Macro Final

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11) A student who just graduated from college but has not found a job would most likely be A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed.

If an economy's growth rate of real GDP is 3 percent per year and the growth rate of the population is 2.5 percent per year, the growth rate of real GDP per person is A) [(2.5 - 3) ÷ 3] × 100 = 16.6 percent per year. B) 3 - 2.5 = 0.5 percent per year. C) 2.5 - 3 = -0.5 percent per year. D) 3 + 2.5 = 5.5 percent per year. E) [(3 - 2.5) ÷ 2.5] × 100 = 20 percent per year.

3 - 2.5 = 0.5 percent per year.

If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

3 Percent

If it took 20 years for real GDP to double, what was the growth rate of real GDP? A) 3.0 percent B) 5 percent C) 3.5 percent D) 4 percent E) 4.5 percent

3.5 percent

If the nominal rate of interest is 6.5% and the inflation rate 3.0%, what is the real rate of interest?

3.5%

According to the Taylor rule, what is the federal funds target rate under the following conditions? ≻Equilibrium real federal funds rate equals 3% ≻Target rate of inflation equals 3% ≻Current inflation rate equals 2% ≻Real GDP is 2% below potential real GDP

3.5% The Taylor Rule is: fft = π + ff*r + ½(π gap) + ½(Y gap) where fft = federal funds target π = inflation ff*r = the real equilibrium fed funds rate π gap = inflation gap (π - π target) Y gap = output gap (actual output [e.g. GDP] − output potential) so if you plug everything in you get: fft = 2+3+0.5(2-3)+0.5(-2)=5-0.5-1=3.5%

If the marginal propensity to consume equals 0.90, the tax rate equals 0.20, what is the value of the government purchases multiplier?

3.57

Consider the following values of the consumer price index for 2012 and 2013. The inflation rate for 2011 was equal to

3.9 percent

Real GDP per capita in the United States, as mentioned in the chapter, grew from about $5,600 in 1900 to about $43,700 in 2008, which represents an annual growth rate of 1.9 percent. if the United States continues to grow at this rate, how long will it take for real GDP per capita to double?

36.84 years

If the # of unemployed works is 19 million, the # in the working-age population is 500 million, and the unemployment rate is 5%, how many workers are in the labor force?

380 million

according to the quantity theory, if the money supply grows at 6%, real GDP grows at 2% and the velocity of money is constant, then the inflation rate will be

In real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita? A. 4.7 B. 10.5 C. 15 D. 21

4.7

If Country A's real GDP grows at a rate of 14 percent per year, about how many years will it take for Country A's real GDP to double? A) 30 B) 10 C) 5 D) 14 E) 7

If the consumption function is defined as C=7,250+0.8Y,what is the value of the multiplier

If workers and firms expect that inflation will be 5 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

5 percent

If the number employed is 190 million, the working-age population is 230 million, and the number unemployed is 10 million, then the unemployment rate is

What is the stable unemployment rate?

. In the figure above,AD1, LRAS1 and SRAS1 denote AD, LRAS and SRAS in year 1, while AD2, LRAS2 and SRAS2 denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2?

7.3%

Number of Years to Double =

70 / Growth Rate

Number of years it takes to double standard of living=

70/growth rate of gdp

If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money?

8 years and 9 months

If you invest 10,000 in a bond that earns 8% interest per year, how many years will it take to double your money?

8 years and 9 months

If the number employed is 190 million, the number unemployed is 10 million, and the working-age population is 250 million, then the labor force participation rate is

80%

Robert Shiller posed the following question to workers: "Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today?" Shiller found that ________ percent of the workers he interviewed reported that it would take several years to restore the purchasing power of their wages or that this power would never be restored.

As the recession persisted into 2009, the unemployment rate in the United States rose to ________, the highest rate since the recession of 2001-2002 and the second highest since the Great Depression.

9.3 percent

Real GDP per capita

= output per person = average consumption = standard of living = Real GDP/Population

1) During a business cycle expansion, total production ________ and total employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases

If the tax multiplier is -1.5 and $200 billion tax increase is implemented, what is the change in GDP , holding everything else constant? (Assume the price level stays constant)

A $300 billion decrease in GDP

Which of the following goods is directly counted in GDP

A 12 inch subway sandwich purchased by a student

Which of the points in the above graph are possible long-run equilibria?

A and C

A farm worker gets paid today in money, but plans to spend the money next week. This illustrates which function of money?

Store of value

Can the Fed, therefore, eliminate recessions?

The Fed can only soften the magnitude of recessions, not eliminate them.

Suppose a political candidate hired you to develop two arguments in favor of a flat tax. Consider the following list of arguments about changing to a flat tax: A. There would be a reduction in paperwork and the compliance cost of the tax system. B. The complexities in the current tax code allow the government to pursue other policy goals. C. A change in the tax code would result in a more unequal distribution of income because the marginal tax rate on high-income taxpayers would be reduced. D. There are potential increases in labor supply, savings, and investment from a lower marginal tax rate. Which two out of the above list of arguments would you advance in favor of a flat tax?

A and D

Which of the following would be considered an active fiscal policy?

A tax cut is designed to stimulate spending passed during a recession.

What is the "tax wedge"?

A tax wedge is the difference between the pretax and posttax return to an economic activity. For example, a tax on interest income would decrease the posttax return to investment.

16-1. Suppose the economy is in a recession and expasionary fiscal policy is pursued. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

In the aggregate expenditure model, when is planned investment greater than actual investment?

A. When there is an unplanned decrease in inventories.

Which of the following is usually the cause of stagflation?

A. a supply shock as a result of an unexpected increase in the price of a natural resource

The long-run aggregate supply curve is vertical because in the long run

A. changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology.

Select the answer below that best corrects the following statement: "An expansionary fiscal policy LOADING... involves an increase in government purchases or an increase in taxes."

An expansionary fiscal policy involves the increase of government purchases and/or a decrease in taxes in order to increase aggregate demand.

Suppose that at the same time Congress and the president pursue an expansionary fiscal policy, the Federal Reserve pursues an expansionary monetary policy. How might an expansionary monetary policy affect the extent of crowding out in the short run?

An expansionary monetary policy would decrease interest rates and thus reduce the extent of crowding out.

33) An example of physical capital is a. exhaust from a smokestack. d. a pillow. b. a factory. e. pants. c. dog food.

B. A Factory

Total population 20,000 Working-age population 15,000 Employment 1,000 Unemployment 100 4) Refer to Table above. The labor force participation rate for this simple economy equals A) (1,000/1,100) × 100. B) (1,000/15,000) × 100. C) (1,100/15,000) × 100. D) (1,100/20,000) × 100.

Which one of the following is not true when the economy is in macroeconomic equilibrium?

C. When the economy is at long-run equilibrium, firms will have excess capacity.

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes

C. a recession in the short run and a decline in the price level in the long run.

If the economy is initially at full-employment equilibrium, then an increase in aggregate demand causes _____________ in real GDP in the short run and ___________ in the price level in the long run.

C. an increase; an increase

"Saving money is not lending. How can it be? When I save my money, I put it in a bank. I don't loan it out to someone else."

C. incorrect. The supply of loanable funds is determined by household saving.

To have growth without inflation, which of the following must be true?

C. AD, SRAS, and LRAS must increase by the same amount.

Which of the following would not be considered a positive addition to household wealth?

a credit card balance

All of the following would be considered a positive addition to household wealth except

a credit card balance.

Ceteris paribus, an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from

a credit card balance.

When is it considered "good policy" for the government to run a budget deficit?

When borrowing is used for long-lived capital goods.

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING... If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06, we would expect the Federal Reserve Bank to pursue ___________ monetary policy. If the Fed's policy is successful, what is the effect of the policy on the following macroeconomic indicators?

a contractionary Actual real GDP decreases Potential real GDP does not change Price level decreases Unemployment increases

Most recessions in the United States since World War II have begun with

a decline in residential construction.

If aggregate demand just decreased, which of the following may have caused the decrease?

a decrease in exports

The international-trade effect refers to the fact that an increase in the price level will result in

a decrease in exports and an increase in imports.

Which of the following will decrease aggregate expenditure in the United States?

a decrease in government purchases

Refer to Figure 16-2. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

a decrease in income taxes

Which of the following leads to an increase in real GDP?

a decrease in interest rates

Which of the following leads to an increase real GDP?

a decrease in interest rates

On the long-run aggregate supply curve,

a decrease in the price level has no effect on the aggregate quantity of GDP supplied.

Because of the slope of the aggregate demand curve, we can say that

a decrease in the price level leads to a higher level of real GDP demanded.

According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following?

a decrease in the unemployment rate to 3.0%

Which of the following does NOT lead to long-run economic growth A. Improved labor productivity B. Increase in average wages C. Increase in the capital stock D. Technological change

B. Increase in average wages

What can low-income countries do in order to increase the amount of loanable funds available to firms for investment projects such as new factories or improved technology?

B. Provide savings incentives

Which one of the following is not one of the monetary policy goals of the Fed? A. Maintain stability of financial markets and institutions. B. Reduce income inequality. C. Maintain high employment. D. Maintain price stability.

B. Reduce income inequality.

Monetary policy is defined as: A. The actions Congress takes to manage tax policy and interest rates. B. The actions the Federal Reserve takes to manage the money supply and interest rates. C. The actions the Federal Reserve takes to manage tax policy and interest rates. D. The actions Congress takes to manage the money supply and interest rates.

B. The actions the Federal Reserve takes to manage the money supply and interest rates.

What are the Fed's main monetary policy targets? A. Taxes and government spending B. The money supply and interest rates C. Price stability and economic growth D. High employment and economic growth

B. The money supply and interest rates

To decrease the money supply, the Fed can A. Buy government bonds or increase the discount rate B. Buy government bonds or decrease the discount rate C. Sell government bonds or increase the discount rate

What causes demand curve to shift?

Changes in real GDP or price level. Increase in real GDP and price level means buying and selling increases demand for money, shift to the right.

Why is the long-run aggregate supply curve vertical?

Changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology

Why did the Fed help JP Morgan Chase buy Bear Stearns?

Commercial banks would be reluctant to lend to investment banks. Failure of Bear Stearns would lead to a larger investment bank failure. A and C only

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation.

What is inflation targeting?

Committing the central bank to achieve an announced level of inflation.

What is crowding out?

Increased government spending leads to borrowing more which means interest rates go up and this leads to a decrease in investment when an increase in government spending decreases a component of GDP (most likely investment)

Which of the following is one explanation as to why the aggregate demand curve slopes downward?

Increases in the U.S. price level relative to the price level in other countries lowers net exports.

How does the fed conduct contractionary fiscal policy?

Increasing taxes on individuals and businesses Decreasing government spending on goods and services

If the government cuts taxes in order to increase aggregate demand, the action is called

a discretionary fiscal policy

Congress and the president enact a temporary cut in payroll taxes. This is an example of

a discretionary fiscal policy.

Decreases in price level, household wealth, expected future income, current disposable income, and interest rates do what to consumption?

Increase, decrease, decrease, decrease, increase

In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?

Increased demand for Treasury securities drives up their prices. Initially, firms hold more money than they want relative to other financial assets. Increased demand for Treasury securities drives down their interest rate.

According to the short-run Phillips curve, which of the following would result in low rates of unemployment?

a higher inflation rate

accumulating debt poses a problem for the US federal government because

a large debt to GDP ratio causes crowding out

Ceteris paribus, an increase in workers and firms adjusting to having previously underestimated the price level would be represented by a movement from

SRAS2 to SRAS1.

Suppose over time firms begin to expect higher inflation in the future.

SRPC shifts to the right

Stagflation is often a result of

a negative supply shock.

In a business cycle, the high point of economic activity is called

a peak

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent trade-off between unemployment and inflation

Economists who believed that the Phillips curve represented a structural relationship believed that the curve represented

a permanent trade-off between unemployment and inflation.

Structural unemployment is the result of

a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs

An example of a seasonally unemployed worker would be

a ski lift operator who loses his job when the snow melts in the spring.

Cyclical unemployment is the result of

a slowdown in the economy.

Stagflation usually results from

a supply shock.

The short-run Phillips curve exhibits ________________________________________ , whereas the long-run Phillips curve shows __________________________________________

a trade-off between inflation and unemployment no trade-off between inflation and unemployment

In a business cycle, the low point of economic activity is called

a trough

If actual inflation is higher than expected inflation, the wages...

actual real wage is less than the expected real wage: unemployment falls.

If actual inflation is higher than expected inflation, If actual inflation is less than expected inflation,

actual real wages in the economy will be lower than expected real wages. As a result, many firms will hire more workers than they had planned. Unemployment falls. actual real wages in the economy will be higher than expected real wages. As a result, many firms will hire fewer workers than they had planned. Unemployment rises.

According to a 2017 Congressional Budget Office (CBO) report, "By 2047, 22 percent of the population will be age 65 or older, CBO anticipates, compared with 15 percent today." Source: Congressional Budget Office, "The 2017 Long-Term Budget Outlook," March 2017, p. 7. The over-65 population is increasing so rapidly because

after WWII, there was a "baby boom," but after 1965 birthrates fell.

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

an automatic mechanism

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of

an automatic stabilizer.

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of

an automatic stabilizer.

If the government finances an increase in government purchases with an increase in taxes, which of the following would you expect to see?

an increase in the exchange rate

In the figure (15.2), a movement from point A to point B would be caused by

an increase in the interest rate

When the Fed embarked on a policy known as quantitive easing, they

bought longer-term securities than are usually bought in open market operations

Expansionary fiscal policy

can be effective in the short run

Crowding out refers to a decline in (blank) as a result of an increase in (blank)

private expenditures; government purchases

If the Federal Reserve raises or lowers interest rates too late, it could result in a ___ policy that destabilizes the economy.

procyclical

These carmakers are likely to react to the increase in inventories by

producing fewer cars in the future

During the expansion phase of the business cycle

production increases

During the expansion phase of the business cycle what eventually increases?

production, income, and employment

Purchases of which of the following goods would be dramatically reduced during a recession?

refrigerators

Most economists agree that an automatic mechanism brings the economy back to potential GDP in the long run. In mid-2011, two years after the recession of 2007-2009 had ended, real GDP in the United States

remained more than 7 percent below potential GDP.

Economists during the early 1960s thought of the Phillips curve as a "policy menu" because they thought that the Phillips curve

represented a structural relationship in the economy that would not change as a result of policy changes. They were not correct to think of the Phillips curve as a "policy menu."

Which of the following policy tools is the Federal Reserve least likely to use in order to actively change the money supply?

reserve requirements

The Fed seeks to promote stability of financial markets because

resources are lost when there is not an efficient matching of savers and borrowers

Due to the American Recovery and Reinvestment Act of 2009long dashthe stimulus packagelong dashthe effect on federal government

revenue and expenditures was highest in 2010 but both effects declined in 2011.

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.

rise fall

According to Milton Friedman, differences between the actual and expected inflation rates could lead the actual unemployment rate to

rise above or fall below the natural rate.

Suppose the government cuts taxes. We would expect interest rates to ________ and the dollar to ________ in foreign exchange markets.

rise; appreciate

During recessions, government expenditure automatically

rises because of programs such as unemployment insurance and medicaid

Stagflation occurs when inflation ________ and GDP ________.

rises; falls

Just before, during, and after the recession of 2007-2009, net exports in the United States

rose, but remained negative.

If tax reduction and simplification are effective, then

saving and investment in new capital will increase

M2 includes M1 plus

savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non institutional money market fund shares

* M2 includes M1 plus

savings account balances, money market deposit accounts in banks, small-denomination time deposits, and non-institutional money market fund shares

Refer to Table 15-2. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2014 and 2015 if the Federal Reserve does not use monetary policy. If the Fed wants to keep real GDP at its potential level in 2015, it should

sell Treasury securities

* If the Federal Open Market Committee wants to decrease the money supply through open market operations it will

sell U.S. Treasury securities

if the FOMC wants to decrease the money supply through open market operations it will

sell US treasury securities

Refer to figure 17-1. What should the Federal Reserve do if it wants to move from point A to point B in the short-run Phillips curve depicted in the figure above?

sell treasury bills

suppose the Fed decreases the money supply. in response households and firms will ____________ short term assets and this will drive ___________ interest rates

sell; up

the fed can increase the federal funds rate by

selling treasury bills which decreases bank reserves

Economic growth will

slow down or stop if more capital per hour is used because of diminishing returns to capital

Suppose that the tax increase only affected aggregate demand. Compared to the above, the effect on real GDP would be smaller and the effect on the price level would be larger .

smaller larger

if during a deposit expansion, not all money gets redeposited into the banking system and some leaks out as currency, then the real world multiplier is

smaller than 1/RR

the real world money multiplier is

smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash

A decline in demand does not always lead to an increase in firms' holdings of inventories because

sometimes the decline is anticipated and inventories can be adjusted.

In February 2013, the Congressional Budget Office (CBO) forecast that the federal budget deficit for fiscal year 2013 would be approximately $850 billion. In May 2013, the CBO revised down its forecast of the budget deficit to $642 billion. The CBO stated that a major reason for the downward revision was "factors related mainly to the strengthening economy." Source: Susan Davis, "CBO Drops 2013 Deficit Estimate to $642 Billion," usatoday.com, May 15, 2013. a. A "strengthening economy" could lead to a downward revision of the projected budget deficit because as GDP increases,

tax revenues increase and government spending decreases, lowering the deficit.

There may be some truth in the columnist's argument, but an economist might argue that

taxpayers in one year should not have to pay for a project that will benefit other taxpayers well into the future.

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then

the MPC is 0.8

From an understanding of the multiplier process, explain why an increase in the tax rate would decrease the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier

the MPC is multiplied by (1 minus t).

If, in the long run, real GDP returns to its potential level, then in the long run

the Phillips curve is vertical

If, in the long run, real GDP returns to its potential level, then in the long run,

the Phillips curve is vertical.

If, in the long run, real GDP returns to its potential level, then in the long run,

the Phillips curve is vertical.

The short-run trade-off between the rate of inflation and the unemployment rate is best represented by:

the Phillips curve.

The seven members of the Board of Governors of the Fed are appointed by

the President

The MPS is

the change in saving divided by the change in income.

Which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?

the end of the housing bubble

Why doesn't the fed have both a money supply target and an interest rate target?

the fed does not control money demand

if the fed lowers its target for the federal funds rate, this indicates that

the fed is pursuing n expansionary monetary policy

When we say that the Federal Reserve has lowered the interest rate, we mean that it has lowered its target for

the federal funds rate

which of the following is responsible for managing the money supply in the US

the federal open market committee

Which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?

the financial crisis

What relationship is shown by the aggregate supply curve?

the price level and the quantity of real GDP supplied by firms.

Ceteris paribus, in the long run, a negative supply shock causes

the price level to rise initially, and then return to its lower level.

When the Federal Reserve purchases Treasury securities in the open market,

the sellers of such securities deposit the funds in their banks and bank reserves increase.

If changes in inflation are higher than expected,

the short-run Phillips curve will be negatively sloped.

Workers and firms both expect that prices will be 2.5% higher next year than they are this year. As a result,

the short-run aggregate supply curve will shift to the left as wages increase.

Workers and firms both expect that prices will be 3% higher next year than they are this year. As a result,

the short-run aggregate supply curve will shift to the left as wages increase.

If the long-run aggregate supply curve is vertical,

the trade-off between unemployment and inflation cannot be permanent

Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job,

the unemployment rate increased.

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending

they may make themselves worse off by causing aggregate expenditure to fall, thereby pushing the economy into a recession.

Milton Friedman argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation, since

the long-run Phillips curve is vertical, there is no trade-off between unemployment and inflation in the long run.

If expected inflation is higher than actual inflation, actual real wages in the economy will turn out to be _________ than expected real wages; consequently, firms will hire _________ workers than they had planned.

higher; fewer

Governments sometimes allow hyperinflation to occur because

when governments want to spend more than they collect in taxes, central banks increase the money supply at a rate higher than GDP growth, often resulting in hyperinflation

The federal funds rate is the interest rate charged

when one bank lends money to another bank

Tax cuts on business income (blank) aggregate

would increase

Forecasts made by White House economists and economists at the Congressional Budget Office in 2011 projected that real GDP

would not return to potential GDP until 2016.

borrowers will have to pay increasing amounts in real terms overtime

your roommate argues that he can think of no better situation than living in deflationary economy, as prices of goods and services would continuously fall. you disagree and argue that during a deflation, people can be made worse off because .....

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

"Fannie Mae" and "Freddie Mac"

What is meant by supply-side economics?

Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply.

Why do poorer countries grow faster than richer countries on catch-up lines?

The lower the initial level of real GDP per capita, the higher the rate of growth in real GDP per capita. (By adding the same amount of new technology for example)

Is it possible for Congress and the president to carry out an expansionary fiscal policy if the money supply does not increase?

Yes, because fiscal policy and monetary policy are separate things.

In 2009, Congress and the president enacted "cash for clunkers" legislation that paid people buying new cars up to $4,500 if they traded in an older, low gas-mileage car. Source: Justin Lahart, Trade-In Program Tunes Up Economic Engine," Wall Street Journal, August 4, 2009. Was this piece of legislation an example of fiscal policy?

Yes, because the primary goal of the spending program was to stimulate the national economy.

Does government spending ever reduce private spending?

Yes, due to crowding out.

An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________.

contractionary; fall; fall

The large budget deficits of $1.4 trillion in fiscal year 2009 and $1.3 trillion in fiscal year 2010 were

caused partly by the increase in government spending including spending to bail out failed financial institutions and by the deep decline in tax revenues as incomes and profits fell.

change in national income formula

change in consumption + change in saving + change in taxes

the government purchases multiplier is defined as

change in equilibrium real GDP/change in government purchases

The multiplier is calculated as the

change in real GDP/ change in autonomous expenditure.

Inventory Investment =

change in value of all firms' inventories = (Number of items produced - number of items sold) x Sales price

By repercussions, Keynes means that an initial increase in autonomous expenditures will

change production by an amount greater than the initial increase in autonomous expenditures.

To increase the money supply, the Fed could

conduct an open market purchase of Treasury securities

national income formula

consumption + savings +taxes

In the aggregate expenditure model, ________ has both an autonomous component and an induced component

consumption spending

Aggregate expenditure, or the total amount of spending in the economy, equals

consumption spending plus planned investment spending plus government purchases plus net exports.

In an open economy, expansionary monetary policy will cause

consumption, investment, and net exports to rise

decreasing government spending _________ the price level and ________________ equilibrium real GDP

decreases; decreases

The following is from a message by President Hoover to Congress, dated May 5, 1932: "I need not recount that the revenues of the Government as estimated for the next fiscal year show a decrease of about $1,700,000,000 below the fiscal year 1929, and inexorably require a broader basis of taxation and a drastic reduction of expenditures in order to balance the Budget. Nothing is more necessary at this time than balancing the Budget." According to the statement, balancing the Budget would require

decreasing government purchases and increasing taxes.

The required reserves of a bank equal its ______ the required reserve ratio.

deposits multiplied by

The portion of ___ that a bank does not loan out or spend on securities is known as ____

deposits; reserves

The portion of ______ that a bank does not alone out or spend on securities is knows as

deposits; reserves

Changes in the price level

do not affect the level of aggregate supply in the long run.

Long-run macroeconomic equilibrium occurs when aggregate demand ________ short-run aggregate supply and they ________ the long-run supply curve.

equals; intersect at a point on

The ratio of the increase in ________ to the increase in ________ is called the multiplier

equilibrium real GDP; autonomous expenditure

The ratio of the increase in ________ to the increase in ________ is called the multiplier.

equilibrium real GDP; autonomous expenditure

The government purchases multiplier equals change in (blank) divided by the change in (blank)

equilibrium real GDP; government purchases

The tax multiplier equals the change in (blank) divided by the change in (blank)

equilibrium real GDP; taxes

The tax multiplier equals the change in ___ divided by the change in ___.

equilibrium real GDP; taxes

difference between household survey and establishment survey

establishment surveys are monthly surveys to businesses, household surveys are

Which of the following is a true statement?

excess reserves = actual reserves - required reserves

suppose you deposit $2000 into Bank of America and that the required reserve ratio is .1. How does this affect the bank's balance sheet

excess reserves rise by $1800

what are the 4 functions of money

exchange, unit of account, store value, and deffered payment

which of the following is not a tool the Fed uses to manage the money supply (what are the tools)

expanding and contracting the money supply, setting the discount rate, open market operations

* The Taylor rule helps explain the relationship between the Fed's _____ and ____.

federal funds target; economic conditions

fiscal policy refers to changes in

federal taxes and purchases that are intended to achieve macroeconomic policy objectives

Fiscal policy refers to

federal taxes and purchases that are intended to achieve macroeconomics policy objectives

Inventories refer to

goods that have been produced but not yet sold

An increase in government purchases will increase aggregate demand because

government expenditures are a component of aggregate demand

If the economy is falling below potential real GDP, what would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply

government purchases

If the economy is falling below potential real GDP, which of the following would be an appropriate fiscal policy to bring the economy back to long-run aggregate supply? An increase in

government purchases

Congress and the president carry out fiscal policy through changes in

government purchases and taxes

Automatic stabilizers refer to

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

Economist Mark Thoma has written, "One of the difficulties in using fiscal policy to combat recessions is getting Congress to agree on what measures to implement. ... Automatic stabilizers bypass this difficulty by doing exactly what their name implies." Source: Mark Thoma, "The Importance of Automatic Stabilizers to the Economy," cbsnews.com, January 25, 2010. Automatic stabilizers are

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

Due to the American Recovery and Reinvestment Act of 2009 (the stimulus package), from 2009 through 2011, the federal budget deficit was

greater than 8 percent of GDP but fell to less than 3 percent of GDP in 2015.

If actual inflation is less than expected inflation, actual real wages will be ________ expected real wages and unemployment will ________.

greater than; rise

The business cycle ________ on FedEx since the company's inception over 40 years ago.

has had a large effect

In the aggregate expenditure model, why is it important to know the factors that determine consumption spending, investment spending, government purchases, and net exports? Because they help us understand

how the level of aggregate expenditure and GDP are determined in the economy. how macroeconomic equilibrium is determined in the aggregate expenditure model. the relationship between aggregate expenditure and real GDP.

Very high rates of inflation are called

hyperinflation

decrease not change

if a person takes $100 from his/her bank at home and puts it in his/her savings account then M1 will _______ and M2 will ___________

Between the beginning of 2009 and the end of 2010, real GDP ________, while employment ________.

increased by 4.0 percent; declined by 3.3 million

b. In terms of its effect on the long-run growth rate of real GDP, it is likely to matter more if the additional government spending involves

increased spending on highways and bridges.

A rise in stock prices and housing prices

increases household wealth which in turn increases consumption and leads to an upward shift of the consumption function.

A rise in stock prices and housing prices

increases household wealth which increases consumption which leads to UPWARD shift of the consumption function.

The cyclically adjusted budget deficit

is measured as if the economy were at potential real GDP.

The prime rate

is the basis of the interest rate on many other types of loans

The federal funds rate

is the rate that banks charge each other for short-term loans of excess reserves.

A countercyclical policy is one that

is used to attempt to stabilize the economy.

The long-run aggregate supply curve

is vertical

The Fed uses policy targets of interest rate and/or money supply because

it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level

If a tax cut has supply-side effects, then

it will affect both aggregate demand and aggregate supply.

Keynes appears unconcerned if government spending is wasteful because

it will still lead to an increase in production and employment.

The federal government would not want to increase its spending, even if the result were to increase real GDP and employment in the short run, if

it would lead to a greater federal deficit and an increase in the national debt.

A country will likely experience an increase in poverty if A) its real GDP per person growth rate increases over time. B) its inflation rate decreases or slows over time. C) it does not receive foreign aid. D) its population decreases over time. E) its real GDP growth rate decreases or slows over time.

its real GDP growth rate decreases or slows over time.

Which of the following labor market statistics best indicates the amount of labor that is available to the economy from a given working-age population?

labor force participation rate

labor force/adult population x 100

The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as

labor productivity

In figure (15.8), if the economy in Year 1 is at point A and expected to Year 2 to be at point B, then the appropriate monetary policy by the Federal Reserve would be to

lower interest rates

Which of the following is included in M2 but not M1?

money market deposit accounts in bank

A higher inflation rate can lead to lower unemployment if ________ mistakenly expect the inflation rate to be lower than it turns out to be.

neither workers nor employers

Into which category of aggregate expenditures LOADING... would the following transaction fall? A consumer in Japan orders a computer online from Dell.

net export expenditure

During the recession of 2007-2009 in the United States, ________ relative to potential GDP.

net export spending rose and consumption spending declined

If net exports are negative,

net foreign investments are also negative

The period of time fro 1,000,000 B.C. to 1300 A.D. was a period of

no sustained economic growth

When the economy enters a recession, your employer is unlikely to reduce your wages because ________ during a recession.

output and input prices generally fall

If real GDP increases we know for sure that

output has risen

Money serves as a standard of deferred payment when

payments agreed to today but can be payed in future in terms of money

On the 45 -degree line diagram, for points that lie below the 45-degree line,

planned aggregate expenditure is less than GDP.

On the 45-degree line diagram, for points that lie below the 45-degree line

planned aggregate expenditure is less than GDP.

Assume that inventories declined by more than analysts predicted. This implies that

planned aggregate expenditure was greater than real GDP.

Ceteris paribus, a decrease in the price level would be represented by a movement from

point B to point A.

Ceteris paribus, an increase in the price level would be represented by a movement from

point B to point A.

The per-worker production function has a _______ slope, indicating that increases in capital per hour worked _______ real GDP.

positive increase

The short-run aggregate supply curve has a

positive slope.

