literally, everything econ, Test 2 ECON

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in 2001 the U.S labor force consisted of 141272600 employed and 6169000 unemployed. The U.S unemployment rate for that year was about

4.4%

Suppose you are given the following information about a country:

Add them all together

The expenditure approach to tabulating GDP

Adds up the total amount spend on newly produced domestic goods and services during the year.

suppose that the economy is shown to the right. This economy is currently experiencing _______. Draw and label the fiscal policy correction that would bring the economy to full employment GDP.

An inflationary gap

Which of the following would create demand-pull inflation?

An increase in household income.

What is true concerning shifts of the LRAS curve?

An increase in the LRAS curve is depicted as a rightward shift and an increase in real GDP

Suppose the rental rate of machinery decreased temporarily. The result of this would be described by

An increase in the SRAS curve only

Which of the following is true concerning shifts of the long-run aggregate supply curve?

An increase in the long-run aggregate supply curve is depicted as rightward shifts and an increase in real GDP.

Between early 2005 and late 2007, total planned expenditures by U.S households substantially increase in response to an increase in the quantity of money in circulation. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were. The resulting spending gap between early 2005 and 2007 in response to the increases.

An increase in the price level along with an increase in equilibrium real GDP. An inflationary gap.

Which of the following is true concerning shifts of the long-run aggregate supply curve?

An increase in the long-run aggregate supply curve is depicted as a rightward shift and an increase in real GDP.

What would create cost-push inflation?

An increase in wages paid to workers.

Which of the following would create cost-push inflation?

An increase in wages paid to workers.

Given that the economy is currently in a long run equilibrium the US dollar depreciates, the economy would the experience:

An inflationary gap

Suppose that the economy is shown to the right. This economy is currently experiencing _______ Draw and label the fiscal policy correction that would bring the economy to full employment GDP.

An inflationary gap

Which of the following will occur when aggregate supply remains stable but aggregate demand increases in the short run?

An inflationary gap is created.

Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD there is an increase in the money supply the economy would then experience.

An inflationary gap.

Zombie S&L

An insolvent thrift which continues to operate

The laffer curve indicates

An inverse relationship between tax rates and tax revenues. a positive relationship between tax rates and tax revenues.

Bear Market

An overall declining stock market

Bull Market

An overall rising stock market

Boiled Frogs

An unflattering description of complacent US taxpayers

What determines the autonomous level of business investment according to Keynes?

Animal spirits

. 1. What is meant by animal spirits? ...stagflation? ...secular stagnation? ... twin deficits anomaly?

Animal spirits - what determines the the autonomous level of business investment according to John Maynard Keynes

Aggregate demand shock

Any event that causes the aggregate demand curve to shift inward or outward.

Aggregate supply shock

Any event that causes the aggregate supply curve to shift inward or outward.

If nominal GDP increases, it is possible that

Any of the above might have happened (Both prices and output have increased. Prices have increased. Output has increased.)

Working age population

Anyone over 15 years of age

The classical model assumes that wages and prices

Are always completely flexible

Which economist is most closely associated with SUPPLY-SIDE economics ?

Arthur Laffer

Which of the following is a possible explanation for sticky prices?

Labor contracts cause wages to be fixed over the contract period.

Which of the followings is a possible explanation for sticky prices?

Labor contracts cause wages to be fixed over the contract period.

Who is included in those two groups?

Labor force participation rate- out population has only risen 70% since 1960 but our labor force participation rate has doubled since 1960, this is accounted for in the increased participation of women. 1 out or 3 women were in the labor force in 1960 but 6 out of 10 are in it today.

Participation rate

Labour force / working age population

The purpose of automatic stabilizers is to

Lessen the impact of unemployment in a recession and slowdown inflation during an expansion.

Fiscal policy time lags are

Long - a policy designed to correct a recession may not produce results until the economy is experiencing inflation. • Variable in length - they can be from 1-3 years, and the timing of the desired effect cannot be predicted. • Because fiscal policy time lags tend to be variable, policymakers have a difficult time fine-tuning the economy.

Joe unable to find a job for 1.5 years after he was let go from the mine.

Long term

Stephen has been looking for a job for 18 months.

Long-term unemployed

What are the four human costs of unemployment?

Lost incomes, lost confidence, social stress and ill health

Because investment is the process by which physical capital is put into place for future production, a lower-than-otherwise level of investment implies a _____ level of future equilibrium real GDP.

Lower-than-otherwise.

Tax increase Tax cut

Lowers prices. lowers demand Increases prices. increases demand.

Quantity Equation -

M*V=P*Y

Function of net export

NX=f(e) negative relation between net export and exchange rate

Group in charge of business cycles

National Bureau of Economic Research (NBER)

In National Income Accounting, what is the formula for Personal Income ?

National Income + Gov'r Transfer Payments - Soc. Security Contributions - Undistributed Corp. Profits

What happens to national saving when the government runs a budget deficit?

National saving DECREASES when the government runs a budget deficit unless private saving increases by the amount of the budget deficit, which is also unlikely.

suppose that the value of the US dollar depreciated. AD will the Short run supply will

Shift to the right Shift to the left.

Suppose higher taxes are placed on businesses. What happens to the Investment Function?

Shifts left

Real GDP levels of all the nation's major trading partners have declined.

Shifts to left

There has been a decline in the foreign exchange value of the nation's currency.

Shifts to right

What happens to the aggregate demand curve when real GDP levels of all the nation's major trading partners have declined?

Shifts to the left

What happens to the AD curve when there has been a decline in the foreign exchange value of the nation's currency?

Shifts to the right

If the prices were sticky, according to Keynes, this would then imply that the

Short-run aggregate supply curve is horizontal

If the prices were sticky, according to Keynes, this would then imply that the

Short-run aggregate supply is horizontal.

The Keynesian model of the macroeconomy argues that prices are sticky due to labor contracts and unions. The existence of sticky prices cause the ____ to be horizontal. Suppose that the aggregate demand changes due to an decrease in the amount of money in circulation. Draw the new AD curve.

Short-run aggregate supply.

The aggregate demand curve

Shows planned purchase rates of goods and services at various price levels.

The classical economists believed that the leakage of saving would be matched by the injection of business investment.

TRUE

The difference between real exports and real imports is called real net exports.

TRUE

The level of employment in an economy determines its real GDP.

TRUE

True or False: Contractionary fiscal policy involves decreasing government purchases or increasing taxes.

TRUE

True or False: Fiscal policy refers to changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives.

TRUE

True or False: To complement actions by the Fed to reduce inflation, Congress and the President can cut spending and/or raise taxes.

TRUE

When including consumption, investment, government expenditures, and net exports, the equilibrium level of real GDP is found at the intersection of the C + I + G + X curve and the 45-degree reference line.

TRUE

DY/DT = -MPC/(1-MPC)

Tax Multiplier

Which of the following is a reason for this resurgence in federal government budget deficits?

Tax revenue not keeping pace with growth in spending.

Shifter of AS

Technology, input prices, action of government (taxes, subsidy),... EX: oil shock

To go from personal income to disposable personal income, personal income taxes must be subtracted.

True

True or False: Contractionary fiscal policy is used to decrease aggregate demand in an attempt to fight rising inflation

True

True or False: Contractionary fiscal policy is used to decrease aggregate demand in an attempt to pay off debt accrued during a recession in a previous time period

True

True or False: Equilibrium has to occur at the intersection of the planned saving and planned investment schedules.

True

True or False: In the United States, resourse-using federal government expenditures account for almost 20 percent of real GDP.

True

Unemployment due to the fact that workers must search for appropriate job offers is called frictional unemployment.

True

Congress votes to fun a new jobs program designed to put unemployed workers to work. This is an example of

a discretionary fiscal policy.

Under powers authorized by an act of congress. the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of

a discretionary fiscal policy.

The aggregate demand curve would shift to the right as a result of

a drop in the foreign exchange value of the dollar.

Internet job sites, like Monster.com, have led potential employees to find jobs via the internet almost instantly. This has caused

a fall in frictional unemployement

Pyramid Scheme

a fraudulent investment device in which an apparent high rate of return lures in investors

Expansionary fiscal policy is:

an increase in G and a decrease in T (^C, ^I) ......therefore you must borrow

In modern Keynesian analysis, an increase in aggregate demand will result in

an increase in both price level and output.

Demand-pull inflation arises due to

an increase in household income

Which of the following would create demand-pull inflation?

an increase in household income.

which of the following would create demand-pull inflation?

an increase in household income.

Demand-pull inflation arises due to

an increase in money supply

In the classical model, an increase in aggregate demand will cause

an increase in price level

Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap?

an increase in taxes.

and a decrease in the interest rate causes

an increase in the amount of real planned investment.

All of the following will cause the planned investment function to shift leftward except

an increase in the interest rate

For simplicity, we assume that real investment is _______________ with respect to real GDP and therefore unaffected by the level of real GDP per year.

autonomous

What is the expression which means the level of consumption which takes place in the macroeconomy when income is equal to zero?

autonomous consumption

We assume that the consumption function has an ____________ part that is independent of the level of real GDP per year. It is labeled "___________ consumption."

autonomous; autonomous

We assume that the consumption function has an _______________ part that is independent of the level of real GDP per year. It is labeled "____________________"

autonomous; autonomous

____________ propensity to save is equal to real saving divided by real disposable income.

average

_______________ propensity to consume is equal to real consumption divided by real disposable income.

average

The ______propensity to consume is equal to real consumption divided by real disposable income. The _________ propensity to save is equal to real saving divided by real disposable income.

average; average

unemployment that naturally occurs during the normal workings of an economy as people change jobs and move across the country is called

frictional unemployment

inflationary gap

gap that exists whenever equilibrium real GDP per year is greater than full-employment real GDP, as shown by the position of the LRAS curve

recessionary gap

gay that exists whenever equilibrium real GDP per year is less than full-employment real GDP, as shown by the position of the LRAS curve

At any given time, swings in sales of a few large firms can

generate significant net effects on aggregate demand and aggregate supply.

One of the advantages of fiscal policy is that it

generates a psyche of safety for consumers and investors because they know the government has the ability to use it.

Anticyclical:

goes against business cycle, ex: higher education ( students don't want jobs when econ is doing well, would want jobs if econ is doing bad )

consumption goods

goods bought by households to use up, food and movies

Crowding out effect -

government borrows to finance its deficit, leaving less funds available for investment

From a Keynesian perspective which multiplier is bigger ?

govt spending

Whenever inflation is __________ than anticipated, creditors lose and debtors gain. Whenever the rate of inflation is _______ than anticipated, creditors gain and debtors lose.

greater; less

Stagflation

high inflation and high unemployment

Stagflation

high unemployment and high inflation

Increased government spending crowds out investment due to

higher interest rates.

If a shift in aggregate demand only affects real Gross Domestic Product (GDP), then the short-run aggregate supply (SRAS) curve must be

horizontal

The short-run Keynesian aggregate supply curve is

horizontal

Keynesians believe that the aggregate supply curve is

horizontal in the short run

Fiscal Policy is most effective when AD is ...

horizontal.

In the circular flow of income

households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms.

The marginal propensity to consume is 0.60. At the market interest rate of 8 percent, planned investment spending is $100 billion. The slope of the C + I function is _______the slope of the consumption function

identical to; autonomous

The slope of the C + I function is ________________ the slope of the consumption function because investment in this model is ____________________.

identical to; autonomous

What does the classical model say about the short run aggregate supply curve?

it does not exist since all adjustments occur quickly

What does Say's law state about overproduction?

it is impossible in a market economy

The Keynesian short-run aggregate supply curve is horizontal because

it reflects wage and price inflexibility

What is the different about the modern Keynesian model?

it shows an upward sloping SRAS to reflect some price flexibility

Real GDP and the price level

keynes argued that in a depressed economy, increased aggregate spending can increase output without raising prices

the study of business cycles and economic fluctuations can be called:

keynesian economics

the fraction of the working-age population that is in the labor force is called the:

labor force participation rate

Which of the following does NOT explain why Aggregate Demand has a negative slope?

law of aggregate demand

According to classical theory, any changes in aggregate demand will

lead to changes in the price level

The purpose of automatic stabilizers is to?

lessen the impact of unemployment in a recession and slowdown inflation during an expansion.

45 degree reference line

line along which planned real expenditure equal real GDP per year

Which of the following is NOT a method for solving for equilibrium income ?

liquidity - money approach

secular means

long term

According to Keynes, involuntary unemployment is possible because of

long-term labor contracts and the existence of labor unions

Any change in factors influencing _____-run output, such as _______, capital, or _______, will shift both the SRAS curve and the LRAS curve.

long; labor; technology

frictional unemployment occurs

naturally during the normal workings of an economy as people change jobs move across the country

dissaving

negative saving, a situation in which spending exceeds income, can occur when a household is able to borrow or use up existing assets

dissaving

negative saving; a situation in which spending exceeds income

All of the following transactions are excluded from the measure of GDP except

paying your dentist to have your teeth cleaned.

Total income can be viewed as the sum of

payments to factor services such as land, labor, capital, and entrepreneurial activity. the dollar value of output produced since total income and total production are equal. wages, rents, interest, and profits. ALL OF THE ABOVE

Labor-force participants

people 16 years or older who are actively seeking employment or are currently working. People who are not working due to vacation, illness, labor dispute, or bad weather are considered working. Unpaid family members working in a family business are counted as working.

Name 4 assumptions of the classical model

people are motivated by self interest, pure competition exists, buyers react to changes in relative prices, all wages and prices are flexible

What are leakages in the circular flow model caused by?

people saving instead of spending

Phantom unemployed

people who say they are looking for work but are not really. Regulations of welfare programs sometimes require people to lie about their situation.

Per capita real GDP measures the amount of real GDP

per person

According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when

there are unemployed resources and prices do not fall when aggregate demand falls

The short-run aggregate supply curve is horizontal when

there are unemployed resources and prices do not increase when aggregate demand increases

The short-run aggregate supply curve is horizontal if

there are unutilized resources in the economy

Consider a nation in which most workers are unionized. If all the nationʹs unions band together and succeed in boosting wages established by long-term labor contracts, then

there is a leftward shift in both LRAS and SRAS

Full employment means

there is a level of unemployment consistent with "normal" frictions in the labor market.

The long-run aggregate supply curve shifts outward when

there is economic growth.

The economy of Finlandia is at full employment when

there is some unemployment due to friction in the labor market, but there is no cyclical unemployment.

When an individual proclaims the need for a new car, the person typically means

they want something they currently do not have.

The long-run aggregate supply curve is determined by

the full-employment level of real output.

If C+I+G+X greater than Y

unplanned decrease in inventories businesses raise output Y returns

According to modern Keynesian analysis, the short-run aggregate supply curve is

upward sloping.

To avoid double counting, we look only at final goods and services produced or, equivalently, at

value added

1/P =

value of $1 measured in goods (real variable)

In the classical model, the aggregate supply curve is

vertical

The long-run aggregate supply curve, LRAS, is a ______ line determined by amounts of available resources such as labor and capital and by technology and resource productivity. The position of the LRAS gives the full-information and full-adjustment level of real GDP per year.

vertical

in the classical model, the supple of saving was determined by the rate of interest

the higher rate, the more people wanted to save and the less they wanted to consume

keynesian short run aggregate supply curve SRAS

the horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy

The equilibrating force in the credit market in the classical model is

the interest rate

According to the classical model, more saving leads to more investment because

the interest rate adjusts to keep investment equal to saving

keynes argued that

the interest rate is not most important factor in saving and consumption decisions, rather real saving and consumption decisions depend on a households real disposable income a persons anticipation about future flows of income influences how much of current income is allocated to consumption and how much is allocated to saving

Equilibrium

Actual Unemployment = Natural rate of unemployment

Recession gap

Actual Unemployment > Natural rate of unemployment

When the economy is at full employment, the unemployment rate is zero

False

According to Keynes, a decrease in aggregate demand will cause

unemployment to increase

Which of the following economist suggested the concept of the invisible hand in regards to self-interest?

Adam Smith

Public Enemy #1

"Inflation is..." according to President Gerald Ford

Classical View Of Economics:

"the economy is inheritably stable ; government intervention tends to destabilize the economy" Less govt intervention Time heals

Keynesian View Of Economics:

"the economy is inheritably unstable ; government intervention tends to stabilize the economy" More govt intervention Arguing for Job programs Nixon

The addition to GDP from the production and sale of one loaf of bread is

$0.95 Add all the stages together

The multiplier in a country is equal to 2.5, and households pay no taxes. At the current equilibrium real GDP of $15 trillion, total real consumption spending by households is $10 trillion. Real autonomous consumption in this country is ________.

$1 trillion

According to the expenditure approach, if depreciation is $125 million, GDP is _____________ and NDP is ___________.

$1,200 million $1,075 million

The cost of a nation's market basket in the base year is $1,420, and the current year's price index equals 120. What is the cost of the market basket in the current year?

$1,420*(120/100)= $1,704

In a simple economy (assume there are no taxes, thus Y is disposable income), the consumption function is: C = 400 + 0.75Y In this economy, the level of income at which the consumer breaks even (consumption equals income) is _________? Draw the graph.

$1,600

Starting from the value for disposable personal income (DPI), gross domestic product is calculated to be $____

$10,700

Assume that the multiplier in a country is equal to 5 and that autonomous real consumption spending is $2 TRILLION. If current real GDP is $15 trillion, the current value of real consumption spending is

$14 trillion

Suppose that in 2017, geologists discover large reserves of oil under the tundra in Alaska. These reserves have a market value estimated at $50 billion at current oil prices. Oil companies spend $1 billion to hire workers and move and position equipment to begin exploratory pumping during that same year. In the process of loading some of the oil onto tankers at a port, one company accidentally spills some of the oil into a bay and by the end of the year pays $1 billion to other companies to clean it up. The oil spill kills thousands of birds, seals, and other wildlife. The combined effect of these events on GDP for the year 2017 was

$2 billion

Refer to the figure at right. Suppose the economy is operating at paint A. There is a recessionary gap of ______, which can be closed by ________.

$2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending.

The following equations describe consumption, investment, government spending, taxes, and net exports in the country of Economika. C = 400 +0.8 (Y − T) I = 400 G = 450 T = 450 X = 50 In Economika, equilibrium GDP is equal to _______?

$4,700

Households receive a total income of %5million. Of this, $3.5 million are wages received for labor services, $1 million are rental payments, and $250,000 are interest payments received. What are the costs of production and profits equal to respectively?

$5 million; $250,000

The marginal propensity to consume in an economy is 0.6. Thus, if the price level is fixed, a $300 increase in investment would be expected to increase real GDP by _______.

$750

Suppose MPC = .31 and that the change in Government Spending is $8,675,309 and that there is a balanced budget. Assuming NO CROWDING OUT, what is the change in equilibrium income?

$8,675,309

The addition to gross domestic product is

$9,245

Nominal GDP

($ Shampoo in 2015 x Quantity of Shampoo in 2015) + ($ external hard drive in 2015 x Quantity of external hard drives in 2015) + ($ books in 2015 x Quantity of books in 2015) + ($ milk in 2015 x Quantity of milk in 2015) + ($ candy in 2015 x Quantity of candy in 2015)

In a simple economy (assume there are no taxes; thus, Y is disposable income), the consumption function is: C=200+0.80Y. The current level of real GDP is $4000. At this level of real GDP, consumption will be (1) ________, and savings will be (2) ________. If GDP were to increase by $1000, consumption would increase by (3) ________. At a real GDP level of $4000, the average propensity to consume is (4) ______, and the average propensity to save is (5) _________.

(1) $3,400 (2) $600 (3) $800 (4) 0.85 (5) 0.15

In an economy in which the multiplier has a value of 4, the price level has decreased from 115 to 110. As a consequence, there has been a movement along the aggregate demand curve from $14.0 trillion in real GDP to $15.6 trillion in real GDP. (1) This economy's MPS is (2) The amount of the change in autonomous expenditures generated by the decline in the price level was, in billions,

(1) .25 (2) $400

(1) The marginal propensity to save for this economy is (2) The present level of planned investment spending for the present period is (in trillions) (3) The equilibrium level of real GDP for the present period is (in trillions) (4) The equilibrium level of saving for the present period is (in trillions) (5) If planned investment spending for the present period increases by $50 billion, the resulting change in equilibrium real GDP will be (in trillions) (6) If other things, including the price level, remain unchanged, the new equilibrium level of real GDP will be (in trillions)

(1) 0.25 (2) $1.5 trillion (3) $10 trillion (4) $1.5 trillion (5) $0.2 trillion (6) $10.2 trillion

The MPC is 0.9. (1) The multiplier is _____ Suppose that investment changes by $-100. (2) The change in real GDP will be $______

(1) 10 (2) $-1,000

In a simple economy (assume there are no taxes, thus Y is disposable income), the consumption function is C = 250 + 0.75Y. Thus autonomous consumption is (1) ____ and the MPC is (2) _______. A consumer whose income increases by $100 will increase consumption by (3) _______. The saving function in this economy is (4) ______________.

(1) 250 (2) .75 (3) $75 (4) S = -250 + 0.25Y

If real GDP in Economika is currently $5,700, which of the following is true? (A) There will be an unplanned decrease in inventories, and real GDP will increase next period. (B) There will be an unplanned increase in inventories, and real GDP will decrease next period. (C) There will be an unplanned increase in inventories, and real GDP will increase next period. (D) There will be an unplanned decrease in inventories, and real GDP will decrease next period. (E) There will be no unplanned change in inventories, and real GDP will stay the same next period.

(B) There will be an unplanned increase in inventories, and real GDP will decrease next period.

If the interest rate increases, which of the following will occur? (A) The investment function will shift leftward. (B) The investment function will shift rightward. (C) The quantity of planned investment will decrease. (D) The quantity of planned investment will increase.

Inflation rate

(CPI new - CPI old)/CPI old

Change in income =

(Change in autonomous spending x Multiplier).

Crowding out

- Occurs when private spending falls in response to government spending - Individuals may just let federal spending substitute for their own spending. - If the government buys a good for you, you won't have to buy it yourself. Implication - Overall spending may not increase. - Government now has higher deficit and debt.

Now suppose that the economy is known to be at a level of GDP that is above full employment and that the price level is not fixed. If the short-run aggregate supply curve (SRAS) is positively sloped, which of the following is the most likely effect of the increase in investment? (A) Aggregate demand will not change, and real GDP will increase by less than $750. (B) Aggregate demand will increase, but real GDP will not change. (C) Aggregate demand will increase, and real GDP will increase by $750. (D) Aggregate demand will increase, and real GDP will increase by less than $750. (E) Aggregate demand will increase, and real GDP will increase by more than $750.

(D) Aggregate demand will increase, and real GDP will increase by less than $750.

At an initial point on the aggregate demand curve, the price level is 125, and real GDP is $10 trillion. When the price level falls to a value of 120, total autonomous expenditures increase by $250 billion. The marginal propensity to consume is 0.75. The level of real GDP at the new point on the aggregate demand curve is (A) $13.2 trillion (B) $1 trillion (C) $10.25 trillion (D) $11 trillion

(D) $11 trillion

Twin deficits anomaly

(G > T) = (M>X) G= govt. spending; M = imports T= taxes; X = exports

What is the TAX MULTIPLIER written entirely in terms of MPS ?

(MPS - 1) / MPS

RGDP=

(NGDP2 x 100/ PL) - (NGDP1 x 100/ PL) Nominal GDP Price Level

Velocity (V) =

(P * Y)/M Y - Real GDP (P*Y) - Nominal GDP M - Money Supply

Real GDP of 2019

(Price of books in 2015×Quantity of books in 2019)+(Price of milk in 2015×Quantity of milk in 2019)+(Price of candy in 2015×Quantity of candy in 2019) We can find the final value of the Real GDP by using the the appropriate price and quantity from the table.

A price index is computed as

(cost of market basket today÷cost of market basket in base year)×100.

Labor force participation (LF) =

(labor force/adult population) *100

reserve ratio (r) =

(reserves/deposits) * 100

Suppose that the Keynesian short-run aggregate supply curve is applicable for a nation's economy. Now suppose that a decrease occurs in nominal wages. a. Using the line drawing tool, show how this change affects the economy in the short run. Properly label your line. (Carefully follow the instructions above, and only draw the required objects.) b. Which of the following might also yield the outcome shown by your diagram? A. An increase in productivity. B. A decrease in raw materials prices. C. An increase in business taxes. D. All of the above. E. A and B only. c. In considering the forces which may increase an economy's real GDP in the long run, which of the following will NOT play a role? A. Discoveries of new raw materials. B. Increased education and training. C. Greater capital accumulation. D. An expanded workforce. E. Lower wages for labor.

(see figure in #17 above definition) E. A and B only. E. Lower wages for labor.

3. What is meant by natural rate of unemployment? Which types of unemployment are associated with it ?

(structural) + (frictional) = Un; natural rate of unemployment is the unemployment rate that would exist in a growing and healthy economy. In other words, the natural rate of unemployment includes only frictional and structural unemployment, and not cyclical unemployment.

u - rate =

(unemployed/labor force) * 100

Shift in the Aggregate demand curve.

*The supply of money. *Confidence *Real interest rates *Taxes-The value of the dollar.

Labor forces

- Aged in 16 to 25 years old - Not institutionalized - Actively seeking unemployment if not working

How is an increase in spending or a decrease in taxes paid for?

- Borrowing! • Example - Government increases [G] by $500 billion to counteract recession. - However, during a recession, income is down and unemployment is up. This will decrease tax revenues as well. - Deficit and debt rise by more than $500 billion. - Expansionary fiscal policy leads to increases in deficit and debt during recessions.

Shifter of AD

- Consumption, Investment, Government, Net export, Money supply, Velocity (+) - Taxes (-)

2 typs of fiscal:

- Expansionary: increase govt spending, and decrease Texas - Contractionary: decrease government spending and increase taxes

• Contractionary fiscal policy

- Government decreases spending or increases taxes to attempt to slow economy. Why? - Pay off government debt - Keep economy from expanding beyond long-run capabilities

Expansionary fiscal policy

- Government increases spending or decreases taxes to stimulate or expand economy. example: • Economic Stimulus Act, 2008 - Tax rebate for Americans - Typical four-person family received $1,800, total of $168 billion - Goal: hope that this money is spent, stimulating the economy American Recovery and Reinvestment Act, 2009 - Focused on government spending - $787 billion stimulus - While seemingly different, both stimulus packages had the goal of increasing aggregate demand.

Classical economic

- High levels of output - Long run - VARY prices - Ineffective of Fiscal Policy

"In the long run, we will all be dead"

- J.M Keynes (father of macro)

Keynesian economic

- Low levels of output - Short run - FIXED prices - The most effective in Fiscal Policy

Changes in government spending

- Military spending - Education spending - Budgets for government agencies

Invisible hand

Adam Smith's metaphor of what drives individual market participants in a free market economy

Two reasons to decrease aggregate demand by decreasing [G] or increasing taxes:

- Pay off debt that was accrued due to expansionary fiscal policy during bad times - Slow down economy that is "overheated" from too much spending • Not sustainable in the long run • Try to reduce upward pressure is put on price level • Still interested in "smoothing" out cycles

Fiscal policy

- The use of government spending and taxes to influence the economy - Taxes and spending changes must be legislated and approved by Congress and the president. - Can be used in conjunction with (or instead of) monetary policy to steer economy

total unemployment in an economy is composed of:

- structural - frictional - cyclical

unemployment that is not associated with economic fluctuations is

- structural unemployment - frictional unemployment

Suppose MPC = .75 and the change in Taxes is $250. In the Keynesian model, what is the expected change in equilibrium income ?

-250

Given the existence of time lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time lags?

-Governments may undershoot the necessary change to government spending or taxes to reach full employment real GDP because they are uncertain what other factors may impact the economy. -Governments may overshoot the full employment real GDP as the economy has improved by the time the policy takes effect. -Subsequent changes in the economy have caused the government to change its fiscal policy making it less consistent and the government less trustworthy.

In the modern Keynesian model the short run aggregate curve slopes upward. This model explains the reason behind the upward sloping SRAS curve by One can explain the shape of the upward sloping short run aggregate supply curve by only focusing on the capital input by.. One can explain the shape of the upward sloping short run aggregate supply curve by only focusing on profit by holding the nominal wage constant and therefore increasing the profit margin as the product price rises.

-Increasing worker effort, -Increasing the amount of time present workers work ( either hours or days) -Switching workers from "uncounted production" to counted production. Uncounted production pertains to work carried out that does not directly produce output for the market. ---------------------------------- -Using capital more intensively ( more hours per day). -By having the machines operate at a faster rate. -by delaying maintenance.

Tax Multiplier

-MPC/(1-MPC) or -MPC/MPS

tax multiplier formula

-MPC/MPS

The AD curve is downward-sloping.

-The real-balances effect - P goes up. Decline in consumer spending. -The interest rate effect- As prices go up then we barrow more money to purchase. banks raise interest rates. reduces investment spending. -the open economy effect. if prices go up goods produced in other countries become cheaper. total demand for us goods and services will go down.

Suppose that the current price level is Upper P 3P3. In this case, the price will riserise toward Upper P 1P1because

-actual real GDP would be less than total planned real expenditures. -inventories of unsold goods would begin to be depleted. -firms would stand ready to offer fewer services than people wish to purchase. All of the above.

The Laffer curve indicates

-an inverse relationship between tax rates and tax revenues -a positive relationship between tax rates and tax revenues

Fiscal policy is likely to be more effective

-during abnormal times as opposed to more normal times. -when government borrowing does not increase interest rates substantially. -when there are less offsetting reductions in private sector spending.

Given the existence of time lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time lags?

-governments may undershoot the necessary change to gov spending or taxes to reach full GDP because they are uncertain what other factors may impact the economy. -governments ma overshoot the full employment real GDP as the economy has improved by the time the policy takes effect. -subsequent changes in the economy have caused the government to change its fiscal policy making it less consistent and the government less trustworthy.

According to the interest rate effect, an increase in the price level

-reduces borrowing and spending. -increases nominal interest rates. -reduces the aggregate quantity of goods and services demanded. All of the above

In an economy in which the multiplier has the value of 4, the price level has decreased from 115 to 110. As a consequence, there has been a movement along the aggregate demand curve from $30 trillion in real GDP to $36 trillion in real GDP. What is the marginal propensity to save?

.25

MPC is between

0 and 1

MPC + MPS

The balanced budget multiplier is equal to

Demand-pull inflation arises due to

An increase in household income

What is the formula for the Government Spending Multiplier expressed entirely in terms of MPS ?

1 / MPS

1 trillion.

1) Which of the following statements is correct? A. Governments have a difficult time fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable. B. Governments have a difficult time fine-tuning the economy by using fiscal policy because of the automatic stabilizers. C. Governments have the knowledge about how to fine-tune the economy, but the effect time lag generates a backlash from voters that makes it difficult to implement. D. Governments have learned how to use fiscal policy to fine-tune the economy. 2) Given the existence of time lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time lags? A. Governments may overshoot the full employment real GDP as the economy has improved by the time the policy takes effect. B. Governments may undershoot the necessary change to government spending or taxes to reach full employment real GDP because they are uncertain what other factors may impact the economy. C. Subsequent changes in the economy have caused the government to change its fiscal policy making it less consistent and the government less trustworthy. D. Each of these scenarios are potential outcomes because of the existence of time lags.

