the first year, 1.07 in the second year, and 1.15 in the third year. What dollar wage must be paid in the third year?

$12.20

Fred and Barney fill egg cartons with eggs. Fred just started the job and can only fill 25 cartons an hour. Barney has significant on-the-job experience that allows him to fill 50 cartons an hour. Both Fred and Barney work 50 hours a week. Fred's average weekly productivity is __________ cartons; Barney's average weekly productivity is __________ cartons; and as a team their average weekly productivity is __________ cartons. (Remember average productivity of a team is also measured per person).

1,250; 2,500; 1,875

According to the Taylor rule, if there is a recessionary gap of 2 percent of potential output and inflation is 4 percent, what real interest rate will the Fed set?

1.5 percent

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62.73 for one share of the stock today, and you expect a dividend payment of $4, what rate of return do you require?

10 percent

Based on the information in the table, what is the unemployment rate?

10%

If the real interest rate is 3 percent and the inflation rate is 7 percent, then the nominal interest rate equals:

10%

If potential output equals $8 billion and actual output equals $10 billion, then this economy's output gap should be expressed as:

25 percent

In Macroland autonomous consumption equals 100, the marginal propensity to consume equals .75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Planned Aggregate Expenditure equals ___ and the short run equilibrium output equals ___

290 + 0.75Y; $1160

If the money supply grows by 5 percent per year, velocity grows by 1 percent per year, and real GDP grows by 3 percent per year, then the rate of inflation is approximately ______________ percent per year.

3

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. If the real rate of interest is set at 5 percent, then the rate of inflation must be:

3 percent

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $62 for one share of the stock today, you expect a dividend payment of $2, and your risk premium is 5%, what is the rate of return on safe assets?

3%

In 1999, average labor productivity in the U.S. was $68,000 per worker and 49% of the population was employed. If over the next forty years average labor productivity increases by 85 percent, but the share of population employed falls to 36%, then compared to real GDP per person in 1999, real GDP per person in 2039 will be approximately:

36% larger

When PAE = 200 + 0.5Y, short-run equilibrium output equals:

400

If planned aggregate spending in an economy can be written as PAE = 15,000 + 0.6Y − 20,000r, and potential output equals 35,000, what real interest rate must the Federal Reserve set to bring the economy to full employment?

5 percent

In Okunland, a country whose economy operates according to Okun's law, real GDP equals $7,520 billion, potential GDP equals $8,000 billion, and the actual unemployment rate is 8 percent. What is the natural rate of unemployment in Okunland?

5 percent

If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential?

5%

In Macroland there is $10,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 10%, deposits in Macroland equal ______________ and the money supply equals ______________.

50,000,000; 55,000,000

Data on output and planned aggregate expenditure in Macroland are given below. Based on these data, the short-run equilibrium level of output is:

5000

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the desired reserve/deposit ratio is 10 percent. What is Macroland's Money Supply?

5000 econs

The economy of Omega operates according to Okun's law. In Omega, potential GDP and real GDP both equal $7 trillion, and the natural rate of unemployment equals 6 percent. What is the actual rate of unemployment in Omega?

6 percent

i. Adam (who lives in England) shears wool from his sheep and sells it to Karl (who lives in Germany) for $1400ii. Karl uses the wool purchased from Adam to weave into cloth that he then sells to Leon (who also lives in Germany) for $1600.iii. Leon sells the wool cloth to Alfred (who lives in England) for $2000.iv. Alfred then tailors a suit for John (who lives in England) for $5000.Suppose that transactions i) and ii) occurred in 2016 and transactions iii) and iv) occurred in 2017. Calculate UK GDP for 2016 and 2017.

$1400 and $3000

Assume an economy produces only hamburgers and hot dogs and the base year is 2016. Use the date to calculate the the value of nominal GDP in 2017.

$15,00

If 50 percent of the population in a country is employed and average labor productivity equals $30,000, then real GDP per person equals:

$15,000

The CPI equals 1.00 in year one and 1.05 in year two. If the nominal wage is $15 in year one and a contract calls for the wage to be indexed to the CPI, what will be the nominal wage in year two?

$15.75

If Bountiful Orchard grows $100,000 worth of peaches, sells $50,000 worth of peaches to consumers and uses to rest to make jam that is sold to consumers for $100,000, Bountiful Orchard's contribution to GDP is:

$150,000

How much (if any) does each of the following transactions raise GDP? The Jones family sells its old house to the Reynolds family for $130,000. The Jones family then buys a newly constructed house from a builder for $175,000.

$175,000

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store, is produced by the production process in the chart below. If the oranges were grown and the jam produced in the year 2005, but the marmalade was sold at The Corner Store in the year 2006, what is the contribution of these transactions to GDP in the year 2005?

$2

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 3 percent, then the output gap equals:

$2 trillion

Given the following data for an economy, compute the value of GDP.

$2,500

Suppose a jar of orange marmalade that is ultimately sold to a customer at The Corner Store, is produced by the production process in the chart below. What is the sum of the value added of all the firms?

$2.50

In the short-run Keynesian model, if the mpc equals 0.8, then to increase planned aggregate spending by $20 billion at any output level, government spending must be increased by ____ or net taxes must be decreased by ____.

$20 billion; more than $20 billion

There is $5,000,000 of currency in Econland, all held by banks as reserves. The public does not hold any currency. If the banks' desired reserve/deposit ratio is 0.25, then the money supply equals:

$20,000,000

In Econoland in 2005, people with incomes between $20,000 and $30,000 paid 12 percent of their income in taxes and people with incomes between $30,001 and $40,000 paid 15 percent. In 2005, the CPI in Econoland equaled 1.20, and it increased to 1.26 in 2006. If the government of Econoland wants to prevent households with a given real income from being pushed up into a higher tax bracket by inflation, the $20,000-to-$30,000 bracket in 2006 will have to be changed to

$21,000 to $31,500

If the desired reserve-deposit ratio is 0.25 and the banking system receives an additional $10 million in reserves, bank deposits will increase by ______.

$40 million

Based on the following information, the value of the M1 measure of the money supply is ______________ and the value of the M2 measure of the money supply is ______________.

$530 billion; $4230 billion

Real GDP per person in the United States was $9,864 in 1950. Over the next 48 years, it grew at a compound annual rate of 2.0%. If, instead, real GDP per person had grown at an average compound annual rate 2.5%, then real GDP per capita in the United States in 1998 would have been approximately __________ larger.

$6,750

Peg's Manicure Manor did 4,000 sets of nails in 2015 and 4,500 sets of nails in 2016. The price of a set of nails was $20 in 2015 and $22 in 2016. If 2015 is the base year, Peg's contribution to real GDP in 2015 was _______ and in 2016 was _______ .

$80,000; $90,000

In Macroland, a country that operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real GDP in Macroland?

$9.6 trillion

If the Central Bank of Macroland puts an additional 1,000 units of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of .10, then the banks will eventually make new loans totaling _______ and the money supply will be _______.

$9000; $10000

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then real GDP must be equal to

$98 trillion

Using Okun's Law, fill in the missing data in the table below. All data re hypothetical.

(Y - Y-star)/Y-star] x 100 = -2 (U - U-star) Calculating (a): [(7,840 - 8,000)/8000] × 100 = -2(6 - a). Therefore, a = 5% Similarly, you can calculate that b = $8,100 billion c = $8,282 billion, and, d = 4%

Planned aggregate expenditure (PAE ) equals:

C + I p + G + NX, where Ip is planned investment.

International data on the relationship between the amount of capital per worker and average labor productivity indicates strong positive relationship between the two variables for developing and less developed nations and a much weaker relationship between the two variables for richer nations. A possible explanation for this is: A. diminishing returns to physical capital B. larger populations putting pressure on limited natural resources in poorer nations C. low human capital accumulation in poorer nations D. none of the above

A. diminishing returns to physical capital

Which of the following events will increase the domestic real interest rate in an open economy?

An increase in the domestic government's budget deficit

The following data give the dates of successive turning points in U.S. economic activity and the corresponding levels of real GDP at the time. Which of the turning points are troughs?

B and D

Did the introduction of credit cards and debit cards change the velocity of circulation in the economy? Why?

Introduction of credit and debit cards reduced the amount of money people needed to hold in the form of cash to carry out transactions. Indeed in the US, a smaller money stock (M1 as a proportion of GDP) has been able to make all the necessary transactions. Therefore, the velocity of circulation of M1 must have risen over time.

Who from among the following would be classified as unemployed?

Jack Little, a 21 year old new college graduate actively looking for his first job

Joan purchases a beautiful rug for $25,000. After several years of wear and tear, Joan has the rug appraised and finds that it is now worth $20,000. Based on this information we may conclude that

Joan has a $5,000 capital loss

Which of the following actions would decrease Joan's money demand by $200?

Joan writes a check for $200 to purchase additional shares of stock

Which of the following is an example of the precautionary motive for saving?

Jordan sets aside $200 per month in case she has to pay for a new roof for her house

M1 differs from M2 in that

M2 includes savings deposits, small-denomination time deposits, and money market mutual funds that are not included in M1.