The short run aggregate supply curve has a(n) _____ slope because as prices of ______ rise, prices of _____ rise more slowly

positive; final goods and services; inputs

The short-run aggregate supply curve has a(n) ________ slope because as prices of ________ rise, prices of ________ rise more slowly.

positive; final goods and services; inputs

When the price level falls from 135 to 120, the aggregate level of GDP supplied falls from $140 billion to $125 billion. This ________ relationship represents the ________ relationship between GDP and the price level.

positive; short-run

The labor force is the sum of

Employed and unemployed workers

Suppose that the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point B, which of the following must be true?

Equilibrium GDP at point B must be below potential GDP.

Marginal Prosperity to Consume (MPC)

Change in consumption/ change in disposable income

What is the NAIRU?

the nonaccelerating inflation rate of unemployment

If an economy growing at a rate of 2.5% per year, for long will it take to double?

28 years

What shifts the LRAS?

Changes in Technology Changes in Capital Accumulation Changes in the Working Population

Which of the following will not have an effect on the long−run Phillips curve?

Changes in monetary policy.

Ceteris paribus, a decrease in the expected future price level would be represented by a movement from

SRAS1 to SRAS2.

Ceteris paribus, an increase in the labor force would be represented by a movement from

SRAS1 to SRAS2.

frictional unemployment

Short-term unemployment where people in the labour force are between jobs.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market?

"Fannie Mae" and "Freddie Mac"

In an effort to discover whether or not workers understand inflation, economist Robert Shiller conducted a survey. When asked about the effect of general inflation on their wages or salary, the most popular response coming from workers was:

"The price increase will create extra profit for my employer.... There will be no affect on my pay."

Suppose saving is $1,400 when income is $10,000 and the MPC equals 0.8. When income increases to $12,000, saving is

$1,800.

Potential GDP equals $100 billion. The economy is currently producing GDP 1 which is equal to $90 billion. If the MPC is 0.8, then how much must autonomous spending change for the economy to move to potential GDP

$2 billion

Consumption spending is $5 million, planned investment spending is $8 million, unplanned investment spending is $2 million, government purchases are $10 million, and net export spending is $2 million. What is aggregate expenditure?

$25 million

* If the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then government purchases would be to increase by _____ to restore the economy to potential real GDP

$250 billion

If the absolute value of the tax multiplier equals 1.6, real GDP is $13 trillion, and potential real GDP is $13.4 trillion, then taxes would need to be cut by _____ to restore the economy to potential real GDP

$250 billion

if the government purchases multiplier equals 2, and real GDP is $14 trillion with potential real GDP $14.5 trillion, then the government purchases would need to increase by __________ to restore the economy to potential real GDP

$250 billion

$27 million

Matt's real wage in 2014 is $26.80. If the price level is 104, what is Matt's nominal wage?

$27.87

Equations for C,I,G,and NX are given below. If the equilibrium level of GDP is $32,000, what will the new equilibrium level of GDP be if government spending increases to 2,500? C=5,000+(MPC)Y I=1,500 G=2,000 NX=-500

$34,000

Suppose you withdraw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ratio is 10%, checking account deposits in the banking system as whole could drop up to a maximum of

$5,000

If the consumption function is defined asC = 5,500 + 0.9Y, what is the autonomous level of consumption expenditure?

$5,500

With a required reserve ratio of 20 percent, an increase in reserves of $10,000 could lead to a maximum increase checking account deposits in the entire banking system of

$50,000

In 2011, Kendall Ford, an automotive dealership, spent $20,000 on a new car lift for its repair shop, $2,000 on a new company machine for its sales division, and $600,000 on Ford Motor company stock. Unsold cars and trucks were valued $400,000 on January 1, 2013 and unsold cars and trucks were valued at $900,000 on December 31, 2013. What is Kendall Ford's total investment spending in 2013?

$522,000

In 2016, Kendall Ford, an automobile dealership, spent $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on Ford Motor company stock. Unsold cars and trucks were valued at $400,000 on January 1, 2016 and unsold cars and trucks were valued at $900,000 on December 31, 2016. What is Kendall Ford's total investment spending in 2016?

$522,000

Given the equations forC,I, G, andNX below, what is the equilibrium level of GDP?

$79,000

Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2013, then the value of your grandfather's salary in 2013 dollars is approx

$84,775

In a small economy, consumption spending is $6,000, government spending is $1,200, gross investment is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product?

$9,700

Total population 20,000 Working-age population 15,000 Employment 1,000 Unemployment 100 Consider the data above for a simple economy. Refer to Table 9-1. The labor force participation rate for this simple economy equals

(1,100/15,000) × 100

Suppose the working-age population of a fictional economy falls into the following categories: 90 are retired or homemakers; 60 have full-time employment; 20 have part-time employment; 20 do not have employment, but are actively looking for employment; and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by the U.S. Bureau of Labor would equal

(20/100) × 100.

Inflation Rate=

(Current deflator value- Previous deflator value)/Previous value))*100

% Change in GDP =

(New Value - Old Value) / Old Value

GDP deflator =

(Nominal GDP/Real GDP) x 100

Employment to Population Ratio Formula

(employment/working age population) x 100

How do investment banks differ from commercial banks?

- investment banks do not take deposits - investment banks generally do not lend to households

If a country experiences a real GDP growth rate of 1 percent and population growth of 2 percent, then the growth rate of real GDP per person is A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent. E) -1 percent.

-1 percent

How do investment banks differ from commercial banks?

.Investment banks do not take deposits, Investment banks generally do not lend to households.

Given the consumption schedule in the table above, the marginal propensity to save is

0.1

Table 12-3 Consumption (dollars) *Disposable Income (dollars)* $1,200 *$3,000* 2,100 *4,000* 3,000 *5,000* Refer to Table 12-3. Given the consumption schedule in the table above, the marginal propensity to save is

0.1.

If national income increases by $20 million and consumption increases by $5 million, the marginal propensity to consume is

0.25

U.S. real GDP in 2007 was $13.25 trillion and U.S. real GDP in 2008 was $13.31 trillion. What was the economic growth rate of the United States during this period? A) $1.8 trillion B) 0.45 percent C) 18 percent D) 6.9 percent E) -1.36 percent

0.45 percent

Equations forC,I, G, andNX are given below. If the equilibrium level of GDP is $21,500, what is the marginal propensity to consume?

0.8

If disposable income falls by $50 billion and consumption falls by $40 billion, then the slope of the consumption function is

0.80

Given the equations for C,I,G,and NX below, what is the marginal propensity to consume? C=2,000+0.9Y I=2,500 G=3,000 NX=400

0.9

If disposable income increases by $100 million, and consumption increases by $90 million, then the marginal propensity to consume is

0.9.

MPC+MPS=

Similarly, explain why a decrease in the marginal propensity to import would increase the size of the government purchases multiplier. The value of the government purchases multiplier would decrease because in the formula for the multiplier the denominator is

1 minus [MPC times (1 minust) minus MPI]

Suppose a transaction changes a bank's balance sheet as indicated in the following T - account, and the required reserve ratio is 10 percent ________________________ Assets | Liabilities | Reserves +2000 | Deposits +2000 ------------------------------------------ As a result of the transaction, the bank can make a maximum loan of

1,800

MPC +MPS =

What causes shifts in the aggregate demand curve?

1. Changes in government policies 2. Expectations of households and firms. 3. Changes in foreign variables

Why does the short-run aggregate supply curve slope upward?

1. Contracts keep wages "sticky." 2. Firms are slow to adjust wages in an attempt to maximize profits. 3. Menu costs keep prices "sticky."

Borrowers are ____ of loanable funds, and lenders are _____ or loanable funds? Demanders or Suppliers

1. Demanders 2. Suppliers

What causes an inverse effect (or downward sloping) aggregate demand curve?

1. Wealth effect 2. Interest rate effect 3. International-trade effect

3 ways to measure GDP

1. expenditure approach 2. income approach 3. value-added (production) approach

If real GDP was $13.1 trillion in 2013 and $13.3 in 2014, what is the growth rate? A) -1.5 percent B) 1.5 percent C) 2.1 percent D) $0.2 trillion E) 15.0 percent

1.5 percent

Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?

1.8%

How to calculate value of the multiplier?

1/(1-MCP)

What is the multiplier formula?

1/(1-MPC)

multiplier formula

1/(1-MPC)

A general formula for the multiplier is

1/MPS

the formula for simple deposit multiplier is

1/RR or ratio of deposits by amount of new reserves

If the consumption function is defined as C=5,500+0.9Y,what is the multiplier

If the consumption function is defined asC = 5,500 + 0.9Y, what is the value of the multiplier?

In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2?

10%

Suppose 180,000 people are employed, 20,000 people are unemployed, the working-age population is 250,000, and 50,000 people are out of the labor force. Calculate the unemployment rate.

10%

Suppose that investment spending increases by $10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2.If the MPC is 0.9, then what is the change in GDP?

100 million

* Suppose a transaction changes the balance sheet of Wells Fargo bank as indicated in the following T-account ______________________ Assets | Liabilities | Reserves +1000 | Deposits +1000 -------------------------------------- At this point, what percentage of the new deposits does Well Fargo hold in reserves?

100 percent

If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is

125.

According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%

14 years

According to the quantity theory of money, if the money supply grows at 20% and real GDP grows at 5% then the inflation rate will be

15%

a. If the government does not take any policy actions, then, in 2019, the value of real GDP will be $ 18.2 trillion and the value of the price level will be 117. (Enter your responses rounded to one decimal place.)

18.2;117

Shondra's real wage in 2014 is $18.50. If the price level is 106, what is Shondra's nominal wage?

19.61

In the decade of the ________, A.W. Phillips plotted data for Great Britain which revealed a relationship between rates of changes in wages versus unemployment rates. Economists later discovered other "Phillips Curve" relationships between rates of inflation versus unemployment rates.

1950's

What years did the rate of real GDP per hour worked slow in the United States?

1974-1995 and 2006-2016

Assume you borrow funds to buy a new car at 10% interest and you think that the economy-wide rate of inflation over the life of the loan will be 8%. If you are correct in your assmption, your real rate of interest on the car loan will be.

The National Restaurant Association states that the restaurant industry has economic effect of more than $1.7 trillion annually in the United States, with every dollar spent in restaurants generating an estimated total of $2.05 in spending in the economy. This indicates that the spending multiplier for the restaurant industry is equal to

2.05

Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?

2.7%

Suppose the working age population of a frictional economy falls into the following categories: 90 are retired or homemakers; 60 have full time employment; 20 have part time employment; 20 do not have employment, but are actively looking for employment: and 10 would like employment but do not have employment and are not actively looking for employment. The official unemployment rate as calculated by the US Bureau of Labor would equal

20/100(100)

13) If cyclical unemployment is eliminated in the economy, then A) the economy is considered to be at full employment. B) the unemployment rate is below the natural rate of unemployment. C) the unemployment rate is above the natural rate of unemployment. D) the economy is at less than full employment.

14) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is A) 5% higher in year 2 than in year 1. B) 105% higher in year 2 than in year 1. C) 5% higher in year 1 than in year 2. D) 105% higher in year 1 than in year 2.

6) If the BLS counted persons that are on active military service in the totals for employment, the labor force, or the working-age population, this would A) decrease the measured unemployment rate. B) decrease the measured labor force participation rate. C) decrease the number of persons in the labor force. D) decrease the number of persons in the working-age population.

7) In the United States since the mid-1980s, consumption as a percentage of GDP has A) increased. B) slowly decreased. C) remained the same. D) dropped by more than half.

9) An advantage of the establishment survey over the household survey of the labor market is that the establishment survey A) is based on actual payrolls, rather than on unverified answers. B) includes the number of self-employed persons. C) includes persons employed at newly opened firms. D) provides an estimate of the number of persons unemployed

A good measure of the standard of living is A) real GDP per capita. B) total nominal GDP. C) nominal GDP per capita. D) total real GDP

According to the short-run Phillips curve, the unemployment rate and the inflation rate are A) negatively related. B) unaffected by monetary policy. C) unrelated. D) positively related.

An increase in government purchases of $200 billion will shift the aggregate demand curve to the right by A) more than $200 billion. B) less than $200 billion. C) $200 billion. D) None of the above are correct. This policy shifts the long-run aggregate supply curve.

As the economy nears the end of a recession, which of the following do we typically see? A) increased spending on capital goods by firms B) further decreases in consumer spending C) increasing interest rates D) all of the above

Assets are things of value that people own. Liabilities are debts. Therefore, a bank will always consider a checking account deposit to be an asset and a car loan to be a liability. A. Disagree. Checking accounts represent something that the bank owes to the owner of the account. It is a bank liability B. Agree. checking accounts or something of value that is in the bank. Therefore, they are a bank asset C. Disagree. Both checking accounts and car loans represent bank liabilities

At which point is the unemployment rate equal to the natural rate of unemployment?

Distinguishing among money, income, and wealth A. A person's money is the currency held and the checking account balance, income is the earning and wealth is equal to the value of assets minus all debts B. A person's money is the currency held and the earnings from work, income is equal to the bank balance and wealth is equal to the profit from investment C. A person's money is the currency in the pocket, income is the earning and wealth is equal to asset value

If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true? A) Public saving is $100 million. B) The budget deficit is $500 mill ion. C) Public saving is $500 million. D) The budget deficit is $100 million

If labor productivity growth slows down in a country, this will A) slow down the increase in real GDP per capita. B) slow down the increase in nominal GDP. C) accelerate the increase in nominal GDP. D) accelerate the increase in real GDP per capita

If, in an economy experiencing inflation, the government decided to tax real interest income rather than nominal interest income, this change would cause the real interest rate to ________ and the equilibrium quantity of loanable funds to ________. A) fall; rise B) rise; rise C) fall; fall D) rise; fall

Suppose American Bank has $500 in deposits and $200 in reserves and that the required reserve ratio is 10%. In this situation, American bank has A. $50 in required reserves B. $50 in excess reserves C. $200 in required reserves

Suppose that you are a bank manager, and the Federal Reserve raises the required reserve ratio from 10% to 12%. What actions would you need to take? A. You would have to reduce lines to make up for the necessary increase in reserves B. You would need to make loans to match the new reserve requirement C. You would have to charge less for your loans because rates are now at 12%

Suppose the bank has a 10% reserve requirement, $5000 in deposits, and has loaned out all it can, given the reserve requirement A. It has $500 in reserves and $4500 in loans B. It has $50 in reserves and $4950 in loans C. It has $555 in reserves and $4445 in loans

Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be?

Suppose you have $2000 in currency in a shoebox in your closet. One day, you decide to deposit the money in a checking account. How will this action affect the M1 and M2 definitions of the money supply? A. Both M1 and M2 will remain unchanged B. M1 will decrease and M2 will increase C. Both M1 and M2 will increase by $2000

The curve showing the short-run relationship between the unemployment rate and the inflation rate is called A) the Phillips curve. B) the monetary policy curve. C) the Sargent curve. D) the unemployment curve.

The demand for durable goods A) declines by a greater percentage than does GDP during a recession. B) rises by a greater percentage than does GDP during a recession. C) declines by a smaller percentage than does GDP during a recession D) has decreased over time

The formula for the simple deposit multiplier is A. 1/RR B. -RR/1-RR C. 1/1-RR

The nonaccelerating inflation rate of unemployment, or NAIRU, is associated with which point rate in the figure above?

The period between a business cycle peak and a business cycle trough is called A) recession. B) diffusion. C) recalculation. D) expansion

The quantity theory of money is better able to A. To explain the inflation rate in the long run B. To explain the full employment in the long run C. To explain the inflation rate in the short run

The value of money varies A. Inversely with the price level B. Directly with the volume of employment C. Directly with the price level

What are the largest asset and the largest liability of a typical bank? A. Loans of the largest assets and deposits are the largest liability of a typical bank B. Reserves are the largest asset and deposits are the largest liability of a typical bank C. Loans of the largest liability and deposits are the largest asset of a typical bank

What can the Federal Reserve do to reduce the natural rate of unemployment? A) nothing B) follow contractionary monetary policy that will increase inflation C) follow expansionary monetary policy that will increase inflation D) follow expansionary monetary policy that will reduce inflation

What two factors are the keys to determining labor productivity? A) technology and the quantity of capital per hour worked B) the business cycle and the growth rate of real GDP C) the growth rate of real GDP and the interest rate D) the average level of education of the workforce and the price level

When the Fed decreases the discount rate, banks will A. Borrow more from the Fed and lend more to the public. The money supply increases B. Borrow more from the Fed and lend less to the public. The money supply decreases C. Borrow less from the Fed and lend more to the public. The money supply increases

When the Federal Reserve sells treasury securities in the open market, A. The buyers of these securities pay for them with checks and bank reserves fall B. The buyers of such securities by new securities in the open market and there is a decrease in bank reserves C. The sellers of such securities deposit the funds in their banks and bank reserves decrease

When the economy enters a recessionary phase of the business cycle, unemployment tends to A) increase. B) be unchanged. C) decrease. D) change in the same direction as the rate of inflation.

Which of the following best explains the difference between commodity money and fiat money? A. Fiat money has no value except as money, whereas commodity money has value independent of its use as money B. all money is commodity money, as it has to be exchanged for gold by the central bank C. commodity money has no value except as money, where as fiat money has value independent of its use as money

Which of the following is an example of human capital? A) a college education B) a software program C) a computer D) a factory building

Which of the following is most liquid? A) a dollar bill B) a government bond C) a mutual fund share D) a corporate bond

Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy? A) growth in capital per hour accompanied by technological change B) a shift of workers in the economy from the agricultural sector to the non-agricultural sector C) increases in labor force participation rates as workers who are out of the labor force pursue rising wages D) an influx of immigrant labor into an economy without any accompanying technological change

Which one of the following is not a function of money? A. open market operation B. store of value C. medium of exchange D. unit of account

Y = $12 trillion C = $8 trillion I = $2 trillion G = $2 trillion TR = $2 trillion T = $3 trillion Based on the information above, what is the level of private saving in the economy? A) $3 trillion B) $4 trillion C) $5 trillion D) $8 trillion

in 1991, the Federal Reserve lowered the reserve requirement from 12% to 10%. Other things the same this should have A. Increased both the money multiplier and the money supply B. Decreased both the money multiplier and the money supply C. Increased the money multiplier and decrease the money supply

Movement along the aggregate demand curve is caused by?

A change in price level

What is stagflation?

A combination of inflation and recession, usually resulting from a supply shock.

Select the answer below that best corrects the following statement: "A contractionary fiscal policy involves a decrease in government purchases or a decrease in taxes."

A contractionary fiscal policy involves the decrease of government purchases and/or an increase in taxes in order to decrease aggregate demand.

Crowding out refers to

A decline in private expenditures as a result of an increase in government purchases

________ in taxes will decrease consumption spending, and ________ in transfer payments will increase consumption spending

A decrease; an increase

The aggregate demand curve slopes downward for all of the following reasons except:

A lower price level makes imports from other countries less expensive, and U.S. citizens buy more imports

Income Approach

A method of computing GDP that measures the income-wages, rents, interest, and profits-received by all factors of production in producing final goods and services.

Expenditure Approach

A method of computing GDP that measures the total amount spent on all final goods and services during a given period.

Production Approach

A method of computing GDP that measures total retail value of the final goods/services produced in a nation in a given year.

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations?

A movement along the LR Phillips Curve

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations ?

A movement from point A to point C

What effect does expansionary monetary policy have on equilibrium if consumers have rational expectations

A movement from point A to point C. (up the LRPC) increasing inflation and unemployment remains the same

If actual inflation is less than expected inflation, which of the following will be true? A) Real wages will fall. B) The Phillips curve will be a vertical line. C) Real wages will rise. D) The unemployment rate will fall.

A or D

What is a banking panic?

A situation in which many banks experience runs at the same time.

What is a supply shock?

A sudden increase in the price of an important natural resource, resulting in a leftward shift of the SRAS curve

Which of the following would be considered a fiscal policy action?

A tax cut is designed to stimulate spending during a recession

What would be considered an active fiscal policy

A tax cut is designed to stimulate spending passed during a recession

16-1. Suppose the economy is in the short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to Figure 15-7. Suppose the economy is in a recession and the Fed pursues an expansionary monetary policy. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to figure 16-1. Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium. Using the static AD-AS model in the figure above, this would be depicted as a movement from

A to B

Refer to Figure 15-7. Suppose the economy is in a recession and no policy is pursued. Using the static AD-AS model in the figure above, this situation would be depicted as a movement from

A to E

Which of the following is an example of a worker experiencing frictional unemployment?

A worker quits his job at the post office to find more interesting work

7) If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from

A) 23.3 years to 17.5 years

10.3 The Business Cycle 21) Which of the following explains the cause of the change in the unemployment rate at the end of a recession?

A) Firms are hesitant to rehire laid off workers, as they continue to operate below capacity

16) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation. B) liquidity effect is dominated by the Fisher effect and interest rates adjust slowly to changes in expected inflation. C) liquidity effect is dominated by the Fisher effect and interest rates adjust quickly to changes in expected inflation. D) Fisher effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation.

A) Fisher effect is dominated by the liquidity effect and interest rates adjust slowly to changes in expected inflation

8) Countries with high rates of economic growth tend to have

A) a labor force that is more productive

18) Which of the following will increase investment spending in the economy, holding everything else constant?

A) an increase in the federal government surplus

14) Financial securities that represent promises to repay a fixed amount of funds are known as

A) bonds

26) The period of expansion ends with a __________ and the period of recession ends with a __________.

A) business cycle peak; business cycle trough

14) When the price level falls, the ________ curve for nominal money ________, and interest rates ________, everything else held constant. A) demand; decreases; fall B) demand; increases; rise C) supply; increases; rise D) supply; decreases; fall

A) demand; decreases; fall

19) Borrowers are __________ of loanable funds, and lenders are ________ of loanable funds.

A) demanders; suppliers

25) From 1991 until 2001, the United States was in a period of

A) expansion

4) Since 1900, real GDP per capita has __________ and this measure __________ the actual growth in standards of living in the United States over this time.

A) increased; understates

10.2 Saving, Investment, and the Financial System 11) A firm can fund an expansion of its operations by

A) issuing bonds

20) The demand for loanable funds is downward sloping because the __________ the interest rate, the __________ the number of profitable investment projects a firm can undertake, and the __________ the quantity demanded of loanable funds.

A) lower; greater; greater

5) Since 1900, real GDP in the United States has grown

A) more rapidly than the population

3) A good measure of the standard of living is

A) real GDP per capita

6) When the growth rate of the money supply increases, interest rates end up being permanently lower if A) the liquidity effect is larger than the other effects. B) there is fast adjustment of expected inflation. C) there is slow adjustment of expected inflation. D) the expected inflation effect is larger than the liquidity effect.

A) the liquidity effect is larger than the other effects

Which of the points in the above graph are possible short-run equilibria?

A, B, C, and D

Which of the following factors brought on the recession of 2007-2009?

A. A rapid increase in the price of oil. B. The end of the housing bubble. C. The financial crisis.

According to the dynamic AD-AS model, what is the most common cause of inflation?

A. AD increases by more than LRAS. B. Total spending increases faster than total production.

The aggregate expenditure model can be written in terms of four spending categories. Which equation shows the relationship between aggregate expenditure and the four spending categories?

A. AE = C + I + G + NX

What is the Fed doing to increase the credibility of its policies?

A. Announcing the federal funds target rate. B. Whenever a change in policy is announced, the change actually takes place.

Firms that act as financial intermediaries match households that have excess funds with firms that want to borrow funds. What other key services does the financial system provide to savers and lenders? (Mark all that apply.)

A. Collects and communicates information about borrowers to savers B. Allows savers to spread their money among many financial investments. C. Provides an easy method of exchanging a financial security for money.

We can use the diagram to compare movements in real consumption between 1979 and 2017.

A. Consumption follows a smooth, upward trend, interrupted only infrequently by brief recessions.

Why might the unemployment rate continue to rise during the early stages of a recovery?

A. Employment growth may be slow relative to the growth in the labor force. C. Some firms continue to operate well below their capacity even after a recession has ended.

According to many economists and policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?

A. Following the Taylor rule. B. Following a rules strategy. C. Following a discretion strategy. D. All of the above.

Why do economic growth rates matter?

A. High levels of sustained economic growth reduce infant mortality. B. When a country sustains high growth rates, life expectancy at birth increases. C. High growth rates coincide with improved living standards.

Which of the following does NOT lead to long-run economic growth?

A. Increase in average wages

Which of the following will increase planned investment spending on the part of firms?

A. Increased optimism about future demand for its product B. A lower real interest rate

The figure to the right illustrates the relationship between weak and strong rule-of-law LOADING... countries and economic growth. In addition to a country's failure to enforce rule-of-law, what else explains why more low-income countries do NOT experience rapid growth as the catch-up line predicts?

A. Lengthy civil wars B. Shortage of childhood vaccinations C. Inability to borrow money needed for investment

The relationship between the marginal propensity to consume (MPC) and the marginal propensity to save (MPS) can best be described as

A. MPC = 1minusMPS. B. MPS = 1minusMPC. C. MPC + MPS = 1. D. All of the above.

New growth theory suggests that the accumulation of knowledge capital can be slowed because knowledge is both nonrival and nonexcludable. How does the federal government intervene in the market to increase the amount of knowledge capital?

A. Public education B. Subsidies C. Patents

Indicate which of the following is correct about the multiplier effect.

A. The multiplier ignores the effect on real GDP of imports, inflation, and interest rates. B. The larger the MPC, the more additional consumption that occurs. C. A decrease in autonomous spending decreases real GDP by a multiple of the change. D. All of the above.

Paul Volcker is credited largely with which of the following?

A. The "Volcker disinflation." B. Fighting inflation by reducing the growth of the money supply.

Which of the following is NOT included in the calculation of total government purchases?

A. Unemployment insurance benefits paid for by the federal government (Transfer Payments)

The short-run aggregate supply curve slopes upward because of all of the following reasons

A. in the short run, as prices of final goods and services increase, input prices react more slowly. B. in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. C. in the short run, prices of final goods and services adjust slowly due to the existence of menu costs.

We say that the economy as a whole is in macroeconomic equilibrium if

A. total spending equals GDP. B. aggregate expenditure equals GDP. C. total spending equals total production. D. aggregate expenditure equals total production. E. all of the above.

U.S. real net exports are typically

A. negative, and usually rise in recessions and fall in expansions.

If workers ignore inflation in forming their expectations of the real wage rate, what is the effect of an expansionary monetary policy? A. A move up along the short-run Phillips curve. B. A move down along the long-run Phillips curve. C. A move down along the short-run Phillips curve. D. A move up along the long-run Phillips curve.

A. A move up along the short-run Phillips curve.

What is a banking panic? A. A situation in which many banks experience runs at the same time. B. A situation in which bank assets exceed liabilities. C. A situation in which there is no demand for loans, so banks cannot make a profit. D. A situation in which banks wish to recall all of their loans.

A. A situation in which many banks experience runs at the same time.

What is meant by crowding out? A. Crowding out is a decline in private expenditures as a result of increases in government purchases. B. Crowding out is a decline in private expenditures as a result of decreases in government purchases. C. Crowding out is an increase in private expenditures as a result of decreases in government purchases. D. Crowding out is an increase in private expenditures as a result of increases in government purchases.

A. Crowding out is a decline in private expenditures as a result of increases in government purchases.

Consider the choices below. All of these except one truly represent the record of productivity growth in the United States from 1800 to the present. Find the one that does not belong.

A. GDP per capita fell rapidly between 1900 and 1950.

__________ of unemployment during _____________ make it easier for workers to ____________ wages. A. High levels; a recession; accept lower B. High levels; an expansion; negotiate higher C. Low levels; an expansion; accept lower D. Low levels; a recession; negotiate higher

A. High levels; a recession; accept lower

Ceteris paribus, an increase in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from

AD2 to AD1.

Aggregate Expenditure Model

AE= C+I+G+NX

30) If an economy experiences economic growth, does that mean that everyone in that economy will be better off? a. No, it means that the average person is better off. b. Yes, that is the definition of economic growth. c. Yes, but only if there is little immigration during that time period. d. No, economic growth is not correlated with standards of living.

A. No, it means that the average person is better off.

What is meant by supply-side economics? A. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply. B. Supply-side economics refers to the use of taxes to decrease incentives to work, save, invest, and start a business in order to increase long-run aggregate supply. C. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to decrease long-run aggregate supply. D. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase short-run aggregate supply.

A. Supply-side economics refers to the use of taxes to increase incentives to work, save, invest, and start a business in order to increase long-run aggregate supply.

German luxury car exports were hurt in 2009 as a result of the recession. How did the decrease in exports affect Germany's aggregate demand curve? A. The aggregate demand curve shifted to the left B. The aggregate demanded curve shifted to the right C. The aggregate demand curve did not shift, but there was a movement down the aggregate demand curve. D. The aggregate demand curve did not shift, but there was a movement up the aggregate demand curve.

A. The aggregate demand curve shifted to the left

The formula for aggregate expenditure is

AE=C+I+G+NX

The impact of Hurricane Katrina on consumers in the economy was to make them very pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve? A. This will shift the aggregate demand curve to the left B. This will shift the aggregate demand curve to the right C. This will move the economy up along a stationary aggregate demand curve D. This will move the economy down along a stationary aggregate demand curve.

A. This will shift the aggregate demand curve to the left.

An increase in the value of which of the following would NOT increase household wealth? A. a credit card balance B. 500 shares of Google stock C. the balance in your savings account D. the equity in one's home

A. a credit card balance

If actual inflation is higher than expected inflation, the A. actual real wage is less than the expected real wage: unemployment falls. B. actual real wage is greater than the expected real wage: unemployment falls. C.actual real wage is greater than the expected real wage: unemployment rises. D. actual real wage is less than the expected real wage: unemployment rises.

A. actual real wage is less than the expected real wage: unemployment falls.

44) Sustained economic growth is primarily caused by a. advances in technology. b. employing more people. c. building new roads and factories. d. increases in government spending.