1) A. Governments have a difficult time fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable. 2) D. Each of these scenarios are potential outcomes because of the existence of time lags.

Which of the following is not an automatic stabilizer? A. Progressive tax rates. B. Defense spending. C. Unemployment compensation. D. All of the above are automatic stabilizers. A progressive tax system is one in which the tax rates A. increase as income increases. B. decrease as income increases. C. are dependent on the progress of the economy; for example if real GDP grows by 3% then tax rates grow by 3%. D. remain constant as income increases.

1) B. Defense spending. 2) A. increase as income increases.

Currently the government has a balanced budget. It decides to follow an expansionary fiscal policy of reducing taxes by $100 billion. Which of the following statements bests describes the Ricardian Equivalence Theorem under these conditions? A. Congress decreases government spending by an equivalent amount. B. Consumption rises and causes the aggregate supply to increase by the full effect of the multiplier. C. Households save more than anticipated. D. People figure that future generations will bear the burden of the tax increase and they themselves are not affected by the tax change. The Ricardian Equivalence Theorem implies that expansionary fiscal policy that creates a budget deficit will result in A. a long run increase in aggregate demand, but no immediate effect. B. no changes in aggregate demand. C. increases in increasing aggregate demand in both the short and long run. D. a short run increase in aggregate demand, but no change in the long run.

1) C. Households save more than anticipated. 2) B. no changes in aggregate demand.

1) The Congressional meetings, discussions, arguments, debates over fiscal policy and the subsequent signing or vetoing by the President of a bill are part of the A. recognition time lag. B. political time lag. C. effect time lag. D. action time lag. 2) Which of the following statements is true when considering time lags? A. The effect time lag depends on the action of presidential economic advisors who will evaluate the effectiveness level of the fiscal policy. B. The shortest time lag is the action time lag since Congress has a set period to debate fiscal policy matters. C. Due to the fiscal policy variables (G and T) being flow variables, which are measured over a set period, time lags are confined to the same period, that is no longer than one year. D. Time lags in fiscal policy can be extremely long and may take several years before any impact is felt.

1) D. action time lag. 2) D. Time lags in fiscal policy can be extremely long and may take several years before any impact is felt.

The Laffer curve indicates A. an inverse relationship between tax rates and tax revenues. B. a positive relationship between tax rates and tax revenues. C. by how much the aggregate demand curve shifts when tax rates are changed. D. both options A and B. According to the supply side economists a(n) increase in marginal tax rates will A. increase the opportunity cost of leisure. B. increase aggregate demand . C. either increase or decrease the amount of leisure time chosen by workers. D. increase disposable income.

1) D. both options A and B. C. either increase or decrease the amount of leisure time chosen by workers.

The balanced budget multiplier is equal to

The balanced budget multiplier is equal to ___.

An economy's consumption function is depicted in the table below. a. When disposable income is equal to $250 billion total expenditures (including investment) equal A. $250 billion. B. $300 billion. C. $20 billion. D. $320 billion. b. Therefore, in this model when investment is included, when the disposable income is $250 billion, saving must be equal to A. $20 billion. B. $negative 70 billion. C. negative 0.20. D. $negative 50 billion.

1. $320 billion. 2. $negative 50 billion. Now that investment has been added as an expenditure, total expenditures are C + I. These must be equivalent to income.

1. Assume that the MPS in an economy is equal to 0.30. The multiplier must be equal to 3.33. You have established that the multiplier is 3.33. Now assume that autonomous real consumption is $3 trillion. There is no other autonomous spending presently taking place in the economy. At what level is consumption equal to real GDP? $____________ trillion. (Round your answer to two decimal places) 2. You have established that the multiplier is 3.33 and that autonomous real consumption is $3 trillion. There is autonomous investment of $6 trillion and autonomous net exports of $8 trillion. At what level are expenditures equal to real GDP? $___________ trillion. (Round your answer to two decimal places)

1. $9.99 trillion First set C = Yd Note that autonomous consumption was $3 trillion. C = $3 trillion + MPC times Yd where C = Yd (substitute and solve for equilibrium income). 2. $56.61 trillion Use the multiplier in the following expression: multiplier x change in autonomous spending = Upper DeltaYd.

An economy's consumption function is depicted in the table below. 1. The economy's marginal propensity to save is ______. 2. The average propensity to consume when the disposable income is $600 billion is equal to _______.

1. 0.25 2. 0.92 It is the (DS/DYd) or simply (1-MPC). It is the (DC/DYd).

Consider the diagram to the right, which applies to a nation with no government spending, taxes, and net exports. Use the information in the diagram to answer the following questions. 1. The marginal propensity to save for this economy is _______. 2. The present level of planned investment spending for the present period is $____________ trillion. 3. The equilibrium level of real GDP for the present period is $______ trillion. 4. The equilibrium level of saving for the present period is $_____ trillion. 5. If planned investment spending for the present period increases by $25 billion, the resulting change in equilibrium real GDP will be $____ trillion. 6. If other things, including the price level, remain unchanged, the new equilibrium level of real GDP will be $_____ trillion.

1. 0.25 The slope of the consumption line gives the marginal propensity to consume and: MPC + MPS = 1. 2. 1.5 The level of planned investment spending is simply the vertical distance between the C line and the C+I line. 3. 10 4. 1.5 Please re-examine the relationship between planned investment and saving for an economy in equilibrium. Recall that equilibrium is given by the intersection of the C + I line and the 45-degree reference line. 5. 0.1 Note that Delta GDP = multiplier times Delta (investment spending), and the multiplier equals 1 divided by MPS. Also, remember that $25 billion is $0.025 trillion 6. 10.1

4 reasons for negative AD slope

1. Real purchases effect 2. Interest rate effect 3. Net export effect 4. Equation of exchange

Consider movements from points Upper A to Upper D in the two figures to the right. Use the resulting changes in planned real consumption and saving corresponding to the change in real disposable income to calculate the marginal propensities to consume and to save. 1. The marginal propensity to consume is _____. (Enter your response rounded to one decimal place.) 2. The marginal propensity to save is _____.

1. 0.8 2. 0.2 The marginal propensity to consume in moving from point A to point D is MPC = Change in planned real consumption/Change in real disposable income = (84 - 12)/(90-0) = 0.8 The marginal propensity to save in moving from point A to point D is MPS = Change in planned real saving/Change in real disposable income = (6-12)/(90-0) = 0.2 .

Consider the current equilibrium real GDP level of $18.0 trillion displayed in the table above. What is the multiplier if the marginal propensity to consume is 0.9? If real government spending were to increase by $1.5 trillion, what would be the resulting change in real GDP? What would be the new equilibrium level of real GDP? Verify that at the new level of government spending, this new equilibrium real GDP equals C + I + G + X. 1. The multiplier associated with a marginal propensity to consume of 0.9 is ____. (Enter your response rounded to two decimal places.) 2.If real government spending were to increase by $1.5 trillion, real GDP would ______ by $____ trillion. (Enter your response rounded to one decimal place.) 3. Consequently, the new equilibrium level of real GDP would be $_____ trillion. (Enter your response rounded to one decimal place.) 4. At the new equilibrium level of real GDP, real investment and real net exports are ___________, real government spending is higher by $1.5 trillion, and real consumption spending is ________ by $_____ trillion. Thus, Upper C plus Upper I plus Upper G plus Upper X equals $_____ trillion. (Enter your responses rounded to one decimal place.)

1. 10 2. rise; $15.0 trillion 3. $33.0 trillion The new equilibrium level of real GDP would be $18 trillion + ($15.0) trillion = $33.0 trillion. 4. unchanged; higher; $13.5 trillion; $33.0 trillion At the new equilibrium level of real GDP, real investment is unchanged at $2.8 trillion, real net exports are unchanged at -$0.4 trillion, real government spending is higher at $4.7 trillion, and real consumption spending is higher at $25.9 (= 12.4 + 0.9 times 15.0) trillion. Thus, Upper C plus Upper I plus Upper G plus Upper X equals 25.9 plus 2.8 plus 4.7 minus 0.4 equals $ 33.0 trillion.

Take a look at the figure to the right. If current real GDP for this nation's economy is $16 trillion per year, what are the values of planned real investment and actual real investment? What is the amount of the unplanned inventory change, and why does this fact imply that real GDP must change? To what new level will real GDP adjust? 1. The value of planned real investment is $____ trillion. (Enter your response rounded to one decimal place.) 2. The value of actual real investment is $_____ trillion. (Enter your response rounded to one decimal place.) 3. The amount of unplanned inventory change is $_____ trillion. (Enter your response rounded to one decimal place and include a minus sign if necessary.)

1. 2.8 2. 3.0 3. 0.2

a. When disposable income is equal to $200 billion total planned expenditures equal A. $340 billion. B. $200 billion. C. $50 billion. D. $250 billion. b. Therefore, in this model when investment, government spending and net exports are included, and the disposable income is $200 billion, unplanned inventory is valued at A. $negative 50 billion. B. $negative 110 billion. C. negative 0.30. D. $50 billion.

1. A. $340 billion. 2. B. $negative 110 billion. This is the difference between GDP (disposable income plus taxes) and expenditures.

Market exchange rates are determined by supply and demand, just like any price. The demand for $US comes from:

1. Foreign firms and households wanting to buy U.S. goods and services 2. Foreign firms and households wanting to invest in U.S. physical or financial assets 3. Currency traders believing the value of the $US will rise

1. Real purchases effect 2. Interest rate effect 3. net Export effect 4. Equation of exchange

4 reasons for negative AD slope

In the table above, consider the changes in planned real consumption and saving associated with an increase in real GDP from $13.0 trillion to $17.0 trillion to calculate the marginal propensity to consume and the marginal propensity to save.

1. The marginal propensity to consume is the proportion of additional income that is consumed. The marginal propensity to consume associated with an increase in real GDP from $13.0 trillion to $17.0 trillion is MPC = Change in planned real consumption/change in real disposable income = 3.2/4.0 = 0.8 2. The marginal propensity to save is the proportion of additional income that is saved. MPS = Change in planned real saving/change in real disposable income = 0.8/4.0 = 0.2

1. Complete the following table which depicts a hypothetical economy in which the marginal propensity to consume is constant at all levels of real GDP and investment spending is autonomous. Equilibrium real GDP is equal to $8,000. There is no government. 2. This economy's marginal propensity to consume is _____ and its marginal propensity to save is _____. 3. At equilibrium real GDP, this economy's average propensity to save is _____. (round to the nearest hundredth). 4. If autonomous consumption were to rise by $100, the new equilibrium real GDP would be $________.

1. see table 2. 0.75; 0.35 3. 0.19 The average propensity to save is the ratio of saving to real GDP. Be sure to round your answer to two places. 4. $8,400 The real GDP will change by a multiple of the change in autonomous consumption.

1. Complete the following table which depicts a hypothetical economy in which the marginal propensity to save is constant at all levels of real GDP, investment spending is autonomous, and there is no government. Note: Enter whole numbers and use the minus sign where needed. 2. This economy's marginal propensity to save is... 3. and its marginal propensity to consume is... 4. The equilibrium level of real GDP is $... 5. In this economy the numerical value of the multiplier is...

1. see table. 2. 0.25 Recall that the marginal propensity to save is the ratio of the change in real saving to the change in real disposable income: Change in real saving/change in real disposable income. 3. 0.75 Recall that the marginal propensity to consume is the ratio of the change in real consumption to the change in real disposable income: change in real consumption/change in real disposable income. 4. $8,000 5. 4 The multiplier is the number by which a permanent change in autonomous real investment or autonomous real consumption is multiplied to get the change in the equilibrium level of real GDP. It is found from: Multiplier = (1/1-MPC) = 1/MPS

What was the amount of change in the autonomous expenditures generated by the decline in the price level?

1.50 trillion

Gov't Spending multiplier = 1/MPS Government spending = Real GDP/Gov't spending Multiplier.

1/0.20 = 5 1/5 = 0.20 trillion

Investment/Government Spending Multiplier

1/MPS

Money multiplier (MM) =

1/R

If the MPC = 0.9, the multiplier equals

Assume that the MPS in an economy is equal to 0.20. The multiplier must be equal to5.00. You have established that the multiplier is 5.00. Now assume that autonomous real consumption is $22 trillion. There is no other autonomous spending presently taking place in the economy. At what level is consumption equal to real GDP

10 trillion

The real rate of interest equals 8%, and the expected rate of inflation equals 2%. The nominal rate of interest is 8%. 2%. 10%. 6%.

10%

If the MPC equals 0.9, the multiplier equals...

10.

If the MPC = 0.9, the multiplier equals

10.

suppose that a CPI in a country was 190 in 1998 and 210 in 1999. The inflation rate between those two years was:

10.53%

To correct nominal GDP for price changes, we first select a base year for our price index and assign it the number _____. Then we construct an index based on how a weighted average of prices has changed relative to that base year. For example, if in the next year a weighted average of the prices indicates that prices have increased by 10 percent, we would assign it the number _____. We then divide each year's price index, so constructed, into its respective nominal GDP figure (and multiply by 100).

100 110

Suppose MPC = .75 and the change in Government Spending is $250. In the Keynesian model, what is the expected change in income?

1000

This year is the base year for computing the nation's price index. The current nominal interest rate is 3.8 percent, and real interest rate is 1.9 percent. What is the anticipated value of next year's price index? The anticipated value of next year's price index is ______. (Enter your response rounded to one decimal place.)

101.9 The anticipated inflation rate equals the nominal interest rate minus the real interest rate, or 3.8 percent - 1.9 percent = 1.9 percent. Because this year is the base year for the price index, this year's price index has a value of 100. Thus, the anticipated value of next year's price index is 101.9. (100 + 1.9 = 101.9)

Jim's favorite breakfast is two eggs, 1/5 lb. of bacon, 1/7 lb. of white toast, 1/6 can (16 ounce can) of frozen concentrate orange juice, and 1 lb. of grapefruit. The following table contains 1991 and 2001 prices for these five items. Using 1991 as the base year, compute the price index for Jim's breakfast for 2001.

107.5 Use weights for each item since they are fractions of what Jim eats.

Refer to the above table. You are given information on Jasmin's consumption for 2005 and 2015. Using 2005 as the base year compute the price index for 2015. The index equals 0.75. 87.50. 73.007. 136.842.

136.842

Between 2017 and 2018 in a particular nation, the value of the consumer price index —for which the base year is 2014 —rose by 6.3 percent, to a value of 140 in 2018. What was the value of the price index in 2017

140/1.063= 131.70

Now assume that autonomous real consumption spending is $1 trillion. There is no other autonomous spending presently taking place in the economy. The current real GDP is $20 trillion. What is the current amount of real consumption in the economy?

16 C= autonomous consumption+ (MPC X Y) MPC= 1-MPS Y= real GDP

Requirements to be in the labor force (of unemployment (?)):

16-65 Civilian (not military) Non institutional (not imprisoned) **Actively seeking employment if not working**

suppose an economy consists of 300,000 individuals 16 years and older 160,000 are employed and 18000 are unemployed but actively seeking work. in this example the labor force is

160,000

Suppose that an economy is in equilibrium at a real GDP of $15 trillion at a price level of 100. An increase in autonomous expenditures of $0.20 trillion takes place. The current multiplier is 10. If the short-run aggregate supply curve is horizontal, the new equilibrium value of real GDP will be

17 trillion

Considering the data from the table shown above, assuming that the market basket cost of light bulbs and volleyballs in the base year was $4500, what would be the price index for the year 2015? 156.30 92.70 177.78 100.00

177.78

The Keynesian Model was supported empirically by data from the decade of the

1930

The Keynesian model was supported empirically by data from the decade of the

1930's. depicted as the era of the great depression. This is when Keynes developed his model in hopes of proving macroeconomic tools for governments to correct the economy.

The Keynesian Model was supported empirically by data from the decade of the

1930s

Suppose that an economy is in equilibrium at a real GDP of $15 trillion at a price level of 100. The short-run aggregate supply curve is upward-sloping and there is an increase in autonomous expenditures of $0.20 trillion. This increase in expenditures enabled the real GDP to increase to $15.50 trillion. The change in the price level has changed the multiplier to

2.5

If the MPC = 0.8, a permanent increase in planned real investment of $40 billion will increase real GDP by a total of

200 billion

What happened to the gains made in the early 2000s?

25% or more unemployment during the depression. Down to 2.8% during the Korean war. high as 10.8% in the 1981-82 recession. Late 1990s and early 2000 we were at the low end of unemployment. Slow growth in 2000-2001 and the terrorist attacks led to a higher rate but went down again until late 2008 when the credit crisis wiped out any gains that were made.

Given that the MPS in an economy is equal to .25, the multiplier is equal to

The economy is depicted by the expenditures function as shown. Suppose that the government decided to decrease government spending by $2 trillion. Draw the new expenditure line after the decrease. Label the new EQ level of real GDP what is the autonomies spending multiplier ____?

Calculate the multiplier for the following cases. MPS=.25 MPC= 5/6 MPS=0.125 MPC= 6/7 C=$200 + 0.9y

4 6 8 7 10

Find the multiplier for the following cases: MPS = 0.25 MPC = 5/6 MPS = 0.125 MPC = 6/7 C = $200 + 0.9Y

4 6 8 7 10

What would create demand-pull inflation?

An increase in household income

Equilibrium real GDP can be found by locating the intersection of the total planned real expenditures curve with the _________ reference line. At that level of real GDP per year, planned real consumption plus planned real investment plus real government expenditure plus real net exports will equal real GDP.

45 degree

Equilibrium real GDP can be found by locating the intersection of the total planned real expenditures curve with the _____________ reference line. At that level of real GDP per year, planned real consumption plus planned real investment plus real government expenditure plus real net exports will equal real GDP.

45-degree

Equilibrium real GDP can be found by locating the intersection of the total planned real expenditures curve with the ________________ reference line. At that level of real GDP per year, planned real consumption plus planned real investment plus real government expenditure plus real net exports will equal real GDP.

45-degree

Currently, economists estimate that the natural rate of unemployment in the United States is about 5 percent. 2 percent. 10 percent. 0 percent.

5 percent.

suppose that a price index in a country was 200 in 1998 and 210 in 1999. The inflation rate between those two years was:

In the country of Economica, the total labor force consists of 5,000 workers. 250 of these workers are unemployed, and thus the current unemployment rate is 5.0%. This year, 100 workers will lose their jobs, 85 workers will return to the labor force after an absence, 50 workers will voluntarily leave their jobs, and 250 new workers will enter the labor force. At the same time, 363 workers will find jobs, and 150 workers will retire or leave the labor force for other reasons. Thus, at the end of the year, the labor force will consist of _______ workers, and the unemployment rate will be ____%. (Round your responses to one decimal place.)

5,185 workers and the unemployment rate will be 7.2% To find the new labor force, begin with the existing labor force, add the workers that reenter the labor market, add the new workers that enter the labor market, and subtract the workers that retire. The unemployment rate is the number of workers unemployed at the end of the year divided by the new labor force multiplied by 100. To find the number of workers unemployed at the end of the year, begin with the existing unemployed workers, add the workers who lose their jobs this year, add the new workers entering the labor market, add the workers who reenter the labor market, add the workers who voluntarily leave there jobs, and subtract the workers who will find jobs.

The total 2005 US employment status of the non-institutional adult population is depicted in the figure on the right. It is measured in millions of workers and as a percentage. According to the labor data in the pie chart, the unemployment rate, the labor force, and the labor force participation rate are:

5.08%, 149.32, 66.05% The unemployment rate (5.08%) is found by dividing the number of unemployed workers (7.59 million) by the total labor force (149.32 million). The total labor force (149.32 million) is the sum of the employed (141.73 million) and unemployed (7.59 million) persons. The labor force participation rate is found by dividing the total labor force (149.32 million) by the civilian non-institutional adult population (226.08 million).

Australia's current unemployment rate

5.6%

suppose an economy consists of 300,000 individuals 16 years and older 160,000 are employed and 18,000 are unemployed but actively seeking work. in this example the labor force participation rate is close to

59%

if the number of people employed is 150,000 and the labor force is 160,000 the unemployment rate is

6.25%

if the number of people classified as unemployed is 50,000 and the number of people classified as employed is 620,000 what is the unemployment rate

7.5%

You have established that the multiplier is 5.00 and that autonomous real consumption is $22 trillion. There is autonomous investment of $66 trillion and autonomous net exports of $1111 trillion. At what level are expenditures equal to real GDP?

95 trillion

Discouraged worker:

: someone not actively seeking employment

multiplier formula

= 1/ 1-MPC = 1/ MPS

Real Consumption

= Autonomous consumption + Marginal Propensity to Consume (MPC) + Disposable Income (Yd)

Real GDP of 2015

= Nominal GDP of 2015, since 2015 is the base year

From the list below, match the letter of the outcome each of the following events produces upon the LRAS curve. A - Shifts to right B - Shifts to left C - Movement up along D - Movement down along (Enter a letter A, B, C, or D.) Last year, businesses invested in new capital equipment, so this year the nation's capital stock is higher than it was last year.__ There has been an 8 percent increase in the quantity of money in circulation that has shifted the AD curve.__ A hurricane of unprecedented strength has damaged oil rigs, factories, and ports all along the nation's coast.__ Inflation has occurred during the past year as a result of rightward shifts of the AD curve.__

A - Shifts to right C - Movement up along B - Shifts to left C - Movement up along

Which of the following is an appropriate fiscal policy if equilibrium real GDP falls (RECESSION) below potential real GDP? A. an increase in government purchases (G) B. an increase in the supply of money C. an increase in individual income taxes D. a decrease in transfer payments

A - an increase in government purchases (G) B AND C ARE BOTH monetary policy

Money illusion

A Keynesian notion in which workers are fooled by rising nominal wages while real wages actually fall

Consider the following diagram in which the current short-run equilibrium is at point A. At point A, the economy has __________ If the marginal propensity to save equals 0.10, calculate the change in government spending that could eliminate the gap. $___ trillion.

A recessionary gap 0.10

Direct Expenditure Offsets

Actions on the part of the private sector in spending income that offset government fiscal policy actions. Any increase in government spending in an area that competes with the private sector will have some direct expenditure offset.

Which of the following might also yield the outcome shown by the diagram? I considering the forces which may increase an economy's real GDP in the long run, which of the following will not play a role?

A and B Lower wages for labor.

fiscal policy

A change in government spending and or a change in taxes

Fiscal policy

A change in government spending or change in taxes

Crowding out

A condition in which an increase in government spending forces out some private investment from the economy

Which of the following is most likely to gain from unanticipated inflation

A consumer with a five year auto loan.

REMEMBER:

A country that has interactions in trade or finance with other countries is known as an open economy, as opposed to a closed economy, which has no interactions in trade or finance with other countries.

Aggregate demand curve

A curve showing planned purchase rates for all final goods and services in the economy at various price levels, all other things held constant.

Aggregate Demand Curve

A curve showing planned purchase rates for all final goods and servies in the economy at various price levels, all other things held constant.

You are a member of Congress. The economy is currently experiencing an inflationaryan inflationary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?

A decrease in government spending and an increase in taxes.

You are a member of congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that congress can enact in an attempt to correct the economy? What will happen in a recessionary gap?

A decrease in government spending and an increase in taxes. An increase in government spending and a decrease in taxes.

When real GDP falls, which of the following will automatically occur?

A decrease in income tax revenues.

Suppose that the economy is presently operating at full employment. If there is a decrease in national income, which of the following will occur automatically?

A decrease in tax revenues.

What won't cause the planned investment function to shift rightward?

A decrease in the interest rate

An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to

A decrease in the price level and an increase in output

In the classical model, a decrease in aggregate demand will result in

A decrease in the price level and no change in output.

Suppose that the rental rate of machinery increased temporarily. The result of this would be best described by what if it decrease?

A decrease in the short run aggregate supply curve. An increase.

Cost-push inflation arises due to

A decrease in the short-run aggregate supply curve

Demand pull inflation arises due to

A depreciation of the US $ this causes the AD curve to increase and create a demand pull inflation.

Say's law

A dictum of economist J.B. Say that supply creates its own demand. Producing goods and services generates the means and willingness to purchase other goods and services.

The aggregate demand curve would shift to the right as a result of

A drop in the foreign exchange value of the dollar.

Inflation

A general and progressive increase in prices

Malthusian Nightmare

A gloomy prophetic notion that population growth will outpace food production

automatic fiscal stabilizer

A government agency arranges to make loans to businesses whenever an economic downturn begins. This is an example of an ____

Suppose that there is an increase in oil prices.

A leftward shift of the SRAS and a cost push inflation.

What is the natural rate of unemployment theory?

A long term rate of unemployment based on structural forces in the labor and product markets. People felt that this was a better way to look at unemployment than the traditional inflation based view.

Year to year rightward shifts in long-run aggregate supply leads to

A long-run trend path for real GDP

Prisoner's Dilemma

A metaphor in game theory which demonstrates conflicts between group goals and individual goals

The gov't wants to increase its spending by $1 billion to stimulate the economy and is counting on the gov't spending multiplier to help.

A new cruise missile for the military

Secular deflation

A persistent decline in prices resulting from economic growth in the presence of stable aggregate demand.

EX: income= 54000 C= 49,200 S=4800

APC= 49200/54000

Inflation gap

Actual Unemployment < Natural rate of unemployment

Consider the following diagram in which the current short-run equilibrium is at point A. At point A, the economy has __________. If the marginal propensity to save equals 0.10, calculate the change in government spending that could eliminate the gap. $___ trillion.

A recessionary gap 0.10

Suppose that the economy is shown to the right. This economy is currently experiencing

A recessionary gap Since the short-run EQ is to the left of the LRAS curve.

Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short run?

A recessionary gap is created.

Suppose the economy is in long-run equilibrium. Given that the US dollar appreciates, the new short run position of the economy finds itself in is termed

A recessionary gap.

The current situation would be described as a ______________. If the government wished to use discretionary fiscal policy to remedy this problem, it would need to ______ government spending. Show how the increase in government spending could be used to return the economy to full employment.

A recessionary gap. Increase.

automatic fiscal stabilizer

A recession occurs, and government-funded unemployment compensation is paid to laid-off workers. This is an example of an ____

Phantom Freight

A shipping term describing a cost borne by the buyer

Deflation

A situation in which prices are declining

Examples of nondurable consumer goods include all of the following EXCEPT

A stereo system (A cup of coffee. A ticket to the movies. A pizza delivered to your home.)

Suppose that congress and the president decide that economic performance is weakening and that the government should" do something" about the situation. They make no tax changes but do enact new laws increasing government spending on variety of programs. Prior to the congressional and presidential actions, careful studies by government economists indicated that the direct effect of a rise in government expenditures on equilibrium real GPD Is equal to 6. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. This could have happened because of all the following except.

A supply-side effect.

cost-push inflation

A sustained rise in the price level caused by a LEFTward shift of the aggregate SUPPLY curve

Demand- pull inflation

A sustained rise in the price level caused by a RIGHTward shift of the aggregate DEMAND curve

Bracket Creep

A tax problem of the late 1970s

Which of the following will cause an outward (rightward) shift in supply?

A technological improvement

What will not shift the SRAS and LRAS

A temporary change in input prices

All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for

A temporary change in input prices.

Long-run aggregate supply curve

A vertical line representing the real output of goods and services after full adjustment has occurred. It can also be viewed as representing the real GDP of the economy under conditions of full employment-the full-employment level of real GDP.

Hyperinflation

A very rapid rise in the price level; an extremely high rate of inflation.

Based on the following information, what is the balance on the current account? Exports of goods and services = $5 billion Imports of goods and services= $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in the United States = $4 billion Increase in U.S. holdings of assets in foreign countries = -$1 billion A) -$2 billion B) $1 billion C) $3 billion D) $4 billion

A) -$2 billion

How does an increase in a country's exchange rate affect its balance of trade? A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade. B) An increase in the exchange rate reduces imports, raises exports, and reduces the balance of trade. C) An increase in the exchange rate reduces imports, raises exports, and increases the balance of trade. D) An increase in the exchange rate raises imports, reduces exports, and increases the

A) An increase in the exchange rate raises imports, reduces exports, and reduces the balance of trade.

If the tax multiplier is -1.5 and a $200 billion tax increase is implemented, what is the change in GDP, holding everything else constant? (Assume the price level stays constant.) A) a $300 billion decrease in GDP B) a $300 billion increase in GDP C) a $30 billion increase in GDP D) a $133.33 billion decrease in GDP E) a $133.33 billion increase in GDP

A) a $300 billion decrease in GDP

A federal budget deficit ________ interest rates, which ________ exchange rates (foreign currency per domestic currency), and ________ the balance of trade. A) raises; raises; reduces B) reduces; raises; reduces C) raises; reduces; reduces D) reduces; reduces; raises

A) raises; raises; reduces

Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets. A) rise; appreciate B) rise; depreciate C) fall; depreciate D) fall; appreciate

A) rise; appreciate When the government cuts taxes, it will need to borrow in order to make purchases. In order to borrow, the government must increase the interest rate on US Treasury securities to attract foreign investors from whom we can borrow. The rising interest rate will increase the demand for the dollar which will appreciate the dollar in the foreign exchange market.

The balance of payments includes which three accounts? A) the current account, the financial account, and the capital account B) the capital flows account, the financial account, and the trade account C) the net investment account, the net exports account, and the net transfers account D) the balance of trade account, the net foreign investment account, and statistical discrepancy

A) the current account, the financial account, and the capital account

Which of the following statements best reflects the relationship between saving and savings? A. Saving is a flow variable; savings is a stock variable. B. Saving is the total amount not consumed whereas savings refers to the amount placed into a savings account. C. Saving and savings are both stock variables. D. Saving and savings are both flow variables.

A. Saving is a flow variable; savings is a stock variable.

When government spending and net exports are added into the Keynesian model A. the aggregate expenditures function shifts. B. there is only a movement along the aggregate expenditure curve. C. the slope of the aggregate expenditure function rises. D. the 45-degree curve shifts upward.

A. the aggregate expenditures function shifts.

Suppose that an economy is in equilibrium at a real GDP of $ 15 15 trillion at a price level of 100. An increase in autonomous expenditures of $ 0.30 0.30 trillion takes place. The current multiplier is 5 5. If the short-run aggregate supply curve is horizontal, the new equilibrium value of real GDP will be A. $ 16.50 16.50 trillion. This is the correct answer. B. $ 1.50 1.50 trillion. Your answer is not correct. C. $ 15.30 15.30 trillion. D. $ 0.30 0.30 billion.

A. $16.50 trillion.

Suppose that the economy is presently operating at full employment. If there is an increase in national income, which of the following will occur automatically? A. An increase in tax revenues. B. An increase in tax rates. C. Upper A decrease in tax rates. D. An increase in unemployment compensation spending.

A. An increase in tax revenues.

Suppose that Congress enacts a significant tax cut with the expectation that this action will stimulate aggregate demand and push up real GDP in the short run. In fact, however, neither real GDP nor the price level changes significantly as a result of the tax cut. This outcome can be explained by all of the following, except one. Which one of the following is the exception? A. Automatic stabilizers. B. Indirect crowding out. C. The Ricardian Equivalence Theorem. D. The Fed's contractionary monetary policy.