Mike and Tom debone chicken breasts for Ted's Chicken Co. Mike is new and can only debone 30 chicken breasts per hour by hand, while Tom's experience allows him to debone 60 chicken breasts per hour by hand. Ted buys one new machine that can debone 100 chicken breasts per hour. Both Mike and Tom work the same 40 hours per week, but one of them is assigned to operate the machine instead of deboning the chicken breasts by hand. To obtain maximum average hourly productivity, __________ is assigned to use the machine and their combined average hourly productivity as a team is __________ chicken breasts

Mike; 80

Which of the following is an example of the life-cycle motive for saving?

Pat puts $400 per month in his 401(k) retirement account

Which of the following equations is equivalent to the equation S - NX = I?

S + KI = I

Which of the following is a flow?

Saving, Investment, Consumption, and Income

Where Y is GDP, C is consumption, I is investment, (G ) is government spending, (T ) is net taxes, and there is no international trade, public saving equals:

T - G

Why do increases in real interest rates reduce the quantity of savings demanded?

The "demanders" of saving are firms investing in new capital goods. The higher the real interest rate that firms must pay to borrow, the less profitable their proposed capital investments will be, and the less they will choose to borrow. Thus, the higher the cost of funds (as measured by the real interest rate), the lower the quantity of saving demanded.

Which of the following would increase the government purchases component of U.S. GDP?

The US federal government pays $3 billion in salaries to soldiers in the military

How many screens will be built if the real interest rate is 7.5?

The value of marginal product exceeds the interest cost (7.5% of $1,000,000, or $75,000) for only the first screen. One screen will be built.

Alex is a US lawyer with an office in Chicago. A Japanese business firm (operating in Japan) hires Alex and pays him $1 million for his services. How would this transaction show up in US GDP?

US exports will rise by $1 million

If the United States has a $500 billion net capital inflow, then there must be a

US trade deficit of $500 billion

If people become discouraged looking for work and drop out of the labor force without finding a job, how does it affect unemployment rates?

Unemployment rate decreases

Which one of the following is the largest part of national income?

Wages

Calculate the short run equilibrium level of GDP.

We know at the short-run equilibrium, actual GDP (Y) must equal PAE. Y = PAEimplies Y = 3,400 + 0.6Yimplies 0.4Y = 3,400Therefore, Y = 8,500

Explanations for the high saving rate in China consistent with the life-cycle reason for saving include:

China's social safety net provides most people little in the way of retirement income

In the recent past, the government has attempted to stimulate the economy by sending tax refunds to individual people so that they will buy more products. What component of GDP is the government attempting to increase?

Consumption

Organizing production, obtaining financing, assigning workers to jobs, and dealing with suppliers are among the ways that __________ increases average labor productivity.

a manager

Which of the following is an example of a final good?

a new computer sold to a business firm

A depression is

a particularly severe and protracted recession

If actual output equals potential output, unusually slow potential output growth would tend to result in:

a recession

If planned aggregate expenditure (PAE) in an economy equals 2,000 + .8Y and potential output (Y*) equals 11,000, then this economy has:

a recessionary gap

Slower growth in labor demand in combination with increases in labor supply explains _____________ accompanied by _____________.

a slowdown in real wage growth; rapid employment growth

Slower growth in labor demand in combination with increases in labor supply explains ______________ accompanied by ______________.

a slowdown in real wage growth; rapid employment growth

The costs of economic growth include current consumption sacrificed for: A. physical capital formation B. acquiring new human capital C. research and development into new technologies D. all of the above

D. all of the above

The interest rate the Federal Reserve charges commercial banks to borrow reserves is called the ____ rate.

Discount

Which of the following is an example of structural unemployment?

Dora lost her job when the textile mill closed. She does not have skills to work in another industry and has been unemployed for over a year.

A country's domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: S = 1,500 + 2,000r I = 2,000 - 4000r KI = - 100 + 6000r Assuming that the market for saving and investment is in equilibrium, find national saving, capital inflows, domestic investment and the real interest rate.

Equilibrium in the market for saving and investment requires S + KI = I (1,500 + 2,000r) + (-100 + 6,000r) = 2,000 - 4,000r 12,000r = 600 r= 0.05 = 5% Given that the real interest rate is 5%, we can find that domestic saving is 1,500 + 2,000(0.05) = 1,600, capital inflows are -100 + 6,000(0.05) = 200, and investment is 2,000 - 4,000(0.05) = 1,800.

Name one factor that could increase the supply of saving and one that could increase the demand for saving. Discuss the effects of each on saving, investment, and, the real interest rate.

Examples of factors that increase the supply of saving are an increase in the government budget surplus (government saving) or an increase in thriftiness among households. Either change increases the amount of saving done at each real interest rate. In the saving-investment diagram, an increase in saving shifts the saving curve to the right, raising the quantities of saving and investment and lowering the real interest rate. An example of a factor increasing the demand for saving is a technological improvement that makes capital investments more productive. As investment becomes more profitable, firms will demand more funds in financial markets at each real interest rate, so that the investment curve shifts to the right. As a result, the equilibrium quantities of saving and investment increase, and the real interest rate increases as well.

Which of the following does not describe a characteristic of short-term economic fluctuations?

Expansions and recessions are felt in only a few sectors of the economy.

Explain with examples why a country's net capital inflow must equal its trade deficit in any given period

If a country imports a good or service, it must pay for that import somehow. If it pays for the import by selling an export of equal value, then the trade balance is zero and the capital inflow is also zero. If it pays for the import by selling a financial asset or by borrowing from abroad, then the country experiences a capital inflow equal in value to the import. Thus its net capital inflow equals its trade deficit.

Cyclical unemployment is equal to zero when:

actual GDP and potential GDP are equal

According to the textbook, the Fed's information is fairly imprecise in regards to all of these things EXCEPT:

actual real GDP

After the Federal Reserve increases reserves in the banking system, banks create new deposits through multiple rounds of lending and accepting deposits until the:

actual reserve-deposit ratio is equal to the desired reserve-deposit ratio

After the Federal Reserve increases reserves in the banking system, banks create new deposits through multiple rounds of lending and accepting deposits until the

actual reserve-deposit ratio is equal to the desired reserve-deposit ratio

One drawback in using fiscal policy as a stabilization tool is that fiscal policy:

affects potential output as well as planned aggregate expenditure

Unemployment insurance contributes to structural unemployment by:

allowing unemployed workers to search longer or less intensively for jobs

Ex-post (in an accounting sense), Savings __________ equals Investment. However, ex-ante, __________ savings may very well be different from __________ investment. It is the __________ which adjusts to make desired savings equal to desired investment.

always; desired; desired; real interest rate

A country's actual output _____ its potential output.

can only temporarily exceed

Stockholders receive returns on their financial investment in the form of ______ and ______.

capital gains; dividends

When a Peruvian buys a U.S. government bond, from the perspective of US, this is a(n):

capital inflow

When the Chinese government buys U.S. government bonds, from the perspective of the United States, this is a(n):

capital inflow

When the Chinese government buys U.S. government bonds, from the perspective of China, this is a(n):

capital outflow

Bank Reserves are

cash and similar assets held by the bank to meet depositor withdrawals and other payments.

Changes in autonomous consumption could be the result of

changes in housing prices

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm:

changes production levels to meet the demand

Menu costs are the costs of

changing prices

Industrial production, total sales, nonfarm employment, and after-tax household income are examples of _ indicators of economic activity.

coincident

Industrial production, total sales, nonfarm employment, and after-tax household income are examples of ____ indicators of economic activity.

coincident

The federal funds rate is the interest rate on short-term loans made by

commercial banks to other commercial banks

The two main responsibilities of the Federal Reserve System are to ______________ and to ______________.

conduct monetary policy; oversee financial markets

The most important, most convenient, and most flexible way in which the Federal Reserve affects the supply of bank reserves is through:

conducting open-market operations

The decision about whether to change prices frequently or infrequently is an application of the:

cost-benefit principle

The prediction that workers get additional training only when the rewards from the training are expected to exceed the costs of the training (including the opportunity costs) is based on the:

cost-benefit principle

People who would like to work full-time, but are able to find only part-time work are:

counted as employed

Regular interest payments made to bondholders are called ______

coupon payments

Saving equals

current income minus spending on current needs

Periods of unusually low production in an economy result in _____________ unemployment.

cyclical

According to Okun's Law, each extra percentage point of _ unemployment is associated with a __ percentage point increase in the output gap, measured in relation to potential output

cyclical; 2

Developing new products and services as well as introducing new production methods are among the ways that __________ increases average labor productivity.

an entrepreneur

The additional goods and services produced by women in the United States as their labor force participation increases represent (e.g. Jane produces water filter membranes for a company that produces reverse osmosis products):

an increase in economic activity

The impact of declining stock prices in the U.S. during 2000-2006 on U.S. household wealth was at least partially offset by

an increase in housing prices

Which of the following would be a consequence of a bank choosing not to lend its excess reserves?