A. advances in technology.

In the long run, increases in government purchases result in A. complete crowding out. B. partial crowding out. C. an absence of crowding out. D. none of the above.

A. complete crowding out.

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will _________________ exports from the U.S. to Sweden and ______________ U.S. aggregate demand. A. decrease; decrease B. increase; increase C. increase; decrease D. decrease; increase

A. decrease; decrease

An increase in aggregate demand results in a(n) _____________ in the ____________. A. expansion; short run B. recession; short run C. recession; long run D. expansion; long run

A. expansion; short run

The government policy that does not increase economic growth is

A. foreign trade policy that favors imposing a high tariff on imported high-tech goods.

Workers, firms, banks, and investors in financial markets care about the future rate of inflation because A. if actual inflation turns out to be different from the expected inflation, real wages, profits, and interest will be different from their expected values. B. actual inflation is always the same as the expected inflation, and there is no difference between actual real wages, profits,and interest and their respective expected values. C. if actual inflation turns out to be lower than the expected inflation, real wages, profits, and interest will be lower than their expected values. D. if actual inflation turns out to be higher than the expected inflation, real wages, profits, and interest will be higher than their expected values.

A. if actual inflation turns out to be different from the expected inflation, real wages, profits, and interest will be different from their expected values.

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then A. inflation will be higher than if the Fed had not acted. B. the unemployment rate will be higher than if the Fed had not acted. C. the economy will be more stable than if the Fed had not acted. D. the real GDP will be lower than if the Fed had not acted.

A. inflation will be higher than if the Fed had not acted.

The Fed uses policy targets of interest rate and/or money supply because A. it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level. B. it is difficult to set a target for the unemployment rate, which constantly fluctuates. C. the target for the GDP growth rate is set by Congress. D. the inflation rate is controlled by Congress and the White House.

A. it can affect the interest rate and the money supply directly and these in turn can affect unemployment, GDP growth, and the price level.

The Federal Reserve sells Treasury securities. This is an example of A. not a fiscal policy. B. an automatic stabilizer. C. a discretionary fiscal policy.

A. not a fiscal policy.

The federal government changes the required gasoline mileage for new cars. This is an example of A. not a fiscal policy. B. a discretionary fiscal policy. C. an automatic stabilizer.

A. not a fiscal policy.

The short run aggregate supply curve has a(n) __________ slope because as prices of ___________ rise, prices of ___________ rise more slowly. A. positive; final goods and services; inputs B. infinite; inputs; final goods and services C. positive; inputs; final goods and services D. infinite; final goods and services; inputs

A. positive; final goods and services; inputs

Workers expect inflation to rise form 3% to 5% next year. As a result this should A. shift the short run aggregate supply curve to the left B. move the economy up along a stationary short run aggregate supply curve C. move the economy down along a short run aggregate supply curve D. shift the short run aggregate supply curve to the right

A. shift the short run aggregate supply curve to the left

5) The government engages in more deficit spending. Ceteris paribus (all else equal), this would cause a. the demand for loanable funds to increase. b. the supply of loanable funds to increase. c. both the demand and supply of loanable funds to increase. d. both the demand and supply of loanable funds to decrease.

A. the demand for loanable funds to increase.

Robert Lucas and Thomas Sargent argued that A. there might not be a trade-off between unemployment and inflation in the short run, and the short-run Phillips curve would be vertical. B. there would always be a trade-off between unemployment and inflation in the short run, and the short-run Phillips curve would be downward sloping. C. there would always be a direct relationship between unemployment and inflation in the short run, and the short-run Phillips curve would be upward rising. D. there would always be a trade-off between unemployment and inflation in both the short run, and the long-run and the Phillips curve in both the short and long run would be downward sloping.

A. there might not be a trade-off between unemployment and inflation in the short run, and the short-run Phillips curve would be vertical.

Milton Friedman argued that the Phillips curve did not represent a permanent trade-off between unemployment and inflation, since A. the long-run Phillips curve is vertical, there is no trade-off between unemployment and inflation in the long run. B. there is no difference between the long-run and the short-run Phillips curves. C. the long-run Phillips curve is horizontal, there is no trade-off between unemployment and inflation in the long run. D. the long-run Phillips curve is downward sloping, there is a trade-off between unemployment and inflation in the long run.

A. the long-run Phillips curve is vertical, there is no trade-off between unemployment and inflation in the long run.

If the Fed wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should A. use expansionary monetary policy B. use contractionary monetary policy. C. use a combination of expansionary monetary and fiscal policies. D. use expansionary fiscal policy.

A. use expansionary monetary policy

Additionally, the federal funds rate is A. very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations. B. not important for the Fed's monetary policy since households and firms are not directly affected by any adjustment of this rate. C. very important for the Fed's monetary policy because it is administratively set by the Fed. D. very important for the Fed's monetary policy because individual borrowers pay this interest rate for mortgage loans.

A. very important for the Fed's monetary policy because the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations.

Assuming people have rational expectations, A. when the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP. B. monetary policy changes will cause the money supply to change, thereby causing changes in inflation and unemployment along a vertical Phillips curve. C. when the Fed uses monetary policy, people do not quickly adjust wages and prices, therefore, inflation will deviate from expectations and create fluctuations in real GDP. D. when the government uses fiscal policy, then changes in the money supply will create quick adjustments in wages and prices which will not cause changes in real GDP.

A. when the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP.

Suppose that when the Fed decreases the money supply, households and firms initially hold less money than they want to, relative to other financial assets. As a result, households and firms will _________ Treasury bills and other financial assets, thereby _________ their prices, and _________ their interest rates. A. sell; decreasing; increasing B. sell; increasing; decreasing C. buy; decreasing; decreasing D. buy; increasing; decreasing

A. sell; decreasing; increasing

What are the Fed's main monetary policy targets? A.The money supply and interest rates B.Taxes and government spending C.Price stability and economic growth D.High employment and economic growth

A.The money supply and interest rates

23) The bonds sold by the U.S. government to pay for the national debt are called a. Treasury securities. b. mortgage-backed securities. c. securitizations. d. debt securities.

A.Treasury securities.

Refer to the graph to answer the following questions: 11) Assuming the figure represents the market for loanable funds, which of the following would represent an increase in household wealth? a. a shift from line 1 to line 4 b. a shift from line 4 to line 1 c. a shift from line 2 to line 3 d. movement from A to B

A.a shift from line 1 to line 4

40) When firms buy new capital, it is called a. investment. b. net investment. c. depreciation. d. a steady state.

A.investment.

34) Which of the following would be classified as human capital? a. obtaining a college degree b. a factory c. coal d. a loaf of bread

A.obtaining a college degree

When Congress established the Federal Reserve in 1913, its main responsibility was A.to make discount loans to banks suffering from large withdrawals by depositors. B.to adjust interest rates. C.to design tax policies. D.to control the money supply.

A.to make discount loans to banks suffering from large withdrawals by depositors.

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP falls?

AD did not shift and SRAS shifted to the left.

In the dynamic aggregated demand and aggregate supply model, inflation occurs if

AD shifts faster than SRAS.

Ceteris paribus, a decrease in interest rates would be represented by a movement from

AD1 to AD2

Ceteris paribus, a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from

AD1 to AD2.

Ceteris paribus, a decrease in the value of the domestic currency relative to foreign currencies would be represented by a movement from

AD1 to AD2.

Ceteris paribus, an increase in government spending would be represented by a movement from

AD1 to AD2.

Ceteris paribus, a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from

AD2 to AD1.

Ceteris paribus, a decrease in government spending would be represented by a movement from

AD2 to AD1.

Ceteris paribus, an increase in personal income taxes would be represented by a movement from

AD2 to AD1.

A political commentator argues: "Congress and the president are more likely to enact an expansionary fiscal policy than a contractionary fiscal policy because expansionary policies are popular and contractionary policies are unpopular." Briefly explain whether you agree.

Agree because expansionary fiscal policies create employment and increase GDP whereas contractionary fiscal policies impose an artificial recession on the economy.

Suppose the economy is at point A in the figure above. Which of the following is true?

Actual inflation and expected inflation are the same.

Which of the following statements is correct? A. Actual investment will equal planned investment only when inventories rise. B. Actual investment and planned investment are always the same thing. C. Actual investment will equal planned investment only when there is no unplanned change in inventories. D. Actual investment equals planned investment only when inventories decline.

Actual investment will equal planned investment only when there is no unplanned change in inventories.

If the government's policy is successful, what is the effect of the policy on the following macroeconomic indicators?

Actual real GDP decreases . Potential real GDP does not change . Price level decreases . Unemployment increases .

If the federal government's policy is successful, what is the effect on the following macroeconomic indicators?

Actual real GDP: increases Potential real GDP: does not change Price level: increases Unemployment: decreases

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Aggregate demand and potential real GDP decrease continuously.

Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run?

Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.

Which of the following best explains how and why the economy will adjust back to long-run equilibrium?

Aggregate demand will increase, restoring the original equilibrium price and quantity

Macro Equilibrium

Aggregate expenditure = GDP

Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?

Aggregate expenditure is equal to GDP.

From July 2017 to October 2017, business inventories increased by $ 15 billion. *Real-time data provided by Federal Reserve Economic Data (FRED), Federal Reserve Bank of Saint Louis. Can we tell from this information whether aggregate expenditure was higher or lower than GDP during this quarter? If not, what other information do we need?

Aggregate expenditure was less than GDP in this quarter

If firms find that consumers are purchasing more than expected, which of the following would you expect?

Aggregate expenditure will likely be greater than GDP.

Suppose that the federal budget is balanced when GDP is at potential GDP. If equilibrium GDP falls below potential,

All are correct. Government transfer payments will be rising and tax receipts will be falling, this will result in a current budget deficit, and the cyclically adjusted budget will be balanced.

An increase in government spending may expedite recovery from a recession in the short run, but in the long run this policy may

All are correct. Raise interest rates and reduce consumer expenditures on automobiles and new houses, make domestic business less competitive in international markets as the dollar appreciates in value, and reduce investment in new capital.

If net exports are equal to net foreign investment,

All are true. The current account balance is equal to the negative of the financial account balance, the balance of payment is zero, and net capital inflows are equal to imports minus exports.

what constitutes M2?

All of M1 in addition to savings account, time deposits, money market, and noninstitutional money

In the figure to the right, when the money supply increased from MS 1 to MS 2, the equilibrium interest rate fell from 4% to 3%. Why?

All of the Above -Initially, firms hold more money than they want relative to other financial assets. -Increased demand for Treasury securities drives down their interest rate. -Increased demand for Treasury securities drives up their prices.

Which of the following is a function that money serves? (store of value, unit of account, medium of exchange, or all of the above)

All of the above

Which of the following is not a correct comparison between an expansionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

All of the above are correct statements about the two models.

How does a budget deficit LOADING... act as an automatic stabilizer and reduce the severity of a recession?

All of the above.

Increased government debt can lead to higher interest rates and, as a result, crowding out of private investment spending. In terms of borrowing (debt-spending), what will offset the effect of crowding out in the long run so that government debt poses less of a problem to the economy?

All of the above.

What are the gains to be had from simplifying the tax code?

All of the above.

Which of the following are categories of federal government expenditures?

All of the above.

In the short run, the Federal Reserve can affect which of the following?

All of these

All other factors held constant, increased growth in aggregate demand will

All of these are correct.

Which of the following is "crowded out" by higher interest rates that can be the result of expansionary fiscal policy?

All. Private investment, consumption, and net exports

Which of the following transactions would be included in Germany's current account?

An American citizen purchases a new Volkswagen made in Germany

Which of the following would decrease net exports in the United States?

An American party planner purchases 350 piñatas from Mexico

What is money?

An asset that people are willing to accept in exchange for goods and services

How does an increase in the relative price of a country's goods in terms of foreign goods, or real exchange rate, affect its balance of trade?

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

Which of the following best describes the "interest rate effect"?

An increase in the price level raises the interest rate and chokes off investment and consumption spending.

Refer to the diagram to the right. Supply curve shifts from s1 to s2. Which of the following is consistent with the diagram

An increase in the proportion of income after net taxes used for consumption

GDP is

An indicator of economic performance

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model What would be the Fed's reaction if actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06? That is, what step will the Fed likely take to control inflation in the second period?

An open market sale of government securities.

What is the Fed doing to increase the credibility of its policies?

Announcing the federal funds target rate. Whenever a change in policy is announced, the change actually takes place.

The economic definition of money is:

Any asset that people are generally willing to accept in exchange for goods and services

A shift in the aggregate demand curve is caused by?

Any factor other than price change like... 1. Increases in labor and in the capital stock. 2. Technology 3. Expected changes in the future price level 4. Adjustments to past errors in expected price level 5. Unexpected change in the price of an important natural resource

Are federal expenditures higher today than they were in 1960?

As a percentage of GDP, federal expenditures have increased since 1960.

Are federal purchases higher today than they were in 1960?

As a percentage of GDP, federal purchases have decreased since 1960.

Why does the SRAS curve have a positive slope?

As prices of final goods and services rise, prices of inputs rise more slowly

________ consumption is consumption that does not depend upon the level of GDP.

Autonomous

1) The unemployment rate is an important economic statistic that can tell us about the health of the economy. If the unemployment rate turns out to be high or higher than anticipated, we would expect A) it is more likely that an incumbent president will be re-elected. B) that stock prices are more likely to fall. C) that jobs are less difficult to find. D) that investors will be more optimistic about the economy.

10) A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce settlements. This will A) increase GDP and increase well being in the economy. B) increase GDP and decrease well being in the economy. C) decrease GDP and increase well being in the economy. D) decrease GDP and decrease well being in the economy.

13) Suppose that nominal GDP in 2011 was less than real GDP in 2011. Given this information, we know for certain that A) the price level in 2011 was greater than the price level in the base year. B) the price level in 2011 was less than the price level in the base year. C) real GDP in 2011 was less than real GDP in the base year. D) real GDP in 2011 was greater than real GDP in the base year.

14) The advice to "retrain" would be most appropriate for which of the following types of unemployment? A) frictional unemployment B) structural unemployment C) cyclical unemployment D) core unemployment

17) The output of Mexican citizens who work in Texas would be included in the A) gross domestic product of Mexico. B) gross national product of Mexico. C) gross national product of the United States. D) net national product of the United States.

3) Suppose that homemakers are included as employed in the labor force statistics, rather than being counted as out of the labor force. This would A) increase the measured unemployment rate. B) increase the measured labor force participation rate. C) decrease the number of persons in the labor force. D) decrease the number of persons in the working-age population.

6) An example of business fixed investment spending is A) a purchase of a home by a household. B) a purchase of a computer by an accounting firm. C) a purchase of a bond by General Electric Corporation. D) $200 million of unsold cars at a car dealership.

A bank which must hold 100% reserves opens in an economy that had no banks and a currency of $100. If customers deposit $50 into the bank, what is the value of the money supply? A. $50 B. $100 C. $150

A higher required reserve ratio _________ the value of the simple deposit multiplier A. Increases B. Decreases C. Eliminates

According to the short-run Phillips curve, if unemployment is 3.2% and inflation is 1.3%, an increase in the inflation rate might result in which of the following? A) an increase in the unemployment rate to 3.4% B) a decrease in the unemployment rate to 3.0% C) a decrease in the demand for labor in the economy D) Both A and C are correct answers.

By raising the discount rate, the Fed leads banks to make ______ loans to households and firms, which will _________ checking account deposits and the money supply A. More; decrease B. Fewer; decrease C. Fewer; increase

Deflation refers to A) a decrease in the rate of inflation. B) a falling price level. C) Both A and B are correct. D) None of the above are correct.

Excess reserves A. Are loans made at above market interest rates B. Are reserves banks keep above the legal requirement C. Are reserves banks keep to meet the reserve requirement

How do the banks create money? A. When there is a decrease in checking account deposits, banks lose reserves and reduce their loans, and the money supply expands B. When there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands C. Banks buy bonds in the open market and gain reserves; this excess reserve holding increases the money supply

How will an increase in the government budget surplus as a result of lower government spending (with no change in net taxes) affect private saving in the economy? A) Private saving will increase by the amount of increase in the budget surplus. B) Private saving will decrease by less than the amount of increase in the budget surplus. C) Private saving will decrease by the amount of increase in the budget surplus. D) Private saving will be unaffected by the increase in the budget surplus

If rational workers and firms know that the Federal Reserve is following an expansionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________. A) increase; decreases B) increase; remains unchanged C) increase; increases D) decrease; decreases

If something is to be considered as money, it has to fulfill... A. all three functions B. all four functions

If the Federal Reserve attempts to continue reducing unemployment by manipulating monetary policy, which of the following would you expect to see? A) The Fed's policies will be deflationary. B) The Fed's policies will be inflationary. C) The Fed will reduce the natural rate of unemployment. D) The rate of inflation will fall as the Fed tries to reduce the unemployment rate.

If the Federal Reserve chooses to fight high inflation with contractionary monetary policy and firms and consumers expect this policy to reduce inflation, which of the following would you expect to see? A) a decrease in the long-run aggregate supply curve B) a downward shift of the short-run Phillips curve C) a reduction in the unemployment rate D) Both A and B are correct answers.

If the federal government's expenditures are less than its tax revenues, then A) a budget deficit results. B) a budget surplus results. C) the budget is balanced. D) No conclusion can be drawn here regarding the budget surplus or deficit without information regarding government purchases versus other outlays.

If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from A) 23.3 years to 20.6 years. B) 23.3 years to 17.5 years. C) 11.2 years to 10.8 years. D) 28.0 years to 21.0 years

If we include consideration of potential effects of a proposed tax reduction and simplification on the labor supply, we would expect crowding out of investment and net exports brought about by the tax cut to be A) increased as aggregate real income and output rise in the long run. B) less than it would be without the supply-side effects. C) unaffected by shifting long-run aggregate supply curve. D) dependent upon the impact of this tax change on consumer disposable income.

In a closed economy, private saving is equal to which of the following? A) Y-C-T B) Y+TR-C-T C) Y-G-T D) Y-G-T+TR

In a closed economy, which of the following components of GDP is not included? A) consumption B) net exports C) investment D) government spending

In a closed economy, which of the following equations reflects investment? A) Y-T+TR B) Y-C-G C) Y-C-T D) C+G-T

In a system of 100% reserve banking, A. Banks do not accept deposits B. Banks do not influence the supply of money C. All of the above are correct

Inflation tends to ________ during the expansion phase of the business cycle and ________ during the recession phase of the business cycle. A) decrease; decrease further B) increase; decrease C) increase; increase further D) decrease; increase

Matt's real wage in 2005 is $26.80. If the price level is 104, what is Matt's nominal wage? A) $30.80 B) $27.87 C) $26.80 D) $25.77

Money serves as a standard of deferred payment when A. It can be easily store today and used for transactions in the future B. Payments agreed to today but made in the future are in terms of money C. Sellers are willing to accept it in exchange for goods or services

One of the board members is appointed to a __ year, renewable term as the chairman A. 6 B. 4 C. 7

Other things equal, an excessive increase in the money supply will A. Increase the purchasing power of each dollar B. Decrease the purchasing power of each dollar C. Have no impact on the purchasing power of the dollar

Product Quantity Price Shoes 40 $60.00 DVDs 100 18.00 Tomatoes 2,000 1.00 Ketchup 300 4.00 4) Refer to Table above. Suppose that a simple economy produces only four goods and services: shoes, DVDs, tomatoes, and ketchup. Assume one half of the tomatoes are used in making the ketchup and the other half of the tomatoes are purchased by households. Using the information in the above table, nominal GDP for this simple economy equals A) $7,400. B) $6,400. C) $5,800. D) 2,440 units.

Suppose that the federal reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have $5 million more they wish to lay down. If the required reserve ratio is 10%, how much more money can banks create if they lend out the remaining amount? A. $55 million B. $50 million C. $45 million

Suppose that the federal reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have 5 million more they wish to lend out. If the required reserve ratio is 10%, how much more money can banks create if they lend out the remaining amount? A. 55 million B. 50 million C. 45 million

Suppose the banking system currently has 300 billion in reserves that the reserve requirement is 10%, and that $3 billion of the reserves are excess reserves that will not be lent out. What is the value of deposits? A. $3300 billion B. $2970 billion C. $2673 billion

Suppose the economy is at point A. If the economy experiences a supply shock, where will the eventual short-run equilibrium be?

The United States is divided into ___ Federal Reserve districts A. 14 B. 12 C. 8

The effect of a recession on a company like Boeing Aircraft is such that A) there is no difference in the impact of the recession on its profits as compared to firms that do not produce durable goods. B) sales decline more sharply for Boeing as compared to firms that do not produce durable goods. C) the decline in sales is more short lived as compared to firms that do not produce durable goods. D) profits fall less sharply as compared to firms that do not produce durable goods.

The federal budget deficit acts as an automatic stabilizer because A) Medicaid payments increase during expansionary periods. B) government tax revenues decrease during a recession. C) food stamp payments increase during expansionary periods. D) unemployment insurance payments decrease during a recession.

The federal government debt equals A) government spending minus tax revenues. B) the total value of U.S. Treasury bonds outstanding. C) the accumulation of past budget deficits. D) tax revenues minus government spending.

The federal reserve bank's board of governors consists of __ members appointed by the president of the US to 14 year, nonrenewable terms A. 8 B. 7 C. 6

The most important role of the Federal Reserve in today's US economy is A. Negotiating with foreign nations to reduce the enormous trade deficit B. Controlling the money supply to pursue economic objectives C. Balancing the government's budget by increasing taxes and cutting spending

The only people without jobs at the natural rate of unemployment are the A) cyclically and structurally unemployed B) structurally and frictionally unemployed C) structurally, frictionally, and cyclically unemployed D) frictionally and cyclically unemployed

The period of expansion ends with a ________ and the period of recession ends with a ________. A) business cycle peak; business cycle peak B) business cycle peak; business cycle trough C) business cycle trough; business cycle trough D) business cycle trough; business cycle peak

The real world money multiplier A. Equals the simple deposit multiplier because banks keep no excess reserves and households do not hold excess cash B. Is smaller than the simple deposit multiplier because banks keep excess reserves and households hold excess cash C. Is larger than the simple deposit multiplier because banks have no excess reserves and households do not deposit checks

The response of investment spending to an increase in the government budget deficit is called A) private dissaving. B) crowding out. C) expansionary investment. D) income minus net taxes

Under which of the following circumstances would the government be running a deficit? 19) ______ A) G = $7 trillion T= $7 trillion TR = $0 B) G = $5 trillion T = $5 trillion TR = $1 trillion C)G = $7 trillion T = $10 trillion TR = $3 trillion D) G = $5 trillion T = $7 trillion TR= $1 trillion

When the Federal Reserve conducts open market operations to increase the money supply, it A. Redeems federal reserve notes B. Buys government bonds from the public C. Raises the discount rate

When the Federal Reserve purchases treasury securities in the open market, A. The sellers of such securities by new securities in the open market and there is an increase in bank reserves B. The sellers of such securities deposits the funds in their banks and bank reserves increase C. The buyers of those securities pay for them with checks drawn on their bank account and bank reserves increase

When the government runs a budget deficit, we would expect to see that A) public saving is positive. B) investment will fall. C) private saving will fall. D)G+ TR <T

Which of the following could increase unemployment and inflation simultaneously? A) a decrease in the real wage B) an increase in oil prices C) contractionary monetary policy D) expansionary monetary policy

Which of the following explains the cause of the change in the unemployment rate at the end of a recession? A) Firms rapidly hire new workers at the first sign of on an increase in demand for their goods. B) Firms are hesitant to rehire laid off workers as they continue to operate below capacity. C) Discouraged workers return to the labor force and this makes the unemployment rate fall. D) Discouraged workers leave the labor force and this makes the unemployment rate rise

Which of the following would you expect to increase the equilibrium interest rate? A) a change from an income tax to a consumption tax B) an increase in the budget deficit C) a decrease in the profitability of investment projects firms are considering D) an increase in the percentage of income after net taxes that households save

Year Nominal GDP Real GDP 2008 $7,400 $7,537 2009 7,813 7,813 2010 8,301 8,165 2011 8,760 8,516 12) Refer to Table above. Consider the following data on nominal GDP and real GDP (values are in billions of dollars): The base year used in calculating real GDP is A) 2008. B) 2009. C) 2010. D) 2011.

Year |Potential Real GDP |Real GDP |Price Level 2011 | $14 trillion |$14 trill | 150 2012 | 14.5 trillion |14.2 trill | 152 Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2011 and in 2012 if the Congress and the president do not use fiscal policy. If the Congress and the president want to keep real GDP at its potential level in 2012, they should A) increase the level of interest rates. B) decrease income taxes. C) decrease government purchases. D) decrease the money supply.

Consider the same list of arguments about changing to a flat tax. Which two out of the above list of arguments would you advance against a flat tax?

B and C

Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP.

B and D

Refer to Figure 16-1. An increase in taxes would be depicted as a movement from (blank), using the static AD-AS model in the figure above

B to A

46) A factor that could cause the demand for bonds to decrease (shift to the left) is A) an increase in the expected return on bonds relative to other assets. B) a decrease in the expected return on bonds relative to other assets. C) an increase in wealth. D) a reduction in the riskiness of bonds relative to other assets.

B) a decrease in the expected return on bonds relative to other assets

30) The demand for durable goods

B) declines by a greater percentage than does GDP during a recession

9) A decline in the expected inflation rate causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) decrease; right B) decrease; left C) increase; right D) increase; left

B) decrease; left

27) When the economy slips into a recession, normally the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

B) decreases; decreases; falls

7) In Keynes's liquidity preference framework, as the expected return on bonds increases (holding everything else unchanged), the expected return on money ________, causing the demand for ________ to fall. A) falls; bonds B) falls; money C) rises; bonds D) rises; money

B) falls; money

5) In the Keynesian liquidity preference framework, a rise in the price level causes the demand for money to ________ and the demand curve to shift to the ________, everything else held constant. A) increase; left B) increase; right C) decrease; left D) decrease; right

B) increase; right

2) Technological advances generally result in

B) increased life expectancy

29) As the economy nears the end of a recession, which of the following do we typically see?

B) increased spending on capital goods by firms

23) During the recession phase of the business cycle,

B) interest rates are usually falling

10) The quantity of goods and services that can be produced by one worker or by one hour of work is referred to as

B) labor productivity

10.1 Long-Run Economic Growth 1) Which of the following statements describes the experiences of the Whirlpool Corporation since it was established in 1911?

B) long-run growth interrupted by periods of business cycle recession

24) The period between a business cycle peak and a business cycle trough is called

B) recession

12) Liquidity refers to

B) the ease with which a financial security can be traded for cash

The economic growth model explains growth in real GDP per capita in the long run. Because of the importance of labor productivity in explaining economic growth, the economic growth model focuses on the causes of increases in long-run labor productivity. What are the key factors that determine labor productivity?

B. Quantity of capital per hour worked C. Technological change

The financial system-either financial markets or financial intermediaries-provides savers and borrowers with

B. The financial system provides liquidity to savers by giving them the opportunity to buy and sell their financial securities. C. The financial system provides savers with facts and information about borrowers and about expected returns on their financial investments. D. The financial system provides risk sharing to savers by giving them the opportunity to diversify their funds among different investment choices.

Often the multiplier formula is considered to be too simple because it ignores some real world complications. Which of the following is not such a reason?

B. The formula ignores the impact of an increase in GDP on consumption.

Indicate the two main objections to the idea that the short-run Phillips curve is vertical.

B. Workers and firms might not have rational expectations. Your answer is correct. C. Contracts with workers keep wages sticky.

Aggregate demand (AD) is comprised of expenditure components that include:

B. government spending, consumption, investment, and net exports.

Potential GDP

B. increases over time as technological change occurs. C. increases over time as the labor force grows.

The aggregate demand curve shows the relationship between

B. the price level and the quantity of real GDP demanded by households, firms, and the government.

Interest rates in the economy have fallen. How will this affect aggregate demand and equilibrium in the short run? A. Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall. B. Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise C. Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall D. Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise

B. Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise

24) The two largest foreign holders of U.S. Treasury securities are a. China and Mexico. b. China and Japan. c. Great Britain and China. d. Japan and Canada.

B. China and Japan.

What is a contractionary fiscal policy? A. Contractionary fiscal policy includes increasing government spending and decreasing taxes to decrease aggregate demand. B. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand. C. Contractionary fiscal policy includes increasing government spending and taxes to decrease aggregate demand. D. Contractionary fiscal policy includes decreasing government spending and taxes to decrease aggregate demand.

B. Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

What is the general relationship between the business cycle and unemployment and inflation?

B. During an expansion, unemployment falls and inflation increases.

What is fiscal policy? A. Fiscal policy can be described as changes in interest rates and taxes to achieve macroeconomic policy objectives. B. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives. C. Fiscal policy can be described as changes in government spending and interest rates to achieve macroeconomic policy objectives. D. Fiscal policy can be described as changes in interest rates to achieve macroeconomic policy objectives.

B. Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes? A. In this case, Congress and the president should enact policies that increase government spending and increase taxes. B. In this case, Congress and the president should enact policies that increase government spending and decrease taxes. C.In this case, Congress and the president should enact policies that decrease government spending and increase taxes. D. In this case, Congress and the president should enact policies that decrease government spending and decrease taxes.

B. In this case, Congress and the president should enact policies that increase government spending and decrease taxes.

Using GDP per capita in 2016 (measured in U.S. dollars, corrected for differences across countries in the cost of living), identify which one of the following statements is true?

B. Western Europe, Australia, Canada, Japan, New Zealand, and the United States are high-income countries.

On the long run aggregate supply curve, A. a decrease in the price level decreases the level of potential GDP B. a decrease in the price level has no effect on the aggregate quantity of GDP supplied C. a decease in the price level decreases the aggregate quantity of GDP supplied D. a decrease in the price level increases the aggregate quantity of GDP supplied

B. a decrease in the price level has no effect on the aggregate quantity of GDP supplied

The total the federal government pays out for unemployment insurance decreases during an expansion. This is an example of A. a discretionary fiscal policy. B. an automatic stabilizer. C. not a fiscal policy.