A. Automatic stabilizers.

Suppose that the position of a nation's long-run aggregate supply (LRAS) curve has not changed, but its long-run equilibrium price level has increased. FACTOR a. A rise in the value of the domestic currency relative to other world currencies b. An increase in the quantity of money in circulation c. An increase in the labor force participation rate d. A decrease in taxes e. A rise in real incomes of countries that are key trading partners of this nation f. Increased long-run economic growth Of the factors given above, which could account for the price level increase with constant LRAS? A. Factors b, d, and e. B. Factors a, c, and f. C. Factors b, c, d, and f. D. Factors c and f.

A. Factors b, d, and e.

Which one of the following is not a component of total expenditures? A. Merchandise inventories. B. Investment expenditures. C. Consumption spending. D. Government purchases.

A. Merchandise inventories.

Directions: Click on the graph to the right and select Time Series to graph the U.S. chain-weighted Real Gross Domestic Product (RGDP) and its rate of growth. Select RGDP for the Y Axis 1 data, and RGDP percent change for the Y Axis 2 data to graph the data measured in the right-hand and the left-hand side of the vertical axes, respectively. According to the graph, A. RGDP was most volatile during the 1930s and 1940s. B. U.S. RGDP has drastically declined since 1990. C. RGDP was exceptionally stable during the period of 1930s and 1940s. D. the behavior of RGDP is exceptionally smooth and uniform during the entire 1929-2004 period.

A. RGDP was most volatile during the 1930s and 1940s.

The congressional meetings, discussions, arguments, debates over fiscal policy and the subsequent signing of vetoing by the president of a bill are part of the

Action time lag.

The classical economists believed that the leakage of saving would be matched by the injection of business investment. A. False B. True The lower the rate of interest, the ________ profitable it is to invest and the ________ the level of desired investment. A. less; higher B. more; lower C. more; higher D. less; lower

A. True C. more; higher

The long-run aggregate supply curve (LRAS) is equivalent to the full-employment level of real GDP. A. True B. False The shape of the long-run aggregate supply curve(LRAS) is A. horizontal. B. upward sloping. C. vertical. D. downward sloping.

A. True C. vertical.

The total of all planned real expenditures in the economy is A. aggregate demand. B. aggregate consumption. C. aggregate GDP. D. aggregate spending.

A. aggregate demand.

Tax cuts on business income increase AD by increasing A. business investment spending (I) B. consumption spending C. government spending D. wage rates

A. business investment spending (I)

Suppose that there is a temporary, but significant increase in oil prices in an economy with an upward-sloping SRAS curve. As a policy response to this short-lived but sudden increase in oil prices, a central bank A. cannot stabilize both the price level and the real GDP simultaneously. B. has no responsibility to stabilize the real GDP. C. can stabilize neither the price level nor the real GDP. D. can stabilize both the price level and the real GDP simultaneously.

A. cannot stabilize both the price level and the real GDP simultaneously.

An increase in government purchases will increase AD because A. government expenditures are a component of AD B. consumption expenditures are a component of AD C. the decline in the price level will increase demand D. the decline in the interest rate will increase demand

A. government expenditures are a component of AD

The U.S. government is in the midst of spending more than $1 billion on seven buildings containing more than 100,000 square feet of space to be used for study of infectious diseases. Prior to the government's decision to construct these buildings, a few universities had been planning to build essentially the same facilities using privately obtained funds. After construction on the government buildings began, however, the universities dropped their plans. The government's $1 billion expenditure will A. not push U.S. real GDP above the level it would have reached in the absence of the government's construction spree because this expenditure would have been undertaken by universities. B. push U.S. real GDP above the level it would have reached in the absence of the government's construction spree because there is a multiplier effect. C. push U.S. real GDP above the level it would have reached in the absence of the government's construction spree because the universities dropped their plans. D. not push U.S. real GDP above the level it would have reached in the absence of the government's construction spree because both the government and the universities would require borrowed funds.

A. not push U.S. real GDP above the level it would have reached in the absence of the government's construction spree because this expenditure would have been undertaken by universities.

If real GDP falls below total planned expenditures the economy will see A. production and employment increases. B. production decreases and employment increases. C. production increases and employment decreases. D. production and employment decreases.

A. production and employment increases. Since expenditures exceed production, production will have to increase. In order to increase production employment generally increases as well.

The U.S. aggregate demand curve would shift to the left if A. the Federal Reserve Board caused the real interest rate to increase. B. there was a tax decrease. C. the foreign exchange rate of the dollar decreased. D. the economic conditions in Europe improved

A. the Federal Reserve Board caused the real interest rate to increase.

The primary difference between the aggregate demand curve and an individual demand curve is that A. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service. B. a change in the price level will shift the aggregate demand curve but not an individual demand curve. C. a change in real balances will shift an individual demand curve but not the aggregate demand curve. D. the aggregate demand curve is vertical in the long run, while an individual demand curve is downward sloping.

A. the aggregate demand curve represents total planned expenditures on all goods and services while an individual demand curve represents a single good or service.

The economy of Finlandia is at full employment when A. there is some unemployment due to friction in the labor market, but there is no cyclical unemployment. B. there is some cyclical unemployment in the economy, but there is no frictional unemployment. C. there is zero unemployment in the economy. D. everyone looking who wants a job has one.

A. there is some unemployment due to friction in the labor market, but there is no cyclical unemployment.

Modern Keynesian analysis assumes that the short-run aggregate supply curve is A. upward sloping. B. horizontal. C. vertical. D. downward sloping.

A. upward sloping.

$1 = 4 pesos now its worth 6 pesos. Given that the US $ has appreciated, the aggregate demand in the united states should

AD shifts to the left Short-run supply shifts to the right.

investment function

AD= C+I+G+X

Complete the following table for the consumption function: C = $400 + 0.75Y Real GDP (Y) $ 10,000 $ 11,000 $ 12,000 $ 13,000 $ 14,000 $ 15,000

APC APS 0.79 0.21 0.786 0.214 0.783 0.217 0.781 0.219 0.779 0.221 0.777 0.223

Which of the following does NOT represent a Keynesian conjecture

APC is some number between zero and one.

some relationships

APC+APS= 1 MPC+MPS= 1

The total of all planned real expenditures in the economy is

Aggregate demand

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If there is decreased security about jobs and future income, which of the following is the best description of the outcome in the economy?

Aggregate demand decrease.

Suppose the economy is in long-run equilibrium. If the US dollar appreciates, what is the best description of the outcome?

Aggregate demand decreases

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. if the US dollar depreciates, which of the following is the best description of the outcome in the economy?

Aggregate demand decreases.

An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that there is an increase in the money supply, which of the following is the best explanation of the outcome.

Aggregate demand increases

An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that the US dollar depreciates , which of the following is the best explanation of the outcome?

Aggregate demand increases.

An economy is currently in long-run equilibrium. Suppose the US dollar depreciates, what is the best explanation of the outcome?

Aggregate demand increases.

Leftward movement along the short-run aggregate supply curve was caused when

Aggregate demand shifted to the left.

Atomic Erosion

Alan Greenspan's description of potential economic catastrophes averted following the stock market crash of October 19,1987

Total income can be viewed as the sum of

All of the above (Payments to factor services such as land, labor, capital, and entrepreneurial activity. The dollar value of output produced since total income and total production are equal. Wages, rents, interest, and profits.)

Which of the following transactions would NOT be included in GDP?

All of the above (The purchase of previously issued corporate bond. The purchase of a newly issued government bond. The purchase of 100 shares of newly issued Microsoft stock.)

When one uses the expenditure approach to calculate Gross Domestic Product (GDP), which of the following would be included?

All of the above (Inventory investment. Government spending at the state level. Household purchases of legal services.)

Given the existence of relative scarcity, resources can be rationed by

All of the above.

When an economist is using the term "discretionary" as in discretionary spending, they are referring to the

Amount of government spending decided upon by congress or the government's ruling body.

An appropriate fiscal policy for a severe recession is: A. a decrease in government spending. B. a decrease in tax rates. C. appreciation of the dollar. D. an increase in interest rates.

A recession occurs, and government-funded unemployment compensation is paid to laid off workers. This is an example of

An automatic fiscal stabilizer

What is the economic effect of price ceilings?

An effective price ceiling will lead to a shortage.

What is the best example of uncounted production?

An employee recalibrating a machine to maintain production within satisfactory tolerance Levels for machine parts

Which of the following is the best example of uncounted production?

An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

yellow dog contract

An illegal agreement in which as a condition of employment one agrees not to join a union

Which of the following would cause a decrease in the supply of fish?

An increase in the price of inputs to fish production.

The Multipliers Work in Both Directions

An increase in government purchases and a cut in taxes have a positive multiplier effect. A decrease in government purchases and an increase in taxes have a negative multiplier effect. Example: a reduction in government spending on defense initially affects defense contractors, but then it would spread to suppliers to and employees of those contractors, and then to other firms and workers.

You are a member of congress. The economy is currently experiencing a recessionary gap. which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?

An increase in government spending and decrease in taxes.

Suppose that the economy is in short-run equilibrium but there is a recessionary gap. Which of the following is an example of discretionary fiscal policy that could be used to return the economy to full-employment real GDP?

An increase in government spending.

automatic fiscal stabilizer

As the economy heats up, the resulting increase in equilibrium real GDP immediately results in higher income tax payments, which dampen consumption spending somewhat. This is an example of an _____

automatic fiscal stabilizer

As the economy starts to recover from a recession and more people go back to work, government funded unemployment compensation payments begin to decline. This is an example of an _____

Long-run equilibrium in the economy will occur

At the price level where total planned real expenditures equals real GDP at full employment

Automatic stabilizers A. are a component of discretionary fiscal policy. B. cause changes in the economy without the action of Congress and the President. C. include the progressive income tax but not unemployment compensation. D. require new legislation to be implemented.

What is meant by autonomous consumption ? ...the marginal propensity to consume ?

Autonomous consumption-- The part of consumption that is independent of (does not depend on) the level of disposable income. Changes in autonomous consumption shift the consumption function. Marginal propensity to consume--The ratio of the change in consumption to the change in disposable income. A marginal propensity to consume of 0.8 tells us that an additional $100 in take-home pay will lead to an additional $80 consume MPC = d(change in real consumption) / d(Change in real disposable income).

The aggregate demand curve will shift to the right ________ the initial increase in government purchases. A. by less than B. by more than C. by the same amount as D. sometimes by more than and other times by less than

B - by more than (B/C multiplier effect)

Automatic stabilizers refer to: a. the money supply and interest rates that automatically increase or decrease along with the business cycle b. government spending and taxes that automatically increase or decrease along with the business cycle c. changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives d. changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives

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

If there is currently a surplus of dollars, which of the following would you expect to see in the foreign exchange market? A) The dollar will appreciate. B) The dollar will depreciate. C) There will be a decrease in the demand for dollars. D) There will be a decrease in the supply of dollars.

B) The dollar will depreciate.

An economy that does not have interactions in trade or finance with other economies is referred to as A) an open economy. B) a closed economy. C) a trade-balanced economy. D) a net foreign investment economy.

B) a closed economy.

The tax multiplier is smaller in absolute value than the government purchases multiplier because some portion of the A) decrease in taxes will be saved by households and not spent, and some portion will be spent on imported goods. B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods. C) increase in government purchases will be saved by households and not spent, and some portion will be spent on imported goods. D) increase in government purchases will be saved by households and not spent, and some portion will be spent on consumer durable goods.

B) decrease in taxes will be saved by households and not spent, and some portion will be spent on consumer durable goods.

To combat a recession with discretionary fiscal policy, Congress and the president should: A) decrease government spending to balance the budget. B) decrease taxes to increase consumer disposable income. C) lower interest rates and increase investment by increasing the money supply. D) raise taxes on interest and dividends, but not on personal income.

B) decrease taxes to increase consumer disposable income.

Which of the following statements is true concerning the foreign sector in the simple Keynesian model? A. Exports are not included as expenditures since they are goods that the home nation ships overseas. B. Net exports are autonomous. C. Imports are not used in the model since they represent the spending on foreign goods by the home country's citizens and firms. D. Exports and imports depend on foreign and domestic incomes.

B. Net exports are autonomous. It is assumed in the simple Keynesian model that net exports are independent of income, from both the domestic home country and the foreign country.

With respect to real GDP, planned investment is autonomous and is therefore represented graphically as A. a downward-sloping line. B. a horizontal line. C. an upward-sloping line. D. a vertical line.

B. a horizontal line.

The multiplier is weakened in inflationary gaps because of A. incomes rising faster than the price level. B. rapid price level increases. C. economies of scale. D. increasing returns.

B. rapid price level increases.

For any given level of real income, the proportion of total real disposable income that is consumed is called A. the marginal propensity to consume. B. the average propensity to consume. C. autonomous consumption. D. dissaving.

B. the average propensity to consume.

If the MPC = 0.8, a permanent increase in planned real investment of $40 billion will increase real GDP by a total of A. $160 billion. B. $200 billion. C. $40 billion. D. $80 billion.

B. $200 billion.

Which of the following would cause a decrease in long-run aggregate supply? A. A decrease in the number of consumers in the market. B. A decrease in the labor force. C. A decrease in the price level. D. A decrease in wealth. E. All of the above would cause a decrease in long-run aggregate supply.

B. A decrease in the labor force.

Which government agency is in charge of keeping track of employment data?

Bureau of Labor Statistics

Calculate GDP

GDP = Consumption + Gross Private Domestic Investment + Gov. Spending + Exports - Imports

Whenever inflation rates are overestimated for the life of a loan, creditors lose and debtors gain. A. True B. False

B. False Whenever inflation rates are overestimated for the life of a loan, creditors gain and debtors lose.

Directions: Click on the graph to the right and select Multiple Plots. Then select RGDP (real chain weighted GDP) for Y1 and NGDP (nominal GDP) for Y2. Roll your cursor over each plotted line to identify the data. Note that the chain-weighted GDP is a measure of GDP that the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce calculates by continuously updating the weights of the various components of GDP to reflect changes in the relative prices and shares of the various components of GDP. According to the graph, A. RGDP has continually decreased. B. RGDP has increased and decreased. C. NGDP and RGDP have continually increased. D. NGDP both increased and decreased over time.

B. RGDP has increased and decreased.

Which of the following statements is true? A. For 80 years after the Civil War, the United States experienced deflation. B. Since World War II, the consumer price index has continued to rise. C. Since World War II, the periods of inflation have typically been followed by periods of deflation. D. For the last 150 years, the consumer price index has continued to rise

B. Since World War II, the consumer price index has continued to rise.

According to the classical model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except A. a decrease in unemployment. B. a decrease in wage rates. C. a rise in real GDP above its long-run level. D. an increase in input prices.

B. a decrease in wage rates.

Suppose that the economy is shown to the right. This economy is currently experiencing A. an inflationary gap. B. a recessionary gap. C. hyperinflation. D. crowding out.

B. a recessionary gap. draw and label the fiscal policy correction that will bring the economy to full employment. (Draw a AD1 line to intersect point B)

One of the main conclusions of Say's Law was that A. if people supply goods in order to then demand goods, there can be overproduction in a market economy and less than full employment will be the normal state of affairs. B. if people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs. C. if people demand goods in order to then supply goods, there can be overproduction in a market economy and less than full employment will be the normal state of affairs. D. if people demand goods in order to then supply goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

B. if people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

Consider an economy with only two groups of people: Wage earners and Goods sellers. If the price level increases by 20% while the nominal wages remains the same, A. income will be redistributed from goods sellers to wage earners. B. income will be redistributed from wage earners to goods sellers. C. real wages will not be affected as nominal wages remained the same. D. no income redistribution will occur as nominal wages are same as before.

B. income will be redistributed from wage earners to goods sellers. There are only two types of people in this economy, namely wage earners and goods sellers. When price level increases by 20% and nominal wages do not, inflation is unexpected and purchasing power is shifted from the wage earners to the goods sellers. Whenever inflation is higher than expected, purchasing power gets redistributed.

Consider the open economy displayed in the figure to the right. Firms in this nation do import raw materials and other productive inputs from abroad, and foreign residents purchase many of the nation's goods and services. a. Using the three point curved line drawing tool, determine the most likely short-run effect on this nation's economy if there is a significant raw materials price inflation in other nations around the world. Label this line 'Shock'. (Carefully follow the instructions above, and only draw the required objects.) b. According to your diagram, the short-run effect upon the economy is A. a lower price level and an economic recession. B. inflation and a lower real GDP. C. a higher price level and an economic expansion. D. deflation and a lower real GDP.

B. inflation and a lower real GDP.

Frictional unemployment

Brief periods of unemployment experienced by people who are moving jobs or into the labor market. People who switch jobs and have to be unemployed for a brief period of time. People who are looking for better work and sometimes end up making more money as a result of a longer unemployment people. Students who are looking for the first time after college graduation may experience a period of unemployment

During normal economic times, when there is not "excessive" unemployment or inflation, discretionary fiscal policy A. is a way of effectively spurring economic growth. B. is probably not very effective due to lags and the uncertainty created by repeated tax policy changes. C. is not used due to legal restrictions on the ability of Congress to make policy. D. is used frequently to effectively fine-tune the economy.

B. is probably not very effective due to lags and the uncertainty created by repeated tax policy changes.

The long-run aggregate supply curve A. shows the various amounts of real output businesses are willing to consume at each price level. B. is vertical because changes in the price level have no effect on real output. C. is vertical because a change in real GDP has no effect on the price level. D. is downward sloping because a higher price level causes businesses and consumers to reduce spending.

B. is vertical because changes in the price level have no effect on real output.

In order to understand the outcomes of a model it is necessary to know the assumptions of a model. In the Keynesian model, businesses A. have retained earnings. B. pay no indirect taxes. C. earn no profit. D. pay only sales tax.

B. pay no indirect taxes

Full employment means A. everyone has a job. B. there is a level of unemployment consistent with "normal" frictions in the labor market. C. there is "normal" frictional unemployment and a small amount of cyclical unemployment. D. everyone in the labor force has a job.

B. there is a level of unemployment consistent with "normal" frictions in the labor market.

The long-run aggregate supply curve shifts outward when A. there is increased demand of real goods and services. B. there is economic growth. C. the real-balance effect takes hold. D. there are changes in the power of government.

B. there is economic growth.

The long-run aggregate supply curve shifts outward when A. there are changes in the power of government. B. there is economic growth. C. there is increased demand of real goods and services. D. the real-balance effect takes hold.

B. there is economic growth.

Consider this statement: "Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the long-run aggregate supply curve." This statement is describing A. supply-side inflation. B. demand-side inflation. C. Both demand-side and supply-side inflation. D. None of the above.

B. demand-side inflation.

Appendix D: The Balanced-Budget Multiplier

Balanced-budget increase in real spending. --The government increases spending by $1 and pays for it by raising current taxes by $1. Balanced-budget multiplier is equal to 1.

What best characterizes demand-pull and cost-push inflation?

Both are short run types of inflation

Which of the following statements best characterizes demand-pull and cost-push inflation?

Both are short run types of inflation.

The economy is depicted in the graph to the right. Suppose, there is an increase in the supply of labor. which of the following best describes the result of this event?

Both the short-run and long-run aggregate supply curves shift outward.

Suppose, there are new discoveries of key raw materials. Which of the following best describes the result of this event?

Both the short-run and long-run aggregate supply curves shift outward.

An increase in the demand for American-made goods will: A) increase the supply of dollars on the foreign exchange market. B) decrease the supply of dollars on the foreign exchange market. C) increase the demand for dollars on the foreign exchange market. D) decrease the demand for dollars on the foreign exchange market. (Hint: This is referring to the first shift factor we studied. An example would be if Japan was experiencing an expansion and their income is rising. This would increase their demand for all goods, including American-made goods. Japanese people must first exchange their currency for US dollar in order to buy American-made goods.)

C) increase the demand for dollars on the foreign exchange market. The supply of dollars comes from when holders of US currency want to exchange the currency for another currency (as when for example there is an increase in the demand for Japanese goods and services and/or financial products or currency).

When the United States sends money to Indonesia to help tsunami survivors, in what account is this transaction recorded? A) the financial account B) the capital account C) the current account D) the foreign exchange account

C) the current account

The balance of trade is defined as A) the difference between the balance of the current account and the balance of the capital account. B) the difference between the value of the goods and services a country exports and the value of the goods and services a country imports. C) the difference between the value of the goods a country exports and the value of the goods a country imports. D) the difference between the balance of the current account and the balance of the financial account.

C) the difference between the value of the goods a country exports and the value of the goods a country imports.

C+I+G+NX Y - total income / total output / GDP C - Consumption I - investment G - government purchases NX - net exports=exports-inputs= X-M (eliminate NX for closed economy)

foreign sector

C+I+G+X net exports X equals exports minus imports depends on international economic conditions independent of real national income

Which of the following statements is true when considering an economy with an upward-sloping short-run aggregate supply curve? A. The multiplier has its full effect no matter what the economy is experiencing. B. The multiplier has more impact when the economy is experiencing an inflationary gap compared to a recessionary gap. C. The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap. D. The multiplier has an equal but muffled impact when there is either a recessionary or inflationary gap.

C. The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap.

All of the following will cause the planned investment function to shift rightward except A. an increase in expected profits. B. a decrease in business taxation. C. a decrease in the interest rate. D. an improvement in technology.

C. a decrease in the interest rate. Any change in the interest rate causes a movement along the investment function. It does not cause a shift in the function.

The greater the value of the marginal propensity to consume A. the greater the value of the marginal propensity to save. B. the greater the value of autonomous consumption. C. the greater the value of the multiplier. D. the smaller the value of the multiplier.

C. the greater the value of the multiplier.

At an initial point on the aggregate demand curve, the price level is 125, and real GDP is $10 trillion. When the price level falls to a value of 120, total autonomous expenditures increase by $250 billion. The marginal propensity to consume LOADING... is 0.75. The level of real GDP at the new point on the aggregate demand curve is A. $1 trillion B. $10.25 trillion C. $11 trillion. D. $13.2 trillion

C. $11 trillion.

Suppose that the economy is in short-run equilibrium but there is an inflationary gap. Which of the following is an example of a discretionary fiscal policy that could be used to return the economy to full-employment real GDP? A. A decrease in taxes. B. An increase in the interest rate. C. A decrease in government spending. D. An increase in unemployment insurance. E. An increase in the money supply.

C. A decrease in government spending.

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. If the US dollar appreciates, which of the following is the best description of the outcome in the economy? A. Aggregate demand increases. B. Short-run aggregate supply decreases. C. Aggregate demand decreases. D. Long-run aggregate supply increases. Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that nbsp the US dollar appreciates, the new short run position of the economy finds itself in is termed A. an inflationary gap. B. a depressionary gap. C. stagflation. D. a recessionary gap.

C. Aggregate demand decreases. D. a recessionary gap.

You are a member of Congress. The economy is currently experiencing a recessionary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy? A. An increase in the money supply and a decrease in taxes. B. A decrease in government spending and an increase in taxes. C. An increase in government spending and a decrease in taxes. D. A decrease in the interest rate and an increase in the money supply.

C. An increase in government spending and a decrease in taxes.

Assume that the position of a nation's aggregate demand curve has not changed, but the long-run equilibrium price level has risen. Now consider the following factors: Factors a. A decrease in labor productivity b. A decrease in the capital stock c. An increase in the quantity of money in circulation d. The depletion of existing mineral resources used to produce various goods e. A technological improvement Other things being equal, which of these factors might account for this event? A. Factors a, d, and e. B. All factors but c. C. Factors a, b, and d. D. Only factor c.

C. Factors a, b, and d.

Which of the following factors could cause the economy to experience supply-side inflation? A. Increased security about jobs and future income. B. Increases in the number of immigrants allowed into the country. C. Government laws which say that the average work week must be reduced by one hour every year. D. The development of new technology to increase productivity.

C. Government laws which say that the average work week must be reduced by one hour every year.

Which of the following measures will lower the natural rate of unemployment? A. The labor force becomes less educated over time. B. Government increases spending to reduce the job loss during a recession. C. More high school graduates enter college without looking for employment right away. D. Government increases the duration of unemployment compensation benefits.

C. More high school graduates enter college without looking for employment right away. If all the high school graduates go to college instead of looking for employment first, that will lower the frictional unemployment. Since the seasonally adjusted natural rate of unemployment is the sum of structural and frictional unemployment, if frictional unemployment falls, the natural rate will fall. Increasing the duration of unemployment benefits and an increasingly less educated workforce will both contribute to increasing the natural rate of unemployment by either increasing frictional or structural unemployment. When the government tries to reduce unemployment caused by a recession, cyclical unemployment falls but it is not a part of natural rate of unemployment.

Which of the following statements is true? A. During the period following 2007, the U.S. unemployment rate rose to about 15 percent. B. Since 1950, the U.S. unemployment rate has not exceeded 7 percent. C. The U.S. unemployment rate exceeded 25 percent during the Great Depression. D. The U.S. unemployment rate dropped to zero percent during World Wars I and II.

C. The U.S. unemployment rate exceeded 25 percent during the Great Depression. The U.S. unemployment rate dropped below 2 percent during World Wars I and II but exceeded 25 percent during the Great Depression. During the period following 2007, the unemployment rate rose to about 10 percent.

The model of long-run equilibrium A. and the Classical Model are based on totally different assumptions. B. assumes that markets always clear but the Classical Model assumes that markets sometimes may not clear. C. is the same as the Keynesian Model. D. is the same as the Classical Model.

D. is the same as the Classical Model.

Internet job sites, like Monster.com, have led potential employees to find jobs via the internet almost instantly. This has caused A. a rise in cyclical unemployment. B. a rise in frictional unemployment. C. a fall in frictional unemployment. D. a fall in structural unemployment.

C. a fall in frictional unemployment.

To move back from an expansion... we need to conduct CONTRACTIONARY fiscal policy. Which of the following shows the actions by Congress and the president: A. an increase in transfer payments ( ^ G) B. an increase in interest rates (Monetary Policy) C. an increase in the income tax rate D. an open market purchase of treasury bills (Monetary Policy)

C. an increase in the income tax rate **Contractionary policy is a decrease in G and/or increase in T.

In the Classical Model, an increase in aggregate demand will result in A. an increase in output and no change in the price level. B. a decrease in both the price level and output. C. an increase in the price level and no change in output. D. a decrease in the price level and an increase in output. E. an increase in both the price level and output.

C. an increase in the price level and no change in output.

Year to year rightward shifts in long-run aggregate supply leads to A. shifts in aggregate demand. B. inflation. C. a long-run trend path for real GDP. D. decreases in the production possibilities curve.

C. a long-run trend path for real GDP.

One of the advantages of fiscal policy is that it A. is able to maintain a balanced budget for the government in the long run. B. is able to work extremely well in spite of the existence of time lags. C. generates a psyche of safety for consumers and investors because they know the government has the ability to use it. D. maintains the economy at full employment.

C. generates a psyche of safety for consumers and investors because they know the government has the ability to use it.

Many economists view the natural rate of unemployment as the level observed when real GDP is given by the position of the long-run aggregate supply curve. There can be positive unemployment in this situation because A. business cycles are an inherent feature of the economy causing cyclical unemployment to naturally occur. B. corporations need the presence of some unemployment to keep workers "in line." C. information is costly and rigidities always exist causing some types of unemployment (frictional and structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes. D. in a free society some people will always prefer idleness over work.

C. information is costly and rigidities always exist causing some types of unemployment (frictional and structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes.

Economic growth is represented by the long-run aggregate supply curve (LRAS) shifting A. vertically down. B. inward to the left. C. outward to the right. D. vertically up.

C. outward to the right.

All of the following would cause the aggregate demand curve to shift except A. increased security about jobs and future income. B. an increase in taxes. C. price level changes. D. an improvement in in economic conditions in other countries.

C. price level changes.

During normal times, fiscal policy probably achieves most of its impact through A. the workings of time lags. B. the workings of discretionary fiscal policy. C. the workings of automatic stabilizers. D. It is always ineffective.

C. the workings of automatic stabilizers.

The long-run aggregate supply curve is determined by A. the real value of cash balances. B. the amount of inflation in the economy. C. the full-employment level of real output. D. the relationship between price and quantity supplied.

C. the full-employment level of real output.

APC

C/Y

Exports of goods and services = $5 billion Imports of goods and services= $3 billion Net income on investments = -$2 billion Net transfers = -$2 billion Increase in foreign holdings of assets in the United States = $4 billion Increase in U.S. holdings of assets in foreign countries = $1 billion What is the current account? What the financial account?

C: -2 billion F: 3 billion

Example two of the above problem

C= 100 + .75 ( Y - T) C 100 G 700 T 700 I 100 X 150 *************MY STEPS******************** 100 + 700 + 100 + 150 = 1050 T = 700 x .75 = 525 1050-525 = 525 1 - .75 = .25 1 / .25 =4 525 * 4 = 2100 Real GDP = 2100 Add spending to $100 (G) Real GDP = 2500 Caution! when adding T!

Voodoo Economics

Candidate George H.W Bush's description of Ronald Reagan's proposed economic policies in 1980

Automatic stabilizers

Cause changes in the economy without the action of congress and the president.

Compromise economic

Change both prices and output

Real GDP is computed by adjusting nominal GDP for

Changes in the price level

Which of the following causes AS to shift?

Changes to regulation Changes to input prices Changes to marginal tax rates

Which of the following statements is correct?

GDP excludes nonmarket production and is not a measure of a nation's overall welfare

8. What is a classical view of the economy? What is a Keynesian view of the economy?

Classical economics is essentially free-market economics, which maintains that government involvement in managing the economy should be limited as much as possible. Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression. Keynesian Economics focuses on using active government policy to manage aggregate demand in order to address or prevent economic recessions.

Say's law fits best in the _____ since this philosophy placed great importance on _____ to determine the _____.

Classical theory, aggregate supply, level of output.

Says law fits best in the _______ since this philosophy placed great importance on ________ to determine the ___________

Classical theory; aggregate supple; level of output

discretionary fiscal policy

Congress votes to fund a new jobs program designed to put unemployed workers to work. This is an example of a _____

If a household purchases a new car and a new refrigerator, this would be classified as spending on

Consumer durables

Total expenditures for domestically produced goods and services consist of

Consumer spending, business spending, government spending, and net foreign spending.

Which of the following spending components makes up the largest percent of Gross Domestic Product (GDP)?

Consumption expenditures

Crowding out occurs when A. increases in government spending cause interest rates to rise, reducing investment and consumption. B. decreases in government spending cause interest rates to rise, reducing investment and consumption. C. increases in investment and consumption cause interest rates to rise, reducing the ability of the government to borrow funds. D. increases in taxes cause interest rates to rise, reducing investment and consumption. E. increases in government spending cause interest rates to fall, reducing investment and consumption.

A computer programmer is laid off because of the recession.

Cyclical

Raquel was laid off at the Toyota plant because the weak economy has meant fewer people are buying new cars. Her supervisor has assured her that she will be rehired if the economy gets better.

Cyclical

Slumping sales lead to the cashier being laid off.