an increase in the bank's reserve-deposit ratio

Growth in the share of population employed in the United States is likely to decline in the future because:

an increasing proportion of those currently employed

Money is

any asset used to make purchases

When a U.S. oil company purchases oil from Saudi Arabia and the Saudi Arabian firm uses the proceeds from the sale to buy transportation services from the U.S., U.S. net exports __________ and the capital inflow to the United States __________.

are unchanged; is unchanged

The productivity slowdown of the 1970's occurred:

around the world

Entrepreneurs contribute to increased average labor productivity in each of the following ways EXCEPT by:

assigning workers to jobs

Entrepreneurs contribute to increased average labor productivity in each of the following ways except by:

assigning workers to jobs

A stock is a measure defined:

at a point in time

Empirical studies indicate that the maximum amount of air pollution occurs __________ levels of real GDP per person.

at intermediate

Changes in consumption and planned investment spending resulting from changes in the real interest rate alter:

autonomous expenditures

In the Keynesian cross diagram, the vertical intercept of the expenditure line equals _ and the slope of the expenditure line equals _.

autonomous expenditures; the mpc

The two parts of planned aggregate expenditure are ____ expenditures and ____ expenditures.

autonomous; induced

If banks' desired reserve ratio increases from 0.10 to 0.15, the public still desires to hold the same amount of currency, the money supply will:

decrease

In Macroland there is $1,000,000 in currency that can either be held by the public or used by banks as reserves. Banks' desired reserve/deposit ratio is 10%. If the public of Macroland decides to hold more currency, increasing the proportion they hold from 50% to 75%, the money supply in Macroland will ______________.

decrease

You own shares in a start-up internet company. If large swings in the stock market increase financial investors' concerns about market risk, then the price of your shares will __________, holding other factors constant.

decrease

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then government purchases must ____ to eliminate any output gap.

decrease by 100

In Macroland, currency held by the public is 2,000 econs, bank reserves are 300 econs, and the required reserve/deposit ratio is 10 percent. If the Central Bank raises the required reserve/deposit ratio making the new desired ratio equal to 15 percent, then the money supply in Macroland will ____ to ____ econs, assuming that the public does not wish to change the amount of currency it holds.

decrease; 4,000

Holding other factors constant, if food prices decline relative to the prices of other products, then the real wages of agricultural workers will ______________ and employment of agricultural workers will ______________.

decrease; decrease

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will ____ their loans based on current deposits, and the money supply will ____.

decrease; decrease

If commercial banks are maintaining a 4 percent reserve/deposit ratio and the Fed raises the required reserve ratio to 6 percent, then banks will see a _ in their deposits and the money supply will _.

decrease; decrease

Your financial investments consist of U.S. government bonds maturing in twenty years and shares in a start-up internet company. If interest rates on newly issued government bonds increase, then the price of your bonds will _____ and the price of the shares you own will ____.

decrease; decrease

As a result of a war in the country of Omega, refugees flee to the country of Alpha to seek employment. Holding other factors constant, the influx of refugees will _____________ the real wage in Alpha and _____________ employment in Alpha.

decrease; increase

Holding other factors constant, if a reduction in government expenditure moves the government budget from deficit to surplus, then the real interest rate will __________ and the equilibrium quantity of national saving and investment will __________.

decrease; increase

Holding other factors constant, if growing concerns about job security raise precautionary saving, then the real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

decrease; increase

Holding other factors constant, if growing concerns about job security raise precautionary saving, then the real interest rate will __________ and the equilibrium quantity of national saving and investment will __________.

decrease; increase

Holding other factors constant, if terrorist attacks increase the desire for precautionary saving, then the real interest rate will ______ and the equilibrium quantity of saving and investment will ______.

decrease; increase

In an open economy with a given level of real interest rates and risk, an increase in real interest rates abroad will __________ capital inflows and __________ the equilibrium domestic real interest rate.

decrease; increase

In an open economy, a decrease in the government's budget deficit will __________ the domestic real interest rate and __________ the level of capital investment in the country, holding other factors constant.

decrease; increase

Initially, workers in the shoe industry and the computer industry earn the same wage. Reductions in trade barriers give domestic consumers access to cheaper shoes produced abroad, so domestic shoe prices fall. At the same time, foreign consumers purchase more computers, raising the relative price of computers. As a result of these changes, wages in the shoe industry ______________ and wages in the computer industry ______________.

decrease; increase

In the short-run Keynesian model, if the mpc equals 0.8, then to decrease planned aggregate spending by $20 billion at any output level, government spending must be _____ or net taxes must be _____.

decreased by $20 billion; decreased by more than $20 billion

The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 gallons of milk. In 2016, pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per gallon. In 2017, the price of pizzas went down to $8 each, while the prices of jeans and milk remained the same. Between 2016 and 2017, a typical family's cost of living

decreased by 4.5 percent

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

decreased by less than $10 billion

In the short-run Keynesian model, to close an expansionary gap of $10 billion dollars government purchases must be:

decreased by less than $10 billion.

When the interest rate on newly issued bonds increases, the price of existing bonds:

decreases

A decrease in the perceived riskiness of Company A stock ______ the risk premium investors require to purchase Company A stock and ______ the price of Company A stock.

decreases; increases

Initially, workers in the shoe industry and the computer industry earn the same wage. Reductions in trade barriers give domestic consumers access to cheaper shoes produced abroad, which causes domestic shoe prices fall. At the same time, foreign consumers purchase more computers, raising the relative price of computers. As a result of these changes, the demand for labor in the shoe industry _____________ and the demand for labor in the computer industry _____________.

decreases; increases

To the extent that households are target savers, who save to reach a specific goal, an increase in the interest rate __________ household saving and a decrease in the interest rate __________ household saving.

decreases; increases

Government health and safety regulations or anti-discrimination laws can reduce real wages by:

decreasing the demand for labor

A decrease in stock prices alters the consumption function by:

decreasing the vertical intercept

If the income-expenditure multiplier equals 4 and a 1 percentage point increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by _ the real interest rate by _ percentage points.

decreasing; 2.5

If the income-expenditure multiplier equals 4, and a 1 percent increase in the real interest rate reduces autonomous spending by 100 units, then a 1,000 unit recessionary gap can be eliminated by ____ the real interest rate by ____ percent.

decreasing; 2.5

When Argentine increases their savings in US dollars, the US money

demand curve shifts right

Liabilities of the commercial banking system include:

deposits

The reserve-deposit ratio equals

bank reserves divided by bank deposits

When an individual deposits currency into a checking account:

bank reserves increase, which allows banks to lend more and increases the money supply

The usefulness of money in carry out transactions is its ____ and the nominal interest rate is its ____.

benefit; cost

Each of the following is an example of a financial intermediary EXCEPT a:

bond market

Financial intermediaries, such as commercial banks, provide benefits to:

both savers and borrowers

People who run businesses on a day-to-day basis are called:

business managers

In the United States from 1960 to today, the largest positive contribution to national saving was from:

business saving

If the money supply exceeds money demand, people will __ bonds which will cause bond prices to __ and the nominal interest rate to _ until money demand equals money supply.

buy; rise; fall

The two parts of the Keynesian consumption function are the induced part of consumption that depends on ____ and the autonomous part of consumption that depends on ____.

disposable income; factors other than disposable income

To a correct a nominal quantity for changes in the price level, one should

divide it by a price index

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving ________ and public saving ________.

does not change; increases

If household saving decreases by $4 million, business saving increases by $4 million, and the government budget deficit decreases by $4 million, then private saving __________ and public saving __________.

does not change; increases

The real rate of return on holding cash _____ inflation is correctly anticipated.

does not depend on whether

The sum of national saving and capital inflows from abroad must equal:

domestic investment in new capital goods

Prior to January 2000, the demand for money increased as people anticipated Y2K problems. If the Fed took no actions to offset this increase in money demand and assuming that the anticipated Y2K problems did not change money supply, then nominal interest rates would

increase

When Federal Reserve actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bonds:

increase

You originally required a risk premium of 6 percent in addition to the rate of return on safe assets before you would purchase shares of Techno Company stock. If you and other investors reduce the risk premium you require to 4 percent, the price of Techno Company stock will:

increase

You own shares in a well-managed and diversified company. If a booming economy decreases investors' concerns about market risk, then the price of your shares will __________, holding other factors constant.

increase

Given the following policies, which is most likely to increase economic growth in the long run? Consider only the direct effects.

increase education spending

Varying the quantity of output produced and sold at preset prices is called:

meeting demand

If the natural rate of unemployment equals 6 percent and the actual rate of unemployment equals 5 percent, then cyclical unemployment equals _____ ; the economy has _____ gap equal to ______ .

minus 1%; expansionary; 2%

Empirical evidence indicates that higher real interest rates lead to __________ in savings.

modest increases

Which of the following would be expected to increase the U.S. demand for money?

financial investors become concerned about increasing riskiness of stocks

When actual investment is greater than planned investment,

firms have actually sold less output than they had planned to

The basic Keynesian model is built on the key assumption that:

firms meet the demand for their products at preset prices

Workers in durable-goods industries are ____ workers in non-durable goods industries to lose their jobs during a recession.