B. an automatic stabilizer.

Some spending and taxes increase or decrease with the business cycle. This event often has an effect on the economy that is similar to fiscal policy and is called A. transfer payments. B. automatic stabilizers. C. discretionary fiscal policy. D. monetary policy.

B. automatic stabilizers.

The total value of U.S. Treasury bonds outstanding equals

The federal government debt

Technological change is more important to long-run economic growth than changes in capital. The easiest way for firms to gain access to new technology is through

B. foreign direct investment

When the price level in the United States falls relative to the price level of other countries, __________ will fall, ____________ will rise, and ______________ will rise. A. net exports; exports; imports B. imports; exports; net exports C. exports; imports; net exports D. net exports; imports; exports

B. imports; exports; net exports

Developing countries have benefited from globalization, because globalization can do all of the following except

B. impose trade barriers and tariffs on imported goods so as to protect domestic industries.

41) It is reasonable to expect that as the amount of physical capital is increased, the amount of output produced will a. increase at a constant rate. b. increase at a diminishing rate. c. increase at an increasing rate. d. decrease.

B. increase at a diminishing rate.

Which of the following is one explanation as to why the aggregate demand curve slopes downward? A. Increases in the price level lower the interest rate and decrease consumption spending. B. Increases in the U.S. price level relative to the price level in other countries lowers net exports. C. Increases in the price level raise real wealth and lowers consumption spending D. Increases in the price level lower the interest rate and decrease investment spending.

B. increases in the U.S. price level relative to the price level in other countries lowers net exports.

16) The two different paths through the loanable funds market are ________ finance and ________ finance. a. indirect; security b. indirect; direct c. internal; external d. saver; borrower

B. indirect; direct

A countercyclical policy is one that A. inadvertently increases the severity of the business cycle. B. is used to attempt to stabilize the economy. C. occurs automatically during recessions. D. increases the benefits of economic expansions.

B. is used to attempt to stabilize the economy.

4) Foreign entities a. are generally borrowers of domestic (U.S.) loanable funds. b. are generally lenders in the domestic (U.S.) loanable funds. c. typically require a greater inflation premium than domestic borrowers. d. typically require a smaller inflation premium than domestic borrowers.

B.are generally lenders in the domestic (U.S.) loanable funds.

An increase in the price level will A. shift the short run aggregate supply curve to the right B. move the economy up along a stationary short run aggregate supply curve. C. shift the short run aggregate supply curve to the left D. move the economy down along a stationary short run aggregate supply curve

B. move the economy up along a stationary short run aggregate supply curve

20) Coupon bonds are bonds with coupons attached that represent a. multiple interest rates. . b. periodic interest payments. c. multiple bond issuers. d. discounted repayments

B. periodic interest payments.

In 2005, Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should A. move the economy up along a stationary short run aggregate supply curve B. shift the short run aggregate supply curve to the right C. shift the short run aggregate supply curve to the left D. move the economy down along the stationary short run aggregate supply curve

B. shift the short run aggregate supply curve to the right

Congress broadened the Fed's responsibility since A. 1987 when Alan Greenspan was appointed the chair of the Fed. B. the 1930s as a result of the Great Depression. C. World War I. D. the end of World War II.

B. the 1930s as a result of the Great Depression.

If workers and firms have rational expectations and wages and prices adjust quickly, then if the Fed announces a credible expansionary monetary policy, A. neither the inflation rate nor the unemployment rate will change. B. the inflation rate will increase, but the unemployment rate will be unchanged. C. both the inflation rate and the unemployment rate will increase. D. the inflation rate will increase, but the unemployment rate will decrease.

B. the inflation rate will increase, but the unemployment rate will be unchanged.

If stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home countries, A. we will move up along the long run aggregate supply curve B. the long run aggregate supply curve will shift to the left C. the long run aggregate supply curve will shift to the right D. we will move down along the long run aggregate supply curve.

B. the long run aggregate supply curve will shift to the left.

If workers and firms have rational expectations, they will A. depend on rational information about wages and prices and thus often fail to realize that as prices rise, inflation will not increase the average wage in the economy. B. use all available information when forming their expectations of future inflation; thus, the actual inflation rate will be equal to the expected inflation rate. C. behave as if they expected the actual inflation rate during one year to continue into the next year; thus, they forecast future rates of inflation based on past rates of inflation. D. ignore the inflation rate since their real wages never keep up with inflation anyway.

B. use all available information when forming their expectations of future inflation; thus, the actual inflation rate will be equal to the expected inflation rate.

If the Fed believes the economy is about to fall into recession, it should A. use an expansionary fiscal policy to increase the interest rate and shift AD to the right. B. use an expansionary monetary policy to lower the interest rate and shift AD to the right. C. use a contractionary monetary policy to lower the interest rate and shift AD to the left. D. use its judgment to do nothing and let the economy make the self adjustment back to potential GDP.

B. use an expansionary monetary policy to lower the interest rate and shift AD to the right.

What two institutions did Congress create in order to increase the availability of mortgages in a secondary market? A. The Federal Open Market Committee (FOMC) and the Federal Deposit Insurance Corporation (FDIC) B. "Fannie Mae" and "Freddie Mac" C. The National Bureau of Economic Research (NBER) and the Bureau of Labor Statistics (BLS) D. The Bank Oversight Committee and the Department of the Interior

B. "Fannie Mae" and "Freddie Mac"

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.) A.Government spending B.Consumption of durable goods C.The value of the dollar D.Business investment projects

B.Consumption of durable goods C.The value of the dollar D.Business investment projects

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except: A.Stability of financial markets and institutions. B.High unemployment. C.Economic growth. D.Price stability.

B.High unemployment.

6) A bond is an instrument that allows the bearer to earn interest. The bearer would be best described as a. a demander of loanable funds. b. a supplier of loanable funds. c. a financial intermediary. d. one who borrows.

B.a supplier of loanable funds.

There is a government budget surplus if A) G > TR B) G > T C) T - TR > G D) TR < T

22) If a bond cannot be resold in secondary markets, the a. demand for that security will increase. b. demand for that security will decrease. c. supply for that security will increase. d. supply and the demand for that security will decrease.

B.demand for that security will decrease.

42) When is net investment equal to investment? a. never b. only if depreciation is zero c. always d. if the economy is in a steady state

B.only if depreciation is zero

3) Every dollar borrowed a. represents a dollar leaving the circular flow. b. requires a dollar to be saved. c. represents a piece of capital. d. requires the supply of loanable funds to increase.

B.requires a dollar to be saved.

21) Ownership shares in a firm are known as a. bonds. b. stocks. c. treasuries. d. mortgages.

B.stocks.

19) The maturity date of a bond is a. the date on which the loan is given out. b. the date on which the loan repayment is due. c. always one year after the loan is given out. d. always more than one year after the loan is given out.

B.the date on which the loan repayment is due.

39) The production function describes the relationship between a. inflation and unemployment in the economy. b. the firm's inputs and outputs. c. the levels of output and spending in the economy. d. the aggregate supply and demand for goods in the economy.

B.the firm's inputs and outputs.

9) When making decisions about saving and borrowing, people care most about a. inflation. b. the real rate of interest. c. the nominal rate of interest. d. the rate of saving minus the rate of borrowing.

B.the real rate of interest.

43) One reason why wealthy nations have continued to realize sustained growth is that a. they participate in unfair trade practices with developing nations. b. there has been continued technological advancement. c. they have passed their steady states. d. they are not getting close to their steady states.

B.there has been continued technological advancement.

How do banks create money?

Banks create checking account deposits when making loans from excess reserves

What is a fractional reserve banking system?

Banks hold less than 100% of deposits in reserves

President of the Federal Reserve System

Ben Bernanke

The following was written by a political columnist: "Today...the main purpose [of government's issuing bonds] is to let craven politicians launch projects they know the public, at the moment, would rather not fully finance. The tab for these projects will not come due, probably, until after the politicians have long since departed for greener (excuse the expression) pastures." Source: Paul Carpenter, "The Bond Issue Won't Be Repaid by Park Tolls," (Allentown, PA) Morning Call, May 26, 2002.

Borrowing is a bad idea to pay for current expenses but a good idea to pay for long-lived capital goods .

Consider the figures below and determine which is the best description of what causes the shift from AD 1 to AD 2

Both A and B Example A shows a contractionary monetary policy. The price level and real GDP both fall. Example B shows an expansionary monetary policy. The price level and real GDP both rise

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand?

Business investment projects Consumption of durable goods The value of the dollar

Changes in interest rates affect aggregate demand. Which of the following is affected by changes in interest rates and, as a result, impacts aggregate demand? (Mark all that apply.)

Business investment projects Consumption of durable goods The value of the dollar

* In figure (15.10), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Buy treasury bills

How does the Federal Open Market Committee increase and decrease money supply?

By buying and selling U.S. Treasury securities

10) Which of the following statements is true about the U.S. economy? A) Each year, many new jobs are created, but few existing jobs are destroyed, and the unemployed find jobs quickly. B) Each year, few new jobs are created, but few existing jobs are destroyed, keeping unemployment low. C) Each year, many new jobs are created and many existing jobs are destroyed. D) Each year few jobs are created, and therefore it takes the unemployed a long time to find a new job.

15) Which of the following would increase the unemployment rate? A) a law making it illegal to work more than 35 hours per week B) a cut in unemployment compensation C) an increase in unemployment insurance payments D) a decrease in the minimum wage

5) Suppose the labor force stays constant, and the working-age population stays constant, but a greater number of persons who were unemployed become employed. The labor force participation rate will A) increase. B) decrease. C) remain constant. D) not change in a way that can be predicted.

8) Since 1948, the labor force participation rate for adult men has ________ and for adult women has ________. A) increased; increased B) increased; decreased C) decreased; increased D) decreased; decreased

A(n) ________ in private expenditures as a result of a(n) ________ in government purchases is called crowding out. A) increase; increase B) decrease; decrease C) decrease; increase D) increase; decrease

According to the "Rule of 70", how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%? A) less than 1 year B) 5 years C) 14 years D) 35 years

Automatic stabilizers refer to A) changes in federal taxes and purchases that are intended to achieve macroeconomic policy objectives. B) the money supply and interest rates that automatically increase or decrease along with the business cycle. C) government spending and taxes that automatically increase or decrease along with the business cycle. D) changes in the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

Congress passed legislation to create the federal reserve system in 1913 in order to A. Take the monetary control over the economy away from the Treasury Department B. End the instability created by a huge crude oil price hike during that time C. End the instability created by bank panics by acting as a lender of last resort

Credit cards are A. Included in both the M1 and M2 definitions of the money supply B.Included in the M1 definition of the money supply, but not in the M2 definition C. Included in neither the M1 definition of the money supply nor in the M2 definition

During a recession, spending on ________ tends to fall more dramatically than spending on ________. A) food; cars B) necessities; luxuries C) durable goods; nondurable goods D) nondurable goods; durable goods

Expansionary fiscal policy actions ________ savings public, _________ the supply of loanable funds, and ______ the real interest rate. A) increase, increase, decrease B) decrease, increase, decrease C) decrease, decrease, increase D) increase, increase, increase

Fiscal policy refers to changes in A) federal taxes and purchases that are intended to fund the war on terrorism. B) state and local taxes and purchases that are intended to achieve macroeconomic policy objectives. C) federal taxes and purchases that are intended to achieve macroeconomic policy objectives. D) the money supply and interest rates that are intended to achieve macroeconomic policy objectives.

If consumers decide to be more frugal and save more out of their income, then this will cause A) a movement to the right along the supply curve for loanable funds. B) a movement to the left along the supply curve for loanable funds. C) a shift in the supply curve for loanable funds to the right. D) a shift in the supply curve for loanable funds to the left.

If real GDP in a small country in 2010 is $8 billion and real GDP in the same country in 2011 is $8.3 billion, the growth rate of real GDP between 2010 and 2011 A) is 3.0%. B) is 3.6%. C) is 3.75%. D) cannot be determined from the information given

If real GDP per capita measured in 2000 dollars was $6,000 in 1950 and $48,000 in 2010, we would say that in the year 2010, the average American could buy ________ times as many goods and services as the average American in 1950. A) 1/8 B) 4 C) 8 D) 12

If the price index rises from 100 to 120, the purchasing power value of the dollar A. May either rise or fall B. Will rise by one sixth C. Will fall by one sixth

In a closed economy public saving plus private saving is equal to A) taxes minus transfers. B) the budget deficit. C) investment. D) the budget surplus

Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long -run economic growth in the economy. A) increases; increases B) decreases; increases C) decreases; decreases D) increases; decreases

Liquidity refers to A) the number of shares of stock a corporation issues. B) the number of times a dollar changes hands in the creation of GDP in an economy. C) the ease with which a financial security can be traded for cash. D) the ease with a stock can be traded for a bond.

Money serves as a unit of account when A. Sellers are willing to accept it in exchange for goods or services B. It can be easily stored and used for transactions in the future C. Prices of goods and services are stated in terms of money

Potential GDP refers to A) the extent to which real GDP is above or below nominal GDP. B) the difference between the highest level of real GDP per quarter and the lowest level of real GDP per quarter within any given year. C) the level of GDP attained when all firms are producing at capacity. D) the level of GDP attained by the country with the highest growth in real GDP in a given year.

Purchases of which of the following goods would be dramatically reduced during a recession? A) tomatoes B)ink pens C) refrigerators D) gasoline

Reserve requirements are changed infrequently because A. Banks can determine the amount of reserves they wish to hold regardless of the reserve requirement B. Banks cannot usually meet their reserve requirements so the Fed does not monitor it C. Banks set long-term policy decisions, loan decisions, and deposit decisions based on the reserve requirement

Suppose the economy is at point A. If government spending increases in the economy, where will the eventual long-run equilibrium be?

Technological advances generally result in A) increased average number of hours worked per day. B) increased infant mortality rates. C) increased life expectancy. D) decreased incomes

The Federal Reserve uses two definitions of the money supply, M1 and M2, because A. M2 satisfies the medium of exchange function of money, whereas M1 satisfies the store of value function B. M2 is a narrow definition focusing more on Liquidy, whereas M1 is a broader definition of the money supply C. M1 is a narrow definition focusing more on liquidy, whereas M2 is a broader definition of the money supply

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

The central bank of a country controls the money supply, which equals the currency held by A. Banks B. The public plus they're checking and savings account balances C. The public plus their checking account balances

The natural rate of unemployment equals A) structural plus frictional plus cyclical unemployment. B) the rate of unemployment we observe in any given period of measurement. C) structural plus frictional unemployment. D) the rate of structural unemployment.

When the Fed conducts open market purchases, A. Banks by treasury securities from Fed, which increases the money supply B. Banks by treasury securities from the Fed, which decreases the money supply C. It buys treasury securities, which increases the money supply

Which of the following increases labor productivity? A) decreases in the availability of computers and factory buildings B) a decline in the health of the population C) inventions of new machinery, equipment, or software D) an increase in the aggregate hours of work

Which of the following is a government expenditure, but is not a government purchase? A) The Federal government pays to support research on Aids. B) The federal government pays the salary of an FBI agent. C) The federal government pays out an unemployment insurance claim. D) The federal government buys a Humvee.

Year Nominal GDP Real GDP 2010 14,078 13,254 2011 14,441 13,312 16) Refer to Table above. Consider the following data on nominal GDP and real GDP (values are in billions of dollars): The GDP deflator for 2011 equals A) 92.2. B) 102.6. C) 108.5. D) 109.1.

Year Oranges Produced Price of Oranges Shirts Produced Price of Shirts 2009 1,800 $0.90 110 $30.00 2011 2,000 1.00 110 35.00 15) Refer to Table above. Real GDP for Vicuna for 2009 using 2011 as the base year equals A) $4,620. B) $5,100. C) $5,650. D) $5,850.

which of the following policy tools is the federal reserve the least likely to use in order to actively change the money supply? A. Discount rate B. Discount loans C. Reserve requirements

16-1. Suppose the economy is in a short0run equilibrium above potential GDP and automatic stabilizers move the economy back to long-run equilibrium. Using static AD-AS model in the figure above, this would be depicted as a movement from

C to B

16-1. Suppose the economy is in short-run equilibrium above potential GDP and wages and prices are rising. If contractionary policy is used to move the economy back to long run equilibrium, this would be depicted as a move from (blank) using the static AD-AS mode

C to B

9) According to the "Rule of 70," how many years will it take for real GDP per capita to double when the growth rate of real GDP per capita is 5%?

C) 14 years

6) If real GDP per capita measured in 2009 dollars was $6,000 in 1950 and $48,000 in 2013, we would say that in the year 2013, the average American could buy __________ times as many goods and services as the average American in 1950.

C) 8

49) A factor that could cause the demand for bonds to shift to the right is A) an increase in the riskiness of bonds relative to other assets. B) an increase in the expected rate of inflation. C) expectations of lower interest rates in the future. D) a decrease in wealth.

C) expectations of lower interest rates in the future

48) A factor that could cause the supply of bonds to increase (shift to the right) is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) expectations of more profitable investment opportunities. D) a business cycle recession

C) expectations of more profitable investment opportunities

9) If the liquidity effect is smaller than the other effects, and the adjustment to expected inflation is slow, then the A) interest rate will fall. B) interest rate will rise. C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth. D) interest rate will initially rise but eventually fall below the initial level in response to an increase in money growth.

C) interest rate will initially fall but eventually climb above the initial level in response to an increase in money growth

16) In a closed economy, which of the following components of GDP is not included?

C) net exports

3) During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________, everything else held constant. A) falls; right B) falls; left C) rises; right D) rises; left

C) rises; right

28) As the economy nears the end of an expansion, which of the following do we typically see?

C) rising interest rates

27) What is the name of the organization that defines business cycle peaks and troughs in the United States?

C) the National Bureau of Economic Research

Formula for Planned Aggregate Expenditures

C+I+G+NX

The equation for aggregate demand is...

C+I+G+Nx

Why should government policymakers be worried about a housing bubble?

C. A housing bubble would deflate housing prices, which would decrease household wealth, which would decrease aggregate demand, which could cause a recession.

What is the effect on inventories, GDP, and employment when aggregate expenditure (total spending) exceeds GDP?

C. Inventories decrease, GDP increases, and employment increases.

What is inflation targeting? A. A policy that attempts to reduce inflation to zero. B. A target that links the Fed's target for the federal funds rate to inflation. C. Committing the central bank to achieve an announced level of inflation. D. Another name for contractionary monetary policy

C. Committing the central bank to achieve an announced level of inflation.

Workers generally form their expectations of future inflation based on the current conditions in the economy. Which one of the following does not reflect how they form their expectations? A. During periods of low inflation, workers, firms,banks, and investors tend to ignore changes in prices. B. During periods of moderate inflation, people usually expect the inflation rate during one year to continue into the following year. C. During periods of high inflation, people do not take any particular action until the Fed has controlled the inflation rate. D. During periods of high inflation, people should use all available information including the Fed's policy announcement when forming their expectations of future inflation.

C. During periods of high inflation, people do not take any particular action until the Fed has controlled the inflation rate.

What is an expansionary fiscal policy? A. Expansionary fiscal policy includes decreasing government spending and increasing taxes to increase aggregate demand. B. Expansionary fiscal policy includes decreasing government spending and taxes to increase aggregate demand. C. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand. D. Expansionary fiscal policy includes increasing government spending and taxes to increase aggregate demand.

C. Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

What changes should they make if they decide a contractionary fiscal policy is necessary? A. In this case, Congress and the president should enact policies that increase government spending and decrease taxes. B. In this case, Congress and the president should enact policies that increase government spending and increase taxes. C. In this case, Congress and the president should enact policies that decrease government spending and increase taxes. D. In this case, Congress and the president should enact policies that decrease government spending and decrease taxes.

C. In this case, Congress and the president should enact policies that decrease government spending and increase taxes.

2) The government a. sets most interest rates. b. is a net lender (or supplier of loanable funds). c. is a net borrower (or demander of loanable funds). d. determines the "federal risk premium" portion of commercial interest rates.

C. Is a net borrower (or demander of loanable funds).

What do economists mean by the demand for money? A. It is the amount of currency, checking account deposits and stocks and bonds that individuals hold. B. It is the amount of money—currency and checking account deposits—that individuals use to pay for one transaction per day. C. It is the amount of money—currency and checking account deposits—that individuals hold D. It is the monetary value of total wealth of individuals.

C. It is the amount of money—currency and checking account deposits—that individuals hold

Which can be changed more quickly: monetary policy or fiscal policy? A. Fiscal policy can be changed more quickly than monetary policy. Fiscal policy has much shorter delays due to the smaller number of legislators involved. B. Fiscal policy can be changed more quickly than monetary policy. Monetary policy has much longer delays due to the larger number of legislators involved. C. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy. D. Monetary policy can be changed more quickly than fiscal policy. Fiscal policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

C. Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

What is the advantage of holding money? A. Money held by an individual can be used to measure one's wealth. B. An individual pays little or no taxes on the amount of money he holds. C. Money can be used to buy goods, services, or financial assets. D. Currency and checking account deposits held by individuals earn substantial interest income.

C. Money can be used to buy goods, services, or financial assets.

Strong rule-of-law countries grow more rapidly than weak rule-of-law countries. What factor will most likely improve economic growth in weak rule-of-law countries?

C. Political reform

If the Federal Reserve is late to recognize a recession and implements an expansionary policy too late, the result could be an increase in inflation during the beginning of the next phase. Even though the goal had been to reduce the severity of the recession, the poor timing caused another problem: inflation. This is an example of what type of policy? A. Countercyclical policy B. Fiscal policy C. Procyclical policy D. Tight policy

C. Procyclical policy

Which of the following is most likely to lead to sustained economic growth: A. Increases in human capital B. Increases in labor force C. Technological change D. Increases in the capital stock

C. Technological change

Which of the following best explains how the Federal Reserve acts to help prevent banking panics? A. The Fed regulates asset markets and prevents damaging speculation. B. The Fed can make it illegal to withdraw deposits from banks, preventing bank panics. C. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors. D. The Fed insures deposits of banks and thus reduces the chance of a panic.

C. The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors.

Japanese electronics exports were hurt in 2008 as a result of the recession. How would this decrease in exports have affected Japan's aggregate demand curve? A. The aggregate demand curve would not have shifted, but there would have been a movement up the aggregate demand curve. B. The aggregate demand curve would have shifted to the right. C. The aggregate demand curve would have shifted to the left. D. The aggregate demand curve would not have shifted, but there would have been a movement down the aggregate demand curve.

C. The aggregate demand curve would have shifted to the left

Who is responsible for fiscal policy? A. The Federal Reserve controls fiscal policy. B. The federal government and the Federal Reserve jointly control fiscal policy. C. The federal government controls fiscal policy. D. Fiscal policy is controlled by market forces.

C. The federal government controls fiscal policy.

The following shows the effect of the business cycle on the inflation rate and the unemployment rate: A. The unemployment rate increases and the inflation rate increases during expansion B. The unemployment rate increases and the inflation rate falls during expansions C. The unemployment rate increases and the inflation rate falls during recessions D. The unemployment rate falls and the inflation rate falls during recessions

C. The unemployment rate increases and the inflation rate falls during recessions

Congress and the president enact a temporary cut in payroll taxes. This is an example of A. not a fiscal policy. B. an automatic stabilizer. C. a discretionary fiscal policy.

C. a discretionary fiscal policy.

Which of the following is not one of the monetary policy goals of the Federal Reserve ("the Fed")? A. high employment B. price stability C. a high foreign exchange rate of the U.S. dollar relative to other currencies D. stability of financial market

C. a high foreign exchange rate of the U.S. dollar relative to other currencies

37) When considering nominal gross domestic product (GDP) growth, inflation has ________ effect on real GDP growth. a. a negligible b. a positive c. a negative d. a mixed

C. a negative

Changes in ________ do not affect the level of aggregate supply in the long run.

The price level

Refer to the graph to answer the following questions: 10) Assuming the figure represents the market for loanable funds, which of the following would represent the government running a larger budget deficit? a. a shift from line 1 to line 4 b. a shift from line 4 to line 1 c. a shift from line 2 to line 3 d. a shift from line 3 to line 2

C. a shift from line 2 to line 3

The revenue the federal government collects from the individual income tax declines during a recession. This is an example of A. not a fiscal policy. B. a discretionary fiscal policy. C. an automatic stabilizer.

C. an automatic stabilizer.

If Lucas and Sargent were right, A. an expansionary fiscal policy would be more suitable if people had adaptive expectations, since they will use all available information including knowledge of the effects of the Fed's fiscal policy. B. a contractionary monetary policy would work better if people had rational expectations, since they will use all available information including knowledge of the effects of the Fed's monetary policy. C. an expansionary monetary policy would not work if people had rational expectations, since they will use all available information including knowledge of the effects of the Fed's monetary policy. D. an expansionary monetary policy would work better if people had rational expectations, since they will not use all available information especially knowledge of the effects of the Fed's fiscal policy.

C. an expansionary monetary policy would not work if people had rational expectations, since they will use all available information including knowledge of the effects of the Fed's monetary policy.

The level of aggregate supply in the long run is NOT affected by A. changes in technology B. changes in the capital stock C. changes in the price level D. changes in the numbers of workers

C. changes in the price level

An attempt to reduce inflation requires _____________ fiscal policy, which causes real GDP to _________ and the price level to __________. A. expansionary; rise; fall B. contractionary; rise; fall C. contractionary; fall; fall D. expansionary; rise; rise

C. contractionary; fall; fall

Higher personal income taxes A. increase aggregate demand B. increase disposable income C. decrease aggregate demand D. both B and C.

C. decrease aggregate demand

Deflation will A. increase aggregate demand B. decrease aggregate demand C. increase the quantity of real GDP demanded D. decreases the quantity of real GDP demanded

C. increase the quantity of real GDP demanded

In the dynamic aggregated demand and aggregate supply model, if AD shifts further than AS A. disinflation occurs B. deflation occurs C. inflation occurs D. stagflation occurs

C. inflation occurs

Because of the slope of the aggregate demand curve we can say that a decrease in the price level: A. leads to a decrease in aggregate demand B. leads to an increase in aggregate demand C. leads to a higher level of real GDP demanded. D. leads to a lower level of real GDP demanded

C. leads to a higher level of real GDP demanded

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________. A. high; high B. high; low C. low; high D. low; low

C. low; high

The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of A. a discretionary fiscal policy. B. an automatic stabilizer. C. not a fiscal policy.

C. not a fiscal policy.

Economists during the early 1960s thought of the Phillips curve as a "policy menu" because they thought that the Phillips curve A. represented a direct relationship between unemployment and inflation in the short run. B. represented a relationship that did not depend on consumers and firms and could change over time. C. represented a structural relationship in the economy that would not change as a result of policy changes. D. presented policymakers with a reliable menu of combinations of unemployment and inflation.

C. represented a structural relationship in the economy that would not change as a result of policy changes.

The federal funds rate is A. the interest rate that the banks charge for loans to its important commercial borrowers. B. the required reserve ratio that the Federal Reserve requires banks to maintain. C. the interest rate that banks charge each other for overnight loans. D. the interest rate that the Federal Reserve charges for its loans to banks

C. the interest rate that banks charge each other for overnight loans.

If real GDP increases, A. there is a movement down along a stationary money demand curve. B. there is a movement up along a stationary money demand curve. C. the money demand curve shifts to the right. D. the money demand curve shifts to the left.

C. the money demand curve shifts to the right.

Friedman defined the "natural rate of unemployment" as the A. unemployment rate that exists when the economy has cyclical unemployment. B. unemployment rate that exists when the actual GDP is higher than potential GDP. C. unemployment rate that exists when the economy produces potential GDP. D. unemployment rate that exists when the actual GDP is less than potential GDP.

C. unemployment rate that exists when the economy produces potential GDP.

If the Fed believes the inflation rate is about to increase, it should A. use a combination of tax increases and spending cuts to keep the budget balanced. B. use a contractionary fiscal policy to increase the interest rate and shift AD to the left. C. use a contractionary monetary policy to increase the interest rate and shift AD to the left. D. use an expansionary monetary policy to lower the interest rate and shift AD to the right.

C. use a contractionary monetary policy to increase the interest rate and shift AD to the left.

Ceteris paribus, an increase in the expected price of an important natural resource would be represented by a movement from

The slope of the consumption function is equal to

Change in consumption / change in disposable income

A serious inconsistency exists between a vertical long-run aggregate supply curve and a downward-sloping long-run Phillips curve because A. when the long-run aggregate supply curve is horizontal at potential real GDP, the long-run Phillips curve is horizontal at the natural rate of unemployment. B. when the long-run aggregate supply curve is upward rising, the long-run Phillips curve is downward sloping. C. when the long-run aggregate supply curve is vertical at potential real GDP, the long-run Phillips curve is vertical at the natural rate of unemployment. D. when the long-run aggregate supply curve is at potential real GDP, it intersects the long-run downward-sloping Phillips curve at the natural rate of unemployment.

C. when the long-run aggregate supply curve is vertical at potential real GDP, the long-run Phillips curve is vertical at the natural rate of unemployment.

29) Average world income began to increase rapidly during the a. Enlightenment. b. Dark Ages. c. Industrial Revolution. d. Second World War.

C.Industrial Revolution.

25) The Troubled Asset Relief Program of 2008 was a(n) a. cooperative venture by large banks to keep one another afloat. b. program funded by large banks to help struggling homeowners. c. government rescue of large banks. d. effort by a few wealthy private citizens to keep small independent banks afloat.

C.government rescue of large banks.

8) If interest rates rise, a. foreign entities that are borrowers of funds will borrow less. b. governments that are savers of funds will save less. c. households that are savers of funds will save more. d. businesses that are savers of funds will borrow less.