Cyclical

Which type of unemployment is relevant to a worker who loses a job due to a recession?

Cyclical

Workers are laid off when the local manufacturing paint closes because the products are not selling as forecasted.

Cyclical

changes in business cycle

Cyclical

When net capital flows are POSITIVE, A) capital inflows are greater than capital outflows. B) net foreign investment is negative. C) capital outflows are greater than capital inflows. D) A and B are both correct.

D) A and B are both correct.

Which of the following equations is true in an open economy? A) Private saving = net foreign investment + domestic investment. B) National saving = net capital flows. C) Net exports = -Financial account balance. D) Net exports = net foreign investment.

D) Net exports = net foreign investment.

Suppose the government spending multiplier is 2. The federal government cuts spending by $40 billion. What is the change in GDP if the price level is not held constant? A) an increase of less than $80 billion B) an increase equal to $80 billion C) an increase of greater than $80 billion D) a decrease of less than $80 billion E) a decrease of more than $80 billion

D) a decrease of less than $80 billion

In a recession, automatic stabilizers such as income transfer payments work by A. decreasing government spending and increasing taxes without requiring that a new policy be implemented. B. allowing Congress to implement new policies to reduce government spending and increase taxes. C. allowing Congress to implement new policies to increase government spending and reduce taxes. D. increasing government spending and reducing taxes without requiring that a new policy be implemented.

D. increasing government spending and reducing taxes without requiring that a new policy be implemented.

dont worry

D) decrease; decrease For the second question you had made the correct point that the cut in (corporate) taxes would free more funds for business investment. However the question was driving at the link between cuts in taxes and an increase in the interest rate (in order to attract international savers to borrow from). So an increase in the interest rate is associated with less domestic investment since it's a cost of borrowing. Rising interest rates are also associated with an appreciating dollar (rightward shift of demand for the dollar) which means its more expensive for others to buy us currency (and thus goods, i.e., our exports will fall) and meanwhile its cheaper for us to buy other currency (and thus their goods and services, i.e. our imports rise). The net effect is a fall in net exports.

Suppose that an economy beings at the short-run equilibrium shown as point A in the figure to the right. Few workers in this nations economy are union members. unions had large wage givebacks. economic conditions improved abroad, real GDP raised. Hurricane caused short term halts in production and created bottlenecks in production. At the same time, the nations banks significantly pushed up the rate of growth of the nations money supply. A strengthening of the value of this nation's currency in terms of other countries currencies affects both SRAS curve and the AD curve. A weakening of the value of this nations currency occurs. Unions successfully negotiated wage boosts, economic conditions worsen abroad and disposable income in other nations. A run of good weather led to great crop harvests.

D,B,C,B, E,C

The Keynsian model assumes that international trade A. has imports equal to a country's exports for simplicity. B. plays a small role since exports and imports are minimal for most countries. C. plays a large role since trade is an important part of every economy. D. plays no role in the simple model.

D. plays no role in the simple model.

The AD curve is drawn with the price level ________, and the C + I + G + X curve is drawn with the price level ________. A. held constant; changing B. changing; also changing C. held constant; also held constant D. changing; held constant

D. changing; held constant

A price index is computed as A. (CPI divided by ÷cost of market basket in base year) times ×100. B. (cost of market basket in base year divided by ÷CPI) times ×100. C. (cost of market basket in base year divided by ÷cost of market basket today) times ×100. D. (cost of market basket today divided by ÷cost of market basket in base year) times ×100.

D. (cost of market basket today divided by cost of market basket in base year) times 100

Suppose that an economy is in equilibrium at a real GDP of $ 15 15 trillion at a price level of 100. The short-run aggregate supply curve is upward-sloping and there is an increase in autonomous expenditures of $ 0.30 0.30 trillion. This increase in expenditures enabled the real GDP to increase to $ 15.50 15.50 trillion. The change in the price level has changed the multiplier to A. 4.70 4.70. B. 4.42 4.42. C. 2.944 2.944. Your answer is not correct. D. 1.667 1.667.

D. 1.667

Which of the following will occur when aggregate supply remains stable but aggregate demand falls in the short run? A. The price level rises. B. An inflationary gap is created. C. The unemployment rate falls. D. A recessionary gap is created.

D. A recessionary gap is created.

An economy is currently in a long run equilibrium where SRAS = LRAS = AD. Suppose that nbsp the US dollar depreciates, which of the following is the best explanation of the outcome? A. Long-run aggregate supply increases. B. Aggregate demand, short-run and long-run aggregate supply all increase. C. Short-run aggregate supply increases. D. Aggregate demand increases. Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD nbsp the US dollar depreciates the economy would then experience A. a depressionary gap. B. stagflation. C. an inflationary gap. D. a recessionary gap.

D. Aggregate demand increases. C. an inflationary gap.

Which of the following would cause a decrease in aggregate demand? A. A decrease in the foreign exchange value of the dollar. B. A decrease in the labor force. C. An increase in the price level. D. An increase in real interest rates. E. All of the above would cause a decrease in aggregate demand.

D. An increase in real interest rates.

Which of the following statements is true concerning the historical picture of business activity in the United States? A. Business fluctuations are regular and take 8 years from the start of a recession to the end of the peak period. B. All recessions have been caused by external shocks. C. The largest expansion since World War II took place in the early 1960s. D. The frequency and size of fluctuations around the trend has decreased since World War II.

D. The frequency and size of fluctuations around the trend has decreased since World War II.

In modern Keynesian analysis, a decrease in aggregate demand will result in A. a decrease in output and no change in the price level. B. a decrease in the price level and no change in output. C. an increase in both the price level and output. D. a decrease in both the price level and output. E. an increase in the price level and a decrease in output.

D. a decrease in both the price level and output.

Year to year rightward shifts in long-run aggregate supply leads to A. decreases in the production possibilities curve. B. inflation. C. shifts in aggregate demand. D. a long-run trend path for real GDP.

D. a long-run trend path for real GDP.

True or False: The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.

False

If real GDP rises above rises above total planned expenditures the economy will see A. production and employment increases. B. production decreases and employment increases. C. production and employment decreases. D. production increases and employment decreases.

D. production and employment decreases.

The long-run equilibrium of an economy occurs A. where the long-run supply curve is to the right of the aggregate demand curve. B. where the long-run horizontal supply curve meets the aggregate demand curve. C. where the upward sloping supply curve meets the aggregate demand curve. D. where the long-run aggregate supply curve meets the aggregate demand curve.

D. where the long-run aggregate supply curve meets the aggregate demand curve.

An increase in the U.S. price level can be caused by all of the following except A. lower U.S. interest rates. B. a tax decrease. C. increases in the security of U.S. jobs. D. worsening economic conditions in Asia.

D. worsening economic conditions in Asia.

Which of the following is most relevant to a Keynesian notion of a tradeoff between inflation and unemployment?

DPhillips Curve

Consider a country whose economic structure matches the assumptions of the classical model. Suppose that businesses in this nation suddenly anticipate lower future profitability from investments they undertake today. From the following list choose the letter that gives the resulting outcome for each of the variables given below: I - Increase D - Decrease N - No Effect (Enter a letter I, D, or N) The current equilibrium interest rate. ___ Current equilibrium real GDP. ___ Current equilibrium employment. ___ Current equilibrium saving. ___ Future equilibrium real GDP. ___

Decrease No Effect No Effect Decrease Decrease

Consider a country whose economic structure matches the assumptions of the classical model. After reading a recent best-seller documenting a growing population of low-income elderly people who were ill- prepared for retirement, most residents of this country decide to increase their saving at any given interest rate. The current equilibrium interest rate will___ Current equilibrium real GDP___ Current equilibrium employment___ Current equilibrium investment___ Future equilibrium real GDP___

Decrease No effect No effect Increase Increase

Supply-side inflation can be caused by a continual

Decrease in aggregate supply while aggregate demand remains unchanged

Inflation can be caused by

Decreases in the LRAS curve or increases in the AD curve

Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given the recessionary gap.

Decreasing taxes

Which of the following is not an automatic stabilizer

Defense spending.

What is a discretionary fiscal policy that leads to spending more than is collected in taxes?

Deficit financing

Determine the most likely short-run effect on this nations economy if there is a significant downturn in economic activity.

Deflation and a lower real GDP

Which term is most relevant to a higher price level caused by Aggregate Demand shifting to the right?

Demand pull inflation

When there is an economic downturn, congress and the president use fiscal policy to stabilize real GDP. But the conduct of the fiscal policy involves several time lags such as the recognition time lag that causes a delay in identification of the economic problem, the action time lag that is cause by the delay in congressional approval of the policy and the effect time lag that arises because policy actions take time to exert their full effect on the economy. These time lags could actually cause discretionary fiscal policy to

Destabilize real GDP because by the time a policy has begun to have its effects, the economy might already be recovering and the policy action might push real GDP up faster than intended, thereby making real GDP less stable.

Animal Spirits

Determines the autonomous level of business investment according to John Maynard Keynes

Reduction in the quantity of money in circulation

Diagonal AD

In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. This is an example of _______________. The government increases it expenditures without raising taxes; to cover the resulting budget deficit, it issues more bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of _________________. The government finances the construction of a classical music museum that otherwise never would have received private funding. This is an example of ______________.

Direct expenditure offset to. Indirect crowing out from. Neither a direct expenditure nor an indirect crowing out offset to.

The government provides a subsidy to help keep an existing firm operating, even though a group of investors otherwise would have provided a cash infusion that would have kept the company in business. This is an example of

Direct expenditures to a fiscal policy action.

What are discouraged workers and underemployed workers?

Discouraged workers- people who are not actively seeking employment. They have gotten tired of being rejected. Underemployed workers- people cannot afford to drop out of the job market so they take jobs that may pay less and may not be full time. They are working in jobs that are beneath their education, skill level, or are not full time.

Fiscal policy refers to?

Discretionary changes in gov't spending and taxes.

Fiscal policy refers to

Discretionary changes in government spending and taxes.

Discretionary fiscal policy refers to: A. any change in government spending or taxes that destabilizes the economy. B. the authority that the President has to change personal income tax rates. C. changes in taxes and government expenditures made by Congress to stabilize the economy. D. the changes in taxes and transfers that occur as GDP changes.

True - False: Per our lecture notes, the most common shape of the production possiblities curve is convex.

False

In early 2008, it appeared that the U.S economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as ___________ and was intended to ___________

Discretionary fiscal policy; Increase consumer spending.

PI - T

Disposable Income

In the Keynesian model the amount of consumption is dependent on

Disposable income.

Which of the following accounting identities is true?

Disposable personal income plus personal income taxes equals personal income

For each event below, suppose that the economy begins at the long-run equilibrium point A in the figure to the right. Identify which of the other points on the diagram - points B, C, D, or E -- could represent a new long-run equilibrium after the described events take place and move the economy away from point A. Events a. Significant productivity improvements occur, and the quantity of money in circulation decreases:___. b. No new capital investment takes place, and a fraction of the existing capital stock depreciates and becomes unusable. At the same time, the government enacts a large tax decrease for the nation's households: ___. c. More efficient techniques for producing goods and services are adopted throughout the economy at the same time that the government increases its spending on goods and services. ___.

E (AD3) D (LRAS3) B (LRAS2)

E + U

(#19 part2 [opposite] above) b. Which of the following might also yield the outcome shown by your diagram? A. An increase in union bargaining power. B. A decrease in productivity. C. A decrease in regulations. D. All of the above. E. A and B only. c. In considering the forces which may increase an economy's real GDP in the long run, which of the following will NOT play a role? A. Greater capital accumulation. B. An expanded workforce. C. Increased education and training. D. Discoveries of new raw materials. E. Lower wages for labor.

E. A and B only. E. Lower wages for labor.

Which type of economist is most likely to advocate deregulation as a method of stimulating the economy?

ESupply-Side

What is expansionary fiscal policy? What is contractionary fiscal policy?

EX: Gov increases spending or decreases taxes to stimulate or expand economy CON: Gov decreases spending or increases taxes to attempt to slow economy

Compare the effectiveness of monetary policy and fiscal policy in an open economy and in a closed economy.

Economists refer to the ways in which monetary policy and fiscal policy affect the domestic economy as policy channels. • An open economy has more policy channels than does a closed economy. • Over time, the U.S. economy has become, and is becoming, more open; what will this do to the relative effectiveness of monetary and fiscal policy?

The government just passed a new tax bill that will be applied to the economy next year. Most people will not immediately feel the impact of this new tax bill and not adjust their W-2 tax forms. The impact of the new tax bill wont become apparent to them until the following April when their tax bills are due . This problem is referred to as the.

Effect time lag, and it makes it difficult to use discretionary fiscal policy to close a recessionary gap.

According to the supply side economists a(n) decrease in marginal tax rates will same for increase.

Either increase or decrease the amount of leisure time chosen by workers.

Jamal has been working 3 hours a day after school at the local convenience store.

Employed

What is the formula for the Labor Force?

Employed PLUS Unemployed

Consider the function: C = 100 + 0.75Y and Investment is equal to 400. What is the equilibrium GDP and what does the graph look like?

Equilibrium GDP is $2,000

Discretionary fiscal policy refers to intentional actions the government takes to change spending or taxes.

Example: American Recovery and Reinvestment Act (ARRA) in 2009

When the $US appreciates, the dollar price of foreign imports falls. Similarly, the foreign currency price of U.S. exports rises.

Example: Suppose the exchange rate between $US and euros is $1 = €1. An iPhone with a U.S. price of $200 will cost €200 to a French person. But if the $US appreciates so that the exchange rate is now $1 = €1.20, that same iPhone will now cost the French person €240. Then we expect French people to buy fewer iPhones. But at the same time, French wine has become cheaper for Americans to buy, so we will buy more of it. An appreciation of the $US causes U.S. exports to fall and imports to rise, so net exports will fall. • Hence aggregate demand will fall and also real GDP. (X-M)

Some forms of government spending and taxes automatically increase or decrease along with the business cycle; these are automatic stabilizers

Example: Unemployment insurance payments (G) are larger during a recession. Example: Tax revenue increases (T) during an expansion.

In the Modern Keynesian Model the SRAS curve slopes upward. How could one explain the shape of the upward sloping SRAS curve by only focusing on the capital input?

Existing machinery can be used longer hours

In the Modern Keynesian Model the short run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?

Existing machinery can be used longer hours.

In the modern Keynesian model the short-run aggregate supply curve slopes upward. How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on the capital input?

Existing machinery can be used longer hours.

Is monetary policy more effective in an open economy or in a closed economy?

Expansionary monetary policy effectively means lowering interest rates. • In a closed economy, this encourages investment, and consumption spending on durables. • In an open economy, the demand for $US falls, decreasing the exchange rate, but this causes net exports to rise. Through this additional policy channel, the expansionary monetary policy will increase aggregate demand by more in an open economy than in a closed economy. • Of course, the same is true of contractionary monetary policy. Monetary policy is more effective in an open economy.

Suppose that the economy Is depicted by the following relationship: C= $100 + .90(Y - T) G= $600 T = $600 I = $200 X= $250 Suppose that the government decides to increase government spending by $100 what is the new EQ of GDP income?

Expenditures = C + I + G + X Solve for Y Y = C + I + G + X Y= 100 + .90(Y - 600) + 200 + 600 + 250 Y=1150 + 0.90(Y)- - (0.90)(600) Y=1150 +0.90(Y) - 540 Y=610 + 0.90(Y) Y= 0.90(Y) = 610 0.10(Y) =610 Y=6100 multiplier is 1/MPS (1- .90 = .10) 1 __ = 10 .10 10 x 610 = 6100 Add $100 to G therefore the new income level is 7,100

Which of the following statements is true of the multiplier in the Keynesian model when there is a(n) decrease in autonomous expenditures?

Expenditures decrease by the same proportion during each round of spending

Which of the following statements is true of the multiplier in the Keynesian model when there is a(n) decrease in autonomous expenditures

Expenditures decrease by the same proportion during each round of spending.

What is true of the multiplier in the Keynesian model when there is an increase in autonomous expenditures?

Expenditures increase by the same proportion during each round of spending

In the long run. Contracts _____. In the short run contracts are ____.

Expire. Fixed

A stonger dollar contributes to inflation.

FALSE

Keynes argued that real consumption and saving decisions depend primarily on a household's expected future income.

FALSE

The larger the MPS, the larger the multiplier.

FALSE

The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.

FALSE

If the MPC equals 0.8, an additional $500 in disposable income will result in an additional $400 saved.

FALSE; it would be 100 saved

A change in the price level has no effect on the real value of cash balances.

False

An increase in the price level shifts the aggregate demand curve (AD) to the left.

False

An increase in long-run aggregate supply cuases the price level to increase, and is therefore inflationary.

False

Disposable personal income refers to the income used by households for all purchases of nondurable goods during a year.

False

Keynes argued that real consumption and saving decisions depend primarily on a household's expected future income

False

Keynes argued that real consumption and saving decisions depend primarily on a household's expected future income.

False

Markets which are temporarily out of equilibrium will always return to equilibrium immediately.

False

Personal income is the income received by households after personal income taxes are paid.

False

Structural unemployment is related to the movement of workers from low-paying to high-paying jobs.

False

The aggregate demand curve is essentially the same as the demand curve for an individual product.

False

The larger the MPS, the larger the multiplier.

False

The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.

False

True or False: Structural unemployment is related to the movement of workers from low-paying to high-paying jobs.

False

True or false: In percentage terms, the largest positive change in business activity in the United States since 1880 occurred during the 1990s.

False In percentage terms, the largest positive change in business activity in the United States since 1880 occurred during the 1940s.

True or False: If the MPC equals 0.8, an additional $500 in disposable income will result in an additional $400 saved.

False If the MPC equals 0.8, an additional $500 in disposable income will result in an additional $100 saved.

True or False: Expansionary fiscal policy involves increasing government purchases or increasing taxes

False Its INCREASES GOV PURCHASES and DECREASES taxes

True or False: Keynes argued that real consumption and saving decisions depend primarily on a household's expected future income.

False Keynes argued that real consumption and saving decisions depend primarily on a household's current real disposable income.

Labor is a key input at fast-food restaurants. Suppose that the government boosts the minimum wage above the equilibrium wage of fast-food workers. Which of the following best describes the response of the quantity of labor employed at restaurants?

Fewer workers will be employed since the wage increase will induce managers to seek to substitute other inputs for the now relatively more expensive labor

How could one explain the shape of the upward sloping SRAS curve by only focusing on profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage Rate remains constant.

How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.

How could one explain the shape of the upward sloping short-run aggregate supply curve by only focusing on profits?

Firms are able to earn higher profits as long as the price level increases and the nominal wage rate remains constant.

A true public good must be provided by the government. Which of the following goods provided by the government is a true public good?

Flood control.

Consumption is what type of variable?

Flow

Stock or Flow: Time Warner purchases $100 million in new computer equipment this month

Flow

A literary editor leaves her job in Sydney to look for a new job in Melbourne.

Frictional

An individual refuse to work for minimum wage.

Frictional

An unemployed university graduate is looking for his first job.

Frictional

Samantha recently quit her job at the landscaping business and has been trying to get hired at Flower Power, but has not received a reply to her application.

Frictional

Which type of unemployment is relevant to a worker who is unemployed while switching from being a cashier to be an accountant?

Frictional

job seeking

Frictional

__________unemployment occurs because of transaction costs in the labor market. For example, workers do not have full information about vacancies and must search for jobs. ___________ unemployment occurs when there is a poor match of workers' skills and abilities with available jobs, perhaps because workers lack appropriate training or government labor rules reduce firms' willingness to hire. The levels of frictional and structural unemployment are used in part to determine our (somewhat arbitrary) measurement of the ______________

Frictional Structural Natural

Frictional Unemployment rate= Frictional Unemployment / Labor Force x 100 1. 4% 2. 3% 3. 7%

The natural rate of unemployment is approximately the sum of which two types of unemployment.

Frictional and structural

Major Types of unemployment:

Frictional: job switching Structural: changes to composition of economy Cyclical: changes in the business cycle

What are the four types of unemployment?

Full employment Seasonal unemployment Frictional unemployment Structural unemployment Cyclical unemployment

LRAS measures

Full employment Real GDP. producing at our limit. Determined by our endowment of resources. Changes in the price level have no affect on AS. Vertical line.

What did the Humphrey Hawkins act do?

Full employment act of 1978 wanted to attain 4% unemployment and 3% inflation but if they didn't meet the goals the President could change the goal.

Budget Deficit =

G - T = -(Public Saving)

Keynesian with gov added

G: C+I+G federal, state and local does not include transfer payments is autonomous lump-sum taxes=G

Many other transactions are excluded from measured _____, among them household services rendered by homemakers, underground economy transactions, and illegal economic activities, even though many of these result in the production of final goods and services.

GDP

Depreciation + Indirect Business Taxes + Rent + Wages + Interest + Profit

GDP (income approach)

Net Domestic Product (NDP)

GDP - Depreciation

Which of the following statements is not true about the use of GDP as a measure of national welfare?

GDP is a useful measure of national welfare since it excludes nonmarket transactions.

Which of the following equations is correct?

GDP minus− depreciation = NDP NDP = C + I + G + X minus− depreciation GDP = C + netI + G + X + depreciation ALL OF THE ABOVE

According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand increases,

GDP will rise and price level will remain constant

GDP

GDP= Consumption + Investment + Government + Net Export

change in equilibrium real

GDP= multiplier X change in autonomous spending

investment consists of expenditures on new buildings and equipment

GPD invetment has been violated consider the panned investment function and shifts in the funtion

One of the advantages of fiscal policy is that it

Generates a psyche of safety for consumers and investors because they know the government has the ability to use it.

Given the existence of time lags, there is potential danger in using fiscal policy. Which of the following outcomes could occur because of the existence of such time lags? A. Governments may overshoot the full employment real GDP as the economy has improved by the time the policy takes effect. B. Governments may undershoot the necessary change to government spending or taxes to reach full employment real GDP because they are uncertain what other factors may impact the economy. C. Subsequent changes in the economy have caused the government to change its fiscal policy making it less consistent and the government less trustworthy. D. Each of these scenarios are potential outcomes because of the existence of time lags.

According to the circular flow of income and output, which of the following is not true?

Goods, services and money all flow in one direction since money pays for the goods and services.

DY/DG = 1/(1-MPC)

Government Multiplier

What can cause the economy to experience supply-side inflation

Government laws which say that the average work week must be reduced by one hour every year

Which of the following factors could cause the economy to experience supply-side inflation?

Government laws which say that the average work week must be reduced by one hour every year.

We can describe the total effect of a change (increase or decrease) in government purchases or taxes by measuring the change in equilibrium real GDP. FORMULAS:

Government purchases multiplier = Change in equilibrium real GDP / Change in government purchases Tax multiplier = Change in equilibrium real GDP / Change in taxes The tax multiplier will be a negative number: an increase in taxes will decrease equilibrium real GDP, and vice versa. We expect the tax multiplier to be smaller (in absolute value) than the government purchases multiplier. • Why? A $100 billion increase in purchases initially increases spending by $100 billion, but a $100 billion tax cut is partially spent and partially saved.

What will generate an increase in aggregate demand?

Government spending for the onset of a war

Which of the following will generate an increase in aggregate demand?

Government spending for the onset of a war.

Which of the following statements is correct?

Governments have a difficult time fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable.

Which of the following statements is correct?

Governments have a difficult time fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable.

T =

Gross Taxes Less Transfer Payments

is the total market value of final goods and services produced in an economy during a one-year period by factors of production within the nation's borders. It represents the dollar value of the flow of final production over a one-year period.

Gross domestic product

Jane has been looking for work but is not getting interviews due to her criminal record

Hard Core

Renee who suffered from chronic fatigue syndrome is looking for administrative work for the past 6 months.

Hardcore

Margaret doesn't have a job, but has been looking for work since last July. Recently she decided to stop searching for a job until the economy improves.

Hidden

Keynesians believe that the aggregate supply curve is

Horizontal in the short-run

In the circular flow of income

Households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms

Households save more than anticipated.

Currently the government has a balance budget. It decided to follow an expansionary fiscal policy of reducing taxes by $100 billion. Which of the following statements bests describes the Ricardian equivalence Theorem under these conditions? The ricardian equivalence theorem implies that expansionary fiscal policy that creates a budget deficit will result in

Households save more than anticipated. No changes in aggregate demand.

Calculate NDP

NDP = GDP - Depreciation Depreciation = capital stock has to be subtracted from the year's GDP.

How do automatic stabilizers work? A. When a decline in national income occurs there will be an increase in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. B. When a decline in national income occurs there will be a reduction in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. C. When an increase in national income occurs there will be a reduction in income tax collections and a decrease in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted. D. When an increase in national income occurs there will be an increase in income tax collections and an increase in unemployment compensation and welfare payments muting the increase in planned expenditures that would have otherwise resulted.

Function of investment

I=f(r) Negative relation between investment and interest rate

Assume the cost of aluminum used by soft-drink companies increases. Which of the following correctly describes the resulting effects in the market for canned soft drinks? I. The demand for soft drinks decreases. II. The quantity of soft drinks demanded decreases. III. The supply of soft drinks decreases. IV. The quantity of soft drinks supplied decreases.

II and III.

6. What would exclude a person from being counted as a part of the labor force?

If he is not actively seeking employment and has no job.

One of the main conclusions of says law was that

If people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

One of the main conclusions off Say's Law was that

If people supply goods in order to then supply goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

Equilibrium in the Foreign Exchange Market

If the exchange rate is too high, more people will want to sell $US for yen than want to buy them—a surplus. The exchange rate will depreciate: the value of the $US will fall, relative to the value of the yen. An exchange rate that is too low will cause the $US to appreciate: increase in market value relative to the yen

When to use EXPANSIONARY FISCAL POLICY?

If the government believes real GDP will be below potential GDP, it can enact expansionary fiscal policy in an attempt to restore long- run equilibrium—decreasing unemployment.

The series of induced increases in consumption spending that results from the initial increase in autonomous expenditures is known as the MULTIPLIER EFFECT

If the government increases its spending on goods and services, then aggregate demand increases immediately. This is the autonomous increase in aggregate demand. But then people receive this increased spending as increased income and increase their consumption spending accordingly. This is the induced increase in aggregate demand.

In a recession, automatic stabilizers such as income transfer payments work by A. allowing Congress to implement new policies to increase government spending and reduce taxes. B. decreasing government spending and increasing taxes without requiring that a new policy be implemented. C. allowing Congress to implement new policies to reduce government spending and increase taxes. D. increasing government spending and reducing taxes without requiring that a new policy be implemented.

In a recession, automatic stabilizers such as unemployment compensation work by A. allowing Congress to implement new policies to reduce government spending and increase taxes. B. decreasing government spending and increasing taxes without requiring that a new policy be implemented. C. allowing Congress to implement new policies to increase government spending and reduce taxes. D. increasing government spending and reducing taxes without requiring that a new policy be implemented.

Which of the following is not an economic function of government

Income redistribution.

A progressive tax system s one in which the tax rates

Increase as income increases.

What are two ways to increase AD using fiscal policy?

Increase government spending [G] - Since G is one component of AD, increases in G directly increase AD. - If private spending (C, I, and NX) is low, then government can increase AD by increasing G. Increasing government purchases directly increases aggregate demand. • Decrease taxes [T] - Reducing the overall tax burden on private individuals, and gives them more to spend. - The focus here is on increasing consumption spending • Decreasing taxes indirectly affects aggregate demand by increasing disposable income, and hence consumption spending.

Rent + Wages + Interest + profit

NI (national income)

When government spending increase, the change in total expenditures. when government spending decreases

Increased by more than the change in government spending. It decreases by more than the change in government spending.

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by

Increased government expenditures and decreased investment.

The macroeconomy is depicted by the graph to the right. Suppose the AD has changed due to reduced taxes. The new short-run equilibrium price level had and the real GDP has _____ Thus, in the short run it is ____ to produce beyond the full employment level of real GDP The cost of producing beyond the full employment level of real GDP is ______

Increased, Increased. Possible. A higher price level. The price level and real GDP move in the same direction as aggregate demand.

Crowding out occurs when

Increases in government spending cause interest rates to rise, reducing investment and consumption.

In the long run, persistent deflation in a growing economy can occur if

Increases in the LRAS are proportionately larger than the increase in AD

According to the interest rate effect, an increase in the price level

Increases nominal interest rates, reduces borrowing and spending, reduces the aggregate quantity of goods and services

The government reduces its taxes without decreasing its expenditures; to cover the resulting budget deficit, it issues more bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of

Indirect crowing out from a fiscal policy action.

Cost-push inflation

Inflation caused by decreases in short-run aggregate supply.

Demand-pull inflation

Inflation caused by increases in aggregate demand not matched by increases in aggregate supply.

Consider the assumption of the classical model. Draw the long-run aggregate supply curve such that real GDP is $10 trillion. Draw the aggregate demand curve. Properly label your line. Suppose that aggregate demand were to increase due to a weaker dollar. which of the following would be the result?

Inflation only.

The gap that exists when equilibrium real gross domestic product is greater than full employment RGDP>Full employment.

Inflationary gap.

How is the short run differentiated from the long run in macroeconomics ?

Input prices

Consumption expenditures do NOT include purchases of

Intermediate goods

DY/DI = 1/(1-MPC)

Investment Multiplier

The dollar value of final output

Is equal to the total income

The model of long-run equilibrium

Is the same as the Classical Model

Since the modern Keynesian Model allows for some price response, the aggregate supply curve

Is upward sloping

The long-run aggregate supply curve

Is vertical because changes in the price level have no effect on real output

The US government decides to follow expansionary fiscal policy. Congress is meeting in late session on the last day before it breaks for vacation. One of the representatives makes a statement. "it does not matter what we spend the money on, let's just pass the bill and go home". Evaluate the accuracy of the representatives belief by choosing either the correct affirmation or rebuttal below. In the extreme case of direct expenditure offsets the

It does matter what the government decides to purchase with the additional spending. Increase in government expenditures are matched by a decrease in consumption.

Many economists argue that real GDP is not a good measure of economic well-being because

It excludes the environmental quality of life

The modern Keynesian short-run aggregate supply curve is best described by which of the following statements?

It is very flat at low levels of real GDP, increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.

The Modern Keynesian short-run aggregate supply curve is best described by what?

It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very Steep as real GPD surpasses full employment

The Modern Keynesian short-run aggregate supply curve is best described by which of the following statements?

It is very flat at low levels of real GDP; increases slightly as real GDP grows; and becomes very steep as real GDP surpasses full employment.

What is Okun's law and what was lost per person as a result of the unemployment numbers in 2008?

It quantified the relationship between unemployment and the PPC. He said that for every 1% of unemployment we lose 3% of real output. Newer estimates have put it at 1% unemployment to 2% real output. In 2008 we lost $2,000 per person of goods and services.

Which type of economist is most likely to advocate the use of government spending to stimulate the economy?

Keynesian

U + E

Adult Population =

Labor Force + Not in Labor Force

What is a possible explanation for sticky prices?

Labor contracts cause wages to be fixed over the contract period.

Calculate NI

NI = NDP - Indirect Business tax

the capital account:

MINOR .. so we ignore it the part of the BoP that records relatively minor transactions such as migrants' transfers and sales and purchases of nonproduced, nonfinancial assets.