more likely than

A financial intermediary that sells shares in itself to the public, and then uses the funds to buy a wide variety of financial assets is called a:

mutual fund

An increase in the price of the output produced by labor will:

increase the demand for labor

Saving $100 will

increase wealth by $100

Assume the minimum wage exceeds the market-clearing wage. If there is an increase in the labor supply, then current number of unemployed will _____________ and the number of employed will ______________.

increase, not change

The supply of saving equals desired (or, ex-ante) __________ and the demand for saving equals desired (or, ex ante) __________.

national saving; investment

Holding constant risk and the real returns available abroad, higher domestic real interest rates __________ capital inflows, __________ capital outflows, and __________ net capital inflows.

increase; decrease; increase

Providing a constant number of workers with additional capital with which to work will __________ average labor productivity at a __________ rate.

increase; decreasing

Holding other factors constant, if Congress passes a 5% investment tax credit under which a firm receives $5 in tax refunds from the government for every $100 it spends on new capital equipment, then the real interest rate will __________ and the equilibrium quantity of national saving and investment will __________.

increase; increase

Holding other factors constant, if computers allow factory workers to manufacture more products per hour, then the real wages of factory workers will _____________ and employment of factory workers will _____________.

increase; increase

In an expansion, the cyclical rate of unemployment is often:

negative

Real GDP per person in Richland is $20,000, while real GDP per person in Poorland is $10,000. However, Richland's real GDP per person is growing at 1 percent per year, and Poorland's real GDP per person is growing at 3 percent per year. After 50 years, real GDP per person in Richland minus real GDP in Poorland is:

negative

If the United States has a $300 billion trade deficit, then there must be:

net capital inflows of $300 billion

Suppose Congress passes a 5% investment tax credit under which a firm receives $5 in tax refunds from the government for every $100 it spends on new capital equipment. Everything else remaining equal, we can conclude that the equilibrium real interest rate will ________ and the equilibrium quantity of national saving and investment will ________.

increase; increase

Assume the minimum wage exceeds the market-clearing wage. If there is an increase in the supply of labor then the number of workers who are unemployed will _____________, and the number of workers who are employed will _____________.

increase; not change

A year's tuition at a state university cost $250 in 1972 when the CPI equaled 0.418. The cost of a year's tuition at the same state university cost $3000 in 2005 when the CPI equaled 1.68. The real cost of tuition between 1972 and 2005:

increased

If the price of motel rooms increases by 10% while the prices of other goods and services increase by 5 % on average, the relative price of motel rooms has:

increased

In a short-run Keynesian model where the marginal propensity to consume is 0.5, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, government purchases must be:

increased by $1 billion

In the short-run Keynesian model where the marginal propensity to consume is 0.75, to offset a recessionary gap resulting from a $1 billion decrease in autonomous consumption, transfers must be:

increased by $1.33 billion.

If business inventories equal $40 billion at the beginning of the year and $55 billion at the end of the year, then, assuming no other changes, GDP must have:

increased by $15 billion

If the total expenditures of a typical family equaled $35,000 per year in 2000 and the exact same basket of goods and services cost $40,000 in the year 2005, the family's cost of living:

increased by 14 percent

If short-run equilibrium output equals 10,000, the mpc equals 0.8, and potential output (Y*) equals 11,000, then government purchases must be _____ to eliminate the output gap.

increased by 200

Changes in taxes and transfers affect planned spending:

indirectly, by changing disposable income and, consequently, consumption.

When real output increases, planned aggregate expenditures increase because

induced expenditures increase

The benefits of net capital inflows to a country include all of the following except:

interest and dividend payments owed to foreign investors

What is the "coupon rate" on a bond? It is the:

interest rate promised when a bond is issued

The coupon rate is the

interest rate promised when a bond is issues

The current price of a stock increases when:

interest rates decrease

The financial system consists of financial __________, such as commercial banks, and financial markets, such as the stock market.

intermediaries

If firms sell more output than expected, planned investment:

is greater than actual investment

When government runs a budget deficit, it makes up the difference by:

issuing government bonds

Money serves as a store of value when:

it is a means of holding wealth

Money serves as a unit of account when:

it is used as a basic measure of economic value

Money serves as a medium of exchange when

it is used to purchase goods and services

In the Keynesian model deviations of output from potential are caused by:

fluctuations in aggregate spending

Recessions tend to be _____ by _____ rate of inflation.

followed; a decrease in the

The recession of 2007-2009 happened in part because, after the housing bubble burst in 2006, disruptions in the financial market made it difficult:

for businesses and consumers to borrow money

Compared to older workers, younger workers change jobs more frequently, so they are more prone to _ unemployment and have fewer skills, so they are more prone to ____ unemployment.

frictional; structural

Martha did not like her job as a receptionist. So she quit her job and is currently looking for one that better suits her artistic talents. Ting Pei would like to work, but employers are not willing to hire him because he does not speak English. Martha is _____________ unemployed and Ting Pei is _____________ unemployed.

frictionally; structurally

If a borrower and lender agree to an interest rate on a loan when inflation is expected to be 7 percent and inflation turns out to be 10 percent over the life of the loan, then the borrower ______ and the lender ______.

gains; loses

Banks help savers find productive uses for their funds because banks are specialized in

gathering information about and evaluating potential borrowers

The rise in average living standards experienced by most industrialized countries:

has been more rapid since 1950 than before 1950

If a bank's desired reserve-deposit ratio is 0.25 and it has deposit liabilities of $75 million and reserves of $20 million, it:

has too many reserves and will increase its lending

If a bank's desired reserve/deposit ratio is .33 and it has deposit liabilities of $100 million and reserves of $50 million, it:

has too many reserves and will increase its lending

A bank's desired reserve/deposit ratio is .33. It has deposit liabilities of $100 million and reserves of $50 million. Therefore, we may conclude that it:

has too much reserves and it should increase its lending

If the share of population employed in two countries are the same, average living standards will be higher in the country with:

higher average labor productivity

A "two-tier" labor market in the United States refers to plenty of jobs for _____________ workers and few jobs for _____________ workers.

highly-skilled; unskilled

An explanation for the low saving rate in the United States consistent with the demonstration effect includes:

households spending beyond their means to keep up with community standards

Extremely rapid rates of money growth are usually the result of:

large government budget deficits

The larger the mpc, the ____ the income-expenditure multiplier and the ____ the effect of a change in autonomous spending on short-run equilibrium output.

larger; larger

Pat pays $10,000 for a newly issued two-year government bond with a $10,000 face value and a 6% coupon rate. One year later, after receiving the first coupon payment, Pat decides to sell the bond. If the savings bank interest rate at the time of sale is 7%, at what price can Pat expect to sell the bond for?

less than $10,000

PAE=1000 + 0.75Y. If actual output equals $4,500, planned aggregate expenditure is _____ output and firms will ____ production.

less than; decrease

Refer to the figure below. Based on the Keynesian cross diagram, if output equals 5,000 planned aggregate expenditure is _ output and firms will ____ production.

less than; decrease

A college graduate in 1972 found a job paying $7,200. The CPI was 0.418 in 1972. A college graduate in 2016 found a job paying $60,000. The CPI was 2.40 in 2016. The 1972 graduate's job paid ____ in nominal terms and ____ in real terms than the 2016 graduate's job.

less; less

If the nominal interest rate is above the equilibrium value, then the quantity demanded of money is ____ than the quantity supplied of money, bond prices will ____, and the nominal interest rate will ____.

less; rise; decrease

Fred and Wilma just had a baby girl and want to make sure they save enough in the future to send her to college. This is an example of the __________ motive for saving.

life-cycle

The key variable in determining changes in a country's standard of living is the:

long-run rate of economic growth

The coupon rate on newly issued bonds is usually higher for bonds with __________ terms and __________ risk that the borrower will go bankrupt.

longer; greater

A nation's standard of living, as measured by real GDP per person, increases:

if either average labor productivity and/or the share of population employed increase

Globalization can increase wage inequality in the United States, if international competition is primarily in industries requiring ______________ workers.

low-skilled

One of the serious drawbacks of the deposit insurance system instituted in the United States is that:

if insured intermediaries make bad loans, the taxpayers may be responsible for covering the losses

A trade deficit occurs when

imports exceed exports

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S. ________ and there is a capital ________ the United States.

imports increase; inflow to

When a U.S. restaurant purchases French wine and the French wine company uses the proceeds to buy U.S. government debt, U.S._____ and there is a capital _____ the United States.

imports increase; inflow to

Governments contribute to increased average labor productivity in each of the following ways EXCEPT by:

imposing taxes on wages

A real quantity is a quantity measured

in physical terms

Compared to Western Europe, over the last three decades unemployment in the United States has been _____________ and the rate of job creation has been _____________.

lower; faster

In an economy where planned aggregate spending is given by PAE = 5,500 + .6Y - 20,000 r, the central bank is currently setting the interest rate at 0.06 (6 percent). If potential output equals 11,250, the central bank must __ the interest rate to close the ____ gap.

lower; recessionary

To close a recessionary gap, the Fed __ interest rates which ____ planned aggregate spending and _ short-run equilibrium output.