C.households that are savers of funds will save more.

35) An increase in human capital would tend to a. decrease worker productivity. b. decrease employee wages. c. increase worker productivity. d. decrease the number of people working

C.increase worker productivity.

13) Equilibrium in the loanable funds market means the a. interest rate at which savings equals consumption. b. interest rate at which investment equals consumption. c. interest rate at which investment equals savings. d. dollar price at which investment equals savings.

C.interest rate at which investment equals savings.

26) What is a commonly used term for noninvestment-grade bonds? a. amplified-risk securities b. low-yield securities c. junk bonds d. D-grade bonds

C.junk bonds

31) An increase in ________ would lead to an increase in long-run economic growth. a. consumer spending and borrowing b. government taxes and fees c. resources and technology d. imports and exports

C.resources and technology

28) Higher rates of real per capita gross domestic product (GDP) are negatively correlated with a. better education. b. better health care. c. shorter life expectancy. d. the number of physicians per capita.

C.shorter life expectancy.

What is the disadvantage of holding money? A. Money is not very "liquid." B. Money cannot be readily used to buy financial assets. C.Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest. D. Money can be easily stolen or lost.

C.Money, in the form of currency or checking account deposits, earns either no interest or a very low rate of interest.

Fiscal policy is determined by

Congress and The President

Fiscal policy is determined by

Congress and the president

Which of the following is considered contractionary fiscal policy

Congress increases the income tax rate

what would be considered contractionary fiscal policy

Congress increases the income tax rate

If the U.S. economy is currently at point K,which of the following could cause it to move to point N

Congress passes investment tax incentives.

The simple multiplier effect shows the resulting change in real GDP due to an increase in government purchases or a decrease in taxes assuming that the price level is

Constant

Which of the following would be the best measure of the cost of living?

Consumer price index

Why is the demand curve for an individual product downward sloping?

Consumers substitute the more expensive product for cheaper goods

Y =

Consumption + Investment + Government Purchases + Net Exports

National income =

Consumption + Saving +Taxes

Which of the following describes the behavior of real consumption and real investment in the United States between 1979 and the first quarter of 2017?

Consumption increased steadily but investment fluctuated, and during the mid-to-late 90s, investment increased very strongly before declining sharply in 2001, only to rise again during the mid-2000s and decline sharply again during the 2007-2009 recession.

The federal government increases taxes in order to attempt to reduce a budget deficit. This is an example of a change in _________ and will cause a ________ of the aggregate demand curve.

Consumption; Shift to the left

What is a contractionary fiscal policy?

Contractionary fiscal policy includes decreasing government spending and increasing taxes to decrease aggregate demand.

Suppose that Matt quits a job with the XYZ Corporation in order to look for more rewarding

Counted as fictionally employed

What is meant by crowding out?

Crowding out is a decline in private expenditures as a result of increases in government purchases.

Globalization entails all of the following except:

Cultural exchange between nations.

What is included in M1?

Currency in reserves and checking account deposits

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase

Current income

11) Real GDP is GDP in a given year A) adjusted only for anticipated inflation. B) adjusted only for unanticipated inflation. C) valued in the prices of that year. D) valued in the prices of the base year.

12) Cyclical unemployment is the result of A) a persistent mismatch between the skills and characteristics of workers and the requirements of the jobs. B) the search process of matching workers with jobs. C) the ups and downs in inflation. D) a slowdown in the economy.

16) Which of the following policies would reduce frictional unemployment? A) a decrease in the minimum wage B) a job retraining program C) implementing an unemployment insurance policy D) building an on-line job database that helps workers find jobs

The growth in U.S. real government purchases

D. tends to be positive, but has fallen in recessions and in response to concerns about the size of budget deficits.

2) In calculating gross domestic product, the Bureau of Economic Analysis uses the sum of the market value of final goods and services produced. This means that the BEA A) simply counts the total number of goods produced in the market place and then adds them up. B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C) simply counts the total number of goods and services produced in the marketplace and then adds them up. D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up.

2) The Bureau of Labor Statistics would categorize a retiree who is not working as A) employed. B) unemployed. C) a discouraged worker. D) out of the labor force.

3) Which of the following transactions represents the purchase of a final good? A) Starbucks purchases coffee beans. B) Delta buys a new European-made jetliner. C) Apple computer buys computer processors from Intel. D) Your father buys a new John Deere riding lawn mower.

5) The nominal GDP of the U.S. in 2010 was approximately $14.6 trillion. This means that A) the value of output in 2010 was around $14.6 trillion. B) total income in 2010 was around $14.6 trillion. C) total spending in 2010 was around $14.6 trillion. D) all of the above are true.

7) Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to overstate the true extent of joblessness? A) inflation B) discouraged workers C) counting people as employed who are working part time, although they would prefer to be working full time D) unemployed persons falsely report themselves to be actively looking for a job

9) Gross domestic product understates the total production of final goods and services because of the omission of A) exports. B) inflation. C) intermediate goods. D) household production.

Active changes in tax and spending by government intended to smooth out the business cycle are called ________, and changes in taxes and spending that occur passively over the business cycle are called ________. A) automatic stabilizers; monetary policy B) discretionary fiscal policy; conscious fiscal policy C) automatic stabilizers; discretionary fiscal policy D) discretionary fiscal policy; automatic stabilizers

Actual real GDP will be above potential GDP if A) firms are producing at capacity. B) firms are producing below capacity. C) inflation is rising. D) firms are producing above capacity

All other factors held constant, increased growth in aggregate demand will A) move the economy to a higher point on the short-run Phillips curve. B) increase inflation. C) reduce unemployment. D) All of the above are correct.

Consumption expenditures $800 Investment expenditures 200 Government purchases 300 Exports 100 Imports 200 Wages 800 8) Refer to Table above. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $1,600. C) $1,400. D) $1,200.

Contractionary monetary policy will result in A) reduced rates of inflation. B) a decrease in aggregate demand. C) higher interest rates. D) All of the above are correct.

Countries with high rates of economic growth tend to have A) low rates of technological advancement. B) a declining incidence of business cycle fluctuations. C) a lower life expectancy at birth. D) a labor force that is more productive

Crowding out will be greater A) the less sensitive consumption spending is to changes in the interest rate. B) the further equilibrium GDP is below potential GDP. C) if the economy is in recession, rather than at full employment. D) the more sensitive investment spending is to changes in the interest rate.

During the expansion phase of the business cycle, which of the following eventually increases? A) employment B) income C) production D) all of the above

Fiscal policy is defined as changes in federal ________ and ________ to achieve macroeconomic objectives such as price stability, high rates of economic growth, and high employment. A) interest rates; money supply B) taxes; the money supply C) taxes; interest rates D) taxes; expenditures

How would the equilibrium quantity of loanable funds respond to a change from an income tax to a consumption tax? A) The equilibrium quantity of loanable funds would be unaffected. B) The equilibrium quantity of loanable funds may rise or fall based on whether household saving increases or decreases as a result of the change from an income tax to a consumption tax. C) The equilibrium quantity of loanable funds would fall. D) The equilibrium quantity of loanable funds would rise

If the economy experiences a negative supply shock, which of the following will be true? A) Inflation will fall, and real GDP will fall. B) Inflation will fall, and real GDP will rise. C) Inflation will rise, and real GDP will rise. D) Inflation will rise, and real GDP will fall.

If you invest $10,000 in a bond that earns 8% interest per year, how many years will it take to double your money? A) 1 year and 3 months B) 2 years and 6 months C) 8 years D) 8 years and 9 months

In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is A) upward sloping. B) horizontal. C) vertical. D) downward sloping.

In conducting monetary policy, how has the Federal Reserve enhanced its credibility? A) by revealing the Fed's target for the federal funds rate B) by following through with changes it has announced C) by making the minutes of the open market committee meetings public D) All of the above have enhanced the Federal Reserve's credibility in conducting monetary policy.

The short run aggregate supply curve shows the relationship in the short run between

D. the price level and the quantity of real GDP supplied by firms.

Monetary policy can A) shift both the short-run and long-run trade-offs between inflation and unemployment if changes in policy are credible. B) shift the long-run trade-off between inflation and unemployment through changes in cyclical unemployment. C) shift neither the short-run nor long-run Phillips curve trade-offs between inflation and unemployment. D) shift the short-run trade-off between inflation and unemployment if it affects expected inflation.

Since 1900, real GDP per capita has ________ and this measure ________ the actual growth in standards of living in the United States over this time. A) increased; overstates B)decreased; overstates C) decreased; understates D) increased; understate

The simple deposit multiplier equals A. the ratio of the amount of deposits created by banks to the amount of new reserves B. The formula used to calculate the total increase in checking account deposits from an increase in bank reserves C. The inverse, or reciprocal, of the required reserve ratio D. All of the above

The use of money... A. reduces the transaction costs of exchange B. eliminates the double coincidence of wants C. Allows for greater specialization D. All of the above

Wage laws cause unemployment because the legal minimum wage is set A) below the market wage, causing labor demand to be greater than labor supply. B) below the market wage, causing labor demand to be less than labor supply. C) above the market wage, causing labor demand to be greater than labor supply. D) above the market wage, causing labor demand to be less than labor supply.

What is the natural rate of unemployment? A) the unemployment rate that exists when the economy is at a trough in a business cycle B) any unemployment rate that is above the inflation rate C) an unemployment rate of 0% D) the unemployment rate that exists when the economy is at potential GDP

Which of the following is a monetary policy tool used by the Federal Reserve Bank? A. Decreasing the rate at which banks can borrow money from the Federal Reserve B. Increasing the reserve requirement from 10% to 12.5% C. Buying 500 million worth of government securities, such as treasury bills D. All of the above

17) If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true?

D) Public saving is $100 million

45) A factor that could cause the supply of bonds to shift to the right is A) a decrease in government budget deficits. B) a decrease in expected inflation. C) a recession. D) a business cycle expansion.

D) a business cycle expansion

15) Factors that decrease the demand for bonds include A) an increase in the volatility of stock prices. B) a decrease in the expected returns on stocks. C) a decrease in the inflation rate. D) a decrease in the riskiness of stocks.

D) a decrease in the riskiness of stocks

13) Which of the following is most liquid?

D) a dollar bill

22) During he expansion phase of the business cycle, which of the following eventually increases?

D) all of the above

23) When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant. A) increases; increases; rises B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises

D) decreases; increases; rises

10) Everything else held constant, when stock prices become less volatile, the demand curve for bonds shifts to the ________ and the interest rate ________. A) right; rises B) right; falls C) left; falls D) left; rises

D) left; rises

15) The figure above illustrates the effect of an increased rate of money supply growth at time period T0. From the figure, one can conclude that the A) liquidity effect is smaller than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. B) liquidity effect is larger than the expected inflation effect and interest rates adjust quickly to changes in expected inflation. C) liquidity effect is larger than the expected inflation effect and interest rates adjust slowly to changes in expected inflation. D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

D) liquidity effect is smaller than the expected inflation effect and interest rates adjust slowly to changes in expected inflation

15) One difference between stocks and bonds is that

D) stocks do not involve a promise to repay a purchaser of the stock, while bonds represent a promise to repay the purchase price of the bond

What is the key idea in the aggregate expenditure macroeconomic model?

D. in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.

Compared to the U.S. aggregate demand curve, the reason that the demand curve for an individual product, such as bananas, slopes downward is

D. different, because consumers can substitute between individual products.

Which of the following is an example of an expansionary fiscal policy? A. An increase in investment spending. B. An increase in the money supply. C. A decrease in government spending. D. A decrease in taxes.

D. A decrease in taxes.

Suppose two countries, Country A and Country B, have a similar real GDP per capita. Country A has an average economic growth rate of 2% and Country B has an average economic growth rate of 3.3%. In the long run, what can we predict about living standards in the two countries?

D. Country B's living standards will increase much more rapidly in the long run.

Which of the following best describes the difference between crowding out in the short run and in the long run? A. In the long run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the short run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures. B. In the short run and the long run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. C. In the short run and the long run, most economists believe that an increase in government purchases will result in complete crowding out of private expenditures. D. In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

D. In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

Which of the following is a monetary policy target used by the Fed? A. Budget deficit. B. Unemployment rate. C. Growth rate of GDP. D. Interest rate.

D. Interest rate.

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)? A.Low unemployment B.Stable financial markets C.Higher living standards D.Low price

D. Low price

Consider the figure to the right. Which of the following is responsible for the upward shifts in the per-worker production function?

D. Technological change

Assuming the economy is initially at full employment, a decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run? A. The price level will fall, and the level of GDP will fall B. The price level will rise, and the level of GDP will fall C. The price level will ride, and the level of GDP will be unaffected D. The price level will fall, and the level of GDP will unaffected

D. The price level will fall, and the level of GDP will be unaffected.

Have poor countries been catching up to rich countries?

D. There has been catch-up by some poor but industrialized countries.

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve? A. This will move the economy down along a stationary aggregate demand curve B. This will shift the aggregate demand curve to the right C. This will move the economy up along a stationary aggregate demand curve. D. This will shift the aggregate demand curve to the left.

D. This will shift the aggregate demand curve to the left

If aggregate demand just decreased, which of the following may have caused the decrease? A. a decrease in the interest rate B. a decrease in the price level C. a decrease in imports D. a decrease in exports

D. a decrease in exports

A country's rate of economic growth is important because

D. an economy that grows too slowly fails to raise the living standards of its citizens.

38) Economic theories about growth a. are mainly used for intellectual debate. b. are mainly used for teaching. c. are not based on real-world facts. d. are used to set economic policies that impact human lives.

D. are used to set economic policies that impact human lives.

Some economies are able to maintain high growth rates despite diminishing returns to capital by using

D. better or enhanced technology, along with accumulating capital; these economies are growing because technology, unlike capital, is subject to increasing returns.

Suppose a recession occurs as a result of a negative supply shock, and instead of the economy naturally working its way back to equilibrium, the government uses policy to shift the aggregate demand curve to fight the recession. Using policy this way would A. quickly result in a new, higher level of real GDP and permanently lower price level B. bring the price level back to its original level more quickly but would result in a permanently lower level of potential GDP C. bring real GDP back to potential GDP more slowly but would bring the price level back to the original price level more quickly D. bring real GDP back to potential GDP more quickly but would result in a permanently higher price level

D. bring real GDP back to potential GDP more quickly but would result in a permanently higher price level

An increase in the price level results in a(n) ______________ in the quantity of real GDP demanded because _____________. A. increase; a higher price level reduces consumption, investment, and net exports B. increases; a higher price level increases consumption, investment, and net exports C. decrease; a higher price level increases consumption, investment, and net exports D. decreases; a higher price level reduces consumption, investment, and net exports

D. decrease; a higher price level reduces consumption, investment, and net exports

The financial system of a country is important for long-run economic growth because

D. firms need the financial system to acquire funds from households.

32) Which of the following are the three major categories of resources? a. physical capital, technology, institutions b. land, labor, technology c. institutions, human capital, land d. natural resources, physical capital, human capital

D. natural resources, physical capital, human capital

27) If the U.S. government wants to increase total spending, what is the alternative to borrowing money by selling bonds? a. bringing in money by selling stocks b. selling off government assets, such as land c. shrinking the money supply d. raising taxes

D. raising taxes

By improving health and education, developing countries can generate economic growth, and increase incomes. This will help combat the prevalence of educated people leaving their home countries for opportunities elsewhere. That is, it will combat

D. the brain drain.

If the price level decreases, A. there is a movement up along a stationary money demand curve. B. the money demand curve shifts to the right. C. there is a movement down along a stationary money demand curve. D. the money demand curve shifts to the left.

D. the money demand curve shifts to the left.

Ceteris paribus, in the long run, a negative supply shock causes A. the long run aggregate supply curve to shift to the left B. unemployment to fall below its short run level C. equilibrium real GDP to fall D. the price level to rise initially, and then return to its lower level

D. the price level to rise initially, and then return to its lower level

When the economy is experiencing an expansion automatic stabilizers will cause: A. transfer payments to increase and tax revenues to increase. B. transfer payments and tax revenues to be unaffected. C. transfer payments to decrease and tax revenues to decrease. D. transfer payments to decrease and tax revenues to increase.

D. transfer payments to decrease and tax revenues to increase.

Which of the following people would be considered unemployed?

Edna who lost her job as a teacher and is currently searching for a new job

14) What is the effect of a decrease in investor confidence? a. It increases the supply of loanable funds. b. It decreases the supply of loanable funds. c. It increases the demand for loanable funds. d. It decreases the demand for loanable funds.

D.It decreases the demand for loanable funds.

15) Banks a. are the only type of financial intermediary. b. are savers looking for opportunities to earn a return on their savings. c. have been owned by the government since the Great Depression. d. are private firms that accept deposits and extend loans.

D.are private firms that accept deposits and extend loans

17) Direct finance occurs when a. savers go directly to borrowers for funds. b. borrowers deposit funds into banks, which then loan these funds to savers. c. savers deposit funds into banks, which then loan these funds to borrowers. d. borrowers go directly to savers for funds.

D.borrowers go directly to savers for funds.

7) The interest rate is a. a cost to both savers and borrowers. b. only a cost to savers. c. only a return to borrowers. d. both a return to savers and a cost to borrowers

D.both a return to savers and a cost to borrowers

18) During the Great Recession, firms found it ________ to borrow, leading to an economic ________. a. easier; contraction b. easier; expansion c. too easy; contraction d. more difficult; contraction

D.more difficult; contraction

12) An increase in the supply of loanable funds means a. borrowers want to borrow more at every interest rate. b. savers want to borrow more at every interest rate. c. borrowers want to borrow more at a specific interest rate. d. savers want to save more at every interest rate.

D.savers want to save more at every interest rate.

36) As they relate to economic growth, institutions are a. resources, like labor and capital, for example. b. wealth, income, and prices. c. different levels of government: federal, state, and local. d. significant practices, relationships, or organizations in society.

D.significant practices, relationships, or organizations in society.

1) Savings is the a. demand for loanable funds and is downward sloping. b. supply of loanable funds and is horizontal. c. supply of loanable funds and is vertical. d. supply of loanable funds and is upward sloping.

D.supply of loanable funds and is upward sloping.

The recession of 2007-2009 began in ________, with the end of the economic expansion that had begun in ________.

December 2007; November 2001

An increase in the U.S. price level relative to other countries' price levels, the growth rate of U.S. GDP relative to other countries', the exchange rate between the dollar and other currencies will do what to net exports?

Decrease

During the recession phase of the business cycle, production, employment, and income

Decrease

How does the fed conduct expansionary monetary policy?

Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities

How would the Fed enact an expansionary monetary policy?

Decrease discount rate, decrease in reserve requirement and conduct open market purchase of government securities and vice versa

What is contractionary monetary policy?

Decrease in price level and real GDP.

* From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly slower than long-run aggregate supply, then the Federal Reserve would most likely

Decrease interest rate

How does the fed conduct expansionary fiscal policy?

Decrease taxes Increase government spending

Last week, six Swedish kronor could purchase on US dollar. This week, it takes eight Swedish Kronor to purchase one US dollar. This change in the value of the dollar will (BLANK) exports from the us to Sweden and (BLANK) us aggregate demand

Decrease, Decrease

In the figure to the right, the opportunity cost of holding money ___________ when moving from Point A to Point B on the money demand curve.

Decreases

Which of the following is one explanation as to why the aggregate demand curve slopes downward?

Decreases in the price level raise real wealth and increase consumption spending.

rule of 70

Doubling time (in years) = 70/(percentage growth rate).

In a graph of unemployment rates (on the horizontal axis) versus inflation rates (on the vertical axis), the short-run Phillips Curve is

Downward Sloping

The short−run Phillips curve is

Downward sloping

Which of the following best explains how the economy will adjust from the short-run equilibrium point to the new long-run equilibrium point?

Due to the higher price level, workers will demand higher wages, and firms will raise prices and cause SRAS to shift to the left to point C.

Does judging whether a deficit is excessive depend in part on whether the country is in a recession?

During a recession, the deficit is higher as tax revenue falls and spending increases making an existing deficit even bigger.

In what ways does the federal budget serve as an automatic stabilizer for the economy?

During a recession, there is an increase in government expenditures for transfer payments and a decrease in taxes as wages and profits fall. During an expansion, there is a decrease in government expenditures for transfer payments and an increase in taxes as wages and profits rise. Both of these occur automatically and both effects help to stabilize aggregate demand.

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 $133.33 billion increase in GDP B) a $30 billion increase in GDP C) a $133.33 billion decrease in GDP D) a $300 billion increase in GDP E) a $300 billion decrease in GDP

If the government increases expenditure without raising taxes, this will A. increase the budget deficit and require the government to borrow additional funds. B. cause the interest rate to increase, thereby, reducing private investment and crowding out the private sector. C. cause a decrease in the domestic exchange rate which will increase exports and decrease imports. D. All of the above. E. A and B only.

E. A and B only.

Refer to figure 17-1. Suppose the economy is currently at point A on the short-run Phillips curve in the figure above, and the unemployment rate at A is the natural rate. If the economy was to move to point C, which of the following must be true?

Equilibrium GDP at point C must be above potential GDP

Consider the figures below. Determine which combination of fiscal policies shifted AD 1 to AD 2 in each figure and returned the economy to long-run macroeconomic equilibrium.

Example (A): Expansionary fiscal policy. Example (B): Contractionary fiscal policy.

The figure to the right illustrates the dynamic AD-AS model LOADING.... Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). We would expect the federal government to pursue what type of policy in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?

Expansionary fiscal policy

What is an expansionary fiscal policy?

Expansionary fiscal policy includes increasing government spending and decreasing taxes to increase aggregate demand.

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD2(policy) and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators?

Expansionary monetary policy Actual real GDP: increases Potential real GDP: does not change Price level: increases Unemployment: decreases

The figure to the right illustrates a dynamic AD-AS model Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. We would expect the Fed to pursue what type of policy in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? If the Federal Reserve Bank's policy is successful, what is the effect on the following macroeconomic indicators? Actual real GDP: Potential real GDP: Price level: Unemployment:

Expansionary monetary policy Increases Does not change Increases Decreases

What are the four main determinants of investment?

Expectations of future profitability, interest rates, taxes and cash flow.

Net Exports =

Exports - Imports

18) Counting part-time workers who are looking for full-time work as employed overstates the degree of joblessness in the economy.

18) Residential investment includes spending by firms on office buildings.

20) Efficiency wage is another name for the minimum wage.

20) Transfer payments are subtracted from national income to get to personal income.

Why did the Fed help JP Morgan Chase buy Bear Stearns?

Failure of Bear Stearns would lead to a larger investment bank failure, Commercial banks would be reluctant to lend to investment banks.

A simplified tax code would reduce economic efficiency by increasing the number of decisions households and firms make solely to reduce their tax payments.

False

Decreasing the tax rate decreases the value of the government purchases multiplier.

False

The higher the tax rate, the larger the multiplier effect.

False

The multiplier effect is only a consideration for increases in government purchases. True or False

False

Which of the following describes a liability on the Federal Reserve's balance sheet?

Federal Reserve notes

Expansionary monetary policy refers to the ___ to increase real GDP.

Federal Reserve's increasing the money supply and decreasing interest rates

As of 1993, the Fed sets targets for which of the following in order to achieve price stability and high employment?

Federal funds rate

What is the difference between federal purchases and federal expenditures?

Federal purchases require that the government receives a good or service in return, whereas federal expenditures include transfer payments.

In a small economy in 2011, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year

Firm investment in inventories was greater than anticipated in 2011.

In a small economy in 2013, aggregate expenditure was $800 million while GDP that year was $850 million. Which of the following can explain the difference between aggregate expenditure and GDP that year?

Firm investment in inventories was greater than anticipated in 2013.

What is fiscal policy?

Fiscal policy can be described as changes in government spending and taxes to achieve macroeconomic policy objectives.

According to many economists and policymakers, what other options does the Fed have to improve its credibility with workers, firms, and investors?

Following a discretion strategy. Following the Taylor rule. Following a rules strategy.

The key idea of the aggregate expenditure model is that in any particular year, the level of ________ is determined mainly by the level of aggregate expenditure.

GDP

Scott is a woodworker and charges $125 an hour for his time manufacturing custom made wood products. For his wife's birthday, he designs and creates an intricate birdseye maple jewelry box takes him 15 hours to complete. By how much and in what direction does GDP change as a result of his efforts?

GDP is not affected by Scott's production of the jewelry box

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium,

GDP will be below potential GDP.

If planned aggregate expenditure is less than total production,

GDP will decrease.

If economists forecast a decrease in aggregate expenditure, which of the following is likely to occur

GDP will fall.

In the long run

GDP= Potential GDP

The value of what a U.S.-owned McDonald's produces in South Korea is included in the U.S. ________ and the South Korean ________.

GNP; GDP

What is the difference between federal government purchases (spending) and federal government expenditures?

Government purchases are included in government expenditures.

Suppose that real GDP is currently $13.6 trillion and potential real GDP is $14.0 trillion, or a gap of $400 billion. The government purchases multiplier LOADING... is 5.0, and the tax multiplier is 4.0. Holding other factors constant, by how much will government purchases need to be increased to bring the economy to equilibrium at potential GDP?

Government spending will need to be increased by $ 80 billion.

Gretchen expects the price level to rise from 104 this year to 108 next year, and she is able to incorporate these expectations into her wage contract. If the price level rises to 106 next year instead of 108, which of the following will occur?

Gretchen's real wage will rise.

Each year that the federal government runs a deficit, the federal debt

Grows

What is the goal of fiscal policy?

High employment, price stability, high growth rates

________ of unemployment during ________ make it easier for workers to ________ wages.

High levels; a recession; accept lower

which of the following is true regarding productivity slowdown in the United States during the mid-1970s?

High oil prices raised the costs of doing business for markets worldwide, and reduced the output worldwide

One objective of fiscal policy is

High rates of economic growth.

The Fed buys and sells bonds as a part of its policy to reach all of the following objectives except:

High unemployment.

Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?

Potential GDP is forecasted to be higher than equilibrium GDP

closed economy

I=Y-C-G

The hypothetical information in the following table shows what the situation will be in 2021 if the federal government does not use fiscal policy:

If Congress and the president want to keep real GDP at its potential level in 2021, they should use an expansionary fiscal policy , which would mean increasing government spending or cutting taxes .

The figure to the right illustrates the economy using the Dynamic Aggregate Demand and Aggregate Supply Model LOADING...

If actual real GDP in 2006 occurs at point B and potential GDP occurs at LRAS 06, we would expect the federal government to pursue a(n) contractionary fiscal policy.

Suppose that the economy is currently at potential GDP, and the federal budget is balanced. If the economy moves into recession, what will happen to the federal budget?

If the budget is balanced at potential GDP and the economy moves into recession, then there will be a budget deficit as government expenditures increase and tax revenues decrease.

Which of the following statements about the federal debt is correct?

If the debt becomes very large relative to the economy, then the government may have to raise taxes to high levels or reduce other types of spending to make the interest payments on the debt.

* If the required reserve ratio is 10 percent, how much excess reserves does the bank have? What is the maximum amount that the bank can expand its loans?

If the required reserve ratio is 10 percent, then a bank must hold 10 percent of its deposits as reserves. Therefore required reserves equal 0.1 × $100,000 = $10,000. This bank has $4,000 in excess reserves ($14,000 - $10,000 or $4,000). This is the maximum that the bank can loan out.

The impact of crowding out may be the least when

In a deep recession

What will the purchase of securities by the Federal Reserve do?

Increase the quantity of reserves held by banks

Use a dynamic aggregate demand and aggregate supply graph to illustrate the change in macroeconomic equilibrium from 2021 to 2022, assuming that the economy experiences deflation during 2022.

In order for deflation to take place in 2022, the economy does also have to be experiencing a recession.

b. What actions can the government take to bring real GDP to its potential level in 2019?

In order to bring real GDP to its potential level in 2019, the government can engage in expansionary fiscal policy by either increasing government spending or decreasing taxes.

Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

In the long run, aggregate supply is vertical

Why doesn't the Phillips curve represent a permanent trade-off between unemployment and inflation in the long run?

In the long run, aggregate supply is vertical.

Which of the following best describes the difference between crowding out in the short run and in the long run?

In the short run, an increase in government purchases may not fully crowd out private expenditures due to the stimulative effect of an increase in government purchases on aggregate demand. In the long run, most economists believe that a permanent increase in government purchases will result in complete crowding out of private expenditures.

What changes should they make if they decide a contractionary fiscal policy is necessary?

In this case, Congress and the president should enact policies that decrease government spending and increase taxes.

If Congress and the president decide an expansionary fiscal policy is necessary, what changes should they make in government spending or taxes?

In this case, Congress and the president should enact policies that increase government spending and decrease taxes.

In The General Theory of Employment, Interest, and Money, John Maynard Keynes wrote this: "If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coal mines which are then filled up to the surface with town rubbish, and leave it to private enterprise...to dig the notes up again... there need be no more unemployment and, with the help of the repercussions, the real income of the community...would probably become a good deal greater than it is."

In this statement, Keynes is discussing the important macroeconomic effect called the multiplier effect.

What impact would including members of the military in employment, labor force, and working-age population statistics have on the unemployment rate and the labor force participation rate?

Including members of the military would reduce the unemployment rate and increase the labor force participation rate

During the expansion phase of the business cycle, production, employment, and income

Increase

How does the fed conduct contractionary monetary policy?

Increase discount rate, increase in reserve requirement and conduct open market purchase of government securities

The figure to the right illustrates the dynamic AD-AS model LOADING.... Suppose the economy is in equilibrium in the first period at point (A). In the second period, the economy reaches point (B). What policy would the federal government likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?

Increase government spending

The graph to the right shows a situation in which the economy was in equilibrium at potential GDP (at point A) when the demand for housing sharply declined. What actions can Congress and the president take to move the economy back to potential GDP?