Increase in deposits:

MM * Deposits

Increase in Money Supply:

MM * Deposits - Currency

Is fiscal policy or monetary policy used more?

MONETARY!!

Slope of the consumption function:

MPC

What is the relationship between MPC and MPS ?

MPC + MPS = 1

0 and 1

MPC is some number between

Slope of savings function:

MPS

Economists refer to the series of induced increase in consumption spending that result from an initial increase in autonomous expenditures as the _______________ effect

MULTIPLIER EFFECT

Categorize each of the following issues as either a microeconomic issue or a macroeconomic issue a. The national unemployment rate b. The decision of a worker to work overtime or not. c. Afamily's choice of having a baby. d. The rate of growth of the money supply. e. The national government's budget deficit f. A student's allocation of study time across two subjects.

Macroeconomics Microeconomics Microeconomics Macroeconomics Macroeconomics Microeconomics

A purchasing power parity index would help you

Make international comparisons of living standards

Maya's internet service is contemplating an investment of $50,000 in new computer servers and related hardware. Management of this company predict a 8.8 percent annual return on this investment. The current market rate of interest is 6.2 percent. Maya's internet service will

Make the investment since the cost is less than the expected return

The _______ propensity to consume is equal to the change in planned real consumption divided by the change in real disposable income. The _______propensity to save is equal to the change in planned real saving divided by the change in real disposable income.

Marginal; marginal

Until 2008, the people of the fictitious nation of Dor relied mainly on private car companies to determine how many automobiles to produce. After 2008, the people of Dor have been relying on the Dor government to determine how many automobiles to produce. This represents a shift in the economic system of Dor from

Market System to Central Planning.

What is not a component of total expenditures?

Merchandise inventories

Which one of the following is not a component of total expenditures?

Merchandise inventories.

Which of the following best demonstrates the concept of scarcity?

Micheal has enough money to buy a CD or a book or not both

Fool in the shower

Milton Friedman's metaphor for the destabilizing effects of interventionist monetary policy

The federal reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of

Monetary policy

Who is considered officially unemployed? Six months after failing to get a job, Abba quit looking. Chen is going to school full time. Kariuki is a retired teacher. Monica graduated from college last summer but is still unemployed despite her spirited search.

Monica graduated from college last summer but is still unemployed despite her spirited search.

Which of the following measures will lower the natural rate of unemployment?

More high school graduates enter college without looking for employment right away.

Deflation has occurred during the past year.

Movement down along

What happens to the aggregate demand curve when deflation has occurred in the past year

Movement down along the curve

The price level has increased this year.

Movement up along

What happens to the AD curve when the price level has increased this year

Movement up along the curve

Change in GDP =

Multiplier * Change in Autonomous Spending

MPC increase

Multiplier increase

This year, a nation's long-run equilibrium real GDP and price level both increased. Which of the following combinations of factors might simultaneously account for both occurrences? In the response box for each of the following pair of events insert Y to indicate YES and N to indicate NO. a. An isolated earthquake at the beginning of the year destroyed part of the nation's capital stock, and the nation's government significantly reduced its purchases of goods and services. ___ b. There was a minor technological improvement at the end of the previous year, and the quantity of money in circulation rose significantly during the year. ___ c. Labor productivity increased somewhat throughout the year, and consumers significantly increased their total planned purchases of goods and services. ___ d. The capital stock increased somewhat during the year, and the quantity of money in circulation declined considerably. ___

N Y Y N

GDP - Depreciation

NDP (Net domestic product)

What happens to national saving when the government runs a budget surplus?

National saving INCREASES when the government runs a budget surplus unless private saving decreases by the amount of the budget surplus, which is unlikely.

Currently, a governments budget is balanced. The marginal propensity to consume is 0.75. The government has determined that each additional $10 billion in new government debt it issues to finance a budget deficit pushes up the market interest rate by .20 percent. it has also determined that every 0.10(on tenth) percentage change in the market interest rate generates a change in planned investment expenditures equal to $1 billion. finally, the government knows that to close a recessionary gap and take into account the resulting change in the price level, it must generate a net rightward shift in the aggregate demand curve equal to $250 billion My way to solve = .20% multiplied by 1 billion expenditure $= .20(mx) MPC = Marginal propensity to consume = 0.75 (MPC) 1 - 0.20- =.80 (1-mx) 1- .75 = .25 (1-MPC) .80 ______ = 3.2 which is the net multiplier 0.25 250/3.2 = 78.125 or 78.13 another example: .20 x 4 billion EX $ = .80 MPC= 0.80 1 - .80 = .20 1- .80 = .20 .20/.20 = 1 150/1= 150

Net change in spending of m = 0.20 X = 1 billion. (1-MX) = (1-0.20) = $0.80 We know that the AD curve will shift tot he right by the net change in spending multiplied by the multiple, which = 1/1- mpc (0.25) = 4 therefore , the net increase in AD due to the 1 billion increase in government expenditures is = 1-mx/1-mpx = 3.2 which is the net multiplier. To close the recessionary gap, government spending will have to increase by an amount equal to 250/3.2 = $

Explain the relationship between net exports and net foreign investment.

Net exports EQUAL net foreign investment. If net exports are negative, the people of the country will sell assets and borrow (negative foreign investment) to pay for the surplus of imports over exports. If net exports are positive, the people of the country will buy assets and lend (positive foreign investment).

What is true concerning the foreign sector in the simple Keynesian model?

Net exports are autonomous

Which of the following statements is true concerning the foreign sector in the simple Keynesian model?

Net exports are autonomous

Which of the following statements is true concerning the foreign sector in the simple Keynesian model?

Net exports are autonomous.

Suppose that AD has changed due to higher taxes

New short run EQ has decreased and real GDP has decreased. thus it is in the short run possible to produce below the full employment level. The cost is higher unemployment.

Price index

Nominal / Real x 100 for percent

What is the difference between nominal GDP and real GDP?

Nominal GDP is measure in current market prices while real GDP corrects for changes in the overall level of prices form year to year

What is the difference between nominal GDP and real GDP?

Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.

Real interest rate =

Nominal interest rate - Inflation rate

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

Nominal wages are inflexible downwards

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

Nominal wages are inflexible downwards.

When considering a change in government spending in the traditional Keynesian model, which of the following expenditures is considered an offset to government spending?

None of these above are considered offsets. Taxes would be the off set!!!

What are the two labor groups our population is broken into?

Nonparticipants and labor-force participants

Many economists argue that real GDP is

Not a good measure of economic well-being because it excludes increases in leisure time

The problem with using foreign exchange rates to convert one country's GDP into dollars is that

Not all goods and services are sold on world markets

What is full employment?

One of our macro goals in the economy. What full employment is, is up for debate. Full employment is not the same as zero unemployment. Some unemployment is inevitable.

Interest rate effect

One of the reasons that the aggregate demand curve slopes downward: Higher price levels increase the interest rate, which in turn causes businesses and consumers to reduce desired spending due to the higher cost of borrowing.

Open Economy Effect

One of the reasons that the aggregate demand curve slopes downward: higher price levels result in foreign residents desiring to buy fewer U.S. made goods, while U.S. residents now desire more foreign-made goods, thereby reducing net exports. This is equivalent to a reduction in the amount of real goods and services purchased in the United States.

Dr. Chan recently sold his medical practice and has retired to a house in the mountains.

Out of the Labour Force

Freddy has been working on the weekends for his mom's restaurant. Rather than paying Freddy a wage, his mom has agreed to make his monthly car payment.

Out of the Labour Force

Tina has decided to not get a job after school because she wants to improve her grades in her HSC.

Out of the Labour Force

When Dorothy had children, she decided to quit her job in advertising to stay home and raise them until they start school.

Out of the Labour Force

Why is outsourcing not so bad?

Outsourced jobs may not be so bad. The cost savings increases profits of U.S. companies which may result in investments that lead to more jobs being created. Outsourcing routine jobs to foreign workers allows U.S. workers to focus more high value and complex tasks. Outsourcing promotes specialization bother here and abroad.

National income + Govt transfer payments - social security contributions - undistributed corporate profits

PI (personal income)

Efficiency Wages -

Pay above equilibrium wages to boost worker productivity

Which of the following transactions is included in the GDP?

Paying a lawyer to create a family trust.

Which of the following is not one of the four major assumptions of the classical model?

People suffer from money illusion.

The largest component of GDP by far is

Personal consumption expenditures

According to the Keynesian model, full employment is

Possible, but not guaranteed

One-armed economist

President Harry S Truman requested one of these

Labor contracts

Prevent nominal wages from falling.

What wouldn't cause the aggregate demand curve to shift?

Price level changes

An important difference between the Classical Model and Keynesian Model is that

Prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in Keynesian Model

An important difference between the classical model and the Keynesian model is that..

Prices adjust to bring equilibrium in the classic model and output adjusts to bring about an equilibrium in the Keynesian model.

What did Keynes mean when he said that prices are sticky?

Prices, especially the price of labor, are inflexible downward

What did Keynes mean when he said that prices are sticky?

Prices, especially the price of labor, are inflexible downward. Prices are inflexible sine the firms costs are inflexible too. If input costs are difficult to decrease, it implies that the prices firms charge for their products are unlikely to decrease too.

Inflation tax -

Printing money causes inflation, which is like a tax on everyone who holds money

National Saving =

Private Saving + Public Saving = Y - C - G

Comparing GDP across countries is unrealistic unless we make adjustment in exchange rates to take into account differences in the cost of living via

Purchasing power parity

The most accurate way to compare standards of living throughout the world is to look at

Purchasing power parity

The Keynesian model indicates that the economy will find an equilibrium, however the economy will not always

Reach full employment

Money illusion

Reacting to changes in money prices rather than relative prices. If a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion.

The aggregate demand curve slopes downward because of the

Real-balance, interest rate and open economy effects

There are several time lags involved when fiscal policy is applied. The first hurdle faced by a government is

Recognizing that the economy is facing a problem that could be solved by applying fiscal policy.

If the economy is experiencing an inflationary gap and the government wants to accelerate the adjustment to the long - run equilibrium, it should?

Reduce aggregate demand by cutting government spending or raising taxes.

Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

Reduce their workforce

Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

Reduce their workforce.

According to the real-balance effect, an increase in the price level

Reduces an individual's expenditures due to a decrease in the real value of cash balances

Suppose that Congress enacts a lump-sum tax cut of 750 billion. The marginal propensity to consume is equal to .75. If Ricardian equivalence holds true, equilibrium and GDP will what?

Remain unchanged.

Suppose that congress enacts a lump-sim tax cut of $750 billion. The marginal propensity to consume is equal to 0.75 If Ricardian equivalence holds true, equilibrium Real GDP will If Ricardian equivalence holds true, savings will

Remain unchanged. increase by the amount of the tax cut.

What is the formula for NATIONAL INCOME ?

Rent + Wages + Interest + Profit

National Income (NI)

Rent + Wages + Profit + Interest

The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the

Ricardian equivalence theorem.

Economic growth is shown by _____.

Rightward shift of the LRAS curve.

Saving in an economy can be expressed as:

S = I + NX OR... S = I + NFI net exports equals net foreign investment National saving = Investment + Net foreign investment This is the saving and investment equation: an equation that shows that national saving is equal to domestic investment plus net foreign investment.

APS

S/Y

A temporary change in input prices will shift only the

SRAS curve

What best reflects the relationship between saving and savings?

Saving is a flow variable; savings is a stock variable

Which of the following statements best reflects the relationship between saving and savings?

Saving is a flow variable; savings is a stock variable

Which of the following statements best reflects the relationship between saving and savings?

Saving is a flow variable; savings is a stock variable

Which of the following statements best reflects the relationship between saving and savings?

Saving is a flow variable; savings is a stock variable.

Which of the following statements best reflects the relationship between saving and savings?

Saving is a flow variable; savings is a stock variable.

________is a flow, something that occurs over time. It equals disposable income minus consumption. In contrast, _________are a stock. They are the accumulation resulting from saving. _________is also a flow. It includes expenditure on new machines, buildings, and equipment and in business inventories.

Saving; savings; Investment

States that if something of value is created it will in turn generate an equal amount of income that will be spent ( demand) on other goods and services.

Say's Law

Katie works during the summer as beach life guard at Bondi.

Seasonal

Max has been working as fruit picker in Orange during his summer holiday.

Seasonal

A persistent decline in the price level due to economic growth with stable aggregate demand is

Secular deflation

"The multiplier effect means that an increase in one component of aggregate demand will result in a larger increase in total aggregate demand," your economics professor states. "Moreover, the multiplier effect also works in reverse." What does your professor mean when she says that the multiplier effect works in reverse?

She means that a decrease in some component of aggregate demand will result in a larger decrease in total aggregate demand.

In many countries, education is either wholly provided by the government or is heavily subsidized. How would an economist explain this?

Since education has a spillover benefit, private markets will under provide for it.

Automatic, or built-in, stabilizers

Special provisions of certain federal programs that cause changes in desired aggregate expenditures without the action of Congress and the president. Examples are federal progressive tax system and unemployment compensation.

Which of the following is NOT associated with the Classical Aggregate Supply Curve?

Sticky prices

An increase in government spending will

Stimulate economic activity.

A high school graduate lacks the skills necessary for a particular job.

Structural

A skilled glass blower becomes unemployed when a new machine does her job faster.

Structural

Advances in technology make the assembly-line worker's job obsolete.

Structural

Eric has worked in the tobacco fields since he was a little kid. Because fewer people are smoking, demand for tobacco has fallen, and Eric can no longer find work in this occupation.

Structural

Which type of unemployment is relevant to a change in technology which makes a worker's skills obsolete?

Structural

____________ unemployment occurs when there is a poor match of workers' skills and abilities with available jobs, perhaps because workers lack appropriate training or government labor rules reduce firms' willingness to hire.

Structural

changes to the composition of the economy

Structural

James worked for an automobile plant that has now closed, as the parts produced are no longer needed. Which type of unemployment is this

Structural Unemployment

The current state of the US domestic economy is depicted in the graph. Draw a new aggregate demand curve. Draw a new SRAS curve.

Suppose that the curves shifted in the opposite direction. The price level decrease and real GDP remains at the original level.

Suppose that foreign currencies depreciate relative to the dollar.

Suppose that the curves shifted in the same proportions. The price level decreases and real GDP remains at the origin.

Suppose that the economy is in short-run equilibrium but there is an inflationary gap. Which of the following is an example of a discretionary fiscal policy that could be used to return the economy to full-employment real GDP? A. An increase in the money supply. B. A decrease in government spending. C. A decrease in taxes. D. An increase in the interest rate. E. An increase in unemployment insurance.

Suppose that the economy is presently operating at full employment. If there is an increase in national income, which of the following will occur automatically? A. An increase in tax revenues. B. An increase in unemployment compensation spending. C. A decrease in tax rates. D. An increase in tax rates.

What is the economic effect of price floors?

Surpluses.

Public Saving =

T - G

Budget Surplus =

T - G = Public Saving

Any permanent decrease in autonomous real spending will cause even larger decreases in real GDP per year.

TRUE

At any point where the consumption function intersects the 45-degree reference line, C = Y.

TRUE

Because of the multiplier effect, a relatively small change in planned investment can trigger a much larger change in equilibrium real GDP per year.

TRUE

Equilibrium has to occur at the intersection of the planned saving and planned investment schedules.

TRUE

In the United States, resourse-using federal government expenditures account for almost 20 percent of real GDP.

TRUE

TRUE OR FALSE: Expansionary fiscal policy should raise the exchange rate of the dollar.

TRUE

TRUE OR FALSE: Holding all else constant, a rise in interest rates in the United States will cause the dollar to appreciate in international exchange markets.

TRUE

TRUE OR FALSE: Monetary policy has a greater impact in an open economy than it does in a closed economy.

TRUE

TRUE OR FALSE: Net foreign investment is a measure of net capital outflows, equal to capital outflows minus capital inflows in a given period of accounting.

TRUE

Why do teens have high unemployment rates?

Teens are just entering the labor market for the first time and have a difficulty finding jobs and keeping them. They have no marketable skills or job experience. Employers are reluctant in hiring them because they have to be paid minimum wage. Teen unemployment is three times higher than adults.

Persistent inflation arises due to

The AD curve increasing by a larger proportion that the LRAS supply curve.

Using the expenditures approach to national income accounting, which of the following would be counted as government spending?

The City of Chicago provides police and fire protection

The U.S. aggregate demand curve would shift to the left if

The Federal Reserve Board caused the real interest rate to increase

monetary policy

The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of a ____

Another year and a half elapses following passage of the government spending boost. The government has undertaken no additional policy actions, nor have there been any other events of significance. Nevertheless, by the end of the second year, real GDP has returned to its original level, and the price level has increased sharply. This possibly happened because.

The LRAS was vertical; the increase in government spending raised aggregate demand and resulted in only a rise in the price level in the long run.

Which of the following measures gives the earliest warning of increasing inflation? The Producer Price Index The Consumer Price Index The Personal Consumption Expenditure Index All of these should signal the same short-run inflation

The Producer Price Index

Suppose that the US dollar was $1 = 4 euros. Today the exchange rate is $1 = 3 euros

The US dollar depreciated.

Inflation in an economy implies that

The average price level has increased over a state period of time.

Inflation in an economy implies that

The average price level has increased over a stated period of time

Suppose that disposable income increases in an economy. Which of the following relationships must always be true

The change in disposable income is equal to the change in saving plus the change in consumption

Suppose that disposable income increases in an economy. Which of the following relationships must always be true?

The change in disposable income is equal to the change in saving plus the change in consumption

Suppose that disposable income increases in an economy. Which of the following relationships must always be true?

The change in disposable income is equal to the change in saving plus the change in consumption

Suppose that disposable income increases in an economy. Which of the following relationships must always be true?

The change in disposable income is equal to the change in saving plus the change in consumption.

Real-balance effect

The change in expenditures resulting from a change in the real value of money balances when the price level changes,all other things held constant; also called the wealth effect.

If the price level did not remain constant when the government spending increases then

The change in total expenditures would be less than they would be if the price level remained constant.

The current EQ interest rate will - D Current EQ real GDP will - N Current EQ employment will - N Current EQ saving- D Future EQ real GDP will - D

In the figure at right, the inflationary gap can correctly e identified as

The difference between 12.2 trillion and 12 trillion.

Fiscal Policy

The discretionary changing of government expenditures or taxes in order to achieve national economic goals, such as: • High employment (low unemployment) • Price stability • Economic growth

Fiscal Policy

The discretionary changing of government expenditures or taxes to achieve national economic goals, such as high employment with price stability.

Suppose that the economy is depicted by the following relationship: Expenditures = C + I + G + X where: C = $100 + 0.80(Y-T) G = $700 T = $700 I = $100 X = $250

The economy is in equilibrium at a level of real GDP or income of $2250. (solve for Y) Y=100+0.80(Y-700)+100+700+250 Y=100+0.80(1150-700)+I+G+X Y=1150+0.80(Y) - 0.80 x 700 Y=1150+0.80(Y) - 560 Y=590+0.80(Y) Y=0.80(Y) = 590 (find the multiplier) 0.2(Y) = 5900 Y = 5 x 590 Y = 2950 -------------------------------------------------- Now suppose that the government decides to increase government spending by $100. What is the new equilibrium level of GDP or income? $2950 5 (multiplier) x $100 (spending) = $500 $2950 + $500 = $3450

If economic growth causes the long-run aggregate supply curve to shift rightward over time, but the aggregate demand curve does not change, we expect

The long-run equilibrium price to decline, and there will be secular deflation

Suppose that the economy is depicted by the following relationship: Expenditures = C + I + G + X where: C = $100 + 0.75(Y - T) G = $700 T = $700 I = $200 X = $250

The economy is in equilibrium at a level of real GDP or income of $2900. (solve for Y) Y=100+0.75(Y-700)+200+700+250 Y=100+0.75(1250-700)+I+G+X Y=1250+0.75(Y) - 0.75x700 Y=1250+0.75(Y) - 525 Y=725+0.75(Y) Y=0.75(Y)=725 (find the multiplier) 0.25(Y)=725 Y=4x725 Y=2900 -------------------------------------------------- Now suppose that the government decides to increase government spending by $100. What is the new equilibrium level of GDP or income? $3300 4(multiplier)x$100 (spending) = $400 $2900+$400=$3300

Suppose that the economy is depicted by the following relationship: Expenditures = C + I + G + X where: C = $100 + 0.80(Y - T) G = $500 T = $500 I = $300 X = $150

The economy is in equilibrium at a level of real GDP or income of $3250. ------------------------------------------- Now suppose that the government decides to increase government spending by $50. What is the new equilibrium level of GDP or income? $3500

4. What is meant by an expenditures approach ? ... an income approach? Why are the two equal ?

The expenditure approach--- is a method for calculating a nation's gross domestic product (GDP) by considering the private sector, investor, and government spending as well as net exports. Y = C + I + G + NX The income approach equates the total output of a nation to the total factor income received by residents or citizens of the nation. The main types of factor income are: (BOTH Calculate GDP) NI = W + R + i + PR Labor Income (W): Salaries, wages, and fringe benefits such as health or retirement. This also includes unemployment insurance and government taxes for Social Security. Rental Income (R): This is income received from property received by households. Royalties from patents, copyrights and assets as well as imputed rent are included. Interest Income (i): Income received by households through the lending of their money to corporations and business firms. Government and household interest payments are not included in the national income. Profits (PR): The amount firms have left after paying their rent, interest on debt, and employee compensation. GDP calculation involves accounting profit and not economic profit.

Suppose that the long-run aggregate supply curve is positioned at a real GDP level of $12 trillion in base year dollars, and the long-run equilibrium price level (in index number form) is 115. The corresponding full employment level of nominal GDP must be $___ trillion dollars (Enter your response rounded to one decimal place).

The following equation gives the relationship between real GDP, nominal GDP, and the price level in index form, PI. PI =NGDP/RGDP x100 You must solve for NGDP, given that PI = 115 and RGDP = $12. nominal GDP must be $13.8 trillion dollars

Which of the following statements is true concerning the historical picture of business activity in the United States?

The frequency and size of fluctuations around the trend has decreased since World War II.

The macroeconomy is depicted by the graph to the right. The eq. price level and output is 80,12 trillion.

The full employment level of GDP is $12 trillion since the LRAS is defined at this point.

The long-run aggregate supply curve is determined by

The full employment level of real output

Inflationary gap

The gap that exists whenever equilibrium real GDP per year is greater than full-employment real GDP, as shown by the position of the long-run aggregate supply curve.

Recessionary gap

The gap that exists whenever equilibrium real GDP per year is less than full-employment real GDP as shown by the position of the long-run aggregate supply curve.

We have an increase in our population every year. What is the good news and the bad news associated with that increase?

The good news is that the increased population increases our production possibilities which is the potential for our economy to produce more goods and services. The bad news is we have to create 2 million new jobs a year to keep up with the population growth or we will be inside the PPC.

Which of the following is an example of a flow variable?

The government budget deficit

Creeping Socialism

The gradual loss of economic freedom to government

Keynesian short-run aggregate supply curve

The horizontal portion of the aggregate supply curve in which there is excessive unemployment and unused capacity in the economy.

Say's law

The idea that supply creates its own demand

Which of the following must be true if the balanced budget multiplier to equal one?

The increases in income stemming from a change in government spending must be greater than the change in income stemming from the change in taxes.

Which of the following must be true if the balanced budget multiplier to equal one?

The increases in income stemming from a change in government spending must be greater than the change in income stemming from the change in taxes.

Which of the following is a key macroeconomic effect of the growing relative economic importance of large firms?

The increasing share of real GDP contributed by large companies' sales has caused swings in these firms' sales to generate greater portions of shocks to the aggregate demand and aggregate supply curves.

Misery Index

The inflation rate added to the unemployment rate

Which of the following transactions is included in GDP?

The sales of houses produced in that given year

REMEMBER:

The majority of federal revenues come from taxes on individual employment: individual income taxes and "payroll taxes" earmarked to fund Social Security and Medicare. Taxes on corporate profits constitute about one-seventh of federal receipts. The remainder of federal revenue comes from excise taxes (on cigarettes, gasoline, etc.), tariffs on imports, and other fees from firms and individuals.

What is true when considering an economy with an upward sloping SRAS curve?

The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap

Which of the following statements is true when considering an economy with an upward-sloping short-run aggregate supply curve?

The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap

Which of the following statements is true when considering an economy with an upward-sloping short-run aggregate supply curve?

The multiplier has more impact when the economy is experiencing a recessionary gap compared to an inflationary gap.

The assumption that the price level is fixed in the Keynesian model allows

The multiplier to be fully applied.

If you receive a free ticket to a concert, what, if anything, is your opportunity cost of attending the concert?

The next best activity that can't be done while attending the concert. increases

What were structural pressures that occurred in the 90s?

The number of teenageres declined. Women's participation leveled off. High school and college graduation increased. Welfare programs were reformed to force people to look for permanent work. These changes allowed the unemployment rate to go down. Bush said 5.5% Clinton said 5.3% Bush said 5.1% and Obama said 5.1%

In may and June of 2008, the federal government issued one time-tax rebates-checks returning a small portion of taxes previously paid - to millions of u.s residents, and u.s real disposable income temporarily jumped by nearly $500 billion. however, household real consumption spending did not increase in response to the short-lived increase in real disposable income because. Which of the following economic theories can be used to account for this apparent non-relationship between real consumption and real disposable income in the late spring of 2008?

The one-time tax rebate failed to increase the recipients permanent income which determines an individuals current consumption. The permanent income hypothesis.

If real GDP increases in any year, we know that

The output of goods and services produced this year has increased

The LRAS curve will not shift if there is a change in

The price level

Suppose the short-run supply curve shifts by more than the aggregate demand curve. In this case, the result would be that

The price level decreases and real GDP increases.

An increase in government spending shows up exclusively as a change in real GDP when

The price level is assumed to be constant.

The long-run aggregate supply curve will not shift if there is a change in

The price level.

The foreign exchange rate is

The price of one currency in terms of another

The modern Keynesian Model assumes that

The prices respond to changes in aggregate demand but not fully

The sum of the value added at all stages of production for a product is

The product's final price

Which of the following best exemplifies say's law?

The production of a $4000 plasma TV set creates demand for other goods and services valued at $4000.

Which of the following best exemplifies Say's Law?

The production of a $4000 plasma TV set creates demand for other goods and services valued at $4000.

Ricardian Equivalence Theorem

The proposition that an increase in the government budget deficit has no effect on aggregate demand. - Reason: people anticipate that a larger deficit today will mean higher taxes in the future and adjust their spending accordingly

When we use the term fixed investment, we include in investment

The purchase of equipment and other capital goods

The purpose of automatic stabilizers is to A. make sure people have a living wage. B. lessen the impact of unemployment in a recession and slowdown inflation during an expansion. C. act as a safety measure preventing the government from using fiscal policy. D. stabilize tax revenue and government expenditures.

Short-run aggregate supply curve

The relationship between total planned economywide production and the price level in the short run, all other things held constant. If prices adjust incompletely in the short run, the curve is positively sloped.

What determines the total value of annual U.S. GDP?

The spending and production decisions of consumers, firms, governments, and foreigners

What determines the total value of annual U.S. GDP?

The spending and production decisions of consumers, firms, governments, and foreigners.

During the summer of 2011, the stock market took a beating as the average value of shares traded in the U.S. stock market dropped by more than 15 percent. In response, total planned expenditures began to decline at any given price level because.

The stock market shock created a negative aggregate demand shock.

Which of the following is not a reason for this change in economywide planned spending?

The substitution effect.

Supply-side economics

The suggestion that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward.

natural rate of unemployment

The sum of frictional and structural unemployment

Natural unemployment rate

The sum of frictional and structural unemployment (no CYCLICAL)

Misery index

The sum of the inflation rate and the unemployment rate

misery index

The sum of the inflation rate and the unemployment rate

Crowding-out effect

The tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector. This decrease normally results from the rise in interest rates

Secular stagnation

The term "secular stagnation" refers to a state of little or no economic growth - in other words, an environment where the economy is essentially stagnant. "Secular" in this context simply means "long term."

Why do economists avoid making the distinction between wants and needs?

The term need is subjective making it difficult to distinguish between something someone wants and something they need.

Action Time Lag

The time required between recognizing an economic problem and implementing policy to solve it. The action time lag is quite long for fiscal policy, which requires congressional approval.

Recognition Time Lag

The time required to gather information about the current state of the economy.

Which of the following defines an effect time lag?

The time that elapses between the implementation of a policy and the results of a policy.

Effect Time Lag

The time that elapses between the implementation of a policy and the results of that policy.

Aggregate Demand

The total of all planned expenditures in the entire economy.

Aggregate supply

The total of all planned production for the economy.

Appendix D: Fiscal Policy: A Keynesian Perspective

The traditional Keynesian approach to fiscal policy differs in three ways from that presented in Chapter 13: -It emphasizes the underpinnings of the components of aggregate demand. -It assumes that government expenditures are not substitutes for private expenditures and that current taxes are the only taxes taken into account by consumers and firms. -It focuses on the short run and so assumes that as a first approximation, the price level is constant.

Monetary policy

The use of the money supply to influence the economy

Base-year Dollars

The value of a current sum expressed in terms of prices in a base year.

Base-year dollars:

The value of a current sum expressed in terms of prices in a base year.

Shadow Price

The value of a factor of the economy that is lost when it is shifted from its current use to the use being analyzed

Show the new equilibrium level of real GDP

The value of the autonomous spending multiplier is planned expenditures 16-4 _______________ = ________ = 0.50 real GDP 24-0 1 1 _______ = ____ = 2. (1 - 0.50 ) 0.50 Y = multiplier x G therefor the EQ GDP is $4 trillion

Suppose the government increases both taxes and government spending by the same amount, creating a balanced budget multiplier. If MPC increases, then

The value of the balanced-budget multiplier will not change.

Endowments

The various resources in an economy, including both physical resources and such human resources as ingenuity and management skills.

In the modern Keynesian Model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor input?

The workers are switched from uncounted production to counted production, thus enabling The firm to expand output as the price level expands

In the modern Keynesian model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only address labor input? Which of the following is the best example of uncounted production?

The workers are switched from uncounted production to counted production, thus enabling the firm to expand output as the price level expands. An employee recalibrating a machine to maintain production within satisfactory tolerance levels for machine parts.

In the modern Keynesian Model the short-run aggregate curve slopes upward. How does this model explain the reason behind this upward sloping curve when it only addresses labor input?

The workers are switched from uncounted production to counted production, thus enabling the firm to expand output as the price level expands.

Cobweb Theorem

Theory of how price and quantity adjust to reach market equilibrium

There are several time lags involved when fiscal policy is applied. The first hurdle faced by a government is A. recognizing that the economy is facing a problem that could be solved by applying fiscal policy. B. the time it takes Congress to pass the bill to enact the fiscal policy. C. the time it takes Congress to decide upon the type of fiscal policy to be used. D. the time it takes for the policy to have an effect on the economy.

Which of the following statements is true regarding the national debt and federal government deficits?