lowers; increases; increases

National defense services provided by the military are:

included in GDP at cost

All else remaining equal, if the public switches from doing most of their shopping with currency to using checks instead, the money supply will:

increase

During the Christmas shopping season, the demand for money increases significantly. If the Fed takes no actions to offset the increase in money demand, then nominal interest rates will:

increase

If inflation does not adjust rapidly in the short run, then when the Federal Reserve increases the nominal interest rate, the real interest rate in the short run will:

increase

If the public switches from using cash for most transactions to using checks instead, then all else equal, the money supply will:

increase

The three broad reasons for saving, as identified by economists, relate to:

the life-cycle, precaution, and bequests

In reference to short-term economic fluctuations, the "trough" refers to

the low point of economic activity prior to recovery

The demand for labor depends on ______ and ______

the marginal product of labor; the price of output produced

Potential output is

the maximum sustainable amount of output

Structural unemployment will decrease when:

the minimum wage is decreased

Two countries, Alpha and Beta have the same real GDP, average price levels and inflation rates. However, a dollar Alpha changes hands more frequently than each dollar in Beta. Therefore, we may conclude that __________ in Alpha than in Beta, holding other factors equal.

the money stock is smaller

Two countries, Alpha and Beta, have the same levels of nominal and real GDP. Each dollar in Alpha is used more frequently than each dollar in Beta. Therefore, it must be the case that _____ in Alpha than in Beta.

the money stock is smaller

Any value of the money supply chosen by the Federal Reserve implies a specific value for:

the nominal interest rate

Three macroeconomic factors that affect the demand for money are:

the nominal interest rate, real income, and the price level

The money demand curve will shift to the right if:

the price level increases

As the real wage decreases, _____________ and _____________.

the quantity of labor demanded increases; the quantity of labor supplied decreases

The Marginal Revenue Product of labor is the additional:

total revenue the firm earns by hiring one extra unit of labor

If domestic saving is less than domestic investment, then a country will have a __________ and positive net capital __________.

trade deficit; inflows

If domestic saving is greater than domestic investment, then a country will have a __________ and positive net capital __________.

trade surplus; outflows

The self-control hypothesis suggests that people:

want to save, but lack the discipline to refrain from consuming

If Dylan saves $50 per week, then Dylan's __________ will increase by $50 per week.

wealth

The tendency of changes in asset prices to affect spending on consumption goods is called the ____ effect.

wealth

If two countries are economically identical except that citizens in one country have more leisure time, then the level of GDP:

will be the same in both countries

When the actual reserve-deposit ratio exceeds the desired reserve-deposit ratio, banks ______.

will find it profitable to make new loans

If workers and employers agree to a three-year wage contract under the expectation of 5 percent inflation, and inflation turns out to be 3 percent, then:

workers gain and employers lose

The money supply in Macroland is currently 2,500, bank reserves are 200, currency held by public is 500, and banks' desired reserve/deposit ratio is 0.10. Assuming the values of the currency held by the public and the desired reserve/deposit ratio do not change, if the Central Bank of Macroland wishes to increase the money supply to 3,000, then it should conduct an open-market ______________ government bonds to/from the public.

purchase of 50

Joe's Taco Hut can purchase a delivery truck for $20,000 and he estimates it will generate a net income (i.e., after-taxes and maintenance and operating costs) of $2,000 per year. He should:

purchase the truck if the real interest rate is less than 10%

Joe's Taco Hut can purchase a delivery truck for $20,000 and Joe estimates it will generate a net income (after taxes, maintenance and operating costs) of $4,000 per year. His other option is to go to work for someone else earning net income of $3,000 per year. He should

purchase the truck if the real interest rate is less than 5 percent.

From the point of view of a particular country, capital inflows are

purchases of domestic assets by foreigners

International capital flows are

purchases or sales of real and financial assets across international borders

Inflation in the health-care sector apparently is overstated because the CPI does not adequately adjust for _ changes.

quality

According to the Taylor rule, the Federal Reserve ____ the real interest rate as the output gap increases and ____ the real interest rate as the inflation rate increases.

raises; raises

Inflation is a measure of the ____ of prices; the CPI is a measure of the ____ of prices.

rate of change in the level; current level

When actual output is less than potential output there is a(n):

recessionary gap

For an economy starting from potential output, a decrease in planned investment in the short run results in a(n):

recessionary output gap

In Macroland potential GDP equals $20 billion and real GDP equals $19.2 billion. Macroland has a(n) ____ gap equal to ____ percent of potential GDP.

recessionary; -4

If short-run equilibrium output equals 20,000 and potential output (Y*) equals 25,000, then this economy has a(n) ____ gap that can be closed by ____.

recessionary; increasing government purchases

According to the quantity equation, if velocity and output are constant, then an increase in the money supply leads to ______________ in inflation.

the same percentage increase

When inflation turns out to be different from what was expected, purchasing power is _____.

redistributed

Crowding out is the tendency for increased government deficits to:

reduce private investment spending

Savers may prefer to use financial intermediaries rather than lending directly to borrowers because financial intermediaries:

reduce the cost of gathering information about borrowers

Inflation makes it difficult to distinguish relative price changes from changes in the general level of prices. Consequently, inflation _____ the efficiency of the market system.

reduces

A recession in the United States ____ the demand for exports from Canada resulting in a reduction in Canadian autonomous expenditures and a(n) ____ output gap in Canada.

reduces; recessionary

Because the minimum wage is not indexed to inflation, when there is inflation the nominal minimum wage ______, and the real minimum wage ______.

remains constant; decreases

Which of the following options will be most likely to help real GDP per capita grow in the long-run?

research and development of new technology

Assets of the commercial banking system include:

reserves and loans

if short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 10, and potential output (Y*) equals 9,000, then taxes must ____ to eliminate any output gap.

rise by $111.11

Refer to the accompanying figure. Based on the figure, if autonomous spending increases from 400 to 600, then the new short-run equilibrium output will ___.

rise by 400

The rate of return that financial investors require to hold a risky asset minus the rate of return on a safe asset is called the:

risk premium

In the long run the real interest rate is determined by ____, and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts ____.

saving and investment; slowly

In the long-run, the real interest rate is determined by __, and in the short-run, the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts _.

saving and investment; slowly

In an open-market sale the Federal Reserve ______________ government bonds and the supply of bank reserves ______________.

sells; decreases

Holding other factors constant, a decrease in the tax rate on the revenue generated by capital will:

shift the investment graph to the right; raise the equilibrium real rate of interest and increase investment in equilibrium

Changes in the growth rate of potential output and deviations of actual output from potential output are two logical explanations for:

short-term economic fluctuations

Because a decrease in the nominal interest rate reduces the opportunity costs of holding money, the money demand curve:

slopes downward

The smaller the mpc, the ____ the income-expenditure multiplier and the ____ the effect of a change in autonomous spending on short-run equilibrium output.

smaller; smaller

All of the following would be included in planned aggregate expenditure EXCEPT:

social security payments

Government policies that are used to affect planned aggregate expenditure, with the objective of eliminating output gaps, are called ____ policies.

stabilization

Most economists agree that __________ is/are the single most important source of productivity improvements.

technological advances

The two most important factors contributing to increased productivity in industrialized countries in the twentieth century were:

technological progress and increases in the capital stock

Which of the following is a stock (as in stocks and flows)?

the amount of US currency in circulation as of 8AM this morning

The vertical intercept of the consumption function equals _____ and the slope equals _____.

the autonomous part of consumption; the mpc

A CPI that equals 1.34 in 2005 (when 2000 is the base year) means that:

the average level of prices is 34 percent higher in 2005 than in the base year

The decline in the natural rate of unemployment between the 1979 and the 2000s might be the result of

the changing age structure of the population and more efficient labor markets

The decline in the natural rate of unemployment between the 1979 and the 2000s might be the result of:

the changing age structure of the population and more efficient labor markets

Two possible explanations for the decline in the natural rate of unemployment in the United States over the past twenty years are:

the changing age structure of the population and more efficient labor markets.