Increase government spending or decrease taxes.

What is expansionary monetary policy?

Increase in price level and real GDP.

In the figure to the right, which of the following events is most likely to cause a shift in the money demand (MD) curve from MD 1MD1 to MD 2MD2 (Point A to Point C)?

Increase in real GDP or increase in the price level

In the figure to the right, the economy experiences inflation in the second period. What would be the Fed's reaction if actual real GDP occurs at point B and potential GDP occurs at LRAS 2?

Increase interest rates Open market sale of government securities Contractionary policy

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases faster than potential real GDP, there will be

Inflation

Refer to figure 17-2. Suppose the economy is at point A. The Fed uses expansionary monetary policy to lower the unemployment rate permanently below the level associated with A. Which of the following will occur?

Inflation will accelerate in the long run

What impact might a decrease in the U.S. federal budget deficit have on interest rates and exchange rates in the market for the U.S. dollar?

Interest rates and exchange rates decrease

What impact might an increase in the budget deficit have on interest rate and exchange rates?

Interest rates and exchange rates increase

During the recession phase of the business cycle

Interest rates are usually falling

If the economy is at point L,what will happen

Inventories have risen above their desired level, and firms decrease production.

The Phillips curve was developed by A.W. Phillips in 1957 and shows the relationship between unemployment and inflation. The curve, shown at the right, indicates what type of relationship between the two variables?

Inverse relationship

How do investment banks differ from commercial banks?

Investment banks do not take deposits. Investment banks generally do not lend to households.

What does the shadow banking system refer to?

Investment banks, money market mutual funds, hedge funds, and other firms engaged in similar activities to commercial banks

Firms become more optimistic and increase their spending on machinery and equipment. This is an example of _________ and will cause a _________ of the aggregate demand curve.

Investment; Shift to the right

The long-run aggregate supply curve

Is vertical

Consider the figure to the right. An increase in government spending shifted the aggregate demand curve from AD 1 to AD 2. As a result, both price level and real GDP increased. What can be said, however, about the increase in real GDP?

It increased by less than indicated by a multiplier with a constant price level.

If full-employment GDP is equal to $4.2 trillion, what does the long-run aggregate supply curve look like?

It is a vertical line at $4.2 trillion of GDP.

If potential GDP is equal to $600 billion, what does the long-run aggregate supply curve look like?

It is a vertical line at $600 billion of GDP.

Each year that the federal government runs a surplus, the federal debt

Shrinks

What is potential GDP?

It is the level of real GDP in the long run.

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right.

The invention of the integrated circuit by Jack Kilby of Texas Instruments gave rise to the information age. What did this technological change do the short-run supply curve?

It shifted the short-run aggregate supply curve to the right.

Consider the figure to the right. What is the effect on LRAS if tax reductions and tax code simplifications are effective? The initial equilibrium can be point A, B, or C. Of the following choices, which shows the most effective tax code simplification?

It shifts from LRAS 1 to LRAS 3.

How does a decrease in government spending affect the aggregate expenditure line?

It shifts the aggregate expenditure line downward.

What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

When SRAS 1 shifts to SRAS 2 the price level increases and the level of real GDP falls. What happens to the short-run Phillips curve when the short-run aggregate supply curve shifts (a supply shock)?

It shifts up such that a given level of unemployment occurs at a higher price level.

Given the economy is at point A in year 1, what will happen to the price level in year 2?

It will rise.

Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2?

It will rise.

According to the figure above, at what point is aggregate expenditure greater than GDP?

Labor Force Participation Rate =

Labor Force / Working Age Population

An increase in interest rates will cause _________ aggregate demand curve.

Leftward shift of

An increase in state income taxes will cause a _________ the aggregate demand curve.

Leftward shift of

As a result, when AD shifts to the right, in reality the change in real GDP will be ________ it would be if the price level were constant.

Less than

________ of unemployment during ________ make it easier for workers to ________ wages.

Low levels; an expansion; negotiate higher

Which of the following is NOT a monetary policy LOADING... goal of the Federal Reserve bank (the Fed)?

Low prices

Which of the following is NOT a monetary policy goal of the Federal Reserve bank (the Fed)?

Low prices

Ceteris paribus, an increase in workers and firms adjusting to having previously overestimated the price level would be represented by a movement from

SRAS1 to SRAS2.

The quantity equation states that

M(money supply) x V(velocity of money) = P(price level) x Y(real output)

The narrowest official definition of the money supply is

M1 + savings deposit and individual money market account

Suppose you decide to withraw $100 in currency from your checking account.?

M1 remains unchanged

If an increase in autonomous consumption spending of $10 million results in a $50 million increase in equilibrium real GDP, then

MPC is 0.8

The industrial revolution

Marked the beginning of significant economic growth in the world

Ceteris paribus, a decrease in the capital stock would be represented by a movement from

SRAS2 to SRAS1

Mo + Demand deposits (checking account)

Which can be changed more quickly: monetary policy or fiscal policy?

Monetary policy can be changed more quickly than fiscal policy. Monetary policy can be changed at any of the FOMC meetings and the smaller number of individuals involved makes it easier to change policy.

According to the multiplier effect, an initial decrease in government purchases decreases real GDP by ___________ the initial decrease in government purchases.

More than

What will happen to the long-run aggregate supply curve if there is a change in the price level?

Move along a stationary LRAS curve

An increase in the price level will cause a _________ the aggregate demand curve.

Movement up along

The federal government collected less in total individual income taxes in 1983 than in 1982. Can we conclude that Congress and the president cut individual income tax rates in 1983?

No. It could be that the economy contracted, so less income was earned and less was paid in tax.

Consider the figure to the right. Can the Fed achieve a $900 billion money supply (MS) AND a 5% interest rate (point C)?

No. The Fed cannot target both the money supply and the interest rate simultaneously.

After September 11, 2001, the federal government increased military spending on wars in Iraq and Afghanistan. Is this increase in spending considered fiscal policy?

No. The increase in defense spending after that date was designed to achieve homeland security objectives.

Jack just received a promotion at work and now works 50 hours per week instead of 35. As a result,

Neither the unemployment rate nor the labor force participation rate changed

________ usually increase(s) when the U.S. economy is in a recession and decrease(s) when the U.S. economy is expanding

Net Exports

If inflation in the United States is higher than inflation in other countries, what will be the effect on net exports for the United States

Net exports will decrease as U.S. exports decrease.

Between 2013 and 2014, if an economy's exports rise by $8 billion and its imports fall by $8 billion, by how much will GDP change between the two years, all else equal?

Net exports will increase GDP by $16 billion

Do price changes affect long run GDP?

Suppose that the economy is currently at point A, and the unemployment rate at A is the natural rate. What policy would the Federal Reserve pursue if it wanted the economy to move to point B in the long run?

No policy will move the economy to point B in the long run.

Ceteris paribus, a decrease in the labor force would be represented by a movement from

SRAS2 to SRAS1

GDP Deflator =

Nominal GDP / Real GDP

Which of the following is not a correct comparison between a contractionary fiscal policy in the basic aggregate demand and aggregate supply model and in the dynamic aggregate demand and aggregate supply model?

None of the above are correct statements about the two models.

A decrease in cyclical unemployment will

None of these is correct

How important is it to pay off this debt?

Not very important if the debt is at a sustainable level, and the interest payments are relatively constant.

Unemployment Rate =

Numbered of Unemployed / Labor Force

Where is long-run macroeconomic equilibrium?

Occurs at a point where the AD curve and the SRAS curve intersect at a point on the LRAS curve

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD 2 comma policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)

Open market purchase of government securities

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2AD2 to AD Subscript 2 comma policyAD2, policy and reach equilibrium (point C) in the second period? (What policy will increase the price level and increase actual real GDP?)

Open market purchase of government securities

Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD Subscript 2 comma policy and reach equilibrium (point C) in the second period?

Open market purchase of government securities.

The figure to the right illustrates a dynamic AD-AS model. Suppose the economy is in equilibrium in the first period at point A. In the second period, the economy reaches point B. What policy would the Fed likely pursue in order to move AD 2 to AD2(policy) and reach equilibrium (point C) in the second period?

Open market purchase of government securities.

In the long run, increases in government purchases result in

Partial crowding out

Economic Growth =

Percent change in GDP = [(GDP(year2) - GDP(year1)) / GDP(year1)] x 100

Inflation Rate =

Percent change in price level = [(Price Level(year2) - Price Level (year1)) / Price Level (year1)] x 100

Suppose that the economy is currently at point A. If the Federal Reserve engaged in contractionary monetary policy, where would the economy end up in the short run?

Point B

The US economy experiences a 4 percent inflation. This is an example of a change in _________ and will cause a _________ the aggregate demand curve.

Price level; Movement along

What is the goal of monetary policy?

Price stability, full employment, and economic growth

What are the monetary goals of the Fed?

Price stability, high employment, economic growth, stable financial markets

Market Value =

Price x Quantity

Real GDP =

Prices(base year) x Quantity(current year)

Ceteris paribus, a decrease in productivity would be represented by a movement from

SRAS2 to SRAS1.

Ceteris paribus, an increase in the expected future price level would be represented by a movement from

SRAS2 to SRAS1.

Procyclical policy

GNP counts

Production by American firms no matter where they are located. Doesn't include foreign companies on American soil

If government purchases are $400 million, taxes are $700 million, and transfers are $200 million, which of the following is true?

Public saving is $100 million

total savings equation

S= S private +S public

Which of the following headlines would be more closely related to what macroeconomics study than what macroeconomics study?

Real GDP grows by 2.3% in the second quarter.

If Congress and the president are successful in keeping real GDP at its potential level in 2021, state whether each of the following will be higher, lower, or the same as it would have been if they had taken no action:

Real GDP will be higher . Potential real GDP will be the same . The inflation rate will be higher . The unemployment rate will be lower .

Suppose congress increased spending by $100 billion and raised taxes by $100 billion to keep the budget balanced. What will happen to real equilibrium GDP?

Real equilibrium GDP will rise

How would an increase in interest rates affect investment?

Real investment spending declines.

Employees at the university have negotiated a 5 percent increase in wages for the next year, based on their inflation expectations. If inflation is actually 4 percent over the next year, which of the following will occur?

Real wages for university employees will rise.

In the dynamic aggregate demand and aggregate supply model, if aggregate demand increases slower than potential real GDP, there will be

Recession

What are the short-run and long-run effects of a decrease in aggregate demand?

Recession in the short-run. A decrease in price level in the long-run. SRAS curve shifts to the right as workers adjust to lower price level. The new long-run equilibrium is at AD1 and SRAS1

Which of the following could explain why there is an increase in potential GDP but the equilibrium level of GDP does not rise?

SRAS and AD do not shift.

Ceteris paribus, a decrease in the expected price of an important natural resource would be represented by a movement from

SRAS1 to SRAS2

Ceteris paribus, an increase in the capital stock would be represented by a movement from

SRAS1 to SRAS2

What are the gains to be had from simplifying the tax code?

Resources from the tax preparation industry freed up for other endeavors. Increased efficiency of households and firms. Greater clarity of the decisions made by households and firms.

Profit =

Revenue-Cost

A faster income growth in other countries will cause a _________ US aggregate demand curve.

Rightward shift of

An increase in government purchases will cause a _________ the aggregate demand curve.

Rightward shift of

Usually at the beginning of a recession, inventories ______ remain unchanged, but at the beginning of an expansion, inventories ________

Rise Fall

Suppose the inflation rate has been at 5 percent for several years. The Fed decides to increase the discount rate which will reduce aggregate demand and reduce the expected inflation rate.

SRPC shifts to the right

Value Added =

Sales Price - cost of intermediate goods

Sarah is a full-time student who is not looking for work. What kind of unemployment is Sarah experiencing?

Sarah is not experiencing unemployment of any kind, because she is not currently part of the labor force.

*In figure (15.11), suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Federal Reserve use to move the economy to point C?

Sell treasury bills

Which of the following contribute(s) to shorter recessions, longer expansions, and less severe fluctuations in real GDP?

Service based economy, fiscal policy, unemployment insurance

Expansionary fiscal policy will

Shift the aggregate demand curve to the right

What will happen to the aggregate demand curve if there are increases in personal income taxes or business taxes?

Shift to the left

What will happen to the aggregate demand curve if there are increases in the value of the US dollar relative to foreign currencies?

Shift to the left

What will happen to the aggregate demand curve if there are increases in firms' expectations of the future profitability and investment spending?

Shift to the right

What will happen to the aggregate demand curve if there are increases in government purchases?

Shift to the right

What will happen to the aggregate demand curve if there are increases of households' expected future income?

Shift to the right

What will happen to the long-run aggregate supply curve if there is a technological change?

Shift to the right

What will happen to the long-run aggregate supply curve if there is an increase in the working population?

Shift to the right

What will happen to the long-run aggregate supply curve if there is more capital accumulation?

Shift to the right

The basic aggregate demand and aggregate supply curve model helps explain ________ fluctuations in real GDP and the price level.

Short term

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-run aggregate supply will shift to the right

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Short-run aggregate supply will shift to the right.

Which interest rate is most relevant?

Short-term nominal interest rate because it is most affected by changes in money supply.

The higher the tax rate, the __________ the multiplier effect.

Smaller

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the following will occur because of the automatic mechanism adjusting to the economy back to the potential GDP?

Sort-run aggregate supply will shift to the right.

People who lost their jobs as hand- drawn animators because of popularity of computer- generated 3D animators are examples of persons who are suffering

Structural unemployment

Mrs Garcia lost her job at a exile mill due to competition from cheaper imported goods. She would be classified as

Structurally unemployed

Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called

Supply-side economics

19) If income is unequally distributed in an economy, increases in GDP may not raise well-being in an economy.

19) The natural rate of unemployment consists of frictional unemployment plus structural unemployment.

Spublic =

T - G - TR

In a closed economy, public saving is equal to which of the following?

T-G-TR

Public Savings Formula

T-G-TR

S public equation

T-G-TR

S public=

T-G-TR

IF... actual inflation is greater than expected inflation, actual inflation is less than expected inflation,

THEN.... the actual real wage is less than the expected real wage, the unemployment rate falls. the actual real wage is greater than the expected real wage, the unemployment rate rises.

Full employment means that

Taking seasonal fluctuations into account, only frictional and structural unemployment exist

The Fed uses monetary policy to offset the effects of a recession (high unemployment and falling prices when actual real GDP falls short of potential GDP) and the effects of a rapid expansion (high prices and wages). Can the Fed, therefore, eliminate recessions?

The Fed can only soften the magnitude of recessions, not eliminate them

Holding other factors constant, by how much will taxes have to be cut to bring the economy to equilibrium at potential GDP?

Taxes will need to be cut by $ 100 billion.

Which of the following best explains how the Federal Reserve acts to help prevent banking panics?

The Fed acts as a lender of last resort, making loans to banks so that they can pay off depositors

The Fed can only soften the magnitude of recessions, not eliminate them.

Which of the following characterizes the Fed's ability to prevent recessions?

The Fed is able to keep recessions shorter and milder than it would be otherwise be

In which of these following situations would the Fed conduct contractionary monetary policy?

The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.

The Federal Reserve responded to the 2008 financial crisis in several ways. Which of the following is one of the ways the Fed responded?

The Fed lent investment banks Treasury securities in exchange for mortgage - backed securities

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule

Nobel laureate Milton Friedman and his followers belong to a school of thought known as monetarism. What do the monetarists argue the Fed should target?

The Fed should target the money supply, not the interest rate, and that it should adopt the monetary growth rule.

Which of the following accurately describes expansionary monetary policy?

The Federal Reserve causes an increase in the money supply.

Which of the following accurately describes a recent change in the Federal Reserve's balance sheet?

The Federal Reserve has more loans to financial markets and institutions on the assets side of its balance sheet.

Which of the following accurately describes contractionary monetary policy?

The Federal Reserve increases interest rates.

Why is the aggregate demand cure downward sloping?

The Wealth Effect, The Interest-Rate Effect, and The International Trade Effect

Monetary policy is defined as:

The actions the Federal Reserve takes to manage the money supply and interest rates.

If actual inflation is greater than expected inflation, what is the relationship between the actual real wage and the expected real wage?

The actual real wage will be lower than the expected real wage.

German luxury car exports were hurt in 2009 as a result of the recession. How would this decrease in exports have affected Germany's aggregate demand curve

The aggregate demand curve would have shifted to the left

German automobile exports were hurt in 2008 as a result of the recession. How would this decrease in exports have affected Germany's aggregate demand curve?

The aggregate demand curve would have shifted to the left.

German luxury car exports were hurt in 2009 as a result of the recession. How would this decrease in exports have affected Germany's aggregate demand curve?

The aggregate demand curve would have shifted to the left.

Given that the Phillips curve is derived from the aggregate demand and aggregate supply model, why use the Phillips curve?

The answer is that while the aggregate demand and aggregate supply model shows the price level , the Phillips curve explicitly shows the inflation rate . Further, the aggregate demand and aggregate supply model explicitly shows changes in the level of real GDP , while the Phillips curve explicitly shows the unemployment rate

If the balance of the current account in the U.S. is -$900 billion then what is true?

The balance of the financial account is positive

Which of the following does the aggregate expenditure macroeconomic model seek to explain?

The business cycle

What does the AD-AS model seek to explain?

The business cycle and the inflation rate

Suppose the economy is at point A in the figure above. Which of the following is true?

The current unemployment rate is equal to the natural rate of unemployment.

What is the cyclically adjusted budget deficit or surplus?

The cyclically adjusted budget deficit or surplus is the deficit or surplus in the federal government's budget if the economy were at potential GDP.

In 2015, an article in the Wall Street Journal noted that "Prime Minister Shinzo Abe is expected to unveil a plan to balance Japan's budget in five years ... as a step toward reducing the country's debt burden, according to government officials." Source: Tatsuo Ito, "Japan Government Takes On Its Deficit-Ridden Finances," Wall Street Journal, June 17, 2015. Which of the following statements is true?

The debt is accumulated deficits, so if there is a positive budget deficit, the debt will increase.

What is the long-run effect of a permanent increase in government spending?

The decline in investment, consumption, and net exports exactly offsets the increase in government spending; therefore, real GDP remains unchanged.

If weak aggregate demand is pushing the economy into recession, which of the following must be true?

The economy is at an equilibrium that is not on the long-run Phillips curve

If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

The economy is in a recession

Refer to figure 17-2. Suppose the economy is at point B in the figure above. Which of the following is true?

The expected rate of inflation is 3%.

What is the difference between the federal budget deficit and federal government debt?

The federal budget deficit is the year-to-year short fall in tax revenues relative to government spending (T < G + TR), financed through government bonds. The federal government debt is the accumulation of all past deficits.

As the figure to the right indicates, the Fed can affect both the money supply and interest rates. However, in recent years, the Fed targets interest rates in monetary policy more often than it does the money supply. Which interest rate does the Fed target?

The federal funds rate

Which interest rate does the Fed target?

The federal funds rate

Who is responsible for fiscal policy?

The federal government controls fiscal policy.

One example of fiscal policy is

The federal government cuts taxes to stimulate the economy

Which of the following would be classified as fiscal policy

The federal government cuts taxes to stimulate the economy

Which of the following is a true statement about the multiplier?

The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in GDP on imports, inflation and the interest rate.

Assuming a fixed amount of taxes and a closed economy and that the marginal propensity to consume equals 0.75, calculate the value of the following multipliers. Be sure to use a negative sign (-) to show if a multiplier has a negative value.

The government purchases multiplier equals 4.0 (enter your response rounded to one decimal place). The tax multiplier equals negative 3.0 (enter your response rounded to one decimal place). The balanced budget multiplier equals 1 (enter your response rounded to one decimal place).

If the marginal propensity to consume equals 0.60, the tax rate equals 0.20, and the marginal propensity to import equals 0.20, what is the value of the government purchases multiplier?

The government purchases multiplier is equal to 1.39 (enter your response rounded to two decimal places).

Which one of the following is not a determinant of consumption spending?

The growth rate in the United States relative to the growth rates in other countries

If the short-run aggregate supply curve (SRAS) were a horizontal line, what would be the impact on the size of the government purchases and tax multipliers LOADING...?

The impact of the multiplier would be larger if the SRAS curve is horizontal.

The federal funds rate is what?

The interest rate banks charge each other for overnight loans

What is the federal funds rate?

The interest rate banks charge each other for overnight loans

What is the discount rate?

The minimum interest rate set by the Federal Reserve for lending to other banks.

What are the Fed's main monetary policy targets?

The money supply and interest rates

What relationship is show by the aggregate demand curve?

The price level and the quantity of real GDP demanded by households, firms, and the government

b. Why does an estimate of the size of the multiplier matter in evaluating the effects of an expansionary fiscal policy?

The larger the multiplier, the greater the effects of an expansionary fiscal policy.

Which of the following statements regarding the 2009 stimulus package is true?

The largest category of expenditures was health care, social services, and education; and the largest category of tax cuts was individual tax cuts.

In the figure to the right, at what point is the inflation rate stable? That is, at what point can we refer to the inflation rate as the nonaccelerating inflation rate of unemployment ?

The moral of the vertical long-run inflation rate is that in the long run, there is no trade-off between the unemployment rate and the inflation rate. The inflation rate is stable only if the unemployment rate equals the natural rate of unemployment (point C). It is often called the nonaccelerating inflation rate of unemployment: the unemployment rate at which the inflation rate has no tendency to increase or decrease. If the unemployment rate is below the natural rate (point A), the inflation rate increases, and, eventually, the Phillips curve shifts up. If the unemployment rate is above the natural rate (point B), the inflation rate decreases, and, eventually, the Phillips curve shifts down.

All of the following are true statements about the multiplier except

The multiplier makes the economy less sensitive to changes in autonomous expenditure.

Which of the following is a true statement about the multiplier?

The multiplier rises as the MPC rises

How does moving up and down the demand curve affect the opportunity cost of holding money?

The opportunity cost is the interest rate. Interest rate decreases, so does opportunity cost

The labor force participation rate I defined as what?

The percentage of the working-age population in the labor force

What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between ________.

The price level and the quantity of real GDP supplied by firms

Given the information above, what can we say has happened in the economy from 2012 to 2013

The price level has risen

A decrease in the aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The price level will fall, and the level of GDP will be unaffected

A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The price level will fall, and the level of GDP will be unaffected.

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The price level will rise, and the level of GDP will be unaffected.

You earned $30,000 in 2000, and your salary rose to $80,000 in 2013. If the CPI rose from 82 to 202 between 2000 and 2013, which of the following is true?

The purchasing power of your salary increased between 2000 and 2013

ow does the quantity theory provide an explanation about the cause of inflation?

The quantity equation shows that if the money supply grows at a faster rate than real GDP, then there will be inflation.

Home Depot sells new and used doors to contractors who build new homes. Home depot also sells new and used doors to homeowners. Which of the following would be counted in GDP?

The sale of a new door to homeowner

What is an example of discretionary fiscal policy

The tax cuts passed by Congress in 2001 to combat the recession

What an economy is at its natural rate of unemployment, which of the following will be true?

The unemployment rate will be greater than 0%

The price level in the economy between 2012 and 2013 rose from 100 to 105. Between 2013 and 2014, the price level rose from 105 to 110.25. How does the short-run Phillips curve predict the unemployment rate will change as a result?

The unemployment rate would not change since there is no change in the rate of inflation

What is affected by changes in interest rates and, as a result, impacts aggregate demand?

The value of the dollar, Business investment projects, Consumption of durable goods

Consumption is $5million, planned investment spending is $8 million, government purchases is $10 million, and net exports are equal to $2 million. If GDP during the same time period equals to $27 million, what unplanned changes in inventories occurred?

There was an unplanned increase in inventories

Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $27 million, what unplanned changes in inventories occurred

There was an unplanned increase in inventories equal to $2 million.

How do lower taxes affect aggregate demand?

They increase disposable income, consumption, and aggregate demand.

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve

They will shift the aggregate demand curve to the right.

Spending on the war in Afghanistan is essentially categorized as government purchases. How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

They will shift the aggregate demand curve to the right.

Use the following information to draw a graph showing the short-run and long-run Phillips curves Natural rate of unemployment = 5 percent Current rate of unemployment = 4 percent Expected inflation rate = 4 percent Current inflation rate = 6 percent

The short-run and long-run Phillips curves intersect at the point where the inflation rate is 4 percent and the unemployment rate is 5 percent.

Suppose that the expected inflation rate increases from 4 percent to 6 percent. What will happen to the short-run Phillips curve?

The short-run trade-off between uemployment and inflation will be worse than before as the economy moves to a higher short-run Phillips curve

This chapter argues that if the price level increases, over time, the average wage should increase by the same amount.

This is true because workers and firms are most concerned with the real wage.

The impact of Hurricane Katrina on consumers in the economy was to make them very pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

This will shift the aggregate demand curve to the left.

The recession of 2007-2009 made many consumers pessimistic about their future incomes. How does this increased pessimism affect the aggregate demand curve?

This will shift the aggregate demand curve to the left.

If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate demand curve?

This will shift the aggregate demand curve to the right.

Why does a $1 increase in government purchases lead to more than a $1 increase in income and spending?

Through the government purchases multiplier, the $1 increase in government spending will lead to an increase in aggregate demand and national income, which will lead to an increase in induced spending.

In the figure to the right, expected inflation is initially at 1.5%. When expected inflation increases to 4.5%, which of the following will occur?

To have 3.5% unemployment rate, inflation would be 7.5%. B. Unemployment reaches the natural rate of 5%. C. At the natural rate of unemployment, inflation is 4.5%. D. All of the above.

Why do few economists argue that it would be a good idea to balance the federal budget every year?

To keep a balanced budget during a recession, taxes would have to increase and government expenditures would have to decrease, which would further reduce aggregate demand and deepen the recession.

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will decline.

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?

Unemployment will rise.

Countries with a higher marginal propensity to import (MPI) will have smaller multipliers than countries with a lower marginal propensity to import.

True

Few economists believe the federal government should attempt to balance its budget every year.

True

The actual change in real GDP resulting from an increase in government purchases or a cut in taxes will be less than the simple multiplier effect indicates.

True

The balanced budget multiplier is always equal to 1.

True

The current account does not include ?

U.S, holdings of foreign assets

If the dollar appreciates against the Mexican peso,

U.S. exports to Mexico become less expensive

Which of the following explains why fluctuations in real GDP have become less volatile in the United States since 1950?

Unemployment insurance and other government transfer programs are more prevalent since the 1950s.

In reality, the SRAS is

Upward sloping

What equals the reserves of a bank?

Vault cash plus deposits with the Federal Reserve

As was demonstrated in 2007, firms in the shadow banking system were _________.

Very vulnerable to bank runs

Which of the following best explains the negative slope of the short-run Phillips curve?

Weak growth in aggregate demand keeps the economy below potential GDP, so unemployment rises but inflation falls.

What are the impact of a change in the money supply on interest rate?

When the Fed increases the money supply, the short-term interest rate must fall until it reaches a level at which firms and households are willing to hold the extra money.

What is a procyclical policy?

When the Fed recognizes a recession too late and tries to implement an expansionary monetary policy but instead causes inflation.

Which of the following best describes the "wealth effect"?

When the price level falls, the real value of household wealth rises.

Why does the short run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.

Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand?

Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.

Sprivate =

Y + TR - C -T

Closed Economy

Y = C + I + G

GDP Formula

Y = C + I + G

Private Savings Formula

Y+TR-C-T

S private equation

Y+TR-C-T

S private=

Y+TR-C-T

S=I=

Y-C-G

relationship between gross domestic product

Y=C+I+G+NX

Under which one of the following situations would you be better off

You borrowed $2,500 at 7% to pay for this year's college expenses and unanticipated inflation is 2% during the year

The growth rate of real GDP equals A) [(real GDP in previous year - real GDP in current year) ÷ real GDP in previous year] × 100. B) (real GDP in current year - real GDP in previous year) × 100. C) [(real GDP in current year - real GDP in previous year) ÷ real GDP in current year] × 100. D) [(employment in the current year - employment in previous year)/employment in previous year] × 100. E) [(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.

[(real GDP in current year - real GDP in previous year) ÷ real GDP in previous year] × 100.

Which of the following are goals to monetary policy? ([A]price stability, economic growth, and maximizing the value of the dollar relative to other currencies; [B]price stability, maximizing the value of the dollar relative to other currencies, and high employment; [C] price stability, money growth, and high employment; [D] maximizing the value of the dollar relative to other currencies, economic growth, and high employment)

[C] price stability, money growth, and high employment

The position of the long-run aggregate supply (LRAS) curve is determined by a. the number of workers, the amount of capital, and the available technology. b. the price level, the available technology, and "sticky" prices. c. the price level and aggregate demand. d. consumption, investment, government purchases, and net exports.

Which of the following is not true when the economy is in macroeconomic equilibrium? a. when the economy is at long-run equilibrium, firms will have excess capacity. b. when the economy is at long-run equilibrium, SRAS=AD=LRAS. c. when the economy is at long-run equilibrium, total unemployment=frictional unemployment+structural unemployment. d. when the economy is at long-run equilibrium, actual GDP= potential GDP.

Which of the following would cause an increase in the price level (i.e., a short-run inflation)? a. a reduction in taxes that increases aggregate demand. b. an increase in government purchases that decreases short-run aggregate supply. c. a reduction in personal income taxes that reduces aggregate demand. d. an increase in the exchange rate of the dollar in relation to foreign currencies that decreases short-run aggregate supply.

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?

a $300 billion decrease in GDP

Which of the following goods is directly counted in GDP?

a 12-inch Subway sandwich purchased by a student

If the federal government's expenditures are less than its tax revenues, then

a budget surplus results

The short-run Phillips curve will not shift unless there is

a change in inflation expectations.

The short-run Phillips curve will shift if there is

a change in inflation expectations.