There is a positive relationship between the national debt and a federal government budget deficit.

The long-run aggregate supply curve shifts outward when

There is economic growth

Anything (apart from the exchange rate itself) affecting the demand for foreign exchange will shift the demand curve—to the right for an increase in demand, to the left for a decrease.

These shifts might result from: 1. Changes in the demand for U.S.-produced goods and services relative to foreign produced goods and services 2. Changes in the desire to invest in the U.S. relative to foreign countries 3. Changes in the expectations of currency traders about the likely future value of $US relative to foreign currencies The supply of $US for yen is the same as the demand for yen with $US, so the same factors that change demand also change supply.

Unemployed

Those actively seeking work

Labour Force

Those working and actively seeking work

Which of the following statements is true when considering time lags?

Time lags in fiscal policy can be extremely long and may take several years before an impact is felt.

Which of the following statements is true when considering time lags?

Time lags in fiscal policy can be extremely long and may take several years before any impact is felt.

Is fiscal policy also more effective in an open economy?

To find out, we can explore the effect of expansionary fiscal policy on the additional policy channel, net exports: • Tax cuts or increased government spending increase aggregate demand. • But this might result in higher interest rates, crowding out net exports due to the appreciating $US. Also, the multiplier effect is lower, since some spending takes place on imported goods, which do not feed back in to real GDP. • Overall, fiscal policy is less effective in an open economy than in a closed economy.

Open Market Operations (Most Used) -

To increase M - buy bonds, to lower M - sell bonds

Reserve Requirements -

To increase M - lower RR, to lower M - raise RR

discretionary fiscal policy

To stem an overheated economy, the President, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on government programs. This is an example of a _____

Twin deficits anomaly

Trade deficit is = to budget deficit

1. A country which incurs a current account deficit will most likely have a financial account surplus.

True

Any permanent decrease in autonomous real spending will cause even larger decreases in real GDP per year.

True

At any point where the consumption function intersects the 45-degree reference line, C = Y.

True

Because of the multiplier effect, a relatively small change in planned investment can trigger a much larger change in equilibrium real GDP per year.

True

Cyclical unemployment results from business recessions.

True

Equilibrium has to occur at the intersection of the planned saving and planned investment schedules

True

In an open economy, the total value of GDP is based on the spending decisions of individuals, firms, governments, and foreign residents.

True

Persistent inflation in a growing economy is possible only if the aggregate demand curve shifts rightward over time at a faster pace than the rightward progression of the long-run aggregate supply curve.

True

The components of GDP as calculated using the expenditure approach are identical to the components of aggregate demand.

True

The difference between real exports and real imports is called real net exports.

True

The lower the price level, the greater the total planned spending on goods and services.

True

The long-run aggregate supply curve (LRAS) is equivalent to the full-employment level of real GDP.

True

True or False: Lowering the individual income tax rate will increase household disposable income and consumption spending

True DECREASE T ... Increase C

Unemployment rate

U/U+E

$1 = 4 euros now its worth 5 An appreciation of the US $ result in

US $ appreciated. A lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the AD and short run supply curves

Suppose that the value of the US $ yesterday was $1 = 4 euroseuros. Today the exchange rate changed such that $1 = 55 euroseuros. One can say the

US $ appreciated.

Suppose that the value of the US dollar ($) yesterday was $1 = 4 yen. Today the exchange rate changed such that $1 = 3 yen. One can say that the

US $ depreciated.

5. What is the formula for the unemployment rate? What is the formula for the labor force?

Un rate = (# of unemployed)/(L) L = labor force = (unemployed + employed)

a discretionary fiscal policy

Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of ____

Luis has been searching for a full-time job in marketing, but has only been able to find a part-time job at the grocery store.

Underemployed

Cyclical Unemployment

Unemployment due to change in business cycle

Structural Unemployment

Unemployment due to change in the composition of the economy

Frictional Unemployment

Unemployment due to job switching

What can be said about unemployment rates between whites and minorities?

Unemployment rates for whites are lower than that of all minorities. Education plays a role in employment. The more education you have the less likely a person is to be unemployed or stay unemployed for a long time.

In the 70s and 80s what was our view of how low unemployment could go and what did Ronald Reagan do in regards to unemployment?

Unemployment stayed above 4% even when the economy was expanding so they felt there were barriers to 4% full employment goals. More youth and women entered the workforce adding to frictional and structural unemployment. Reagan administration said that full employment was 6-7%

wildcat strike

Unofficial work stoppages by employees

Suppose that the economy is presently operating at full employment. If there is a decreasea decrease in national income, which of the following will occur automatically?

Upper A decreaseA decrease in tax revenues.

In calculating GDP, the value of intermediate goods is eliminated by using the

Value added method

The shape of the long-run aggregate supply curve (LRAS) is

Vertical

Technological improvement

Vertical LRAS

Which of the following is NOT associated with the Keynesian AS curve?

Vertical aggregate supply

Animal Spirits

What determines the autonomous level of business investment according to John Maynard Keynes

remember:

When a country's spending exceeds its income, it finances the difference by selling assets or by borrowing.

How do automatic stabilizers work?

When a decline in national income occurs there will be a reduction in income tax collections and an increase in unemployment compensation and welfare payments muting the reduction in planned expenditures that would have otherwise resulted

How do automatic stabilizers work?

Fiscal policy is likely to be more effective

When the government borrowing does not increase interest rates substantially. when there are less offsetting reductions in private sector spending during abnormal times as opposed to more normal times.

Explain the effect of a government budget deficit on investment in an open economy.

When the government runs a budget deficit, Spublic is negative, and national savings tends to decline. By the saving and investment equation, we know domestic investment and/or net foreign investment must decline. • Why? When the government runs a budget deficit, it finances its dissaving by selling bonds. To attract buyers, the government must typically raise interest rates. • Higher interest rates discourage firms from making investments. • They encourage funds to flow to the U.S. to buy those bonds, causing the $US to appreciate, but this causes net exports to fall. And net exports equal net foreign investment.

The long-run equilibrium of an economy occurs

Where the long-run aggregate supply curve meets the aggregate demand curve

Which of the following statements is correct? A. Governments have a difficult time fine-tuning the economy by using fiscal policy because of the automatic stabilizers. B. Governments have learned how to use fiscal policy to fine-tune the economy. C. Governments have a difficult time fine-tuning the economy by using fiscal policy because there are several time lags and these are often variable. D. Governments have the knowledge about how to fine-tune the economy, but the effect time lag generates a backlash from voters that makes it difficult to implement.

the three fundamental economic questions that a nation addresses in order to allocate society's scarce resources include

Why will the items be produced?

If the Ricardian equivalence theorem is not relevant, then an income-tax-rate cut

Will result in a multiple times higher increase in equilibrium real GDP in the short run; however, a tax-rate reduction will reduce the automatic-stabilizer properties of the tax system, so equilibrium real GDP would be less stable.

Underemployed

Working but wanting to increase hours

S+T+M (leakages)

X+I+G (injection)

Private Saving =

Y - T - G

Disposable income

Y-T

You are a member of Congress. The economy is currently experiencing a recessionary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy? A. A decrease in government spending and an increase in taxes. B. An increase in government spending and a decrease in taxes. C. An increase in the money supply and a decrease in taxes. D. A decrease in the interest rate and an increase in the money supply.

What will increase both the SRAS and LRAS curves?

Younger workers in the labor force receive better and more training than their predecessors

Which of the following will increase both the short-run and long-run aggregate supply curves?

Younger workers in the labor force receive better and more training than their predecessors.

Which of the following will increase both the short-run and long-run aggregate supply curves?

Younger workers in the labor force receive better and more training than their predecessors.

The federal government has its best opportunity to lower its national debt when it has

a budget surplus.

All of the following can cause the investment function to shift except

a change in the rate of interest

All of the following can cause the investment function to shift except

a change in the rate of interest.

crowding out

a condition in which an increase in government spending forces out some private investment from the economy

Most economists agree that the fainter response of household spending on services during the most recent recovery resulted from

a decline in overall household net wealth.

Contractionary fiscal policy is:

a decrease in G and an increase in T (vC, vI)

You are a member of Congress. The economy is currently experiencing an inflationary gap. Which of the following are fiscal policies that Congress can enact in an attempt to correct the economy?

a decrease in government spending and increase in taxes

What will shift the Keynesian short-run aggregate supply curve downward and to the right?

a decrease in input prices

An increase in the interest rate causes

a decrease in the amount of real planned investment

and an increase in the interest rate causes

a decrease in the amount of real planned investment.

All of the following will cause the planned investment function to shift rightward except

a decrease in the interest rate

All of the following will cause the planned investment function to shift rightward expect _________________________ and an increase in the interest rate causes

a decrease in the interest rate. a decrease in the amount of real planned investment.

An increase in the LRAS curve that is larger proportionately than an increase in the AD curve will lead to

a decrease in the price level and an increase in output.

In the classical model, a decrease in AD will result in

a decrease in the price level and no change in output.

Cost-push inflation arises due to

a decrease in the short run aggregate supply curve.

Suppose that the wage rate of labor increased temporarily. The result of this would be best described by

a decrease in the short-run aggregate supply curve only.

Cost-push inflation arises due to

a decrease in the short-run aggregate supply curve.

According to the classical model, if the economy starts at full employment an increase in aggregate demand will cause all of the following to occur except

a decrease in wage rates.

Congress votes to fund a new jobs program designed to put unemployed workers to work. This is an example of

a discretionary fiscal policy

Under powers authorized by an act of Congress, the president decides to authorize an emergency release of funds for spending programs intended head off economic crises. This is an example of

a discretionary fiscal policy

A depreciation of the U.S dollar should be result in

a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short run aggregate supply.

A depreciation of the U.S. dollar should result in

a higher price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves.

With respect to real GDP, planned investment is autonomous and is therefore represented graphically as

a horizontal line

With respect to real GDP, planned investment is autonomous and is therefore represented graphically as

a horizontal line.

Generally a larger US trade deficit is accompanied by a

a larger US federal government budget deficit.

According to Keynes, the classical model could not explain

a long term economic decline

An appreciation of the US $ should result in

a lower price level but the impact on the level of real GDP depends on the magnitude of the shifts in the aggregate demand and short-run aggregate supply curves.

Per your lecture notes, wich of the following most closely defines economic capital?

a manufactured aid to production

The Federal Reserve decides to reduce the quantity of money in circulation in an effort to slow inflation. This is an example of

a monetary policy

In this most recent case of finical shocks during the summer of 2011, aggregate demand declined generating a leftward movement along the short-run aggregate supply curve, thus creating...

a recessionary gap.

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that there is decreased security about jobs and future income, the new short run position of the economy finds itself in is termed.

a recessionary gap.

Suppose that an economy is currently in a long run equilibrium where SRAS = LRAS = AD. Given that the US dollar appreciates, the new short run position of the economy finds itself in is termed

a recessionary gap.

When aggregate demand decreases while aggregate supply is stable, ________ gap can occur, defined as the difference between how much the economy could be producing if it were operating on its LRAS and the equilibrium level of real GDP. An increase in aggregate demand leads to ______ gap.

a recessionary gap; inflationary gap

In our capitalistic system of markets and prices, "prices" are _______

a signal

Disinflation

a situation in which price increases are slowing (the inflation rate is declining)

So any change in the level of taxes leads to

a smaller change in consumption and expenditures compared to the change in taxes.

What does saving represent>

a source of funds for business investment

lump-sum tax

a tax that does not depend on income or the circumstances of the taxpayer

All of the following will shift the short-run aggregate supply and the long-run aggregate supply except for

a temporary change in input prices.

From the end of WWII through 1983 the U.S. government had consistently experienced

a trade surplus.

In the labor market, full employment occurs at __________at which quantity demanded equals quantity supplied. That particular level of employment is associated with the full-employment level of real GDP per year.

a wage rate

Complete the following diagram. Draw a long-run aggregate supply curve for any value of GDP greater than 2 trillion. Draw a short-run aggregate supply curve label. a) Which of the following factors will shift the short-run aggregate supply curve but not the long run AS. b) If petroleum prices increase temporarily the _______ curve would shift to the _____

a) An economy wide increase in wages. b) Short-run aggregate supply curve, Left

Refer to the economy shown in the graph to the right. Suppose that there is an increase in oil prices. The short-run effect of this change on the economy is a) A. a leftward shift of the AD curve, and demand-pull inflation. B. a rightward shift of the AD curve, and demand-pull inflation. C. a leftward shift of the SRAS curve, and cost-push inflation. D. a rightward shift of the SRAS curve, and cost-push inflation. E. none; changes in prices have no effect on the economy in the short run. b) Due to the weakening of the dollar, the price level ________, and real GDP _________. A. will increase, will increase B. will increase, will decrease C. will decrease, will decrease D. will decrease, may increase or decrease depending on the size of the shifts E. will increase, may increase or decrease depending on the size of the shifts

a) C. a leftward shift of the SRAS curve, and cost-push inflation. a) E. will increase, may increase or decrease depending on the size of the shifts

Explain what happens to contributions to GDP in each of the following situations. a) A woman who makes a living charging for investment advice on her Internet Web site marries one of her clients, to whom she now provides advice at no charge. As a result of this, GDP b) A tennis player wins two top professional tournaments as an unpaid amateur, meaning the tournament sponsor does not have to pay out his share of prize money. As a result of this, GDP c) A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale. As a result of this, GDP

a) Decreases b) Remains unchanged c) Remains unchanged

Which of the following are production activities that are included in GDP? Which are not? a) Mr. King performs the service of painting his own house instead of paying someone else to do it. This activity is _____ in the GDP. b) Mr. King paints houses for a living. This activity is _____ in the GDP. c) Mrs. King earns income from parents by taking baby photos in her home photography studio. This activity is _____ in the GDP. d) Mrs. King takes photos of planets and stars as part of her astronomy hobby. This activity is _____ in the GDP. e) E*Trade charges fees to process Internet orders for stock trades. This activity is _____ in the GDP. f) Mr. Ho spends $10,000 on shares of stock via an Internet trade order. This activity is _____ in the GDP. Mr. Ho pays a $10 brokerage fee. This activity is _____ in the GDP. g) Mrs. Ho receives a Social Security payment. This activity is _____ in the GDP. h) Ms. Chavez makes a $300 payment for an Internet-based course on stock trading. This activity is _____ in the GDP. i) Mr. Langham sells a used laptop computer to his neighbor. This activity is _____ in the GDP.

a) Excluded b) Included c) Included d) Excluded e) Included f) Excluded Included g) Excluded h) Included i) Excluded

Explain what happens to the official measure of GDP in each of the following situations. a) Air quality improves significantly throughout the United States, but there are no effects on aggregate production or on market prices of final goods and services. As a result of this, GDP b) The U.S. government spends considerably less on antipollution efforts this year than it did in recent years. As a result of this, GDP c) The quality of cancer treatments increases, so patients undergo fewer treatments, which hospitals continue to provide at the same price per treatment as before. As a result of this GDP

a) Remains the same b) Decreases c) Decreases

A recession occurs, and government-funded unemployment compensation is paid to laid-off workers. This is an example of

an automatic fiscal stabilizer

a.Autonomous consumption in this model is equal to: $___ trillion. (Enter your answer as a whole number) b. If autonomous consumption should increase then A. the slope of the consumption function becomes steeper. B. the consumption function shifts upward. C. the slope of the consumption function becomes flatter. D. the slope of the saving function becomes steeper.

a. 2 b. B. This is the point at which the consumption function intersects the Y-axis.

During the course of a year, the labor force consists of the same 1,029 people. Of these, 23 lack skills that employers desire and hence remain unemployed throughout the year. At the same time, every month during the year, 27 different people become unemployed, and 27 other different people who were unemployed find jobs. There is no cyclical unemployment. a. Calculate the frictional unemployment rate. (Enter your response as a percentage rounded to two decimal places). b. Calculate the unemployment rate. (Enter your response as a percentage rounded to two decimal places). c. Suppose that a system of unemployment compensation is established. Each month, 27 new people (not including the 23 lacking required skills) continue to become unemployed, but each monthly group of newly unemployed now takes two months to find a job. Calculate the frictional unemployment rate after this change. (Enter your response as a percentage rounded to two decimal places). d. After the change discussed in part (c), calculate the unemployment rate. (Enter your response as a percentage rounded to two decimal places).

a. 2.62% b. 4.86% c. 5.25% d. 7.48%

Suppose that a nation has a labor force of 100 people. In January, Amy, Barbara, Carine, and Denise are unemployed; in February, those four find jobs, but Evan, Francesco, George, and Horatio become unemployed. Suppose further that every month, the previous four who were unemployed find jobs and four different people become unemployed. Throughout the year, however, the same three people — Ito, Jack, and Kelley — continually remain unemployed because their skills are a poor match with employers' requirements. a. Calculate this nation's frictional unemployment rate. (Enter your response as a percentage rounded to two decimal places.) b. Calculate the nation's structural unemployment rate. (Enter your response as a percentage rounded to two decimal places.) c. Calculate the nation's unemployment rate. (Enter your response as a percentage rounded to two decimal places.)

a. 4.00% b. 3.00% c. 7.00%

Identify each of the following as (i) part of an expansionary fiscal policy, (ii) part of a contractionary fiscal policy, or (iii) not part of fiscal policy. a. The personal income tax rate is lowered. b. Congress cuts spending on defense. c. College students are allowed to deduct tuition costs from their federal income taxes. d. The corporate income tax rate is lowered. e. The state of Nevada builds a new tollway in an attempt to expand employment and ease traffic in Las Vegas.

a. expansionary b. not c. not d. expansionary e. not

An important difference between the classical model and the Keynesian model is that the a. Keynesians believe that the aggregate supply curve is ________. b. The classical model assumes prices ____ so that the aggregate supply curve is _______ and the economy is always _______ c. The Keynesian model indicates that the economy will find an equilibrium however the economy will not always _________.

a. Horizontal in the short run. b. Are flexible, vertical, at full employment c. Reach full employment.

The equilibrium real GDP is $13.00 trillion and full-employment EQ (FE) is 16.00 trillion. The marginal propensity is 0.30. Answer the questions using the data in the following graph.

a. Marginal propensity to consume: 1 - Marginal Propensity to save (MPS) since MPC + MPS = 1 MPC = 1- 0.30 = 0.70 Real GDP x MPS x 1000 = 3 x 0.30 x 1000 = 900 billion (calculated investment and spending increased) In order to convert the change in taxes from trillions of dollars to Billions of dollars, we need to multiply the expression by 1000. thus Real GDP x MPS ____________ x 1000 MPC = 3.00 x 0.30 ____________ x 1000 0.70 =$ 2396.71

Assume that MPX = 0.75, when answering the following questions. Calculate by how much the aggregate expenditure curve will shift. calculate the increase in EQ level of real GDP.

a. Suppose the government raises both taxes and government expenditures by 3 billion, calculate by how much the aggregate expenditure curve will shift. (1-0.75) x 3 =$ 0.75 billion b. By the same about... Increases in real GDP = Increase in government spending or increase in taxes = $ 3 billion. ****************

Assume that MPC = 0.60, consider the following a. If government expenditures rise by 1 billion, calculate by how much the aggregate expenditure curve will shift upward.

a. When government expenditures increases by 1 billion, the Aggregate expenditure or AE curve will shift up by an equal amount. AE1 = C + I + G1 AE2 = C+I+G2. The increase in AE2 -AE 1 = G2 - G1. The ******curve will shift upward by 1 billion.******* b. When taxes are raised by 1 billion, the aggregate expenditure or AE curve will shift downward by an amount that is equal to the initial increase in taxes time the MPC. AE = C + I + G = A + MPC ( Y - T) + I + G in other words *********MPC x Change in taxes = 0.60 x 1 = 0.6 *********

a. A government agency arranges to make loans to businesses whenever an economic downturn begins. This is an example of __ _____ _____ _____. b. As the economy heats up, the resulting increase in equilibrium real GDP immediately results in higher income tax payments, which dampen consumption spending somewhat. This is an example of __ _____ _____ ______. c. As the economy starts to recover from a recession and more people go back to work, government funded unemployment compensation payments begin to decline. This is an example of __ _____ _____ _____. d. To stem an overheated economy, the President, using special powers granted by Congress, authorizes emergency impoundment of funds that Congress had previously authorized for spending on government programs. This is an example of __ _____ _____ _____.

a. an automatic fiscal stabilizer b. an automatic fiscal stabilizer c. an automatic fiscal stabilizer d. a discretionary fiscal policy

a. In an effort to help rejuvenate the nation's railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. This is an example of _____ _____ _____ to a fiscal policy action. b. The government increases its expenditures without raising taxes; to cover the resulting budget deficit, it issues more bonds, thereby pushing up the market interest rate and discouraging private planned investment spending. This is an example of_____ _____ _____ from a fiscal policy action. c. The government finances the construction of a classical music museum that otherwise never would have received private funding. This is an example of _____ __ _____ _____ ___ ___ _____ _____ __ _____ to a fiscal policy action.

a. direct expenditure offset b. indirect crowding out c. neither a direct expenditure nor an indirect crowding out offset

Briefly explain whether each of the following is an example of (1) discretionary fiscal policy, (2) an automatic stabilizer, or (3) not a fiscal policy a. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. b. The Federal Reserve sells Treasury securities. c. The total the federal government pays out for unemployment insurance decreases during an expansion. d. The revenue the federal government collects from the individual income tax declines during a recession. e. The federal government changes the requires gasoline mileage for new cars. f. Congress and the president enact a temporary cut in payroll taxes.

a. not b. not c. automatic d. automatic e. not f. discretionary

2. Why would a government ever want to engage in contractionary fiscal policy? a. pay off debt that was accrued during recessions b. speed up a growing economy c. increase the size of business cycles d. to increase the popularity of the president

a. pay off debt that was accrued during recessions

saving

act of not consuming all of one's current income whatever is not consumed out of spendable income is saved saving is an action of measured over time (flow) savings are a stock, an accumulation resulting from the act of saving in the past

The Congressional meetings, discussions, arguments, debates over fiscal policy and the subsequent signing or vetoing by the President of a bill are part of the

action time lag.

Suppose that Maria hurt her back this year and is recovering from surgery. Her surgeon has instructed her not to do any texturing work, but he has given her the go-ahead to paint a room as long as she is cautious. Thus, she buys all the equipment required to both texture and paint a room. She hires someone else to do the texturing work but does the painting herself. Suppose that as soon as Maria bends down to dip her brush into the paint, she realizes that painting will be too hard on her back after all. She decides to hire someone else to do all the work using the materials she has already purchased. In this case, how much will her spring painting activity contribute to GDP?

add all the shit together this time. 842

The term "marginal utility" most closely aligns with which of the following phrases?

additional satisfaction

Marginal

additional/change

The expenditure approach to tabulating GDP

adds up the total amount spent on newly produced domestic goods and services during the year.

which of the following groups has the highest unemployment rates in the U.S

african american under age 20

According to Keynes, when there is excess capacity in an economy, the equilibrium level of real GDP per year is determined by

aggregate demand.

The total of all planned real expenditures in the economy is

aggregate demand.

Each year after a regular spring cleaning, Maria spruces up her home a little by retexturing and repainting the walls of one room in her house. In a given year, she spends $28 on magazines to get ideas about wall textures and paint shades, $42 on newly produced texturing materials and tools, $38 on new paintbrushes and other painting equipment, and $170 on newly produced paint. Normally, she preps the walls, a service that a professional wall-texturing specialist would charge $196 to do, and applies two coats of paint, a service that a painter would charge $368 to do, on her own. When she purchases her usual set of materials and does all the work on her home by herself in a given spring, how much does Maria's annual spring texturing and painting activity contribute to GDP? $

all materials and supplies added together (NO SERVICE FEES/CHARGES) 278

all materials and supplies added together, plus the fee for the person to do the texturing 474

Which of the following can be described as "human" resources?

all of the above

A production possibilities curve represents

all possible combinations of output that could be produced assuming fixed productive resources and their efficient use.

Since the economy's current real GDP is unaffected by the decision of the country's residents to seek to decrease their saving, it must be true, all else constant, that the current level of employment is ___.

also unaffected.

The growing importance of large firms has

altered the ways in which aggregate demand and aggregate supply shocks occur within the economy and influence real GDP.

When an economist is using the term "discretionary" as in discretionary spending, they are referring to the?

amount f gov't spending decided upon by Congress or the gov'ts ruling body.

When an economist is using the term "discretionary" as in discretionary spending, they are referring to the

amount of government spending decided upon by Congress or the government's ruling body

When an economist is using the term "discretionary" as in discretionary spending, they are referring to the

amount of government spending decided upon by Congress or the government's ruling body.

Between early 2005 and late 2007, total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation. From a short-run Keynesian perspective, the predicted effects of this event on the equilibrium U.S. price level and equilibrium U.S. real GDP were

an increase in the price level along with an increase in equilibrium real GDP.

Which of the following would create cost-push inflation.

an increase in wages paid to workers.

Given that the economy is currently in a long run equilibrium where SRAS = LRAS = AD the US dollar depreciates the economy would then experience

an inflationary gap.

The resulting spending gap between early 2005 and late 2007 when total planned expenditures by U.S. households substantially increased in response to an increase in the quantity of money in circulation can best be described as

an inflationary gap.

Consider the following diagram, in which the current short-run equilibrium is at point A. At point A, the economy has __________ If the marginal propensity to consume equals 0.8, to eliminate the gap, the government should decrease spending by ___________

an inflationary gap. *******formula*** 1-0.8 = 0.20 1/0.2 = 5 inflation gap = 1.6 1.6 ___ = 0.32 trillion 5 0.32 Trillion!

Consider the following diagram, in which the current short-run equilibrium is at point A. At point A, the economy has __________. If the marginal propensity to consume equals 0.8, to eliminate the gap, the government should decrease spending by ___________.

an inflationary gap. *******formula*** 1-0.8 = 0.20 1/0.2 = 5 inflation gap = 1.6 1.6 ___ = 0.32 trillion 5 0.32 Trillion!

Suppose that the economy is shown to the right. This economy is currently experiencing

an inflationary gap. the fiscal policy correction is labeled D1

Central bank -

an institution designed to oversee the banking system and regulate the quantity of money in the economy

The amount of planned real investment in the economy has _________ relationship with the rate of interest.

an inverse

The amount of planned real investment in the economy has _______________ relationship with the rate of interest

an inverse

The amount of planned real investment in the economy has _____________________ relationship with the rate of interest

an inverse

Julie goes to a cooking academy to become a chef. This is an example of

an investment in human capital.

Medium of Exchange -

an item that buyers give to sellers when they want to purchase goods and services

Store of Value -

an item that people can use to transfer purchasing power from the present to the future

aggregate demand shock

any event that causes the aggregate demand curve to shift inward or outward

aggregate supply shock

any event that causes the aggregate supply curve to shift inward or outward

If nominal GDP increases, it is possible that

any of the above might have happened.

When there is ________ gap, the government would increase taxes in an attempt to shift the aggregate demand curve to the ________.

an inflationary; left

remember

appereication of our dollar decreases NX. Crowding out occurs in the NX.

savings

are a stock. They are the accumulation resulting from saving.

The classical model assumes that wages and prices

are always completely flexible.

The Classical model assumes prices _________so that the aggregate supply curve is_______ and the economy is always ________

are flexible; vertical; at full employment

keynesian theory of consumption and saving

argues that real consumption and saving decisions depend primarily on households current real disposable income

The law of demand states that

as price increases, quantity demanded decreases, all other things equal.

the relationship between inflation and unemployment is usually that

as unemployment falls inflation increases

in the equilibrium graphs

as you move up, dollar is gettin stronger; goes down it depcriates

At which of the market rates of interest below would Fred's Fish House be inclined to make the investment?

at any of these interest rates listed

At which of the market rates of interest below would maya's internet services be inclined to make the investment

at any of these interest rates listed.

Where does aggregate supply and aggregate demand intersect in the classical model?

at full employment

Long-run equilibrium in the economy will occur

at the price level where total planned real expenditures equals real GDP at full employment.

An advantage of automatic stabilizers over discretionary fiscal policy is that?

automatic stabilizers are not subject to the same time lags as discretionary fiscal policy.

For simplicity, we assume that real investment is ________ with respect to real GDP and therefore unaffected by the level of real GDP per year.

autonomous

During normal times, fiscal policy probably achieves most of its impact through

the workings of automatic stabilizers.

The ______________ propensity to consume is equal to real consumption divided by real disposable income. The _____________ propensity to save is equal to real saving divided by real disposable income. The _____________ propensity to consume is equal to the change in planned real consumption divided by the change in real disposable income. The ____________ propensity to save is equal to the change in planned real saving divided by the change in real disposable income.

average; average marginal; marginal

Since 1970 the U.S. government's budget deficit as a percentage of real GDP has

averaged approximately 3%.

Year to year rightward shifts in long-run aggregate supply leads to

a long-run trend path for real GDP.

When there is ________ gap, the government would increase spending in an attempt to shift the aggregate demand curve to the ________.

a recessionary; right

Prior to the congressional and presidential actions, careful studies by government economists indicated that the direct multiplier effect of a rise in government expenditures on equilibrium real GDP is equal to 6. In the 12 months since the increase in government spending, however, it has become clear that the actual ultimate effect on real GDP will be less than half of that amount. This could have happened because of all the following except

a supply-side effect.

Suppose that there is a temporary, but significant, increase in oil prices in the economy depicted in the figure to the right. a. Using the 3-point curved line drawing tool, show the impact the elevated oil prices have on the macroeconomy. Properly label this line. If the central bank wishes to prevent the equilibrium real GDP from changing in response to the oil price increase, it should b) If the central bank wishes to prevent the equilibrium price level from changing in response to the oil price increase, it should A. increase the quantity of money in circulation in order to shift aggregate demand rightward. B. decrease the quantity of money in circulation in order to shift the short-run aggregate supply curve rightward. C. decrease the quantity of money in circulation so that oil prices will fall. D. decrease the quantity of money in circulation in order to shift aggregate demand leftward. c) If the central bank wishes to prevent the equilibrium price level from changing in response to the oil price increase, it should A. increase the quantity of money in circulation in order to shift aggregate demand rightward. B. decrease the quantity of money in circulation in order to shift aggregate demand leftward. C. decrease the quantity of money in circulation so that oil prices will fall. D. decrease the quantity of money in circulation in order to shift the short-run aggregate supply curve rightward.

b) D. decrease the quantity of money in circulation in order to shift aggregate demand leftward. c) B. decrease the quantity of money in circulation in order to shift aggregate demand leftward.

Suppose that an economy begins in equilibrium at E1 as depicted in the graph to the right. Draw a new aggregate demand curve reflecting an increase in the amount of money in circulation. b) During the rapid adjustment period (that results from the change in the AD curve), the economy will immediately tend toward a price level that ___ ___ and a level of real GDP that ___ before quickly returning to full employment. c) Now that the macro economy is in a disequilibrium what happens in the labor market? _____. d) As the wage increase, the _____.

b) remains constant; increases c) unemployment decreases, which increases wages. d) quantity demanded of labor decreases, while the law of supply increase the number of workers seeking jobs.