The amount of money in the United States is determined by:

the combined behavior of commercial banks and the public, and actions of the Federal Reserve

Among the most important indicators used by the NBER Business Cycle Dating Committee to determine the beginning of the 2001 recession were each of the following indicators EXCEPT:

the consumer price index

Among the most important indicators used by the NBER Business Cycle Dating Committee to determine the beginning of the 2007-2009 recession were all of the following except:

the consumer price index

The Federal Reserve can:

only set a money supply target that is consistent with the target nominal interest rate

The real rate of interest measures the __________ of capital investment.

opportunity cost

If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services:

output gaps would not exist

The Marginal Product of labor is the additional:

output produced by one more worker

In the short run, total spending affects _____, and in the long run total spending affects _____.

output; prices

When statisticians fail to allow for the possibility that consumers switch from products with rising prices to those whose prices are stable or falling, the CPI will tend to ______ the rate of inflation.

overstate

The Boskin Commission's concluded that the CPI ______ the true inflation rate by 1 to 2 percent points. If this is correct then the actual improvement in living standards over time is ______.

overstates; underestimated

Velocity is determined by

payments methods and technology

Velocity is determined by:

payments methods and technology

The beginning of a recession is called the

peak

Economic activity moves from a period of expansion to a ___ and then moves into a period of ___ until it reaches a _.

peak, recession; trough

In the Keynesian cross diagram, the ____ line shows the relationship between planned aggregate expenditure and output, and the ____ line represents the condition that planned aggregate expenditure and output are equal.

planned aggregate expenditure; 45-degree

In the basic Keynesian model all of the following are true EXCEPT:

planned investment always equals actual investment

In the short run, with predetermined prices, when output is less than planned aggregate expenditure:

planned investment is greater than actual investment

Planned aggregate expenditure is total:

planned spending on final goods and services

To counteract inflation, the government could implement all of the following EXCEPT:

policies that affect the supply and demand for a specific good

An economy with a trade surplus must also have:

positive net capital outflows

If the output gap equals $200 million, then

potential GDP is less than actual GDP

If the actual rate of unemployment equals the natural rate of unemployment, then:

potential output equals real GDP

An expansion occurs when ____, when ____, or when both of these occur.

potential output grows rapidly; actual output rises above potential output

An expansion occurs when either _____ or _______.

potential output grows rapidly; actual output rises above potential output

The market value of a particular bond at any given point in time is called the bond's

price

In the long run, output gaps are eliminated by:

price changes

The costs of investment depend on the __________ and the __________.

price of new capital goods; real interest rate

In the long run, total spending affects ____, and output is determined by ____.

prices; inputs and productivity

The specialized information-gathering activities that banks use to evaluate borrowers are an example of the:

principle of comparative advantage

The principle of diminishing returns to labor is based on the:

principle of increasing opportunity cost

Diminishing returns to capital is a consequence of firms' incentives to use each piece of capital as productively as possible and illustrates the:

principle of increasing opportunity costs

If taxes paid by households increase, everything else remaining constant,

private saving will decrease

In the Keynesian model, it is assumed that, when demand for a firm's product changes, the firm changes

production levels (but not prices), to meet the demand

The value marginal product of new capital increases when the:

productivity of new capital increases

When recessions are the result of slowing growth in potential output, the government's best response is a policy to:

promote saving and investment.

Decentralized market-based financial systems improve the allocation of saving by:

providing information and risk sharing services

The main difference between regular open-market operations and quantitative easing (QE) is:

the type and term of the financial assets targeted

If the Consumer Price Index increased from 1.52 to 1.65, then it must be the case that _____ relative to prices in the base year.

the weighted average level of prices rose

Bank depositors will not lose their deposits in a banking panic if:

there is 100 percent reserve banking

The money supply will increase by a multiple of the increase in bank reserves created by the central bank unless:

there is 100 percent reserve banking

If the output gap equals -$200 million, then

there is a recessionary gap

Refer to the figure above. Based on the Keynesian cross diagram, at short-run equilibrium output,

there is an expansionary gap

PAE=1000 + 0.75Y. If potential output equals $5,000, at short-run equilibrium output,

there is an expansionary gap equal to $750

Commercial banks create new money

through multiple rounds of lending

The amount of wealth an individual chooses to hold in the form of money is called

the demand for money

The income-expenditure multiplier leads to greater than one-for-one changes in output when autonomous spending changes because:

the direct changes in spending change the income of producers which leads to additional changes in spending.

Which of the following is most likely to occur in the labor market during a recession?

the growth of real wages declines

Empirical evidence for the US indicates that higher real interest rates lead to modest increases in savings. Therefore, we can conclude that

the income effect is less than the substitution effect

A report indicated that the average real wage in manufacturing declined by 2% between 1990 and 2000. If the CPI equaled 1.30 in 1990, 1.69 in 2000, and the average nominal wage in manufacturing was $35 in 2000, what was the average nominal wage in manufacturing in 1990?

$27.46

In Econland, 500,000 of the 2 million people in the country are employed. Average labor productivity in Econland is $15,000 per worker. Real GDP per person in Econland totals:

$3,750

An economy produces 500,000 tables valued at $100 each. Households purchase 100,000 tables, of which 50,000 are imported. Businesses purchase 200,000 domestically produced tables, the government purchases 100,000 domestically produced tables, and 50,000 domestically produced tables are sold abroad. At the end of the year, the table manufacturers hold the unsold tables in inventory. What is value of the investment component of GDP?

$30 million

In 1998, average labor productivity in the U.S. was $66,381 per worker and 48.9% of the population was employed. What is the per capita GDP in 1998?

$32,460

. Adam (who lives in England) shears wool from his sheep and sells it to Karl (who lives in Germany) for $1400ii. Karl uses the wool purchased from Adam to weave into cloth that he then sells to Leon (who also lives in Germany) for $1600.iii. Leon sells the wool cloth to Alfred (who lives in England) for $2000.iv. Alfred then tailors a suit for John (who lives in England) for $5000.Suppose that these are the only transactions in the two countries, and that they all take place in the year 2017. The GDPs of the United Kingdom and Germany (measured in dollars), respectively, are:

$4400 and $600

In Macroland there is $12,000,000 in currency. The public holds half of the currency and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5 percent, deposits in Macroland equal ______ and the money supply equals ______.

$48,000,000; $54,000,000

In Macroland there is $12,000,000 in currency. The public holds half of the currency as cash and banks hold the rest as reserves. If banks' desired reserve/deposit ratio is 12.5 percent, deposits in Macroland equal ________ and the money supply equals ________.

$48,000,000; $54,000,000

In the year, 2005 Janice Quinn sells a five-year-old car to Used Car, Inc. for $3,000. In the same year, Used Car, Inc. resells the car to Ima Goner for $3,500. What is the contribution of this transaction to GDP in the year 2005?

$500

Chris earns $1,500 per week and spends $1,000 per week on living expenses, puts $200 in a savings account, and buys $300 worth of shares in a stock mutual fund. Chris's saving is __________ and Chris's saving rate is __________.

$500; 33.3%

Joy's Java Café needs $4,000 cash per day for customer transactions. Joy has a choice between going to the bank first thing on Monday morning to withdraw $20,000 - enough cash for the whole week - or going to the bank first thing every morning for $4,000 each time. Joy puts the cost of going to the bank at $3 per trip. Assume that funds left in the bank earn precisely enough interest to keep their purchasing power unaffected by inflation. Joy's Java Cafe is open 5 days a week for 50 weeks each year. When the inflation rate is 10% Joy goes to the bank everyday instead of once a week. Joy's annual shoe leather costs of inflation equal _.

$600

Dave's Mirror Company produces $1,250,000 worth of mirrors this year. They expect to sell $1,000,000 worth of mirrors over the year. The company purchases $300,000 of new equipment during the year. Sales for the year turn out to be $900,000. Actual investment by Dave's Mirror Company equals _ and planned investment equals ___.

$650,000; $550,000

If the principal amount of a bond is $10,000,000, the coupon rate is 7 percent, and the inflation rate is 4 percent, then the annual coupon payment made to the holder of the bond is ______.

$700,000

If the marginal propensity to consume is 0.75, then a $100 increase in disposable income leads to a ________ increase in consumption.

$75

Jan's Dry Cleaning holds $10,000 on a typical day, although only $2,000 is essential for carrying out business. Making a midday deposit is estimated to reduce cash holdings to $8,000, but would cost an extra $80 per year in lost production. Jan's can reduce cash holdings to $6,000 if it hires an armored car service to pick up cash more frequently for a fee of $120 per year. Employing a computerized cash management service for an annual fee of $180 would reduce cash holdings to $4,000. Jan's plans on purchasing government bonds paying a 5% interest rate with any cash holding reductions. What is Jan's optimal money holding?

$8,000

A country's domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: S = 1,500 + 2,000r I = 2,000 - 4000r KI = - 100 + 6000r Repeat part a, assuming that desired national saving declines by 120 at each value of the real interest rate. What effect does a reduction in domestic saving have on capital inflows?

12,000r= 720 r = 0.06 = 6% Now domestic saving is 1,380 + 2,000(0.06) = 1,500, capital inflows are -100 + 6,000(0.06) = 260, and investment is 2,000 - 4,000(0.06) = 1,760. The reduced domestic saving has raised the domestic real interest rate, which has attracted additional capital inflows from abroad (KI rises from 200 to 260). The extra capital inflows partially offset the decline in domestic saving.

In a small town of 100 people, there are 10 children under 16, 10 retired people, 60 people with full-time jobs, 3 people with part-time jobs, 3 full-time students over 16, and 4 full-time homemakers. The remaining people did not have jobs, but wanted them. All but one of these had actively looked for a job in the previous four weeks. What is the unemployment rate in this town?

12.5%

The towns of Jekyll and Hyde each have a labor force of 2,000 people. In Jekyll, 500 people were unemployed for the entire year, while the rest of the labor force was employed continuously. In Hyde, every member of the labor force was unemployed for three months and was employed for nine months. The average duration of unemployment spells over the year was _____ months in Jekyll and _____ months in Hyde.

12; 3

If the Consumer Price Index for one year was 150.0 and the rate of inflation from that year to the next was 10 percent, what would be the Consumer Price Index in the second year?