In a business cycle, the period between the high point of economic activity and the following low point is called

a recession

What is a "structural" relationship?

a relationship that depends on the basic behavior of consumers and firms and remains unchanged over long periods

In a column in the Financial Times, the prime minister and the finance minister of the Netherlands argue that the European Union, an organization of 27 countries in Europe, should have "a commissioner for budgetary discipline." They believe that: "The new commissioner should be given clear powers to set requirements for the budgetary policy of countries that run excessive deficits." Source: Mark Rutte and Jan Kees de Jager, "Expulsion from the Eurozone Has to Be the Final Penalty," Financial Times, September 7, 2011. An "excessive" budget deficit in this context is

a relatively large budget deficit as a percentage of GDP beyond the European Union's deficit and debt rules .

Which of the following would cause the short-run aggregate supply curve to shift to the right?

a technological advance

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 corporate income tax rate is increased. This is part of a contractionary fiscal policy . b. Defense spending is increased. This is not part of fiscal policy . c. The Federal Reserve lowers the target for the federal funds rate. This is not part of fiscal policy . d. Families are allowed to deduct all their expenses for daycare from their federal income taxes. This is not part of fiscal policy . e. The individual income tax rate is decreased. This is part of an expansionary fiscal policy .

Some economists argue that because increases in government spending crowd out LOADING... private spending, increased government spending will reduce the long-run growth rate of real GDP.

a. This is most likely to happen if the private spending being crowded out is investment spending .

President Trump was assuming that in 2017, the economy was

able to create more jobs and expand without increasing the inflation rate.

Minimum wage laws cause unemployment because the legal minimum wage is set

above the market wage, causing labor demand to be less than labor supply

At the beginning of the recession of 2007-2009, real GDP in the United States was ________ potential GDP, and in June 2009, real GDP was ________ potential GDP.

above; below

the money supply growing faster than real GDP

according to the quantity theory of money inflation is caused by

money supply grows at a slower rate than real GDP

according to the quantity theory of money, deflation will occur if the

according to the quantity theory of money, if the money supply grows at 6%, real gdp grows at 2% and the velocity of money is constant, then inflation will be?

If inventories decline by more than analysts predict they will decline, this implies that

actual investment spending was less than planned investment spending.

An unplanned increase in inventories results from

actual investment that is greater than planned investment.

An unplanned decrease in inventories results in

actual investment that is less than planned investment.

If actual inflation is higher than expected inflation, the

actual real wage is less than the expected real wage: unemployment falls

If actual inflation is higher than expected inflation, the

actual real wage is less than the expected real wage: unemployment falls.

According to Lucas and Sargent, workers and firms have rational expectations, and therefore if the Fed pursues an expansionary monetary policy:

agents will immediately adjust their expectations of inflation up.

All of the following are assumptions made by the dynamic model of aggregate demand and aggregate supply except

aggregate demand and potential real GDP decrease continuously.

Short-run macroeconomic equilibrium occurs when

aggregate demand and short-run aggregate supply intersect.

Because of the slope(s) of the ________, we can say that a decrease in the price level leads to a higher level of real GDP demanded.

aggregate demand curve

The ________ shows the relationship between the price level and quantity of real GDP demanded.

aggregate demand curve

If the Fed pursues expansionary monetary policy,

aggregate demand will rise(shift to the right), and the price level will rise

Firms in a small economy planned that inventories would grow over the past year by $500,000. Over that year, inventories did grow by exactly $500,000. This implies that

aggregate expenditure that year was equal to GDP that year.

Firms in a small economy planned that inventories would grow over the past year by $300,000. Over that year, inventories actually grew by $400,000. This implies that

aggregate expenditure that year was less than GDP that year.

If firms sell exactly what they expected to sell, all of the following will be trueexcept

aggregate expenditure will be greater than GDP.

A decrease in consumer confidence can put your job at risk if

aggregate expenditures fall.

Fiscal policy actions that are intended to have long-run effects on real GDP attempt to increase ___ through changing ___.

aggregate supply; taxes

Alan Greenspan

agreed with Paul Volcker about the importance of keeping inflation low.

The normal GDP of the U.S. in 2012 was approx $16.2 trillion. This means that

all of the above are true

In a business cycle, the period between the low point of economic activity and the following high point is called

an expansion

If Lucas and Sargent were right,

an expansionary monetary policy would not work if people had rational expectations, since they will use all available information including knowledge of the effects of the Fed's monetary policy.

The increase in the number of people age 65 or older will result in _____ in federal spending on Social Security and Medicare as a percentage of GDP.

an increase

Which of the following will raise consumer expenditures?

an increase in expected future income

If aggregate demand just increased, what may have caused the increase?

an increase in government purchases

If aggregate demand just increased, which of the following may have caused the increase?

an increase in government purchases

Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?

an increase in government purchases

Which of the following would cause the short-run aggregate supply curve to shift to the left?

an increase in inflation expectations

Which of the following will shift the aggregate demand curve to the left, ceteris paribus?

an increase in interest rates

Which of the following would cause a decrease in real GDP and, if large enough, a recession?

an increase in interest rates that causes aggregate demand to fall

Which of the following will shift the aggregate demand curve to the right, ceteris paribus?

an increase in net exports

Which of the following scenarios would lead to a reduction in real GDP and may even cause a recession?

an increase in oil prices that causes short run aggregate supply to fall

an equal increase in government purchases and taxes sill cause

an increase in real GDP

If real GDP exceeded potential real GDP and inflation was increasing, which of the following would be an appropriate fiscal policy

an increase in taxes

Which of the following is not an example of monetary policy?

an increase in taxes

Refer to Figure 16-3. In the graph above, suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Congress and the president?

an increase in the marginal income tax rate

In the figure (15.4), the movement from point A to point B in the money market would be caused by

an increase in the price level

The effect on the economy of tax reduction and simplification is

an increase in the quantity of real GDP supplied at every price level, and a shift in the long-run aggregate supply curve.

* In the figure (15.6), suppose the economy is initially at point A. The movement of the economy to point B as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market purchase of Treasury bills

In the figure (15.7), suppose the economy is initially at point A. The movement of the economy to point as shown in the graph illustrates the effect of which of the following policy actions by the Federal Reserve?

an open market sale of Treasury bills

In the figure (15.3), the movement from point A to point B in the money market would be caused by

an open market sale of Treasury securities by the Federal Reserve

Which of the following is considered a negative supply shock?

an unexpected decrease in the refining capacity for oil

Which of the following is considered a negative supply shock?

an unexpected increase in the price of natural gas

The increase in government spending on unemployment insurance payments to workers who lose their jobs during a recession and the decrease in government spending on unemployment insurance payments to workers during an expansion is an example of

automatic stabilizers

The increase in the amount that the government collects in taxes when the economy expands and the decrease in the amount that that the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers

The increase in the amount the government collects in taxes when the economy expands and the decrease in the amount the government collects in taxes when the economy goes into a recession is an example of

automatic stabilizers

Changes in taxes and spending that happen without actions by the government are called

automatic stabilizers.

Equilibrium GDP is equal to

autonomous expenditure times the multiplier.

Which of the following does not describe governmental policy actions that are helpful in supporting growth in an economy? Governmental policies that

avoid playing any role in developing communication systems.

Menu costs are a. the same as sunk costs. b. the costs to firms of changing prices. c. the cost of printing a restaurant menu. d. the costs incurred in the short run.

The long-run aggregate supply curve is vertical because in the long run, a.changes in the price level affect potential GDP via other variables, such as the size of the labor force, capital stock, and technology. b. changes in the price level do not affect potential GDP, as potential GDP depends on the size of the labor force, capital stock, and technology. c. the price level does not change, but potential GDP changes its value. d. changes in the size of the labor force, capital stock, and technology affect the price level but not the potential GDP.

The short-run aggregate supply curve slopes upward because of all of the following reasons except a. in the short run, as prices of final goods and services increase, some firms are very slow to adjust their prices, thus their sales increase. b. in the short run, an unexpected change in the price of an important resource can change the cost to firms. c. in the short run, as prices of final goods and services increase, input prices react more slowly. d. in the short run, prices of final goods and services adjust slowly due to existence of menu costs.

Which of the following scenarios would lead to a reduction in real GDP and may even causes a recession? a. an increase in oil prices that causes short-run aggregate supply to increase. b. a reduction in the growth rate in foreign countries compared to the United States that causes aggregate demand to fall. c. a recession in a foreign trading partner's causing aggregate supply to fall. d. a reduction in taxes causing aggregate demand to fall.

balls

In 1913, Congress established the Federal Reserve system with the intention of putting an end to

bank panics

congress in 1913 established the Federal Reserves system with the intention of putting an end to

bank panics

If policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

be below potential GDP

if policy makers implement an expansionary fiscal policy but do not take into account the potential for crowding out, the new equilibrium level of GDP is likely to

be below potential GDP

Suppose real GDP is $14 trillion and potential real GDP is $14 trillion. An increase in government purchases of $400 billion would cause real GDP to ____ potential real GDP (assuming a constant price level).

be more than

The report also notes: "In advanced economies an increase in infrastructure investment ... is one of the few remaining policy levers available to support growth." When infrastructure investment is described as a "policy lever" it means that

because infrastructure investment adds to the productive capacity of the economy, policies that promote it can spur economic growth.

To reduce a budget deficit,

budgetary policies such as increasing taxes and cutting expenditures can be used.

Tax cuts on business income increase aggregate demand by increasing

business investment spending

Tax increases on business income decrease aggregate demand by decreasing

business investment spending

To increase the money supply, the FOMC directs the trading desk, located at the Federal Reserve Bank of New York, to

buy U.S treasure securities form the public

What should the Federal Reserve do if it wants to move from point A to point C in the short-run Phillips curve depicted in the figure above?

buy treasury bills

* The primary tool the Federal Reserve uses to increase the money supply is

buying U.S. Treasury securities

When the Federal Open Market Committee (FOMC) decides to increase the money supply, it ____ U.S. Treasury securities. If the FOMC wishes to decrease the money supply, it _____ U.S. Treasury securities.

buys, sells

The aggregate demand curve will shift to the left (blank) the initial decrease in government purchases

by more than

Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?

The aggregate demand curve is downward sloping because a. a decrease in government spending reduces prices and makes consumption demand increase b. as income increases it causes an increase in the amount of planned expenditures. c. an increase in the price level reduces real money holdings, which reduces the amount of expenditures d. an increase in the price of a good causes a decrease in market demand for that good.

What relationship is shown by the aggregate demand curve? The aggregate demand curve shows the relationship between a. the price level and the quantity of real GDP demanded by the private sector: households and firms b. the price level and the quantity of real GDP demanded by consumers c. the price level and the quantity of real GDP demanded by households, firms, and the government d. the price level and the quantity of real GDP produced by the firms

What relationship is shown by the aggregate supply curve? The short run aggregate supply curve shows the relationship in the short run between a. the price level and the quantity of real GDP demanded by firms b. the price level and the quantity of capital goods: machines, factories and buildings, demanded by firms and households c. the price level and the quantity of real GDP supplied by firms d. the price level and the quantity of real GDP demanded by households, firms and the government

Which of the following scenarios would lead to an increase in the price level (i.e., a short-run inflation)? a. an increase in payroll taxes leading to an increase in aggregate demand. b. an increase in business pessimism regarding future profitability that decreases short-run aggregate supply. c. an increase in oil prices that decreases short-run aggregate supply. d. an increase in oil prices that leads to a reduction in aggregate demand.

If money demanded is extremely sensitive to changes in the interest rate, the money demand curve becomes almost horizontal. If the Fed expands the money supply under these circumstances, then the interest rate will

change very little and investment and consumer spending will change very little

b. Suppose that Congress and the president were committed to balancing the budget each year. How does what happened during 2013 provide insight into difficulties they might run into in trying to balance the budget every year. Because government spending and tax revenues

change with GDP, balancing the budget annually would result in economic disruptions.

The reference to "the environment in which they are implemented" is a recognition that

changes in government spending can be offset or reinforced by monetary policy, and that the impacts will be different at different phases of the business cycle.

The level of aggregate supply in the long run is not affected by

changes in the price level.

The level of long-run aggregate supply is affected by all of the following except

changes in the price level.

The _______ school of economics states that leaving the economy alone will keep it stable.

classical

Although the Federal Reserve had traditionally made discount loans only to _____, in response to the financial crisis in 2008 the Fed made primary dealers eligible for discount loans as well.

commercial banks

Which of the following best explains the difference between commodity money and fiat money?

commodity money is a good used as money where flat money is just money through central bank

What provides government provisions that would help increase the accumulation of knowledge capital?

copyrights, patents, and education rights

The response of investment spending to an increase in the government budget deficit is called

crowding out

The theory that, in the long run, fiscal policy is self-destructive is defined as:

crowding out

what constitutes M1?

currency (paper money and coins), checking account, and travelers checks

currency and reserves

The M1 measure of the money supply equals

currency plus checking account balances plus travelers checks

what are the 5 most important variables in consumption spending

current disposable income, household wealth, expected future income, price level, and interest rate

One-time tax rebates, such as those in 2001 and 2008, increase consumption spending by less than a permanent tax cut because one-time tax rebates increase

current income.

The most important determinant of consumption spending is

current personal disposable income.

If you have trouble finding a job because of a slowdown in the overall economy, we would say that you are

cyclically unemployed.

Aggregate demand (AD) is comprised of expenditure components that include: a. consumption, investment, exports, and taxes b. consumption, government spending, exports, and labor c. government spending, taxes, exports, and labor d. government spending, consumption, investment, and net exports

Edward Leamer of UCLA has argued that "housing is the business cycle." Spending on housing is likely to fluctuate more than spending by households on consumer durables, such as automobiles or furniture, or spending by firms on plant and equipment because a. spending by firms on plant and equipment is less sensitive to interest rate changes, which are countercyclical. b. housing is very sensitive to spending by households on consumer durables. c. spending by households on consumer durables is not sensitive to interest rate changes, which are cyclical. d. housing is very sensitive to interest rate changes, which are cyclical.

Suppose that workers and firms could always predict next year's price level with perfect accuracy. Under these circumstances, the SRAS curve a. would be downward sloping because quantity supplied would increase as the price level falls. b. would be upward sloping because higher price levels would still reduce household wealth and consumption spending c. would be upward sloping because worker and firm price predictions do not affect the SRAS curve d. would be the same as the LRAS

Which of the following would cause a decrease in real GDP and, if large enough, a recession? a. an increase in interest rates that causes short-run aggregate supply to fall. b. an increase in government purchases that causes aggregate demand to rise. c. a reduction in consumer confidence that causes short-run aggregate supply to fall. d. a reduction in consumer confidence that causes aggregate demand to fall.

Using the money demand and money supply model, an open market purchase of Treasury securities by the Federal Reserve would cause the equilibrium interest rate to

decrease

during the recession phase of the business cycle, production, employment, and income ___________ increase/ decrease

decrease

If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially

decrease M1 and not change M2

Higher personal income taxes

decrease aggregate demand.

If the marginal propensity to save is 0.25, then a $10,000 decrease in disposable income will

decrease consumption by $7,500.

A decrease in Social Security payments will

decrease consumption spending.

Complete the following table for a static AD-AS model:

decrease taxes rise Decrease gov't spending fall

to combat a recession with discretionary fiscal policy congress and the president may

decrease taxes to increase consumer disposable income

What are the three expansionary fiscal policy actions?

decrease taxes, increase purchases, increase transfer payments

If Californians increase their purchase of Italian wine, assuming all else remains constant, this will ____ of the U.S

decrease the balance of trade

If a country passes a labor law limiting the number of hours per week, GDP would be (BLANK) and leisure would (BLANK)

decrease, increase

When unemployment is above its natural rate, the inflation rate will eventually

decrease.

An increase in the price level results in a(n) ________ in the quantity of real GDP demanded because ________.

decrease; a higher price level reduces consumption, investment, and net exports.

Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Sweden and ________ U.S. aggregate demand.

decrease; decrease

A decrease in investment causes the price level to ________ in the short run and ________ in the long run.

decrease; decrease further

Suppose the Fed purchases Treasury Securities. Interest rates in the United States will ____ and the U.S. dollar will ____ against foreign currencies?

decrease; depreciate

An INCREASE in the price level results in a(n) _________ in the quantity of real GDP demanded because ______

decrease; higher price level reduces consumption, investment, and net exports

A(n) ____ in private expenditures as a result of a(n) _____ in government purchases is called crowding out

decrease; increase

Following a decrease in government spending, as the price level falls we would expect the level of interest rates to _____ and investment to _____.

decrease; increase

There has been a decrease in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.

decrease; increase to its initial level

An economic expansion tends to cause the federal budget deficit to ___ because tax revenues ___ and government spending on transfer payments ___.

decrease; rise; falls

The widespread use of computers and the Internet has ________ menu costs.

decreased

In the figure to the right, the opportunity cost LOADING... of holding money ___________ when moving from Point A to Point B on the money demand curve.

decreases

The U.S. work week has declined from 60 hours in 1890 to 40 hours today. The impact of the decline in working hours

decreases U.S. GDP and increases the well-being of a typical working person in the U.S.

sdf

According to an article in the Wall Street Journal, in late 2014, the Japanese economy experienced a large increase in business inventories. The article noted, "The large buildup of inventories is a reflection that the ... drop in demand was bigger than expected." Source: Eleanor Warnock, "Rising Inventories Hamper Japan Recovery," Wall Street Journal, September 30, 2014. Because the Japanese firms didn't expect the drop in demand, they

did not reduce their inventories.

During 2008, oil price increases

did not shift the short-run aggregate supply curve as far to the left as similar increases had 30 years earlier.

Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understates the extent of joblessness.

discourage workers

Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to understate the true extent of joblessness?

discouraged workers

* Active changes in tax and spending by government intended to smooth out the business cycle are called ____, and changes in taxes and spending that occur passively over the business cycle are called _____.

discretionary fiscal policy; automatic stabilizers

active changes in tax and spending by government intended to smooth out the business cycle are called ____________, and changes in taxes and spending that occur passively over with the business cycle are called _____________

discretionary fiscal policy; automatic stabilizers

The five most important variables that determine the level of consumption are

disposable income, wealth, expected future income, price level, and interest rate

What is the rule of 70?

divide 70 by the real GDP growth rate to find the number of year for an economy to double in size

Assume that Intel sells $1 billion of computer chips to Dell, Inc., for use in Dell's personal computers. This transaction

does not affect aggregate expenditure because computer chips are an intermediate good, and including the value of the computer chip would be double counting.

A nation's annual growth rate of real GDP per person is 2 percent. Its standard of living will A) double in 10 years. B) double in 50 years. C) fall because of its population growth. D) double in 35 years. E) not change because its population is growing.

double in 35 years.

A "long-run exploitable Phillips curve" refers to a Phillips curve that in the long run is ________ rather than ________.

downward sloping; vertical

During the twentieth century, the largest budge deficits as a percentage of GDP occured

during World Wars I and II

Almora, a developing open economy, is experiencing an economic boom since it discovered discovered oil reserves off its coast two years ago. Bill Hudson, an economist with the Finance Ministry of Almora, said said in an interview that the oil boom has improved the average standard of living in the economy. Robin Peters is an industry analyst who does not agree with Hudson's view. In one of his recent articles in the country's leading business daily, Robin claimed that the high rate of inflation following the boom has actually weakened the expansionary impact on the economy. which of the following statements is Bill and Robin likely to agree with? a. the purchasing power of the people has increased substantially after the discovery of oil reserves. b. the cost of industrial production will decline over the next couple of years. c. the country's production possibilities frontier will not be affected by this discovery. d. the government's expenses on unemployment benefits will increase. e. the discovery of oil reserves has resulted in a rightward shift of the long-run aggregate supply curve.

The labor force equals the number of people

employed plus unemployed.

Ways a country could promote long-run economic growth

enacting stronger laws to protect property rights, increasing vaccinations against infectious diseases, undergoing political reform to decrease corruption

During a(n) ________ many firms experience increased profits, which increases ________ and investment spending

expansion; cash flow

An increase in aggregate demand results in a(n) ________ in the ________.

expansion; short run

CPI (Consumer Price Index) formula

expenditures in the current year/expenditure in the base ear X100

The long-run aggregate supply curve will shift to the right if the economy

experiences technological change

When aggregate expenditure is greater than GDP, inventories will __________ and GDP and total employment will __________.

fall, increase

Refer to the Article Summary. When Fed Chair Janet Yellen announced that a rate increase would be warranted by the end of the year, she was referring to the

federal funds rate

A barter economy is an economy where

goods and services are exchanged for other goods and services

Evidence shows that many people who delay searching for a job for a year or longer after they are laid off

find it more difficult to find new employment than if they had searched for a new job soon after they were laid off.

Studies have shown that

firms are reluctant to cut nominal wages during recessions but instead freeze workers' nominal wages and allow inflation to gradually reduce real wages.

If people assume that future rates of inflation will ___, they are said to have adaptive expectations.

follow the pattern of inflation rates in the past

Consumer spending ________ and investment spending ________.

follows a smooth trend; is more volatile and subject to fluctuations

The purchase by and individual or firm of stock or bonds issued in another country is called

foreign portfolio investment

The advice to "keep searching, there are plenty of jobs around here for which you are qualified," would be most appropriate for which of the following types of unemployment?

frictional unemployment

Potential GDP is also referred to as

full-employment GDP.

A report from the Congressional Budget Office (CBO) notes, "Potential GDP is CBO's estimate of the maximum sustainable output of the economy." In early 2015, the CBO estimated that the gap between real GDP and potential GDP would fall from 2.9 percent in 2014 to zero in 2017. In 2014, real GDP was $16.3 trillion and the CBO's estimate of potential GDP was $16.8 trillion. The CBO forecast that potential GDP would increase to $17.5 trillion. Sources: Congressional Budget Office, "The 2015 Long-Term Budget Outlook," June 2015, p. 36; and Congressional Budget Office, "The Budget and Economic Outlook: 2015 to 2025," January 2015. The CBO includes the word "sustainable" in its definition of potential GDP because

given the available resources in the economy, this is level of GDP that can be maintained.

What can we expect from the Federal Reserve Bank if it seeks to move the economy in the direction of long-run macroeconomic equilibrium? If the Fed's policy is successful, what is the effect on the following indicators?

he Fed will pursue a contractionary monetary policy. Actual real GDP: decreases Potential real GDP: does not change Price level: decreases Unemployment: increases

Which of the following is an objective of fiscal policy

high rates of economic growth

Crowding out, following an increase in government spending, results form (the exchange rate is the foreign exchange price of the domestic currency)

higher interest rates and a lower exchange rate

The interest rate effect refers to the fact that a higher price level results in

higher interest rates and lower investments

What does Feldstein mean by a "behavioral response" to tax cuts? The behavioral response will be that people in

higher tax brackets will experience an increase in taxable income and thus will work more.

*Expansionary monetary policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be ___ and real GDP to be ____

higher; higher

Expansionary fiscal policy to prevent real GDP from falling below potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)

higher;higher

Refer to the Article Summary. The increase in consumer spending discussed in the article summary was due in part to an improving housing market. This reason for the increase in consumer spending is most closely related to which of the following variables that determine the level of consumption?

household wealth

Wall Street Journal writers Josh Zumbrun and Nick Timiraos published answers to several of their readers' questions regarding the federal government's debt. Two of the questions were: "Why is government debt different from mine?" and "How important is it to pay off this debt?" Source: Josh Zumbrun and Nick Timiraos, "Q&A: What the $18 Trillion National Debt Means for the U.S. Economy," Wall Street Journal, February 1, 2015. Government debt is different from household debt because

households cannot tax to bring in revenue and so will default if they can't make the payments.

The type of policy matters for the size of the multiplier because

households may not spend all of the saved taxes when there is a tax cut, but an increase in government spending will increase aggregate demand by the full amount.

According to a study by Kanishka Misra of the University of Michigan and Paolo Surico of the London Business School, "Almost half of American families did not adjust their consumption following receipt of the ... 2008 tax rebate." Source: Kanishka Misra and Paolo Surico, "Consumption, Income Changes, and Heterogeneity: Evidence from Two Fiscal Stimulus Programs," American Economic Journal: Macroeconomics, Vol. 6, No. 4, October 2014, pp. 84-106. In general, we expect that people will increase their consumption

if their disposable income increases.

When the price level in the United States falls relative to the price level of other countries, ________ will fall, ________ will rise, and ________ will rise.

imports; exports; net exports

When the price level in the United States rises relative to the price level of other countries, ________ will rise, ________ will fall, and ________ will fall.

imports; exports; net exports

If real GDP grows at a faster rate than does population, then the standard of living, as measured by real GDP per person, A) improves. B) cannot be measured. C) remains the same. D) worsens. E) either improves, worsens, or stays the same, depending on the size of the population and the actual level of real GDP.

improves

What is the key idea in the aggregate expenditure macroeconomic model? The key idea in the aggregate expenditure model is that

in any particular year, the level of GDP is determined mainly by the level of aggregate expenditure.

An advantage of the household survey over the establishment survey of the labor market is that the household survey

includes the number of self-employed persons.

National saving equals

income - consumption - government spending

In the context of what was happening in the economy in 1929, President Hoover was _____ in saying that, in 1932, nothing was more necessary than balancing the federal government's budget.

incorrect

As a result, when compared to Y1, real GDP would

increase

During the expansion phase of the business cycle, production, employment, and income ________ increase / decrease

increase

Falling interest rates can

increase a firm's stock price, which causes firms to issue more stock shares, and thus increase funds for investments

Lower personal income taxes

increase aggregatCeteris paribus, a decrease in interest rates would be represented by a movement frome demand.

If the reduction in inventories was unplanned, then future production would be expected to

increase as inventories are replenished.

An article in the Wall Street Journal in 2015 noted that an official of the European Union was forecasting that "Greece faces two years of recession amid sharp budget cuts." Source: Gabriele Steinhauser and Andrea Thomas, "Greece Faces Two-Year Recession amid Bailout Cuts," Wall Street Journal, August 12, 2015. During a recession, a government's budget deficit will

increase as there are more government expenditures for income support programs and less tax revenue as income falls.

Refer to Figure 16-4. Given that the economy has moved from A to B in the graph above, which of the following would be the appropriate fiscal policy to achieve potential GDP?

increase government spending

Refer to Figure 16-5. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use to move the economy to point C?

increase government spending

Compared to P1, the price level would

increase if aggregate demand increased more than long-run aggregate supply.

Which of the following would be most likely to induce Congress and the president to conduct contractionary fiscal policy?

increase in inflation

Refer to Figure 16-7. In the graph above, suppose the economy in Year 1 is at point A and expected in Year 2 to be at point B. Which of the following policies could the Congress and the president use

increase income taxes

* Lowering the interest rate

increase investment projects by firms

lowering the interest rate will

increase investment projects by firms

Writing in the Wall Street Journal, Martin Feldstein, an economist at Harvard University, argues that: "behavioral responses" of taxpayers to the cuts in marginal tax rates enacted in 1986 resulted in "an enormous rise in the taxes paid, particularly by those who experienced the greatest reductions in marginal tax rates." Source: Martin Feldstein, "The Tax Reform Evidence from 1986," Wall Street Journal, October 24, 2011. Cuts in marginal tax rates will

increase marginal net-of-tax income, increase the supply of labor and increase total taxes as people work longer hours.

* A Canadian oil company hires geological survey services form the United State. If all else remains equal, this will

increase net exports

lowering the discount rate will

increase reserves, encourage banks to make more loans, and increase the money supply

Refer to Figure 16-6. Given that the economy has moved from A to B in the graph above, which of the following would the appropriate fiscal policy to achieve potential GDP?

increase taxes

* If New Yorkers decrease their purchases of French champagne, assuming all else remains constant, this will _____ of the United States

increase the balance of trade

An increase in the demand for American-made goods will

increase the demand for dollars on the foreign exchange market

Suppose that homemakers are included as employed in the labor force statistics, rather than being counted as out of the labor force. This would

increase the measured labor force participation rate.

Increases in the price level

increase the quantity of money needed for buying and selling

Deflation will

increase the quantity of real GDP demanded.

Ceteris paribus, a rise in interest rates in the United States will cause the yen price of the dollar in international exchange markets to _____. I.e., the dollar ____ in value against the yen.

increase; appreciates

In international exchange markets, a rise in interest rates in the United States will cause the demand for dollars to ____ and the supply of dollars to _____

increase; decrease

suppose the government wants to maintain a balanced budget. to achieve this goal, when the economy falls into recession govern,met would need to _________ taxes, which would cause aggregate demand to _________

increase; decrease

Suppose there has been an increase in investment. As a result, real GDP will ________ in the short run, and ________ in the long run

increase; decrease to its initial value

After an unexpected ________ in the price of oil, the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.

increase; decreases

Expansionary fiscal policy ________ the price level and ________ equilibrium real GDP.

increase; increase

If the Fed pursues an expansionary monetary policy, investment in the United States will ________ and net exports will ________.

increase; increase

Last week, 13 Mexican pesos could purchase one U.S. dollar. This week, it takes 11 Mexican pesos to purchase one U.S. dollar. This change in the value of the dollar will ________ exports from the United States to Mexico and ________ U.S. aggregate demand.

increase; increase

Tax reduction and simplification should ____ long - run aggregate supply and ____ aggregate demand

increase; increase

tax reduction and simplification should _______ long run aggregate supply and _______ aggregate demand

increase; increase

An increase in investment causes the price level to ________ in the short run and ________ in the long run.

increase; increase further

A decrease in the price level results in a(n) ________ in the quantity of real GDP demanded because a lower price level ________ consumption, investment, and net exports.

increase; increases

If a person withdraws $500 from their savings account and puts it in their checking account, then M1 will _______ and M2 will_______-

increase; not change

An increase in investment causes the price level to (BLANK) in the short run and (BLANK) in the long run.

increase;increase further

Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy?

increases in labor force participation rates as workers who are out of the labor force pursue rising wages

Potential GDP...

increases over time as the labor force grows, and increases over time as technological change occurs

an increase in real GDP

increases the buying and selling of goods and increases the demand for money as a medium of exchange

A decrease in individual income taxes ________ disposable income, which ________ consumption spending.

increases; increases

According to the International Energy Agency (IEA), increased oil production resulting from U.S. shale oil has invigorated the North American oil industry and has created a global supply shock. The shale oil and gas industry has generated tens of billions of dollars in revenues and hundreds of thousands of new jobs, and could result in the United States changing from being the world's largest oil importer to a net exporter within a few years. An IEA forecast predicts that because of shale oil, the United States will become the world's largest oil producer by 2017, with supply growing by 3.9 million barrels per day from 2012-2018. Source: Denise Roland, and AFP, "US shale energy creates global oil 'supply shock'," Telegraph, May 14, 2013.

increases; increases

Expansionary fiscal policy involves

increasing government purchases or decreasing taxes

A cut in tax rates effects equilibrium real GDP through two channels: ________ disposable income and consumer spending, and ________ the size of the multiplier effect.

increasing; increasing

GDP Deflator

indicates the average price level on all goods and services

Which of the following raises the largest percentage of federal government revenue?

individual income taxes

The multiplier effect refers to the series of

induced increases in consumption spending that result from an initial increase in autonomous expenditures

According to the real business cycle models,

inflation can change due to movements in the money supply, however, fluctuations in real GDP are mainly explained by changes in the level of technology.