1. Which of the following is an example of expansionary fiscal policy? a. increase in taxes b. stimulus package c. increasing the money supply d. lowering interest rates

b. stimulus package

Demand Deposits -

balances in bank accounts that depositors can access on demand by writing a check

structural unemployment occurs:

because of a mismatch between the jobs that are available in the economy and the skills of workers seeking jobs

Which of the following statements best characterizes demand-pull and cost-push inflation?

both are short run types of inflation.

In 2005 national government spending is $6.00 trillion and tax collections are $6.38 trillion. This government, in 2005, experienced a

budget surplus

unplanned decreases in business inventories

business will increase production of goods and services and increase employment there will be an increase in real GDP

In an economic downturn, sticky wages and prices reduce the economyʹs speed of adjustment because

businesses are unable to adjust quickly to changes in aggregate demand

simplify the determination model

businesses pay no indirect taxes businesses distribute all profits to shareholders no depreciation economy is closed, no foreign trade

Many economists would argue that some frictional unemployment should be eliminated whatever the cost. cannot and probably should not be eliminated. creates massive economic disruptions and should be eliminated as quickly as feasible. no longer exists because increased unemployment benefits have generally solved this problem.

cannot and probably should not be eliminated.

Which of the following is most relevant to a higher price level caused by an aggregate supply curve shifting to the left?

cost-push inflation

A rise in taxes

causes a reduction in aggregate demand because it can reduce consumption spending, investment expenditures, and net exports.

the dollar becomes weaker against other world currencies

causes a shift inward to the left in the short run AS curve causes in equilibrium real GDP to fall causes price level to rise tend to cause employment to decrease contributes to inflation

The city of New Raven has decided to impose rent controls on office buildings in the city. As a result of this, the new ren

celing is lower than the equilibrium rent and there will be a shortage of rental offices.

The C + I + G + X curve, is drawn with the price level held constant, whereas the AD curve allows the price level to ________. Each different price level generates a new C + I + G + X curve.

change

The C + I + G + X curve, is drawn with the price level held constant, whereas the AD curve allows the price level to ______________. Each different price level generates a new C + I + G + X curve.

change

MPC

change in consumption/change in income

MPS

change in saving/change in income

What is meant by FISCAL Policy - on t2-congress and president in charge of fiscal

change in taxes and / or government spending change in government spending and or taxes

Sectoral shifts -

changes in composition of demand across industries or regions of the country

Real GDP is computed by adjusting nominal GDP for

changes in price level

equating desired saving and investment in the classical model

changes in saving and investment create a surplus or shortage in the short run, in the long run this is offset by changes in the interest rate this interest rate adjustment returns the market to equilibrium, where S=I

The BEA must estimate the future streams of returns on "intellectual property products" because real GDP is nominal GDP corrected for

changes in the average of overall prices from year to year.

Automatic stabilizers cause what?

changes in the economy without the action of congress and the President.

The study of the economy when it operates at or near full employment is called:

classical economics

In economic terminology, personal disposable income, or income after taxes, can be either

consumed or saved

In economic terminology, personal disposable income, or income after taxes, can be either

consumed or saved

In economic terminology, personal disposable income, or income after taxes, can be either

consumed or saved.

If a household purchases a new car and a new refrigerator, this would be classified as spending on

consumer durables.

in product markets

consumer goods and services flow to households and money flows to businesses.

the index most widely used by the government and the private sector to measure changes in the cost of living is the:

consumer price index

unplanned increases in business inventories

consumers purchase fewer goods and services than anticipated this leaves firms with unsold products and inventories will rise business reason by butting back production and reducing employment

If actual saving exceeds planned investment, all of the following will occur except

consumers will purchase more goods than had been anticipated by businesses

If actual saving exceeds planned investment, all of the following will occur except

consumers will purchase more goods than had been anticipated by businesses.

The biggest component of GDP using the expenditure approach is ____________ and the biggest component of GDP using the income approach is _____________.

consumer expenditures wages

Total expenditures for domestically produced goods and services consist of

consumer spending, business spending, government spending, and net foreign spending.

Largest component of GDP:

consumption

disposable income =

consumption + saving

disposable income

consumption is a function of

accounting identity

consumption+saving= disposable income saving=disposable income- Consumption

To derive GDP using the expenditure approach, which of the following components are added togehter?

consumption expenditures, gross private domestic investment, government expenditures, and net exports

With stable aggregate demand, an abrupt shift inward in SRAS may lead to what is called

cost push inflation

speculators:

currency traders who buy and sell foreign exchange in an attempt to profit from changes in exchange rates. Speculators purchase and hold a currency when they believe it will appreciate, or they may engage in more complicated financial transactions. • Example: An agreement to buy currency in the future at a price agreed today.

M1 -

currency, demand deposits, travelers checks, and other checkable deposits

Fred Flintstone was laid off at the quarry because the nation is suffering from a recession

cyclical

Sam I Am was laid off after orders for green eggs and ham decline greatly following last years stock market crash

cyclical

The Easter Bunny is looking for job since he ran out of eggs when they became scarce eggs during the current recession

cyclical

The type of unemployment that rises as the economy goes into a recession is called

cyclical

Full employment does not mean ZERO unemployment. Rather "FULL EMPLOYMENT" means that there is ZERO:

cyclical unemployment

actual unemployment can exceed the natural rate of unemployment due to

cyclical unemployment

the type of unemployment most closely associated with periods of falling GDP is

cyclical unemployment

Consider an economy where the natural rate of unemployment is equal to 5%. If the actual unemployment rate is equal to 7%, then

cyclical unemployment rate is 2% .

Consider an economy where the natural rate of unemployment is equal to 5%. If the actual unemployment rate is equal to 7%, then

cyclical unemployment rate is 2%

The type of unemployment that rises as the economy goes into a recession is called

cyclical.

autoworkers laid off from Hot-Rod autoworks as the result of a recession are considered

cyclically unemployed

steelworkers laid off from their jobs as the result of a recession are considered

cyclically unemployed

3. Which of the following is an example of contractionary fiscal policy? a. decreasing the money supply b. increasing the interest rate c. increasing government spending d. increasing taxes

d. increasing taxes

Government Multiplier

dY/dG=1/1-MPC

Investment Multiplier

dY/dI=1/1-MPC

During periods of poor economic performance, real GDP:

declines and unemployment rises sharply

Suppose that there is a sudden riserise in the price level. As a consequence, economywide planned spending on purchases of goods and services will

decrease

Suppose that there is a sudden rise in the price level. As a consequence, economywide planned spending on purchases of goods and services will _____ . Which of the following is not a reason for this change in economywide planned spending? A. The substitution effect. B. The open economy effect. C. The interest rate effect. D. The real-balance effect.

decrease A. The substitution effect.

Use the identity: Yd = C + S as a basis to answer the following questions. In the Keynesian model, if disposable income were to decrease households would

decrease both consumptions and savings

Which of the following will NOT cause AD to shift to the RIGHT ?

decrease in Money supply

Supply-side inflation can be caused by a continual

decrease in aggregate supply while aggregate demand remains unchanged.

Which of the following will cause Aggregate Demand to shift to the LEFT?

decrease in velocity

If Y increases then APC

decrease, secular stagnation

Since investment is inversely related to the rate of interest, the former will obviously

decrease.

Whenever total planned real expenditures exceed real GDP, there will be unplanned ________ in inventories. Production of goods and services will increase, and a higher level of equilibrium real GDP will prevail. Whenever total planned real expenditures are less than real GDP, there will be unplanned __________ in inventories. Production of goods and services will decrease, and equilibrium real GDP will decrease.

decrease; increases

A woman who makes a living charging for investment advice on her Internet Web site marries one of her clients, to whom she now provides advice at no charge. As a result of this, GDP

decreases

Inflation can be caused by

decreases in the long-run aggregate supply curve or increases in the aggregate demand curve.

Cost-push inflation is caused by persistent

decreases in short-run aggregate supply.

An increase in individual income taxes (________) disposable income, which (________) consumption spending.

decreases, decreases

Whenever total planned real expenditures exceed real GDP, there will be unplanned _____________ in inventories. Production of goods and services will increase, and a higher level of equilibrium real GDP will prevail. Whenever total planned real expenditures are less than real GDP, there will be unplanned ____________ in inventories. Production of goods and services will decrease, and equilibrium real GDP will decrease.

decreases; increases

Whenever total planned real expenditures exceed real GDP, there will be unplanned ____________________ in inventories. Production of goods and services will increase, and a higher level of equilibrium real GDP will prevail. Whenever total planned real expenditures are less than real GDP, there will be unplanned ___________________ in inventories. Production of goods and services will decrease, and equilibrium real GDP will decrease.

decreases; increases

Contractionary fiscal policy involves:

decreasing government purchases or increasing taxes. If the government believes real GDP will be above potential GDP, it can enact contractionary fiscal policy in an attempt to restore long- run equilibrium—decreasing inflation.

If we assume that the economy is operating on a horizontal short-run aggregate supply curve, the equilibrium level of real GDP per year is completely ___________ determined

demand

With stable aggregate supply, an abrupt outward shift in AD may lead to what is called

demand pull inflation

Inflation can be caused by an increase in aggregate _____ or by a decrease in aggregate ________.

demand/ supply

changes that decrease in aggregate supply

depletion of raw materials decreased competiton an increase in international trade more regulatory impediments to business decrease in labor supplied decrease in training and edu increase in tax rates increase in input prices

Reserves -

deposits that banks have received but have not loaned out

GDP (income approach)

depreciation + indirected business taxes + rent + wages + interest + profit

When there is an economic downturn, Congress and the President use fiscal policy to stabilize real GDP. But the conduct of the fiscal policy involves several time lags, such as the recognition time lag that causes a delay in identification of the economic problem, the action time lag that is caused by the delay in Congressional approval of the policy, and the effect time lag that arises because policy actions take time to exert their full effects on the economy. These time lags could actually cause discretionary fiscal policy to

destabilize real GDP because by the time a policy has begun to have its effects, the economy might already be recovering and the policy action might push real GDP up faster than intended, thereby making real GDP less stable.

classical model was first attempt to explain

determinants of price level national levels of real GDP employment consumption saving investment

Cyclical unemployment -

deviation of unemployment from its natural rate

say's law

dictum of economist J.B say that supply creates its own demand, producing goods and services generates the means and the willingness to purchase other goods and services

Government expenditures fund construction of high-rise office building on a plot of land where a private company otherwise would have constructed an essentially identical building. This is an example of

direct expenditure offsets to a fiscal policy action.

people who stopped looking for work because they could not find jobs are called

discouraged workers

changes that cause an increase in aggregate supply

discoveries of new raw materials increased competition a reduction in international trade barriers fewer regulatory impediments to business an increase in the supply labor increase training and education a decrease in marginal tax rates a reduction in input prices

Fiscal policy refers to

discretionary changes in government spending and taxes.

In early 2008, it appeared that the U.S. economy was either in a recession or growing very slowly. President Bush announced a program of tax rebates. This program can be described as what type of policy and was meant to increase what?

discretionary fiscal policy and meant to increase consumer spending.

Fiscal policies potentially can influence equilibrium real GDP through

discretionary fiscal policy.

According to Keynes production is a function of

disposable income

Consumption is a function of

disposable income

Suppose social security contributions rise by $1 billion while social security benefits also rise by $1 billion. Further, personal income taxes fall by $500 million. As a result,

disposable income should increase while personal income and national income are unchanged.

Saving is the portion of

disposable income that is not consumed

Saving is the portion of

disposable income that is not consumed.

In the Keynesian model the amount of consumption is dependent on

disposable income.

The consumption function shows the relationship between planned rates of real consumption and real ______ per year. he saving function is the complement of the consumption function because real saving plus real _______ must equal real disposable income.

disposable income; consumption

Government-enforced prices such as price ceilings

disrupt the rationing function performed by prices in a market system.

the unemployment rate is the number of unemployed people:

divided by the number of people who are working or looking for work

The open economy effect occurs because of a shift away from expenditures on ______ goods and a shift toward expenditures on _______ goods when the domestic price level increases.

domestic/ foreign

The shape of the aggregate demand curve (AD) is

downward sloping.

Fiscal policy is likely to be least effective

during normal economic times.

REMEMBER:

each time the multiplier effect ripples, the impact on GDP gets smaller

The production possibilities curve will shift outward (upward, and or, to the right) when

economic growth occurs.

The government just passed a new tax bill that will be applied to the economy next year. Most people will not immediately feel the impact of this new tax bill and not adjust their W-2 tax forms. The impact of the new tax bill won't become apparent to them until the following April when their tax bills are due. This problem is referred to as the

effect time lag, and it makes it difficult to use discretionary fiscal policy to close a recessionary gap.

An economic fluctuation is:

either an upturn or a downturn in the economy

According to the supply side economists a(n) increase in marginal tax rates will

either increase or decrease the amount of leisure time chosen by workers.

An increase in the price of electricity, ceteris paribus, indicates that the purchasing power of money is decreasing. inflation is increasing. the purchasing power of money is increasing. electricity is relatively more scarce than it was before.

electricity is relatively more scarce than it was before.

Labor Force =

employed + unemployed

people who are only working part time but want to be working full time are classified officially as

employed and in the labor force

Three characteristics of frictional unemployment

enough jobs exist for those who are frictionally unemployed. Aka there is adequate demand for labor. those who are frictionally unemployed have the skill for the jobs available. The job search will be relatively short

In the Keynesian model equilibrium national income

equals planned consumption, investment, government, and net export expenditures

In the Keynesian model equilibrium national income

equals planned consumption, investment, government, and net export expenditur

In the Keynesian model equilibrium national income

equals planned consumption, investment, government, and net export expenditures

In the Keynesian model equilibrium national income

equals planned consumption, investment, government, and net export expenditures.

The _________ level of real GDP can be found where planned savings equals planned investment.

equilibrium

the _______ level of real GDP can be found where planned savings equals planned investment.

equilibrium

Keynesian model

equilibrium GDP is demand determined keynesian SRAS shows sources of price rigidities

Nonparticipants

everyone not included in these groups including, prisoners, patients in a mental hospital, people employed by the military, and students.

M2 -

everything in M1 plus savings deposits, small time deposits, money market mutual funds

Statisticians often calculate relative GDP by adding up each country's GDP in its local currency and dividing by the dollar _______. Because not all goods and services are bought and sold in the world market, however, we must correct exchange rate conversions of other countries' GDP figures to take into account differences in the true _____ across countries.

exchange rate cost of living

In measuring GDP, we must ____ (1) purely financial transactions, such as the buying and selling of securities; (2) government transfer payments and private transfer payments; and (3) the transfer of secondhand goods.

exclude

Which of the following activities of a computer manufacturer during the current year are included in this year's measure of GDP? The manufacturer purchases a chip in June. This activity is ____ in GDP. Then the manufacturer uses it as a component in a computer in August. This activity is _____ in GDP. Finally, the company sells the computer to a customer in November. This activity is ______ in GDP.

excluded excluded included

remember

expansionary fiscal is not good for our savings IF we were in a closed economy, fiscal would work better

The non-interest-rate determinants of planned investment are _________, nnovation and technological changes, and ________

expectations, business taxes

The non-interest-rate determinants of planned investment are ________________, innovation and technological changes, and _____________.

expectations; business taxes

The non-interest-rate determinants of planned investment are ________________, innovation and technological changes, and ________________________.

expectations; business taxes

The ___ approach to measuring GDP requires that we add up consumption expenditures, gross private investment, government purchases, and net exports. Consumption expenditures include consumer _____, consumer _____, and _____.

expenditure durables nondurables services

In this situation in which there is a decrease in autonomous expenditures, in each successive round that the multiplier is applied

expenditures decrease

In this situation in which there is a decrease in autonomous expenditures, in each successive round that the multiplier is applied

expenditures decreasedecrease by a smaller amount than the previous round

In this situation in which there is an increase in autonomous expenditures, in each successive round that the multiplier is applied

expenditures increase by a smaller amount than the previous round

When the economy is in long-run equilibrium, the price level adjusts to equate total planned real ___________ by individuals, businesses, the government, and foreign (non-U.S.) residents with total planned ______ by firms.

expenditures/ production

Aggregate demand is the total of all planned ______ in the economy, and aggregate supply is the total of all planned ______ in the economy. The aggregate demand curve shows the various quantities of total planned ________ on final goods and services at various price levels; it is downward sloping.

expenditures/production/spending

A cost or benefit of an economic activity that has an impact on an individual's well-being, even though the individual was not directly involved in the activity, is known as a(n)

externality.

In the circular flow model of income and output, households sell ____ services to businesses that pay for those services. The receipt of payments is total _____. Businesses sell goods and services to households that pay for them.

factor income

during a recession it is generally the case that output _______ and inflation______

falls, falls

GDP counts intermediate goods because to not do so would result in GDP being undervalued.

false

If the MPC equals 0.8, an additional $500 in disposable income will result in an additional $400 saved.

false

The larger the MPS, the larger the multiplier.

false

The multiplier has a larger effect on equilibrium real GDP when the price level is rising than it does when the price level remains constant.

false

Fiscal policy refers to changes in:

federal taxes (t) and purchases (G) that are intended to achieve macroeconomic policy objectives.

The dollar value of total output is equal to the total monetary value of all ______vgoods and services produced.

final

If the actual price level increases beyond the long-run equilibrium price level, all of the following will tend to occur except

firms offering fewer services than people wish to purchase.

real GDP rises as the price level increases

firms use worked more intensively (work harder) existing capital equipment is used more intensively (using machines longer) if wage rates are held constant, a higher price level leads to increased profits, which leads to lower unemployment as firms hire more

what does the multiplier effect do

first one is autonomous impact the autonomous impact and all of the induced impacts show how much shifting will actually occur

The impact fiscal multiplier measures the direct, contemporaneous effect on equilibrium real GDP of an increase in government spending after accounting for direct

fiscal offsets and any other short-term crowding-out of private spending.

REMEMBER

fiscal policy is more effective in an closed economy

consumption is a ______ variable

flow

By providing information and reducing the costs of job search, the Internet's impact on the job market is to reduce

frictional

Mickey Mouse voluntarily quit his job at Disney and has decided to seek a job driving trucks

frictional

Ronald McDonald, who just graduated from clown school, is looking to find his first real job.

frictional

The tooth fairy decide to look for a better job because she was just no getting enough money

frictional

The natural rate of unemployment includes

frictional and structural unemployment

Unit of account -

the yardstick people use to post prices and record debts

The marginal propensity to consume is 0.75. At the market interest rate of 8 percent, planned investment spending is $100 billion. The slope of the C + I function is __________ the slope of the consumption function because investment in this model is _____________. So as the amount of planned investment decreases, the slope of the C + I function ___________________.

identical to; autonomous; remains constant

falls, secular stagnation

if Y increases, then APC

One of the main conclusions of Say's Law was that

if people supply goods in order to then demand goods, there can be no overproduction in a market economy and full employment will be the normal state of affairs.

consequences of the assumptions

if role of gov in economy is minimal, if pure cimpetition previals and all prices and wages are flexible, if people are self-interested and do not experience money illusion then problems in the economy will be temporary and the market will correct itself

Shifts in short and long run aggregate supply

include any change in endowments of the factors of production

shifts in SRAS

include changes in production input prices, particularly those caused by temporary external events

A marketing arm of the company receives fee income during the current year when a buyer of one of its computers elects to use the computer manufacturer as her Internet service provider. This activity is ____ in GDP.

included

A retail outlet of the company sells a computer manufactured during the current year. This activity is ____ in GDP.

included

To obtain disposable personal income, we subtract all personal ____ from personal income. Disposable personal income is income that individuals actually have for consumption or saving.

income taxes

Typically during a recession

incomes fall and unemployment rises.

During the year, no change occurs in the various factors that influence aggregate demand. As a result, the U.S. long-run equilibrium price level during this particular year will

increase

In the Keynesian model, if disposable income were to increase, households would

increase both their consumption and saving.

In the Keynesian model, if disposable income were to increase households would

increase both their consumption and saving.

Use the identity: Yd = C + S as a basis to answer the following questions. In the Keynesian model, if disposable income were to increase households would

increase both their consumption and saving.

If congress enacts a lump-sum tax cut of 750 billion with an mac of .75, the Ricardian equivalence says savings will what?

increase by the amount of the tax cut.

The equilibrium real GDP increases by the same amount as the

increase in government spending or taxes

A permanent reduction in international trade barriers would

increase long-run aggregate supply

If the gov't increases aggregate demand when the economy is at both short-run and long-run equilibrium, the full long-run effect on the fiscal policy will be?

increase the price level

Other things remaining equal, a decrease in the world oil supply like those that occurred in 1973-74 and 1979 would

increase the price of airline travel and decrease its equilibrium quantity.

cyclical unemployment__________ during recessions and ___________ during booms

increase, decrease

If the LRAS shifts to the right over time and during this time AD does not noticeably change, real GDP will ________ and the price level will ________.

increase; decrease

Expansionary fiscal policy that creates a budget deficit can lead to crowding out. This crowding out effect is exhibited by

increased government expenditures and decreased investment.

When government spending decreases, the change in total expenditures

increases by more than the change in government spending

In the long run, persistent deflation in a growing economy can occur if

increases in the LRAS are proportionately larger than the increases in AD.

government spending ________ aggregate expenditure directly, whereas tax increase _______ aggregate expenditure indirectly through the consumer's disposable income

increases, reduces

Whenever planned saving exceeds planned investment, there will be unplanned inventory __________ , and real GDP will fall as producers cut production of goods and services. Whenever planned saving is less than planned investment, there will be unplanned inventory ___________, and real GDP will rise as producers increase production of goods and services.

increases; decreases

The long-run aggregate supply curve

is vertical because changes in the price level have no effect on real output.

What does the classical model assume about money illusion?

it cannot fool workers

Whenever planned saving exceeds planned investment, there will be unplanned inventory _____________, and real GDP will fall as producers cut production of goods and services. Whenever planned saving is less than planned investment, there will be unplanned inventory ______________, and real GDP will rise as producers increase production of goods and services.

increases; decreases

A decrease in individual income taxes ____________ disposable income, which _____________ consumption spending

increases; increases

From the Keynesian perspective, what is the most effective way to stimulate the economy ?

increasing government spending

To get an accurate measure of GDP using the income approach, we must also add _____ and ______ to those total factor payments.

indirect business taxes depreciation

indirect crowding out from a fiscal policy action.

cost push inflation

inflation caused by decreases in short run AS, line moves to the right

demand pull inflation

inflation caused by increases in AD not matched by increases in AS

Hyperinflation -

inflation exceeding 50% per month (Zimbabwe)

information is costly and rigidities always exist causing some types of unemployment (frictional and structural) to occur even in the long run after everyone in the economy has fully adjusted to any changes.

Along a short-run aggregate supply curve, which of the following is (are) held constant?

input prices

Real GDP can be expanded in the short run because firms can use existing workers and capital equipment more ________. Also, in the short run, when input prices are fixed, a higher price level means __________ profits, which induce firms to hire more workers.

intensively; higher

According to classical theory, desired saving always equals investment due to changes in

interest rate

remember

interest rate in the us makes the dollar strongers which encourages foreigners to invest in our country

The ______ effect is caused by interest rate changes that mimic price level changes. At higher interest rates, people seek to buy _______ houses and cars, and at lower interest rates, they seek to buy _______.

interest rate/ fewer/ more

The planned investment schedule shows the relationship between real investment and the ________; it slopes _________

interest rate; downward

The planned investment schedule shows the relationship between real investment and the ____________________; it slopes ____________.

interest rate; downward

Which is the most erratic component of GDP:

investment

the spending by businesses on capital goods and inventories

investment

Consumption

is a flow variable

Structural unemployment

is a mismatch of the skills of job seekers and the skill requirement of the jobs that are available. Unemployment that may drag on for months or years because they don't have the skills that employers are looking for.

investment

is also a flow. It includes expenditure on new machines, buildings, and equipment and in business inventories.

saving

is a flow, something that occurs over time. It equals disposable income minus consumption.

An increase in the labor force participation rate means there are more discouraged workers. implies that the unemployment rate must fall. is consistent with either a rise or a fall in the unemployment rate. implies that the unemployment rate must rise.

is consistent with either a rise or a fall in the unemployment rate.

The relationship between the MPC and the MPS indicates that the entire increase in household disposable income

is distributed between consumption and saving

The relationship between the MPC and the MPS indicates that the entire decrease in household disposable income

is distributed between consumption and saving.

The relationship between the MPC and the MPS indicates that the entire increase in household disposable income

is distributed between consumption and saving.

SRAS

is horizontal shows the relationship between total planned economy wide production and the price level in the short run if prices adjust incompletely in the short run, the curve is positively sloped

During normal times, discretionary fiscal policy

is probably not very effective in influencing real GDP.

The model of long-run equilibrium

is the same as the Classical Model.

The model of a long run equilibrium

is the same as the classical model

Opportunity cost

is the value of the next best alternative as a result of choosing some given alternative.

Since modern Keynesian model allows for price response, the aggregate supply curve

is upward sloping.

Since the modern Keynesian Model allows for some price response, the aggregate supply curve

is upward sloping.

Suppose that in 2019 there is a sudden unanticipated burst of inflation. Consider the situations faced by the following individuals and determine who gains and who loses due to this inflation. A retired individual who earns a pension with fixed monthly payments from her past employer during 2019 _______, but the employer who pays the fixed monthly payment to her ______.

loses; gains

in periods when GDP grows very rapidly for a long period, the actual unemployment rate will be ______________ than the natural rate of unemployment

lower

The current market rate of interest is 4.1 percent. Fred's Fish House will

make the investment since the cost is less than the expected return

Voluntary exchange

makes both parties to a trade better off.

____________ propensity to consume is equal to the change in planned real consumption divided by the change in real disposable income.

marginal

____________ propensity to save is equal to the change in planned real saving divided by the change in real disposable income.

marginal

Change in consumption divided by change of income:

marginal propensity to consume

The multiplier is equal to 1 divided by the ________ propensity to ______

marginal; save

The multiplier is equal to 1 divided by the _________ propensity to _______________.

marginal; save

GDP is a useful measure for tracking changes in the ___ of overall economic activity over time, but it is not a measure of the well-being of a nation's residents because it fails to account for nonmarket transactions, the amount and quality of leisure time, environmental or safety issues, labor market discrimination, and other factors that influence general welfare.

market value

Which of the following is not characterized as a "resource

money

Commodity money -

money that takes the form of a commodity with intrinsic value (gold coins, cigarettes in POW camp)

Fiat money -

money without intrinsic value (U.S. dollar)

Which of the following is not a factor of production

money.

The multiplier effect implies that, for a $100 increase in some autonomous component of aggregate demand, the total increase in aggregate demand will be

more than $100

in keynesian short run, when the price level rises partially, rela GDP can expand beyond the level consistent with its long-run growth path because

most labor contracts allow for flexibility in the total number of hours worked the existing capital stock can be used more intensely if wages are constant when prices rise, a firm is more profitable in it operations

the life-cycle theory of consumption

most realistic theory, considers how a person varies saving and consumption as income ebbs and flow throughout an entire life span predicts that people will predit a higher income in the future, he or she will consume more and save less in the current period than would have been the case otherwise

Any change in real disposable income will cause the planned rate of consumption to change. This is represented by a _____________ the consumption function.

movement along

Any change in real disposable income will cause the planned rate of consumption to change. This is represented by a ________ the consumption function. Any change in a nonincome determinant of consumption will cause a __________ the consumption function

movement along; shift in

Any change in real disposable income will cause the planned rate of consumption to change. This is represented by a ____________________ the consumption function. Any change in a nonincome determinant of consumption will cause a ______________ the consumption function.

movement along; shift in

Any change in autonomous spending shifts the expenditure curve and causes a ________ effect on equilibrium real GDP pear year.

multiplier

Any change in autonomous spending shifts the expenditure curve and causes a __________________ effect on equilibrium real GDP pear year.

multiplier

What is the term which describes the impact of a one-dollar change of investment on equilibrium income

multiplier

If an excess quantity of labor is supplied at a particular wage level, the wage level

must be above equilibrium.

to obtain ____ we subtract indirect business taxes and transfers from net domestic product and add other business income adjustments and net U.S. income earned abroad.

national income

Personal Income (PI)

national income + government transfer payment - social security contributions - undistributed corporate profits

The ______ rate of unemployment occurs at the long-run level of real GDP per year given by the position of the LRAS.

natural

U to the power of n

natural rate of unemployment

the level of unemployment at which there is no cyclical unemployment is called

natural unemployment rate

For purposes of national income accounting, business fixed investment has traditionally included primarily purchases of

newly produced producer durables, or capital goods.

Was Keynes a classical economist?

The Ricardian Equivalence Theorem implies that expansionary fiscal policy that creates a budget deficit will result in

no changes in aggregate demand.

would unemployment be a problem in the classical model

no, classical economist assumed that wages would always adjust to the full employment level

The value of one country's currency in terms of another country's currency is known as the _________________________

nominal exchange rate. • Example: If one U.S. dollar can purchase 100 Japanese yen, then the exchange rate is ¥100 = $1, or alternatively, ¥1 = $0.01.

Real wage = Nominal Wage/ Price Level.

nominal wage = 100/price level 10 = 10. what if it goes up by 5%? over time nominal wage will go up by 5 % . No change in the real wage. employers will not change the number of workers. no impact on labor. no change in output in the long run.

The Keynesian model argues that prices are sticky. One reason supporting this argument is that

nominal wages are inflexible downwards.

causes of shifts in consumption function

non income determinants: population wealth

The problem with using foreign exchange rates to convert one country's GDP into dollars is that

not all goods and services are sold on world markets.

The loss in national welfare will

not be reflected in GDP since it is a non-market transaction and thus is not included in GDP.

Assume that the economy is in long-run equilibrium with complete information and that input prices adjust rapidly to changes in the prices of goods and services. If there is a sudden rise in the price level induced by an increase in aggregate demand, real GDP will (decrease, increase, not change) _____.

not change.

Economists define the unemployed as individuals who are:

not currently working but are actively looking for work

In order to be defined as unemployed, a person must

not have a job and must be actively looking for work

Structural unemployment -

occurs when there are fewer jobs than workers (usually long term)

stock variable

one that can be measured at a specific point in time. For example, the gasoline in your car's tank, the water in an aquarium, or the amount owed on your student loan.

flow variable

one that can only be measured between two points in time. Examples include the water over Niagara Falls, weekly household budgets, and wages.

panned vs, actual saving investment

only at equilibrium real GDP will planned saving equal actual saving planned investment equals actual investment planed saving is equal to planned investment

Gross domestic product

only includes "final" goods and services to avoid double counting. does not include transfer payments or financial transactions. does not include the transfer of second-hand goods. ALL OF THE ABOVE

The idea that higher price levels in the United States result in foreign residents desiring to buy fewer U.S.-made goods and U.S. residents desiring to buy more foreign-made goods is referred to as the

open economy effect.

The ceteris paribus assumption means

other things equal.