165

Based on the table below, if the production process described below is subject to diminishing returns to capital, then total packages wrapped when a fourth machine is installed must be less than __________ packages.

17,000

Data for an economy shows that the unemployment rate is 6%, the participation rate 60 percent, and 200 million people 16 years or older are not in the labor force. How many people are unemployed this economy?

18 million

In the United Sates, the average annual rate of growth of real wages was fastest in the period:

1960-1973

If real GDP equals 1,500, and, the price level equals 2.5, then what is velocity of circulation if the money stock equals 1,875?

2

If the money supply equals 1,000, velocity equals 5, and real GDP equals 2,500, then the price level equals:

2

Refer to the accompanying figure. Based on the figure, the income-expenditure multiplier equals:

2

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 3 percent, then the output gap equals:

2 percent

If real GDP equals 3,500, nominal GDP equals 5,250, and the price level equals 1.5, then what is velocity if the money stock equals 2,100?

2.5

If real GDP equals 3,500, the CPI (average price level) equals 1.5, then what is velocity of circulation if the money stock equals 2,100?

2.5

The money supply in Econland is 1,000, and currency held by the public equals bank reserves. The desired reserve-deposit ratio is 0.25. Bank reserves equal ______________.

200

One year before maturity, the price of a bond with a principal amount of $1,000 and a coupon rate of 5 percent paid annually fell to $981. The one-year interest rate must be:

7 percent

In an economy of 100 people in the labor force, if 10 people are unemployed for 4 weeks during the year, and 30 people are unemployed for 8 weeks during the year, and the rest are employed continuously throughout the year, then the average duration of unemployment in this economy is:

7 weeks

If the cyclical rate of employment equals 1% and the actual rate of unemployment equals 8%, then the natural rate of unemployment must equal:

7%

If the frictional rate of unemployment equals 3 percent, the structural rate of unemployment equals 4 percent, and the cyclical rate of unemployment equals -2 percent, then the natural rate of unemployment equals:

7%

The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $480 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha?

7%

In Macroland, autonomous consumption equals 100, the marginal propensity to consume equals .75, net taxes are fixed at 40, planned investment is fixed at 50, government purchases are fixed at 150, and net exports are fixed at 20. Short-run equilibrium output in this economy equals:

760

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?

8 percent

Which of the following is NOT a capital good: A. Batteries purchased by a car manufacturer B. Machines purchased by a car manufacturer to measure metal thickness C. A new house purchased by a family D. A new apartment building purchased by a corporation

A. batteries purchased by a car manufacturer to install new cars

How are capital inflows and outflows related to domestic investment in new capital goods?

A capital inflow leads to funds flowing into a country, which in turn can be used for domestic investment in new capital goods. A capital inflow allows a country whose productive investment opportunities are greater than domestic savings to finance those investment opportunities by borrowing from abroad, increasing the total amount of investment in new capital goods. Domestic countries who finance domestic capital formation largely through capital inflows must pay interest and dividends to the foreign lenders in the future, which could impose a future burden on the domestic country. However, the hope is that the investment in new capital goods will increase domestic productivity, allowing the borrowing country to pay back its loans while benefiting from increased output and incomes in the meantime. Capital outflows have the opposite effect on investment in new capital. A capital outflow leaves less domestic savings to finance investment opportunities, leading to less investment in new capital goods.

Which of the following is an example of investing in human capital?

A firm pays for workers to take college classes

Refer to the accompanying figure. In the figure, which interval represents a business cycle expansion?

A to B

Find the general rule for calculating the money multiplier.

As the example in part b illustrates, in general, the increase in deposits and the money supply equals the change in bank reserves times 1/(desired reserve-deposit ratio). Hence the money multiplier equals 1/(desired reserve-deposit ratio).

If the unemployment rate decreases, which of the following is true? A. The number of people looking for work decreased and the number of people with jobs increased by even more B. The number of people employed increased but the number of people looking for work stayed the same C. The number of people unemployed stayed the same but the labor force increased D. All of the above are true

D. All of the above are true

Discuss three reasons why the use of fiscal policy to stabilize the economy may be more complicated than that suggested by the basic Keynesian model.

First - is the issue of fiscal policy affecting both short run equilibrium GDP and Potential output. What the government spends its money on, as well as the incentive effects of changes in tax and transfer programs, need to be factored in when evaluating the effects of fiscal policy. Long-run growth of potential output may be affected by the type of spending the government pursues; tax policies may affect labor supply decisions and investment decisions as well. Second - is the Crowding out effect. Changes in government spending and taxation can affect the government's budget deficit, which in turn may affect long-run investment in capital goods and hence growth of potential output. For example, an expansionary fiscal policy may boost planned aggregate expenditure in the short run, leading to increased output and employment, but it may also raise real interest rates if it reduces national saving (by increasing the government's budget deficit without an offsetting increase in private saving). The increased interest rates may reduce capital investment and long-run growth of output. This is called the crowding out effect. Third - is the problem of lags and delays in the legislative process. Fiscal policy is relatively inflexible, with long legislative processes reducing the government's ability to quickly respond to output gaps. The delays in implementation may stem from the legislative process itself (budget recommendations are first presented to Congress by the President, then are often debated for months before finally becoming law, and may take effect months after this) or from political wrangling over spending and taxing priorities.

Which of the following hypotheses is a plausible explanation for why U.S. households save so little?

Government assistance to the elderly has reduced the need for life-cycling saving.

A price index that is used to measure inflation will do which of the following?

Hold quantities constant

When a central bank increases bank reserves by $1, the money supply rises by more than $1. The amount of extra money created when the central bank increases bank reserves by $1 is called the money multiplier. Explain why the money multiplier is generally greater than 1. In special what case would it exactly equal 1?

In a fractional-reserve banking system (where the reserve-deposit ratio is less than one), banks loan out part of their deposits. The process of banks making loans and the public redepositing the funds back to the bank increases deposits and therefore money supply. This expansion process continues until the bank reaches its desired ratio of reserves to deposits. Because each dollar of reserves ultimately supports several dollars of deposits, one extra dollar of bank reserves results in an increase in the money supply of several dollars. This makes the money multiplier to be greater than 1. The money multiplier equals one only in the case of 100 percent reserve banking. In that case, reserves are equal to deposits, so that an extra dollar of bank reserves increases deposits and the money supply by only one dollar.

Which firm is likely to see its profits reduced the most in a recession: an automobile producer, a manufacturer of boots and shoes, or a janitorial service? Which is likely to see its profits reduced the least? Explain.

In general, producers of durable goods are affected most by recessions while producers of non-durables (like food) and services are affected least. Automobiles are durable goods, so the automobile producer would probably see its profits reduced the most, while the janitorial service will see the smallest decline in profit. Boots and shoes are "semi-durable" since a pair of shoes may last for several years and people can put off purchases of these for a while if necessary. Thus the boot manufacturer's losses are likely to fall in between those of the other two firms.

The initial money supply is $1000, of which $500 is currency held by the public. The desired reserve-deposit ratio is 0.2. Find the increase in money supply associated with an increase in bank reserves of $1, $5, and $10. What is the money multiplier for this economy?

Initially the money supply is $1,000 and currency held by the public is $500, hence deposits are $500 (= 1000 - 500). Since the desired ratio of reserves to deposits is 0.2, initial bank reserves are equal to the reserve ratio x deposits, or 0.2 x 500 = $100. An increase of $1 in bank reserves expands deposits from $500 to $101/0.2 = $505, increasing deposits and the money supply by $5. An increase of $5 in reserves increases deposits and the money supply by $5/0.2 = $25. An increase of $10 raises deposits and the money supply by $10/0.2 = $50. The money multiplier = 1/(Reserve-to-Deposit Ratio) = 1/0.02 = 5.

Total taxes minus transfer payments minus government interest payments is called:

Net taxes

Consider an economy described by the following equations: C = 1,800 + (0.6)(Y - T); IP = 900; G = 1,500; NX = 100; T = 1,500; Y* = 9,000 W. Derive the expression for the Planned Aggregate Expenditure.

PAE = C + Ip + G + NX Next, substitute the components of PAE that are given in the problem: PAE = [1,800 + (0.6)(Y - 1,500)] + 900 + 1,500 + 100 Collecting terms, we have: PAE = 3,400 + 0.6Y

Explain how planned spending and actual spending might differ. Illustrate with an example.

Planned spending includes planned additions to inventories to firms. When firms' actual sales differ from planned sales, the resulting changes to inventory will differ from what was planned, and actual spending will differ from planned spending. For example, suppose a firm planned to produce 100 units, sell 90 units to the public, and add 10 units to its inventory. But the firm sells only 80 units and thus must add 20 units to inventory. The firm's planned inventory investment (a component of planned investment and thus total planned spending) was 10 units, but its actual inventory investment was 20 units. So the firm's actual investment spending (inclusive of inventory investment) is greater than it planned. On the other hand, if the firm sold all 100 units, it would add nothing to inventory, and its actual investment (including inventory investment) would be less than planned.

Suppose that you are much less concerned about risk than the typical person. Are stocks a good financial investment for you? Why or why not?