Stagflation occurs when

inflation rises and GDP falls.

If the Fed is too slow to react to a recession and applies an expansionary monetary policy only after the economy begins to recover, then

inflation will be higher than if the Fed had not acted.

Low government borrowing costs would be relevant for the decision regarding whether a government increases infrastructure investment because

infrastructure investments are long-term and expensive investments that require the use of borrowed funds.

What is a monetary policy target used by the Fed?

interest rate and money supply

Refer to Figure 18-1. Which of the following events below cause the shifts in the supply and demand curves in the market for dollars against the British pound shown in the graph above?

interest rates rise in England

If real GDP in a small country in 2012 is $8 billion and real GDP in the same country in 2013 is $8.3 billion, the growing rate of real GDP between 2012 and 2013

is 3.75%

An advantage of the establishment survey over the household survey of the labor market is that the establishment survey

is based on actual payrolls, rather than on unverified answers.

In reporting on real GDP growth in the second quarter of 2015, an article in the Wall Street Journal noted that the 2.3 percent annual growth rate "would have been stronger if it hadn't been for companies drawing down inventories." Source: Justin Lahart, "Consumers Priming U.S. Pump," Wall Street Journal, July 30, 2015. If companies are "drawing down inventories," aggregate expenditure is likely to have been

larger than GDP

What is an example of something that is not an automatic stabilizer

legislation increasing funding for job retraining passed during a recession

Which of the following would NOT be considered an automatic stabilizer

legislation increasing funding for job retraining passed during a recession

When the Federal Reserve provides liquidity to banks by lending to them, it is acting as a

lender of last resort

Suppose real GDP is $13 trillion, potential real GDP is $13.5 trillion, and Congress and the president plan to use fiscal policy to restore the economy to potential real GDP. Assuming a constant price level, Congress and the president would need to decrease taxes by

less than $500 billion

The federal government's day-to-day activities include running federal agencies like the Environmental Protection Agency, the FBI, the National Park Service, and the Immigration and Customs Enforcement. Spending on these types of activities make up

less than 10 percent of federal government expenditures.

suppose real GDP 13 trillion with potential real GDP 13.5 trillion and that the congress and the president plan to use fiscal policy to restore the economy to potential real GDP. assuming a constant price level,t he congress and the president would need to decrease taxes by

less than 500 billion

less than it would be without the supply - side effects

As a result of crowding out LOADING... in the short run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending

As a result of crowding out LOADING... in the short run, the effect on real GDP of an increase in government spending is often

less than the increase in government spending.

The Taylor rule predicted a federal funds rate which was ___ that set when Paul Volcker was chairman of the Fed, and a rate which was ___ that set when Arthur Burns chaired the Fed.

less than; greater than

When people became ________ concerned with the underlying value of their houses and became ________ with the expectations of the prices of their houses increasing, a housing bubble occurred.

less; more

The economic growth model predicts that the

level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations.

fiat money

little to no intrinsic value and is authorized by the central bank or governmental body

The ________ curve is vertical.

long-run aggregate supply

The ________ curves are both vertical.

long-run aggregate supply and long-run Phillips

[Related to the Making the Connection] A report from the International Monetary Fund in late 2014 contained the following observations: "Five years after the global financial crisis, the economic recovery continues but remains weak. ... Given ... the current environment of low government borrowing costs ... might this be a good time to increase public infrastructure investment?" Source: International Monetary Fund, "World Economic Outlook: Legacies, Clouds, Uncertainties", October 2014, pp. 75-76. The reference to "low government borrowing costs" means that

low interest rates make borrowing less expensive.

When interest rates on Treasury bills and other financial assets are low, the opportunity cost of holding money is _________, so the quantity of money demanded will be _________.

low, high

Those who are constantly unemployed accept _______ pay rates.

lower

Suppose real GDP is $12.6 trillion and potential GDP is $12.4 trillion. To move the economy back to potential GDP, Congress should

lower government purchases by an amount less than $200 billion

Contractionary fiscal policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be (blank) and real GDP to be (blank)

lower;lower

The automatic mechanism (BLANK) the price level in the case of (BLANK) and (BLANK) the price level in the case of (BLANK)

lowers, recession, raises, expansion

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

lowers; recession; raises; expansion

When aggregate expenditure = GDP,

macroeconomic equilibrium occurs.

When aggregate expenditure=GDP

macroeconomic equilibrium occurs.

The Federal Reserve may try to lower the federal funds rate to

make people more willing to borrow

Rising prices erode the value of money as ____ and as a ____

medium of exchange; store of value

Rising prices erode the value of money as a ___ and as a ___.

medium of exchange; store of value

Technological change is _____________ for economic growth than additional capital

more important

The crowding out of government spending by private spending will be greater the

more sensitive consumption, investment, and net exports are to changes in interest rates

According to the multiplier effect LOADING..., an initial decrease in government purchases decreases real GDP by more than the initial decrease in government purchases.

more than

"Real GDP is currently $17.7 trillion, and potential real GDP is $17.4 trillion. If Congress and the president would decrease government purchases by $300 billion or increase taxes by $300 billion, the economy could be brought to equilibrium at potential GDP." If government purchases were to decrease by $300 billion or if taxes were increased by $300 billion, the equilibrium level of real GDP would decrease by

more than $300 billion. Therefore, the statement above is incorrect .

It is ____ difficult to effectively time fiscal policy than monetary because ____.

more; fiscal policy takes longer to implement

it is ________ difficult to reflectively time fiscal police than monetary policy because

more;fiscal policy takes longer to implement

An increase in the real interest rate will

most likely lower consumers' purchases of durable goods.

A decrease in the price level will

move the economy down along a stationary aggregate demand curve.

A decrease in the price level will

move the economy down along a stationary short-run aggregate supply curve.

An increase in the price level will

move the economy up along a stationary short-run aggregate supply curve.

Refer to the Article Summary. The increase in consumer spending discussed in the article summary was due in part to lower debt payments which have resulted in an increase in disposable income. The increase in consumption resulting from

movement up along

If the federal budget has an actual budget deficit of $100 billion and a cyclically adjusted budget deficit of $75 million, then the economy

must be blow potential real GDP

Disposable income is defined as

national income + transfers - taxes.

disposable income formula

national income - net taxes

According to the short-run Phillips curve, the unemployment rate and the inflation rate are

negatively related.

Briefly explain whether each of the following is an example of (1) a discretionary fiscal policy, (2) an automatic stabilizer, or (3) not a fiscal policy. The federal government increases spending on rebuilding the New Jersey shore following a hurricane. This is an example of

not a fiscal policy.

The Federal Reserve sells Treasury securities. This is an example of

not a fiscal policy.

The federal government changes the required gasoline mileage for new cars. This is an example of

not a fiscal policy.

If households in the economy decide to take money out of checking account deposits and hold it as currency, this will initially

not change M1 and not change M2

if you transfer all of your currency to your checking account, initially M1 will ______ and m2 will _________

not change; not change

What can the Federal Reserve do to increase the natural rate of unemployment?

nothing

Unemoloyment rate

number of unemployed/labor force X 100

The Rule of 70 can be used to calculate the A) economic growth rate per month. B) 70 percent level of the economic growth rate. C) number of years it would take for the level of any variable to double. D) population growth rate per year. E) economic growth rate per year.

number of years it would take for the level of any variable to double.

nuts

a large government budget deficits

one of the main reasons for hyperinflation episode is ...

The 2008 tax cut made it more likely that people would not respond by increasing their consumption spending because it was a

one-time tax cut that affected current, not permanent, income.

Economists use the term fiscal policy to refer to changes in taxing and spending policies

only by the federal government.

What are the policy tools the Fed uses to control the money supply?

open market operations, discount policy, and reserve requirements

When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80 billion to $120 billion. This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level.

positive; short-run

The dynamic AD-AS model assumes

potential GDP increases continually, while the AD-AS model assumes the LRAS does not change.

The level of real GDP in the long run is

potential GDP.

The aggravated demand curve shows the relationship between what?

price level and quantity of real GDP demanded by households, firms, and the government

The aggregate demand curve shows the relationship between the ________ and ________.

price level; quantity of real GDP demanded

The long-run aggregate supply curve shows the relationship between the ________ and ________.

price level; quantity of real GDP supplied

According to the "wealth effect," when the ________ falls, the ________ rises.

price level; the real value of household wealth

The Federal Reserve System's four monetary policy goals are

price stability, high employment, economic growth, and stability of financial markets and institutions

What are the goals of monetary policy?

price stability, high employment, finaincial markets, economic growth

money serves as a unit of account when

prices of goods and services are stated in terms of money

* A federal budget deficit _____ interest rates, which ____ exchange rates (foreign currency per domestic currency), and _____ the balance of trade

raises; raises; reduces

When individuals use all available information about an economic variable to make a decision, expectations are

rational

Economic growth is a sustained expansion of production possibilities, as measured by the increase in ________ over time. A) inflation B) employment C) population D) the price level E) real GDP

real GDP

unplanned change in inventories

real GDP (Y) - planned aggregate expenditures (AE)

Refer to Table 15-3. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2015 and in 2015 if the Federal Reserve does not sue monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2015, which of the following will be higher than if the Fed had taken no action?

real GDP and the inflation rate

Refer to Table 16-4. Consider the hypothetical information in the table above for potential real GDP, real GDP and the price level in 2013 and in 2014 if the Congress and the president do not use fiscal policy. If the Congress and the president use fiscal policy successfully to keep real GDP at its potential level in 2014, which of the following will be lower than if the Congress and the president had taken no action?

real GDP and the inflation rate

Refer to Figure 15-1. In the figure, the money demand curve would move from Money demand1 to Money demand2 if

real GDP increased

A good measure of the standard of living is

real GDP per capita

Growth in the standard of living is measured by the increase in A) employment. B) the Rule of 70. C) real GDP. D) consumption. E) real GDP per person.

real GDP per person

Suppose India wants to measure how much the standard of living has changed over the last decade. Which piece of data should India use? A) inflation B) real GDP C) real GDP per person D) population E) wages

real GDP per person

A decrease in aggregate demand causes a decrease in ________ only in the short run, but causes a decrease in ________ in both the short run and the long run.

real GDP; the price level

Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models

Models that use factors, such as technology shocks, to explain fluctuations in real GDP instead of changes in the money supply are called

real business cycle models.

If an output gap exists, a _______ exists.

recession

A decrease in aggregate demand results in a(n) ________ in the ________.

recession; short run

If the Fed raises the interest rate, this will ____ inflation and ___ real GDP in the short run.

reduce; lower

Which of the following is not a major function of the Federal Reserve System? (lender of last resort, clearing checks between banks, controlling the money supply, or setting interests rates)

setting income tax rates

The recessions accompanied by a financial crisis are more severe than recessions that do not involve bank crises because

severe financial crises collapse asset markets, lower real housing prices and cause a significant fall in GDP and employment.

A rapid increase in the price of oil will tend to

shift short-run aggregate supply to the left.

Suppose the U.S. GDP growth rate is faster relative to other countries' GDP growth rates. This will

shift the aggregate demand curve to the left.

* Expansionary fiscal policy will

shift the aggregate demand curve to the right

Suppose the U.S. GDP growth rate is slower relative to other countries' GDP growth rates. This will

shift the aggregate demand curve to the right.

An increase in the expected inflation rate will

shift the short-run Phillips curve to the right.

If, due to a recession, foreign workers begin to leave the United States to search for temporary work in their home countries until the recession has ended, this will

shift the short-run aggregate supply curve of the home country to the right.

If workers leave a country to seek out better opportunities in another country, then this will

shift the short-run aggregate supply curve of the original country to the left.

Workers expect inflation to rise from 3% to 5% next year. As a result, this should

shift the short-run aggregate supply curve to the left

Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico. This subsequently drove up natural gas, gasoline, and heating oil prices. As a result, this should

shift the short-run aggregate supply curve to the left.

Workers expect inflation rate to rise from 3% to 5% next year. As a result this should

shift the short-run aggregate supply curve to the left.

Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, these prices came back down. The restoration of refining capacity should

shift the short-run aggregate supply curve to the right.

Workers expect inflation to fall from 4% to 1% next year. As a result, this should

shift the short-run aggregate supply curve to the right.

As expectations of inflation increase, the short-run Phillips curve will

shift to the right

Which aggregate supply curve has a positive slope?

short run only

The ________ curve has a positive slope because as prices of final goods and services rise, prices of inputs rise more slowly.

short-run aggregate supply

The aggregate expenditure model focuses on the ________ relationship between real spending and ________

short-run; real GDP

The _________________ rate is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest

The _________________ is considered the most relevant interest rate when conducting monetary policy.

short-term nominal interest rate

the money market is concerned with _____________ and the loanable funds market model is concerned with ___________

short-term nominal interest rates; long term real interest rates

If current projections of federal spending on Social Security and Medicare are accurate, policymakers are faced with the choice of

significantly restraining spending on these programs and/or greatly increasing taxes on households and firms.

The Greek government responded to the recession by cutting its budget in contrast to the typical response, which is to

spend more. Historically high overspending had weakened its economy.

Actual investment spending does not include

spending on consumer durable goods.

If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the short run, the economy would experience

stagflation.

The majority of dollars spent by government prior to the Great Depression was spending at the ____ level. In the post World War II period, two - thirds to three quarters of all dollars spent by government in the United States are spend at the ____ level.

state and local; federal

The long-run Phillips curve is ________ than the short-run Phillips curve.

steeper

If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?

store of value

Evidence shows that for many people, delaying searching for a job for a year or longer after they are laid off will contribute to a deterioration of their job skills, making it harder for them to find employment. This deterioration in job skills and the subsequent retraining that is necessary to obtain employment relates to which type of unemployment?

structural

The natural rate of unemployment equals

structural plus frictional unemployment.

People who lost their jobs as hand-drawn animators because of the popularity of computer-generated 3D animation are examples of persons who are suffering

structural unemployment

When the price of gasoline rises, some consumers begin riding their bikes more frequently or riding the bus instead of driving their cars. The fact that the CPI does not fully account for such changes in consumer behavior is called

substitution bias

An increase in the government budget surplus will shift the (BLANK) curve for loanable funds to the (BLANK) and the equilibrium real interest rate will (BLANK)

supply, right, fall

Policy that is specifically designed to affect aggregate supply and increase incentives to work, save, and start a business, by reducing the tax wedge LOADING... is called

supply-side economics.

Congress broadened the Fed's responsibility since

the 1930s as a result of the Great Depression.

The federal funds rate is very important for the Feds monetary policy because..

the Fed uses the federal funds rate as a monetary policy target since it can control the rate through open market operations

If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then

the MPC is 0.75.

The slope of the consumption function is equal to

the change in consumption divided by the change in disposable income.

When the United States sends money to the Philippines to help typhoon survivors, the transaction is recorded in

the current account

The debt is a "burden" on

the current generation, which pays the interest on the debt, and future generations, which will be taxed to pay for present spending.

Crowding out refers to

the decline in private expenditures that result from an increase in government purchases.

The long-run aggregate supply curve will shift to the right if

the economy experiences technological change.

If cyclical unemployment is eliminated in the economy, then

the economy is considered to be at full employment.

If planned aggregate expenditure is below potential GDP and planned aggregate expenditure equals GDP, then

the economy is in a recession.

When the aggregate demand curve and the short-run aggregate supply curve intersect,

the economy is in short-run macroeconomic equilibrium.

In 2017, in proposing a $1 trillion increase in government spending on infrastructure, President Trump argued that the spending would increase total employment in the United States. Source: Ted Mann and Michael C. Bender, "President Trump to Launch Push for Infrastructure Investment," Wall Street Journal, June 4, 2017. In the short run, increases in federal spending will increase real GDP and employment if

the economy is producing at less than its potential output and has some cyclical unemployment.

The size of the multiplier could be affected by how close real GDP is to potential GDP because

the effects are more positive during recessions than during inflations.

Declines in spending on residential construction are often due to increases in interest rates. The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.

the financial crisis that began in 2007

U.S. net export spending falls when

the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.

U.S. net export spending rises when

the growth rate of U.S. GDP is slower than the growth rate of GDP in other countries.

The quantity theory of money implies that the price level will be stable (no definition or deflation) when the growth rate of the money supply equals

the growth rate of real GDP

the quantity theory of money implies that the price level will be stable (no inflation or deflation) when the growth rate of the money supply equals

the growth rate of real GDP

natural rate of unemployment

the normal rate of unemployment around which the unemployment rate fluctuates

If government spending and the price level increase, then

the interest rate increases, consumption declines, and investment spending declines

The federal funds rate is

the interest rate that banks charge each other for overnight loans.

Another infrastructure project in northern California funded in part by ARRA funds involved expanding the Caldecott Tunnel between the cities of Oakland and Orinda. Source: Zusha Elinson, "Caldecott Tunnel Edges Forward, Tribute to Stimulus Bill," New York Times, September 10, 2011. A spokesperson for the California state agency in charge of the project mentioned that the Caldecott tunnel project would have a "ripple effect" on employment. The ripple effect meant that

the job creation would spread to other industries and eventually to the whole economy due to the consumption of the construction workers.

Suppose the government launches a successful advertising campaign that convinces workers with high school degrees to quit their jobs and become full time college students. This would cause

the labor force participation rate to decrease

The use of fiscal policy to stabilize the economy is limited because

the legislative process can be slow, which means that it is difficult to make fiscal policy actions in a timely way

Potential real GDP is

the level of GDP attained when all firms are producing at capacity

The key idea of the aggregate expenditure model is that in any particular year, the level of GDP is determined mainly by

the level of aggregate expenditure.

If stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home countries,

the long-run aggregate supply curve will shift to the left.

Suppose a developing country experiences a reduction in machinery and capital equipment as foreign entrepreneurs decrease the amount of investment in the economy. As a result,

the long-run aggregate supply curve will shift to the left.

If technological change occurs in the economy,

the long-run aggregate supply curve will shift to the right.

If the economy receives an influx of new workers from immigration,

the long-run aggregate supply curve will shift to the right.

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result,

the long-run aggregate supply curve will shift to the right.

We saw that in calculating the stimulus package's effect on real GDP, economists in the Obama administration estimated that the government purchases multiplier has a value of 1.57. John F. Cogan, Tobias Cwik, John B. Taylor, and Volker Wieland, in a research paper written in early 2009, argue that the value is only 0.61. Source: John F. Cogan, Tobias Cwik, John B. Taylor, and Volker Wieland, "New Keynesian versus Old Keynesian Government Spending Multipliers," National Bureau of Economic Research Working Paper No. 14782, March 2009. a. The government purchases multiplier can have a value greater than zero and less than 1 if

the marginal propensity to consume is negative.

If the price level decreases,

the money demand curve shifts to the left

If real GDP increases,

the money demand curve shifts to the right

The Fed's two main monetary policy targets are

the money supply and interest rate

* Monetary policy refers to the actions the Federal Reserve takes to manage

the money supply and interest rates to purpose its economic purposes

monetary policy refers to the actions the federal reserve takes to manage

the money supply and interest rates to pursue its economic objectives

According to the quantity theory of money, inflation is caused by

the money supply is growing faster than real GDP

When the Federal Reserve decreases the required reserve ratio

the money supply will increase

If the Fed pursues expansionary monetary policy then

the money supply will increase, interest rates will fall, and the real GDP will rise

Economists believe that the smaller the tax wedge for any economic activity, such as working, saving, investing, or starting a business,

the more of that economic activity that will occur.

Crowding out will be greater

the more sensitive investment spending is to changes in the interest rate

As the tax rate increases,

the multiplier effect decreases.

If an increase in investment spending of $20 million results in a $200 million increase in equilibrium real GDP, then

the multiplier is 10.

If an increase in investment spending of $50 million results in a $400 million increase in equilibrium real GDP, then

the multiplier is 8.

All of the following are true statements about the multiplier except

the multiplier is a value between zero and one.

the two key factors that cause labor productivity to increase over time are:

the quantity of capital per hour worked and the level of technology

the velocity of money was fixed

the quantity theory of money was derived from the quantity equation asserting that

Suppose that the inflation rate is increasing each year for a number of years, then

the rational expectations hypothesis is likely to give more accurate forecasts because if workers or firms have rational expectations, then they will use all the available information to forecast future inflation.

If inflation increases beyond expectations of inflation,

the real wage paid by employers and received by workers will decrease.

The Phillips curve exhibits

the relationship between the unemployment and the inflation rates.

The figure on the right refers to the dynamic AD-AS model. In that model, aggregate demand (AD), short-run aggregate supply (SRAS), and long-run aggregate supply (LRAS) all shift to the right in any given year (i.e., AD1 right arrow AD2 and LRAS1 right arrow LRAS2 ). Notice that the graph only shows the shifts in aggregate demand (AD) and long-run aggregate supply (LRAS); for purposes of this exercise we ignore short-run aggregate supply. Now suppose that there is an increase in marginal tax rates on individual income that affects both aggregate demand and long-run aggregate supply. Compared to the dynamic changes shown in the graph, the result of the increase in the marginal tax rate will be that

the rightward shift in aggregate demand will be smaller and the rightward shift in long-run aggregate supply will be smaller.

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

the rightward shift of the short-run aggregate supply curve that occurs after a recession

Frictional unemployment is the result of

the search process of matching workers with jobs

If Country A's real GDP per person is growing at 6 percent and Country B's real GDP per person is growing at 3 percent, then A) the standard of living is growing more rapidly in Country A. B) the standard of living is higher in Country B. C) the standard of living is higher in Country A. D) We cannot say whose standard of living is growing more rapidly without knowing the population growth rate. E) We cannot say whose standard of living is growing more rapidly without knowing the growth rate of real GDP.

the standard of living is growing more rapidly in Country A.

In the Expenditure Approach Real GDP equals

the sum of Consumption, Investment, Government Spending, and Net Exports: Y = C + I + G + NX

Which of the following is an example of discretionary fiscal policy?

the tax cuts passed by Congress in 2001 to combat the recession

It would seem that both households and businesses would benefit if the federal income tax were simpler and tax forms were easier to fill out. However, tax laws have become increasingly complicated because

the tax laws are used to encourage certain activities and discourage others.

A Federal Reserve publication argues that the size of the multiplier "depends on the type of fiscal policy changes in question and the environment in which they are implemented." Source: Daniel J. Wilson, "Government Spending: An Economic Boost?," Federal Reserve Bank of San Francisco Economic Letter, February 6, 2012. In referring to "the type of fiscal policy changes in question," the author recognizes that

the tax multiplier is different from the government purchases multiplier.

The national debt is best measured as

the total value of U.S. Treasury securities outstanding.

Suppose in 2016, you purchase a house built in 2003. Which of the following would be included in the gross domestic product for 2016?

the value of the services of the real estate agent

Suppose, in 2014, you purchased a house built in 2003. Which of the following would be included in the gross domestic product of 2014

the value of the services of the real estate agent

* The quantity theory of money assumes that

the velocity of money is constant

An article in the Wall Street Journal stated that in China, "carmakers continue to grapple with ... rising inventories." Source: Colum Murphy, "China's Automobile Sales to Slow Further in 2015," Wall Street Journal, January 12, 2015. Carmakers in China might find that their inventories are rising unexpectedly because

their sales are lower than expected

in the long run, but not in the short run

there is a strong link between changes in the money supply in inflation

Robert Lucas and Thomas Sargent argued that

there might not be a trade-off between unemployment and inflation in the short run, and the short-run Phillips curve would be vertical.

Which of the following summarizes the President's and Congress' role in conducting monetary policy

they are not involved in monetary policy

In 2015, the ratio of imports to GDP was 18 percent in Japan and 81 percent in Belgium. On the basis of this information, you can conclude that

the open-economy multiplier in Belgium would be less than the the open-economy multiplier in Japan.

John Maynard Keynes argued that if many households decide at the same time to increase saving and reduce spending

this may benefit the economy in the long run, but could be counterproductive in the short run

If the U.S. dollar increases in value relative to other currencies, how does this affect the aggregate demand curve?

this will shift the aggregate demand curve to the left.

The goal of expansionary fiscal policy is

to increase aggregate demand.

When Congress established the Federal Reserve in 1913, its main responsibility was

to make discount loans to banks suffering from large withdrawals by depositors.

At macroeconomic equilibrium,

total spending equals total production.

The aggregate expenditure model focuses on the relationship between ________ and ________ in the short run, assuming ________ is constant.

total spending; real GDP; the price level

Macroeconomic equilibrium occurs where

total spending, or aggregate expenditure, equals total production, or GDP.

The largest and fastest-growing category of federal government expenditures is

transfer payments

The largest and fastest-growing category of federal expenditures is

transfer payments.

Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to overstate the true extent of joblessness?

unemployed persons falsely report themselves to be actively looking for a job

Two examples of automatic stabilizers in the U.S. are

unemployment insurance payments and the progressive income tax system.

If the economy is producing at potential GDP,

unemployment is at its natural rate.

In the long run,

unemployment is at its natural rate.

Automatic stabilizers can reduce the severity of a recession because, during a recession,

unemployment payments rise and tax collections fall, providing more spending ability to push the economy back to full employment.

Friedman defined the "natural rate of unemployment" as the

unemployment rate that exists when the economy produces potential GDP.

structural unemployment

unemployment that results because the number of jobs available in some labor markets is insufficient to provide a job for everyone who wants one

cyclical unemployment

unemployment that rises during economic downturns and falls when the economy improves

All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except

unions are successful in pushing up wages.

The statement "This Dell laptop costs $2500 illustrates which function of money

unit of account

When the economy enters into a recession, your employer is ________ to reduce your wages because ________.

unlikely; output and input prices generally fall during recession

if menu costs were eliminated, the short-run aggregate supply curve will be ____________ because of wage price stickiness and slow wage adjustment by firms.

upward sloping

If the Fed believes the inflation rate is about to increase, it should

use a contractionary monetary policy to increase the interest rate and shift AD to the left.

If the Fed believes the economy is about to fall into recession, it should

use an expansionary monetary policy to lower the interest rate and shift AD to the right.

If the Fed wants to move from a point on the short-run Phillips curve representing high unemployment and low inflation to a point representing lower unemployment and higher inflation, then it should

use expansionary monetary policy.

Commodity money is a good

used as money that also has value independent of its use of money

A bank holds its reserves as ___ and ___

vault cash; deposits at the Federal Reserve

In the long run, the Phillips curve is a ________ at ________.

vertical line; the natural rate of unemployment

The long-run aggregate supply curve is ________, while the long-run Phillips curve is ________.

vertical; also vertical

Which of the following are not considered part of government purchases?

welfare benefits

money makes exchange easier, leading to more specialization and higher productivity

what is one of the most important benefits of money in an economy?

Assuming people have rational expectations,

when the Fed uses monetary policy, people quickly realize the impact that will be created by the policy, adjust wages and prices, and inflation will adjust to the new expectations which means the policy will not affect real GDP.

The wealth effect refers to the fact that

when the price level falls, the real value of household wealth rises, and so will consumption.

how do banks "create money"

when there is an increase in checking account deposits, banks gain reserves and make new loans, and the money supply expands

In the aggregate expenditure model, when is planned investment greater than actual investment?

when there is an unplaned DECREASE in inventories

Cutting taxes

will raise disposable income and raise spending

* By the height of the housing bubble in 2005 and early 2006, lenders had greatly loosened the standards for obtaining a mortgage loan, with many mortgages being granted to sub-prime borrowers ____ and "Alt-A" borrowers _____.

with flawed credit histories; who did not document their incomes

Discouraged workers are

workers who have stopped looking for work because they believe there are no jobs for them

Figure 6-4. In the graph above, the shift AD 1 to AD 2 represents the total change in aggregate demand. If government purchases increased by $50 billion, then the distance from point A to point B (blank) $50 billion

would be greater than

According to the crowding-out effect, if the federal government increases spending, the demand for money and the equilibrium interest rate will ___________, which will cause consumption, investment, and net exports to ___________.

increase; decrease

Budget deficits automatically __________ during recessions and __________ during expansions.

increase; decrease

Over time, potential GDP ________, which is shown by the ________ curve shifting to the right.

increases; long-run aggregate supply

Expansionary fiscal policy has a ________ multiplier effect on equilibrium real GDP, and contractionary fiscal policy has a ________ multiplier effect on equilibrium real GDP.

positive; negative

Since World War II, the federal government's share of total government expenditures has been between

two-thirds and three-quarters.

About ________ of the American Recovery and Reinvestment Act stimulus package took the form of increases in government expenditures, and about ________ took the form of tax cuts.

Macro Final

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