Economic growth is represented by the long-run aggregate supply curve (LRAS) shifting

outward to the right.

autonomous consumption

part of consumption that is independent of the level of disposable income, changes in autonomous consumption shift the consumption function

In modern Keynesian theory, the short-run aggregate supply curve, SRAS, shows the relationship between the price level and real GDP without full adjustment or full information. It is upward sloping because it allows for ______ price adjustment in the short run

partial

In order to understand the outcomes of a model it is necessary to know the assumptions of a model. In the Keynesian model, businesses

pay no indirect taxes

In the Keynesian model, businesses

pay no indirect taxes

In order to understand the outcomes of a model it is necessary to know the assumptions of a model. In the Keynesian model, businesses

pay no indirect taxes.

The largest component of GDP by far is

personal consumption expenditures.

to obtain _____ we must add government transfer payments, such as Social Security benefits and food stamps. We must subtract income earned but not received by factor owners, such as corporate retained earnings, Social Security contributions, and corporate income taxes.

personal income

An increase in social security benefits will make

personal income larger.

An increase in corporate income taxes would reduce

personal income.

The income households actually receive before they pay personal income taxes is:

personal income.

Consumption goods are

physical goods or services that households purchase and then use up.

When we add autonomous investment, I, and autonomous government spending, G, to the consumption function, we obtain the C + I + G curve, which represents total ___________ for a closed economy. In an open economy, we add the foreign sector, which consists of exports minus imports, or net exports, X. Total planned expenditures are thus represented by the C + I + G + X curve.

planned expenditures

When we add autonomous investment, I, and autonomous government spending, G, to the consumption function, we obtain the C + I + G curve, which represents total _________________ for a closed economy. In an open economy, we add the foreign sector, which consists of exports minus imports, or net exports, X. Total planned expenditures are thus represented by the C + I + G + X curve.

planned expenditures

When we add autonomous investment, I, and autonomous government spending, G, to the consumption function, we obtain the C + I + G curve, which represents total _______________________ for a closed economy. In an open economy, we add the foreign sector, which consists of exports minus imports, or net exports, X. Total planned expenditures are thus represented by the C + I + G + X curve.

planned expenditures

The Keynesian model assumes that international trade

plays no role in the simple model

The Keynsian model assumes that international trade

plays no role in the simple model

The Keynsian model assumes that international trade

plays no role in the simple model.

We can divide the ____ into real GDP to obtain per capita real GDP.

population

According to classical theory, total employment and real Gross Domestic Product (GDP) are

positively related

Thus, according to the Keynesian model full employment is

possible but not guaranteed

Thus, according to the Keynesian model full employment is

possible but not guaranteed.

When demand decreases and the (upward sloping) supply curve remains in the same position,

price falls and equilibrium quantity falls

When supply increases and the (downward-sloping) demand curve remains in the same position,

price falls and equilibrium quantity rises.

P =

price level (nominal variable)

All of the following would cause the aggregate demand curve to shift except

price level changes.

An important difference between the Classical Model and the Keynesian Model is that

prices adjust to bring about equilibrium in the Classical Model and output adjusts to bring about an equilibrium in the Keynesian Model.

the consumer price index (CPI) relies on the calculation of:

prices of a fixed basket of goods that does not change often

The modern Keynesian model assumes that

prices respond to changes in aggregate demand but not fully.

capital goods

producer durables; non consumable goods that firms use to make other goods

If real GDP falls below total planned expenditures the economy will see

production and employment increases.

If real GDP rises aboverises above total planned expenditures the economy will see

production and employment decreases

If real GDP rises above total planned expenditures the economy will see

production and employment decreases.

If real GDP falls below total planned expenditures the economy will see

production and employment increases

A production possibilities curve that is bowed outward (from the origin) represents the concept that

production of additional units of one good requires that increasing quantities of the other good be given up.

The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as ____.

profit

There are three reasons why the aggregate demand curve is downward sloping. They are the ______ effect, the _______ effect, and the ______ effect.

real balance/ interest rate/ open economy

Other than correcting externalities, other economic functions of government include

providing a legal system, allocating public goods, promoting competition, and stabilizing the economy.

According to the classical model, the income generated by production is enough to...

purchase all the goods and services produced

The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called

purchasing power parity

When comparing per capita GDP across countries, GDP should be adjusted for

purchasing power parity.

The classical model assumes that

pure competition wages and prices are flexible motivated by self interest cannot be fooled by money illusion

assumptions of the classical model

pure competition exists wages and prices are flexible people are motivated by self-interest people cannot be fooled by money illusion

At the market equilibrium price,

quantity demanded equals quantity supplied

Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be ʺtoo low,ʺ then an appropriate policy action would be to

raise government spending, increasing aggregate demand and pushing up real GDP w little or no inflationary consequences.

Which of the following is not a fiscal policy action?

raising the quantity of money in circulation.

The multiplier is weakened in inflationary gaps because of

rapid price level increases

The multiplier is weakened in inflationary gaps because of

rapid price level increases.

the percentage rate of change in the price level is called the

rate of inflation

Planned real investment is determined by the

rate of interest

Planned real investment is determined by the

rate of interest.

multiplier

ratio of change in equilibrium level of real national income to the change in autonomous expenditures

MPC- marginal propensity to consume

ratio of change in real consumption to the change in real disposable income MPC= change in real consumption/ change in real disposable income

Marginal propensity to save- MPS

ration of the change in saving to the change in disposable income =change in real saving/ change in real disposable income

The Keynesian model indicates that the economy will find an equilibrium however the economy will not always

reach full employment

money illusion

reacting to changes in money prices rather than relative prices.. if a worker whose wages double when the price level also doubles thinks he or she is better off, that worker is suffering from money illusion

When GDP is corrected to reflect constant dollars, this price-corrected GDP is called

real GDP

The short-run aggregate supply curve is a relationship between

real GDP and price level

The graph shows the aggregate demand curve in a representative economy. Suppose that this economy is known to be operating below full employment. In this model, a change in aggregate demand will change _____.

real GDP but not the price level.

In the accompanying graph if the price level is 140

real GDP exceeds total planned expenditures.

real disposable income

real GDP minus net taxes or after tax real income

Suppose an economy originally in long-run equilibrium experiences a decrease in aggregate demand. According to the classical model,

real GDP will not change but the price level will fall

The ______ effect occurs because price level changes alter the real value of cash balances, thereby causing people to desire to spend more or less, depending on whether the price level decreases or increases.

real balance

effects of price level increase?

real balance effect interest rate effect open economy effect

APC- average propensity to consume

real consumption divided by real disposable income the proportion of total disposable income that is consumed APC= Real consumption/ real disposable income

APS- average propensity to save

real saving divided by real disposable income save proportion of real DI APS= real saving/ real disposable income

The aggregate demand curve slopes downward because of the

real-balance, interest rate and open economy effects.

Per capita real GDP equals

real GDP/population.

Unemployment compensation programs are called automatic stablizers because payments increase during what time?

recessions

There are several time lags involved when fiscal policy is applied. The first hurdle faced by a government is

recognizing that the economy is facing a problem that could be solved by applying fiscal policy.

Since the nominal wage is deemed inflexible, a decrease in aggregate demand causes firms to

reduce their workforce.

The horizontal short-run aggregate supply curve has been called the Keynesian short-run aggregate supply curve because Keynes believed that many prices, especially wages, would not be ______ even when AD decreased

reduced

The BEA evaluated the effects of investments in intangible assets, such as "intellectual property products" that included releases of new songs by Justin Bieber and Lady Gaga, on measured average real GDP growth rates during 2007-2009 and 2009-2012. This resulted in alterations to the BEA's GDP computation that

reduced the measured severity of the recession between 2007 and 2009.

According to the real-balance effect, an increase in the price level

reduces an individual's expenditures due to a decrease in the real value of cash balances.

consumption function

relationship between the amount consumed and disposable income indicates how much people plan to consume at various levels of disposable income

So as the amount of planned investment decreases, the slope of the C + I function

remains constant

So as the amount of planned investment decreases, the slope of the C + I function ______________.

remains constant

A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale. As a result of this, GDP

remains unchanged

tennis player wins two top professional tournaments as an unpaid amateur, meaning the tournament sponsor does not have to pay out his share of prize money. As a result of this, GDP

remains unchanged

A point inside the PPC means that

resources are not being fully utilized due to unemployment or inefficiency.

Because the U.S. economy has grown in recent decades, the persistent inflation during those years has been caused by the aggregate demand curve shifting ________ at a faster pace than the long-run aggregate supply curve.

rightward

Economic growth causes the long-run aggregate supply schedule to shift _______ over time. If the position of the aggregate demand curve does not change, the long-run equilibrium price level tends to ________, and there is secular deflation.

rightward/ decrease

If labor or capital increases from year to year or if the productivity of either of these resources rises from one year to the next, the LRAS shifts ________. In a growing economy, therefore, real GDP per year gradually _______ over time.

rightward/ increases

the unemployment rate

rises during recessions and falls during booms

during an expansion it is generally the case that output________ and inflation _________

rises,rises

During the recovery from the most recent recession, real consumption expenditures

rose slowly and weakly because households boosted their spending on services much less than their expenditures on physical goods.

Since the 1940s, more often than not, the U.S. federal government has

run a budget deficit.

Since 2001, more often than not, the U.S. federal government has

run a budget deficit.

velocity:

sales, average dollar bill changes hands

The smaller the marginal propensity to ________ , the larger the multiplier. Otherwise stated, the larger the marginal propensity to ________ , the larger the multiplier.

save; consume

The smaller the marginal propensity to _________________, the larger the multiplier. Otherwise stated, the larger the marginal propensity to __________, the larger the multiplier.

save; consume

Current disposable income held to buy consumption goods in the future is referred to as

saving

Current disposable income held to buy consumption goods in the future is referred to as A. autonomous consumption. B. savings. C. saving. D. future consumption.

saving

Current disposable income held to buy consumption goods in the future is referred to as

saving.

each leakage with its corresponding injection

saving: investment taxes: government spending imports: exports

When saving is introduced into the model, equilibrium occurs in the credit market through changes in the interest rate such that desired ________ equals desired ________ at the equilibrium rate of interest

saving; investment

All of the following are flow concepts except

savings

All of the following are flow concepts except

savings.

Frosty the Snowman is expecting to be out of work shortly following the last big snow of the year

seasonal

Scooby Dooby is looking for a job during the winter since Kings Island is closed until spring

seasonal

The fact that a number of lifeguards lose their jobs at the end of each summer would be counted as cyclical unemployment. structural unemployment. frictional unemployment. seasonal unemployment.

seasonal unemployment.

A persistent decline in the price level due to economic growth with stable aggregate demand is

secular deflation.

The following table depicts a hypothetical economy in which the marginal propensity to save is constant at all levels of real GDP, investment spending is autonomous, and there is no government. This economy's marginal propensity to save is 0.25 and its marginal propensity to consume is 0.75. 1.) Using the line drawing tool, draw the consumption function Use the values of $0, and $10,000 for Real GDP to locate the endpoints of this line and label it 'C'. 2.) Using the line drawing tool, add the investment function to obtain C + I. Properly label this line. Carefully follow the instructions above, and only draw the required objects.

see graph/table

If the federal government has a budget deficit it can finance its spending by

selling Treasury bonds

Changes in factors of production that influence economic growth will

shift SRAS and LRAS.

A short-lived change in production input prices will

shift SRAS but not LRAS.

Any change in income determinant of consumption will cause a ________ the consumption function.

shift in

Any change in the non-interest-rate determinants of planned investment will cause a ____________ he planned investment function so that at each and every rate of interest a different amount of planned investment will be made.

shift in

Any change in the non-interest-rate determinants of planned investment will cause a _____________ the planned investment function so that at each and every rate of interest a different amount of planned investment will be made.

shift in

Any change in the non-interest-rate determinants of planned investment will cause a ______________________ the planned investment function so that at each and every rate of interest a different amount of planned investment will be made.

shift in

Given that the US dollar has depreciated the short-run aggregate supply in the United States should

shift to the left.

Suppose that the value of the US dollar ($) yesterday was $1 = 4 pesos. Today the exchange rate changed such that $1 = 6 pesos. Given that the US $ has appreciated, the aggregate demand in the United States should

shift to the left.

Given that the US $ has appreciated, the short-run aggregate supply in the United States should

shift to the right

Suppose that the value of the US dollar ($) yesterday was $1 = 4 yen. Today the exchange rate changed such that $1 = 2 yen. Given that the US dollar has depreciated, the aggregate demand in the United States should

shift to the right.

Suppose that the value of the US dollar yesterday was $1 = 4 yen. Today the exchange rate changed such that the $1 = 3 yen. Given that the US dollar has depreciated, the aggregate demand in the united states should

shift to the right. The Short run supply curve shifts to the left.

If real investment increases by $500 billion, the C + I + G + X curve will

shift up vertically by $500 billion

If real investment increases by $500 billion, the C + I + G + X curve will

shift up vertically by $500 billion.

Any unanticipated shifts in aggregate demand or supply are called aggregate demand or aggregate supply

shocks

The Keynesian model is basically a ___ ____ theory

short run

When is fiscal policy most effective

short run, Keynesian section of AS

If the prices were sticky, according to Keynes, this would then imply that the

short-run aggregate supply is horizontal.

_______ run equilibrium occurs at the intersection of the aggregate demand curve, AD, and the short-run aggregate supply curve, SRAS. ______run equilibrium occurs at the intersection of AD and the long-run aggregate supply curve, LRAS.

short; long

The assumption that the price level is fixed allows an increase in government spending to

show up exclusively as a rise in real GDP (There are only real effects when the price level does not change.)

The assumption that the price level is fixed allows an increase in government spending to

show up exclusively as a rise in real GDP.

The aggregate demand curve

shows planned purchase rates of goods and services at various price levels.

The greater the value of the marginal propensity to consume

the greater the value of the multiplier

The multiplier effect implies that if government wants to cause an increase in aggregate demand of $500 million, it can do so by increasing government spending by an amount

smaller than $500 million

Frictional unemployment -

spend time searching for jobs that best suit their skills and tastes (short term)

Fiscal policy is defined as changes in federal ________ and ___________ to achieve macroeconomic objectives such as prie stability, high rates of economic growth, and high employment

spending (G) ; taxes (T)

investment

spending by businesses on things such as machines and buildings, which can be used to produce goods and services in the future the investment part of real GDP is the portion that will be used in the process of producing goods in the future

The flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period because

spending by one group is income to another. AND profit is defined as what is left over from total business receipts after all other costs—wages, rents, interest—have been paid.

consumption

spending on new goods or services out of a households income whatever is not consumed is saved

The popularity of supply-side economics and the demise of Keynesian economics correspond with which of the following?

stagflation

Which term is most relevant for an economy which has both a high price level and high unemployment ?

stagflation

the Keynesian model says that prices are...

sticky

Triple witching hour

stock market term describing a special calendar event

net wealth

stock of assets owned by a person, household, firm or nation for households, wealth can consist of house,cars, personal belongings, stocks, bonds, bank accounts and cash (minus any debts owed)

a _______ dollar will reduce the cost of imported inputs, thereby causing SRAS to shift outward to the right. At the same time, a ________dollar will lead to lower net exports, causing the aggregate demand curve to shift inward. The equilibrium price level definitely falls, but the net effect on equilibrium real GDP depends on which shift is larger.

stronger; stronger

Paul Bunyan lost his job as a lumberjack because the timber company he works for decided to just buy chainsaws

structural

Peter Pan was fired from his job at the Peanut Butter factory because he is being replaced by RoboCop (ahighly efficient peanut butter machine)

structural

telephone operators who have lost their jobs as a result of computerized switchboards are an example of

structural unemployment

at full employment the unemployment rate equals the

structural unemployment rate plus the frictional unemployment rate

Environmental regulation reduces the demand for West Virginia coal and the unemployment rate in West Virginia increases. This is an example of cyclical unemployment. regulatory unemployment. structural unemployment. frictional unemployment.

structural unemployment. (gov't business regulations and labor market policies; also lack of skills wanted by employer)

typewriter repair technicians who lost their jobs as computers became widely used are considered:

structurally unemployed

the permanent income hypothesis

suggests that income level that matters for a persons decision about current consumption and saving is permanent income, expected average lifetime income thus if a persons flow of income temporarily rises without an increase in average income, the person responds by saving moo and leaving consumption unchanged

in the classical model, real GDP is determined by....

supply

Say's law asserts that

supply creates its own demand

Say's law asserts that

supply creates its own demand.

In the Classical Model, the equilibrium level of real GDP per year is completely _____ _____. The supply, in turn, is fixed by the country's resource endowments and the state of its technology and productivity.

supply determined

Regarding the economy's current equilibrium real GDP, it must be noted that in the classical model this variable is determined exclusively by___.

supply.

__________ side inflation cannot account for persistent inflation in a growing economy, but _______ side inflation can occur even as real GDP increases.

supply/ demand

Say's law states that _______ creates its own _________and therefore desired expenditures will equal actual expenditures.

supply; demand

The greater the value of the marginal propensity to consume

the greater the value of the multiplier.

When considering a change in government spending in the traditional Keynesian model, which of the following expenditures is considered an offset to government spending?

taxes

What does the classical model say about unemployment?

temporary, not a serious problem

The modern Keynesian Model assumes that

that prices respond to changes in aggregate demand but not fully.

Persistent inflation arises due to

the AD curve increasing by a larger portion that the long run supply curve.

With regard to the relationship between the C + I + G + X curve and the aggregate demand curve, changes in the price level cause

the C + I + G + X curve to shift while it causes a movement along the aggregate demand curve

With regard to the relationship between the C + I + G + X curve and the aggregate demand curve, changes in the price level cause

the C + I + G + X curve to shift while it causes a movement along the aggregate demand curve.

The U.S. aggregate demand curve would shift to the left if

the Federal Reserve Board caused the real interest rate to increase.

What is the graph which demonstrates the equilibrium level of income in an income-expenditures graph called ?

the Keynesian Cross

the LRAS was vertical; the increase in government spending raised aggregate demand and resulted in only a rise in the price level in the long run.

The country with the highest per capita GDP based on purchasing power parity (U.S. dollars) is

the United States.

Persistent inflation arises due to

the aggregate demand curve increasing by a larger proportion than the long-run aggregate supply curve.

When government spending and net exports are added into the Keynesian model

the aggregate expenditures function shifts

When government spending and net exports are added into the Keynesian model

the aggregate expenditures function shifts.

Money multiplier -

the amount of money the banking system generates with each dollar of reserves

Inflation in an economy implies that

the average price level has increased over a stated period of time.

For any given level of real income, the proportion of total real disposable income that is consumed is called

the average propensity to consume

For any given level of real income, the proportion of total real disposable income that is consumed is called

the average propensity to consume.

Federal Reserve (Fed) -

the central bank of the United States

Changes in leading indicators signal the changes that will occur in the economy. the changes in the frictional and seasonal unemployment rate. the changes in the frictional unemployment rate and the changes in the inflation rate. the changes in the market basket.

the changes that will occur in the economy.

Menu costs -

the costs of changing prices

The tendency for expansionary fiscal policy to cause a reduction in planned investment spending by the private sector is called what?

the crowding out effect

the Balance of Payments is composed of:

the current account the financial account the capital account The balance of payments is the sum of these three. IT MUST EQUAL ZERO !! The current account records a country's net exports, net income on investments, and net transfers.

net foreign investment:

the difference between capital outflows from a country and capital inflows. outflow - inflow

balance of trade:

the difference between the value of the goods a country exports and the value of the goods a country imports. • Positive = trade surplus • Negative = trade deficit (Xg+Xs)-(Mg+Ms) = NX

A trade deficit implies that

the dollar value of imports exceeds the dollar value of exports.

Liquidity -

the ease with which an asset can be converted into the economy's medium of exchange

The time that elapses between the implementation of a policy and its intended result is referred to as.

the effect time lag

the C + I + G + X curve intersects the 45-degree reference line at $4 trillion. If the price level rises

the equilibrium real national income falls because consumption falls, investment falls, and net exports decrease, shifting the C + I + G + X curve down.

The C + I + G + X curve intersects the 45-degree reference line at $4 trillion. If the price level falls

the equilibrium real national income rises because consumption rises, investment rises, and net exports increase, shifting the C + I + G + X curve up

The equilibrium exchange rate is

the exchange rate at which the quantity of dollars supplied is just equal to the quantity of dollars demanded.

which one of the following statements is true of the consumer price index

the goods used to construct the index do not change from month to month

The nominal rate of interest is not influenced by inflation. the interest rate observed in today's market. a value that depends upon the stock market. the interest rate observed in the market minus the inflation premium.

the interest rate observed in today's market.

45 degree reference line

the line along which planned real expenditures equal real GDP per year

Market failure occurs because

the market system does not make individuals responsible for the social costs/benefits of their actions.

The economic concept that part of each additional dollar earned will be spent, and that this spending will provide additional income of which part will again be spent, is known as

the multiplier principle

how can a 100 billion increase in investment generate 500 billion increase in equilibrium real GDP?

the multiplier process

The assumption that the price level is fixed in the Keynesian model allows

the multiplier to be fully applied.

In the classical model, the aggregate supply curve is consistent with

the natural rate of unemployment

If real GDP increases in any year, we know that

the output of goods and services produced this year has increased.

financial account:

the part of the BoP that records purchases of assets a country has made abroad and foreign purchases of assets in the country this account records LONG-TERM flows: • Capital outflows: purchases of assets overseas by Americans • Capital inflows: purchases of American assets by foreigners (These assets might be financial assets, like stocks and bonds— foreign portfolio investment—or physical assets, like factories— foreign direct investment.) net capital flow = inflow - outflow **think of this account as a measure of National Foreign Investment **last two lines of account thing** SUBTRACT THE INFLOW - THE OUTFLOW

current account:

the part of the BoP that records the country's net exports, net income on investments, and net transfers...

Which of the following economic theories can be used to account for this apparent non-relationship between real consumption and real disposable income in the late spring of 2008?

the permanent income hypothesis

Nominal GDP is dependent on

the price level and output

Nominal GDP is dependent on

the price level and output.

An increase in government spending shows up exclusively as a change in real GDP when

the price level is assumed to be constant. (To impact real GDP solely, there can be no inflation or deflation.)

The long-run aggregate supply curve will not shift if there is a change in

the price level.

Money Neutrality -

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

Money Supply -

the quantity of money available in the economy

The investment function is represented as an inverse relationship between the value of planned real investment and

the rate of interest

The investment function is represented as an inverse relationship between the value of planned real investment and

the rate of interest.

marginal propensity to save

the ratio of the change in saving to the change in disposable income.

balance of payments (BoP):

the record of a country's trade with other countries in goods, services, and assets.

consumption function

the relationship between amount consumed and disposable income. a consumption function tells us how much people plan to consume at various levels of disposable income

Shoe leather costs -

the resources wasted when inflation encourages people to reduce their money holdings

The relationship between the price level and the real Gross Domestic Product (GDP) without full adjustment or full information is represented by

the short-run aggregate supply curve

The greater the value of the marginal propensity to save

the smaller the value of the multiplier

The greater the value of the marginal propensity to save

the smaller the value of the multiplier.

The extent to which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by

the speed with which input prices adjust and people become more fully informed. the ability of firms to hire additional inputs, particularly workers. the ability of firms to use existing workers and capital more intensively.

The extent of which real GDP responds to changes in the price level along the short-run aggregate supply curve is largely determined by

the speed with which input pries adjust and people become more fully informed. the ability of firms to use existing workers and capital more intensively. the ability of firms to hire additional inputs, particularly workers.

Economics is

the study of how limited resources are allocated to satisfy unlimited wants.

Classical dichotomy -

the theoretical separation of nominal and real variables

Gross domestic product is defined as

the total market value of all final goods and services produced in an economy during a year.

Suppose the government increases both taxes and government spending by the same amount, creating a balanced budget multiplier. If MPC increases, then

the value of the balanced-budget multiplier will not change.

If economic growth causes the long-run aggregate supply curve to shift rightward over time, but the aggregate demand curve does not change, we expect

the long-run equilibrium price to decline, and there will be secular deflation.

However, household real consumption spending did not increase in response to the short-lived increase in real disposable income because

the one-time tax rebate failed to increase the recipients' permanent income which determines an individual's current consumption.

Economists also are interested in the cumulative fiscal multiplier, which applies to a long-run period after which all influences of

time lags on equilibrium real GDP are complete.

Underemployed

to not get a job in your desire field and instead get a minimum wage job

Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as

transfer payments.

A traditional Keynesian assumption is that government expenditures are not substitutes for private expenditures.

true

Any permanent decrease in autonomous real spending will cause even larger decreases in real GDP per year.

true

At any point where the consumption function intersects the 45-degree reference line, C = Y.

true

Because of the multiplier effect, a relatively small change in planned investment can trigger a much larger change in equilibrium real GDP per year.

true

Equilibrium has to occur at the intersection of the planned saving and planned investment schedules.

true

For a business, profit is a cost of production.

true

Gross domestic income (GDI) is identical to gross domestic product (GDP).

true

In the United States, resourse-using federal government expenditures account for almost 20 percent of real GDP.

true

National income is income earned by all U.S. factors of production.

true

The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is known as purchasing power parity.

true

The difference between real GDP and nominal GDP for the same year reflects the amount of inflation that occurred during that year.

true

The difference between real exports and real imports is called real net exports.

true

The dollar value of total output is always equal to total income.

true

Total income is the annual cost of producing the entire output of final goods and services.

true

workers who hold part time jobs but prefer to work full time are called

underemployed

Unemployment rate

unemployed / labour force

people who are currently not working but are actively looking for work are classified officially

unemployed and in the labor force

Unemployment Formula:

unemployed/labor force

Cyclical unemployment

unemployment attributable to a lack of vacancies; that is an inadequate level of aggregate demand.

Seasonal unemployment

unemployment due to seasonal changes in employment or labor supply. Students who work in the summer are examples of seasonal unemployment. This is impossible to avoid.

U/L

unemployment rate

The long-run aggregate supply curve, LRAS, is a ____ line determined by amounts of available resources such as labor and capital and by technology and resource productivity. The position of the LRAS gives the full-information and full-adjustment level of real GDP per year. The _____ rate of unemployment occurs at the long-run level of real GDP per year given by the position of the LRAS. If labor or capital increases from year to year or if the productivity of either of these resources rises from one year to the next, the LRAS shifts _____ . In a growing economy, therefore, real GDP per year gradually _____ over time.

vertical natural rightward increases

The Classical model has a _____. Therefor any change in the aggregate demand (AD) curve will only result in a change in the price level.

vertical aggregate supply curve.

In the classical model, because LRAS is ________he equilibrium level of real GDP is supply determined. Any changes in aggregate demand simply change the ____________

vertical; price level

To derive GDP using the income approach, we add up all factor payments, including

wages profit interest rent

Which of the following equations is used to calculate gross domestic income (GDI)?

wages + interest + rent + profit + indirect business taxes + depreciation = GDI

If the price level rises the multiplier effect on real GDP will be

weaker than if the price level were constant

If the price level rises the multiplier effect on real GDP will be

weaker than if the price level were constant.

equilibrium in the credit market

when income is saved, it is not reflected in product demand it is a type of leakage from the circular flow of income and output because saving withdraws funds form the income stream, therefore total planned consumption spending can fall short of total current real GDP

The long-run equilibrium of an economy occurs

where the long-run aggregate supply curve meets the aggregate demand curve.

Suppose that the dollar becomes weaker in foreign exchange markets. Consider the two effects of a weaker dollar. Due to the weakening of the dollar the price level _____ and real GDP ____.

will increase, may increase or decrease depending on the size of the shifts.

If the Ricardian equivalence theorem is not relevant, then an income-tax-rate cut

will result in a multiple times higher increase in equilibrium real GDP in the short run; however, a tax-rate reduction will reduce the automatic-stabilizer properties of the tax system, so equilibrium real GDP would be less stable.

Unions -

worker association that bargains with employers over wages, benefits, and working conditions

An increase in the U.S. price level can be caused by all of the following except

worsening economic conditions in Asia.

According to the figure at right, an increase in aggregate demand between real GDP levels Y and Y 1

would most likely result in some inflation.

"Discouraged workers" would be considered as part of the labor force. would be considered as unemployed. would, according to some, tend to skew the unemployment rate upward. would not be considered as unemployed.

would not be considered as unemployed. (unemployed people have not stopped actively looking for a job where discouraged workers have actively stopped looking for a job)

If the MPC = 0.8, a permanent increase in planned real investment of $40 billion will increase real GDP by a total of

$200 billion.

1.According to the graphs, the equilibrium level of real GDP is $_________ (Hint: the values on the graph are in thousands of dollars) 2. In this economy, the numerical value of the multiplier is _____. 3. Had there not been any investment, this economy's equilibrium real GDP would be $________. 4. The multiplier effect from the inclusion of investment is $________. 5. If autonomous investment declines from $1,500 to 1,000 the equilibrium real GDP changes to $________.

1. 8,000 2. 4 3. 2,000 4. 6,000 5. 6,000 First, multiply the change in planned investment by the multiplier. Then, subtract this amount from the economy's original equilibrium.

In the accompanying graph the equilibrium price level is ____ and the equilibrium real GDP is _____.

120; $8 trillion

To which of the following household-type(s) does the phrase "unlimited wants and limited resources" apply? I. A low-income household II. A middle-income household III. A high-income household

I, II, and III.

Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of a decrease in equilibrium real GDP with no change in the equilibrium price level.

Long-run aggregate supply schedule (LRAS) shifts to the left and aggregate demand schedule (AD) shifts to the left by an equal amount.

Identify the combined shifts in long-run aggregate supply and aggregate demand that could unambiguously explain the simultaneous occurrences of an increase in equilibrium real GDP and increase in the equilibrium price level.

Long-run aggregate supply schedule (LRAS) shifts to the right and aggregate demand schedule (AD) shifts to the right by a larger amount.

Long-run aggregate supply schedule (LRAS) shifts to the right and aggregate demand schedule (AD) shifts to the right by an equal amount.

What did Keynes mean when he said that prices are sticky?

Prices, especially the price of labor, are inflexible downward.

The AD curve is drawn with the price level ________, and the C + I + G + X curve is drawn with the price level ________.

changing; held constant

demand-side inflation.

Since the 1960s, public spending on education has _________, while student performance has ______________.

increased, remained constant or declined

Factors of production include

land, labor, physical capital, human capital and entrepreneurship.

The lower the rate of interest, the ________ profitable it is to invest and the ________ the level of desired investment.

more; higher

Classical economists thought that

price, wage, and interest rate flexibility can quickly cure any tendencies for a recession.

As the dollar becomes stronger in international foreign exchange markets, the short-run aggregate supply curve will shift to the ________ and the aggregate demand curve will shift to the ________.

right; left

What is the "driving" force in our capitalistic system

self-interest

Economists assume that an individual acts as if motivated by

self-interest.

The current account is made up of the***********

• Balance of trade, • Balance of services, the difference between the values of the exports and imports of services, • (The sum of balance of trade and balance of services is net exports). • Net income on investments, and • Net transfers

For several reasons, fiscal policy may be even less effective than monetary policy at countercyclical stabilization:

• Timing fiscal policy is harder, due to: • Legislative delay: Congress needs to agree on the actions • Implementation delay: Large spending projects may take months or even years to begin, even once approved. • Government spending might crowd out private spending Crowding out: A decline in private expenditures as a result of an increase in government purchases

literally, everything econ, Test 2 ECON

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