Stock values are fairly volatile and so carry a risk premium. In other words, the typical investor will hold stocks only if she expects to earn a higher return on average holding stocks than holding a safer asset, such as government bonds. If the relative riskiness of stocks does not bother you, then stocks are a good financial investment because of the higher return that you can expect to earn (on average, but not for certain) by holding them.

A country's domestic supply of saving, domestic demand for saving for purposes of capital formation, and supply of net capital inflows are given by the following equations: S = 1,500 + 2,000r I = 2,000 - 4000r KI = - 100 + 6000r Concern about the economy's macroeconomic policies cause capital inflows to fall sharply so that now KI = - 700 + 6000r. Repeat part a. What does a reduction in capital inflows do to domestic investment and the real interest rate?

The condition S + KI = I becomes (1,500 + 2,000r) + (-700 + 6,000r) = 2,000 - 4,000r 12,000r = 1200 r = 0.10 = 10% Domestic saving is 1,500 + 2,000(0.10) = 1,700; capital inflows are -700 + 6,000(0.10) = -100 (that is, there is a net capital outflow); and investment is 2,000 - 4,000(0.10) = 1,600. Note that the reduction in capital inflows has raised the real interest rate and reduced domestic investment. This illustrates why "capital flight" (sharp increases in capital outflows) is of particular concern for developing countries.

Suppose the economy enjoys a positive shock that raises consumption by $1,000 at each level of after-tax income. How does this change the mpc and the consumption function?

The consumption function shifts upward by $1,000 at each level of disposable income (that is, the vertical intercept, Cbar, rises from $200 to $1,200.) The mpc is unaffected because the increase in consumption is the same at each level of disposable (after-tax) income. This implies that the graph makes a parallel upward shift and the slope, equal to the mpc, does not change.

The builder of a new movie theater complex is trying to decide on how many screens she wants. Below are her estimates of the number of patrons the complex will attract each year, depending on the number of screens available. After paying the movie distributors and meeting all other non-interest expenses, the owner expects to net $2.00 per ticket sold. Construction costs are $1,000,000 per screen. Make a table showing the value marginal product for each screen. What property is illustrated by the behavior of the marginal products?

The marginal product declines as screens are added, illustrating diminishing returns to capital.

What is the value of the mpc?

The mpc = Δ Consumption / Δ Disposable Income.

How is each of the following likely to be affected by a recession: the natural rate of unemployment, the cyclical unemployment rate, the inflation rate, and, the poll ratings of the President?

The natural unemployment rate is the sum of structural and frictional unemployment and excludes cyclical unemployment. Hence, the natural unemployment rate by definition should not be affected by a recession. Also, by definition, the cyclical unemployment rate rises in a recession. Inflation tends to decline in the period following a recession. Finally, poll ratings of presidents tend to be strongly correlated with the state of the economy, so a recession will probably reduce a president's popularity.

If the natural rate of unemployment equals 4%, what is the actual unemployment rate in this economy? Hint: Use Okun's Law.

The output gap = [(Y - Y*) / Y*] × 100 = [-500/9,000] × 100 = -5.6%. So, -5.6% = -2 (u - 4). Solving this equations yields u = 6.8%

Why is the purchase of a share of stock not included in GDP?

The purchase of a share of stock does not correspond to the production of a good or service

If the real interest rate is 5.5%, how far would construction costs have to fall before the builder would be willing to build a 5 screen complex?

The value of the marginal product of the fifth screen is $40,000. At an interest rate of 5.5 percent, building five screens is profitable only if 5.5 percent times the per-screen construction cost is no greater than $40,000. So, we can find this cost as follows: Cost per screen × 0.055 = $40,000 Cost per screen = $40,000/0.055 = $727,273 That is, the construction cost would have to be $727,273 per screen or less in order to make the five-screen complex profitable.

What is the value of consumption spending when before tax income equals $32,000 and taxes paid equals $5,000?

To answer this let's first derive the equation of the consumption function. Since the mpc is 0.9, we know the consumption function can be expressed as C = Cbar + ).9(Y - T). To find Cbar, plug into this equation any of the numerical combinations of consumption and disposable income given above. For example, if we set C = $20,000 and (Y - T) = $22,000, we get Cbar = $200. Therefore the Consumption function is C = 200 + 0.9(Y - T). When Y = $32,000 and T = $5,000, C = $200 + (0.9)($27,000) = $24,500.

Where Y is GDP, C is consumption, I is investment, G is government spending, and there is no international trade, national saving equals:

Y - C - G

What is the output gap for this economy?

Y - Y* = 8,500 - 9,000 = minus 500. So the economy is suffering from a recessionary gap of $500

Which of the following would increase the consumption component of U.S. GDP?

You purchase a vacation at Disney World in Florida

In the Keynesian model, a $1 billion increase in autonomous consumption leads to ____ in PAE and a __ in the short-run equilibrium output.

a $1 billion increase; a greater than $1 billion increase

In the United States saving is allocated to its most productive use by:

a decentralized, market oriented financial system

During the 1960s and 1970s, the U.S. trade balance was close to zero, but during the 1980s, the trade deficit ballooned to unprecedented levels due to:

a decline in national saving caused largely by rapidly rising government budget deficits

Two reasons savers keep deposits at banks are to

earn a return on their savings and to facilitate making payments

In the short-run, ____ determines a nation's GDP. In the long-run, ____ determines a nation's GDP

economy-wide spending; potential output

If firms maintain preset prices in the short run, then the primary cause of outputs gaps is changes in:

economywide spending

Individuals who undertake business risks to earn a profit are called:

entrepreneurs

A period in which the economy is growing at a rate significantly above normal is called a(n):

expansion

Economic activity moves from a trough into a period of ______ until it reaches a ______ and then into a period of ______.

expansion; peak; recession

Factors increasing the labor supply and thereby contributing to the slowdown in real-wage growth that began in the 1970s include ______________ and ______________.

increased labor force participation by women; the coming-of-age of the baby-boom generation

The introduction of credit cards and debit cards ______.

increased velocity of circulation

If short-run equilibrium output equals 10,000, the income-expenditure multiplier equals 5, and potential output (Y*) equals 9,000, then taxes must be _____ by approximately _____ to eliminate the output gap.

increased; 250

The price of a gallon of gasoline at the pump increased by 10 percent at the same time that the inflation rate was 15 percent. The nominal price of gasoline _____ and the real price of gasoline _____.

increased; decreased

The increasing availability of temporary job placement agencies and online job services has ______ the efficiency of matching workers and jobs and ____ the natural rate of unemployment in the United States.

increased; reduced

As disposable income increases, consumption

increases

For a given nominal interest rate, an unexpectedly low inflation rate _____ the real interest rate

increases

A political system that promotes the free and open exchange of ideas

increases average labor productivity

If firms sell less than expected, actual investment ______.

increases because the unsold goods are added to inventory

According to the quantity equation, if velocity and real GDP are constant, and the Federal Reserve increases the money supply by 5 percent, then the price level ______.

increases by 5 percent

When the central bank buys $1,000,000 worth of government bonds from the public, the money supply:

increases by more than $1,000,000

capital gains are

increases in the value of existing assets

According to the principle of diminishing returns to labor, if the amount of capital and other inputs are held constant, employing additional workers:

increases output at a decreasing rate

As the real interest rate increases, the quantity of saving supplied ______ and the quantity of saving demanded _______.

increases; decreases

Automatic stabilizers are provisions in the law that create automatic ____ in government spending or ____ in taxes when real output declines.

increases; decreases

In an open economy, a decrease in capital inflows __________ the equilibrium domestic real interest rate and __________ the quantity of domestic investment.

increases; decreases

Lower nominal interest rates ____ the amount of money demanded and a lower price level ____ the amount of money demanded.

increases; decreases

An increase in the perceived riskiness of Company A stock ________ the risk premium investors require to purchase Company A stock and thereby ________ the price of Company A stock.

increases; decreasing

The introduction of new technologies __________ the real interest rate and __________ the equilibrium quantity of national saving.

increases; increases

When commercial banks borrow reserves from the Fed, the quantity of reserves in the banking system ____ and, ultimately, the money supply ____.

increases; increases

Indexing is the process of:

increasing a nominal quantity by an amount equal to the percentage change in a price index

High rates of saving and investing in the private sector promote economic growth by:

increasing physical capital

Globalization and skill-biased technological change have contributed to:

increasing wage inequality

Worker mobility and transition aid to workers are two ways to offset some of the impacts of:

increasing wage inequality

If the income-expenditure multiplier equals 2.5 and a 1 percent increase in the real interest rate reduces autonomous spending by 200 units, then a 1,000 unit expansionary gap can be eliminated by ____ the real interest rate by ____ percent.

increasing; 2.0

Long-term chronic unemployment that results even when the economy is producing at a normal rate is called _____________ unemployment.

structural

The end of a recession is called the

trough

The duration of an expansion is measured from

truogh to peak

An informal definition of a recession is at least ____ consecutive quarters of declining real GDP.

two

Planned investment may differ from actual investment because of

unplanned changes in inventories

Nominal GDP divided by the money stock equals:

velocity

Because the Fed determines the money supply, the money supply curve is:

vertical